Wrong tax return began clock for assessing tax
3-year assessment statute of limitations began with the filing
TAX ALERT |
On Sept. 11, the United States Tax Court found in New Capital Fire, Inc. v Comm’r, T.C. 2017-17, that the statute of limitations for tax assessments barred the IRS from making an additional tax assessment for a taxpayer that filed the wrong tax return.
Facts of the case
On Dec. 4, 2002, Capital Fire Insurance Co., (Old Capital) merged into New Capital Fire, Inc. (New Capital). Old Capital did not file a 2002 tax return. New Capital filed a 2002 tax return on Sept. 12, 2003 and included a pro forma 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return,” with Old Capital’s employer identification number (EIN), income, deductions and credits for the period of Jan. 1 through Dec. 4, 2002. On its 2002 return, New Capital reported Old Capital’s tax payments and checked the box stating it was the final return for Old Capital. Its return was filed under penalty of perjury.
The IRS argued that Old Capital and New Capital were two different taxpayers, and while New Capital filed a 2002 tax return, Old Capital never filed a 2002 tax return. As a result, the IRS argued that §6501(c)(3) allowed assessment at any time because Old Capital never filed a return. The taxpayer argued that the statute of limitations had expired and the IRS could not make a deficiency assessment.
Grounds for the decision
The Tax Court determined that the statute of limitations for the period in which the IRS could make an assessment of a deficiency in income tax ended three years after New Capital filed its tax return and the notice of deficiency filed nearly nine years later was too late.
Case law shows that the statute of limitations on assessment begins to run when a taxpayer files an incorrect return, but the return sets forth all of the data necessary to compute the taxes owed. The Tax Court applied the four-prong test from Beard v. Comm’r, 82 T.C. 766 (1984):
- the document must contain sufficient data to calculate tax liability;
- the document must purport to be a return;
- there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and
- the taxpayer must have executed the document under penalties of perjury.
The pro forma return filed with New Capital’s 2002 return included the name of Old Capital, reported income, deductions and credits that were included in the notice of deficiency at issue, and included a statement that Old Capital merged into New Capital, its operations ceased and Old Capital’s operations were included on the 2002 return on Form 1120-PC. As a result, the Tax Court determined that New Capital’s 2002 return provided enough information to calculate Old Capital’s tax liability. New Capital’s 2002 return reported Old Capital’s tax payments, listed Old Capital’s EIN, and checked the box that it was the “Final Return” for Old Capital, and New Capital’s return clearly purported to be a return and was executed under penalties of perjury.
The IRS argued that New Capital’s 2002 return was purposefully misleading and failed the third prong of the Beard test. However, the Court cited Mabel Elevator Co. v. Comm’r, 2 B.T.A. 517 (1925), in the absence of any evidence or claim that [a] return was false or fraudulent with intent to evade tax, it became the duty of the Commissioner to determine, within the time provided by law, “whether or not the return was erroneous in any respect.” The court determined that New Capital’s 2002 return included Old Capital’s income for 2002 and the IRS never alleged, nor did the court find, that it was false or fraudulent.
Conclusion and analysis
Section 6501(a) states that the IRS shall assess an addition to tax within 3 years after a taxpayer files its return. As this case shows, a taxpayer need not file a perfect return, or even the right return, for the 3-year countdown to begin. Rather, that taxpayer must only file a return that provides the IRS with sufficient information to recognize that a filing was made. The filing must have the taxpayer’s name, taxpayer information number, report income, deductions and credits necessary to calculate the taxes owed.
In this instance, the Tax Court determined that New Capital’s return, combined with the pro forma return for New Capital, provided the IRS with adequate information to notify the IRS that Old Capital made a filing. Once the taxpayer filed its return, it was the duty of the IRS, within the 3-year statute of limitations on assessment, to determine if the return, as it related to Old Capital, was erroneous.