In U.S. v. Stewart, No. 15-20596, the Fifth Circuit Court of Appeals concluded that the taxpayer was not entitled to a tax refund that was based on a corrected Schedule K-1 received from a partnership the taxpayer owned. The question on appeal was whether a partnership tax return can be corrected by filing an amended tax return.
Facts & Procedural History
The partnership filed a tax return to report a $20 million ordinary gain. It issued Schedules K-1 to the partners reflecting their distributive share of the $20 million ordinary gain.
Two years later, the partnership filed an amended tax return and issued corrected Schedules K-1 reflecting a $20 million capital gain, rather than an ordinary gain. The partners filed amended tax returns accordingly.
The IRS issued refunds to the partner involved in this case and denied the refund for another partner. In denying the refund for the other partner, the IRS realized that it issued the refunds to the partner involved in this case in error. The IRS brought suit to recoup the erroneous refund. The district court concluded that the gain was capital in nature and that the refund was properly issued. The IRS appealed the decision to the Fifth Circuit Court of Appeals.
The Administrative Adjustment Request
The issue for the appeals court was whether the refunds were properly issued. The IRS argued that they were not properly issued, as neither the partnership nor the partners filed an Administrative Adjustment Request (“AAR”) under I.R.C. § 6227 on a Form 8082. Neither the partnership nor the taxpayer in this case filed the Form 8082. Instead, they merely filed amended tax returns. So the appeals court agreed with the IRS.
Substantial Compliance With AAR Requirements
The court then considered substantial compliance. In a prior case, the Fifth Circuit had said that substantial compliance with the AAR requirements is sufficient. According to the court, this would include a detailed statement on the amended tax return explaining why the return was being amended. The IRS has made it clear that it expects detailed explanations for AARs. This is evident in the Form 8082 itself. The Form 8082 is a two page form that provides a page and a half of blank lines for taxpayers to write in their explanation. Compare this to the Form 1040X, which provides a quarter page blank to write in an explanation.
The court also noted that substantial compliance also requires the taxpayers send the amended returns to the appropriate IRS service center for AARs. According to the instructions for the Form 8082, when filed after the original due date for the partnership return, the partner is to mail a copy in with their amended tax return and to the IRS service center where the partnership files its partnership tax return.
The taxpayer did not do either of these things in the current case. The amended tax returns did not contain the level of detail required for an AAR and they were not mailed to the correct IRS service center. So the court concluded that the refunds were not properly issued.