In an important win for taxpayers, a unanimous Second Circuit reversed the Tax Court on a statutory interpretation issue involving the three-year “look-back” period for Tax Court jurisdiction over refunds. Borenstein v. Commissioner, No. 17-3900 (2d Cir. 2019). In addressing the statutory scheme for refund and overpayment jurisdiction, a scheme the court characterized as “dizzying,” the Second Circuit held that context and purpose matter in statutory interpretation and can overcome interpretations of statutory language that may unreasonably harm taxpayers. The court found that its holding was supported by “the longstanding canon of construction that where ‘the words [of a tax statute] are doubtful, the doubt must be resolved against the government and in favor of the taxpayer,’” (quoting Exxon Mobil Corp. & Affiliated Cos. v. Comm’r of Internal Revenue, 689 F.3d 191, 199‐200 (2d Cir. 2012). Eversheds Sutherland represented the taxpayer before the Second Circuit. The Federal Tax Clinic at the Legal Services Center of Harvard Law School and the Philip C. Cook Low-Income Taxpayer Clinic filed a joint amici curiae brief in support of the taxpayer’s interpretation of the statute.
Ordinarily, the Tax Court has jurisdiction to order refunds for past overpayments during a “look-back period” after a notice of deficiency has been mailed. Where a notice of deficiency was mailed within three years after filing a return, the “look-back” period was three years. Additionally, the flush language of section 6512(b)(3) reads: “In a case described in subparagraph (B) 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 government argued, and the Tax Court agreed, that section 6512(b)(3) created a potential six-month gap in its jurisdiction to order refunds. During this gap, the Commissioner could mail a notice of deficiency to a non-filing taxpayer who had previously obtained a filing extension, thereby depriving the Tax Court of jurisdiction to grant the taxpayer a refund for overpaid taxes. As the taxpayer and the Second Circuit noted, in that case, the refund due to the taxpayer disappeared into a “black hole.” But, as the Second Circuit noted, if the notice of deficiency was mailed before or after the “black hole” period, the Tax Court would have jurisdiction to order a refund. This interpretation gave the Internal Revenue Service the arbitrary ability to shorten a non-filing taxpayer’s period for claiming a refund.
The Tax Court found that the statutory language was unambiguous, and based on the “rule of the last antecedent” the statutory term “(with extensions)” only modified the “due date” not the “third year after the due date.” While expressing sympathy for the taxpayer, the Tax Court held that fault lay with the plain language of the statute.
The Second Circuit disagreed, finding that in 1997 Congress specifically amended section 6512(b)(3) to eliminate unwarranted differential treatment between taxpayers.1 Taking into account the “structure, history and purposes” of the statute, the Second Circuit held that “(with extensions)” modified the entire term “third year after the due date.” It reasoned that such a reading was entirely consistent with congressional intent to eliminate differential treatment between non-filing and filing taxpayers, thereby plugging the “black hole.” Accordingly, the Tax Court was directed to enter judgment for the (undisputed) refund.
Eversheds Sutherland Observation: The Second Circuit’s holding is important because of the court’s observation that it had an “obligation to resolve doubtful language” in favor of taxpayers, and that the rule of statutory construction should not be overlooked when a taxpayer challenges the government’s interpretation of a statute. The reiteration of this fundamental principle of statutory interpretation would appear to provide additional comfort to taxpayers, and possibly the government, in grappling with technically difficult language enacted as part of tax reform.