Yapp Corporation v. Commissioner
| Decision Date | 18 June 1992 |
| Docket Number | Docket No. 2064-90. |
| Citation | 63 T.C.M. 3155 |
| Parties | Yapp Corporation, formerly Spray Rite Service Corporation v. Commissioner. |
| Court | U.S. Tax Court |
Cary B. Edgar, Three First National Plaza, Chicago, Ill., for the petitioner. William T. Derick, for the respondent.
Respondent determined a deficiency of $1,738,691 in petitioner's Federal income tax for the year ended December 31, 1984. After concessions by the parties, the only remaining issue for decision is whether, under the accrual method of accounting, State income and replacement tax refunds attributable to net operating loss (NOL) carrybacks should be included in petitioner's gross income in either: (1) The year of the loss which gave rise to the respective refund, or (2) in the year the State revenue department reviews and concludes that petitioner is entitled to such a refund. For reasons discussed below, we find that petitioner need not include State income and replacement tax refunds until the right to those refunds is ultimately determined.
This case was submitted fully stipulated at a trial session of this Court at Chicago, Illinois. The stipulation of facts and exhibits are incorporated herein by this reference. Rockford, Illinois, was the principal place of business of petitioner at the time the petition was filed with this Court.
Petitioner is a corporation that used a hybrid method of accounting to compute its taxable income on a calendar year basis for the taxable years 1984 through 1987. The accrual method of accounting was used for income and deductions pertaining to State income and replacement taxes; the cash method of accounting was used for most other items.
In 1985 petitioner filed a 1984 Corporation & Replacement Income Tax Return (State return) with the Illinois Department of Revenue (Department) reflecting a liability of $561,006.1 Petitioner also filed a 1984 U.S. Corporation Income Tax Return in 1985 in which the accrued State tax liability was claimed as a deduction.
Petitioner sustained a loss for each of the next 3 years, 1985 through 1987. For each loss year, petitioner filed an amended 1984 State return carrying the loss back and recovering some of the State tax paid in 1984 in accordance with State law.2
On August 1, 1986, based on an NOL carryback from 1985, petitioner filed a 1984 amended State return with the Department requesting a refund in the amount of $117,613.
During petitioner's taxable year ended December 31, 1986, petitioner received a $103,020 refund of Illinois corporate income and replacement tax attributable to the claim it filed for $117,613 on August 1, 1986. Petitioner included this refund in its Federal gross income for its taxable year ended December 31, 1986.
On July 23, 1987, based on an NOL carryback from its taxable year ended December 31, 1986, petitioner filed a second 1984 amended State return with the Department, requesting a refund in the amount of $158,000.
Petitioner received a notice from the Department dated December 4, 1987, concerning petitioner's claim filed on July 23, 1987, which included the following handwritten statement:
We are unable to process your claim with the information submitted. It appears that you are taking your federal loss for 1986 and an Illinois loss for 1985. Please submit an explanation. Attached is an IL-1120X-PY which is the correct form to be used. If you are carryingback your 1986 loss you must do so on a separate return basis since combined (Illinois) filing was unacceptable in 1984. You cannot carryback your 1985 loss as consolidated filers are not allowed to carryback NOL's prior to 12/31/86 for Illinois purposes.
On January 15, 1988, petitioner resubmitted its claim in conformance with Department rules attributable to the NOL from its taxable year ended December 31, 1986, on a 1984 amended State return requesting a refund in the amount of $157,948.
During its taxable year ended December 31, 1989, petitioner received a $161,530 refund of Illinois corporate income and replacement tax which was attributable to the claim petitioner filed on July 23, 1987, and refiled for $157,948 on January 15, 1988. Petitioner included this refund in its Federal gross income for the taxable year ended December 31, 1989.
On November 14, 1988, based on an NOL carryback from 1987, petitioner filed a third 1984 amended State return with the Department requesting a refund in the amount of $393,781.
During its taxable year ended December 31, 1990, petitioner received a $235,830 refund of Illinois corporate income and replacement tax which was attributable to the claim petitioner filed on November 14, 1988. Petitioner included this refund in its Federal gross income for the taxable year ended December 31, 1990.
Section 909(e) of the Illinois Income Tax Act provides in relevant part as follows:
As soon as practicable after a claim for refund is filed, the Department shall examine it and either issue a notice of refund, abatement or credit to the claimant or issue a notice of denial. If the Department has failed to approve or deny the claim before the expiration of 6 months from the date the claim was filed, the claimant may nevertheless thereafter file with the Department a written protest in such form as the Department may by regulation prescribe. If a protest is filed, the Department shall consider the claim and, if the taxpayer has so requested, shall grant the taxpayer or the taxpayer's authorized representative a hearing within 6 months after the date such request is filed.
See Ill. Ann. Stat. ch. 120, par. 9-909(e) (Smith-Hurd 1983).
The parties do not dispute that State income tax refunds, previously deducted, are taxable for Federal income tax purposes. The question before us is the timing of the inclusion in petitioner's income of each refund.
The resolution of when petitioner is required to include refunds of State taxes in its Federal gross income is governed by section 1.451-1(a), Income Tax Regs., which provides:
Under an accrual method of accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. * * *
Section 909(e) of the Illinois Income Tax Act gives the Department the right to examine and deny a claim for a refund of the Illinois corporate income and replacement tax. This Court has previously held that where a State or local taxing authority has the right to deny all or a portion of a refund claim, the refund is not includable in Federal gross income until the State or local authority ultimately determines that the taxpayer...
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