Second Circuit Reaffirms Taxpayer’s Use of Protective Refund Claims

On September 9, 2013, the U.S. Court of Appeals for the Second Circuit held that the District Court had jurisdiction to hear the taxpayer's case based on the taxpayer's use of a protective refund claim.

On September 9, 2013, the U.S. Court of Appeals for the Second Circuit issued a decision in AmBase Corp. v. United States, No. 12-3563 (2d Cir. 2013), affirming that the U.S. District Court for the District of Connecticut (District Court) had subject-matter jurisdiction over the taxpayer's case based on the taxpayer's use of a protective refund claim.

Background

A taxpayer must satisfy a number of hurdles before commencing a tax refund action against the United States. Even a small foot fault can deprive the refund forum, such as the district court with subject-matter jurisdiction. Subject-matter jurisdiction in a refund forum is premised on two separate filings by the taxpayer. First the taxpayer must file an administrative claim for refund with the Internal Revenue Service (IRS). Once that claim for refund is denied (or six months has passed after the filing of the claim), then the taxpayer can file a refund suit in the District Court or the U.S. Court of Federal Claims. Under Section 6511 of the Internal Revenue Code the taxpayer has the later of three years from the time the tax return was filed or two years from the time the tax was paid to file the administrative claim. The three-year limitation is increased to seven years if the claim relates to a bad debt deduction. Section 6511(d)(1). The taxpayer then has from six months after the filing of the claim up until two years after the claim's denial to file the refund suit. Section 6532. Section 301.6402-3 of the U.S. Department of the Treasury Regulations sets forth the formal requirements for filing a refund claim; however, as the Second Circuit noted, informal refund claims are also recognized as valid refund claims. See United States v. Kales, 314 U.S. 186 (1941). Protective claims are a type of informal claim a taxpayer may file. The Second Circuit cited to Chief Counsel Advisory 200848045, which explains "[p]rotective claims are filed to preserve the taxpayer's right to claim a refund when the taxpayer's right to the refund is contingent on future events and may not be determinable until after the statute of limitations expires."

The specific requirements for filing a proper protective refund claim, are "designed both to prevent surprise and to give adequate notice to the Service...