| ||The Variance Doctrine: No Forks in the Road to Refunds |
Margaret C. Wilson
Associate, McCarter & English, LLP in Newark, New Jersey; University of Michigan, B.A., 1991; J.D., 1994; New York University Law School, LL.M. Taxation, 2001.
A taxpayer seeking a refund of a federal tax overpayment has a burden of foresight far beyond that placed upon its adversary, the Service, when seeking to recover a deficiency in tax from the taxpayer. The taxpayer's administrative refund claim constitutes a limiting document in the event the taxpayer ultimately must sue to recover the refund. Any items that were not raised in the refund claim, as well as any arguments for a particular item that substantially vary from the arguments raised in the refund claim, will be dismissed by the reviewing court for lack of subject matter jurisdiction.
In contrast, when the Service issues a notice of deficiency that the taxpayer chooses to litigate before the Tax Court, the Service is free to raise any conceivable new ground or item of deficiency, even if not raised in the notice of deficiency-albeit with the burden of proof shifting to the Service. A taxpayer can effectively restrict the Service's broad latitude to expand upon its initial claims by instead pursuing its dispute in a refund action, where the Service may only raise new offsetting claims up to the amount of the refund being sought. This avenue, however, requires the taxpayer to pay the entire deficiency and seek a refund-a refund that will be subject to the variance doctrine.
Nonetheless, exceptions to the variance doctrine do exist. A taxpayer faced with a Service motion to dismiss based on variance should consider whether the Service had actual notice of the claim, even if not through a formal refund claim. The taxpayer might even argue that the Service had constructive notice. However, the Service's knowledge of the bases for the refund claim generally will not be enough, but must be accompanied by notice that the taxpayer intends to seek a refund of the relevant items. Federal courts similarly have rejected Service variance defenses where the Service waived the defense. Perhaps even more importantly, the taxpayer may dispute whether the extent of the differences between its administrative refund claim and its judicial complaint are substantial enough to justify dismissal.
Even though a taxpayer is not defenseless in the face of a motion to dismiss based upon the variance doctrine, the importance of the formal administrative refund claim cannot be underestimated when determining what to include, as well as the level of specificity with which the claim must be described.