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How protective is a protective claim under Altera?

TAX BLOG  | 


On a recent webcast on international tax controversy, we talked about the opportunity to file protective claims related to cost sharing agreements and the now-infamous Altera case. Viewer questions highlight the importance of procedure when it comes to dealing with the IRS. (Watch the full tax controversy webcast here.)

Can a protective claim be made for years where the statute of limitation had expired?

This is an important question because a protective claim keeps the statute open – however the statue must be open when the claim is filed. If the statute of limitations has expired under section 6511, then no claim (protective or formal) can be filed as the IRS cannot pay a refund if the statute has expired. 

What guarantee does a taxpayer have that the IRS will honor a protective claim under Altera?

The short answer? There is no guarantee. However the denial of a claim does allow the taxpayer to appeal the denial to IRS Appeals where the case could be settled. Absent a timely protective claim, the taxpayer has little recourse. 

The long answer revealed by understanding what happens when a protective claim is filed. The IRS can retain the protective claim until the contingency is lifted, or it could deny the claim.

You may recall the issue involving supplemental unemployment compensation benefits (severance pay) and whether it was subject to Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) and Railroad Retirement Tax Act (RRTA) tax several years ago. The Court of Federal Claims held that the severance pay at issue was not subject to FICA tax in CSX Corp v. U.S.  The government appealed to the Federal Circuit. While the case was pending, many employers filed refund claims for the employer and employee’s share of the tax. 

The IRS announced that it would deny the claims and later, the lower court decision was overturned by the Federal Circuit, finding for the IRS. The same issue arose in Quality Stores, Inc.; however, the Sixth Circuit held that the payments were not wages subject to FICA. Many more protective claims were then filed. The IRS disallowed any claim of an employer outside of the Sixth Circuit while the case awaited Supreme Court review. All claims were denied after the Supreme Court overturned Quality Stores.

The impact of the Altera case on taxpayers is still playing out. As an initial matter, it is a good idea to carefully examine cost share agreements to identify provisions that are triggered by a successful challenge to the cost share regulations. The presence of specific language in a cost share agreement may provide support to make a self-initiated Altera based adjustment, possibly even in the current year. Without such language, you may find it more challenging to recognize any benefit for open years for which a return has been filed. 


Patti Burquest

Principal

Patti has extensive experience handling IRS examination and appeals matters for all types of business. Reach her at patti.burquest@rsmus.com.

Areas of focus: Tax ControversyWashington National Tax