Second Circuit Reverses Tax Court, Removing "Black Hole" for Claiming Refunds

The Second Circuit Court of Appeals eliminated the six month “black hole” that the Tax Court believed existed for refunds of taxpayers who failed to timely file a return when it reversed that Court’s decision in the case of Borenstein v. Commissioner, Case No. 17-3900.

The details of the original case were discussed in our blog post in August 2017 when the original decision was issued (“Taxpayer’s Refund on Unfiled Return Falls Into “Black Hole” Based on Date IRS Issued Deficiency Notice[1]).  The Tax Court found that IRC §6512(b)(3), added by Congress in the Taxpayer Relief Act of 1997, created a six month “black hole” during which, if no return had originally been filed and the IRS issues a notice of deficiency before such a return is filed, the taxpayer would be barred from claiming a refund by filing a return following the issuance of the notice.  The problem is triggered if the taxpayer, while not filing a return, had filed for an extension of time to file such return.  The six month extension created, in the view of the Tax Court, a six month black hole for such refunds.

The issue is the flush language found at IRC §6512(b)(3) that was meant to expand the period when a taxpayer who had not filed a return could claim a refund that Congress added to reverse the U.S. Supreme Court’s decision in the case of Commissioner v. Lunder, 516 US 235 (1996).

That language provides:

…where the date of the mailing of the notice of deficiency is during the third year after the due date (with extensions) for filing the return of tax and no return was filed before such date, the applicable period under subsections (a) and (b)(2) of section 6511 shall be 3 years.

The IRS had issued a notice of deficiency in June of 2015 for the taxpayer’s 2011 return that had an original due date of April 15, 2012 and an extended due date of October 15, 2012—and the Tax Court found that, in its view, the plain language of the statute placed that notice outside the “third year” but after the standard two year statute for claims for refunds:

The “third year” after that date began on October 15, 2015. But the notice of deficiency was mailed on June 19, 2015. That date was during the second year, not during the third year, “after the due date (with extensions) for filing the return,” as the 1997 amendment requires. Respondent accordingly contends that the exception set forth in the final sentence of section 6512(b)(3) does not apply, with the result that a refund or credit of petitioner’s $32,411 overpayment is barred by the two-year lookback rule generally applicable to nonfilers.[2]

The Second Circuit did not agree the provision was quite so plain, finding the phrasing was open to multiple interpretations.  The Second Circuit notes it was clear Congress’s intent was to eliminate the distinction between filers and nonfilers in that third year, but the Tax Court’s decision created, in that Court’s own words, a “black hole” into which the taxpayer loses a right to claim a refund that would have reopened later had the IRS issued the notice of deficiency a bit later.

Thus, the panel states:

…the interpretation we adopt is consistent with the language of 26 U.S.C. § 6511(b)(2)(A), which provides for a look-back period “equal to 3 years plus the period of any extension of time for filing the return.” 26 U.S.C. § 6511(b)(2)(A) (emphasis added). In view of our obligation to resolve doubtful language in tax statutes against the government and in favor of the taxpayer, we conclude that “(with extensions)” has the same effect as does the similar language that existed in § 6511(b)(2)(A) at the time of § 6512(b)(3)’s amendment — that is, the language expands the Tax Court's jurisdiction to order refunds and credits.

In this case, the taxpayer retained the right to pursue the refund even though the IRS issued the notice of deficiency more than two years after the original due date but before the date two years after the extended due date that was created when the taxpayer originally applied for an extension of time to file the return in question.

One thing to note about this case—the original Tax Court opinion is a reported Tax Court decision.  While the holding now won’t be applied in for taxpayers in the Second Circuit who go to Tax Court, the Tax Court will not necessarily reverse its position on cases arising outside the Second Circuit if the IRS decides to pursue this position outside that Circuit.

[1] “Taxpayer's Refund on Unfiled Return Falls Into “Black Hole” Based on Date IRS Issued Deficiency Notice,” Current Federal Tax Developments, August 31, 2017,

[2] Borenstein v. Commissioner, 149 TC No. 10