Bouchey v. Commissioner

Ione P. Bouchey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harmon N. Bouchey, Petitioner, v. Commissioner of Internal Revenue, Respondent Bouchey v. Commissioner Docket Nos. 32541, 32542 United States Tax Court 19 T.C. 1078; 1953 U.S. Tax Ct. LEXIS 219; March 16, 1953, Promulgated *219 Decisions will be entered under Rule 50. A deficiency was determined for 1945 after the normal 3-year statute of limitations based on adjustments from a net operating loss carry-back from 1947 and other adjustments to 1945 income. Petitioners contend that the part of the deficiency based on the latter adjustments is barred by the statute of limitations. Held, where taxpayers receive a refund by reason of a carry-back pursuant to section 3780, I. R. C., the period of limitations for assessment of deficiencies with respect to the earlier year is not enlarged by section 3780 (c) or 276 (d), I. R. C., except to the extent that the deficiency is based upon an error "attributable to the carry-back," and the other adjustments to 1945 are barred by limitations. Edward G. Leuthesser, 18 T. C. 1112, followed. Jack M. Harrison, Esq., for the petitioners. Earl C. Crouter, Esq., for the respondent. Black, Judge. BLACK *1078 Respondent has determined deficiencies in income tax of petitioners, who are husband and wife, for the calendar year 1945 as follows: Petitioner Docket No. Deficiency Ione P. Bouchey 32541 $ 3,933.94 Harmon N. Bouchey 32542 3,933.94 The cases have been consolidated. Respondent made the adjustments to 1945 net income for each petitioner as follows: Net income as disclosed by return $ 20,743.21 Additional income: (a) Net gain from the sale or exchange of capital assets increased 6,891.64 (b) Interest income unreported 385.00 Total $ 28,019.85 Decrease in income: (c) Partnership income decreased $ 1,213.07 (d) Net operating loss deduction allowed 803.83 2,016.90 Net income adjusted $ 26,002.95 *1079 Each petitioner pleads the statute of limitations in the same*221 language, as follows: (a) The Commissioner erred in that he has proposed a deficiency in federal income tax against petitioner for the taxable year 1945 after the expiration of 3 years from the date the petitioner's federal income tax return for 1945 was filed. In his answer respondent has certain affirmative allegations, among which are the following: (10) Under the provisions of section 3780, the Commissioner has the right to assess the amount of the tax shown in the computation attached to the deficiency notice and accompanying statement, without regard to the normal three-year statute of limitation; and the Commissioner, under section 3780 of the Internal Revenue Code, may thus recover any refund erroneously made on account of any tentative allowance of net operating loss carry-back. * * * * (12) That the said deficiency for 1945 is not barred by the three-year statute of limitation, for other reasons: That the petitioner, in his said income tax return for said year, omitted and failed to report as gross income an amount which was properly includible therein and which was in excess of 25 per cent of the amount of gross income stated in the return, so that the tax may be assessed*222 at any time within five years of March 15, 1946. Petitioners do not contest the deficiencies on any other ground than the statute of limitations. In their brief they concede that $ 2,354.01 of the deficiency determined as to each petitioner is not barred by the statute of limitations. They contend that $ 1,579.93 of the deficiency as to each petitioner is the result of adjustments which are in no way attributable to the application to petitioners of a net operating loss carry-back and is barred by the normal 3-year statute of limitations. FINDINGS OF FACT. All of the facts have been stipulated and are found accordingly. Petitioners reside at Lakeside, California, and filed the tax returns involved here with the collector of internal revenue for the sixth district of California. Petitioners are husband and wife and each claimed one-half community income. Each of the petitioners reported net income of $ 20,743.21 and tax liability of $ 8,003.50 in his original 1945 return. Neither petitioner in the 1945 income tax return claimed any deduction for a net operating loss. Within 12 months from the end of the taxable year 1947 each petitioner made application to the Commissioner for*223 a tentative carry-back adjustment of the 1945 income tax as affected by a net operating loss carry-back from the year 1947. The Commissioner subsequently determined the amount of $ 8,003.50 in each case as the decrease in 1945 Federal income tax attributable to the carry-back adjustment, upon the basis of each petitioner's application. *1080 On March 11, 1949, each of the petitioners was assessed a deficiency of $ 4,069.56 in Federal income tax for the taxable year 1945 as the result of a revenue agent's examination of petitioners' Federal income tax returns for said year. The agent's examination resulted in the determination that each petitioner's net income for the taxable year 1945 amounted to $ 13,172.96, after the allowance of a net operating loss deduction for said year in the amount of $ 5,533.83 for Harmon N. Bouchey and $ 5,533.82 for Ione P. Bouchey (the result of a carry-back of a net operating loss claimed by the taxpayers for the taxable year 1947). In determining the amount of the 1945 deficiency assessed against the taxpayers on March 11, 1949, the agent made adjustments other than those pertaining to the net operating loss deduction. By the Commissioner's notice*224 of deficiency dated November 30, 1950, he proposes to reduce petitioners' net operating loss deduction for the taxable year 1945 from $ 5,533.83 to $ 803.83 in the case of Harmon N. Bouchey and from $ 5,533.82 to $ 803.83 in the case of Ione P. Bouchey. Petitioners do not contest the correctness of this adjustment in the net operating loss deduction carry-back from 1947 and concede that so much of the deficiency which is due thereto is within the applicable statute of limitations. But the petitioners do contend that the other adjustments made by the Commissioner which had nothing to do with the adjustment of petitioners' net operating loss deduction are barred by the normal 3-year statute of limitations and cannot now be assessed. The deficiency notices were issued and the determinations therein were made after the expiration of the normal 3-year statute of limitations. No specific waivers or other exceptions with respect to the 3-year statute of limitations are involved except in connection with the adjustments of the net loss carry-back deduction from 1947. OPINION. This case raises the single question of whether part of the deficiency of $ 3,933.94 for 1945 is barred by the *225 statute of limitations. A portion of the deficiency is conceded by petitioners to be timely assessed since it is attributable to adjustments to net operating loss deductions from the year 1947 claimed by petitioners by applying net operating loss carry-backs under section 3780, I. R. C. Under section 276 (d), I. R. C., a deficiency in any tax attributable to the application of a net operating loss carry-back may be assessed within the period during which a deficiency may be assessed with respect to the taxable year of the loss resulting in the carry-back. The dispute concerns other adjustments to 1945 which were not assessed within 3 years from the date petitioners' 1945 returns were filed. *1081 The total amount of the deficiency determined here was less than the total refund received for 1945 because of the net operating loss carry-backs. The applicable statutes are printed in the margin. 1 *226 Petitioners contend that the extended period of assessment under sections 3780 and 276 (d) applies only to deficiencies resulting from adjustments to the net operating loss carry-backs and that any portion of an asserted deficiency attributable to other adjustments is barred by the normal 3-year statute of limitations under section 275 (a). Respondent argues that since the petitioners took advantage of refunds under section 3780 and since the total deficiency for 1945 does not exceed the prior tentative refund, the total represents an erroneous allowance of a tentative refund which may be assessed pursuant to section 3780 (c) within the period specified in section 276 (d): that is, any such deficiency represents an "amount refunded * * * in excess of the over-assessment attributable to the carry-back" within the meaning of section 3780 (c) and a "deficiency attributable to the application to the taxpayer of a net operating loss carry-back" within the meaning of section 276 (d). The identical question was decided recently in Edward G. Leuthesser, 18 T. C. 1112, which concluded as follows: Section 3780 (c), in providing for assessment of erroneous allowances*227 is specifically limited to the situation where "the Commissioner determines that the *1082 amount applied, credited or refunded under subsection (b) is in excess of the over-assessment attributable to the carry-back with respect to which such amount was applied, credited or refunded * * *." (Emphasis added.) And throughout the report of the House Ways and Means Committee which accompanied the bill introducing these provisions, the inference is inescapable that they were intended merely to permit an enlargement of the period of limitations where the error giving rise to the deficiency was "attributable to the carry-back." Nowhere is there any suggestion that liability for the earlier year is to be kept alive for all purposes (limited only by the amount of the refund or credit) for an additional period of years beyond the original period of limitations. * * * The above case is determinative of the question before us and we will not repeat its detailed analysis here. Since the part of the deficiency which is disputed is not within section 3780 (c), section 276 (d) extending the statute of limitations is not applicable and the assessment is barred under section 275 (a) since*228 it was not assessed within 3 years. Respondent in his pleadings argued alternatively that each petitioner omitted more than 25 per cent of gross income in his 1945 income tax return so that a 5-year statute of limitations is applicable. Since respondent no longer presses this argument in his brief, we assume it is abandoned and we decide this issue, raised by affirmative allegations in respondent's answer, in petitioners' favor. Decisions will be entered under Rule 50. Footnotes 1. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION. Except as provided in section 276 -- (a) General Rule. -- The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. SEC. 276. SAME -- EXCEPTIONS. (d) Net Operating Loss Carry-Backs and Unused Excess Profits Credit Carry-Backs. -- In the case of a deficiency attributable to the application to the taxpayer of a net operating loss carry-back or an unused excess profits credit carry-back, including deficiencies which may be assessed pursuant to the provisions of section 3780 (b) or (c), such deficiency may be assessed -- (1) in case a return was required under subchapter E of chapter 2 for the taxable year of the net operating loss or unused excess profits credit resulting in the carry-back, at any time before the expiration of the period within which (under section 275 or subsection (a) or (b) of this section) a deficiency (with respect to tax imposed either by chapter 1 or by subchapter B or E of chapter 2) for such taxable year (whichever is the longer period) may be assessed; or (2) in case a return was not required under subchapter E of chapter 2 for the taxable year of the net operating loss or unused excess profits credit resulting in the carry-back, at any time before the expiration of the period within which (under section 275 or subsection (a) or (b) of this section) a deficiency (with respect to tax imposed either by chapter 1 or by subchapter A or B of chapter 2) for such taxable year (whichever is the longer period) may be assessed. SEC. 3780. TENTATIVE CARRY-BACK ADJUSTMENTS. (c) Assessment of Erroneous Allowances. -- If the Commissioner determines that the amount applied, credited or refunded under subsection (b) is in excess of the overassessment attributable to the carry-back with respect to which such amount was applied, credited or refunded, he may assess the amount of the excess as a deficiency as if it were due to a mathematical error appearing on the face of the return, as provided in section 272 (f). Upon making such assessment, the Commissioner shall schedule as an overassessment the decrease in any other tax resulting from the adjustments reflected in the computation of the deficiency.↩