Tax Court petition challenging a notice of deficiency suspends statute of limitation

The Eleventh Circuit overturned a Tax Court decision and held that a petition filed by taxpayers who had transferee liability for their corporation’s tax liability was a “proceeding in respect of the deficiency” under Sec. 6503(a)(1) that suspended the limitation period for assessment (Shockley, No. 11-13494 (11th Cir. 7/11/12), rev’g and remanding T.C. Memo. 2011-96). Therefore, the assessments the IRS issued were timely.

The Shockleys were shareholders and officers in a closely held corporation, Shockley Communications Corporation (SCC), which owned and operated numerous media stations. On May 31, 2001, another corporation bought all of SCC’s shares and merged SCC into a new corporation. A Form 1120, U.S. Corporation Income Tax Return, was filed for SCC’s short tax year ending May 31, 2001. On Feb. 18, 2005, the IRS issued two notices of deficiency to SCC, one of which was mailed to a D.C. address listed on SCC’s 2001 return, the other of which was mailed to the Shockleys at their home address. The D.C. notice was returned as undeliverable, but the Shockleys received their copy and filed a petition in Tax Court on May 25, 2005.

In the petition, the Shockleys argued that the notice of deficiency was invalid because it was addressed and delivered to the Shockleys’ personal residence, not the business address of SCC or SCC’s last known address. They also claimed that the notice improperly named the Shockleys individually and not as transferees.  

Although the sale of SCC stock occurred on May 31, 2001, between that date and Oct. 29, 2003, according to the IRS, the Shockleys and their limited partnership together received cash distributions from SCC of more than $26 million. The IRS mailed notices of transferee liability to the Shockleys (and their limited partnership) in the same amounts as the cash distributions. The notices were mailed on Aug. 31, 2008, which the Shockleys argued was not timely. They claimed that the three-year limitation period under Sec. 6501(a) expired on July 24, 2005, and that the transferee liability extended it for one year to July 24, 2006, under Sec. 6901(c)(1). The IRS, however, claimed that the petition the Shockleys filed in Tax Court was a proceeding in respect of SCC’s deficiency that suspended the limitation period under Sec. 6503(a)(1). Thus, the IRS argued, the petition suspended the limitation period until Sept. 29, 2007. With the transferee liability extension, the assessment was timely, the IRS said.

The Tax Court agreed with the Shockleys, holding that the notice of deficiency was invalid and the petition “was not filed on behalf of SCC in form or in effect, was not in respect of a deficiency, and did not prohibit assessment for purposes of section 6503(a)(1). That petition, therefore, did not extend the period of limitations as to SCC. The notices sent to petitioners as transferees were not timely” (T.C. Memo. 2001-96 at *21).

The IRS appealed, and the Eleventh Circuit reversed and remanded the case to the Tax Court. The Shockleys argued that 6503(a)(1) did not apply because their petition was filed in response to the IRS notice sent to their personal residence (which was invalid), not the notice sent to SCC’s last business address (which was valid). The court disagreed explaining that the requirement that a petition be “in respect of a deficiency” should be broadly interpreted in the government’s favor and noting that a petition need not be filed in respect of a valid deficiency for the statute of limitation to be suspended. The court further found that it did not matter if a taxpayer who did not have authority to contest the deficiency filed the petition.

The Shockleys also argued that their petition, which was filed in response to the notice sent to their personal residence, did not involve the same deficiency as the notice sent to SCC’s last address. The Shockleys claimed their petition addressed their personal liability, not the corporation’s liability for which they asserted they were not responsible, and that therefore their petition should not affect the limitation period for the corporate deficiency. The court, after noting that the petition itself clearly showed it was about the same deficiency, emphasized that the broad language of the statute “in respect of the deficiency” meant that the Shockleys’ petition, regardless of their intent or their authority to challenge the corporate deficiency, was encompassed within it. 

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.