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Supreme Court: IRS wins S corporation limitations-period issue.

Bufferd, a shareholder in an S corporation, claimed a pro rata share of losses and investment credits reported on the corporation's 1978-79 fiscal-year tax return, which was filed on February 1, 1980. Bufferd's 1979 return, on which he claimed the pass-through items, was filed on April 15, 1980.

The Internal Revenue Service disputed the pass-through items and in December 1987 sent Bufferd a deficiency notice. Because the assessment period for his return had been extended, Bufferd's 1979 tax year was still open when the IRS sent the notice. No such extension was in effect for the S corporation's tax return.

Bufferd claimed the deficiency was time-barred because the three-year statute of limitations (Internal Revenue Code section 6501(a)) for the S corporation's return had run.

Section 6501(a), the general statute of limitations on assessment, provides that a deficiency must be assessed "within three years after the return is filed." The question here was which return--the shareholder's or the corporation's.

For S corporations governed by the uniform audit and review procedures (IRC sections 6241 et seq.), the code says the assessment time is measured from the date the corporation's return is filed. (See sections 6244(1)(A); 6229(a)(1).) However, the uniform audit rules generally do not apply to S corporations with five or fewer shareholders, unless an election is made to have them apply (temporary regulations section 301.6241-1T(c)(2)). According to IRS statistics, most S corporations are such "small corporations." Also, the uniform audit rules did not apply to tax years beginning before 1983.

Due to conflicting decisions among the courts, the U.S. Supreme Court agreed to decide which return started the assessment period.

Result: For the IRS. The filing of the shareholder's return starts the three-year period provided in section 6501 (a). The return referred to in that section is the return of the taxpayer against whom the deficiency is assessed. Therefore, the IRS deficiency against Bufferd was not time-barred.

* Bufferd (Sup. Ct., 1993).
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1993
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