Whitesell v. Comm'r, T.C. Memo. 2017-84

• Decision Date: 18 May 2017
• Docket Number: T.C. Memo. 2017-84,Docket No. 26230-15.
• Parties: NEIL L. WHITESELL AND TRACY L. WHITESELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

NEIL L. WHITESELL AND TRACY L. WHITESELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2017-84

Docket No. 26230-15.

UNITED STATES TAX COURT

May 18, 2017

Neil L. Whitesell and Tracy L. Whitesell, pro se.

Joel D. McMahan, for respondent.

MEMORANDUM OPINION

PARIS, Judge: In a notice of deficiency respondent determined deficiencies in petitioners' Federal income tax of $2,862,054 and $81,893 for 2011 and 2012, respectively.Respondent also determined an addition to tax for failure to timely file under section 6651(a)(1)¹ of $696,206.50 for 2011.

On October 20, 2016, respondent filed a motion for partial summary judgment under Rule 121.The issues are: (1) whether the expiration of the periods of limitation for assessment of deficiencies attributable to the S corporations' income barred respondent from determining flowthrough income for Mr. Whitesell from his wholly owned S corporations and (2) whether petitioners and respondent entered into a contract settling petitioners' income tax liabilities for 2011 and 2012.The Court holds for respondent on both issues and will grant respondent's motion for partial summary judgment.

Background

The Court derives the following facts from the parties' pleadings and motion papers, including exhibits and affidavits.They are stated solely for the purpose of deciding respondent's motion for partial summary judgment and not as findings of fact in this case.SeeRule 1(b);Fed. R. Civ. P. 52(a);Cook v.Commissioner, 115 T.C. 15, 16(2000), aff'd, 269 F.3d 854(7th Cir.2001).Petitioners resided in Florida when they timely filed their petition.²

I.Petitioners' 2011 and 2012 Federal Tax Returns

On October 12, 2012, petitioners filed their Form 1040, U.S. Individual Income Tax Return, for 2011.On October 15, 2013, petitioners filed their Form 1040 for 2012.

Respondent issued to petitioners a notice of deficiency for their 2011 and 2012 tax years on July 27, 2015.The adjustments in the notice of deficiency included amounts that flowed through from Mr. Whitesell's wholly owned S corporations--Whitesell International Corp.(WIC), NLW Holdings, LLC(NLW),³ and Whitesell Corp.

WIC and NLW filed their Forms1120S, U.S. Income Tax Return for an S Corporation, for 2011 on September 17, 2012.NLW filed its Form 1120S for 2012 on September 16, 2013.Respondent did not issue a notice of deficiency to any of Mr. Whitesell's S corporations.

II.Petitioners' Offer-in-Compromise

On December 28, 2015, after their petition was filed with the Court,⁴petitioners mailed to the Internal Revenue Service (IRS) a modified Form 656-L, Offer in Compromise (Doubt as to Liability)(OIC), for their Federal income tax liabilities for 2006 through 2012, including liabilities resulting from the related flowthrough entities.Petitioners substantially modified the terms and conditions of the Form 656-L by crossing out sentences in subsections (b) and (d) and crossing out entirely subsections (k), (l), and (m).Along with their OIC, petitioners tendered a $3 million check as satisfaction of their 2006 through 2012 tax liabilities.⁵

The IRS received their OIC and deposited the $3 million check.⁶A few weeks later, on January 21, 2016, the IRS sent petitioners a letter informing them that it was returning their OIC.On February 9, 2016, the IRS sent petitioners another letter confirming that it had closed its file on their OIC and was in the process of refunding their $3 million deposit because of the modified terms and conditions.Petitioners have not provided this Court with a copy of the returned check, but they did provide a bank account statement reflecting a deposit of $3 million on April 8, 2016.

Discussion

Summary judgment is intended to expedite litigation by avoiding unnecessary and expensive trials.Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681(1988).Summary judgment is appropriate if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to anymaterial fact and that a decision may be rendered as a matter of law.Rule 121(b);Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520(1992), aff'd, 17 F.3d 965(7th Cir.1994);Naftel v. Commissioner, 85 T.C. 527, 529(1985).Partial summary adjudication may be made which does not dispose of all issues in the case.Naftel v. Commissioner, 85 T.C. at 529;see alsoRule 121(b).The moving party bears the burden of proving that no genuine issue of material fact exists and that a decision may be rendered as a matter of law.Naftel v. Commissioner, 85 T.C. at 529.

In deciding whether to grant summary judgment, the Court views the factual material and inferences drawn from that material in the light most favorable to the opposing party.Id.However, the party opposing summary judgment may not simply rest upon the mere allegations or denials of his pleadings.The adverse party must set forth specific facts, in affidavits or otherwise, showing the existence of a genuine issue for trial.Rule 121(d);Celotex Corp. v. Catrett, 477 U.S. 317, 322(1986).

Petitioners have not identified disputes as to any genuine issue of material fact related to the issues in respondent's motion for partial summary judgment.Accordingly, partial summary judgment is appropriate in this case.

I.Whether the Periods for Assessment Have Expired

Respondent determined that Mr. Whitesell had flowthrough income attributable to income originating in transactions of separate taxable S corporations.Petitioners argue that the S corporations' periods for assessment should govern whether respondent may make a timely adjustment to any of their Forms 1040 for any item related to the corporate entities.Respondent contends that the period for assessment is determined by the taxpayers' return and not by the returns of related entities whose attributes flow through to the taxpayers' return.

Generally, the Commissioner's authority to assess income tax deficiencies is limited to a period ending three years after the filing of the taxpayers' return.Seesec. 6501(a)."The statute of limitations is an affirmative defense, and the party interposing it must specifically plead it and carry the burden of showing its applicability."Robinson v. Commissioner, 117 T.C. 308, 312(2001);seeRule 142;Alder v. Commissioner, 85 T.C. 535, 540(1985).Generally, statutes limiting the assessment and collection of tax are strictly construed in the Government's favor.Badaracco v. Commissioner, 464 U.S. 386, 391(1984).

The parties focus on the term "return" in section 6501(a): "[T]he amount of * * * tax imposed by this title shall be assessed within 3 years after the return was filed".(Emphasis added.)Here, the question is whether the "return" referred to is that of the shareholder or the S corporations.

This Court has consistently held that the relevant "return" for determining whether the period for assessment has expired under section 6501(a) is that of the taxpayer with respect to whom the Commissioner seeks to determine a deficiency.SeeRobinson v. Commissioner, 117 T.C. at 313;Lardas v. Commissioner, 99 T.C. 490, 493(1992)(and cases cited thereat).The Court has reached that conclusion irrespective of whether the adjustment concerned the transactions of another entity or whether that entity was taxable.SeeLardas v. Commissioner, 99 T.C. at 493.

Petitioners' argument appears to focus on a previous conflict amongst U.S. Courts of Appeals that arose around 1992 over whether the period for assessment of a passthrough corporate entity or a shareholder controlled the Commissioner's authority to determine a deficiency for an item flowing from the corporation to the shareholder.⁷In Bufferd v. Commissioner, 506 U.S. 523(1993), the SupremeCourt resolved that conflict in the context of a S corporation and its shareholder by holding that adjustments to a shareholder's income are governed by the shareholder's period for assessment.The Supreme Court also interpreted the term "return" in section 6501(a) to be the return of the taxpayer against whom the deficiency is determined or to be assessed.Id. at 527.

After Bufferd was released, Congress enacted the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 1284,111 Stat.at 1038, which in part amended section 6501(a).One of its specifically intended purposes was to clarify this issue with respect to S corporations.SeeRobinson v. Commissioner, 117 T.C. at 317(and legislative history cited thereat).The legislative history explains that the new provision is intended to clarify that the return that starts the running of the period of limitations on assessment for a taxpayer is the return of the taxpayer and not the return of another "person"⁸ from whom the taxpayer has received an item of income, gain, loss, deduction, or credit.SeeH.R. Rept. No. 105-148, at 609-610(1997), 1997-4 C.B. (Vol. 1) 323, 931-932;S. Rept. No. 105-33, at 277-278(1997), 1997-4 C.B. (Vol. 2) 1067, 1357-1358;H.R. Conf. Rept. No. 105-220, at702-703 (1997), 1997-4 C.B. (Vol. 2) 1457, 2172-2173;see alsoRobinson v. Commissioner, 117 T.C. at 317.Therefore, the controlling return for each period of limitation for assessment in this case is petitioners' respective Form 1040--not the corresponding Forms 1120S of the related S corporations.

Petitioners filed their 2011 Form 1040 on October 12, 2012, and their 2012 Form 1040 on October 15, 2013.The notice of deficiency for petitioners' 2011 and 2012 tax years was issued on July 27, 2015, which was within the 3-year period of limitations on assessment for each year in issue.Accordingly, respondent is not time barred from assessing income tax attributable to the flowthrough income for Mr. Whitesell for petitioners' tax years 2011 and 2012.Seesec. 6501(a);Bufferd v. Commissioner, 506 U.S. 523;Robinson v. Commissioner, 117 T.C. at 319;see alsosec. 6503(a)(providing that the period of limitations...