112 T.C. No. 18

UNITED STATES TAX COURT

ROBERT E. WADLOW AND CONNIE V. WADLOW, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21017-96. Filed May 11, 1999.

Ps engaged in horse boarding and training

activities beginning in 1989. Ps claimed deductions

related to these activities on Schedule C for their

1990, 1991, 1992, 1993, and 1994 taxable years. Ps

made valid elections on Form 5213, Election To Postpone

Determination as To Whether the Presumption Applies

That an Activity Is Engaged In for Profit, attached to

their income tax returns for 1990, 1991, 1992, and

1993. R issued notices of deficiency for Ps' 1990,

1991, 1992, 1993, and 1994 taxable years on August 15,

1996, in which deductions related to Ps' horse boarding

and training activities were disallowed. R

subsequently agreed to such deductions for 1991 and

1992 and also allowed additional deductions related to

Ps' horse boarding and training activities, resulting

in overpayments as to those years, but challenges the

Court's jurisdiction to determine and allow such 

overpayments. Ps did not file amended returns or

execute Form 872 for their 1991 and 1992 taxable years. 

Held: Overpayments of Ps' 1991 and 1992 Federal income

tax are not barred by the period of limitations on

credits or refunds.
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A. Jerry Busby, for petitioners.

John W. Duncan, for respondent.

OPINION

NIMS, Judge: Petitioners have made overpayments of their

1991 and 1992 Federal income taxes in the following amounts:

Year Overpayment

1991 $322

1992 322

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure. 

After concessions by both parties, the issue for decision is

whether Form 5213, Election To Postpone Determination as To

Whether the Presumption Applies That an Activity Is Engaged In

for Profit, extends the period of limitations for the

determination and allowance of overpayments. This case was

submitted on the basis of a stipulation of facts. 

Petitioners Robert and Connie Wadlow resided in Phoenix,

Arizona, at the time they filed their petition. Beginning in

1989, petitioners undertook a horse boarding and training

activity (activity), for which they reported income and expenses

on Schedules C attached to their income tax returns for 1990,

1991, 1992, 1993, and 1994. Petitioners attached validly
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executed Forms 5213 to their returns for 1990, 1991, 1992, and

1993, all of which were timely filed. 

Respondent mailed notices of deficiency to petitioners on

August 15, 1996, which were timely under section 183(e)(4), see

infra, determining deficiencies in income tax of $6,828, $5,763,

$7,182, $5,924, and $10,481 for 1990, 1991, 1992, 1993, and 1994,

respectively. The deficiency notices addressed only deficiencies

arising from deductions for activity-related expenses claimed on

Schedules C. Only petitioners' 1991 and 1992 taxable years

remain in dispute.

For their 1991 taxable year, petitioners made tax payments

of $7,568.37, all of which were credited to their IRS account on

April 15, 1992. On May 25, 1992, respondent allowed and paid in

full the $277.37 refund claimed by petitioners on their 1991 tax

return, resulting in a $7,291 net payment of tax. 

For their 1992 taxable year, petitioners made tax payments

of $9,255, all of which were credited to their IRS account on or

before April 15, 1993. 

The deficiency notice for 1991 reflects (1) the disallowance

of all Schedule C expenses, totaling $14,702; (2) a correlative

adjusted gross income adjustment in the amount of $957; and (3) a

related self-employment tax of $1,914. 

The deficiency notice for 1992 reflects (1) the disallowance

of all Schedule C expenses, totaling $18,855; (2) a correlative
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adjusted gross income adjustment in the amount of $1,113; and (3)

a related self-employment tax of $2,226. 

For purposes of this case, respondent has now stipulated

that petitioners are entitled to claim, as to both the years 1991

and 1992, Schedule C expenses in excess of the amounts claimed on

the respective returns and disallowed in the deficiency notices,

and that they are liable for no self-employment tax for those

years.

The result of the above-mentioned stipulation is that (1)

petitioners' total corrected income tax liability for 1991 is

$6,969, resulting in an overpayment of $322; and (2) petitioners'

total corrected income tax liability for 1992 is $8,933, also

resulting in a $322 overpayment.

Petitioners did not file amended returns or claims for

refund on Form 872 for 1991 and 1992, nor did they agree in

writing with respondent to extend the respective periods of

limitation for assessment for either year.

The bottom line issue for determination is whether

petitioners can recover overpayments in tax for their 1991 and

1992 taxable years. In general, we have jurisdiction to

determine the amount of an overpayment in income tax for a

taxable year where we find "that there is no deficiency and

further * * * [find] that the taxpayer has made an overpayment of

income tax for the same taxable year". Sec. 6512(b)(1). When
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our decision becomes final, the overpayment must be credited or

refunded to the taxpayer. See id. 

Nevertheless, under certain circumstances section 6512(b)(3)

limits the allowance of any credit or refund determined by this

Court. This section provides, in pertinent part, as follows:

(3) Limit on amount of credit or refund.--No such 

credit or refund shall be allowed or made of any portion of 

the tax unless the Tax Court determines as part of its 

decision that such portion was paid--

(A) after the mailing of the notice of deficiency,

(B) within the period which would be applicable 

under section 6511(b)(2), (c), or (d), if on the date 

of the mailing of the notice of deficiency a claim had 

been filed (whether or not filed) stating the grounds 

upon which the Tax Court finds that there is an 

overpayment, or 

(C) within the period which would be applicable 

under section 6511(b)(2), (c), or (d), in respect of 

any claim for refund filed within the applicable period

specified in section 6511 and before the date of the 

mailing of the notice of deficiency--

(i) which had not been disallowed 

before that date,

(ii) which had been disallowed before 

that date and in respect of which a 

timely suit for refund could have been commenced 

as of that date, * * * 

Thus, since no payments were made after the mailing of the

respective notices of deficiency (section 6512(b)(3)(A)), and no

claims for refund were filed before the mailing of the respective

notices of deficiency (section 6512(b)(3)(C)), only section
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6512(b)(3)(B) could be applicable. Under this latter section,

the termination of the period of limitations within which a claim

can be filed is tolled by the mailing of the notice of deficiency

if a claim for refund could have been filed within section

6511(b)(2), (c), or (d), on the date of the mailing of the notice

of deficiency (mailing date). As stated, no valid refund claims

were filed in this case before the respective mailing dates.

Petitioners contend that, pursuant to section 183(e), see

infra, section 6511(c) controls by virtue of the filing of Forms

5213 with petitioners' 1990, 1991, 1992, and 1993 returns,

because, say petitioners, Form 5213 is tantamount to an

"extension by agreement" pursuant to section 6501(c)(4). Section

6511(c) provides special rules relating to the general

limitations on credits and refunds provided in section 6511(a)

and (b) when the parties enter into an agreement described in

section 6501(c)(4). 

Respondent counters that the automatic extension of the

period of assessment occasioned by petitioners' section 183(e)

election on Form 5213 is not an "agreement" within the meaning of

section 6501(c)(4). Respondent contends that the fact that he

did not sign Forms 5213 fails to comply with the requirement

under section 6501(c)(4) and section 301.6501(c)-1(d), Proced. &

Admin. Regs., that both respondent and the taxpayer consent in

writing to extend the period of assessment. 
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Section 183 disallows (with certain nongermane exceptions)

deductions attributable to an activity not engaged in for profit. 

Section 183(d) provides a rebuttable presumption that an activity

will be an activity engaged in for profit if the gross income

from the activity exceeds the deductions attributable to the

activity for 3 or more of the taxable years in a 5-year period. 

In the case of an activity which consists in major part of the

breeding, training, showing, or racing of horses, "2" is

substituted for "3" and "7" for "5". Generally, as to a "horse"

activity, if gross income exceeds the deductions for 2 of the 7

years, the activity is presumed to be conducted for profit during

the second profit year and all subsequent years during the same

7-year period. See 1 Bittker & Lokken, Federal Taxation of

Income, Estates and Gifts, par. 22.5.5, at 22-79 (3d ed. 1999).

Under section 183(e), a taxpayer may elect to postpone a

determination of whether the presumption applies until the close

of the fourth taxable year (or the sixth year for qualifying

horse activities) following the first taxable year in which the

taxpayer engages in the activity. An electing taxpayer may file

returns in the interim on the assumption that the activity is

conducted for profit, and if, under section 183(e)(2), there are

3 or 2 profitable years in the applicable 5-year or 7-year

period, the presumption applies to all 5 or 7 years, including

years preceding the profit years. See id. 
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Under section 183(e)(4), if a taxpayer elects a

postponement, the statutory period for the assessment of any

deficiency attributable to the activity is extended to 2 years

after the due date (without extensions) for filing the return for

the last taxable year in the 5- or 7-year period to which the

election relates. As noted previously, petitioners made valid

elections to postpone a determination as to their 1990, 1991,

1992, and 1993 horse activities by attaching properly executed

Forms 5213 to their returns for those years.

The Form 5213 attached to petitioners' 1990 return states

that 1989 was the first tax year in which petitioners engaged in

their horse activity. Thus, under section 183(e)(4), the period

of limitations for assessment under the election was extended to

April 15, 1998--2 years after the due date (without any

extension) for filing petitioners' 1995 return.

Section 6511(c) provides special rules in cases of extension

of time by agreement. Under section 6511(c)(1), the time for

filing a claim for credit or refund does not expire prior to 6

months after the expiration of the period within which an

assessment may be made pursuant to an agreement or any extension

thereof under section 6501(c)(4). That section provides for an

extension of time for assessment by agreement in writing signed

by both the Secretary and the taxpayer, if done before the

expiration of the time prescribed in section 6501.
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Section 6512(b)(3), in effect, allows a credit or refund of

an overpayment if the Tax Court finds, among other things, that

the overpayment was made within the period specified in section

6511(c). The latter period comes into play where the time for

making an assessment has been extended by reason of a written

agreement between the Secretary and the taxpayer under section

6501(c)(4).

In Crawford v. Commissioner, 97 T.C. 302, 307 (1991), we

stated that the effect of a section 183(e)(1) election is to

modify the normal period of limitations found in section 6501(a)

by extending it as provided for in section 183(e)(4). The

question with which we are confronted here is whether a section

183(e)(1) election also impacts the extension by agreement

provisions of section 6501(c)(4), which, as previously noted,

requires the mutual consent in writing of the Secretary and the

taxpayer.

Our analysis leads us to conclude that Congress intended

that a section 183(e)(1) election (election or section 183

election) supersedes the requirements of section 6501(c)(4) in

the limited area within which the election is operative. The

legislative history of section 183(e)(4) makes this clear. 

The Tax Reform Act of 1976 (TRA 1976), Pub. L. 94-455, sec.

214(a), 90 Stat. 1549, added section 183(e)(4) to the Code. The

report of the Senate Committee on Finance notes that temporary
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regulations under prior law required a taxpayer who made the

election to agree to "extend the statute of limitations for each

taxable year in the 5 (or 7) year period to at least 18 months

after the due date of his return for the last year in the

period." S. Rept. 94-938 (Part 1), at 67 (1976), 1976-3 C.B.

(Vol. 3) 49, 105. Such an extension applied to all potential

income tax liabilities arising during the period, including

liabilities unrelated to deductions subject to section 183

issues. See id.

In explaining the purpose of section 183(e)(4), the Senate

report goes on to say that "the making of this election

automatically extends the statute of limitations, but only with

regard to deductions which might be disallowed under section

183." S. Rept. 94-938 (Part 1), supra at 106. (As we have

previously pointed out, the deductions, and the resulting

overpayments, in this case arose solely in connection with

petitioners' horse boarding and training activities.)

It is thus obvious that by enacting section 183(e)(4),

Congress intended to override section 6501(c)(4) in this narrow

area, and since a valid election extends the period of

limitations on assessment by operation of the law, the

requirement of section 6501(c)(4) that there be mutuality by

written agreement is inoperative in this area. A taxpayer could

not be heard to object that an assessment resulting from
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disallowance of deductions in a section 183 election case is

invalid from lack of mutuality, and the Commissioner, we believe, 

may not do likewise as to overpayments.

Respondent argues that if, as in the present case, no claim

for refund is filed prior to the mailing of a notice of

deficiency, then the amount of the refund is limited to the

amount that would be allowable under section 6511(b)(2) if a

claim had been filed on the date of the mailing of the notice of

deficiency, citing section 6512(b)(3)(B). Nevertheless, since

the period of limitations on assessment of any deficiency arising

from deductions relating to petitioners' horse boarding and

training activities has been extended by the section 183 election

(petitioners' overpayments being related solely to such

deductions), which elections we regard as tantamount to section

6501(c)(4) extensions, petitioners could have filed claims for

overpayment as of the deficiency notice dates by reason of

section 6511(c), even though no such claims were actually filed. 

Therefore, this Court has jurisdiction to allow such claims

insofar as section 6512(b)(3) is concerned.

Respondent also suggests, referring to section 183(e)(4),

that the only period extended by a section 183(e) election is the

statutory period for the assessment of any deficiency

attributable to "such activity." We believe, and hold, that

section 183(e)(4) also extends, mutatis mutandis, the statutory
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period for overpayments. Section 6511(c)(2) provides that a

credit or refund may be allowed within 6 months after expiration

of the period within which an assessment may be made, when, as

here, no claim was filed but the period of assessment was

extended by agreement (in this case by operation of law, which we

construe as the equivalent of such an agreement).

Section 183(e)(4) substantially expands, in the somewhat

complex manner delineated above, the period for assessing any

deficiency attributable to an activity in the circumstances

described. Nevertheless, we hold for the sake of consistent

treatment that petitioners' right to an allowance of overpayments

in connection with their section 183 election be at least

coterminous with respondent's authority to make an assessment

under section 183(e)(4).

For the above reasons, we determine that there is an 

overpayment of petitioners' Federal income tax for 1991 and 1992

in the amount of $322 for each respective year, and we hold that

such overpayments are not barred by the period of limitations on

credits or refunds.

Decision will be entered

under Rule 155.

Reviewed by the Court.

COHEN, CHABOT, PARR, BEGHE, CHIECHI, FOLEY, VASQUEZ, and

GALE, JJ., agree with this majority opinion.
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1 Sec. 6501 provides, in pertinent part, as follows: 

SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

(a) General Rule.--Except as otherwise provided in this

(continued...)

CHABOT, and FOLEY, JJ., concurring: We agree with the

majority opinion, and write separately to emphasize that section

183(e)(4) extends the period for assessing a deficiency, but it

does not provide an independent basis for extending the

limitation period for overpayments. Nevertheless, the period of

limitation for overpayments is extended because a section

183(e)(4) election meets the requirements of a section 6501(c)(4)

agreement. 

I. Statutory Requirements of Section 6501(c)(4) Are Met.

The basic issue before us is whether petitioners' claim for

refund was timely. This Court pursuant to section 6512(b)(1) has

jurisdiction to determine the existence and amount of any

overpayment of tax. Section 6512(b)(3)(B) prohibits this Court

from awarding a refund unless we determine that petitioners'

claim was timely under section 6511. 

Section 6511(c) provides that the normal period of

limitation for filing a claim for refund may be extended if there

is "an agreement under the provisions of section 6501(c)(4)

extending the period for assessment of a tax". Section 6501

provides rules that limit assessment and collection.1 More
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1(...continued)

section, the amount of any tax imposed by this title shall

be assessed within 3 years after the return was filed

(whether or not such return was filed on or after the date

prescribed) or, if the tax is payable by stamp, at any time

after such tax became due and before the expiration of 3

years after the date on which any part of such tax was paid,

and no proceeding in court without assessment for the

collection of such tax shall be begun after the expiration

of such period.

* * * * * * *

(c) Exceptions.--

* * * * * * *

(4) Extension by agreement.--Where, before the

expiration of the time prescribed in this section for

the assessment of any tax imposed by this title, except

the estate tax provided in chapter 11, both the

Secretary and the taxpayer have consented in writing to

its assessment after such time, the tax may be assessed

at any time prior to the expiration of the period

agreed upon. The period so agreed upon may be extended

by subsequent agreements in writing made before the

expiration of the period previously agreed upon. 

specifically, section 6501(c)(4) provides that, where the

Internal Revenue Service (IRS) and the taxpayer have consented in

writing, the assessment period is extended. The accompanying

regulations state that the extension of the assessment period

"[becomes] effective when the agreement has been executed by both

parties." Sec. 301.6501(c)-1(d), Proced. & Admin. Regs. 
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2 Sec. 183(e) provides, in pertinent part, as follows: 

SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. 

* * * * * * *

(e) Special Rule.--

* * * * * * *

(3) Election.--An election under paragraph (1)

shall be made at such time and manner, and subject to

such terms and conditions, as the Secretary may

prescribe. 

(4) Time for assessing deficiency attributable to

activity.--If a taxpayer makes an election under

paragraph (1) with respect to an activity, the

statutory period for the assessment of any deficiency

attributable to such activity shall not expire before

the expiration of 2 years after the date prescribed by

law (determined without extensions) for filing the

return of tax under chapter 1 for the last taxable year

in the period of 5 taxable years (or 7 taxable years)

to which the election relates. Such deficiency may be

assessed notwithstanding the provisions of any law or

rule of law which would otherwise prevent such an

assessment. 

In section 183(e)2 the Congress provided rules to facilitate

the even-handed administration of the provisions of section 183. 

In paragraphs (3) and (4) of section 183(e), the Congress gave to

the Secretary broad power to determine what should be in the

election under section 183(e), required that such an election

contain specified elements of an extension agreement,

legislatively mandated the IRS's consent to extend the assessment

period, and explicitly provided that the assessment period is
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extended when the taxpayer makes the election; i.e., the taxpayer

consents. In effect, the Congress authorized the Secretary to

set any appropriate conditions for a specialized extension of the

limitation on assessment, prescribed in the statute the nature

and extent of this extension, required the Secretary to offer

this agreement to any taxpayer on a take-it-or-leave-it basis,

and mandated that the Secretary agree; i.e., "consent", to the

taxpayer's election. 

Thus, the Congress' mandate satisfies the requirement of

section 6501(c)(4) that the IRS "consent", and the requirement in

section 301.6501(c)-1(d), Proced. & Admin. Regs., that the IRS

execute the agreement. In short, a section 183(e) election meets

the requirements of a section 6501(c)(4) agreement and the period

of limitation for overpayments is extended pursuant to section

6511(c). 

II. The Legislative History Supports This Analysis. 

Section 183 was enacted by the Tax Reform Act of 1969, Pub.

L. 91-172, sec. 213, 83 Stat. 487, 571-572, to deal with "hobby

losses"; i.e., losses in an activity not engaged in for profit. 

Section 183(d) provided a presumption that an activity is engaged

in for profit if a gross income test is satisfied for 2 out of 5

consecutive years. The time periods were modified by later

statutes. Special rules were provided for certain horse-related

activities. The Congress then became aware of a problem in
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applying section 183--some taxpayers were denied the opportunity

to use the presumption where the Commissioner challenged the

status of the activity before the end of the presumption period. 

As a result, section 183(e) was enacted by the Revenue Act of

1971 (1971 Act), Pub. L. 92-178, sec. 311, 85 Stat. 497, 525-526. 

Paragraph (1) of section 183(e) permits a taxpayer to elect to

delay the determination of whether the section 183(d) presumption

applies. Paragraph (2) of section 183(e) applies the presumption

to all of the years in the testing period; i.e., 5 years

generally and 7 years as to horse-related activities. Paragraph

(3) of section 183(e) gives the Secretary broad powers as set

forth supra note 2. 

The Senate Committee on Finance report explains the 1971 Act

as follows: 

The committee is aware that because of the 5- or 7-year

periods involved in the case of the presumption, the statute

of limitations may run before any action could otherwise be

taken under the provision added by the committee. For this

reason, the committee believes that this provision should

not generally be applicable unless the taxpayer executes a

waiver of the statute of limitations for the 5- or 7-year

period and for a reasonable time thereafter. This will

allow the taxpayer time to claim any refunds of tax paid

during this period and also will allow the Internal Revenue

Service to assess any deficiencies. [S. Rept. 92-437, at 74

(1971), 1972-1 C.B. 600, emphasis added; see also Staff of

Joint Comm. on Taxation, General Explanation of the Revenue

Act of 1971, at 71-72 (J. Comm. Print 1972).] 

Section 183(e) as enacted in the 1971 Act was identical to the

language reported by the Senate Committee on Finance. 
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The Congress' work was not complete. There remained a "fly

in the ointment" because of restrictions on multiple notices of

deficiency for the same tax year, the Treasury's temporary

regulations required that section 183 elections be accompanied by

general waivers of the statute of limitations. Thus, all the

non-hobby-loss elements of a taxpayer’s liability for a year had

to be held in suspense until the hobby-loss matters were dealt

with. In order to deal with this limited problem, section

183(e)(4) was enacted by the Tax Reform Act of 1976 (1976 Act),

Pub. L. 94-455, sec. 214, 90 Stat. 1520, 1549. The committee

reports described the situation in pertinent part as follows: 

 Present law

* * * * * * *

If, at the end of a given year, the taxpayer has not

conducted the activity for 5 (or 7) years, a special

provision allows the taxpayer to elect to postpone a

determination as to whether he can benefit by this

presumption until he has conducted the activity for 5 (or 7)

years (sec. 183(e)). This election was added to the Code in

1971. The committee reports at that time express an intent

that a taxpayer who makes the election should be required to

waive the statute of limitations for the 5 (or 7) year

period and for a reasonable time thereafter. The aim was to

prevent the statute of limitations (3 years, in the usual

case) from running on any year in the period. The taxpayer,

it was believed, should have time to claim a refund of tax

paid by him during the period and the Internal Revenue

Service should also have time to assess any deficiency owed

by the taxpayer for any year in the period. 

* * * * * * *
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 General reasons for change

* * * * * * *

In order to accomplish the purposes which Congress

sought when it enacted the look-forward presumption of

section 183(e), it is not necessary to keep the statute of

limitations open for all issues on the taxpayer’s return

during the 5 (or 7) year period. The only issues on which

the statute of limitations needs to remain open concern the 

deductions which will be tested as to whether they are

incurred in an activity which the taxpayer engaged in for

profit. Your committee believes that a taxpayer should be

able to take full advantage of a statutory presumption which

was intended for his benefit, without unnecessarily

extending the statute of limitations for items on his return

which are unrelated to deductions which might be disallowed

under section 183. 

 Explanation of provisions

* * * * * * *

If a taxpayer makes an election under section 183(e) of

present law and postpones a determination whether he engaged

in a particular activity for profit, the making of such

election automatically extends the statute of limitations,

but only with regard to deductions which might be disallowed

under section 183. The taxpayer would not have to agree to

extend the statute of limitations for any other item on his

return during the 5 (or 7) year period. On the other hand,

even if the taxpayer has petitioned the Tax Court with

regard to an unrelated issue on his return for any year in

the same period, the Service will be able to issue a second

notice of deficiency relating to a section 183 issue as to

any taxable year in the period. [H. Rept. 94-658, at 127-

129 (1975), 1976-3 C.B. (Vol. 2) 695, 819-821; see S. Rept.

94-938 (Part 1), at 66-69 (1976), 1976-3 C.B. (Vol. 3) 49,

104-107; Staff of the Joint Comm. on Taxation, General

Explanation of the Tax Reform Act of 1976, at 59-62, 1976-3

C.B. (Vol. 2) 71-74; emphasis added and fn. ref. omitted.]

Thus, in the 1976 Act, the Congress reaffirmed that the 1971

Act had resulted in both taxpayers’ and the IRS’ having

correlative rights to claim refunds and assess deficiencies for
- 20 -

the 5-year (or 7-year) presumption test period, intended "that a

taxpayer should be able to take full advantage of a statutory

presumption which was intended for his benefit", and understood

that the limited modification made by the 1976 Act had the effect

of removing the IRS's concern about restrictions on multiple

notices of deficiency for the same year. See S. Rept. 94-938

(Part 1), supra at 66-68, 1976-3 C.B. (Vol. 3) at 104-106. Thus,

we conclude that the Congress intended that an extension of the

statute of limitations would be a two-way street; i.e., an

extension of the assessment period should be accompanied by an

extension of the period of limitation for claiming a refund. 

We concluded in Crawford v. Commissioner, 97 T.C. 302, 307

(1991), that we should harmonize sections 183 and 6501 by writing

section 183(e) into section 6501(a) for purposes of applying

section 6501(c)(4). Similarly, we should harmonize those

sections by writing section 183(e) into section 6501(c)(4). 

Failure to do so would take away from taxpayers a benefit that

taxpayers had under the 1971 Act amendment and that was intended

to be left undisturbed by the 1976 Act amendment.

The dissenters suggest that this “statute appears to be

clear on its face” (infra p. 31) and that they champion “A

literal reading” thereof. Infra p. 36. With respect, we suggest

it is not so clear what the statutes mean.
- 21 -

We have focused on the language of the statutes in light of

the legislative history of the later-enacted provisions of

section 183(e), and we discern a congressional purpose that the

refund statute of limitations provisions be interpreted in light

of section 183(e). The matter before us, then, is how to

harmonize sections 183(e) and 6501. In doing so we have

interpreted the statutory language in light of the Congress’

instructions as to what this language was intended to, and

expected to, accomplish.

Our analysis is consistent with the analysis set forth in

Crawford v. Commissioner, supra. Instead of limiting ourselves

to the text of section 6501(a), which provides that "Except as

otherwise provided in this section," the 3-year assessment period

is applicable, we examined the legislative history of section 183

and concluded that "a sensible construction of section 183(e)(4)

is that it modifies section 6501(a) with regard to a section 183

activity for which an election under section 183(e)(1) has been

made." Crawford v. Commissioner, 97 T.C. at 307. We reached

this conclusion in Crawford notwithstanding the absence in the

section 183 legislative history of any discussion about section

6501(c)(4) agreements’ being entered into at any time after the

expiration of the assessment period actually prescribed in

section 6501. If our harmonizing of sections 183(e)(4) and 6501

was permissible in Crawford--and we believe it was--then a
- 22 -

fortiori the harmonizing we do in the instant case is

permissible. Indeed, here we are effectuating explicit

expressions of congressional intent. The 1971 Act committee

report and the 1976 Act committee report provided that the

Congress’ action "will allow the taxpayer time to claim any

refunds of tax paid during this period [the 5- or 7-year

period]". S. Rept. 92-437, supra at 74, 1972-1 C.B. at 600; see

also S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 105. 

Moreover, the 1976 Act committee report provided "that a taxpayer

should be able to take full advantage of a statutory presumption

which was intended for his benefit". S. Rept. 94-938 (Part 1),

supra, 1976-3 C.B. (Vol. 3) at 105; emphasis added. 

COHEN, PARR, BEGHE, CHIECHI, LARO, VASQUEZ, and GALE, JJ., 

agree with this concurring opinion.
- 23 -

LARO, J., concurring: I agree with the majority's holding

that the period of limitations does not prevent petitioners from

recovering overpayments of their 1991 and 1992 income taxes. I

write separately, however, to set forth my view as to why this is

so. 

The Court's disposition of this case turns on our answer to

the following question that evolves from the text of section

6501(c)(4): "before the expiration of the time prescribed in

this section for the assessment of any tax imposed by this title

* * *, [did] both the Secretary and the taxpayer[s] * * *

[consent] in writing to its assessment after such time"? Like

the majority and Judges Chabot and Foley in concurrence, I

conclude that the Commissioner and petitioners both did.

Longstanding Supreme Court precedent provides that the term

"agreement" as used in section 6501(c)(4) does not require that a

taxpayer and the Commissioner enter into an agreement that meets

the formal requirements of a contract under applicable law. See

Stange v. United States, 282 U.S. 270, 276 (1931); Florsheim

Bros. Drygoods Co. v. United States, 280 U. S. 453, 466 (1930). 

Section 6501(c)(4) simply mandates that the Commissioner and the

taxpayer execute a written document that allows the former to

assess tax against the latter after the statutory period that

would otherwise apply. In the instant case, Form 5213 is that

written document. Petitioners prepared Form 5213, and they
- 24 -

signified their agreement to the terms therein by filing it with

the Commissioner. The Commissioner, on the other hand, signified

his agreement to those terms by accepting petitioners' form

without reservation. See Instructions to Form 5213, in which the

Commissioner states that the filing of Form 5213 "automatically

extends the period of limitations for assessing any income tax

deficiency."; see also sec. 183(e)(3) ("An election * * * [under

section 183(e)] shall be made at such time and manner, and

subject to such terms and conditions, as the Secretary shall

prescribe."). Although both section 183(e)(4) and the

instructions to Form 5213 speak solely to the ability to assess a

deficiency, section 6511(c) acts to allow petitioners to seek a

refund during the same period of time under which the

Commissioner may assess a deficiency. In this regard, this Court

considers an election under section 183(e) to have been made

under section 6501(a). See Crawford v. Commissioner, 97 T.C.

302, 307 (1991), wherein the Court stated that section 6501(a) is

read as if section 183(e)(4) were written therein.

CHABOT, BEGHE, FOLEY, and VASQUEZ, JJ., agree with this

concurring opinion. 
- 25 -

RUWE, J., dissenting: Section 6512(b)(1) generally confers

overpayment jurisdiction for a taxable year that is otherwise

properly before the Court when we find "that the taxpayer has

made an overpayment of income tax for the same taxable year". 

However, this general statutory grant of overpayment jurisdiction

is limited by the initial words of section 6512(b)(1)--"Except as

provided by paragraph (3)". "[T]he Tax Court's jurisdiction to

award a refund is limited to those circumstances delineated in

section 6512(b)(3)." Commissioner v. Lundy, 516 U.S. 235, 247

(1996). The outcome in this case is dependent upon whether

petitioners meet the requirements of section 6512(b)(3)(B).

"The analysis dictated by section 6512(b)(3)(B) is not

elegant, but it is straightforward." Id. at 242. Section

6512(b)(3)(B) provides:

No such * * * refund shall be allowed or made of any

portion of the tax unless the Tax Court determines as

part of its decision that such portion was paid--

* * * * * * *

(B) within the period which would be

applicable under section 6511(b)(2), (c), or

(d), if on the date of the mailing of the

notice of deficiency a claim had been filed

(whether or not filed) stating the grounds

upon which the Tax Court finds that there is

an overpayment * * *

Based on the facts presented, petitioners can meet the

jurisdictional requirements of section 6512(b)(3)(B) only if the
- 26 -

periods for filing their claims for refund were extended by

agreement pursuant to section 6511(c). 

Section 6511(c) provides that the normal period of

limitations for filing refund claims is extended if there was "an

agreement under the provisions of section 6501(c)(4) extending

the period for assessment of a tax". Section 6501(c)(4)

provides:

(4) Extension by agreement.--Where, before the

expiration of the time prescribed in this section for

the assessment of any tax imposed by this title, * * * 

both the Secretary and the taxpayer have consented in

writing to its assessment after such time, the tax may

be assessed at any time prior to the expiration of the

period agreed upon. The period so agreed upon may be

extended by subsequent agreements in writing made

before the expiration of the period previously agreed

upon. [Emphasis added.]

Section 301.6501(c)-1(d), Proced. & Admin. Regs., provides:

(d) Extension by agreement. The time prescribed

by section 6501 for the assessment of any tax (other

than the estate tax imposed by chapter 11 of the Code)

may, prior to the expiration of such time, be extended

for any period of time agreed upon in writing by the

taxpayer and the district director or an assistant

regional commissioner. The extension shall become

effective when the agreement has been executed by both

parties. The period agreed upon may be extended by

subsequent agreements in writing made before the

expiration of the period previously agreed upon. 

[Emphasis added.]

It is apparent from the facts in this case that petitioners

and respondent never executed a written agreement to extend the

period of limitations pursuant to section 6501(c)(4). It follows

that the statutory predicate to our overpayment jurisdiction
- 27 -

under sections 6512(b)(3) and 6511(c) is missing. Based on the

explicit statutory language of sections 6512(b), 6511(c), and

6501(c)(4), we have no jurisdiction to determine overpayments and

order refunds in this case.

There is nothing in section 183(e)(4) that changes the

foregoing analysis. Section 183(e) allows a taxpayer to elect

unilaterally to postpone a determination of whether an activity

was engaged in for profit. Such an election allows additional

time for a taxpayer to qualify for a statutory presumption that

his activity was engaged in for profit. The presumption is

dependent upon facts that may occur during a period of 5 to 7

years and thus may not be ascertainable within section 6501(a)'s

normal 3-year period of limitations for making assessments. Of

course, if the taxpayer can elect to postpone a challenge to his

profit objective to a time that is beyond the normal period of

limitations for making assessments, one would expect Congress to

allow the Commissioner additional time to challenge the tax

aspects of the activity in question. Section 183(e)(4) therefore

provides:

(4) Time for assessing deficiency attributable to

activity.--If a taxpayer makes an election under

paragraph (1) with respect to an activity, the

statutory period for the assessment of any deficiency

attributable to such activity shall not expire before

the expiration of 2 years after the date prescribed by

law (determined without extensions) for filing the

return of tax under chapter 1 for the last taxable year

in the period of 5 taxable years (or 7 taxable years)
- 28 -

3In Bachner v. Commissioner, 81 F.3d 1274 (3d Cir. 1996),

the Court of Appeals for the Third Circuit explained why

expiration of the period of limitations for assessments does not

preclude the Commissioner from defending against a claim for

refund of an overpayment.

(continued...)

to which the election relates. Such deficiency may be

assessed notwithstanding the provisions of any law or

rule of law which would otherwise prevent such an

assessment. [Emphasis added.]

Section 183(e)(4) explicitly provides that with respect to

the taxpayer's activity for which a section 183(e) election is

made, the normal statutory period for the "assessment of any

deficiency" shall not expire until 2 years after the required

filing date of the last return in the 5- or 7-year period

referred to in section 183(e). In the Internal Revenue Code, the

terms "deficiency" and "overpayment" have distinctly different

meanings and separate statutes of limitations. Section 6211

generally defines a deficiency as the excess of the correct

amount of tax over the amount shown on the return. Section 6501

governs the period of limitations for assessment of a deficiency. 

An "overpayment" is the excess of the amount of tax that has been

paid over the amount of tax that is properly due. Bachner v.

Commissioner, 109 T.C. 125, 128-129 (1997), affd. without

published opinion ___ F.3d ___ (3d Cir., Nov. 20, 1998). The

period of limitations for claiming refunds of overpayments is

contained in section 6511.3 Section 183(e)(4) extends the normal
- 29 -

(...continued)

"The language in §6501 refers only to 'limitations on

assessment and collection,' and the operative clause of

§6501(a) directs only that taxes 'be assessed within 3

years after the return was filed.' * * * A deficiency

determination, by which the IRS seeks to establish the

taxpayer's additional tax liability, is patently

different from a refund determination, by which the

taxpayer seeks repayment or credit from the IRS." * * *

[Bachner v. Commissioner, 109 T.C. 125, 130 (1997)

(quoting Bachner v. Commissioner, 81 F.3d at 1277),

affd. without published opinion __ F.3d __ (3d Cir.,

Nov. 20, 1998).]

4In Crawford v. Commissioner, 97 T.C. 302 (1991), we held

that a written agreement to extend the period of limitations that

was executed after the normal 3-year period of limitations, but

before the expiration of the period provided in sec. 183(e),

operated to extend the limitations period. However, we also held

that the written agreement was only effective to the extent that

the period of limitations had been extended by sec. 183(e)(4). 

Therefore, we held that the written agreement to extend the

period of limitations "would be effective only with regard to

assessments arising from deficiencies attributable to the section

183 activity." Id. at 307 (emphasis added).

period of limitations only for "assessment of any deficiency"

related to the activity in question. Crawford v. Commissioner,

97 T.C. 302, 307-308 (1991);4 Estate of Caporella v.

Commissioner, 86 T.C. 285, 296 (1986), affd. 817 F.2d 706 (11th

Cir. 1987). Section 183(e)(4) makes no reference to the

statutory period for claiming refunds of overpayments.

When it enacted section 183(e)(4), Congress was aware of the

difference between the statute of limitations on assessing

deficiencies and the statute of limitations on claiming refunds. 

In order to make a section 183(e) election under the law and
- 30 -

5In 1971, when Congress first recognized the need to enlarge

the period of limitations in order to accommodate a sec. 183(e)

election, Congress envisioned that such an election would be

conditional on a general waiver of the statute of limitations as

to both deficiencies and overpayments for the election year. 

Thus, the Senate committee report states:

The committee is aware that because of the 5- or

7-year periods involved in the case of the presumption,

the statute of limitations may run before any action

could otherwise be taken under the provision added by

the committee. For this reason, the committee believes

that this provision should not generally be applicable

unless the taxpayer executes a waiver of the statute of

limitations for the 5- or 7-year period and for a

reasonable time thereafter. This will allow the

taxpayer time to claim any refunds of tax paid during

this period and also will allow the Internal Revenue

Service to assess any deficiencies. [S. Rept. 92-437

at 74 (1971), 1972-1 C.B. 559, 600.]

regulations existing prior to enactment of section 183(e)(4), the

taxpayer and Commissioner were required to execute a written

agreement extending the period of limitations for assessing

deficiencies and for claiming refunds of overpayments.5 When

section 183(e)(4) was enacted in 1976, the legislative history

explains the reasons for the law as it existed prior to enactment

of section 183(e)(4):

The taxpayer, it was believed, should have time to

claim a refund of tax paid by him during the period and

the Internal Revenue Service should also have time to

assess any deficiency owed by the taxpayer for any year

in the period. [S. Rept. 94-938 (Part I), at 67 (1976),

1976-3 C.B. (Vol. 3) 49, 105.]

Congress was aware that an election under prior law enlarged

the period of limitations for deficiencies and refunds. The
- 31 -

1976 change, which added section 183(e)(4), eliminated the

requirement for a written agreement that generally waived the

statute of limitations and provided that a section 183(e)

election would automatically extend the limitation period, but

only for "the assessment of any deficiency". The purpose of

section 183(e)(4) was to narrow the scope of the extension

required under prior law. See S. Rept. 94-938 (Part I), supra at

67-69, 1976-3 C.B. (Vol. 3) at 105-107. By enacting section

183(e)(4), Congress limited the subject matter of the new

automatic extension to the "assessment of any deficiency"

attributable to the activity that might be subject to section

183. In Estate of Caporella v. Commissioner, supra, we explained

the purpose of section 183(e)(4):

Without question, the intent of Congress in amending

section 183(e) was to automatically extend the period

of limitations on assessment of deficiencies arising

from "hobby losses" when a taxpayer elects a

postponement of a profit determination. [Id. at 296.]

When it enacted section 183(e)(4), Congress made no provision for

extending the period of limitations for claiming a refund of an

overpayment.

Where a statute appears to be clear on its face, we require

unequivocal evidence of legislative purpose before construing the

statute so as to override the plain meaning of the words used

therein. Huntsberry v. Commissioner, 83 T.C. 742, 747-748
- 32 -

(1984); see Pallottini v. Commissioner, 90 T.C. 498, 503 (1988),

and cases cited therein. 

The legislative history of section 183(e)(4) is consistent

with the literal language of sections 183(e)(4), 6512(b),

6511(c), and 6501(c)(4). Senate Report 94-938 explains that

Congress intended that a section 183(e)(4) election would only

extend the period for assessment of a deficiency.

Explanation of provision

The committee amendment revises present law (sec.

183(e)) to provide that if a taxpayer elects to

postpone the determination of his conduct of an

activity under the presumption provisions, the

statutory period for the assessment of any deficiency

specifically attributable to that activity during any

year in the 5 (or 7) year period shall not expire until

at least two years after the due date of the taxpayer's

income tax return for his last taxable year in the

period. This provision is the same as that in the

House bill.

If a taxpayer makes an election under section

183(e) of present law and postpones a determination

whether he engaged in a particular activity for profit,

the making of this election automatically extends the

statute of limitations, but only with regard to

deductions which might be disallowed under section 183. 

The taxpayer would not have to agree to extend the

statute of limitations for any other item on his return

during the 5 (or 7) year period. On the other hand,

even if the taxpayer has petitioned the Tax Court with

regard to an unrelated issue on his return for any year

in the same period, the Service will be able to issue a

second notice of deficiency relating to a section 183

issue as to any taxable year in the period.

In order to assure the Service adequate time to

reexamine the section 183 issue after the suspension

period has ended, this new provision allows the Service

two years after the end of the period in which to
- 33 -

contest the taxpayer's deductions. The making of the

election extends the statute of limitations on any year

in the suspension period to at least two years after

the due date of his return for the last year in the

period. (The due date is to be determined without

regard to extensions of time to file his return for the

last year.)

The taxpayer's limited waiver of the statute of

limitations would include not only the section 183

issue itself but also related deductions, etc., which

depend on adjusted gross income and which might be

affected if the deductions are disallowed in accord

with section 183.

The provision for this limited waiver is not

intended to affect the scope or duration of any general

waivers of the statute of limitations which taxpayers

have signed (or sign) before the date of enactment of

this bill.

Similarly, the bill does not affect general

waivers of the statute of limitations which may be

signed after enactment, since in order to avoid two

controversies relating to overall income tax liability

for the same year, a taxpayer may wish to postpone a

resolution of non-section 183 issues until the

information relating to the section 183 presumption is

available. [S. Rept. 94-938 (Part I), supra at 68-69,

1976-3 C.B. (Vol. 3) at 106-107; fn. refs. omitted;

emphasis added.]

This legislative history explains that the section 183(e)

election "automatically" extends the statutory period for

"assessment of any deficiency" attributable to the activity,

applies "only with regard to deductions which might be

disallowed", "allows the Service" additional time "in which to

contest the taxpayer's deductions" regarding the activity, and

describes the extension pursuant to section 183(e) as "The

taxpayer's limited waiver of the statute of limitations". In
- 34 -

short, the legislative history is perfectly consistent with the

literal words of section 183(e)(4). There is nothing in the

legislative history to indicate that Congress intended that

section 183(e)(4) would extend the period of limitations for

claiming refunds or that it would override the specific

provisions of section 6501(c)(4).

Absent absurd, unreasonable, or futile results, there is "no

more persuasive evidence of the purpose of a statute than the

words by which the legislature undertook to give expression to

its wishes." United States v. American Trucking Associations,

Inc., 310 U.S. 534, 543 (1940). There is nothing that is

unreasonable or absurd about providing an extension that is

limited to permitting the assessment of a deficiency regarding

the section 183 activity in return for allowing a taxpayer to

postpone a determination by the Commissioner regarding the same

activity. There is no compelling policy-based reason why the

statutory period within which the Commissioner may make a

deficiency determination pursuant to section 183(e)(4) must be

coterminous with the period within which a taxpayer may claim

refund of an overpayment. Sections 6501 and 6511 provide

different periods of limitations for making deficiency

determinations and claiming refunds. Thus, it is not infrequent

that this Court acquires deficiency jurisdiction based on a

timely notice of deficiency and at the same time lacks
- 35 -

6Conversely, in Barton v. Commissioner, 97 T.C. 548 (1991),

we held that statutes governing our overpayment jurisdiction gave

us authority to determine whether the taxpayer was liable for

sec. 6621(c) increased interest, whereas in White v.

Commissioner, 95 T.C. 209 (1990), we held that we lacked

deficiency jurisdiction to determine whether a taxpayer was

liable for sec. 6621(c) increased interest. Those different

outcomes were based on the literal differences between the

provisions of the Code controlling our jurisdiction over

overpayments and deficiencies.

overpayment jurisdiction regarding the same year. See

Commissioner v. Lundy, 516 U.S. 235 (1996).6

When it enacted section 183(e)(4), Congress limited the

effect of the section 183(e)(4) extension to assessments

attributable to section 183 activity. However, if the section

183(e)(4) extension is construed to also apply to refund claims,

unintended consequences may arise. In a refund context, it is

possible that matters other than the putative section 183

activity could be placed in issue by the Commissioner, even

though such matters would be time barred for purposes of

assessing a deficiency. For example, in Bachner v. Commissioner,

109 T.C. 125 (1997), the taxpayer filed a petition in this Court

contesting a notice of deficiency and claiming an overpayment of

all taxes withheld from his wages. The assessment of the

deficiency determined by the Commissioner was barred by the

statute of limitations. Nevertheless, the Commissioner argued

that any overpayment was restricted to the excess of the amount
- 36 -

of tax paid through withholding over the correct amount of tax

that was properly due, regardless of the fact that the

Commissioner was time barred from assessing the proper tax. The

taxpayer argued that we could not reduce any overpayment by

considering unassessed tax liabilities which were barred by the

statute of limitations on assessment. We agreed with the

Commissioner, holding:

Under the principles established by the Supreme

Court in Lewis v. Reynolds, 284 U.S. 281 (1932), a

taxpayer's claim for refund must be reduced by the

amount of the correct tax liability for the taxable

year, regardless of the fact that the Commissioner can

no longer assess any deficiency for the taxable year. 

* * * [Bachner v. Commissioner, 109 T.C. at 130.]

A literal reading of the statutes in issue avoids this potential

for raising issues other than those related to the section 183

activity.

Finally it has been suggested that the provisions of section

183(e)(4) in combination with the taxpayer's unilateral election

under section 183(e) constitute an "agreement" between the

taxpayer and the Commissioner within the meaning of section

6501(c)(4). But there is no requirement in section 183(e) that

the taxpayer and the Commissioner agree and execute a written

extension agreement, and no such agreement was executed in this

case. A statutory provision mandating an enlargement of "the

statutory period for the assessment of any deficiency" is not an

"agreement", and there is nothing in the statute or the
- 37 -

legislative history to support such a theory. Indeed, in

Crawford v. Commissioner, 97 T.C. 302 (1991), we explicitly held

that section 183(e)(4) "modifies" the normal 3-year period of

limitations in section 6501(a) with respect to a section 183

activity for which an election was made. As a result, we held

that a written agreement to extend the period of limitations

pursuant to section 6501(c)(4) that was executed after the normal

3-year period, but before expiration of the period as modified by

section 183(e)(4), was effective to extend the period of

limitations for the limited purpose of assessing deficiencies

attributable to the section 183 activity. Our holding that

section 183(e)(4) modified the normal 3-year period of

limitations in which a section 6501(c)(4) agreement can be

executed is clearly inconsistent with any suggestion that a

section 183(e) election is an agreement within the meaning of

section 6501(c)(4). The last sentence of section 6501(c)(4)

explicitly provides that a written agreement to extend the period

of limitations may be extended by "subsequent agreements". In

Crawford v. Commissioner, supra, we clearly did not consider this

provision regarding "subsequent agreements" to be applicable

because we did not view the previous section 183(e) election as

an agreement. A taxpayer's election pursuant to section 183(e)

is simply a unilateral act that has statutory consequences; i.e.,

it allows the taxpayer additional time to qualify for a
- 38 -

presumption regarding certain activity and gives the Commissioner

additional time to assess a deficiency regarding that activity.

Overpayment jurisdiction in this case is dependent upon the

meaning of language in statutes of limitations. Statutes of

limitation provisions are to be strictly construed in favor of

the Government. Zeier v. United States, 80 F.3d 1360, 1365 (9th

Cir. 1996). As the Supreme Court has stated:

we reject any suggestion that we elevate the 'perceived

unfairness to taxpayers' over our duty to strictly

construe in favor of the government a statute of

limitation when the petitioner seeks application of the

statute so as to bar the rights of the government. 

Fehlhaber, 954 F.2d at 658." * * * [Bufferd v.

Commissioner, 506 U.S. 523, 532 (1993) (quoting Green

v. Commissioner, 963 F.2d 783, 789 (5th Cir. 1992),

affg. T.C. Memo. 1991-78).]

And as recently stated by the Supreme Court in construing the

statutory language in sections 6512(b)(3) and 6511:

We are bound by the language of the statute as it

is written, and even if the rule Lundy advocates might

"accor[d] with good policy," we are not at liberty "to

rewrite [the] statute because [we] might deem its

effects susceptible of improvement." Badaracco, supra,

at 398. Applying §6512(b)(3)(B) as Congress drafted

it, we find that the applicable look-back period in

this case is two years, measured from the date of the

mailing of the notice of deficiency. Accordingly, we

find that the Tax Court lacked jurisdiction to award

Lundy a refund of his overwithheld taxes. The judgment

is reversed. [Commissioner v. Lundy, 516 U.S. at 252-

253.]

More recently, in rejecting a taxpayer's attempt to infer an

equitable tolling exception into the limitations provisions of

section 6511, the Supreme Court stated:
- 39 -

Section 6511's detail, its technical language, the

iteration of the limitations in both procedural and

substantive forms, and the explicit listing of

exceptions, taken together, indicate to us that

Congress did not intend courts to read other

unmentioned, open-ended, "equitable" exceptions into

the statute that it wrote. * * * [United States v.

Brockamp, 519 U.S. 347, 352 (1997).] 

We should follow the admonitions of the Supreme Court and 

apply sections 6512(b), 6511(c), 6501(c)(4), and 183(e)(4) in

accordance with their literal terms and hold that we lack

jurisdiction to determine any overpayments in this case.

JACOBS, GERBER, WELLS, WHALEN, COLVIN, HALPERN, THORNTON,

and MARVEL, JJ., agree with this dissent.