Neri v. Comm'r of Internal Revenue , Docket No. 1925-68.

• Citation: 54 T.C. 767
• Decision Date: 14 April 1970
• Docket Number: Docket No. 1925-68.
• Parties: JOHN S. NERI AND MARY C. NERI, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

54 T.C. 767

JOHN S. NERI AND MARY C. NERI, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1925-68.

United States Tax Court

Filed April 14, 1970.

John S. Neri, pro se.

Marlene Gross, for the respondent.

Petitioners' wholly owned subchapter S corporation suffered net operating losses in its taxable years ending Apr. 30, 1963 through 1965. Following advice given by a representative of the Internal Revenue Service, petitioners filed applications for tentative carryback adjustments in which they deducted the net operating losses against gross income of years prior to the years in which the losses were sustained, rather than first applying these losses against their income for the calendar years in which the corporations's loss years ended as provided in sec. 1374(b), I.R.C. 1954. The adjustments were allowed and petitioners received refunds based thereon. Held, an erroneous refund suit under sec. 7405, I.R.C. 1954, is not the Commissioner's exclusive remedy for recovery of the refunds; they may also be assessed under the deficiency procedures set forth in secs. 6212-6215, I.R.C. 1954. Held, further, the erroneous advice given by the Internal Revenue representative as to the years for which the net operating loss deductions should be taken does not estop respondent from determining the deficiencies herein.

FEATHERSTON, Judge:

Respondent determined deficiencies in petitioners' income tax for 1959, 1961, and 1962 in the amounts of $1,998.58, $1,093.47, and $226.15, respectively, and overassessment for 1960 in the amount of $396.83.

The questions presented for decision are as follows:

(1) Whether the notice of deficiency, issued February 2, 1968, was timely, or whether respondent was required to proceed in a suit for an erroneous refund to recover excessive amounts refunded to petitioners as tentative net operating loss carryback adjustments; and

(2) Whether respondent is estopped from asserting the deficiencies by reason of erroneous advice given petitioners by officials of the Internal Revenue Service at the time they filed applications for tentative carryback adjustments.

FINDINGS OF FACT

Petitioners John S. and Mary C. Neri, husband and wife, were legal residents of Scarsdale, N.Y., at the time their petition was filed. They filed joint Federal income tax returns for 1959 through 1962 with the district director of internal revenue, Manhattan, New York.

John was president and sole shareholder of Plyorient Corp. (hereinafter referred to as Plyorient or the corporation), a small business corporation which had elected under subchapter S not to be subject to taxes for its taxable years ending April 30, 1963, through April 30, 1965.

When John's computations showed that Plyorient had incurred a net operating loss in its taxable year ending April 30, 1963, he visited the offices of the Internal Revenue Service (hereinafter IRS) in Manhattan on September 9, 1963, and sought device. A representative of the IRS informed him that he was entitled to a net operating loss carryback adjustment which could be applied against his individual income. The representative completed the blanks of a Form 1045, ‘Application for Tentative Carryback Adjustment,‘ basing his computations on carrying back Plyorient's loss to petitioners' taxable year ending December 31, 1960. The representative gave the completed form to John, who then typed the form and filed it. Petitioners later received a form letter from the IRS stating that the application was incorrect because the net operating loss should have been carried back 3 years rather than 2. Accordingly, still following the IRS representative's advice, petitioners filed an amended Form 1045 on October 23, 1963, applying the net operating loss against the gross income reported on their joint income tax return for 1959. On December 18, 1963, the IRS allowed a tentative carryback adjustment, and petitioners received a refund of tax plus interest thereon in the respective amounts of $1,998.58 and $75.53.

On September 14, 1964, petitioners filed another Form 1045, in which they applied a net operating loss sustained by the corporation for its taxable year ending April 30, 1964, against the income reported on their 1961 income tax return. A tentative carryback adjustment was allowed, and on December 2, 1964, petitioners received a refund of tax plus interest thereon in the respective amounts of $1,093.47 and $38.45.

On August 31, 1965, petitioners filed still another Form 1045, applying a net operating loss sustained by Plyorient for its taxable year ending April 30, 1965, against the income reported on their 1962, 1963, and 1964 returns. A tentative carryback received refunds in the amounts of $226.15, $587.79, and $681.48, plus interest thereon in the amounts of $7.19, $18.69, and $21.67, for 1962, 1963, and 1964, respectively.

On January 27, 1967, petitioners executed Form 872, ‘Consent Fixing Period of Limitation Upon Assessment of Income and Profits Tax,‘ extending the time for the assessment of income taxes for 1963 to June 30, 1968.

Respondent mailed the notice of deficiency to petitioners on February 2, 1968, determining deficiencies in their income tax for 1959, 1961, and 1962, and an overassessment for 1960. The adjustments made in the notice were explained as follows:

Amounts refunded on the basis of your applications for tentative carryback adjustment for the years 1959, 1961 and 1962 have been determined to be erroneous. A net operating loss of an electing small business corporation is not carried back to a shareholder's third preceding taxable years as shown in the applications but is first applied to gross income of the shareholder's taxable year in which the taxable year of the corporation ends, pursuant to section 1374 of the Internal Revenue Code. * * *

Respondent further determined that Plyorient's net operating losses in its taxable years ending April 30, 1963, 1964, and 1965, are allowable as deductions on petitioners' returns for the calendar years 1963, 1964, and 1965, respectively.

OPINION

Petitioners contend that the refunds made pursuant to their applications for tentative carryback adjustments were ‘erroneous refunds' within the meaning of section 6532(b),¹ and that, consequently, any action by respondent for their recovery was required to be taken within 2 years after they were made. Respondent denies that his remedies are so limited, and asserts that, in addition to a suit for an erroneous refund, he may pursue either of the following courses : (1) Assessment as a mathematical error under section 6213(b)(2); or (2) assessment as a deficiency pursuant to a notice of deficiency, issued under section 6212 within the time prescribed by section 6501(h).² Since respondent followed the latter course, we limit our consideration to its validity and hold that the notice of deficiency was timely.

The net operating losses from which the present controversy stems were sustained by Plyorient, a subchapter S corporation, in its taxable years ending April 30, 1963, 1964, and 1965. As the sole shareholder of that corporation John was entitled to deduct these losses from his and Mary's gross income for 1963, 1964, and 1965, respectively. Sec. 1374(b). Any part of the losses not offset by petitioners' income in the loss years could be used as net operating loss carryback deductions, under the general rules of section 172, to reduce their taxable income for earlier years. To obtain this benefit they were entitled to file applications for tentative carryback adjustments under section 6411. Sec. 1.6411-1(a), Income Tax Regs. Subsection (b) of that sectio...