BUFFERD v. COMMISSIONER(1993)
Subchapter S of the Internal Revenue Code seeks to eliminate tax disadvantages that might dissuade small businesses from adopting the corporate form and to lessen the tax burden on such businesses by means of a pass-through system under which corporate income, losses, deductions, and credits are attributed to individual shareholders in a manner akin to the tax treatment of partnerships. Petitioner Bufferd, a shareholder in an S corporation, Compo Financial Services, Inc., claimed on his 1979 income tax return a pro rata share of a loss deduction and investment tax credit reported by Compo on its return for the 1978-1979 tax year. Code 6501(a) establishes a generally applicable statute of limitations allowing the Internal Revenue Service to assess tax deficiencies "within 3 years after the return was filed." (Emphasis added.) As provided in 6501(c)(4), Bufferd extended the limitations period on his return, but no extension was obtained from Compo with respect to its return. In 1987, the Commissioner determined that the loss deduction and credit reported by Compo were erroneous, and sent a notice of deficiency to Bufferd based on the deduction and credit he had claimed on his return. The Tax Court found for the Commissioner, rejecting Bufferd's argument that the claim was time-barred because the disallowance was based on an error in Compo's return, for which the 3-year period had lapsed. The Court of Appeals affirmed, holding that, where a tax deficiency is assessed against a shareholder, the filing date of the shareholder's return is the relevant date for purposes of 6501(a).
The limitations period for assessing the income tax liability of an S corporation shareholder runs from the date on which the shareholder's return is filed. Plainly, "the" return referred to in 6501(a) is the return of the taxpayer against whom a deficiency is assessed, since the Commissioner can only determine whether the taxpayer understated his tax obligation and should be assessed a deficiency after examining his return. That Compo erroneously asserted a loss and credit to be passed through to its shareholders is of no consequence. The errors did not and could not affect Compo's tax liability, and hence the Commissioner could only assess a deficiency against the shareholder whose return claimed the benefit of the errors. By contrast, the S [506 U.S. 523, 524] corporation's return does not contain all of the information necessary to compute a shareholder's taxes, and thus should not be regarded as triggering the period of assessment. Cf. Automobile Club of Mich. v. Commissioner, 353 U.S. 180, 188 . The statutory evidence and policy considerations proffered by Bufferd offer no basis for questioning this conclusion. Pp. 526-533.
952 F.2d 675, affirmed.
WHITE, J., delivered the opinion for a unanimous Court.
Stuart J. Filler, by appointment of the court, 506 U.S. 809 , argued the cause for petitioner. With him on the briefs were Toni Robinson and Mary Ferrari.
Kent L. Jones argued the cause for respondent. With him on the brief were Solicitor General Starr, Acting Assistant Attorney General Bruton, Deputy Solicitor General Wallacce, Ann B. Durney, and Janet Kay Jones. *
[ Footnote * ] Briefs of amici curiae urging reversal were filed for Arthur H. Boelter and John J. White, Jr., pro se; and for Charles T. Green et al. by Robert I. White.
JUSTICE WHITE delivered the opinion of the Court.
On his 1979 income tax return, petitioner, a shareholder in a Subchapter S corporation, claimed as "pass-through" items portions of a deduction and a tax credit reported on the corporation's return. The question presented is whether the 3-year period in which the Internal Revenue Service is permitted to assess petitioner's tax liability runs from the filing date of the individual return or the corporate return. We conclude with the Tax Court and the Court of Appeals for the Second Circuit that the relevant date is that on which petitioner's return was filed.
Subchapter S of the Internal Revenue Code, 26 U.S.C. 1361-1379, was enacted in 1958 to eliminate tax disadvantages that might dissuade small businesses from adopting [506 U.S. 523, 525] the corporate form and to lessen the tax burden on such businesses. The statute accomplishes these goals by means of a pass-through system under which corporate income, losses, deductions, and credits are attributed to individual shareholders in a manner akin to the tax treatment of partnerships. See 1366-1368. 1 In addition, since 1966, "S corporations" have been liable for certain capital gains and other taxes. 80 Stat. 111, 113; 26 U.S.C. 1374, 1378.
Petitioner was treasurer and a shareholder of Compo Financial Services, Inc., an S corporation. On February 1, 1980, Compo filed a return for the tax year of December 26, 1978, to November 30, 1979, as required by 6037(a) of the Code. 2 On that return, Compo reported a loss deduction and an investment tax credit arising from its partnership interest in a venture known as Printers Associates. Petitioner and his wife filed a joint return for 1979 on April 15, 1980. 3 Their return claimed a pro rata share of the deduction and credit reported by Compo pursuant to the pass-through provisions of Subchapter S.
Code 6501(a) establishes a generally applicable statute of limitations providing that the Internal Revenue Service may assess tax deficiencies within a 3-year period from the date [506 U.S. 523, 526] a return is filed. 4 That limitations period may be extended by written agreement. 6501(c)(4). In March, 1983, before three years had passed from the time the joint return was filed, petitioner agreed to extend the period in which deficiencies arising from certain claims on the return could be assessed against him. No extension was obtained from Compo with respect to its return for the 1978-1979 tax year.
In 1987, the Commissioner determined that the loss deduction and credit reported by Compo were erroneous, and sent a notice of deficiency to petitioner based on the loss deduction and credit that he had claimed on his return. In the Tax Court, petitioner contended that the Commissioner's claim was time-barred because the disallowance was based on an error in Compo's return, for which the 3-year assessment period had lapsed. The Tax Court found for the Commissioner, relying on its decision in Fehlhaber v. Commissioner, 94 T.C. 863 (1990), aff'd, 954 F.2d 653 (CA11 1992). See App. 61. The Court of Appeals for the Second Circuit affirmed, holding that, where a tax deficiency is assessed against the shareholder, the filing date of the shareholder's return is the relevant date for purposes of 6501(a). 952 F.2d 675 (1992). Because another Court of Appeals has a contrary view, we granted certiorari. 505 U.S. 1203 (1992). 5
Title 26 U.S.C. 6501(a) states simply that "the amount of any tax imposed by this title shall be assessed within 3 [506 U.S. 523, 527] years after the return was filed. . . ." The issue before us is whether "the" return is that of petitioner or that of the corporation which was the source of the loss and credit claimed on petitioner's return. Petitioner's position is that the Commissioner had three years from the date his return was filed to object to that return in any respect except the loss and credit items passed through to him by the corporation. To disallow those items, petitioner argues, the Commissioner must have acted within three years of the filing of the corporate return. Under this approach, "the" return referred to in 6501(a) becomes two returns, and petitioner claims that there is adequate statutory basis for his submission. We have no doubt that the courts below properly concluded, as the Commissioner argued, that it is the filing of petitioner's return that triggers the running of the statutory period.
The Commissioner can only determine whether the taxpayer understated his tax obligation and should be assessed a deficiency after examining that taxpayer's return. Plainly, then, "the" return referred to in 6501(a) is the return of the taxpayer against whom a deficiency is assessed. Here, the Commissioner sought to assess taxes which petitioner owed under the Code because his return had erroneously reported a loss and credit to which he was not entitled. The fact that the corporation's return erroneously asserted a loss and credit to be passed through to its shareholders is of no consequence. In this case, the errors on the corporate return did not and could not affect the tax liability of the corporation, and hence the Commissioner could only assess a deficiency against the stockholder-taxpayer whose return claimed the benefit of the errors. Under the plain language of 6501(a), the Commissioner's time to make the assessment ran from the filing date of petitioner's return. 6 [506 U.S. 523, 528]
By contrast, the S corporation's return, which petitioner asserts triggers the beginning of the limitations period, is deficient precisely because it does not contain all of the information necessary to compute a shareholder's taxes. If the Internal Revenue Service were required to rely on that return, it would be forced to conduct its assessment on the basis of incomplete information:
Petitioner asserts that 6501(a) supports a contrary view when read in light of two related Code provisions pertaining [506 U.S. 523, 529] to S corporations. Section 6012(a)(2) requires both Subchapter C and Subchapter S corporations to file income tax returns. 8 Section 6037(a) specifies the information that each S corporation's return must provide (including "each shareholder's pro rata share of each item of the corporation") and further states that: "any return filed pursuant to this section shall, for purposes of [26 U.S.C. 6501-6531], be treated as a return filed by the corporation under section 6012."
We do not see that these provisions aid petitioner's cause. Read together, 6012(a)(2), 6037(a), and 6501(a) establish only that each S corporation must file a tax return containing certain information, and that a Commissioner desiring to make an assessment must act within three years of filing. Nothing on the face of these provisions demonstrates that an individual's income tax return is brought within the compass of 6037(a)'s reference to "any return" simply because a portion of that return reports income and losses that have passed through from the return of an S corporation. If anything, the phrase "[a]ny return filed pursuant to this section," coupled with the fact that 6037(a) is concerned with describing the contents of the corporation's return, indicates that the provision is not meant to determine when the assessment period for a shareholder's individual tax return begins.
Petitioner argues that this reading of the relevant provisions runs afoul of the fact that, prior to 1966, S corporations were not subject to taxation. According to petitioner, no purpose would have been served by establishing an assessment period that applied to returns reporting corporate income on which no taxes could be assessed, but not to the returns [506 U.S. 523, 530] of corporate stockholders. This argument fails because, even in the period when the S corporation could not be taxed, examination of a corporation's return was necessary to determine if it could lay valid claim to Subchapter S status. Section 6037(a) thus originally functioned to set the starting date of the 3-year period within which that determination had to be made. See United States v. Adams Building Co., 531 F.2d 342, 343, n. 2 (CA6 1976); see also 952 F.2d, at 677 (citing Fehlhaber v. Commissioner, 94 T.C. 863 1990). 9 Petitioner maintains that such a function would be superfluous because, if the election of S corporation status were found invalid, the corporation's return would "automatically be subject to the existing rules for C corporations." Brief for Petitioner 38. But this proposition is hardly self-evident, and petitioner cites no authority to support it. In the absence of 6037(a), the Internal Revenue Service could claim that a corporation which files a return containing an erroneous election of Subchapter S status has failed to file any return, which would allow the Service to issue a notice of deficiency with respect to the return "at any time." See 6501(c)(3); cf. Germantown Trust Co. v. Commissioner, 309 U.S. 304, 307 (1940); Mason v. United States, 801 F.Supp. 718, 721 (ND Ga. 1992). 10 [506 U.S. 523, 531]
The Ninth Circuit's rejection, in Kelley v. Commissioner, 877 F.2d 756 (1989), of the view adopted by the Commissioner was prompted in part by a concern to avoid unfairly [506 U.S. 523, 532] burdening shareholders, who might find it difficult to obtain corporate records necessary to defend against a deficiency assessment based on an adjustment made to a corporation's return years after it was filed. The Fifth Circuit's opinion by Judge Goldberg in Green v. Commissioner, 963 F.2d 783 (1992), neatly summarizes the appropriate response to that concern:
As found by the courts below, the plain language of 6501(a) supports the Commissioner. The statutory evidence and policy considerations proffered by petitioner offer no basis for questioning this conclusion. We hold that the limitations period within which the Internal Revenue Service must assess the income tax liability of an S corporation shareholder runs from the date on which the shareholder's return is filed. The judgment of the Court of Appeals is affirmed.
It is so ordered
[ Footnote 2 ] In relevant part, the statute reads:
[ Footnote 3 ] Phyllis Bufferd settled separately with the Commissioner, and is not a party to this action.
[ Footnote 4 ] The statute reads in part:
[ Footnote 5 ] Kelley v. Commissioner, 877 F.2d 756 (CA9 1989), held that the filing date of the corporation's return controls. The Eleventh and Fifth Circuits have joined the Second Circuit in declining to follow Kelley. See Green v. Commissioner, 963 F.2d 783 (CA5 1492); Fehlhaber v. Commissioner, 954 F.2d 653 (CA11 1992).
[ Footnote 6 ] Even if it could credibly be argued that 6501(a) is ambiguous because it does not expressly indicate how it is to be applied to S corporations and their stockholders, the Commissioner's construction of [506 U.S. 523, 528] the section is a reasonable one to say the least, and we should accept it absent convincing grounds for rejecting it. As noted in Badaracco v. Commissioner, 464 U.S. 386 (1984), "`limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.'" Id., at 392 (quoting Lucia v. United States, 474 F.2d 565, 570 (CA5 1973)).
[ Footnote 7 ] In these circumstances, the incompleteness of the corporate return provides a reason for doubting petitioner's understanding of the Code. We do not thereby suggest that, for cases in which a corporate return does supply all of the information necessary to process a shareholder's return, the mere fact of completeness is sufficient to establish the corporate return as "the" return of 6501(a).
[ Footnote 8 ] Section 6012(a)(2) reads:
[ Footnote 9 ] Since S corporations are now subject to limited taxation, 6037(a) serves the additional function of determining the assessment period for those taxes. See 952 F.2d, at 678.
[ Footnote 10 ] Petitioner's reading of 6037(a) is sufficiently lacking in textual support to obviate any need to examine legislative history. However, several courts have noted that the history of 6037 contains evidence in support of the Commissioner's interpretation. See, e.g, Green v. Commissioner, 963 F.2d, at 788-790; Fehlhaber v. Commissioner, 954 F.2d, at 656-657. Section 6037(a) was introduced in the Technical Amendments Act of 1958, 72 Stat. 1606, 1656. The Senate Report explaining the provision states:
The Commissioner claims additional support in the Senate Report accompanying the 1982 amendments to Subchapter S, which states in relevant part:
[ Footnote 11 ] Petitioner additionally asserts that the returns of shareholders of a Subchapter C corporation cannot be adjusted after the limitations period has run for assessing the corporation's return, and that therefore S corporation shareholders are entitled to identical treatment. Brief for Petitioner 11-12, 21-22. However, petitioner has not provided a single authority in support of the premise of this assertion. At oral argument, the Commissioner maintained that the opposite is the case, see Tr. of Oral Arg. 2728, relying mainly on Commissioner v. Munter, 331 U.S. 210 (1947), which, without addressing the limitations issue, allowed an adjustment of shareholders' 1940 taxes based upon the Commissioner's finding that, at the time of its creation by merger in 1928, the corporation had acquired the accumulated earnings and profits of its predecessor [506 U.S. 523, 533] corporations. A recent Tax Court decision also provides indirect support for the Commissioner's view: