Beating the clock on refunds.

Most taxpayers know when to file their annual tax return. But they may be less sure of how much time they have to claim a refund. Three decisions last year may help clarify the rules.

In the first, Wachovia Bank was trustee for the George C. Nunamann Trust, which was created in 1984 and became a charitable trust in 1991. Although Wachovia was then no longer obligated to file returns or pay taxes, it mistakenly continued to do so through 2001. In 2003, Wachovia realized its error and filed for refunds for 1997 and 1998 totaling more than $111,000. Citing the three-year statute of limitations in IRC section 6511(a), the IRS denied the claims. A district court granted summary judgment for Wachovia. The IRS appealed (see "Tax Matters," JofA, Dec.06, page 82).

In the second case, home-products company Electrolux claimed a special exception to section 6511(a) in subsection (d)(2)(A), which allows refunds arising from a net capital loss carryback that are claimed within three years from the time for filing a return for the tax year in which the loss occurred. Electrolux's former parent company, White Consolidated Industries Inc. (WCI), had sustained a $53.8 million capital loss in 1994. WCI carried the loss back to 1993 and forward through 1998. In 1999, the IRS allowed refunds stemming from all the years except 1995, saying that WCI's Dec. 31, 1999, amended return was too late by 3 1/2 months. Electrolux, as successor-in-interest to WCI, sought a refund of more than $1.45 million for 1995 and filed a complaint in the U.S. Court of Federal Claims.

In the third case, Richard Stevens was named executor of the Gloria S. Keesey Stevens estate. In November 1998, he filed a request for an extension of time to file a return and included a payment of $162,109. He was given until May 16, 1999. Before the extended due date and several times after it, Stevens called the IRS and requested further extensions, noting that the estate was entitled to a significant refund. He was told he could extend the due date. On July 30, 2002, he filed the return, requesting a refund of $65,481. The refund was denied as being past the due date. Stevens filed an action in the U.S. District Court for Northern California.

Results. Against Wachovia and Electrolux but for Stevens.

Wachovia argued that it came under the general six-year statute of limitations for civil actions against the United States in 28 U.S.C. [section] 2401, outside the tax code. The Eleventh Circuit Court of Appeals said the three-year limit of section 6511(a) applied instead, interpreting "in respect of which tax the taxpayer is required to file a return" to mean a tax return generally.

In Electrolux, the court held that the special rule applied only to the carryback years, not a carryforward one. In Stevens, the court held that Stevens' telephone conversations were informal but valid requests and he was entitled to the refund.

These cases underscore that refund claims filed beyond the prescribed deadlines will be narrowly construed. The one exception is informal extension requests, although taxpayers must be able to prove they made them.

* Wachovia Bank v. U.S., 98 AFTR2d 2006-5111 (CA-11).

* Electrolux Holdings, Inc. v U.S., 97 AFTR2d 2006-3123.

* Richard O. Stevens v U.S., 98 AFTR2d 2006-5184.

Prepared by Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.