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Sect. 183 special limitation period modifies general three-year SOL.

C filed a timely 1983 return and included Form 5213 (which postpones determination of whether a Sec. 183 activity is engaged in for profit). In January 1989, C and the IRS extended the assessment period (through Form 872) until Dec. 31, 1989.

When a deficiency for 1983 was assessed, C challenged the extension, arguing that the general three-year period to assess tax had expired. The Service argued that the extension was valid, since it was given before the expiration of the special period to assess tax provided under Sec. 183(e)(4).

The Tax Court (opinion Halpern, J.) rules for the IRS; since Sec. 183(e)(4) extended the normal three-year assessment period to a five-year period, an agreement to extend made within that five-year period was timely made and bound C.

Normally, the period for assessing tax expires three years after a return is filed. That period can be extended by agreement. Sec. 183 disallows certain deductions associated with activities not engaged in for profit (so-called "hobby losses"). Sec. 183(d) establishes a presumption that an activity is engaged in for profit if a gross income test can be passed for two out of five consecutive years (seven consecutive years for certain horse-related activities). In the case of a new activity, a taxpayer can elect to delay a determination as to application of the presumption until the five- (or seven-) year period has expired. If a taxpayer makes such an election, the presumption will apply to each year in the test period. The usual period for assessing tax is extended to accommodate the delayed determination. The period for assessing tax with respect to the activity does not expire before the expiration of two years after a return is due (determined without extensions) for the last year in the test period.

Temp. Regs. Sec. 12.9(c) provides that, generally, an election to delay application of the presumption provided for in Sec. 183(d) can be made within three years after a return is due for the year in which the taxpayer first engages in the activity in question. C first engaged in the activity here in question in 1982. C made the required election by including Form 5213 with his timely filed 1983 return. Accordingly, C's election was timely. By virtue of that election, the period for assessing tax with respect to the activity in question was extended until Apr. 15, 1989.

It is C's argument that Sec. 183 does not provide for any extension of the Sec. 183(e)(4) period and an agreement entered into pursuant to Sec. 6501(c)(4) cannot extend the Sec. 183(e)(4) period because that period is not provided for in Sec. 6501. The consent entered into by C (the Form 872) was ineffective because the three-year period provided for in Sec. 6501(a) already had expired. We disagree.

Sec. 183 was enacted in 1969. Initially, the IRS took the position that it need not await the end of the five- (or seven-) year period to determine whether a taxpayer failed to benefit from the Sec. 183(d) presumption. Thus, if a five-year period were applicable, and if the Service examined the first year in the period before the period was over, it would give no weight to the presumption unless the presumption already had been satisfied, although there might be sufficient years remaining in the period so that satisfaction still was possible. Congress believed such treatment to be contrary to its intent in originally enacting Sec. 183 and therefore it amended Sec. 183 in 1971 to allow a taxpayer the election to await the close of the relevant period to determine if the presumption had been satisfied. Congress contemplated that a taxpayer making the election might be asked to execute a waiver of the statute of limitations (SOL) for the applicable period and for a reasonable time thereafter. Because of a technical problem involving multiple notices of deficiency, the IRS required a waiver with regard to all potential income tax liabilities arising during the period, including issues unrelated to deductions subject to Sec. 183.

As part of the Tax Reform Act of 1976, Congress amended Sec. 183(e) to provide that a taxpayer need not waive the SOL for unrelated items on his return in order to take advantage of the special presumption of Sec. 183(e). If a taxpayer makes an election under Sec. 183(e), and thus postpones a determination of whether he is engaged in a particular activity for profit, the making of that election automatically extends the SOL, but only with regard to deductions attributable to the Sec. 183 activity.

It is true that no provision of Sec. 183 provides for extension of the Sec. 183(e)(4) limitations period. It is also true that Sec. 183(e)(4) modifies the period of limitations on assessment that would apply in the absence of an election under Sec. 183(e)(1). Sec. 183(e)(4) provides that "the statutory period for the assessment of any deficiency attributable to . . . [a Sec. 183] activity shall not expire before. . . ." (Emphasis added.) The "statutory period" referred to is the period that otherwise would apply. It is the normal three-year limitations period that is being extended. That period is found in Sec. 6501(a). Thus, a sensible construction of Sec. 183(e)(4) is that it modifies Sec. 6501(a) with regard to a Sec. 183 activity for which an election under Sec. 183(e)(1) has been made. As a result, that modification must be taken into account, as if written into Sec. 6501(a), when applying Sec. 6501(a) in connection with a Sec. 183 activity for which the election has been made. An agreement under Sec. 6501(c)(4) would, by the same reasoning, be effective to extend the period of limitations provided for in Sec. 6501(a), notwithstanding that it was entered into after the normal three-year period provided for in that section had run, so long as it was entered into before the Sec. 6501(a) period, as extended by Sec. 183(e)(4), had run. Of course, it would be effective only with regard to assessments arising from deficiencies attributable to the Sec. 183 activity.

Here, C timely made an election under Sec. 183(e)(1), by including with his 1983 return Form 5213, Election to Postpone Determination with Respect to the Presumption that an Activity Is Engaged in for Profit. The effect of that election was to modify the normal period of limitations found in Sec. 6501(a) by extending it as provided for in Sec. 183(e)(4). The extended period ran until Apr. 15, 1989. Prior to that date, C and an IRS agent entered into an agreement, pursuant to Sec. 6501(c)(4), to extend the period to assess tax. That agreement (Form 872, Consent to Extend the Time to Assess Tax) would have been untimely were Sec. 6501(a) not modified by Sec. 183(e)(4). We have concluded, however, that it is so modified. Accordingly, the agreement was timely made and binds C. It is limited, of course, to deficiencies attributable to the Sec. 183 activity in question. LYNN CRAWFORD, 97 TC No. 20

REFLECTIONS: The court noted that this ruling did not necessarily apply to all Code sections that do not contain direct and specific references to limitations period provisions. Recent developments. Other recent decisions include: Partnerships. In Campbell, 8/27/91, rev'g TC Memo 1990-162, the Eighth Circuit reversed the Tax Court and held that receipt of a profits interest in a partnership by a service provider was too speculative and therefore was not income to the provider. (Note: The court did not hold that the partnership interests could not be compensation for services provided for the provider's employer (rather than for the partnership). However, since this specific issue was not raised at the Tax Court level and the details surrounding the service provider's compensation arrangement were not in the record, the court declined to consider this argument.) AMT. In Frist, DC Tenn., 8/9/91, the district court held that interest expense deductions under the AMT provisions (Sec. 55) are subject to the same limitations as under the regular tax provisions (Sec. 163). Rather than deducting their total interest expense in computing their Sec. 55 liability, the taxpayers were limited to the amount deductible for regular tax purposes. Partnerships. A general partner, who was not the TMP, could validly extend the partnership's assessment period (Cambridge Research and Development Group, 97 TC No. 19). Based on state law, the general partner's "agency authority" was sufficient to satisfy Sec. 6229(b)(1)(B)'s requirement that another person may extend the limitations period "if authorized by the partnership." In addition, extending this limitations period for partnership items was within the scope of the partnership's business.
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Article Details
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Author:Fiore, Nicholas J.
Publication:The Tax Adviser
Date:Nov 1, 1991
Previous Article:Limitations on NOL carryforwards.
Next Article:S corporation's TMP personally responsible for sec. 6673 penalty.

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