“I think it’s important that taxpayers’ rights be protected,” said retired accountant Charles Ulrich. “We should have had a Boston Tea Party over this.”
After a 7-year fight, Ulrich is winning in court against the IRS, and it’s possible that tens of thousands of taxpayers may be able to get income tax refunds from the IRS.
The case revolves around investors who held policies in mutual life insurance companies that later went public. Each of these policyholders literally owned a part of a company, and they received shares in the company when it went public. The tax they had to pay when they sold these shares became the subject of a dispute between Ulrich and the IRS.
If a policyholder received shares worth $30, and then sold them for $35, Ulrich would argue that the $5 gains would be taxed. But the IRS taxed the entire $35, leading to a huge increase in tax bills for millions of Americans.
The thinking goes something like this. According to the IRS, the policyholders never “bought” their shares in the first place, so the full amount is taxable. Ulrich argued that the policyholders paid for their shares through their premiums.
In August, 2008, a federal court agreed with Ulrich’s interpretation.
Tax attorney Don Alexander, a former IRS commissioner, called it “quite a significant case.”
While many individuals have challenged the IRS in court, according to Alexander, “Most of them lose.”
Beating The IRS—It’s A Matter Of Interpretation
The tax code is more than 4,500 pages long, and it’s amended almost every year. Very few IRS agents are familiar with all of it, and there are a lot of grey areas. The uncertain, convoluted nature of the code leaves room for interpretation, and this is where tax attorneys are able to challenge the IRS’s interpretation and potentially prevail with their own.
When Ulrich began contacting former policyholders and presenting his version of the situation, “largely I was regarded as a lunatic who would never prevail over the IRS.”
Nevertheless, some people contacted him and paid a small fee to have him file a refund request. Some of these requests were granted, including a $1500 refund for a couple in Minneapolis.
One of his clients, Eugene Fisher, was a trustee for a Baltimore, Md.-based trust. After the IRS denied him a refund, he sued them. On August 6th the Court of Federal Claims in Washington called the IRS’ view “illogical” and sided with Fisher and Ulrich.
This decision could have far-reaching implications. There are more than 30 million mutual life policyholders who are potentially affected by this case. For many of them, it is too late to file for a refund, and for others the amount of any refund is probably too small to be worth the trouble.
Claims must be filed within 3 years of the April 15th deadline. This means that if you want a refund on your 2005 income tax forms, the statute of limitations will run out for you on April 15, 2009.
Nevertheless, tax attorney Jeff Fouts advises that if you’re eligible, you should request a tax refund. Simply doing so extends the deadline for a potential refund for two more years, even if the IRS rejects your claim.
IRS Battles: It’s Not Over Yet
This is a great victory for taxpayers, but tax attorneys warn that the IRS hasn’t completely lost this fight. They can reject future refund claims, and this may lead to a different outcome in a separate court. The government may also decide to appeal the recent ruling.