The United States Court of Appeals for the Second Circuit reversed the Tax Court’s decision in Borenstein v. Commissioner,1 which denied a taxpayer’s refund claim based on a reading of a complex lookback statute of limitations. The Second Circuit ruled that the Tax Court’s interpretation of Internal Revenue Code (IRC) § 6512(b)(3) created a six-month “black hole” for taxpayers who failed to timely file their return within three years of the original due date despite having filed a timely extension.
On April 15, 2013, Roberta Borenstein was granted a six-month extension to file her 2012 federal income tax return and submitted $112,000 in income tax payments for the year. Borenstein failed to file her return. On June 19, 2015, the Commissioner sent her a deficiency notice, which stated that Borenstein owed $1,666,463 in income taxes and $572,756.90 in penalties for 2012. Later, on August 29, 2015, Borenstein filed the late return and reported a tax liability of only $79,559, resulting in an overpayment of $32,441. On September 16, 2015, Borenstein filed a petition with the Tax Court calling for a redetermination of her 2012 tax deficiency, as well as a refund of her overpayment.
The Commissioner later stipulated that the income tax liability reported on the return was accurate but argued that Borenstein was only entitled to a two-year look-back period, as she had not filed a return before the mailing of the notice of deficiency, thus leaving the Internal Revenue Service (IRS) unable to remedy the overpayment.
Per IRC § 6512(b)(3), if a notice of deficiency is mailed “during the third year after the due date (with extensions) for filing the return,” and if no return was filed before the notice of deficiency was mailed, the applicable look-back period is three years. Borenstein argued that “(with extensions)” extends the “third year after the due date” by six months; therefore, the notice was mailed during the third year and the applicable look-back period should be three years. However, the Tax Court ruled that “(with extensions)” delays the beginning of the “third year after the due date” by six months, meaning that Borenstein’s notice of deficiency was mailed prior to the beginning of the third year, allowing only the default two-year look-back period.
Because the language in the code supports various interpretations, the Second Circuit consulted the legislative history to determine the meaning of Congress. After reviewing the conference committee report for the Taxpayer Relief Act of 1997, which triggered the amendment of IRC § 6512(b)(3), the Second Circuit stated that the Tax Court’s interpretation of the rule limited its jurisdiction, when in fact the amendment was intended to expand the jurisdiction of the Tax Court.
The court concluded that the “black hole” created by the Tax Court unreasonably harms the taxpayer. The court had an obligation to resolve the unclear language in tax statutes in favor of the taxpayer. The court concluded that “(with extensions)” expands the Tax Court’s jurisdiction to order refunds and credits. The Second Circuit reversed the judgment of the Tax Court and remanded the entry of judgment for Borenstein.
In its most simple form, the analysis in this case could be relevant to taxpayers seeking refunds on prior tax obligations. More importantly, the Second Circuit felt that it had an obligation to resolve unclear or doubtful language within the tax statutes in favor of the taxpayer. This principle should provide additional comfort to taxpayers struggling to interpret the difficult language used in regulations. The analysis used by the Court could be used in future cases to challenge burdensome language that unreasonably impairs the taxpayer.
1 Borenstein v. Commissioner, 149 TC No. 10.
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