Supreme Court resolves refund issue in Service's favor.

The Supreme Court recently decided that the Tax Court does not have jurisdiction to grant a refund of taxes paid more than two years prior to the date the Service had mailed a notice of deficiency if, on the date the notice was mailed, the taxpayer had not yet filed a return (Lundy, 1/17/96). This decision clarifies that in these circumstances, the applicable look-back period under Sec. 6512 (b) (3) (B) is two years.

In 1987, Lundy had Federal income tax withheld from his wages. He did not file a tax return by Apr. 15, 1988, the due date for 1987 tax returns. On Sept. 26, 1990, over two years after Lundy's tax return was due, the IRS mailed Lundy a deficiency notice for his 1987 taxes presumed due.

On Dec. 22, 1990, Lundy mailed his 1987 tax return (filed jointly with his wife), which was received by the Service on Dec. 28, 1990. The return showed an overpayment of income tax in the amount of $3,537. On Dec. 28, 1990, Lundy filed a petition in the Tax Court requesting it to determine that there was an overpayment of tax and that he was entitled to a refund.

The Tax Court held that it could not determine whether a refund was due the taxpayer, because Sec. 6512 limits the Tax Court's authority to make such determinations to cases involving overpayments for which a refund claim could have been filed (whether it was or not) at the time the deficiency notice was issued. Lundy's tax payments, consisting of amounts withheld from his and his wife's wages, were deemed to have been paid on Apr. 15, 1988. Because the IRS sent the deficiency notice on Sept. 26, 1990, more than two years after the date Lundy was deemed to have paid his taxes, the Tax Court could not order a refund for the overpayment of taxes. Also, since the tax return had not been filed when the deficiency notice was issued, the three-year rule for refund claims was inapplicable.

The Fourth Circuit found that, had Lundy filed his claim for refund in district court or the Court of Claims, Sec. 6512 would not have applied and his claim would have been considered. Thus, the Fourth Circuit, applying principles of fairness, determined that Lundy was entitled to his refund.

The Tenth Circuit had explicitly followed the Tax Court's interpretation of Sec. 6512 in a case with facts identical to Lundy's situation; see Richards, 10/5/94. The Tenth Circuit held that, under Sec. 6512, Richards was deemed to have filed her claim for refund on the date of the mailing of a deficiency notice. Because Richards did not file a tax return until after that date, the Tenth Circuit determined that the Tax Court did not have the authority to grant her refund.

The Supreme Court's decision resolved this conflict, holding that a taxpayer is barred by the statute of limitations from receiving a refund of taxes paid more than two years prior to the date the Service had mailed a deficiency notice if on the date the notice was mailed, the taxpayer had not yet filed a return.

This case puts pressure on nonfilers with overpayments to act within two years, rather than three.