Fehlhaber v. Comm'r of Internal Revenue

• Decision Date: 13 June 1990
• Docket Number: Docket No. 10543-89.
• Citation: 94 T.C. 863,94 T.C. No. 54
• Parties: ROBERT FEHLHABER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

94 T.C. 863

94 T.C. No. 54

ROBERT FEHLHABER, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10543-89.

United States Tax Court

Filed June 13, 1990.

P was the only shareholder of FA, an S corporation. FA timely filed its return for the taxable year ended November 30, 1985. P timely filed his Federal income tax return for 1985 on or before April 15, 1986. R sent a notice to P on April 12, 1989, determining a deficiency for 1985 based on the disallowance of a loss attributable to FA. The notice of deficiency was sent after the expiration of the 3-year period for assessment against the S corporation but prior to the expiration of the 3-year period for assessment against P. HELD, the notice of deficiency was timely. Under sections 6037(a) and 6501(a), I.R.C. 1954, assessment of P's income tax for 1985 is not barred by the statute of limitations. Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989), reversing and remanding T.C. Memo. 1986-405, not followed herein on this issue. Jerome S. Richman, for the petitioner.

Sergio Garcia-Pages, for the respondent.

OPINION

DAWSON, JUDGE:

This case was assigned to Special Trial Judge James M. Gussis pursuant to section 7443A(b)(4) of the Code and Rule 180 et seq.¹ The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

GUSSIS, SPECIAL TRIAL JUDGE:

This case is before the Court on petitioner's Motion for Summary Judgment filed August 11, 1989. ¹ Both parties presented arguments at a hearing on the motion held on November 22, 1989.

The stipulation of facts is incorporated herein by this reference. Petitioner was a resident of Fort Lauderdale, Florida, when the petition was filed in this case.

Petitioner was the sole shareholder in Fehlhaber Associates, Inc., a small business corporation under section 1361, during the period here involved. Fehlhaber Associates, Inc. timely filed a return on Form 1120-5 for the taxable year ended November 30, 1985. No Form 872, Consent to Extend the Time to Assess Tax, was executed as to the corporation's tax return for the taxable year ended November 30, 1985.

Petitioner timely filed his Federal income tax return for the year 1985 on or before April 15, 1986. Respondent mailed a statutory notice of deficiency on April 12, 1989, in which he determined a deficiency in petitioner's Federal income tax for 1985 in the amount of $59,041 and also determined that petitioner was liable for additions to tax under the provisions of sections 6653(a)(1), 6653(a) (2) and 6661. The only adjustment to income was the disallowance of a loss in the amount of $79,166 attributable to Fehlhaber Associates, Inc. The issue for decision is whether the statute of limitations bars the adjustment.²

Summary judgment is a device used to avoid unnecessary and expensive trials of ‘phantom factual questions.‘ Espinoza v. Commissioner, 78 T.C. 412, 416 (1982). A motion for summary judgment is granted only when it is shown that ‘there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law.‘ Rule 121(b).

With certain exceptions, an S corporation is not subject to income tax on its taxable income. Section 1363(a). Instead, it files an information return and the shareholders report their pro rata share of the S corporation's gross income and are liable for the taxes due on the corporate income. Sections 1366(a) and 1366(c).

The facts are not in dispute. The notice of deficiency was sent to petitioner on April 12, 1989, which was within three years from the date he filed his individual Federal income tax return for 1985. However, the deficiency notice was not sent within three years from the date the S corporation timely filed its information return for the taxable year ended November 30, 1985. Respondent contends that the statute of limitations should be applied at the shareholder level and hence the assessment of petitioner's 1985 tax would not be barred. Petitioner argues that the statute of limitations should be applied at the S corporation level and thus the assessment of petitioner's 1985 tax reflecting his share of the Fehlhaber Associates, Inc., loss is barred.

Section 6501(a) generally provides that the amount of any tax imposed by the Internal Revenue Code shall be assessed within three years after the return was filed. Section 6037(a) requires S corporations to file information returns for each taxable year and provides that ‘Any return filed pursuant to this section shall, for purposes of chapter 66 (relating to limitations), be treated as a return filed by the corporation under section 6012.‘

The parties differ as to the meaning of section 6037(a). Petitioner relies upon Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989), reversing and remanding T.C. Memo. 1986-405, in which the Court of Appeals interpreted section 6037(a) to mean that the statute of limitations must be applied at the S corporation level. We note that an appeal in this case will lie in the Eleventh Circuit and therefore we are not bound by the Ninth Circuit's opinion in Kelley. See Golsen v. Commissioner, 54 T.C. 742, 756-757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

In interpreting a statute it is the function of the Court to construe the language so as to give effect to the intent of Congress. United States v. American Trucking Associations, Inc., 310 U.S. 534, 542 (1940). The entire context of a statute must be considered to give effect to the object and policy of the whole law. Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 51 (1987). Since words are inexact tools at best, ‘there is wisely no rule of law forbidding resort to explanatory legislative history no matter how clear the words may appear on 'superficial examination’.‘ Harrison v. Northern Trust Co., 317 U.S. 476, 479 (1943); see Carasso v. Commissioner, 34 T.C. 1139, 1142 (1960), affd. 292 F.2d 367 (2d Cir. 1961). In addition, statutes should be interpreted in a practical way. Palermo v. United States, 360 U.S. 343 (1959). Courts are not bound to apply slavishly the literal phrasing of a statute when the clearly indicated purpose of Congress seems to require a broader interpretation. J.C. Penney Co. v. Commissioner, 37 T.C. 1013, 1017 (1962), affd. 312 F.2d 65 (2d Cir. 1962). Courts can also reject the literal meaning of the words of a statute ‘where acceptance of that meaning would lead to absurd results.‘ See Commissioner v. Brown, 380 U.S. 563, 571 (1965).

We have previously considered the legislative history relevant to section 6037(a). In Leonhart v. Commissioner, T.C. Memo. 1968-98, affd. per curiam on other issues 414 F.2d 749 (4th Cir. 1969), the taxpayer, an S corporation shareholder, argued that the statute of limitations applied at the S corporation level to bar assessment of taxes against him because of the adjustments to the S corporation's income. We rejected the argument, concluding that section 6037 was intended to provide that the INFORMATION RETURN filed by the corporation would be treated as a corporate return for purposes of the statute of limitations ONLY where the election of the corporation under subchapter S was ineffective. In so concluding we relied upon the relevant portion of the Senate Report on the Technical Amendments Act of 1958, which added section 6037 and reads as follows:

IV. TECHNICAL EXPLANATION

Section 68. Election of Certain Small Business Corporations

* * *

Annual Returns Required

Notwithstanding the fact that an electing small-business corporation is not subject to the tax imposed by chapter 1 of the 1954 Code, such corporation must make a return for each taxable year in accordance with new section 6037 as added by subsection (c) of section 68 of the bill. Such return will be considered as a return filed under section 6012 for purposes of the provisions of chapter 66, relating to limitations. Thus, for example, the period of limitations on assessment and collection of any corporate tax found to be due upon a subsequent determination that THE CORPORATION WAS NOT ENTITLED TO THE BENEFITS OF SUBCHAPTER S, will run from the date of filing of the return required under the new section 6037. [Senate Report No. 1983, 85th Cong., 2d Sess. (1958), 1958-3 C.B. 922, 1147. Emphasis added.]

See also United States v. Adams Building Co., 531 F.2d 342, 343 n.2 (6th Cir. 1976); and Jacobsson v. Commissioner, T.C. Memo. 1987-559.

This interpretation is also reflected in section 1.6037-1(e), Income Tax Regs., promulgated in 1959, which provides:

(c) OTHER PROVISIONS. The return on Form 1120-5 will be treated as a return filed by the corporation under section 6012, relating to persons required to make returns of income, for purposes of the provisions of chapter 66 of the Code, relating to limitations. Thus, for example, the period of limitation on assessment and collection of any corporate tax found to be due upon a subsequent determination that the corporation was not entitled to the benefits of subchapter S, chapter 1 of the Code, will run from the date of filing the return under section 6037, or from the date prescribed for filing such return, whichever is the later.

Congress was cognizant of the prior legislative history and the long-standing and unchallenged regulations under section 6037 when it enacted the Subchapter S Revision Act of 1982, Pub.L. 97-354, 96 Stat. 1669. Senate Report No. 97-640, 97th Cong., 2d Sess. (1982), 1982-2 C.B. 718, 729, states:

Under present law, a taxpayer's individual tax liability is determined in proceedings between the Internal Revenue Service and the individual whose tax liability is in dispute. Thus, any issues involving the income or deductions of a subchapter S corporation are determined separately in administrative or judicial proceedings involving the individual shareholder whose tax liability is affected. Statutes of limitations apply at the individual level, based on the returns filed by the individual....