Taxing Lessons From Court Decisions

Decisions — Counting the days

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All good things must end, including the amount of time the IRS is allowed to assess tax. That time frame is called the statute of limitations.

In T.C. Memo. 2018-182 (Namm Trust), the taxpayer says the IRS did not mail a notice of deficiency before the expiration of the statute of limitations.

The case involved items on a corporate tax return that were “affected items” from a partnership return. In this situation, two distinct limitations provisions apply.

The first is internal revenue code section 6501(a). This section is the general rule that federal income tax must be assessed “within three years after the return was filed.”

The second provision applicable to this case is internal revenue code section 6229(a). This section addresses the statute of limitations for partnership items and provides that this assessment period “shall not expire before the date which is three years after the later of (1) the date on which the partnership return for such taxable year was filed, or (2) the last date for filing such return * * * (determined without regard to extensions).”
 

Question: True or false? In cases where sections 6501(a) and 6229(a) both apply, the longer of the two periods controls.

 

or

 

To add another wrinkle, the statute of limitations under section 6229 can be suspended when the IRS timely mails an adjustment notice to the responsible partner and the taxpayer has filed a lawsuit contesting the assessment.

In that situation, section 6229(d) suspends the running of the period of limitations “(1) for the period during which an action may be brought under section 6226 (and, if a petition is filed under section 6226 * * * , until the decision of the court becomes final), and (2) for one year thereafter.”

In this case, the taxpayer did file suit in the applicable district court.

1. The corporate tax return on which the taxpayer reported the challenged losses was filed January 17, 2002.

The statute of limitations for this return falls under the general rule of section 6501(a).

Question: What was the initial expiration date of the statute of limitations for this return?

 

or

 

2. The partnership tax return reporting the relevant partnership items was filed on December 14, 2001.

The applicable statute of limitations for assessing tax on the affected items is code section 6229(a). See above for link and wording.

Question: What was the initial expiration date of the statute of limitations for this return?

 

or

 

3. As mentioned above, code section 6229(d) suspends the three year statute of limitations when the IRS timely files a notice of partnership adjustment and the taxpayer files a court action. The suspension is for the duration of the litigation and for one year after the judgment becomes final.

When section 6229(d) suspends a limitations period, any unexpired time left in the original assessment period is tacked on following the suspension.

The IRS issued the notice of partnership adjustment on December 14, 2004.

The taxpayer filed a district court action to contest the adjustment.

The district court dismissed the case with prejudice on June 25, 2014, and neither party appealed. That court’s judgment became final on August 25, 2014, the last day on which a notice of appeal could have been filed.

Question: What was the expiration date of the statute of limitations given these facts?

 

or

 
 

EDITORIAL NOTE

 

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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Right answer!

In situations where sections 6501(a) and 6229(a) both apply, the tax court has held that the longer of the two periods controls. At least four Courts of Appeals agree with that conclusion.

Sorry, wrong answer :(
Right answer!

The IRS initially had three years, until January 17, 2005, to assess tax against this return.

Sorry, wrong answer :(
Sorry, wrong answer :(
Right answer!

Under section 6229(a), the period of limitations for assessing additional tax for the affected items “[did] not expire before” December 14, 2004. The initial period of limitations on assessment ran until January 17, 2005, the later of the two dates.

Sorry, wrong answer :(
Right answer!

Section 6229(d) suspends the running of the section 6501(a) period once the IRS issues a timely notice to the partnership.

The IRS issued the notice on December 14, 2004. That date was 34 days before January 17, 2005, the date on which the section 6501(a) period for assessing tax expired.

Under section 6229(d), the running of the remaining 34 days of the limitations period was suspended during the district court litigation and for one year after the judgment of the district court became final.

The district court dismissed the case with prejudice on June 25, 2014, and neither party appealed. That court’s judgment became final on August 25, 2014, the last day on which a notice of appeal could have been filed.

Thus, section 6229(d)(2) caused the period of limitations to be suspended for an additional year, until August 25, 2015.

When section 6229(d) suspends a limitations period, any unexpired time left in the original assessment period is tacked on following the suspension.

Here, immediately before the section 6229(d) suspension began, the IRS had 34 days remaining to assess tax. The section 6229(d) suspension ended on August 25, 2015.

The period for assessing tax, as extended by section 6229(d), thus closed 34 days later, on September 28, 2015.


The final decision was for the IRS. The court determined the notices were filed within the applicable statute of limitations.
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