Aug 10, 2015
From KPMG TaxWatch
The Supreme Court of South Dakota recently upheld the denial of a taxpayer’s bank franchise tax refund claim because the claim was time-barred by the statute of limitations. Under South Dakota law, the statute of limitations is generally three years from the date a bank franchise return is due or the tax is paid, whichever is earlier. The taxpayer, a national bank, filed federal income tax returns and South Dakota bank franchise tax returns for the 1999 to 2002 tax years. The Taxpayer’s federal returns were subsequently audited, and the Taxpayer agreed to extend the federal statute of limitations for the audited years through 2012. During the federal audit, the taxpayer requested a reduction in taxable income for the tax years at issue because of an accounting method change that occurred in 2001. In 2012, as part of a settlement, the IRS agreed to the reduction in federal income. Because the starting point in computing South Dakota bank franchise tax is based on federal taxable income, the taxpayer subsequently requested a refund of the bank franchise taxes for the relevant tax years. The Department denied the request because the refund claim was filed well after the three-year statute of limitations had expired. After the circuit court affirmed the denial, the taxpayer appealed to the South Dakota Supreme Court.
The court first considered whether the taxpayer’s request for refund was timely, observing that the statute plainly provided for a three-year statute of limitations for filing refund claims. As support for its position, the taxpayer relied on a regulation providing that when there is a decrease in taxable income because of an IRS audit or otherwise, the taxpayer may request a refund. The taxpayer contended that this carved out a limited exception to the three-year limitations period. In other words, the taxpayer argued that when a decrease in taxable income occurs because of an IRS audit, the taxpayer may request a refund at the conclusion of the audit regardless of whether the general three-year statute of limitation has run. The court disagreed. First, it noted that the unambiguous language of the statute requires that a refund claim related to overpaid tax be filed within three years from the date the tax was paid or the return was due. Furthermore, no language in the regulation actually permitted an exception to the three-year statute of limitations. In the court’s view, the statute and the regulation could be read harmoniously: the statute sets the limitation period and the regulation designates when a refund request may be filed. The taxpayer argued that the regulation did not permit a refund claim when a decrease in taxable income is “anticipated” and therefore it could not feasibly file a refund until the federal audit was completed, which typically takes several years. In the courts’ view, the taxpayer’s federal taxable income actually decreased – not when the IRS audit was complete – but when the taxpayer changed accounting methods in 2001. Moreover, the court observed that if it were to hold that the regulation carved out an exception to the three-year limitations period, then it would strike down the regulation as contravening the statute. The court also rejected other arguments including that the regulation constituted written advice or raised constitutional due process concerns. Interestingly, the court also declined to rule as to whether increases to federal taxable income, which were governed by a separate statute and regulation, were likewise subject to the three year statutes of limitations.
Next the court considered whether the taxpayer was entitled to equitable tolling, a doctrine that allows courts to apply equitable powers to extend a statute of limitations to mitigate particularly harsh effects. Equitable tolling is presumed to be permitted, but the presumption may be rebutted by showing that the legislature intended to prohibit it. One way to meet this burden is to show that the legislature made the limitation period a jurisdictional matter. The court ruled that the South Dakota legislature clearly intended the limitation period to be jurisdictional and therefore equitable tolling was not available. For more information on Citibank v. Department of Revenue, please contact Trevor McCormick at 612-305-5349.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.