TAX COURT POWERLESS IF TAXPAYER WAITS OVER TWO YEARS AND UNTIL NOTICE OF DEFICIENCY BEFORE FILING

The Tax Court dismissed the case, claiming it had no jurisdiction--that is, no power--to hear the case. The court held that it only had jurisdiction if taxes had been paid within the appropriate look-back period under the statute of limitations applicable to refund claims. In this instance, the court noted, a two-year look-back period applied when no tax return is filed and none had been filed on the date the notice of deficiency was issued. Later the Fourth Circuit Court of Appeals overruled and held that the Tax Court does have jurisdiction because a three-year look-back period applies when a return is filed and a return was ultimately filed by the Lundys.

Now the U.S. Supreme Court has spoken and determined that the Tax Court was right after all. When no return is filed before a notice of deficiency is issued and the taxes had been paid over two years before the petition was filed, the Tax Court is powerless to order a refund.

Justices Stevens and Thomas dissented, pointing out that the IRS has, for 20 years, taken the position that, in these situations, it would use a three-year look-back period and grant the refund. Further, the taxpayer could have received the refund if it filed in a District Court or the Claims Court.

The moral is that if you wait over two years to file a tax return and receive a notice of deficiency in the interim, don't sue for the refund in the Tax Court. Go to the U.S. District Court or Claims Court instead. And never wait more than three years to file or the refund will be barred altogether.