2019 is turning into a banner year for cases in which GSU’s own Philip C. Cook Low Income Taxpayer Clinic and the Harvard Federal Tax Clinic have partnered up to file amicus briefs. On April 2, the United States Second Circuit Court of Appeals reversed the United States Tax Court in Borenstein v. Comm’r of Internal Revenue (No. 17-3900).
This was a case that the clinics had been involved with for some time, as they had filed amicus briefs when the case was in the United States Tax Court as well. For a good discussion on the background of the case before it landed in the Second Circuit, see here and here. In a nutshell, the case involved a very technical application of the statute of limitations applicable to receiving tax refunds and a question over whether taxpayers who request extensions to file their tax returns but who then end up not using the extension experience a 6 month “black hole” in the middle of their refund statute in which they lose their ability to obtain a refund, only to regain it after the six month window has passed.
The roots of this problem go back to Congress’ attempt to remedy unfairness in the refund statute and to legislatively correct a limitations consistency problem from the Supreme Court’s decision in Comm’r of Internal Revenue v. Lundy, 516 U.S. 235 (1996). Normally, taxpayers have a three year lookback period to request refunds if they receive a notice of deficiency (i.e. a notice from the IRS stating that the IRS believes they owe additional tax). However, under prior law, this lookback period was shortened to two years if the IRS sent a notice of deficiency before the taxpayer had filed a tax return. Congress rightfully believed that a three year lookback period should apply regardless of whether the return was filed before the IRS issued a notice of deficiency and accordingly amended IRC § 6512(b)(3) to state that a three year lookback period would apply for refunds if the IRS mailed a notice of deficiency “during the third year after the due date (with extensions) for filing the return” and before the taxpayer had filed the return.
For years, this seemed to have resolved the issue, until the unique facts of Ms. Borenstein’s case came along. Ms. Borenstein overpaid her 2012 taxes at the time her 2012 tax return was due but received a six-month extension for the filing of the return (the six-month extension is basically automatically granted to taxpayers who request it, but it is only an extension of the time to file the return, not to pay the tax). However, she then did not file her 2012 tax return until after the IRS issued its notice of deficiency to her in June of 2015 (i.e., 26 months after the normal return filing deadline of April 15, 2015). Thus, an interesting question of statutory interpretation was born. Was this notice issued in the third year because it was more than 24 months past the original return due date, thus entitling Ms. Borenstein to a three year lookback period that would allow her to receive her 2012 refund? Or, alternatively, because Ms. Borenstein requested a six month extension of the return filing due date, was the notice issued in the second year after the return due date, in which case Congress’s amended language to IRC § 6512(b)(3) would seemingly not apply, requiring application of the two year lookback period that would put Ms. Borenstein’s refund 2 months out of reach?
Basically, this case turned on the statutory interpretation meaning of what the phrase “with extensions” should modify. Ms. Borenstein argued that it should be interpreted to have the third year run from April 16, 2015-October 15, 2016 (i.e., it should begin immediately at the start of the third year and end six months after the end of the third year because of the extension request). The IRS argued that the third year should not begin until October 16, 2015 because of the six month extension request, which would create a six-month “black hole” in which the IRS could issue a notice of deficiency between April 16, 2015 and October 15, 2016, and Ms. Borenstein would be subject to a two year lookback period, only to have a three year lookback period once again apply from October 16, 2015-Octobber 15, 2016.
The Tax Court had ruled in favor of the IRS because it believed that rules of statutory construction clearly indicated that “with extensions” only modified “due date,” which would cause the third year not to begin until October 16, 2015. The Second Circuit, however, acknowledged that it was certainly plausible that “with extensions” modified the phrase “third year after the due date”, which would support Ms. Borenstein’s interpretation if Congress did in fact intend that meaning. Because the Second Circuit realized that there could be possible interpretations of the statute, it consulted the relevant legislative history to ascertain Congressional intent. Noting that Congress amended IRC § 6512(b)(3) to provide more consistent and equal treatment among taxpayers, the court stated that the IRS’s interpretation in this case would increase rather than reduce inconsistent taxpayer treatment. Accordingly, the court agreed with Ms. Borenstein that her interpretation more accurately reflected Congressional intent. Thus, Ms. Borenstein’s refund was deemed to be in the third year, allowing a three year lookback period that has now allowed her to finally obtain her refund for 2012.
Why did the clinics get involved as amici in a hyper-technical statutory interpretation case involving the statute of limitations? A world in which an arbitrary six month “black hole” in which taxpayers lose their rights to obtain refunds if they have not filed a tax return can have a particularly negative impact on the types of low-income taxpayers that the clinics routinely represent. Low-income taxpayers often find themselves in situations in which, despite their best efforts to comply with the tax law, they may miss a return filing deadline because of a lack of knowledge about their filing obligations or challenges resulting from adverse conditions such as disability, lack of affordable childcare, the need to take on multiple jobs, etc. Compounding this problem is that losing even a modest refund to which they would otherwise be entitled can dramatically worsen the financial situations of many low-income taxpayers. The clinics were very concerned that, should the IRS’s interpretation become law, this would add a needless degree of complexity and unequal taxpayer treatment that could impose yet another roadblock on non-filing low-income taxpayers’ ability to obtain refunds during the three year lookback period that Congress intended to apply uniformly.