1

United States Court of Appeals,

Fifth Circuit.

No. 95-10582.

TLI, INC., Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Appellee.

Nov. 29, 1996.

Appeal from the United States District Court for the Northern

District of Texas.

Before GARWOOD, EMILIO M. GARZA and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

TLI, Inc. filed this federal income tax refund action

contending that its claims were not barred by the statute of

limitations because it had satisfied the requirements of the

"mitigation" provisions, §§ 1311 and 1314 of the Internal Revenue

Code, for lifting the bar of the statute of limitations respecting

its otherwise untimely administrative claims for refunds for 1983

and 1984, and that in any event, § 108(a)(2) of the Bankruptcy Code

extended its time for filing its claim for refund for the 1984 tax

year. The parties filed motions for summary judgment. The

district court granted the United States' motion, holding that TLI

failed to satisfy all the requirements of the mitigation provisions

and that § 108(a)(2) of the Bankruptcy Code does not extend the

time for filing claims for refund. TLI appealed. Having reviewed
 

1Int'l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1263

(5th Cir.1991) (citation omitted). 

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the district court's grant of summary judgment de novo,1 we now

affirm.

Facts and Procedural History

TLI, Inc., prior to changing its name in 1987, was known as

Trailways Lines, Inc. During the taxable years in question, TLI

was a component member of an affiliated group of corporations that

had properly elected to file consolidated federal income tax

returns (the "Trailways Group"). The Trailways Group filed for

Chapter 11 bankruptcy protection on February 12, 1988. Pursuant to

the confirmed Plan of Reorganization, the parent and subsidiary

corporations of the Trailways Group were merged into TLI. As the

successor to the other members of the Trailways Group, TLI is the

sole owner of the taxpayer claims asserted by the Trailways Group.

During 1976, 1977, 1978, and 1979, the Trailways Group

acquired and placed in service tangible personal property ("Section

38" property) which qualified it for a significant number of

Investment Tax Credits ("ITCs"). The ITCs claimed in 1976, 1977

and 1978 were fully utilized to reduce the Trailways Group's tax

burden for such years; however, the Trailways Group had no taxable

income for 1979. Therefore, the ITCs claimed in that year were

carried back to reduce its income tax liabilities for 1977 and

1978. What was left of the 1979 ITCs were carried forward to 1980
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and subsequent taxable years.

The Trailways Group, in 1983, 1984, 1985, and 1986, disposed

of items of the Section 38 property before the end of their

estimated useful life. Section 47(a)(1) of the Internal Revenue

Code provides that upon a disposition of Section 38 property

before the close of the useful life which was taken into

account in computing the credit ... the tax ... for such

taxable year shall be increased by an amount equal to the

aggregate decrease in the credits allowed ... for all prior

taxable years which would have resulted solely from

substituting, in determining qualified investment, for such

useful life the period beginning with the time the property

was placed in service ... and ending with the time the

property ceased to be section 38 property.

26 U.S.C. § 47(a)(1). Revenue Ruling 72-221 explains that

"[s]ection 47(a) ... is designed to place the taxpayer in the same

position at the close of the recapture year as he would have been

in had he claimed the actual life of the "section 38 property' "

that was disposed of prematurely. Rev.Rul. 72-221, 1972-3 C.B. 15.

In order to reach this result, the true life of the property "must

be substituted in place of the useful life claimed initially, and

the tax liabilities of all prior years affected by the substitution

must be recomputed." Id. In situations similar to that of the

Trailways Group, the Ruling provides that the unused investment

credit earned in a later year must be treated as an increase in the

credits allowed under § 38 for prior taxable years and this

increase must be taken into account in computing the aggregate

decrease in credits under 47(a); and that § 47(c) does not
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preclude the carryback of the unused investment credit for a later

year in recomputing the tax liabilities for all prior taxable years

to determine the amount of recapture tax liability under section

47(a). Consequently, the Trailways Group should have avoided

paying recapture taxes in 1983 through 1986 by carrying back its

unused 1979 ITCs in recomputing the tax liabilities for all prior

taxable years. But the Trailways Group failed to compute its taxes

properly and, as a result, in 1983 through 1986, erroneously paid

recapture taxes it did not owe and claimed investment credit

carryforwards to which it was not entitled.

After the Trailways Group filed for Chapter 11 bankruptcy

protection on February 12, 1988, its insolvency accountants

discovered the erroneous computations resulting in the payment of

recapture taxes and improper ITC carryovers. To correct these

errors, the taxpayer filed amended returns on July 28, 1988, for

the calendar years 1983 through 1986. The amended returns sought

to reduce the taxpayer's ITC carryforward to the proper amount and

to obtain a refund of the recapture taxes paid in error. The

taxpayer attached a statement explaining that because the requested

refunds related, in part, to a return filed more than three years

ago, the amended returns were being filed under the mitigation

provisions of §§ 1311 through 1314 of the Internal Revenue Code as

well as § 505(b) of the Bankruptcy Code.

On August 29, 1989, the Internal Revenue Service ("IRS")

determined that the Trailways Group would be allowed its claims for
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a refund for the year 1985 and for a reduction of its ITC carryover

for the year 1986, concluding that "Revenue Ruling 72-221 does

apply in calculating the ITC recapture and the carryovers for 1985

and 1986." The Trailways Group did not exercise its appeal rights

with the IRS or contest in court the findings in the report.

On October 4, 1989, the IRS examiner reported that the

Trailways Group's claims requesting refunds for 1983 and 1984 would

be denied because the claims were not timely filed and the

mitigation statutes did not apply to them. The examiner's

explanation, in pertinent part, provided:

The taxpayer in this case is relying on Section 1312(4) which

allows an adjustment if a determination disallows a deduction

or credit which should have been, but was not, allowed to the

taxpayer for another year or to a related taxpayer (for any

year). An inconsistent position is not required, but at the

time the taxpayer first maintained, in writing, the claim for

deduction or credit that was disallowed by the determination,

the proper deduction or credit cannot be barred.

On December 11, 1989, the IRS determined that the Trailways Group's

claims for the 1983 and 1984 tax years would be disallowed,

concluding that for each year "[t]he claim has been denied as it

was not timely filed and the mitigation statutes do not apply."

TLI filed an action in the district court on September 6,

1991, for the recovery of federal income taxes erroneously assessed

and collected. TLI moved for summary judgment on the grounds that:

(1) § 108(a)(2) of the Bankruptcy Code extended its time for filing

its claim for refund for the 1984 tax year; and, (2) it had

satisfied the requirements of the mitigation provisions for lifting
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the bar of the statute of limitations respecting its otherwise

untimely administrative claims for refunds for 1983 and 1984 tax

years. The United States filed a response and a cross motion for

summary judgment. The district court denied TLI's motion and

granted the United States' cross motion for summary judgment. In

its opinion, the district court concluded that (1) § 108 of the

Bankruptcy Code did not afford the taxpayer an extension of time in

which it could file a timely claim for refund of the overpayment of

1984 recapture taxes; and, (2) the mitigation provisions of the

Tax Code, §§ 1311 through 1314, may not be applied to allow the

taxpayer to lift the bar of the statute of limitations and obtain

refunds of overpaid 1983 and 1984 recapture taxes.

Discussion

1.

Pursuant to § 108(a) of the Bankruptcy Code, a party may

extend a limitations period for two years following a bankruptcy

order for relief. It applies "[i]f applicable nonbankruptcy law

... fixes a period within which the debtor may commence an action,

and such period has not expired before the date of the filing of

the petition [of bankruptcy]." 11 U.S.C. § 108(a) (emphasis

added). In this case, TLI filed for bankruptcy before the

expiration of the three-year limitations period for filing a tax

refund claim, set forth in 26 U.S.C. § 6511(a), for the 1984

refund. The district court decided, however, that § 108(a) of the
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Bankruptcy Code tolls the statute of limitations, not for bringing

an administrative tax refund claim, but only for the bringing of a

suit in court. Since TLI brought suit more than two years after

the petition for bankruptcy, its claim rests on the application of

§ 108(a)'s "commence[ment of] an action" to administrative refund

claims.

TLI argues that § 108(a)'s "commence[ment of] an action"

includes the filing of an administrative claim prerequisite to

litigation. A taxpayer must file a claim for refund with the IRS

before bringing suit in court. Brown v. United States, 890 F.2d

1329, 1346 (5th Cir.1989) (citing 26 U.S.C. § 7422(a); Treas.Reg.

§ 301.6402-2(b)(1)). Therefore, TLI argues, the administrative

application for refund is the true commencement of the "action."

The few courts to have addressed this issue have held that §

108(a) does not apply to administrative tax refund claims. In re

Carter, 125 B.R. 832, 836 (D.Kan.1991); In re Howard Industries,

Inc., 170 B.R. 358, 361-62 (S.D.Ohio 1994). See also Lynch v.

Rogan, 50 F.Supp. 356, 357-58 (S.D.Cal.1943) (interpreting the

predecessor to § 108(a), the former 11 U.S.C. § 29, which tolls the

statute of limitations for "institut[ing] proceedings"). In re

Carter, cited by In re Howard Industries, held that the filing of

an administrative refund claim does not constitute the commencement
 

2Carter, 125 B.R. at 836. The court held instead that refund

claims come under § 108(b), which grants a 60-day extension for the

"period within which the debtor ... may file any pleading, demand,

notice, or proof of claim or loss, cure a default, or perform any

similar act." 11 U.S.C. § 108(b). The application of § 108(b)

does not affect TLI's 1984 amended refund request, submitted more

than sixty days after filing for bankruptcy. TLI argues that §

108(b) does not apply to its refund claim because § 108(b) lists

categories of procedures, "pleadings, demands, notice," required

after the start of litigation, but a tax refund claim precedes

litigation. While we need not decide the issue of the

applicability of § 108(b) to tax refund claims here, we note that

TLI's argument ignores § 108(b)'s reference to "proof of claim or

loss," a precursor to litigation. Thus § 108(b) may very well

apply to an administrative tax refund claim due prior to any

potential litigation. 

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of "an action" under § 108(a).2 The Bankruptcy Court reasoned that

a taxpayer must file an administrative refund claim and wait for a

ruling or for the statutory waiting period to expire before it may

"commence an action" by filing suit in district court. Carter, 125

B.R. at 836. "Action" refers to the actual tax litigation, a legal

contest by judicial process.

We agree. While an administrative refund application must

precede a tax action, it does not commence it. Statutory

construction begins with the ordinary meaning of the text.

Escondido Mutual Water Co. v. La Jolla Band of Mission Indians, 466

U.S. 765, 772, 104 S.Ct. 2105, 2110, 80 L.Ed. 753, 761 (1984);

Amarillo Prod. Credit Assoc. v. Farm Credit Admin., 887 F.2d 507,

510 (5th Cir.1989) (citation omitted). An "action" in its "usual

legal sense means a lawsuit brought in a court; a formal complaint

brought within the jurisdiction of a court of law." Black's Law
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Dictionary 28 (6th ed. 1990). Rule 3 of the Federal Rules of Civil

Procedure, titled "Commencement of Action," defines it thus: "A

civil action is commenced by filing a complaint with the court."

We agree with the other courts that have addressed the issue that

the language of § 108(a) does not serve to extend the statute of

limitations for filing an administrative tax refund claim.

2.

Ordinarily, the statute of limitations acts as a complete bar

to both taxpayers and the IRS seeking to correct past errors.

Years closed off through a closing agreement or the doctrine of res

judicata are similarly beyond the reach of efforts to recalculate

tax liability. However, in narrowly defined circumstances, the

strictures established by the statutes of repose are loosened by

the Tax Code's mitigation provisions. 26 U.S.C. §§ 1311-1314.

These sections, designed mainly to deal with inconsistencies

by the taxpayer, a related person, or the IRS, were expanded by

Congress in 1953 to allow redress of additional "tax inequities" in

spite of the statute of limitations or similar barrier. The

legislation, found in §§ 1312(3)(B) and 1312(4), is applicable when

the taxpayer or the IRS, while the proper taxable year remains

open, chooses the wrong year to include an item in gross income or

takes a deduction or credit and discovers the mistake after the

period for correction has ended. See generally Irving Bell, Recent

Developments Amid the Mysteries of Mitigation, 17 U.C.L.A.L.Rev.
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542 (1969-70); Boris I. Bittker & Lawrence Lokken, Federal

Taxation of Income, Estates and Gifts § 113.9 (2d ed. 1992);

Mertens Law of Fed. Income Tax, Comm. § 1311-12.

Sections 1311 and 1312, in pertinent parts, provide:

If a determination (as defined in section 1313) is described

in one or more of the paragraphs of section 1312 and, on the

date of the determination, correction of the effect of the

error referred to in the applicable paragraph of section 1312

is prevented by the operation of any law or rule of law ...

then the effect of the error shall be corrected by an

adjustment made in the amount and in the manner specified in

section 1314.

26 U.S.C. § 1311(a);

The circumstances under which the adjustment provided in

section 1311 is authorized are as follows:

(4) Double disallowance of a deduction or credit. The

determination disallows a deduction or credit which should

have been allowed to, but was not allowed to, the taxpayer for

another taxable year, or to a related taxpayer.

26 U.S.C. § 1312;

In the case of a determination described in section 1312(4)

(relating to disallowance of certain deductions and credits),

adjustment shall be made under this part only if credit or

refund of the overpayment attributable to the deduction or

credit described in such section which should have been

allowed to the taxpayer or related taxpayer was not barred, by

any law or rule of law, at the time the taxpayer first

maintained before the Secretary or before the Tax Court, in

writing, that he was entitled to such deduction or credit for

the taxable year to which the determination relates.

26 U.S.C. § 1311(b)(2)(B).

Thus, § 1312(4) permits a refund claim which is otherwise

barred if (1) the determination disallows a deduction or credit

that should have been—but was not—allowed the taxpayer for another
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taxable year or to a related taxpayer; and, (2) the resulting

credit or refund was not barred at the time the taxpayer first

maintained in writing before the IRS or the Tax Court that he was

entitled to the deduction or credit for the taxable year to which

the determination relates. See Longiotti v. United States, 819

F.2d 65, 68 (4th Cir.1987). The government argues that the

taxpayer has failed to demonstrate that either of these mitigation

elements is present. We need not reach both issues, because we

agree that TLI failed to establish that there was a "double

disallowance"—i.e. a determination disallowing a deduction or

credit that should have been—but was not—allowed the taxpayer for

another taxable year.

TLI contends that the IRS's determination allowing TLI's

claims for 1985 and 1986 also constituted a "determination" that

resulted in a "double disallowance" of the taxpayer's 1979 ITCs for

use in its 1983 and 1984 tax years. This argument simply begs the

question; it bases its conclusion on assumptions that are as much

in need of proof or demonstration as the conclusion itself, viz.,

that the taxpayer asked for and was disallowed 1983 and 1984

credits or deductions in connection with its amended 1985 and 1986

returns. The record does not support these suppositions.

Section 1312(4) applies in the select circumstances in which

the taxpayer, while the correct taxable year is still open, picks

the wrong year to take a deduction or credit and finds, when
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disallowance for the wrong year is determined, that the correct

year is no longer open. 4 Bittker & Lokken, supra, § 113.9.3. For

example, if a taxpayer files a claim for a refund in 1990,

asserting that she neglected to include a charitable contribution

for that year, and the claim is refused by the IRS and the courts

on the basis that the contribution was actually paid in 1989, a

refund claim should be allowed for 1989. Provided that the claim

would have been timely had it been filed when the unsuccessful 1990

claim was filed, the statutes of limitation would not prevent

recovery. Id. citing JBN Tel. Co. v. U.S., 638 F.2d 227 (10th

Cir.1981) (applying § 1312(4) to a taxpayer who deducted a loss on

his 1972 return, but the court, after the limitations period had

expired for 1971, found that the proper year was 1971).

TLI's double disallowance claim does not clear even the first

hurdle of the mitigation provisions. TLI bases its case upon the

IRS's determination to grant the taxpayer refunds for its 1985 and

1986 tax years. That determination did not disallow the taxpayer

a deduction or credit, much less constitute a disallowance of a

deduction or credit which should have been allowed to the taxpayer

in another year. That determination involved only the 1985 and

1986 tax years; it did not address substantively the taxpayer's

entitlement to deductions or credits in any other year. Of course,

the Trailways Group's claims asserted in its amended 1983, 1984,

1985, and 1986 returns were interrelated in that they sought to
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have its tax liability for each year recomputed according to the

interpretation of the Code set forth in Revenue Ruling 72-221.

This relationship alone, however, is not sufficient to cause the

IRS's determinations regarding the 1985 and 1986 tax years to meet

the requirements of a double disallowance under § 1312(4).

The judgment of the district court is AFFIRMED.