Eleventh Circuit Rules that Tax Court Petition by Former owners Suspended the Statute of Limitations

Jul 23, 2012   
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On July 11, 2012, the Atlanta based Eleventh Circuit Court of Appeals issued its opinion in Shockley v. IRS, __ F.3d ____, (11th Cir.) available here, and overruled the U.S. Tax Court’s earlier decision in Shockley v. IRS, T.C. Memo. 2011-96.  A full copy of the Tax Court’s decision is available here.

The question addressed by the Eleventh Circuit in Shockley was whether a Tax Court petition that challenged a notice of deficiency as being invalid suspended the statute of limitations against the assessment. The facts of the case were as follows.

On May 31, 2001, pursuant to a stock purchase agreement, the Shockleys sold their shares of Shockley Communications Corporation (“SCC”), a closely held

corporation that owned and operated numerous media stations, to a third party. Pursuant to the terms of the sale, the Shockleys resigned from their positions in SCC as of that date, and at no time after the sale did they resume their roles as officers, directors, or shareholders of SCC.  Also on May 31, 2001, following the sale, the third party purchaser converted SCC to a Delaware limited liability (SCA LLC). SCA LLC immediately sold some of SCCs assets to Quincy Newspapers, Inc. The Shockleys timely filed Federal income tax returns for calendar year 2001 reporting gains from the May 31, 2001, SCC stock sale.

On or about February 24, 2002, the Internal Revenue Service (IRS) received SCCs Form 1120 for the short tax year of January 1, 2001, through May 31, 2001. That form reported a Washington, D.C., mailing address for SCC. On February 18, 2005, the IRS issued multiple notices of deficiency relating to SCCs short tax year ending May 31, 2001. The IRS also sent a notice of deficiency to “Shockley Communications Corporation” at the Washington, D.C., address reported on the 2001 Form 1120, determining a deficiency in tax of $41,566,515, a penalty under section 6662 (available here) of $8,313,303, and an addition to tax under section 6651(a)(1) (available here) of $2,078,276. The IRS calculated the determined deficiency and the penalty with respect to gain allegedly realized by SCC as a result of the sale of assets acquired and later sold by SCA LLC. However, this notice was returned to the IRS as undeliverable, and no petition was filed in the Tax Court in response.

On February 18, 2005, the IRS also sent a notice of deficiency to “Shockley Communications Corporation, Terry K & Sandra K Shockley, Officers & Shareholders” at the then- home address of the Shockleys in Madison, Wisconsin (the Madison notice). On May 25, 2005, a petition was filed in the Tax Court in response to the Madison notice (docket No. 9699-05). The petition stated that it was “filed on behalf of Petitioner subject to the invalidity of the Notice of Deficiency and the failure to properly serve the corporation as required by statute.” Without conceding the jurisdiction of the Tax Court, the Shockleys tendered a "Limited and Special Petition.”

A letter dated May 18, 2005, from the Shockleys to the Clerk of the Tax Court was also attached and was served on the Commissioner with the petition. In the letter, the Shockleys expressed concern that the notice was addressed to both SCC and the Shockleys as officers and shareholders and was mailed to their then-home address, which had never been SCCs address. The Shockleys also expressed concern that the notice might be directed to them in an individual or some representative capacity.  In an answer filed July 29, 2005, the Commissioner admitted that the Madison notice was sent to the personal residence of the Shockleys but alleged that this was a courtesy copy and that a copy of the notice of deficiency was also sent to the last known address of SCC at the Washington, D.C., address.

On April 26, 2007, the Tax Court case (docket No. 9699-05) was dismissed for lack of jurisdiction because SCC lacked legal capacity to proceed in the case through the Shockleys. The order of dismissal for lack of jurisdiction stated that the parties agreed that the case should be dismissed on this ground and thus the Court did not determine the validity of the notice of deficiency.

On September 6, 2007, the IRS assessed the following amounts against SCC for the tax year ending May 31, 2001: (1) Corporate income tax of $41,566,515; (2) an addition to tax under section 6651 of $2,078,276; (3) an accuracy-related penalty under section 6662 of $8,313,303; and (4) interest of $26,953,309.60.

On appeal, the 11th Circuit turned to the Internal Revenue Code as applied to the facts. First, the 11th Circuit noted that generally under section 6501(a) (available here) the IRS has 3 years to assess a tax (or additional tax) against a taxpayer.  But under section 6503 (available here), "[t]he running of the period of limitations provided in section 6501 or 6502 (or section 6229, but only with respect to a deficiency described in paragraph (2)(A) or (3) of section 6230 (a)) on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency as defined in section 6211 (relating to income, estate, gift and certain excise taxes), shall (after the mailing of a notice under section 6212 (a)) be suspended for the period during which the Secretary is prohibited from making the assessment or from collecting by levy or a proceeding in court (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 11th Circuit then determined that the question was whether the petition filed by the Shockleys (which was dismissed because they did not have the authority to file on behalf of SCC) gave the IRS additional time to issue the statutory notice of deficiency by operation of section 6503.  In concluding that it did, and thus reversing the Tax Court, the 11th Circuit began with the well established rule that statutes of limitations are strictly construed in favor of the Government, citing to Badaracco v. Commr, 464 U.S. 386, 391, 395, (1984) (available here).  The 11th Circuit held as follows: "In short, Congress established a mechanical, bright-line test that would suspend the limitations period of § 6501 automatically upon the placing of any “proceeding in respect of the deficiency” on the Tax Court docket. To interpret § 6503(a)(1) otherwise would present the IRS with the Hobsons choice of deciding between assessing the taxpayers liability at the risk of doing so prematurely, and waiting until the resolution of the proceeding at the risk of doing so too late."

Based on that interpretation of section 6503 as applied to section 6501, the 11th Circuit quickly dispensed with the case and determined that the Tax Court’s decision that the statute of limitations was not suspended was in error, and reversed and remanded the case to the Tax Court for further consideration.

The takeaway from this decision is that Tax Court petitions filed without authority may have unintended consequences.  Accordingly, every single move in Tax Court litigation must be analyzed for possible ramifications, not only in the Tax Court, but in the Courts of Appeal.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating in the Tax Court, the U.S. District Courts, the Court of Federal Claims, and the U.S. Courts of Appeal in both civil and criminal tax cases.  You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.