What’s the point?
In 149 T.C. No. 17 (CreditGuard of America, Inc.), the court answers the question of at what point a corporation has to start paying interest on a tax liability.
The taxpayer, a credit counseling organization, was incorporated in Florida in 1991, and received tax-exempt status from the IRS in December 1993.
In May 2003, the taxpayer filed its income tax return as a nonprofit (Form 990) for the 2002 calendar year.
The IRS began an audit of the 2002 tax year in 2003, and concluded the audit in February 2012. In March 2013, the IRS issued a final determination letter revoking tax-exempt status retroactively to January 1, 2002. The IRS told the taxpayer to file corporate federal income tax returns (Forms 1120) for 2002 and all tax years thereafter.
When the taxpayer failed to file Form 1120, the IRS prepared a return showing the taxpayer owed $216,547 of tax, as well as $142,185 of interest. The IRS calculated the interest from the due date of Form 1120 for 2002 (March 17, 2003), saying that under the applicable tax code provisions, “interest is to be charged on unpaid taxes from the date the taxes were due until the date they are paid” (internal revenue code 6601).
The taxpayer said the earliest the interest could begin accruing would be the date on which the IRS assessed the deficiency (March 13, 2013). The taxpayer says it could not possibly have paid its 2002 tax liability timely because it did not know on March 17, 2003, that this liability existed.
According to the taxpayer, it was tax exempt during 2002, it correctly filed Form 990 for that year, and it had no obligation to file Form 1120 until its tax exemption was revoked. The taxpayer contends that the starting date for paying interest is governed by section 6601(b)(5), captioned “Last date for payment not otherwise prescribed.” That section provides that, “[i]n the case of taxes payable by stamp and in all other cases in which the last date for payment is not otherwise prescribed, the last date for payment shall be deemed to be the date the liability for tax arises.”
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Section 6501(g)(2) provides that the filing of a Form 990 by a taxpayer that determines in good faith that it is a tax-exempt organization “shall be deemed the return of the organization” for purposes of starting the period of limitations on assessment.
By triggering the start of the three-year limitations period of section 6501(a), the good-faith filing of a Form 990 prevents the IRS from revoking an entity’s tax-exempt status for years in the distant past.
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For the IRS.
Section 6601(b)(5) by its terms is inapplicable here. It applies only to taxes payable by stamp and other taxes for which “the last date for payment is not otherwise prescribed.”
The tax involved here is the corporate income tax. The last date for payment of the corporate income tax is “otherwise prescribed,” namely, by section 6072(b). For a calendar year corporate taxpayer in 2002, that date was March 17, 2003.
Even if section 6601(b)(5) applied, it would not help the taxpayer. The taxpayer’s corporate income tax liability for 2002 did not “arise” on February 1, 2012, when the IRS mailed the letter revoking tax-exempt status.
Nor did it arise on November 30, 2012, when this court entered a decision determining a deficiency of $216,547 for 2002. And it did not arise on March 13, 2013, when the IRS assessed that tax.
Rather, by virtue of the retroactive revocation of the taxpayer’s tax-exempt status to January 1, 2002, its corporate income tax liability arose during 2002, the calendar year for which it had become a “corporation subject to tax under subtitle A.” Section 6012(a)(2).
And the taxpayer’s liability for payment of that tax arose on March 17, 2003, the due date of its Form 1120 for 2002. In contending that it had no tax liability for 2002 until 2012, the taxpayer is ignoring the fact that its tax-exempt status was revoked, not prospectively, but retroactively to January 1, 2002. Retroactive revocation is not just a slap on the wrist; it has real tax consequences.
Here, the premise is that the taxpayer was not in fact tax exempt during 2002 but rather was a corporation subject to the regular corporate income tax. Because the taxpayer did not actually pay that tax on the date prescribed for payment, it is liable for interest beginning on that date.
The IRS is seeking only to collect interest on the unpaid tax from the date the tax was due to be paid. In so doing, the IRS is simply implementing the logical consequences of the retroactive revocation to which the taxpayer agreed, whereby the IRS is restored to the position it would have occupied if the taxpayer had never enjoyed tax-exempt status during 2002.
The IRS is simply seeking to collect interest on a deficiency that arose in 2002 and has not been paid. The fact that the taxpayer could not literally have filed a Form 1120 on March 17, 2003, does not negate the existence of a corporate income tax liability for 2002 or entitle the taxpayer to free use of the money for the ensuing decade.
The taxpayer has had use and enjoyment of that $216,547 from March 17, 2003, until now. It has supplied no reason, in law or logic, why it should not have to pay interest as any other corporate taxpayer would have to do.
If the assessment limitations period remains open, as it was here upon the IRS’ prompt examination of the taxpayer’s 2002 Form 990, neither section 6501(g) nor any other code provision prevents the IRS from assessing the accrued interest.