Financial Disability Suspension of Statute of Limitations Does Not Apply to Net Operating Loss Special Statute Rules

A person who is unable to manage their financial affairs due to a disability has the statute of limitations for claiming refunds suspended generally under §6511(h).  However, in Chief Counsel Advice 201515019 the IRS National Office concluded that the suspension is limited in one very important way—it does not suspend the special extended period for filing a net operating loss claim under IRC §6511(d)(2).

The statute of limitations for filing a claim for refund is generally governed by IRC §6511(a) which provides:

(a) Period of limitation on filing claim

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.

To deal with certain hardships, Congress added IRC §6511(h) that suspends that time period in certain situations.  IRC §6511(h) reads:

(h) Running of periods of limitation suspended while taxpayer is unable to manage financial affairs due to disability

(1) In general

In the case of an individual, the running of the periods specified in subsections (a), (b), and (c) shall be suspended during any period of such individual's life that such individual is financially disabled.

(2) Financially disabled

(A) In general

For purposes of paragraph (1), an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.

(B) Exception where individual has guardian, etc.

An individual shall not be treated as financially disabled during any period that such individual's spouse or any other person is authorized to act on behalf of such individual in financial matters.

Thus, if a taxpayer timely filed his/her 2012 income tax return before April 15, 2013 the “normal” statute of limitation on refund claims would expire on April 15, 2016.  However if that person becomes unable, due to a physical or medical impairment, to manage his/her affairs from January 1, 2015 through December 31, 2016 the statute would stop running for two years, picking up again on January 1, 2017.  Thus the taxpayer would have until April 15, 2018 to file a claim for refund.

A number of other special exceptions to the 3-year/2-year provision of §6511(a) are found in IRC §6511(d).  Of particular interest are the rules at §6511(d)(2)(A) that provide for dealing with net operating loss claims.

That provision provides:

(2) Special period of limitation with respect to net operating loss or capital loss carrybacks

(A) Period of limitation

If the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback or a capital loss carryback, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions thereof) for the taxable year of the net operating loss or net capital loss which results in such carryback, or the period prescribed in subsection (c) in respect of such taxable year, whichever expires later. In the case of such a claim, the amount of the credit or refund may exceed the portion of the tax paid within the period provided in subsection (b)(2) or (c), whichever is applicable to the extent of the amount of the overpayment attributable to such carryback.

This provision generally allows taxpayers to carryback net operating losses and receive refunds from otherwise “closed” years.  For instance, if a taxpayer finds an issue on a 2013 income tax return that generates a net operating loss and files that amended return on January 1, 2016, the resulting loss would have to be carried back to 2011 since the time period for electing to carry the loss forward has expired. [IRC §172(b)(3)] 

However, since the statute for filing a refund claim on a timely filed 2011 return would have expired on April 15, 2015 (three years after the April 15, 2012 filing date) the taxpayer would lose the benefit of any loss that ended up “trapped” in that year.  This statute extends the 2011 return claim period for the net operating loss on that 2013 return to the period ending three years after the date the original 2013 return was filed (including extensions).

However, what if our taxpayer had been financially disabled for two years and doesn’t discover the problem with the 2013 return until January of 2018?  Under §6511(h) the statue on filing a claim of taxes on the 2013 return has been extended, but what about the refund claim for the loss that must be carried back to 2011?  Does §6511(h) serve to extend that time period as well?

Certainly it appears that such a result is a just one—Congress added that provision because these individuals were losing their right to refunds on original returns due to being financially disabled for an extended period and the NOL provision was meant to allow for an earlier expiration of the statute on returns with losses carried back to them.  However, just because it “makes sense” at first glance doesn’t mean the tax law will end up with that result.

And, in fact, the National Office concludes that §6511(h) does not, in fact, do anything to the expiration of the statute for a year to which is a loss is carried back to.  Thus, in the fact pattern above, the NOL refund claim against the 2011 tax year from 2013 must be filed no later than April 15, 2017—three years after the 2013 return was filed—and not by expiration of the tolled §6511(a) claim period.

The Office comes to this conclusion by noting that the language of §6511(h) only refers to statutes governed by §§6511(a), (b) and (c).  The omission of (d) by Congress (along with all other special rule provisions beyond (c) in §6511) is taken in the memo to be intentional by Congress to limit the application of this rule, providing statutory relief provisions and explicitly stating Congress’s view that general rules of equitable relief should not apply to §6511 statute issues.