Mitigation of the SOL on refund claims.

The Internal Revenue Code's mitigation provisions (Sees. 1311-1314) are available to either a taxpayer or the IRS to provide relief when the statute of limitations (SOL) or other provisions would otherwise give rise to an inequitable adjustment in tax. The provisions permit either a refund to the taxpayer or an assessment to the Service under special circumstances.

The mitigation provisions usually arise when the taxpayer or the IRS maintains an inconsistent position, the effect of which would cause a double inclusion of income or double exclusion of a deduction. For example, assume a taxpayer erroneously includes an item of income in year 1 (a year closed by the statute) when it should have been included in year 2. If the Service determines that year 2 rather than year 1 is the proper year of inclusion, the Service has maintained an inconsistent position. The taxpayer can invoke the mitigation provisions to Obtain a refund for the taxes paid on the income item in year 1 (Regs. Sec. 1.1311 (b)-1(b)(1)). Likewise, if a taxpayer erroneously claims a deduction in year 1, which the IRS determines should have been claimed in year 2, the taxpayer has maintained an inconsistent position. The Service can invoke the mitigation provisions to assess additional tax in year 1, despite the fact that the SOL for year 1 is otherwise closed (Regs. Sec. 1.1311(b)-1(c)). In all cases, a key element is the existence of a "determination" under Sec. 1311 that gives rise to the inconsistent position.

Taxpayers often invoke the mitigation provisions when refund claims are not timely filed. The IRS and the courts normally deny these claims, as the Ninth Circuit recently did in Beaudry Motor Co., 9/16/96.

Corporation B filed returns for calendar-year 1983 and 1984, properly claiming an investment tax credit (ITC). In 1986, B disposed of some of the property that gave rise to the 1983 and 1984 ITCs. On its 1986 corporate return (filed in 1987), B reported and paid the recapture tax attributable to the ITCs. Subsequently, in 1987, B amended its 1985 corporate return, reporting a net operating loss (NOL). B filed amended returns to carry back the 1985 NOL to 1983 and 1984. The effect of this NOL carryback was to "free up" the ITCs originally claimed in 1983 and 1984. In 1991, more than three years after the extended due date of the 1986 return, B filed an amended 1986 return, claiming a refund for the ITC recapture tax. The Service denied the claim, citing the three-year SOL period (Sec. 6511 (a)).

The taxpayer argued that when the IRS allowed the NOL carryback from 1985 to 1983 and 1984, it effectively disallowed the ITCs for those two years. Thus, under Sec. 1312(4), this action constituted a determination disallowing a deduction or credit that should have been allowed to B for another tax year. However, the Ninth Circuit stated that the allowance of the NOL carryback claims for 1983 and 1984 did not constitute a disallowance of a deduction or credit under Sec. 1312(4). B could have filed a timely amended 1986 return when it filed its amended returns for 1983-1985. The court stated that B should have realized that one consequence of the NOL carryback would be the loss of the ITCs and elimination of the 1986 recapture tax.

Comment: The case emphasizes that the mitigation provisions are meant to cover narrow circumstances and were not intended to provide relief to a tax-payer who has delayed filing a return or refund claim.