Without a comprehensive knowledge of federal tax law, it can be difficult for any taxpayer to determine if they're in the right when in a dispute with the Internal Revenue Service (IRS). Most people may simply give in to the tax-collecting body's demands when they receive a notification regarding unpaid amounts and fees, entirely unaware that the government entity's claim is may be unfounded or even illegal.
In this case, the United States of America filed suit against Harold Steinbrenner, co-owner of the New York Yankees. The Internal Revenue Service filed the action against Steinbrenner because he had filed an amended income tax return claiming a loss that resulted in a tax refund of $670,493. The IRS believed the Steinbrenner would have been entitled to the refund had his request been timely but objected to the validity of it claiming that the statute of limitations for Steinbrenner to request a refund, had passed.
The statute of limitations, in a claim for refund case is governed by Title 26, Section 6511(a) which states:
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. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.
In this case, the Steinbrenners’ paid the tax in June and October 2008 and filed the amended tax return (claiming the refund) in August 2009. Seemingly comfortably within the 2 year time period as provided for in Section 6511(a).
However, the IRS alleged that because the amended return related back to an adjustment to a partnership return (that therein flowed through to the individual return that was amended), it was entitled to pursue ‘special rule for claims with respect to partnership items.” The Special Rule, if applicable, requires that if a pertinent tax is “attributable to” a “partnership item,” the limitation of Section 6230(c)(2)(B)(i) applies, not Section 6511. Section 6230(c) (B)(i) requires that a claim for refund occur within “two years of the day on which the settlement is entered….” See Order
Judge Merryday then provides quite an elegant and informative interpretation of a difficult statute governing the ‘special rule’ the IRS believed it was entitled to employ.
Ultimately finding that the code section the IRS asserted was ‘Not the limitation applicable in this action because, in addition to other reasons, it is inapplicable on its face.’ Page 18 of Order.
Case studies such as this highlight the importance of being able to assert your rights in defending yourself in civil tax charges. It also highlights how complex tax statutes are written and how they can be manipulated by the government.