Can Robert J. and Barbara Hanrahan get a 1988 New York income tax refund for tax they mistakenly paid on pension income that should have been excluded, when they only asked for it in 1993, after the ordinary refund deadline had passed?

Plain-English summary

Robert J. and Barbara Hanrahan retired in 1988 - Barbara from the New York State Teachers' Retirement System, receiving a $9,531.71 taxable retirement-system refund plus $26,189.64 in pension payments, and Robert, who turned 65 that April, receiving a $3,599.76 pension from his former employer, Marine Midland Bank. Between them, their federal return reported $39,321.11 of total 1988 pension income. Because that income had to be reported federally, the Hanrahans mistakenly assumed it also had to be reported as New York taxable income, and paid New York tax on the full amount - even though New York State Teachers' Retirement System pension income is fully excludable and private pension income is excludable up to $20,000 a year. They made the same mistake again on their 1989 through 1992 New York returns.

The Hanrahans filed their original 1988 New York return around August 1, 1989 (with an extension to August 15, 1989), showing a $224.74 refund. On April 14, 1990, they filed an amended 1988 return to claim a missed Keogh retirement-plan deduction, which produced an additional $922.79 refund - but that amended return still did not claim the pension exclusion. Once they discovered the pension-exclusion error, they filed amended returns for 1989-1992 on April 12, 1993 (those years were still within the ordinary refund window) and separately attached another amended 1988 return to a Petition for Advisory Opinion filed April 16, 1993, asking the Department to use its discretionary "special refund authority" under Tax Law § 697(d) to refund the time-barred 1988 overpayment.

The Department denied 1988 relief on two independent grounds. First, under Tax Law § 687(a), the ordinary deadline to claim a refund or credit is three years from filing (or two years from payment, whichever is later); for the 1988 return, that window ran from about August 1, 1989 to about July 31, 1992, and filing an amended 1988 return in 1990 - even one that produced a refund - did not extend or restart that deadline. The Hanrahans' April 16, 1993 request came after the window closed, so the amended 1988 return was never even processed. Second, Tax Law § 697(d)'s special refund authority lets the Department reach back at any time with no limitations period, but only where no question of fact or law is involved and the money was paid under a mistake of fact - not a mistake of law. The Department held that not knowing pension income was excludable is a mistake of law (ignorance of the legal consequence of facts the Hanrahans understood correctly), not a mistake of fact, so § 697(d) relief was also unavailable. The opinion notes that the Department had previously granted § 697(d) relief in similar pension-exclusion-ignorance situations (Isaac and Lilyan Zimmet, 1968; Herbert F. Tompkins, 1987) but states plainly that those older decisions "would now be decided differently" under the analysis applied here. A companion opinion issued the same day, on an unrelated S-corporation pass-through issue, reached the identical "mistake of law, not fact" conclusion, confirming this was a considered, general shift in the Department's position rather than a one-off result on these facts.

What this means for you

New retirees who may not know about New York's pension-income exclusions

If 1988 was the Hanrahans' first year receiving pension income and they didn't realize New York exempts government-pension income (like a Teachers' Retirement System pension) entirely, and shelters up to $20,000 a year of most other pension and annuity income, don't assume that whatever you report federally must also be taxed by New York. Review your New York return's pension exclusion line every year you first start drawing a pension, and act quickly if you spot the error - New York's ordinary refund deadline (three years from filing, or two years from payment, whichever is later) runs independently for each tax year, and once it closes, filing a later amended return for that same year will not reopen it.

Accountants preparing returns for clients receiving their first year of pension income

When a client starts receiving pension income, confirm which portions are excludable under New York's pension rules before assuming the federal treatment carries over. Also flag the limitations trap this opinion illustrates: an otherwise-valid amended return (here, one correcting a missed Keogh deduction) does not reset or extend the § 687(a) refund clock for other issues in that same tax year. If a client discovers a multi-year pension-exclusion error, prioritize amending the oldest year still within the three-year/two-year window first, since New York's discretionary § 697(d) safety valve for time-barred years will not help with an error rooted in not knowing the law - only with a genuine mistake of fact.

Common questions

Q: What is the legal difference between a "mistake of fact" and a "mistake of law" under Tax Law § 697(d), and why did it matter here?
A: A mistake of fact means someone misunderstood what the actual underlying facts were - for example, an arithmetic error, a duplicate filing, or an overpayment caused by miscalculation. A mistake of law means someone understood the facts correctly but was ignorant of the legal consequences that flow from them. The Hanrahans knew exactly how much pension income they received and from where; they simply didn't know New York law excluded most of it from tax. Because § 697(d) only reaches mistakes of fact, their error didn't qualify, no matter how sympathetic the facts were.

Q: The Hanrahans filed an amended 1988 return in 1990 and got a refund. Why didn't that keep the door open for a later 1988 refund claim in 1993?
A: Tax Law § 687(a)'s three-year (or two-year-from-payment) deadline is measured from the original 1988 return's filing date, on or about August 1, 1989, making the deadline about July 31, 1992. Filing an amended return in 1990 to fix an unrelated issue (a missed Keogh deduction) and receiving a refund from that amendment did not restart or extend the clock for other 1988 overpayment claims. By the time the Hanrahans asked to also fix the pension exclusion for 1988 in April 1993, the window for that tax year had already closed for good.

Q: Why were the Hanrahans able to get refunds for 1989 through 1992 but not 1988?
A: Because they filed their amended returns for 1989-1992 on April 12, 1993, those tax years were still within the ordinary three-year/two-year § 687(a) window. Only the 1988 tax year had already fallen outside that window by the time they caught the error, which is why 1988 required (and failed to qualify for) the separate, discretionary § 697(d) special refund authority.

Q: Has the Department always denied refunds in situations like this?
A: No. The opinion itself notes that the Department previously allowed § 697(d) refunds in comparable pension-exclusion-ignorance cases, citing Isaac and Lilyan Zimmet (1968) and Herbert F. Tompkins (1987, TSB-H-87(125)I). But the Department states explicitly that, under the mistake-of-fact/mistake-of-law analysis applied in this opinion, those older decisions "would now be decided differently" if presented today - meaning the Department changed its own position on this exact question rather than merely distinguishing the Hanrahans' facts.

Q: Was this a one-off result, or does it reflect a broader Department position?
A: It reflects a broader position. The Department issued a companion advisory opinion the same day, July 15, 1993, involving different facts (an S-corporation shareholder's pass-through income issue) but the identical legal question of whether § 697(d)'s special refund authority can override the ordinary statute of limitations for a taxpayer's own legal misunderstanding. That companion opinion reached the same conclusion: an error rooted in not knowing the law is a mistake of law, not a mistake of fact, and does not qualify for § 697(d) relief.

Citations and references

• Tax Law § 687(a) - ordinary refund/credit claim deadline of three years from filing or two years from payment, whichever is later; the basis for denying the time-barred 1988 claim
• Tax Law § 697(d) - discretionary "special refund authority" allowing refunds at any time without regard to any limitations period, but only where no question of fact or law is involved and the money was erroneously/illegally collected or paid under a mistake of fact
• Mercury Mach. Importing Corp. v. City of New York, 3 NY2d 418, 429 (1957) - taxes voluntarily paid, without protest, under a mistake of law generally cannot be recovered
• Isaac and Lilyan Zimmet, Dec. St. Tax Comm., October 14, 1968, and Herbert F. Tompkins, Dec. St. Tax Comm., May 26, 1987 (TSB-H-87(125)I) - earlier Department decisions granting § 697(d) refunds for New York pension income mischaracterized on a return; this opinion states they "would now be decided differently" under its mistake-of-fact/mistake-of-law analysis

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a93_10i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (10) I
Income Tax
July 15, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I930416B

On April 16, 1993, a Petition for Advisory Opinion was received from Robert J. Hanrahan
and Barbara Hanrahan, R.D. 2, East Gotham Road, Watertown, New York 13601.
The issue raised by Petitioners, Robert J. Hanrahan and Barbara Hanrahan, is whether for
taxable year 1988 the pensions paid to them could be excluded from New York personal income tax
under Article 22 of the Tax Law pursuant to section 687(a) or section 697(d).
Petitioners filed their 1988 New York resident income tax return on or about August 1, 1989.
They were granted an extension of time to file until August 15, 1989. The return showed a refund
due of $224.74, which Petitioners received. On April 14, 1990, Petitioners filed an amended 1988
income tax return making an adjustment for a deduction for a Keogh Retirement Plan payment of
$11,018.35, which had been mistakenly left off the original return. Based on such amended return,
Petitioners received an additional refund of $922.79.
In both Petitioners' original and amended returns for 1988, Petitioners failed to list any
pension income exclusion on line 27 of the return. On Petitioners' Federal income tax return for
1988, Petitioners showed, at line 17a of the return, total pensions amounting to $39,321.11.
Petitioners contend that this sum could have been properly excluded on their New York income tax
return but that tax was erroneously paid on such amount due to a mistake on their part.
Petitioner, Barbara Hanrahan, was a member of the New York State Teacher's Retirement
System and retired in 1988. As a result of her retirement, she received a taxable refund from the
system upon retirement in an amount of $9,531.71 and also received payments from the pension plan
totaling $26,189.64. Petitioner, Robert J. Hanrahan, was sixty-five on April 22, 1988 and received
$3,599.76 as a pension from Marine Midland Bank, a former employer. The pensions of Petitioners
totaled $39,321.11 and 1988 was the first year in which both Petitioners received pension payments.
Petitioners were unaware of the fact that the pensions paid to them in 1988 could be excluded
from the New York income tax return. Because they were required to report the pension income on
their Federal income tax return, they assumed that it had to be reported on their New York resident
income tax return.
Petitioners continued to make the same mistakes on their 1989, 1990, 1991 and 1992 New
York income tax returns by reporting the pension income, not claiming the exclusion for such
pensions and paying income tax on such pension income.

TP-9 (9/88)

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TSB-A-93 (10) I
Income Tax
July 15, 1993

Recently, Petitioners became aware of the fact that all of the pension income of the New
York State Teacher's Retirement System and private pension income up to $20,000 a year was
excludable for each taxable year on their New York income tax return. As a result, on April 12,
1993, Petitioners filed amended returns for taxable years 1989, 1990, 1991 and 1992 requesting
refunds based on this adjustment. Petitioners have attached an amended return for taxable year 1988
to their Petition for Advisory Opinion.
Section 687(a) of the Tax Law provides that a claim for credit or refund of an overpayment
of income tax shall be filed by the taxpayer 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. If the claim is filed
within the three year period, the amount of the credit or refund shall not exceed the portion of the
tax paid within the three years immediately preceding the filing of the claim plus the period of any
extension of time for filing the return.
Herein, the time period for Petitioners to file a claim for credit or refund of an overpayment
of income tax for taxable year 1988, is three years from the time the original return was filed, that
is from, on or about August 1, 1989 to on or about July 31, 1992. The fact that Petitioners filed an
amended return for taxable year 1988 on April 14, 1990 and received a refund therefrom, does not
extend the statute for the time period for which a claim for credit or refund may be filed under
section 687(a) of the Tax Law for such taxable year.
Accordingly, Petitioners' claim for a refund of taxes paid for taxable year 1988 with respect
to tax exempt pension income that was submitted April 16, 1993 with Petitioners' Petition for
Advisory Opinion must be denied pursuant to section 687(a) of the Tax Law because the statute of
limitations for the filing of such refund claim expired on or about July 31, 1992. Therefore,
Petitioners' amended return for taxable year 1988 has not been processed.
Petitioners also request that a refund of taxes paid on the tax exempt pension income for
taxable year 1988 be issued under the special refund authority pursuant to section 697(d) of the Tax
Law. Such section 697(d) of the Tax Law, states that:
Special refund authority.--Where no questions of fact or law are involved and it
appears from the records of the tax commission that any moneys have been
erroneously or illegally collected from any taxpayer or other person, or paid by such
taxpayer or other person under a mistake of facts, pursuant to the provisions of this
article, the tax commission at any time, without regard to any period of limitations,
shall have the power, upon making a record of its reasons therefor in writing, to cause
such moneys so paid and being erroneously and illegally held to be refunded and to
issue therefor its certificate to the comptroller.

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TSB-A-93 (10) I
Income Tax
July 15, 1993

Accordingly, before the special refund authority under section 697(d) of the Tax Law can be
implemented, the following two requirements must be met:
1.

There are no questions of fact or law involved.

2.

A determination can be made from the records of the Commissioner
of Taxation and Finance that moneys have been
(a)

erroneously or illegally collected from a taxpayer or other
person, or

(b)

paid by a taxpayer or other person under a mistake of fact.

A mistake of fact exists where a person understands the facts to be other than they actually
are, as where some fact which really exists is unknown, or some fact is supposed to exist which
really does not or did not exist. (54 Am Jut 2d Mistake, Accident or Surprise §4; Wendell
Foundation v Moredall Realty Corp., 176 Misc 1006, 1009). A mistake of fact includes such things
as where an arithmetical or other error of computation is made on the return, where the tax liability
has been overpaid in error, and where two or more returns are erroneously filed for the same year
and tax paid on each. But a situation which has resulted from ignorance of the law will not be
recognized as a mistake of fact. A mistake of law has been defined as a mistaken opinion or
inference arising from an imperfect or incorrect exercise of the judgment upon the facts as they really
are. Such a mistake has been said to occur where a party, having knowledge of the facts, is ignorant
of the legal consequences of his conduct or reaches an erroneous conclusion as the effect thereof.
(54 Am Jur 2d Mistake. Accident or Surprise §8; Wendell Foundation v Moredall Realty Corp.,
supra, at 1009). There can be no recovery of taxes voluntarily paid, without protest, under a mistake
of law (Mercury Mach. Importing Corp. v City of New York, 3 NY2d 418, 429).
Therefore, where a taxpayer includes in taxable income which he or she knows to be pension
income from the New York State Employees' Retirement System, which income is exempt from
New York State income tax, there is a mistake of law, not a mistake of fact. It should be noted that
in the past, the State Tax Commission allowed refunds under section 697(d) of the Tax Law for taxes
paid with respect to New York State pensions. For instance, taxes paid on a New York State pension
that was incorrectly identified on the return as an "annuity" was held to be a mistake of fact not a
question of fact or law. (Isaac and Lilyan Zimmet, Dec St Tax Comm, October 14, 1968; see also,
Herbert F. Tompkins, Dec St Tax Comm, May 26, 1987, TSB-H-87(125)I). Under the analysis set
forth above these cases would now be decided differently if they were now to come before the
Commissioner of Taxation and Finance for consideration.

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TSB-A-93 (10) I
Income Tax
July 15, 1993

In the instant case, Petitioners were unaware of the fact that the pensions paid to them in
1988 could be excluded from New York taxable income. Petitioners' inclusion of the New York
State Teachers's Retirement System pension and the Marine Midland Bank pension income in their
New York taxable income, for taxable year 1988, was not a mistake of fact since ignorance of the
law is a mistake of law not a mistake of fact. Therefore, the Commissioner of Taxation and Finance
on the facts presented may not exercise his discretionary authority, under section 697(d) of the Tax
Law, to issue a refund to Petitioners for taxable year 1988.

DATED: July 15, 1993

NOTE:

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.