Limitations period for S shareholder begins at shareholder's filing.

Fehlhaber, the sole shareholder of an S corporation, timely filed his 1985 tax return on April 15, 1986. The 1985 return for the S corporation, which had a noncalendar tax year, was filed timely in February 1986. The corporation reported a $79,000 loss for its 1985 fiscal year, a loss Fehlhaber used to reduce his tax liability.

In auditing Fehlhaber's return, the IRS determined the corporation had not sustained the loss and disallowed the loss passthrough to Fehlhaber. The IRS assessed a deficiency on April 12, 1989-less than three years after Fehlhaber's individual return was filed but more than three years after the corporate return was filed. Fehlhaber claimed the deficiency was barred by the statute of limitations. The Tax Court held in the IRS's favor.

IRC section 6501 generally requires the IRS to make assessments of tax "within three years after the return was filed." In Kelley, the Ninth Circuit held in a similar situation the statute of limitations began running when the entity filed its return.

Result: For the IRS. The statute of limitations began running against Fehlhaber when he filed is return. The S corporation return is merely an information return, with insufficient information to determine an individual shareholder's tax liability. Common sense dictates the "return" referred to in section 6501 be that of the person or entity against whom the tax is asserted. The Eleventh Circuit declines to follow Kelley.

Note: Under the IRC's unified audit procedures, generally applicable to S corporations with more than five shareholders, the three-year period is measured from the date of the entity's filing Sec 6244(l); 6241; 6229(a).

* Fehlhaber (11th Cir., 1992).