Procedure & Administration
The Eleventh Circuit, reversing the Tax Court, held that the filing of a Tax Court petition “was a proceeding in respect of the deficiency” for purposes of Sec. 6503(a)(1) that suspended the running of the limitation period for the IRS to assess a tax deficiency even though the petition responded to a defective notice.
Background
Shockley Communications Corp. (SCC) was a closely held corporation that owned and operated numerous media stations. Terry Shockley and Sandra Shockley were shareholders, officers, and directors of SCC, and Shockley Holdings LP was also a shareholder.
On May 31, 2001, Northern Communications Acquisition Corp. (NCAC) bought all shares of SCC. That same day, Terry and Sandra Shockley resigned from their SCC positions because of that sale. Subsequently, SCC merged into Shockley Delaware Corp. On Feb. 24, 2002, SCC filed its Form 1120, U.S. Corporation Income Tax Return, for the short tax year ending May 31, 2001. The form showed a Washington, D.C., address for SCC.
The IRS selected SCC’s return for audit. The IRS determined a deficiency for taxes and penalties of more than $50 million for SCC for the 2001 short tax year and moved to assess the deficiency. It mailed two notices of deficiency for the 2001 tax year, the first to “Shockley Communications Corporation” at its last known address in Washington, D.C. It sent a second nearly identical notice to:
Shockley
Communications Corporation
Terry K. &
Sandra K. Shockley
Officers &
Shareholders
at what was then the Shockleys’ home address in Madison, Wis. (the Madison notice).
In May 2005, the Shockleys responded to the Madison notice by filing a petition (the 2005 petition) with the Tax Court. The 2005 petition listed SCC and the Shockleys as petitioners. It sought both a declaration that the Madison notice was invalid as to SCC and a “redetermination of the deficiencies set forth” in the notice. Before the Tax Court could rule on the merits of the 2005 petition, in March 2007, the Shockleys moved to have their case dismissed on the grounds that the Madison notice was invalid because the IRS did not send it to SCC’s last known address and they lacked capacity to contest the deficiency on SCC’s behalf. In April 2007, the Tax Court dismissed the case for lack of jurisdiction because the Shockleys lacked capacity to act on SCC’s behalf.
With the petition dismissed, on Sept. 6, 2007, the IRS assessed SCC for the taxes and penalties for the 2001 tax year listed in the 2005 notices of deficiency, along with almost $27 million more in interest. Subsequently, the IRS examined the Shockleys and Shockley Holdings with respect to the SCC merger transaction and concluded that they were transferees of SCC’s assets and liable as transferees for SCC’s tax deficiency for 2001. On Aug. 31, 2008, the IRS mailed the Shockleys and Shockley Holdings notices of transferee liability for an amount equal to the distributions each received from SCC as part of the merger transaction.
Statutes of Limitation for Assessment
The IRS generally must assess the liability of a taxpayer within three years after the taxpayer’s tax return was filed under Sec. 6501(a). In addition, within one year of the expiration of the three-year limitation period for assessment against the taxpayer, the IRS may assess the taxpayer’s tax deficiency against a transferee of assets of the taxpayer-transferor (Secs. 6501(a), 6901(a), and 6901(c)(1)). Accordingly, any suspension or tolling in the three-year limitation period applicable to the taxpayer-transferor extends the limitation period applicable to the transferee.
However, after the IRS has mailed a notice of deficiency to the taxpayer, as it is required to do before making an assessment, the three-year limitation period may be suspended for several reasons, including, under Sec. 6503(a)(1), when “a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final.”
The Tax Court Proceedings
On Nov. 19, 2008, Sandra Shockley, Terry Shockley, and Shockley Holdings brought separate petitions in Tax Court for redetermination of their respective transferee liability, which the Tax Court consolidated. Before trial, the Shockleys moved to dismiss their petitions. According to the Shockleys, the IRS could not assess their liability as transferees because, among other things, (1) the IRS did not assess the original corporate tax deficiency against SCC (the taxpayer-transferor) until Sept. 6, 2007, and the three-year statute of limitation for assessment of the transferor’s original tax deficiency allegedly expired July 24, 2005; (2) the statute of limitation for transferee liability expires one year after the transferor’s limitation period expires, which was July 24, 2006; and (3) therefore the Aug. 31, 2008, notices of transferee liability against the Shockleys were untimely.
The IRS countered that the notices of transferee liability were timely because the 2005 petition constituted a “proceeding in respect of [SCC’s] deficiency” that suspended the limitation period under Sec. 6503(a)(1). Specifically, the 2005 petition suspended the limitation period from May 18, 2005, until Sept. 29, 2007, which was 66 days after the Tax Court’s order became final. With one year tacked on for transferee liability, the August 2008 notices were timely.
The Tax Court held in favor of the Shockleys (Shockley, T.C. Memo 2011-96). It found that the 2005 petition was not a proceeding in respect of SCC’s deficiency because the Shockleys did not file it on SCC’s behalf and the Madison notice, in response to which they filed the petition, was invalid. It further found that an invalid notice to a transferee cannot suspend the limitation period as to the transferor, and thus the Shockleys’ 2005 petition filed in response to the invalid Madison notice did not toll the limitation period for assessment of transferor SCC’s deficiency, making the IRS’s 2007 assessment against SCC untimely. The IRS appealed the Tax Court’s decision to the Eleventh Circuit.
The Eleventh Circuit’s Decision
The Eleventh Circuit reversed the Tax Court and held that the Shockleys’ 2005 petition was a proceeding in respect of SCC’s deficiency that suspended the running of the statute of limitation. Therefore, the 2008 notices of transferee liability were timely.
To interpret the meaning of “proceeding in respect of a deficiency,” the Eleventh Circuit first looked to the language of Sec. 6503(a)(1), explaining that unless the statute was ambiguous, it would rely on the plain language of the statute in its interpretation. The court found that the plain language of Sec. 6503(a)(1) indicated that the 2005 petition qualified as a proceeding in respect of SCC’s deficiency.
First, under the plain language of Sec. 6503(a)(1), the court noted that the proceeding only needed to be “in respect of” the deficiency, not seeking “a redetermination of” the deficiency. In the court’s view, this meant that the statute requires only that the substance of the proceeding concern the deficiency. Second, the court found that because the statute’s language refers to a “proceeding” and does so in the passive voice, its construction emphasizes the placing of a proceeding on a court docket, not who places it on the docket.
Applying these points to the Shockleys’ 2005 petition, the court found that although the Madison notice was invalid because the IRS sent it to the wrong address, in all material respects it contained the same information as the D.C. notice, which was valid and clearly issued with respect to SCC’s deficiency. According to the court, the fact that the IRS added the Shockleys’ names to the Madison notice did not mean that the notice concerned a different tax deficiency.
Thus, although the Shockleys may not have been intending to challenge SCC’s corporate deficiency with the 2005 petition, the Shockleys filed the petition in response to a notice for SCC’s deficiency and it was therefore in respect of that deficiency. Because the petition had been placed on the Tax Court docket, it was a proceeding. Accordingly, under Sec. 6503(a)(1), the 2005 petition suspended the statute of limitation for assessment of transferor SCC’s deficiency.
The Shockleys also argued that the 2005 petition did not suspend the statute of limitation under Sec. 6503(a)(1) because it was filed in response to the invalid Madison notice of deficiency rather than the valid D.C. notice. The Eleventh Circuit found that the statutory requirement proposed by the Shockleys, that a petition be filed in response to a valid notice of deficiency, could not be found on the face of the statute and could not be squared with the plain language of the statute. The court explained that reading this requirement into the statute would force the IRS into a Hobson’s choice to either (1) treat a proceeding posing a jurisdictional problem as a “nullity,” proceed to assessment, and hope not to run afoul of the statutory prohibition against assessment; or (2) do nothing until the Tax Court ruled and hope the Tax Court did so before the statute of limitation expired. Citing opinions from the Second and Tenth circuits, the court found that Congress did not intend this result, so whether or not the Shockleys petition was filed in response to a valid notice of deficiency did not matter for purposes of the suspension of the statute of limitation.
Reflections
The Eleventh Circuit’s decision gives a broad scope to the “in respect of” language of Sec. 6503(a)(1) to prevent taxpayers who had actual knowledge of the IRS’s deficiency assessment against them to use a technicality to avoid that assessment. However, while the Eleventh Circuit properly held against the Shockleys on this procedural issue in this long-running battle, all is not lost for the couple. The court remanded the case to the Tax Court, which in its original decision, having held for the Shockleys on the statute of limitation issue, did not address the Shockleys’ substantive claims that they were not liable as transferees for SCC’s tax liabilities.
Shockley, No. 11-13494 (11th Cir. 7/11/12)
