Back in 2012, the tax court decided a case typically referred to as WHO515. In that case, the question was whether certain partnership tax items were included when a taxpayer agreed to an extension of the statute of limitations for a personal federal income tax return.
In T.C. Memo 2018-114 (Inman Partners), the taxpayer asked the court to review the WHO515 decision. The taxpayer believed the court misread the term “by or for” in the form the taxpayer signed. The taxpayer says that phrase does not include a partnership return with a year end before the date stated on the form.
The partnership in this case was formed in October 2000 and owned by three limited liability companies. In December 2000, the limited liability companies transferred the partnership interests to subchapter S corporations. A day later, the corporations liquidated the partnership.
Because partnership assets are distributed and sold in a liquidation, this type of transaction is designed to produce substantial—and fake—tax losses. The taxpayer and the IRS agreed that the losses were not real and that the partnership was a scam.
The partnership reported the losses on a first and final partnership tax return. The return was for the short tax year that ended on the day the partnership was liquidated (December 19, 2000), and was filed in February 2001.
The S corporations that owned the partnership at the date of liquidation reported the losses. The losses flowed through to the S corporation owners and the owners reported the losses on their individual federal income tax returns for 2000.
The IRS audited the returns but was unable to finish the audit before the expiration of the statute of limitations.
The general rule is that the IRS has three years from the date a return is filed to assess additional tax. Returns filed on or before the original due date are considered filed on the original due date. Returns filed after the original due date are considered filed on the date the IRS receives them.
In this case, the partnership return for 2000 was filed on February 18, 2001, and the original due date was April 15, 2001. The taxpayer filed a federal individual income tax return for the calendar year 2000 on April 15, 2001.
On what date would the statute of limitations have expired for the taxpayer?
In order to finish the audit, the IRS asked for an extension of the statute of limitations for the taxpayer’s tax year ending December 31, 2000. Because the losses involved the partnership, the IRS used Form 872-I, Consent to Extend the Time to Assess Tax as Well as Tax Attributable to Items of a Partnership. (Editorial note: This form is obsolete as of 2009.)
The taxpayer agreed to the extension.
The initial extension gave the IRS until June 30, 2005 to complete the audit. Because the audit was not finished by then, the IRS asked for a second extension to June 30, 2006. The taxpayer agreed.
All the extensions included the following language:
Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see section 6231(a)(3)), affected items (see section 6231(a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231(b)).
Income tax due on any return(s) made by or for the taxpayer(s) for the period(s) ended December 31, 2000, may be assessed at any time on or before this extension expires.
The IRS finished the audit and issued a notice for the sham partnership on May 18, 2006, a month before the extended statute of limitations would expire. The IRS adjusted all partnership items to zero and assessed penalties.
The taxpayer agreed with the changes, but said the partnership’s tax year that ended December 19, 2000, was not included in the extension of the statute of limitations. The taxpayer says the IRS didn’t issue the notice until May 18, 2006—two years after the statute expired for the partnership tax return.
The taxpayer argues that the phrase “any return(s) made by or for * * * taxpayer(s) for the period(s) ended December 31, 2000,” in the Form 872-I does not include a return for a taxpayer for a period that ended before December 31—that is, a partnership return with a tax year that ended December 19, 2000.
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The three-year statute of limitations would have expired on April 15, 2004.
The taxpayer is missing a key point: The Forms 872-I may have extended the statute only for the individual returns with tax years that ended December 31, 2000, but those individual returns had to report any income tax due to partnership items from any of their partnerships whose tax year ended in 2000 on or before December 31 (see internal revenue code sections 702(a) and 706(a)).
The key point to understand is that the IRS forms don’t extend the statute for returns but for the assessment of income tax due on those returns.
The internal revenue code required the taxpayer to report partnership items on the individual return for the December 31, 2000 tax year, and the taxpayer consented twice to extend the statute for assessing the income tax due on that return.