In a recent case before the Rhode Island District Court, McLaughlinQuinn attorneys, Thomas P. Quinn, Esq. and Kristen Reilly Alberione, Esq., LL.M. successfully challenged the Division of Taxation’s interpretation of the Three-Year Rule. McLaughlinQuinn’s attorneys argued that the Division of Taxation’s interpretation of the refund statute produced an unreasonable result and that in order for the Three-Year Rule to have meaning it must include taxes paid in the three-year period "immediately preceding the claim for refund."

The taxpayers requested a refund for the overpayment of their personal income taxes two years and three months after the taxes were deemed paid. The Division of Taxation denied the taxpayers' refund request claiming that the taxpayers’ request for refund did not qualify under within the statutory time period because the tax was not paid within the two-years immediately preceding the claim for refund. The Division of Taxation further stated that the three-year statutory period did not apply to the taxpayers because no taxes were paid after they filed their claim for refund.

For decades the Division of Taxation’s interpretation of the Three-Year Rule only allowed for a refund of taxes paid in the three-year period following the refund claim. This forward-looking approach meant, for taxes deemed paid on April 15th each year (i.e., all income taxes paid through withholding), no refund would ever be available after the expiration of the two-year period. As a result, the Division of Taxation denied each and every refund claim for overpaid taxes when the Three-Year Rule applied. 

The District Court found that the Division of Taxation's interpretation of the statute led to an "absurd result" and that the taxes refundable under the Three-Year Rule are the taxes paid during the three years “immediately preceding the refund request.”  This is a major victory for Rhode Island taxpayers who timely file refund claims within three years but in the past were denied refunds if their taxes were deemed paid within two years.

Although the Division of Taxation has the right to Appeal, the District Court Decision represents a key judicial decision in favor of Rhode Island taxpayers for the first time in more than fifty (50) years of the Division of Taxation’s interpretation of the Three-Year Rule.