The U.S. Court of Appeals for the Eleventh Circuit reversed and remanded a Tax Court decision holding that the statute of limitations on assessment of a corporation’s taxes had lapsed (Shockley v. Commissioner, CA-11, 2012-2 ustc ¶50,453). The appellate court determined that an earlier Tax Court proceeding suspended the statute of limitations against the taxpayers, who were former shareholders of the corporation. As a result, an IRS notice asserting transferee liability against the taxpayers was timely.
Under Code Sec. 6503(a)(1), the normal statute of limitations for the IRS to assess taxes is suspended if “a proceeding in respect of the deficiency” is being heard by the Tax Court, until 60 days after a final decision. The Eleventh Circuit interpreted the phrase “proceeding in respect of the deficiency” to apply to the taxpayers’ situation, citing similar holdings by the Second and Tenth Circuits.
The taxpayers, a husband and wife, were shareholders in a closely held corporation. They were also officers and directors of the corporation.
Another company purchased the corporation on May 31, 2001, and the husband and wife resigned their corporate positions. The corporation filed Form 1120, U.S. Corporation Income Tax Return, on February 24, 2002, for the short tax year ending May 31, 2001, showing a Washington, D.C. address.
On February 18, 2005, the IRS mailed nearly identical notices of deficiency, challenging the corporation’s 2001 taxes, to the corporation in Washington, D.C., and to the taxpayers in Wisconsin. Both notices were issued to the corporation; the Wisconsin notice listed the husband and wife as corporate officials and shareholders.
The taxpayers filed a timely Tax Court petition on May 25, 2005. On April 26, 2007, the Tax Court dismissed the petition for lack of jurisdiction. In September 2007, the IRS assessed taxes against the corporation. On August 31, 2008, the IRS asserted that the taxpayers were liable for the 2001 corporate taxes as transferees of its assets. The taxpayers petitioned the Tax Court regarding their transferee liability.
The Tax Court concluded that the limitations period for assessing transferee liability had expired. The Tax Court found that the Wisconsin notice was invalid. The Tax Court also found that an invalid notice could not suspend the period of limitations of the corporation as transferor.
The issue was whether the initial (2005) Tax Court petition initiated a proceeding in respect of the corporation’s deficiency. Examining the plain language of the statute, the Eleventh Circuit found that the 2005 petition was such a proceeding. It did not matter that the Tax Court had invalidated the Wisconsin notice after a trial. The IRS should not have to choose between assessing taxes prematurely or waiting for the court proceeding to end and risking a late assessment (because the petition was invalid). The fact of the proceeding was sufficient to suspend the statute. It also did not matter that the taxpayers filed their petition as a precautionary measure to disclaim personal liability; it still involved the corporate deficiency.