Taxing Lessons From Court Decisions

Decisions — Form matters

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Currently, the IRS website has about 900 forms that can be downloaded for filing purposes. Using the right form can make a difference when you’re seeking a refund as an innocent spouse (Palomares) or trying to convince the IRS that your return was properly filed and the statute of limitations has expired.

In T.C. Memo. 2017-177 (New Capital Fire, Inc.), the taxpayer, a former insurance company, filed a tax return for 2002 after what was supposed to be a tax-free merger.

The old company did not file a tax return for any part of 2002. The new company timely filed Form 1120, U.S. Corporation Income Tax Return, for 2002, and included a pro forma Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, for the old company’s 2002 tax year.

The pro forma return reported the old company’s employer identification number, tax payments, income, deductions, and credits for the period January 1 through December 4, 2002, and checked the box stating that it was the “Final Return” for old company. The 2002 return was signed under penalties of perjury.

The new company also attached the following statement to its 2002 return:

On December 4, 2002, old company, an insurance corporation, was merged into new company, a non-insurance corporation. At the time of the merger, new company ceased its insurance operations. Attached is a copy of the certificate of merger. The operations of old company are included in this return on Form 1120-PC Statement.

In 2012, the IRS determined that old company was required to file a return for the short tax year ending December 4, 2002, because the merger failed to meet tax law requirements. The IRS issued a notice of deficiency to old company.

The taxpayer says the three year statute of limitations prevents the IRS from issuing the notice.

The IRS says the taxpayer was two separate companies (old company and new company) and each company was required to file a return. In addition, the IRS says, new company’s 2002 return, with the proforma information regarding old company, does not qualify as a valid return. Because old company did not file a valid tax return, the three year statute of limitations does not apply.

The IRS agrees that income tax regulation 1.381(b)-1(a)(2) states that when a corporation engages in a reorganization (F type), the part of the tax year before the reorganization and the part after constitute a single tax year, and the resulting corporation must file a single full-year return. However, the IRS says the merger was not such a reorganization.

The first question the tax court had to answer was whether the filing of the 2002 return began the running of the statute of limitations for old company.

The court turned to the Beard test (from Beard v. Commissioner, 82 T.C. 766, 777 (1984)),to determine the answer. Under that test, if a taxpayer files the wrong type of return, the wrong return will still trigger the statute of limitations, so long as

  1. the document contains sufficient data to calculate tax liability;
  2. the document purports to be a return;
  3. there is an honest and reasonable attempt to satisfy the requirements of the tax law; and
  4. the taxpayer executed the document under penalties of perjury.

While not alleging that new company’s 2002 tax return was false or fraudulent with intent to evade tax (as pertaining to old company), the IRS said new company’s 2002 return failed the third prong of the Beard test because it was “purposefully misleading.”

The court also did not find that the return was false or fraudulent.

Do you think a return that is “purposefully misleading” will fail to meet the third prong of the Beard test and render the return invalid as the IRS asserts?

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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!
Sorry, wrong answer :(

For the taxpayer.

If we accept the IRS’s “misleading” assertion for the sake of argument, “purposefully misleading” does not render a tax return a nullity.

New company’s 2002 return purported to and did include old company’s income from January 1 through December 4, 2002.

The IRS has not alleged, and we do not find, that new company’s 2002 return was false or fraudulent with intent to evade tax as it pertains to old company. It was the IRS’s duty to determine, within the period of limitations provided by section 6501(a), whether new company’s 2002 return, as it pertains to old company, was erroneous in any respect.

The exception under section 6501(c)(3) (not filing a valid return) does not apply.

Accordingly, assessment of the determined deficiency and additions to tax is barred by the statute of limitations.

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