Neri v. Commissioner , 54 T.C. 767 ( 1970 )

John S. Neri and Mary C. Neri, Petitioners v. Commissioner of Internal Revenue, Respondent

Neri v. Commissioner

Docket No. 1925-68

United States Tax Court

54 T.C. 767; 1970 U.S. Tax Ct. LEXIS 164;

April 14, 1970, Filed

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Decision will be entered for the respondent.

Petitioners' wholly owned subchapter S corporation suffered net operating losses in its taxable years ending Apr. 30, 1963 through 1965. Following advice given by a representative of the Internal Revenue Service, petitioners filed applications for tentative carryback adjustments in which they deducted the net operating losses against gross income of years prior to the years in which the losses were sustained, rather than first applying these losses against their income for the calendar years in which the corporation's loss years ended as provided in sec. 1374(b), I.R.C. 1954. The adjustments were allowed and petitioners received refunds based thereon. Held, an erroneous refund suit under sec. 7405, I.R.C. 1954, is not the Commissioner's exclusive remedy for recovery of the refunds; they may also be assessed under the deficiency procedures set forth in secs. 6212-6215, I.R.C. 1954. Held, further, the erroneous advice given by the Internal Revenue representative as to the years for which the net operating loss deductions should be taken does not estop respondent from determining the deficiencies herein.

John S. Neri, pro se.

Marlene Gross, for the respondent.

Featherston, Judge.

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FEATHERSTON

Respondent determined deficiencies in petitioners' income tax for 1959, 1961, and 1962 in the amounts of $ 1,998.58, $ 1,093.47, and $ 226.15, respectively, and an overassessment for 1960 in the amount of $ 396.83.

The questions presented for decision are as follows:

(1) Whether the notice of deficiency, issued February 2, 1968, was timely, or whether respondent was required to proceed in a suit for an erroneous refund to recover excessive amounts refunded to petitioners as tentative net operating loss carryback adjustments; and

(2) Whether respondent is estopped from asserting the deficiencies by reason of erroneous advice given petitioners by officials of the Internal Revenue Service at the time they filed applications for tentative carryback adjustments.

FINDINGS OF FACT

Petitioners John S. and Mary C. Neri, husband and wife, were legal residents of Scarsdale, N.Y., at the time their petition was filed. They filed joint Federal income tax returns for 1959 through 1962 with the district director of internal revenue, Manhattan, New York.

John was president and sole shareholder of Plyorient Corp. (hereinafter referred to as Plyorient or the corporation), a small business corporation which had elected under subchapter S not to be subject to taxes for its taxable years ending April 30, 1963, through April 30, 1965.

When John's computations showed that Plyorient had incurred a net operating loss in its taxable year ending April 30, 1963, he visited the offices of the Internal Revenue Service (hereinafter IRS) in Manhattan on September 9, 1963, and sought advice. A representative of the IRS informed him that he was entitled to a net operating loss carryback adjustment which could be applied against his individual income. The representative completed the blanks of a Form 1045, "Application for Tentative Carryback Adjustment," basing his computations on carrying back Plyorient's loss to petitioners' taxable year ending December 31, 1960. The representative gave the completed form to John, who then typed the form and filed it. Petitioners later received a form letter from the IRS stating that the application was incorrect because the net operating loss should have been carried back 3 years rather than 2. Accordingly, still following the IRS representative's advice, petitioners filed an amended Form 1045 on October 23, 1963, applying the net operating loss against the gross income reported on their joint income tax return for 1959. On December 18, 1963, the IRS allowed a tentative carryback adjustment, and petitioners received a refund of tax plus interest thereon in the respective amounts of $ 1,998.58 and $ 75.53.

On September 14, 1964, petitioners filed another Form 1045, in which they applied a net operating loss sustained by the corporation for its taxable year ending April 30, 1964, against the income reported on their 1961 income tax return. A tentative carryback adjustment was allowed, and on December 2, 1964, petitioners received a refund of tax plus interest thereon in the respective amounts of $ 1,093.47 and $ 38.45.

On August 31, 1965, petitioners filed still another Form 1045, applying a net operating loss sustained by Plyorient for its taxable year ending April 30, 1965, against the income reported on their 1962, 1963, and 1964 returns. A tentative carryback adjustment was allowed, and on November 12, 1965, petitioners received refunds in the amounts of $ 226.15, $ 587.79, and $ 681.48, plus interest thereon in the amounts of $ 7.19, $ 18.69, and $ 21.67, for 1962, 1963, and 1964, respectively.

On January 27, 1967, petitioners executed Form 872, "Consent Fixing Period of Limitation Upon Assessment of Income and Profits Tax," extending the time for the assessement of income taxes for 1963 to June 30, 1968.

Respondent mailed the notice of deficiency to petitioners on February 2, 1968, determining deficiencies in their income tax for 1959, 1961, and 1962, and an overassessment for 1960. The adjustments made in the notice were explained as follows:

Amounts refunded on the basis of your applications for tentative carryback adjustment for the years 1959, 1961 and 1962 have been determined to be erroneous. A net operating loss of an electing small business corporation is not carried back to a shareholder's third preceding taxable years as shown in the applications but is first applied to gross income of the shareholder's taxable year in which the taxable year of the corporation ends, pursuant to section 1374 of the Internal Revenue Code. * * *

Respondent further determined that Plyorient's net operating losses in its taxable years ending April 30, 1963, 1964, and 1965, are allowable as deductions on petitioners' returns for the calendar years 1963, 1964, and 1965, respectively.

OPINION

Petitioners contend that the refunds made pursuant to their applications for tentative carryback adjustments were "erroneous refunds" within the meaning of section 6532(b), ^{*172 and that, consequently, any action by respondent for their recovery was required to be taken within 2 years after they were made. Respondent denies that his remedies are so limited, and asserts that, in addition to a suit for an erroneous refund, he may pursue either of the following courses: (1) Assessment as a mathematical error under section 6213(b)(2); or (2) assessment as a deficiency pursuant to a notice of deficiency, issued under section 6212 within the time prescribed by section 6501(h). Sec. 1374(b). Any part of the losses not offset by petitioners' income in the loss years could be used as net operating loss carryback deductions, under the general rules of section 172, to reduce their taxable income for earlier years. To obtain this benefit they were entitled to file applications for tentative carryback adjustments under section 6411. Sec. 1.6411-1(a), Income Tax Regs. Subsection (b) of that section provides in part that "the Secretary or his delegate shall make, to the extent he deems practicable in such period, a limited examination of the application, to discover omissions and errors of computation therein." In the absence of such errors the section contemplates that the adjustment to tax will generally be credited or refunded within 90 days from the date the application is filed. Sec. 1.6411-3(a), Income Tax Regs.}

This provision was first enacted as section 3780 of the Internal Revenue Code of 1939 by the Tax Adjustment Act of 1945 (Act of July 31, 1945, ch. 340, 59 Stat. 521) and was accompanied by a committee report (H. Rept. No. 849, 79th Cong., 1st Sess. (1945), 1945 C.B. 566">1945 C.B. 566, 580-583) which emphasized the tentative character of adjustments made pursuant thereto. Referring specifically to subsection (c) of 1939 Code section 3780 -- the predecessor of section 6213(b)(2), which authorizes the assessment as mathematical errors of deficiencies attributable to tentative carryback adjustments -- the committee report states (1945 C.B. at 583):

It is to be noted that the method provided in subsection (c) of section 3780 to recover any amounts applied, credited, or refunded under section 3780 which the Commissioner determines should not have been so applied, credited, or refunded is not an exclusive method. It is contemplated that the Commissioner will usually proceed by way of a deficiency notice in the ordinary manner, and the taxpayer may litigate any disputed issues before The Tax Court. The Commissioner may also proceed by way of a suit to recover an erroneous refund.

In light of this explanation, this Court has previously rejected a contention that the mathematical error procedure is exclusive. Frank B. Polachek, 22 T.C. 858">22 T.C. 858, 863-865 (1954). For much the same reason we also reject petitioners' contention that the erroneous-refund procedure is exclusive, notwithstanding that the refunds herein were made with respect to improper years.

Turning to the question of the timeliness of the notice of deficiency issued to petitioners on February 2, 1968, section 6501(h) authorizes the Commissioner to assess a deficiency arising out of an erroneous carryback adjustment at any time within the period he could assess a deficiency for the year in which the loss occurred -- "the taxable year of the net operating loss." Frank B. Polachek, supra at 863-865; see also Edward G. Leuthesser, 18 T.C. 1112">18 T.C. 1112, 1125 (1952); Ione P. Bouchey, 1078">19 T.C. 1078 (1953). Section 6501(a) lays down the general rule that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed." Section 6501(b)(1) further provides that early returns "shall be considered" as filed on the last day prescribed by law for the filing thereof, in this case April 15 following the close of each of the years 1963, 1964, and 1965. The deficiency notice of February 2, 1968, was sent within 3 years of April 15 following the close of 1964 and 1965; and as to 1963, it is stipulated that petitioner agreed on January 27, 1967, within the 3-year period, to extend the time for the assessment of income taxes due for that year to June 30, 1968. The notice of deficiency was, therefore, timely. *176 Petitioners' final argument is that respondent is estopped from determining the deficiencies here in dispute, because a representative of the IRS gave erroneous advice pursuant to which the applications for tentative carryback adjustments were filed. We do not agree. Respondent does not deny that one of his representatives erred in the advice he gave; but this was simply a mistake in interpreting the law. In correcting it, the notice of deficiency recites that petitioners are entitled to the benefit of deductions for Plyorient's losses in the manner prescribed by section 1374. "The doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law." Automobile Club v. Commissioner, 353 U.S. 180">353 U.S. 180, 183 (1957). ^{Decision will be entered for the respondent .}

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Footnotes

• 1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.

  SEC. 6532. PERIODS OF LIMITATION ON SUITS.

  (b) Suits by United States for Recovery of Erroneous Refunds. -- Recovery of an erroneous refund by suit under section 7405↩ shall be allowed only if such suit is begun within 2 years after the making of such refund, except that such suit may be brought at any time within 5 years from the making of the refund if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact.

• 2. SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

  (h) Net Operating Loss Carrybacks. -- In the case of a deficiency attributable to the application to the taxpayer of a net operating loss carryback (including deficiencies which may be assessed pursuant to the provisions of section 6213(b)(2)), such deficiency may be assessed at any time before the expiration of the period within which a deficiency for the taxable year of the net operating loss which results in such carryback may be assessed, * * *↩

• 3. Careful review of the notice of deficiency shows that the determined deficiencies are attributable solely to adjustments of the net operating loss carryback. See Edward G. Leuthesser, 18 T.C. 1112">18 T.C. 1112↩ (1952); cf. sec. 6501(m).

• 4. The case having been decided on its merits, respondent's motion to dismiss for failure of petitioners to carry their burden of proof is denied.↩