Case Name: Robert E. Wadlow and Connie V. Wadlow, Petitioners v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1999-05-11
Citations: 112 T.C. 247
Docket Number: Docket No. 21017-96
Parties: Robert E. Wadlow and Connie V. Wadlow, Petitioners v. Commissioner of Internal Revenue, Respondent
Judges: Cohen, Chabot, Parr, Beghe, Chiechi, Foley, Vasquez, and Gale, JJ., agree with this majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 112
Pages: 247–270

Head Matter:
Robert E. Wadlow and Connie V. Wadlow, Petitioners v. Commissioner of Internal Revenue, Respondent
Docket No. 21017-96.
Filed May 11, 1999.
A. Jerry Busby, for petitioners.
John W. Duncan, for respondent.

Opinion:
OPINION
NlMS, Judge:
Petitioners have made overpayments of their 1991 and 1992 Federal income taxes in the following amounts:
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 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 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 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, sec. 6512(b)(3)(A), and no claims for refund were filed before the mailing of the respective notices of deficiency, sec. 6512(b)(3)(C), only section 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)-l(d), Proced. & Admin. Regs., that both respondent and the taxpayer consent in writing to extend the period of assessment.
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.'
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.
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 mod ify 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 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 68, 1976-3 C.B. (Vol. 3) at 106 (emphasis added). (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 dis-allowance 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 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.