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Thursday, February 09, 2006


Taxpayers generally have a fixed period of time to amend a tax return and claim a refund - usually they must file for the refund no later than 2 years from when they paid the tax or 3 years after the due date of the applicable return. In a recent case, an estate filed an income tax return regarding the sale of property owned by a decedent, reporting the gain from the sale by the estate. Based on basis rules, the amount of the gain on the sale was based on the estate tax value of the property that was sold.

Due to estate tax litigation, the value of the property that was sold was not finally determined by a court until after the income tax statute of limitations expired. Since the value of the property was increased in the estate tax litigation, the estate desired to amend its earlier return for the sale and report a higher tax basis, which would have substantially reduced the gain(and thus the income tax) from the sale. However, since the income tax refund statute of limitations had expired, no refund was allowable under normal rules.

In situations such as these, the "mitigation" provisions of the Internal Revenue Code can often allow a refund even if the applicable statute of limitations has expired. However, in Malm v. U.S. (DC ND 20050, and notwithstanding a contrary decision in the Fourth Circuit Court of Appeals, the District Court found that the mitigation provisions were not applicable, and thus the taxpayer ended up paying more tax than was legally required. The unfortunate taxpayer fell through the cracks in the tax system and could not get the excess tax back.

Some commentators believe that a taxpayer in this kind of situation may be able to obtain relief under the equitable recoupment doctrine. This doctrine allows a party litigating a tax claim in a timely proceeding to recoup in that same proceeding a related and inconsistent, but time-barred, tax claim arising from the same transaction.

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