CCA 1216033: Form 843 may amend a timely refund claim

Plain-English summary

Chief Counsel advice concludes that a taxpayer's Form 843 could be treated as a permissible amendment to a timely Form 1040X, rather than as a new and untimely refund claim. The taxpayer had originally claimed a refund after removing fictitious interest income from a return connected to a failed investment scheme. The IRS concluded that the later form raised the same refund basis and did not require investigation of new matters. Because the IRS had overlooked that basis when it disallowed the original claim, the advice concluded that the refund claim was not time-barred under IRC § 6511.

Ruling snapshot

• Question: Could the later Form 843 amend the taxpayer's timely Form 1040X instead of being an untimely new refund claim?
• Outcome: Advice
• Key authorities: IRC §§ 6402, 6511, 7503, and 165; Treas. Reg. § 301.6402-2(a)(1); Treas. Reg. §§ 1.165-1(d)(2)(i), 1.165-8(a)(2).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201216033
       Release Date: 4/20/2012
       CC:NTA:SLHartford
       POSTN-136718-11

UILC: 6511.05-00, 6511.09-00

date: January 05, 2012

 to:   Frederic M. Blinn
       Local Taxpayer Advocate, Indianapolis

from: Susan L. Hartford
Technical Advisor to the Special Counsel
(National Taxpayer Advocate)

subject: Timeliness of Refund Claim

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

       LEGEND

       Taxpayer = ----------------------

       Amount1 = $------------

       Amount2 = $---------

       Amount3 = $---------

       Amount4 = $-------------

       Amount5 = $---------

       Date 1 = -------------------

       Date 2 = -------------------

       Date 3 = --------------------------

POSTN-136718-11 2

Date 4 = --------------------------

Date 5 = -------------------------

Date 6 = -------------------------

ISSUE

Whether Taxpayer’s Form 843 was a permissible amendment to her timely filed Form
1040X rather than a new, untimely claim for refund for tax year 2003.

CONCLUSION

Section 6511(b)(1) provides that a refund cannot be allowed unless a timely claim for
refund is filed. Taxpayer timely filed a Form 1040X for tax year 2003. The facts upon
which the later-filed Form 843 did not require an investigation of new matters, as
Taxpayer was merely reiterating the claim she had made on Form 1040X. Moreover,
the Commissioner had overlooked the grounds upon which she was claiming a refund in
the Form 1040X. Therefore, the Form 843 should be viewed as a permissible
amendment to the Form 1040X, and her refund for tax year 2003 is not time-barred.

FACTS

Beginning in 2003 and continuing until sometime in early 2006, Taxpayer invested
$Amount1 with a businessman. For tax year 2003, Taxpayer received a Form 1099-
INT, reporting $Amount2 in interest income, and reported that amount on her 2003
Form 1040 filed on April 15, 2004.

In 2006, Taxpayer learned the businessman had been embezzling funds and the
investment was a Ponzi scheme. Taxpayer filed Form 1040X for 2003, eliminating the
$Amount2 as interest income, as she had never actually received any interest income.
As a result, Taxpayer timely claimed a refund for 2003 of $Amount3. The IRS received
the Form 1040X on Date 1. Because Taxpayer was able to recover $Amount4 of the
$Amount1 she had invested, Taxpayer claimed the remaining $Amount5 as a theft loss
on Form 1040 for tax year 2006.

On Date 2, the IRS issued Letter 906 to Taxpayer, disallowing her claim for refund for
the 2003 tax year. The explanation for the denial was as follows:

    Any loss arising from theft is treated as sustained in the year in which the
    taxpayer discovers the loss. See IRC Sec. 165(e). The amount of a theft loss is
    reduced by any recovery. In addition, a taxpayer is not entitled to a theft loss if
    she has a claim for reimbursement and there is a reasonable prospect of
    recovery. See Treas. Reg. 1.165-1(d)(2)(i) and (3); 1.165-8(a)(2).

On Date 3, Taxpayer filed Form 843 for tax year 2003, again requesting a refund for
that year on the theory that the interest income originally reported was fictitious and the
POSTN-136718-11 3

money Taxpayer actually received was a return of capital. The IRS received Form 843
on Date 4.

On Date 5, Taxpayer contacted the IRS to ascertain the status of the Form 843. The
IRS responded on Date 6, indicating the IRS was still doing research. Taxpayer never
heard anything further from the IRS.

LAW AND ANALYSIS

As a preliminary matter, we note that our analysis focuses on the timeliness of a refund
claim, not the proper income tax treatment of the losses resulting from this failed
investment scheme. We have confirmed with CC:ITA that Taxpayer’s treatment of the
fictitious interest income for 2003 and 20041, was properly reflected on her Forms
1040X. In addition, we have confirmed with CC:ITA that the amount of funds Taxpayer
did not recover from the scheme ($Amount5) was properly claimed as a loss on
Taxpayer’s 2006 Form 1040.

Section 6402(a) of the Internal Revenue Code authorizes the Secretary of the Treasury
to make refunds when a taxpayer overpays taxes. The regulations on
Procedure and Administration under section 6402 provide that “refunds of
overpayments may not be allowed or made after the expiration of the statutory period of
limitation properly applicable unless, before the expiration of such period, a claim
therefor has been filed by the taxpayer.” Treas. Reg. § 301.6402-2(a)(1).

Section 6511(a) provides that a claim for credit or refund of an overpayment of any tax
in respect of which the taxpayer is required to file a return shall be filed within three
years from the time the return was filed or two years from the time the tax was paid,
whichever of such periods expires later, or if no return is filed by the taxpayer, within two
years from the time the tax was paid. Section 6511(b)(1) provides that no credit or
refund shall be allowed or made after the expiration of the period of limitation prescribed
in section 6511(a), unless a claim for credit or refund is filed by the taxpayer within such
period.

In the present case, the three-year period prescribed by section 6511(a) in which to file
a claim for refund for 2003 expired on April 17, 2007.2 Thus, the Form 1040X for 2003
that the IRS received on Date 1, was a timely refund claim for 2003. The Form 843 for

1
Taxpayer had initially reported interest income on her 2004 tax return as well, and
subsequently filed a Form 1040X for that year, claiming zero interest income. The IRS
issued a partial notice of claim disallowance for 2004, but the explanation for the partial
disallowance was not attached to the notice we received, and we have been unable to
locate a copy. Therefore, we have focused our analysis on the 2003 tax year.
2
April 15, 2007, was a Sunday, and April 16, 2007, was Emancipation Day (a legal
holiday in the District of Columbia). Pursuant to section 7503, a claim for refund for the
2003 tax year is considered timely filed if filed on the next succeeding day that is not a
Saturday, Sunday, or legal holiday.
POSTN-136718-11 4

2003, however, was received by the IRS on Date 4, and was therefore an untimely
refund claim unless it relates back to the timely refund claim filed on Form 1040X.

Two considerations are relevant in determining whether a supplemental claim for refund
is considered an amendment to the original claim, rather than an untimely new claim. If
these two requirements are satisfied, there is no specific time period within which a
supplemental claim must be filed. First, the supplemental claim will not be considered
an amendment to the original claim if it would require the investigation of new matters
that would not have been disclosed by the investigation of the original claim. United
States v. Andrews, 302 U.S. 517, 524-26 (1938); Pink v. United States, 105 F.2d 183,
187 (2d Cir. 1939). Such a supplemental claim is a new claim, rather than an
amendment to the existing timely claim. The policy ground for not allowing time-barred
claims that vary from timely claims is that “[t]he Commissioner does not possess the
time or resources to perform extensive investigations into the precise reasons and facts
supporting every taxpayer=s claim for refund.” Stoller v. United States, 444 F.2d 1391,
1393 (5th Cir. 1971).

Second, a supplemental claim will not generally be considered an amendment if the IRS
took final action on the original claim by either rejecting or allowing the claim in whole or
in part. In either case, the supplemental claim is untimely because once the IRS has
taken final action on the original claim, there is no longer any claim left to amend.
Mondshein v. United States, 338 F.Supp. 786 (E.D.N.Y. 1971), aff’d, 469 F.2d 1394 (2d
Cir. 1973); Edwards v. Malley, 109 F.2d 640 (1st Cir. 1940), aff’g 38-1 U.S.T.C. (CCH) &
9026 (D. Mass. 1937).

There are certain narrow exceptions to the rule concerning final action by the IRS. For
example, the IRS’s disallowance of a claim will not constitute final action by the IRS if
the IRS did not fully consider all grounds for the refund. Bemis Bros. Bag Co. v. United
States, 289 U.S. 28 (1933). In Bemis Bros. Bag Co., the IRS denied a claim for refund
by rejecting one of the three grounds stated in the claim, while overlooking two
independent grounds for the claim. Id. at 31-32. The taxpayer then submitted an
amended claim, reiterating the grounds stated in the original claim. The Supreme Court
held that the claim as amended was timely. The IRS has adopted this exception. In
this regard, the IRM contains the following:

   Exception Where the Service’s Final Action Was Insufficient. There is a narrow
   exception to the rule concerning the effect of the Service’s disallowance of a
   claim. The disallowance will not constitute final action if the Service did not fully
   consider all grounds for the refund and the taxpayer asks for “reconsideration” of
   those grounds. Bemis Bros. Bag Co. v. United States, 289 U.S. 28 (1933) (the
   Service overlooked two independent grounds for the claim).

IRM 25.6.1.10.2.6.4(2)(b). Moreover, the IRM notes that “[o]verlooking a ground in the
claim for refund is not the same as making an incorrect determination regarding the
facts or law of a claim.” Id.
POSTN-136718-11 5

Applying the logic of United States v. Andrews and Pink v. United States, supra,
Taxpayer’s Form 843 for tax year 2003 did not require investigation of new matters; the
Form 843 and the Form 1040X claimed the same basis for a refund – namely, that
Taxpayer was claiming zero interest income rather than the interest income amount
initially reported on her Form 1040. The facts upon which the Form 843 was based
would have been ascertained by the Commissioner in determining the merits of the
Form 1040X if the Commissioner had evaluated the precise grounds in the Form 1040X
rather than concluding that Taxpayer was trying to recoup her entire loss from the
investment scheme.

In addition, although the IRS acted on the Form 1040X by issuing a notice of claim
disallowance for 2003, that was not “final action” because the IRS overlooked the
grounds stated in the Form 1040X. Taxpayer was not seeking to claim the amount of
her loss from the investment scheme when she filed Form 1040X; rather, Taxpayer was
seeking a refund as a result of improperly including a fictitious amount of interest
income on her original return for tax year 2003. Thus, applying the Supreme Court’s
logic, Taxpayer’s “claim as amended does not differ in matter of substance from the
claim as first presented.” Bemis Bro. Bag Co., 289 U.S. at 33. Taxpayer reiterated that
she was claiming zero interest income for those two years, and therefore was
requesting a refund – a refund which had nothing to do with the amount of her loss from
the investment scheme that she was unable to recover. Consequently, Taxpayer’s
Form 843 should be viewed as a permissible amendment to the timely filed Form
1040X, and therefore her refund for tax year 2003 is not time-barred.

In providing this advice, we coordinated with CC:PA:1 and they concur with the
conclusion set forth above.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 622-7852 if you have any further questions.