In Shockley v. Commissioner, 110 AFTR 2d 2012-XXXX (July 11, 2012), the Court of Appeals for the 11th Circuit held that a Tax Court petition that challenged a notice of deficiency as invalid “was a proceeding in respect of the deficiency” so as to suspend the limitations period.
In this case, the IRS sent a notice of deficiency regarding a corporation’s income tax return to the address on file for two former shareholders rather than to the corporation’s last known address.
Under the tax law, a taxpayer may challenge a notice of deficiency by filing a petition in the Tax Court. If a proceeding regarding the taxpayer's deficiency is placed on the Tax Court docket, the IRS must wait to assess until the Tax Court decision becomes final, plus 60 days thereafter. In this case, a petition was filed in the Tax Court challenging the notice of deficiency.
The taxpayer argued that the statute of limitation period had already expired. The IRS, however, argued that the notices were timely, because the petition constituted a “proceeding in respect of [the corporation's] deficiency” that suspended the limitations period.
Within one year of the expiration of the three-year limitations period for assessment against the taxpayer, the IRS may assess the taxpayer's tax deficiency against a transferee of assets of the taxpayer-transferor. Accordingly, any suspension or tolling in the three-year limitations period applicable to the taxpayer-transferor (here, the corporation) extends the limitations period applicable to the transferee (here, the former shareholders).
As a prerequisite to any suspension, however, the IRS must mail a notice of deficiency to the taxpayer. Such notice is effective if mailed to the taxpayer's last known address, even if, in the case of corporations, it has terminated its existence. The three-year limitations period is suspended during the period in which the Secretary is prohibited from making the assessment ... (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.
The Tax Court has previously found that the petition did not toll the limitations period for assessment, making the assessment against the taxpayer untimely. The Tax Court stated that the petition “was not filed on behalf of [the corporation] in form or in effect, was not in respect of a deficiency, and did not prohibit assessment,” and entered judgment in favor of the taxpayers. In addition IRC Sec. 6503(a)(1) provides a more general suspension, stating that, “in any event,” the limitations period is suspended when “a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final.”
The Court of Appeals for the 11th Circuit, however, concluded that the petition qualifies as a proceeding in respect of the corporation’s deficiency under the plain language of IRC sec. 6503 and reversed the decision of the Tax Court and remanded for proceedings consistent with its opinion.