Examination form preserved a taxpayer’s unresolved refund claim

Plain-English summary

A field examination produced a signed Form 4549 showing that taxpayers were due a refund after a loss reduced their taxable income. The Taxpayer Advocate Service later submitted Form 982 on a different theory, arguing that cancellation-of-debt income should be excluded because the taxpayers were insolvent. Chief Counsel advised that the Form 4549 was a timely informal refund claim and that the Form 982 was a separate claim based on new grounds. A Letter 105C expressly disallowed only the Form 982 claim, so it did not start the two-year refund-suit period for the Form 4549 claim. Because that earlier claim remained timely and undisallowed, section 6514 did not bar the IRS from issuing the remaining refund or credit.

Ruling snapshot

• Question: Did the Form 4549 preserve a refund claim that remained payable despite a later Letter 105C addressing Form 982?
• Outcome: advice given, the Form 4549 was a timely informal claim that had never been disallowed
• Key authorities: IRC §§ 6511, 6514, 6532; Treas. Reg. § 301.6402-2; United States v. Kales; Pala, Inc. Employees Profit Sharing Plan & Trust Agreement v. United States

Full text (IRS public release)

Office of Chief Counsel
           Internal Revenue Service
           Memorandum
           Number: 201921013
           Release Date: 5/24/2019
           CC:PA:02: --------------------
           POSTF-128572-18

 UILC:     6511.09-00, 6514.00-00, 6532.02-01

  date:    December 20, 2018

     to:   Peggy Gartenbaum
           Associate Area Counsel, Long Island
           (Small Business/Self Employed: Area 1)

  from:    Adrienne Griffin
           Branch Chief
           (Procedure & Administration)


subject:   POSTF-128572-18

           This memorandum responds to your request for assistance. This advice may not be
           used or cited as precedent.

           LEGEND

           Taxpayers = --------------------------------------------
           Tax year at issue = --------

           ISSUES

           (1)     Whether the Form 4549 constituted an informal claim for refund.
           (2)     Whether the Form 982 constituted an additional informal claim for refund.
           (3)     Whether the Letter 105C triggered the two-year period of limitations for taxpayers
                   to file a refund suit.
           (4)     Whether the Service is barred from making a refund or credit by I.R.C. § 6514.

           CONCLUSIONS

           (1)     The Form 4549 constituted an informal claim because it comprised a timely
                   request for a refund/credit for certain years or periods and informed the Service
                   of the basis for the overpayment.

POSTF-128572-18                                   2

(2)       The Form 982 constituted an additional claim because the form and supporting
          documents provided an alternative basis for the claim than was iterated in the
          Form 4549 claim.
(3)       The Letter 105C did not disallow the claim contained in the Form 4549 and
          therefore the I.R.C. § 6532 period for filing suit has not begun to run.
(4)       Because the Form 4549 was a timely informal claim that was never disallowed,
          I.R.C. § 6514 does not prevent the Service from making a credit or refund in this
          case.

FACTS

         -------------------: Federal income tax for tax year --------deemed timely paid
         -------------------: Federal income tax return for tax year --------deemed timely filed
         ---------------------------: Examination of return by Automated Underreporter
          Program (AUR) begins
         ---------------------Examination of return by --------------Field Examiner (Exam)
          begins
         --------------------Notice of Deficiency sent to taxpayers by AUR
         ----------------------: Assessed additional tax of -----------as a result of defaulted
          Notice of Deficiency
         ---------------------POA signs Form 4549 (Income Tax Examination Changes)
         ---------------------- Taxpayer Advocate Service (TAS) submits Form 982
          (Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section
          1082 Basis Adjustment)) and supporting documents
         ------------------------ Letter 105C disallows claim dated ----------------------

The taxpayers’ --------return was simultaneously selected for review by both AUR and
Exam. Subsequent to the AUR review, the taxpayers were assessed an additional -------
----------of tax due to -----------of unreported cancellation of indebtedness income and the
denial of an unsubstantiated ------------------------------credit of -------. The assessment
resulted from a defaulted Notice of Deficiency. Subsequent to the Field Examiner’s
review, the taxpayers’ representative signed a Form 4549 that showed a refund due to
the taxpayers of ----------, because of the allowance of a ----------------------------loss. The
Form 4549 included the ----------of cancellation of indebtedness income and allowed the
------------------------------credit of -------. The -----------of unreported cancellation of
indebtedness income was therefore taken into account by both AUR and Exam, and by
the time the POA signed the Form 4549, the additional tax related to this income had
been assessed and the -------- ---------------credit had been removed from the account.

In ---------------, the Service sent the taxpayers a refund check in the amount of ------------
(plus ------------in interest), which was less than the amount shown they were due on
Form 4549. The difference of -----------represents the additional assessment ------------
and credit removal ---------. Beginning in --------------, the taxpayers met with TAS to try to

POSTF-128572-18                                 3

obtain the balance of the refund. --------------------------, the taxpayers and their
representative communicated with the Service in attempts to have the assessment
removed and the credit restored so that they could receive the balance of the refund. In
-----------of -------, TAS submitted a Form 982 on behalf of the taxpayers. On ----------------
-------, the Service issued a Letter 105C, Claim Disallowed.

LAW AND ANALYSIS

I.R.C. § 6511 provides, in pertinent part, that

       Claim for credit or refund of an overpayment of any tax imposed by this
       title in respect of which tax the taxpayer is required to file a return shall be
       filed by the taxpayer within 3 years from the time the return was filed or 2
       years from the time the tax was paid, whichever of such periods expires
       the later, or if no return was filed by the taxpayer, within 2 years from the
       time the tax was paid.

“Read together, the import of these sections is clear: unless a claim for refund of a tax
has been filed within the time limits imposed by I.R.C. § 6511(a), a suit for refund,
regardless of whether the tax is alleged to have been “erroneously,” “illegally,” or
“wrongfully collected,” … may not be maintained in any court.” United States v. Dalm,
494 U.S. 596, 602 (1990).

I.R.C. § 6514 provides, in pertinent part,

       A refund of any portion of an internal revenue tax shall be considered
       erroneous and a credit of any such portion shall be considered void … If
       made after the expiration of the period of limitation for filing claim therefor,
       unless within such period claim was filed; or … [i]n the case of a claim
       filed within the proper time and disallowed by the Secretary, if the credit or
       refund was made after the expiration of the period of limitation for filing
       suit, unless within such period suit was begun by the taxpayer.

I.R.C. § 6514 provides that a refund is erroneous if it is made after the expiration of the
I.R.C. § 6511 limitations period and no timely claim was filed with the Service or if a
claim is filed and disallowed and the taxpayer does not file suit within the time outlined
in I.R.C. § 6532. Computervision Corp. v. United States, 445 F.3d 1355, 1367 (Fed.
Cir.), adhered to on denial of reh’g, 467 F.3d 1322 (Fed. Cir. 2006).

I.R.C. § 6532(a) provides, in pertinent part,

        No suit or proceeding shall be begun … after the expiration of 2 years
        from the date of mailing by certified mail or registered mail by the
        Secretary to the taxpayer of a notice of the disallowance of the part of
        the claim to which the suit or proceeding relates.

POSTF-128572-18                                4

Thus, once the two-year period expires without a taxpayer filing suit, I.R.C. § 6514
prevents the Service from making a refund or credit

Issue 1: Whether the Form 4549 constituted an informal claim for refund.

The regulations under I.R.C. § 6402 set forth the formal requirements for filing a refund
claim. It has long been recognized by the courts, however, that an informal claim for
refund may suffice. See, e.g., United States v. Kales, 314 U.S. 186, 194 (1941). A valid
informal claim for refund must have a written component (written by either the taxpayer
or the Service); must include a timely request for a refund/credit for certain years or
periods; and must inform the Service of the basis for the overpayment with sufficient
information as to the tax and year to allow the Service to examine the claim. Pala, Inc.
Employees Profit Sharing Plan & Trust Agreement v. United States, 234 F.3d 873, 877
(5th Cir. 2000).

While an informal claim must have some written component, each case must be
decided on its own particular set of facts with the primary question being whether the
Service knew or should have known that a refund claim was being made. American
Radiator & Standard Sanitary Corp. v. United States, 318 F.2d 915, 920 (Ct. Cl. 1963);
Newton v. United States, 163 F. Supp. 614 (Ct. Cl. 1958). In American Radiator, the
court noted that the purpose behind the requirement of an adequate informal refund
claim is to prevent surprise through the giving of adequate notice of the nature of the
claim as well as of its factual basis so that the Service may begin an investigation into
the claim. A Form 4549, which reflects an overpayment on line 16 (Balance Due or
Overpayment) of the form, could be considered a valid refund claim because it puts the
Service on notice that a refund claim was being made. See Rev. Rul. 68-65, 1968-1
C.B. 555 (holding that a Form 870 waiver on which a taxpayer agrees to an
overassessment will be considered a valid refund claim.). As far as we are aware, there
is no case law directly considering whether a Form 4549 can be considered an informal
claim.

Based on the facts we have received, it is likely that the Form 4549 was an informal
claim.


                                                                             Finally,
the Form 4549 informal claim was timely filed under I.R.C. § 6511 because it was filed
within three years from the time the income tax return was filed.

Issue 2: Whether the Form 982 constituted an additional informal claim for refund.

Although the Form 4549 was likely a timely informal claim, we must also consider
whether the Letter 105C triggered the two-year period of limitations to file suit. If it did,
because it is now more than two years later, no suit would be possible due to I.R.C. §

POSTF-128572-18                               5

6532. Thus under I.R.C. § 6514(a)(2), the Service would not be able to make any credit
or refund.

Determining whether additional documentation submitted by the taxpayer constitutes an
additional informal claim, an update to the prior claim, or neither of the two is a matter of
fact dependent on the information contained in that documentation. This issue typically
arises in cases where the taxpayer has been issued two separate notices of claim
disallowance and the question is whether the second disallowance triggers a new two-
year period under I.R.C. § 6532. If the second claim merely duplicates the first, then
there is only one period in which a refund suit can be filed. In Byrne v. United States,
127 Fed. Cl. 284, 298 (2016), the Court of Federal Claims addressed the ways in which
case law has differentiated between potentially duplicative claims.

        Compare Jones v. United States, 26 Cl. Ct. 424, 425 (1992)
        (determining that where plaintiff’s second set of refund claims are
        identical to the first set of refund claims “in all material respects,” the
        second set of refund claims does not change the statute of limitations
        (citing 26 U.S.C. § 6532(a)(4)), aff’d, 988 F.2d 131 (Fed. Cir. 1993)),
        and B. Altman & Co., 69 Ct. Cl. at 727, 40 F.2d 781 (“The second
        refund claim ... raises no new issue, involves no additional assessment
        made subsequent to the filing and denial of the first, and could not by
        any possibility occasion a reopening of plaintiff’s tax liability[.]”), with
        Charlson Realty Co. v. United States, 181 Ct. Cl. 262, 270, 384 F.2d
        434 (1967) (“[T]he two claims are separate and distinct ... the second
        claim alleges and asserts facts, grounds, and theories for recovery
        different from those set forth in the first claim.”); see also Pacetti v.
        United States, 50 Fed. Cl. 239, 249 (2001) (determining that the filing of
        a second claim for an increased amount of refund for the same taxable
        periods does not alter the statute of limitations.).

Two similar claims can be considered independent when “[t]he second claim was not a
mere repetition of the first claim, but is based upon new grounds, and, therefore,
constitutes a separate claim which is entitled to independent treatment with reference to
the statute of limitations.” Charlson Realty Co., 384 F.2d at 440. In Charlson, the
taxpayer submitted two claims for refund. Both claims alleged the same amount of
refund plus interest was due back to the taxpayer and both claims contained the same
grounds as the basis for the taxpayers’ recovery. However, the second claim, while
containing the same grounds as iterated in the first claim, alleged various other and
different grounds and theories for recovery. The court determined that these two claims
were different because of the additional grounds for relief outlined in the second claim.
Id.

Similarly, in this case, the Form 4549 claim and the Form 982 claim are two separate
claims. The Form 4549 claim is a claim for refund of taxes already paid. The grounds for
the Form 4549 claim stemmed from a recalculation of taxable income due to a ------------

POSTF-128572-18                                    6

-------------------------------------------------. The loss was brought to the Service’s attention
during the examination on a Form 4797, which allowed the taxpayers to deduct the loss
from the sale of --------------------------------from their taxable income, leading the
taxpayers to ultimately have negative income for --------and to being due a refund. The
Form 4549 included the taxpayer’s cancellation of indebtedness income and the
taxpayers did not dispute that inclusion.

The Form 982 claim and supporting documents is not a repetition of the Form 4549
claim because is a claim based upon new grounds. The Form 982 dealt with the
taxpayers’ --------cancellation of indebtedness income1 and is a claim to recalculate the
taxpayers’ taxable income, without taking it into account. The grounds for the Form 982
claim were to dispute the inclusion of cancellation of indebtedness income in the
taxpayers’ taxable income due to the taxpayers’ insolvency stemming from their loss in
the sale of -------------------------------. The form and the supporting documents were sent
to “substantiate [the taxpayers’] insolvency in -------” and were not sent to substantiate
or amend the previous Form 4549 claim or its grounds for refund (namely, ------------------
------).

Issue 3: Whether the Letter 105C triggered the two-year period of limitations for
taxpayers to file a refund suit.

Using a Letter 105C is an appropriate means to fully disallow claims. See IRM
21.5.3.4.6.1 (Letter 105C is one of the form letters used for a notice of total claim
disallowance). Because there were two claims involved in this case, the Form 4549
claim, and the Form 982 claim, we must determine whether the Letter 105C was a
denial of both claims, just one of the claims, or neither claim.

The Letter 105C was most likely issued in response to the Form 982 claim and
supporting documentation as opposed to the Form 4549 claim. While --------is the year
at issue for both claims, the Letter 105C explicitly disallowed a claim dated -----------------
-------, the date of the Form 982 claim. The letter 105C does not reference the Form
4549 claim or any other prior claim or date. Without more information, the Letter 105C
can only be read as a disallowance of the claim it explicitly references, the Form 982
claim. The Letter 105C was a disallowance of the Form 982 claim and cannot be
considered a disallowance of the Form 4549 claim, which as discussed above, was
based on different grounds. Thus, the best interpretation is that Form 4549 claim has
never been disallowed.

Issue 4: Whether the Service is barred from making a refund or credit by I.R.C. § 6514.

I.R.C. § 6514 prevents the Service from issuing refunds or credits if certain periods of
time have elapsed. If the taxpayer did not file an administrative claim for refund within

1
 This form is used to determine under certain circumstances described in I.R.C. § 108 the amount of
discharge of indebtedness income that can be excluded from gross income.

POSTF-128572-18                              7

the I.R.C. § 6511 period of limitations, then no refund or credit can be made. In addition,
no refund or credit can be made if the taxpayer timely filed a claim for refund and more
than two years have passed since that claim was disallowed and the taxpayer has not
filed suit.

The taxpayers submitted the Form 4549 claim in -------. That claim was timely under
I.R.C. § 6511 because it was filed within three years from the time the tax return was
filed. The Form 4549 claim was never disallowed because the taxpayers never received
a Letter 105C or other letter of disallowance pertaining to that claim and thus the I.R.C.
§ 6532 period never began to run. Therefore I.R.C. § 6514 does not preclude the
Service from issuing the taxpayers a refund.


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