In a recent case, the Fifth Circuit addressed the definition of “the return” for purposes of starting the statute of limitations. In a win for the taxpayer, the court held that the regulatorily prescribed form is not necessarily the only document that can start the statute of limitations.
A brief summary of the salient facts. According to the court, the taxpayer failed to backup withhold for various subcontractors. Backup withholding is found in § 3406. In brief, as relevant here, business owners have to backup withhold if, among other things, they do not receive a Taxpayer Identification Number for a payee to whom they issue a Form 1099. In those instances, the payor has to withhold a flat rate on the payments and send those withholdings to the government.
If a person is required to backup withhold, they must also file a Form 945 with the IRS, which reports the amount that was backup withheld over the year.
Facade of courthouse with columns.
getty
Here, the IRS made an assessment against the taxpayer for the amounts that were failed to be backup withheld (and penalties and interest). However, that assessment came more than three years after Forms 1040 and 1099 were filed for 2008, which was the last tax year at issue.
In 2016, the taxpayer filed for bankruptcy. In the bankruptcy proceeding, the IRS filed a proof of claim for the backup withholding assessment. In response, the taxpayer objected, noting that the assessment was barred by the three-year limitations period.
The taxpayer argued that the Forms 1040 and 1099, taken together, constituted “the return,” which started the three-year limitations period. Both the bankruptcy court and the district court rejected that argument and entered judgment for the IRS. The taxpayer appealed to the Fifth Circuit.
MORE FOR YOU
Thus, the appeal focused on one question: whether the IRS’s assessment was time-barred.
IRC § 6501 provides that, “[e]xcept as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) . . . .” (emphasis added). Therefore, the issue was whether the Forms 1040 and 1099, combined, can be “the return” to trigger the starting of the limitations clock.
The taxpayer argued that the Forms 1040 and 1099 contained enough information to calculate the backup withholding liability. For its part, the IRS argued that only the Form 945—the form prescribed by the regulations—can constitute “the return” to start the clock.
Section 6501 provides that, “the term ‘return’ means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).”
Here, according to the IRS, because the Form 945 is the “return required to be filed by” the taxpayer, and it was never filed, the clock did not start to run. In short, according to the IRS’s argument, the only document that starts the clock is the filing of the Form 945.
The court turned to Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944). There, the taxpayer filed a corporate return, but not a personal holding company return (because it believed it was not a personal holding company). The IRS made an assessment, but some were three years after the filing of the corporate return. Thus, if the underlying corporate returns started the limitations period, the IRS would be barred. The Supreme Court held for the IRS; however, it noted that the filed returns “did not show the facts on which liability would be predicated.”
The Fifth Circuit found unpersuasive the argument that Lane-Wells created an inflexible rule that only the regulatorily prescribed form is “the return.” Moreover, the Fifth Circuit noted that “[t]he IRS does not cite any opinion that adopts its reading of Lane-Wells, perhaps because none can be found.” Indeed, the court noted that other circuits—for example, the Second, Sixth, Ninth, and Eleventh—“have recognized that a form other than the one prescribed by treasury regulations can be ‘the return.’”
Accordingly, the Fifth Circuit held that, “the better reading of Lane-Wells is that the taxpayer is not required to file the precise return prescribed by treasury regulations in order to start the limitations clock.” Consequently, it continued, “‘the return’ is filed, and the limitations clock begins to tick, when the taxpayer files a return that contains data sufficient (1) to show that the taxpayer is liable for the tax at issue and (2) to calculate the extent of that liability.”
As applied to these facts, the Fifth Circuit concluded that the Forms 1040 and 1099 contained enough data to calculate the extent of the backup-withholding liability. That is, the forms disclosed the amount paid to each subcontractor and whether a TIN was obtained for each. Incidentally, the court also noted that the Forms 1040 and 1099 were the actual basis by which the IRS calculated the amount of backup-withholding taxes to assess. Because those forms triggered the three-year limitations period, and the assessment was beyond that period, the court held that the assessment was barred by the statute of limitations.
The case is Quezada v. IRS (In re Quezada), No. 19-51000 (5th Cir. Dec. 11, 2020). You can find it here.
This is only a summary of the case and some portions—including facts, issues, or analysis—have been omitted or edited; if you need advice in this area, please review the case in its entirety and consult a tax attorney.