Trust's Filing of Form 843 Did Not Qualify as a Valid Informal Refund Claim

(Parker Tax Publishing August 2023)

A district court dismissed an action brought by the trustee of a trust that paid the tax reported on its Form 1041, U.S. Income Tax Return for Estates and Trusts, and later requested a refund by filing a Form 843, Claim for Refund and Request for Abatement. The court found that under Reg. Sec. 301.6402-3(a)(4) the trust was required to file a refund claim on an amended Form 1041 and the Form 843 did not constitute a valid informal claim for a refund because, although it put the IRS on notice that a refund was being requested, the trust never remedied the filing defect by filing an amended Form 1041. Palermo v. U.S., 2023 PTC 215 (S.D. Fla. 2023).

Background

In 2002, Magistrate Judge Peter Palermo (Judge Palermo) created the Peter R. Palermo Qualified Personal Residence Trust, and subsequently conveyed his home to the trust for a term of five years. Judge Palermo's son, Gregory Palermo (Palermo), was the sole trustee when the trust expired in 2007. Palermo then leased the property to his father in two subsequent one-year leases. In 2009, after the leases terminated, father and son agreed to a 99-year lease that expired upon the death of Judge Palermo. In 2015, Judge Palermo died, and the 99-year lease terminated.

In 2016, the trust sold the property for $1,875,000. That number was reported on the trust's tax return for 2016 on a Form 1041, U.S. Income Tax Return for Estates and Trusts. The trust claimed a basis of $2,021,096 for the property. To arrive at this basis amount, the trust added the "stepped-up basis" of the property (the fair market value of the property at the time of Judge Palermo's death and not the property's purchase price) and the allowable depreciation and costs of sale. The trust subtracted the basis from the proceeds of the sale plus allowed depreciation, which resulted in a capital loss of $126,108.

The IRS reviewed the trust's tax returns and determined that the trust could not use the stepped-up basis calculation. The IRS thereafter issued a notice of deficiency with the proper adjustments to the returns, and by September of 2021, the IRS demanded $930,127 in taxes, penalties, and interest from the trust. The trust paid the amount assessed. After years of correspondence between the IRS and the trust, Palermo filed a Form 843, Claim for Refund or Request for Abatement, to receive a tax refund with the IRS. The IRS rejected the request and Palermo filed an action for the refund in a district court.

Under Code Sec. 7422(a), a court has jurisdiction over a taxpayer's claim for a refund only if the taxpayer duly filed an administrative claim for refund on the form required by the applicable regulations. Reg. Sec. 301.6402-3(a)(4) provides that in the case of an overpayment for a year for which a form other than Form 1040, 1040A, or 1120 was filed (such as Form 1041 or Form 990T, Exempt Organization Business Income Tax Return, a claim for credit or refund must be filed on an amended return. In addition, the instructions for Form 843 specifically states that the form is for a refund of taxes other than income tax.

In U.S. v. Kales, 314 U.S. 194 (S. Ct. 1941), the Supreme Court held that when the formal requirements for a refund claim are lacking, an informal claim that does not use the correct form may be sufficient to confer jurisdiction on a court if (1) it gives fair notice of the nature of the taxpayer's claim to the IRS, and (2) the defects are remedied by amendment filed after lapse of the statutory period. In Lawrence v. U.S., 2015 PTC 24, the Eleventh Circuit (the court to which this case was appealable) applied Kales and found that a taxpayer who failed to remedy the formal defects in an earlier refund claim did not duly file an administrative claim under Code Sec. 7422(a).

In this case, the IRS filed a motion to dismiss Palermo's complaint on the basis that he failed to "duly file" an administrative claim for refund on an amended Form 1041, the form required by Reg. Sec. 301.6402-3(a)(4). Palermo responded that Form 843 was the proper form. He relied on Cash v. U.S., 2018 PTC 32 (3d Cir. 2018), where the Third Circuit held that Form 843 was the proper form to request a refund of the shared responsibility payment (SRP) under the Affordable Care Act. Alternatively, Palermo contended that even if Form 843 was the wrong form, it served as an informal claim because it put the IRS on notice of Palermo's belief that an erroneous tax was assessed. Palermo also cited two cases from other circuits - Lemoge v. U.S., 378 F.Supp. 228 (N.D. Cal. 1974), and Thomas v. U.S., 166 F.3d 825 (6th Cir. 1999) - in which each court held that filing a Form 843 is a sufficient informal claim. In addition, Palermo requested injunctive and declaratory relief to determine that the trust's tax was incorrectly determined by the IRS and to have the return reviewed and administered consistent with previous IRS policy and procedure.

Analysis

The district court held that the Form 843 filed by Palermo was not the proper form for the trust to request a refund of income tax, nor did it qualify as an informal claim. The court therefore granted the IRS's motion to dismiss.

The court found that an amended Form 1041 was the proper form and because such a form was not filed, no formal claim for a refund was filed with the IRS. The court noted that Reg. Sec. 301.6402-3(a)(4) specifically provides that a Form 1041 income tax refund requires the filing of an amended Form 1041. Further, the court observed that the instructions for Form 843 specifically state that the form is for a refund of taxes other than income tax. Palermo's reliance on Cash was misplaced, in the court's view, since in that case the taxpayers filed their tax returns on Form 1040 and filed a Form 843 solely to request a refund of the SRP, which is treated as a penalty for statutory purposes. The court also disagreed with Palermo's assertion that an amended Form 1041 is merely for correcting errors on the initial filing; the court again noted that Reg. Sec. 301.6402-3(a)(4) and the instructions for Form 843 both demonstrate that an amended Form 1041, rather than a Form 843, is proper under the circumstances presented.

The court also found that Palermo's Form 843 did not qualify as an informal claim. The court reasoned that, even though the Form 843 may have placed the IRS on notice, Palermo never remedied the defective refund claim by filing an amended Form 1041. The court rejected the reasoning of the out of circuit cases cited by Palermo. The court said that by relying only on the requirement of sufficient notice and not accounting for the requirement that the defect in the refund claim be remedied, those cases contradicted binding precedent of the Eleventh Circuit in Lawrence. The court quoted the language of the opinion in Fulham v. U.S., 2021 PTC 373 (N.D. Ill. 2021), in which a district court observed that the informal claim doctrine "does not mean that a taxpayer has a foot in the door of the courthouse, so long as the taxpayer submitted something to the IRS." In that case, the court first determined that Form 843 was not the proper form and then addressed whether a sufficient informal claim was submitted. The court found that even with a Form 1040X (the proper form for a refund in the Fulham case) attached to the compliant, the deficiency in the original refund claim was never corrected because the correction must be filed with the IRS, not the court.

The court also rejected Palermo's request for injunctive and declaratory relief. The court found that declaratory judgment would constitute judicial intervention that challenges the IRS's methods for determining taxes, which is plainly in conflict with the Anti-Injunction Act. The court also found that under the Administrative Procedures Act, judicial review is available on by statute or for final agency action for which there is no other adequate remedy at law. The court found that Palermo had an adequate remedy at law, since a suit for refund would be maintainable if Palermo properly filed an amended Form 1041.

For a discussion of filing a claim for a refund, see Parker Tax ¶261,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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