Tax Court's decision in Risman gives hope for some refunds previously thought barred by SOL.
Risman, an independent real estate broker and insurance agent, was experiencing distress in both his business and personal affairs during April 1982. Among other things, Risman's long-time office manager and bookkeeper was terminally ill with cancer. In addition, he moved his business office. As a result, his business records were in disarray at the time he was required to file his return. In April 1982, he filed Form 4868 for his 1981 Federal income tax return. Along with the extension application, Risman remitted a $25,000 payment to the IRS.
In June 1983, the taxpayer indicated to the Service that the $25,000 remittance was not based on any estimate of the taxpayer's 1981 liability. Instead, the funds were to be applied to future taxes owed on the returns he had not yet filed.
In June 1989, the taxpayer filed a Federal income tax return reflecting a tax liability of $1,283 and an overpayment of $23,717. In the same month, the IRS assessed the reported liability and applied $1,283 of the $25,000 remittance against this amount.
Subsequent to a later audit, the Service issued deficiency notices for 1981 through 1985. Due to various concessions, the sole issue before the Tax Court was the point in time at which the $25,000 remittance was to be treated as a payment of taxes. If the taxpayer's remittance was treated as a payment when remitted in April 1982, the SOL under Sec. 6511 would bar any refund or credit to later years.
SOL under Sec. 6511
The limitations on claims for refund or credit are twofold: Sec. 6511(a) imposes specific filing periods and Sec. 6511(b) places a limit on the amount of overpayment that may be credited or refunded. Under Sec. 6511(a), a timely claim for refund must be filed within (1) three years from the date the return was filed or (2) two years from the date the tax was paid, whichever is later. Sec. 6511(b)(2)(a) provides that if the claim was filed within three years from the date the return was filed, the amount of the credit or refund will not exceed the amount of tax paid within the period immediately preceding the filing of the claim, equal to three years plus any extension.
In this case, the regulations under Sec. 6402 provide that the taxpayer's income tax return will serve as a claim for refund. As such, the return and claim are considered filed on the same day and the filing limitation under Sec. 6511(a) is obviously met. The amount of refund allowed under Sec. 6511(b), however, hinges on the question of when the remittance became a payment.
Payment of tax
Whether or not a preassessment remittance constitutes a payment for purposes of the SOL on refunds and credits has been an area of considerable controversy. in Rosenman, 323 US 658 (1945), the Supreme Court held that a tax is paid when the taxpayer intends that a remittance satisfy what the taxpayer regards as an existing tax liability. Until such time, and absent such intent, a remittance will generally be regarded as a mere deposit.
Under Sec. 6513(b)(2), estimated tax payments (and tax withholding) are deemed to be payments of tax made on the last day prescribed for filing a return. As such, remittances of estimated tax (and tax withholding) are "payments" for Sec. 6511 purposes, regardless of whether a tax liability has been assessed or the taxpayer's intent. In Risman, the IRS argued that the remittance accompanying Form 4868 must be treated, by law, as a payment of estimated tax and as a payment of tax under Sec. 6513(b)(2). Consequently, the Service contended, any recovery of the remittance was barred by Sec. 6511(b)(2)(A). The IRS cited two previous Federal District Court opinions that held that despite the differences between payments under Sec. 6015 and those under Sec. 6081, a remittance accompanying a Form 4868 must be treated as a payment of "estimated income tax" for purposes of the Sec. 6511 SOL (England, 760 F Supp 186 (DC Kans. 1991); Batton, DC Md., 1987). Essentially, the England and Batton courts held that the differences between payments under Sec. 6015 and Sec. 6081 were insignificant as they relate to Sec. 6513(b)(2). The Tax Court, however, found these decisions to be "conclusory, cursory and . . . erroneous."
estimated tax payments
and extension payments
The Tax Court noted "obvious and significant" differences between payments of estimated tax under Sec. 6015 and a payment of estimated total tax liability ("extension payment") required under Sec. 6081. These differences included the fact that estimated tax payments are paid quarterly with Form 1040-ES, while extension payments are made at the return's due date and constitute an attempt to estimate a taxpayer's total income tax liability. More significantly, the court noted differences between the "statutory scheme and in the language relating to" payments of estimated tax under Secs. 6015 and 6513(b)(2) and to the remittance of amounts estimated as total tax due under Sec. 6081. Finally, the court noted that, in some cases, remittances made by taxpayers with Form 4868 are not necessarily to be treated as payments of tax. This conclusion took into consideration Crocker, 92 TC 899 (1989), in which a remittance not based on good faith calculations caused the taxpayer's extension request to be invalid.
Based on these differences, the Tax Court concluded that payments accompanying Form 4868 were not payments of estimated tax for purposes of Sec. 6513(b)(2). Therefore, given the taxpayer's lack of intention that the remittance satisfy a liability, no payment occurred until the 1981 return was filed in 1989 (and the related liability assessed).
Implications for taxpayers
The Tax Court's decision in Risman gives hope to some taxpayers who have had claims for refund denied due to the SOL under Sec. 6511. The court's holding indicates that preassessment extension remittances not intended to satisfy an ascertained tax liability become "payments" when the related tax liability is assessed rather than when remitted. Practitioners would be well-advised to examine any claims that have been denied in light of the Risman decision. If the facts and circumstances indicate that an extension payment was intended to serve as a deposit, a refund previously thought "lost" may be obtained.
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|Title Annotation:||statute of limitations|
|Author:||Ruane, James F.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 1993|
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