Ron Lykins, Inc. v. Comm'r of Internal Revenue, No. 10034–07L.

• Decision Date: 02 September 2009
• Docket Number: No. 10034–07L.
• Citation: 133 T.C. 87,133 T.C. No. 5
• Parties: RON LYKINS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

133 T.C. 87

133 T.C. No. 5

RON LYKINS, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 10034–07L.

United States Tax Court.

Sept. 2, 2009.

P filed a corporate tax return for 2001 reporting a net operating loss (NOL). P then requested tentative refunds for 1999 and 2000 from the NOL carryback into those years, pursuant to I.R.C. sec. 6411. The IRS allowed those refunds in December 2002. In February 2003 R issued to P a statutory notice of deficiency for 1999 and 2000 that made no adjustment related to, nor any mention of, the NOL carryback or the refunds. P filed a timely petition with respect to that notice of deficiency. During the deficiency case, the IRS Office of Appeals considered P's NOL carrybacks and determined not to allow them. R's attorneys were aware that R intended to recapture the tentative refunds but did not amend the answer to assert additional deficiencies. The case was tried in February 2005, with neither party putting on evidence as to the NOL carrybacks, and decision was eventually entered in P's favor on March 3, 2006. However, on March 8, 2005, while the deficiency case had been awaiting decision, R summarily assessed the amounts of the tentative refunds pursuant to I.R.C. sec. 6213(b)(3). R then gave notice of his intent to levy in order to recapture the tentative refunds. P requested a collection due process (CDP) hearing; and following P's hearing, on April 10, 2007, R issued a notice of determination to proceed with collection. In his CDP hearing and this case, P did not attempt to prove the merits of the 2001 NOL but rather contends that, under the doctrine of res judicata, the March 3, 2006, decision in the original deficiency case bars R from contending that P owes more tax for 1999 and 2000. R contends that he properly assessed the taxes against P pursuant to I.R.C. sec. 6213(b)(3) and that because P allowed the Court to render a final decision in a prior deficiency case without considering the merits of the NOL claim, P should be barred by res judicata from raising the issue in this proceeding.

Held: Res judicata does not bar P from claiming NOL carrybacks to 1999 and 2000, despite the prior deficiency case involving those years, because the statutory scheme for NOL carrybacks includes I.R.C. sec. 6511(d)(2)(B)(i), which allows a refund attributable to an NOL carryback notwithstanding “the operation of any * * * rule of law”, including res judicata.

Held, further, res judicata does not bar R from recapturing P's tentative refunds for 1999 and 2000, despite the prior deficiency case involving those years, because of the statutory scheme for NOL carrybacks, in which tentative refunds under I.R.C. sec. 6411 are granted summarily and are excepted by I.R.C. secs. 6212(c)(1) and 6213(b)(3) from normal restrictions on assessment.

Ronald G. Lykins (an officer), for petitioner.

Terry Serena, for respondent.

OPINION

GUSTAFSON, Judge:

This case is an appeal by petitioner Ron Lykins, Inc. (RLI), under section 6330(d).¹ RLI seeks our review of the determination by the Internal Revenue Service (IRS) to uphold a proposed levy on RLI's assets. The levy is intended to recapture income tax refunds for tax years 1999 and 2000 which the IRS tentatively allowed as a result of RLI's claimed net operating loss (NOL) carryback from 2001 but later concluded was improper. This case is submitted to the Court fully stipulated under Rule 122.

The parties' primary contentions focus on the doctrine of res judicata. Therefore, the dispositive issue is whether RLI's favorable decision in a prior deficiency case— Ron Lykins, Inc. v. Commissioner, T.C. Memo.2006–35—either bars RLI from disputing, or bars the IRS from collecting, the liability now asserted. We hold that res judicata neither bars RLI from asserting the NOL carryback nor bars the IRS from recapturing the tentative refunds allowed on account of the NOL carryback.

Background

The facts are derived from the parties' stipulations of March 18, 2008 (as amended January 5, 2009), and those stipulations are incorporated herein by this reference.

RLI is currently an S corporation, see sec. 1361, though in the tax years at issue—1999 and 2000—it was a C corporation, see secs. 301 et seq. RLI's principal place of business was in Ohio at the time the petition was filed.

Activity Before Litigation

For the years 1999 and 2000, RLI filed its Forms 1120, U.S. Corporation Income Tax Return, reporting taxable income and a tax liability for each year that was satisfied by quarterly estimated tax payments. For the year 2001, however, RLI filed a Form 1120 reporting a net operating loss (NOL) of about $135,000. RLI filed that 2001 Form 1120 in June 2002; and on November 5, 2002, it filed a Form 1139, Corporation Application for Tentative Refund, in order to carry that 2001 loss back to the years 1999 and 2000 (pursuant to section 172), reduce its tax liability for those earlier years, and obtain the resulting refunds. In this instance, the IRS made the tentative refunds very promptly on December 16, 2002, allowing $24,113 for 1999 and $6,337 for 2000.

However, while the IRS personnel responsible for the tentative refunds had been processing RLI's Form 1139, IRS examination personnel were examining RLI's returns for 1999 and 2000. On February 6, 2003—less than 2 months after RLI had received tentative refunds for 1999 and 2000—the IRS issued to RLI, for those very same years, a statutory notice of deficiency (pursuant to section 6212), determining that RLI owed more tax than it had originally reported and paid for those years. The notice of deficiency did not make any reference to the NOL carrybacks from 2001, nor did it take into account the recent refunds in its computation of RLI's liability. Rather, the notice made unrelated adjustments that are not at issue.

The Prior Deficiency Case, Docket No. 6795–03

RLI filed a timely petition in this Court on May 6, 2003, which commenced docket No. 6795–03. The petition stated in part, in paragraph 4:

I disagree with the deficiency for the following reasons: * * * 4) Form 1139 to claim an NOL deduction of $135,748 was filed on, or about, November 5, 2002, for the years 1999 and 2000.

Thus, although RLI had already received the 1999 and 2000 refunds resulting from the 2001 NOL carryback, RLI initially believed that the 2001 NOL was relevant to its 1999–2000 deficiency case. Thereafter, at least as early as March 1, 2004, respondent requested that RLI “substantiate the deductions on the 2001 return” so as to verify RLI's entitlement to the NOL carryback to 1999 and 2000, the years in the deficiency case. Respondent's litigating attorneys were aware of the dispute about the tentative refunds allowing the NOL carryback. In March 2004 the Court granted a continuance upon the parties' joint representation that they “currently are not able to stipulate the amount of any loss in taxable year 2001 to which the petitioner is entitled.” By letter dated August 4, 2004, an Appeals officer offered RLI a conference at which the IRS Office of Appeals would consider “the allowance of the net operating loss deduction (NOLD) carryback to 1999 and 2000.” Thereafter correspondence was exchanged between RLI and the Office of Appeals on the subject of the NOL.²

In pretrial activity throughout 2004, the parties explicitly disputed whether the NOL was properly included in the deficiency case, with RLI eventually contending that it was not in the case and respondent contending that it was in the case. By December 2004, the Appeals officer who was considering the matter determined that the 2001 NOL should be disallowed. However, respondent did not amend the answer or assert an increased deficiency to take account of this development.

Rather, on January 18, 2005, RLI moved for leave to file an amendment to its petition ³ in docket No. 6795–03. The motion explained that the reference in the original petition to the carryback of the 2001 NOL “was inadvertent and unnecessary as to why the Petitioner disagreed with the Notice of Deficiency”, and it requested that the “petition be amended to strike (eliminate) the statement from the petition”. The attachment to the motion restated the original petition verbatim, except that it omitted the original reference to the NOL (i.e., in paragraph 4, the subparagraph “4) Form 1139 to claim an NOL deduction of $135,748 was filed on, or about, November 5, 2002, for the years 1999 and 2000”) by excluding subparagraph “4)” of the original petition in its entirety. RLI's motion was granted on January 24, 2005, and its amendment to paragraph 4 of the petition was filed.

On February 1, 2005, the parties and the Court held a telephone pretrial conference in which respondent's counsel stated respondent's position that res judicata would thereafter bar RLI from litigating the NOL, and RLI stated its position that there would have to be another trial on the NOL issue. As respondent's brief explains, the Court did not decide the res judicata issue but made “sure that petitioner understood the respondent's position.” RLI's understanding was that its amendment had “eliminate[d] the NOL” from consideration in the deficiency case.

Notwithstanding the amendment that had been made to the petition, respondent did not move to amend the answer.⁴ As a result, respondent's answer remained silent as to the 2001 NOL and its having been carried back to 1999 and 2000, the tax years at issue in the deficiency case. Respondent never alleged in the answer (and never moved to amend the answer to allege) that, as a result of the refunds, the deficiencies were greater than had been determined in the notice of deficiency. Nor did respondent ever ask the Court to hold that the tentative carryback was excepted from the effect of the Court's decision. ⁵

On February 17, 2005, at the one-day trial of RLI's deficiency case (docket No. 6795–03), neither party put on any evidence as to the 2001 NOL or the carrybacks to 1...