Here is a pattern I see constantly. Someone has taxes withheld from every paycheck, more than they actually owe, and simply never files. Years later the IRS sends a notice of deficiency. The taxpayer finally files, shows an overpayment, and asks the Tax Court for the money back. Commissioner v. Lundy is the Supreme Court case about whether that works.
The Facts
During 1987, Robert Lundy and his wife had $10,131 in federal income tax withheld from their wages. They actually owed $6,594. They did not file their 1987 return when it was due, and did not file a return or claim a refund for the next two and a half years.
On September 26, 1990, the IRS mailed Lundy a notice of deficiency claiming he owed $7,672 in additional taxes and interest for 1987, plus penalties for late filing and negligence. On December 22, 1990, the Lundys mailed their joint 1987 return showing an overpayment of $3,537 and claiming a refund. Six days later, Lundy filed a timely Tax Court petition contesting the deficiency and asking for the refund.
The IRS argued the Tax Court had no jurisdiction to refund the money. Withheld taxes are deemed paid on the return due date, April 15, 1988, under IRC § 6513(b)(1). That was more than two years before the notice of deficiency was mailed. The Tax Court agreed with the IRS, following an unbroken line of its own decisions. The Fourth Circuit reversed, applying a 3-year look-back. Every other circuit to address the question had sided with the Tax Court.
The Issue
When a taxpayer has not filed a return by the time the IRS mails a notice of deficiency, how far back can the Tax Court reach to refund overpaid taxes: two years or three?
The Holding
Two. Justice O'Connor wrote for the Court: "We hold that in these circumstances the 2-year look-back period set forth in § 6512(b)(3)(B) applies, and the Tax Court lacks jurisdiction to award a refund." The Court reversed the Fourth Circuit.
The Reasoning
The Tax Court uses a hypothetical claim
A taxpayer seeking a refund in district court or the Court of Federal Claims must first file a timely administrative claim under § 6511. The Tax Court works differently. Section 6512(b)(3) incorporates only the look-back periods from § 6511(b)(2), not the filing deadline. It directs the Tax Court to imagine a claim filed "on the date of the mailing of the notice of deficiency" and ask how far back that hypothetical claim could reach.
No return, no three-year window
Under § 6511(b)(2)(A), the 3-year look-back applies only if the claim is filed "within 3 years from the time the return was filed." The Court explained: "In the case of a taxpayer who does not file a return before the notice of deficiency is mailed, the claim described in § 6512(b)(3)(B) could not be filed 'within 3 years from the time the return was filed.' No return having been filed, there is no date from which to measure the 3-year filing period." So the default 2-year period applies, measured back from the mailing date.
Lundy's withholding was deemed paid April 15, 1988. The notice was mailed September 26, 1990. That was more than two years later, so the Tax Court could not refund it.
The timely filer is protected
The Court noted that the scheme works well for taxpayers who file on time. Because the IRS generally must mail a notice of deficiency within 3 years after a return is filed, a hypothetical claim on the mailing date will almost always fall within 3 years of the return, giving a 3-year look-back. Such a taxpayer can discover a refund during Tax Court litigation and recover it without ever filing a separate claim. The statute "treats delinquent filers of income tax returns less charitably."
The taxpayer's arguments failed
The Fourth Circuit had measured the length of the look-back by Lundy's actual late claim. The Court said his later filing "has no bearing" on the Tax Court's jurisdiction, and that the Fourth Circuit's rule would perversely give timely filers a shorter period in some cases. Lundy argued the hypothetical claim should be treated as filed on a return, giving everyone 3 years. The Court said "we are bound by the terms Congress chose to use."
What Congress Did Next
In the Taxpayer Relief Act of 1997, Congress added a sentence to the end of § 6512(b)(3): "In a case described in subparagraph (B) where the date of the mailing of the notice of deficiency is during the third year after the due date (with extensions) for filing the return of tax and no return was filed before such date, the applicable period under subsections (a) and (b)(2) of section 6511 shall be 3 years." It applies to claims for taxable years ending after August 5, 1997.
Lundy's own notice of deficiency was mailed on September 26, 1990, during the third year after his April 15, 1988 due date. That is exactly the situation the amendment addresses.
What It Means for Taxpayers Today
The third-year rule helps, but only in the third year
If you did not file and the IRS mails a notice of deficiency during the third year after the original due date, including extensions, the Tax Court can now look back 3 years. If the notice arrives later than that, the 2-year look-back from Lundy still governs, and withholding deemed paid on the due date may be out of reach.
How to count the third year
Take a return due April 15 of one year with no extension. The "third year after the due date" begins two years after that date and ends three years after it. If the notice of deficiency is mailed inside that twelve-month window and no return was filed before the mailing, the Tax Court can look back three years from the mailing date, which reaches withholding deemed paid on the original due date. If the notice is mailed in the first or second year, the hypothetical claim falls within the ordinary rules. If it is mailed after the third year, the two-year look-back from Lundy applies and the withholding is likely beyond reach. Extensions move the due date, so count from the extended date if you had one.
File the return, even late, even with no money due
The simplest protection is filing. A filed return starts the 3-year clock in § 6511(a) and changes the look-back analysis. Nonfilers who are owed money lose it more often than nonfilers who owe. Our article on unfiled tax returns explains the other costs of waiting.
District court rules are different
The Tax Court can refund without a separate claim; a refund suit in district court or the Court of Federal Claims requires a timely administrative claim under § 6511 first. Which forum you choose changes the analysis, and courts will not stretch either set of deadlines on equitable grounds, as United States v. Brockamp holds.
Withholding is deemed paid on the due date
Remember § 6513(b)(1): wage withholding and estimated tax payments are treated as paid on the return's due date, not on the paycheck dates. Count your look-back from there.
The Bottom Line
Lundy read the statute literally and left a nonfiler's overpayment with the Treasury. Congress softened the result for notices mailed in the third year. The lesson did not change: the person who never files is the one most likely to leave his own money on the table.