SC Administrative Law Court Decisions

Anonymous Taxpayers (taxpayer) seek a refund of income taxes paid for the 1997 tax year. The South Carolina Department of Revenue (DOR) opposes the taxpayer's refund on the ground that no refund can be granted since the taxpayer failed to timely file a claim for refund. Given the disagreement, the taxpayer asked for and received the right to a contested case hearing. S.C. Code Ann. Section 12-60-470(F) (2000).

In preparing for the hearing, the taxpayer and DOR stipulated the controlling facts, agreed upon and submitted relevant documents, and presented supporting arguments in written form. Further, both parties agreed that no oral hearing was required. Accordingly, the parties specified that the case was now ready for decision based on the stipulations, documents, and arguments filed with the ALJD.

After an examination of the arguments and the documents submitted, I find the law affords no refund in the instant case.

The issue for decision is whether the taxpayer's 1997 income tax refund claim is allowable under S.C. Code Ann. § 12-54-85(F)(3)?

1. Positions of Parties

The taxpayer argues that even if the refund claim for the 1997 tax year was not filed within either the three year or two year periods of § 12-54-85(F)(1), section 12-54-85(F)(3) still allows the refund claimed as long as the amount of the refund does not exceed the taxes paid by the taxpayer during 1995 and 1996.

DOR disagrees. First, DOR argues that § 12-54-85(F)(3) does not apply in this case since that section applies only to taxpayers who have timely filed an income tax return, a fact DOR argues is missing in the instant case due to the late filing of the taxpayer's 1997 income tax return. Second, DOR argues that the taxpayer has misread and misapplied § 12-54-85(F)(3)'s language which the taxpayer believes grants a refund but limits the amount of the refund to "the tax paid during the two years immediately preceding the filing of the claim." DOR argues the "the tax paid during the two years immediately preceding the filing of the claim" does not look to the taxes paid for the 1995 and 1996 tax returns. Rather, the amount-limitation means the actual tax for which the refund is sought must have been paid within two years of filing the claim. Further, DOR argues that even if the taxpayer is right on the view that the refund is available but cannot exceed the taxes paid by the taxpayer during 1995 and 1996, the refund is still not proper since the taxpayer paid its 1995 taxes on April 15, 1996 and its 1996 taxes on April 15, 1997. DOR explains that such payments are not within two years of the refund claim which was filed on March 23, 2001.

2. Findings of Fact

The facts as listed here have all been stipulated to by the parties and such facts form the basis for the decision reached in this matter:

1 The taxpayers filed their 1995 South Carolina income tax return on May 16, 1996. The tax liability reflected on that return was $34,451.00.

2. The taxpayers filed their 1996 South Carolina income tax return on October 10, 1997. The tax liability reflected on that return was $31,750.00.

3. In 1997, the taxpayers had taxable income, part of which was withheld for income tax purposes and remitted to the South Carolina Department of Revenue (Department).

4. The taxpayers applied for and received an extension in which to file their 1997 income tax return. Included with the request was an additional estimated tax payment of $6,000.00. As a result of the extension, the return's due date became August 15, 1998.

5. The taxpayers applied for and received a second extension in which to file their 1997 income tax return. As a result of the extension, the return's due date became October 15, 1998.

6. The taxpayers did not file a 1997 South Carolina income tax return on or before October 15, 1998.

7. The taxpayers filed their 1997 income tax return on March 23, 2001. That return claimed a refund of $7,374.00.

8. The Department's Revenue & Regulation Operations Division (Division) denied the taxpayers' refund claim because the request was untimely.

9. The taxpayers timely protested the Division's denial.

10. The Department issued a Final Agency Determination denying the refund on November 7, 2001.

11. The taxpayers timely requested a contested case hearing before the Administrative Law Judge Division.

3. Conclusions of Law

a. Introduction

The portions of § 12-54-85(F) applicable to the instant case are those provisions as amended by 1997 South Carolina Laws Act 86. The provisions are as follows:

(1) Except as provided in subsection (D) above, claims for credit or refund must be filed within three years of the time the timely filed return, including extensions, was filed, or two years from the date of payment, whichever is later. If no return was filed, a claim for refund must be filed within two years from the date of payment.

(2) If the claim was filed by the taxpayer during the three-year period prescribed in item (1), the amount of the credit or refund may not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to three years plus the period of any extension of time for filing the return.

(3) If the claim was not filed within the three-year period, the amount of the credit or refund may not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim.

(4) If no claim was filed, the credit or refund may not exceed the amount which would be allowable under item (2) or (3), as the case may be, as if a claim were filed on the date the credit or refund is allowed.

(5) For the purposes of this subsection:

(a) A return filed before the last day prescribed for the filing is considered as filed on the last day. Payment of any portion of the tax made before the last day prescribed for the payment of the tax is considered made on the last day. The last day prescribed for filing the return or paying the tax must be determined without regard to any extension of time.

(b) Any tax actually withheld at the source in respect of the recipient of income, is considered to have been paid by the recipient on the last day prescribed for filing his return for the taxable year, determined without regard to any extension of time for filing the return, with respect to which the taxpayer would be allowed a credit for the amount withheld.

(c) Any amount paid as estimated income tax for any taxable year is considered to have been paid on the last day prescribed for filing the return for the taxable year, determined without regard to any extension of time for filing the return."

The taxpayer argues that § 12-54-85(F)(3) provides the basis for a refund. To prevail, the taxpayer must clearly meet the requirements imposed by the statutes authorizing the refund. Guaranty Bank & Trust v. South Carolina Tax Commission, 254 S.C. 82, 173 S.E.2d 367 (1970) ("A refund of taxes is solely a matter of governmental or legislative grace and any person seeking such relief must bring himself clearly within the terms of the statute authorizing the same."). In this case, the statutes covering the refund are §§ 12-60-470 and 12-54-85.

In particular, § 12-54-85(F)(3) cannot be examined in isolation since examining only that single tree causes one to lose sight of the forest of which 12-54-85(F)(3) is but a single part. Thus, the best approach to understanding § 12-54-85(F)(3) is to place that provision within the broader confines of the section as a whole. See State v. Woody, 345 S.C. 34, 545 S.E.2d 521 (Ct. App. 2001)(when construing a statutory clause, the court should not consider the particular clause in isolation, but should read it in conjunction with the purpose of the whole statute and the policy of the law).

In general, § 12-54-85(F) accomplishes two objectives: imposing a time period in which refund claims must be filed and imposing a limitation on the amount for which a refund can be made. The time limits for filing a refund claim are expressed in § 12-54-85(F)(1) and the limitation on the amount that can be refunded is expressed in § 12-54-85(F)(2), (3), and (4). The two objectives are sequential since the time limitation requirements of § 12-54-85(F)(1) must be satisfied first before the limitation on the amount of the refund can become a factor. Thus, for the instant case, I find no refund can be made since the taxpayer here fails both the three year and the two year limitations for which refunds can be made.

b. Refund Requirements: Time for Filing

Section 12-60-470 explains that "[a] claim for refund is timely filed if filed within the period specified in Section 12-54-85." Section 12-54-85(F)(1) explains that "claims for credit or refund must be filed within three years of the time the timely filed return, including extensions, was filed, or two years from the date of payment, whichever is later." ⁽¹⁾

Here, the taxpayer was not eligible for the three year limit since that limit applied only to a "timely filed return" and the 1997 return was not timely filed. Rather, while the taxpayer obtained two extensions until August 15, 1998 and the second until October 15, 1998, the return was filed late on March 23, 2001. Thus, the remaining refund time limit of "two years from the date of payment" became applicable to the refund claim.

Under the facts here, April 15, 2000 is two years from the date of payment since tax of $6,000 was paid with the April 15, 1998 extension request and $11,361 of withholding was deemed paid on April 15, 1998. See § 12-54-85(F)(5)(b) ("Any tax actually withheld at the source in respect of the recipient of income, is considered to have been paid by the recipient on the last day prescribed for filing his return for the taxable year, determined without regard to any extension of time for filing the return."). Thus, the refund claim was not timely filed since the filing occurred on March 23, 2001, well beyond the April 15, 2000 deadline.

c. Refund Requirements: Amount of Refund

i. Section 12-54-85(F)(3) Does Not Apply

The taxpayer is mistaken as to the application of § 12-54-85(F)(3). That section is solely a limitation on the amount of the refund. Indeed, each provision of § 12-54-84(F)(2),(3), and (4) explains that "the amount of the credit or refund may not exceed" or states that "the credit or refund may not exceed" some portion of a previously paid tax amount. To reach the "amount" issue, the claim must first have been timely filed. Simply put, § 12-54-85(F)(3) is not an independent source for obtaining a refund as the taxpayer suggests.

While no South Carolina appellate court has addressed this point, the statute in question is significantly similar to IRC § 6511. In interpreting IRC § 6511, federal case law holds that since the statute authorizing the tax refund (26 U.S.C. § 7422(a) for federal law corresponding to § 12-60-470 for South Carolina) looks to a specific statute setting a time period for filing the claim for refund (26 U.S.C. § 6511 for federal law corresponding to § 12-54-85 for South Carolina), the failure to satisfy the required time-to-file limitation (26 U.S.C. 6511(a) which employs a similar three years from filing and two years from payment as does § 12-54-85(F)(1)) imposes a jurisdictional defect that precludes the refund so that no issue is ever reached on the amount of the refund (26 U.S.C. 6511(b)(2) corresponding to § 12-54-85(F)(2),(3), and (4)). See Southern California First Nat. Bank v. U.S., 298 F.Supp. 1249 (S.D.Cal.1969) ("Section 7422(a) not only requires that a claim be 'duly' filed before suit, but that it be filed 'according to the provisions of law in that regard', which must mean, among other things, according to § 6511(a)"); Porter v. U.S., 919 F.Supp. 927 (E.D.Va.1996) ("the jurisdictional basis in federal district court derives from a two-fold determination: first, whether a claim is timely filed, and second, whether tax payments fit within the appropriate 'look-back' period.").

Accordingly, for the 1997 tax year here in dispute, the amount of the refund sought (which is all § 12-54-85(F)(3) addresses) is never reached since the refund claim was not filed "within three years of the time the timely filed return, including extensions, was filed, or two years from the date of payment, whichever is later." S.C. Code Ann. § 12-54-85(F)(1). Thus, no authority exists to grant the refund claim.

ii. Section 12-54-85(F)(3) Does Not Give the Relief Sought

Finally, even if § 12-54-85(F)(3) could provide a route for the refund requested, "the amount of the credit or refund may not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim." The portion of the tax paid during the two years immediately preceding the filing of the claim was zero.

The claim was filed on March 23, 2001. Two years before that filing was March 23, 1999. No tax associated with the 1997 tax year was paid during that two year period since $6,000 was paid with the April 15, 1998 extension request and $11,361 of withholding was deemed paid on April 15, 1998. See § 12-54-85(F)(5)(b). Thus, all of the 1997 tax was paid before March 23, 1999 so that zero tax was paid within two years of March 23, 2001.

No authority exits to grant the taxpayer's 1997 income tax refund claim under § 12-54-85(F)(3).

AND IT IS SO ORDERED.

______________________

RAY N. STEVENS

Administrative Law Judge

Dated: April 23, 2002

Columbia, South Carolina

1. For tax years beginning after December 31, 1997, § 12-54-85(F)(1) was amended in 2001 to read "claims for credit or refund must be filed within three years from the time the return was filed, or two years from the date the tax was paid, whichever is later." See 2001 South Carolina Laws Act 89, section 34. Thus, the "timely filed return" is no longer an issue.