Tax Court Rejects IRS Argument that Corporate Taxpayer Failed to File Valid Return
The issue of whether a valid tax return has been filed usually comes up in the context of individuals. One common situation involves taxpayers who file so-called zero returns or returns with an altered jurat and protest paying any taxes. Another common situation, which has received substantial attention lately, involves whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code. We previously posted on the latter.
This post focuses on the uncommon situation where the IRS disputes whether a corporate taxpayer filed a valid return. As we have previously discussed, in the widely cited Beard v. Commissioner, 82 TC 766 (1984), the Tax Court defined a four-part test (the Beard Test) for determining whether a document constitutes a “return.” To be a return, a document must: (1) provide sufficient data to calculate tax liability; (2) purport to be a return; (3) be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) be executed by the taxpayer under penalties of perjury. This test applies to all types of taxpayers, and its application to corporate taxpayers was recently highlighted in New Capital Fire, Inc. v. Commissioner, TC Memo. 2017-177.
In New Capital Fire, Capital Fire Insurance Co. (Old Capital) merged into New Capital Fire, Inc. (New Capital), with New Capital surviving, on December 4, 2002. The merger was designed to be a tax-free reorganization under Internal Revenue Code (Code) Section 368(a)(1)(F). Old Capital did not file a tax return for any part of 2002 and New Capital filed a tax return for 2002 which included a pro forma Form 1120-PC, US Property and Casualty Insurance Company Income Tax Return, for Old Capital’s 2002 tax year. The IRS issued Old Capital a notice of deficiency in 2012 determining that Old Capital was required to file a return for the short tax year ending December 4, 2002, because the merger failed to meet to reorganization rules.
Under Code Section 6501(a), the general period for assessment, and therefore the period for issuing a notice of deficiency, ends three years after the filing of the income tax return. The IRS asserted that under Code Section 6501(c)(3), the statute of limitations never started to run because Old Capital failed to file a tax return. This position was based on the argument that Old Capital and New Capital were each required to file tax returns for 2002 and that New Capital’s 2002 return with the accompanying pro forma return for Old Capital did not qualify as a valid return for Old Capital’s short tax year.
The Tax Court recited the Beard Test as controlling law, and noted that if a taxpayer files the wrong type of return, that wrong return will be sufficient to start the running of the period of limitations so long as the Beard Test is met. Upon review of New Capital’s tax return and the pro forma return for Old Capital, as well as certain statements attached to the return and the information provided, the Tax Court concluded that the Beard Test was met. It had no problem rejecting the IRS’s argument that New Capital’s 2002 return was “purposely misleading” and failed the third-prong of the Beard Test. All information necessary for the IRS to determine, within three years, whether New Capital’s 2002 return, as it related to Old Capital, was erroneous in any respect. Accordingly, the Tax Court held that the Code Section 6501(c093) exception did not apply.
Practice Point: As noted above, corporate taxpayers rarely find themselves in the situation where the IRS is challenging whether a valid return has been filed. In the context of short tax years and mergers, the New Capital Fire case sheds some light on the proper requirements for a valid return.