Bolten v. Comm'r of Internal Revenue, Docket No. 24007-88.

• Decision Date: 04 October 1990
• Docket Number: Docket No. 24007-88.
• Citation: 95 T.C. No. 29,95 T.C. 397
• Parties: JOHN BOLTEN, JR., AND INES BOLTEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

95 T.C. 397

95 T.C. No. 29

JOHN BOLTEN, JR., AND INES BOLTEN, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24007-88.

United States Tax Court

Filed October 4, 1990.

Petitioners had a $781,927 net operating loss (NOL) in 1976. Pursuant to section 172 of the Internal Revenue Code, they carried it back as required and then carried it forward to the years 1977, 1978, and 1979. The amount of the 1976 NOL remaining after the deductions thus taken through 1979 was sufficient to support the NOL deduction of $460,382 which they took for 1980 and the final NOL deduction of $8,599 which they took for 1981. In 1988, when the period of limitations for assessment of deficiencies as extended for 1980 had already expired, they entered into a closing agreement under section 7121. Pursuant to that agreement, certain unrelated deductions were disallowed and the taxable income for each of the years 1977-1979 (which were then still open) was consequently increased. Accordingly, the portions of the 1976 NOL previously carried over to 1977-1979 were substantially increased to offset the upwardly revised amounts of taxable income for each of those years. The portions of the $781,927 NOL for 1976 to which petitioners were entitled under the closing agreement as allowable carryback and carryover deductions through 1979 amounted in the aggregate to $718,846. The closing agreement then provided that ‘the amount of the net operating loss deductions available for * * * 1980 and 1981 are reduced to $63,081 and $-0-, respectively.‘ The Commissioner thereupon determined a deficiency for 1980, at issue herein, based upon the reduction of petitioners' 1980 NOL carryover deduction of $460,382 to $63,081.

HELD, the mitigation provisions of sections 1311-1314 are applicable to lift the bar of the statute of limitations to permit assessment of deficiency based upon the reduction of the $460,382 NOL deduction for 1980 to the correct amount of $63,081. A. William Caporizzo, for the petitioners.

Barry J. Laterman and Maureen T. O'Brien, for the respondent.

OPINION

RAUM, JUDGE:

The Commissioner determined a $108,900 deficiency in income tax for 1980 against petitioners, husband and wife. They resided in West Germany at the time the petition herein was filed. At issue is whether the mitigation provisions of sections 1311-1314 ¹ of the Internal Revenue Code are applicable to lift the bar of the statute of limitations against assessment which had otherwise expired. ² The facts have been stipulated.

Petitioners discovered a $904,900 embezzlement loss in 1976 which they claimed as a deduction on their return for that year. They thus incurred a $781,927 net operating loss (NOL) which, as stipulated by the parties, petitioners carried back or forward as follows:

+----------------------------------+
                ¦Taxable year¦NOL deduction claimed¦
                +------------+---------------------¦
                ¦            ¦                     ¦
                +------------+---------------------¦
                ¦1975        ¦$ 3,568              ¦
                +------------+---------------------¦
                ¦1977        ¦56,691               ¦
                +------------+---------------------¦
                ¦1978        ¦77,384               ¦
                +------------+---------------------¦
                ¦1979        ¦175,303              ¦
                +------------+---------------------¦
                ¦1980        ¦460,382              ¦
                +------------+---------------------¦
                ¦1981        ¦8,599                ¦
                +------------+---------------------¦
                ¦Total       ¦781,927              ¦
                +----------------------------------+
                

The $460,382 portion of the 1976 net operating loss which petition ers thus carried forward and deducted on their 1980 return, here involved, completely eliminated all tax for that year.

Subsequent to the filing of returns for the foregoing years, the parties agreed that petitioners were not entitled to certain deductions relative to investments in the partnerships Harrison Associates and Mona Hill Associates for 1977 and 1978 and in a diamond mining venture known as Imperial Finance for 1978 and 1979, which had been claimed on their returns for these years. The parties entered into a timely settlement of these issues whereby petitioners conceded all issues and the IRS allowed a deduction of cash invested in Harrison and Mona Hill. As a consequence of the foregoing agreed adjustments, the taxable income for each of the years 1977-1979 was substantially increased, and the NOL deductions for those years required to offset the revised amounts of taxable income were correspondingly increased, thereby reducing the amount of NOL deductions available for carryover beyond 1979.

The parties thereupon entered into a closing agreement under section 7121 dated May 9, 1988, ³ in which it was agreed:

(1) That taxpayers have consistently claimed the net operating loss deductions on the basis of their returns as filed under the ordering rules of Internal Revenue Code Section 172.

(2) That taxpayers are entitled to the following net operating loss deductions on their income tax returns as the result of the adjustments to adjusted gross income and taxable income for the calendar years 1977, 1978 and 1979:

+------------------------------------+
                ¦Taxable year  ¦Allowable deduction  ¦
                +--------------+---------------------¦
                ¦1975          ¦$3,568               ¦
                +--------------+---------------------¦
                ¦1977          ¦140,023              ¦
                +--------------+---------------------¦
                ¦1978          ¦249,782              ¦
                +--------------+---------------------¦
                ¦1979          ¦325,473              ¦
                +--------------+---------------------¦
                ¦Total         ¦718,846              ¦
                +--------------+---------------------¦
                ¦              ¦                     ¦
                +------------------------------------+
                

(3) That as a result of the increases to adjusted gross income and taxable income for the calendar years 1977, 1978 and 1979 and the reordering of net operating loss deductions as noted above, the amount of net operating loss deductions available for the calendar years 1980 and 1981 are reduced to $63,081 and $-0-, respectively.

(4) That absent a determination by a court of competent jurisdiction or by agreement of the parties that the mitigation provisions are applicable under Internal Revenue Code Sections 1311 through 1314, inclusive, the time for assessing any tax for the calendar years 1980 and 1981 resulting from the reordering of the net operating loss deductions has expired under Internal Revenue Code Section 6501.

The normal period of limitations for assessment for 1980, as extended pursuant to section 6501, had expired on June 30, 1985. We are accordingly faced with the question whether the mitigation provisions of sections 1311 through 1314 lift the bar of the statute of limitations for assessment of 1980 tax as a result of the reordering of the net operating deductions required by the closing agreement.

The mitigation provisions were first enacted as section 820 of the Revenue Act of 1938, ch. 289, tit. V, 52 Stat. 581, and were included, successively, in the 1939 Code as section 3801 and in the 1954 Code and the 1988 Code as sections 1311-1314. ⁴ The provisions now in effect reflect certain amendments to the original 1938 provisions, ⁵ but to the extent that they relate to the present case the basic provisions involved remain substantially the same as enacted in 1938. Pertinent portions of sections 1311 through 1314 in effect here are set forth in the margin. ⁶

Turning to the facts of the present case, we begin with a $781,927 net operating loss incurred in 1976 which can be carried back to each of the preceding three years, section 172(b)(1)(A), as needed to reduce taxable income, and the remainder then carried forward to years beginning with 1977, as needed similarly to reduce taxable income in such later years, section 172(b)(1)(B), until it has been fully absorbed or until the right to carry it forward has expired. ⁷

After taking into account that portion of the 1976 NOL already used up for the carryback period and the carryovers for 1977, 1978, and 1979, required to offset gross income and reduce taxable income reported by petitioners on their returns for those years, there still remained a sufficient amount of the 1976 NOL to offset petitioners' reported 1980 gross income and reduce their taxable income to the point that their tax for 1980 was completely eliminated. Accordingly, petitioners did in fact carry forward $480,382 as a 1980 NOL, namely, that portion of the remaining 1976 NOL required to wipe out their tax for 1980. However, as a result of the May 9, 1988, closing agreement, increasing the amounts of the 1976 NOL allowable and used up for 1977, 1978, and 1979, there remained only $63,081 of the 1976 NOL that was available to petitioners for carryover to 1980, ⁸ the year now before us. It is thus plain that petitioners are not entitled under section 172 to an NOL carryover deduction for 1980 in excess of $63,081, and the deficiency before us relates exclusively to the decrease of the $460,382 deduction taken by petitioners for 1980 to the correct amount of $63,081. There can be no reasonable doubt that the deficiency thus determined must be sustained if the mitigation provisions lift the bar of the statute of limitations, which otherwise prevents the reopening of the closed year 1980 for this purpose. We hold that the mitigation provisions of sections 1311-1314 are applicable here.

Sections 1311 through 1314 constitute the entire part II of subchapter Q of chapter 1 of the income tax subtitle A, of the Internal Revenue Code. Part II is captioned ‘Mitigation of Effect of Limitations and Other Provisions. ‘ In the aggregate, sections 1311 through 1314 set forth a highly complicated and confusingly interrelated set of provisions authorizing the correction of error which is otherwise prevented by operation of law, e.g., the expiration of the statutory period of limitations for assessment. Considerably oversimplified but nevertheless sufficiently accurate for present purposes, sections...