Opinion ID: 29928
Heading Depth: 2
Heading Rank: 3

Heading: The Commissioner's Challenge to the Wrong Tax Years

Text: 22 Brookshire urges on appeal, as in the Tax Court, that the Commissioner's acceptance of the amended returns for tax years ending 1993-95, including payment of refunds to Brookshire for its overpayment of taxes under the original returns for those years, amounts to consent by the Commissioner for such a change, even if it is assumed arguendo that, as a matter of law, the reclassification of the gas station properties did constitute a change in accounting method for purposes of IRC § 446(e). Not surprisingly, the Commissioner has taken the position — and forcefully urged it again at oral argument — that acceptance of amended returns, including payment of refunds based on such returns, does not bind the government on indirect issues such as consent; neither does such acceptance constitute waiver, estoppel, or other preclusion of a subsequent challenge by the Commissioner to positions taken by the taxpayer in such returns. 23 Because we need not, we do not decide what preclusive effects, if any, the Commissioner's acceptance of amended returns or actions based on them might produce. Rather, we address the significance of the pervasive time bar in the federal taxation scheme to challenges that the Commissioner would mount in contesting the positions taken by the taxpayer in years that are no longer open, i.e., closed years. When we do so, we conclude that the Commissioner is barred from assessing a deficiency for the challenged tax years of 1996 and 1997 grounded solely on Brookshire's failure to obtain consent pursuant to IRC § 446(e): Brookshire made no change in either of the challenged years; if a change were made at all, it was in a prior year that was closed before the Commissioner assessed a deficiency. 24 The first tax year for which Brookshire reported the depreciation of its gas station properties under the declining balance, 15-year provision of MACRS was its tax year ending in April, 1993. For all subsequent tax years, including those for which the Commissioner would now assess deficiencies, Brookshire consistently took depreciation for its gas station properties the same way it did for 1993. Thus, even if we assume arguendo that there was a change in accounting methods at all and that it was not exempt under the useful-life exception, there still was only one change, and it is the one that was made for Brookshire's tax year ending April, 1993. As depreciation for all the following years was treated identically, there was no change for any subsequent year, specifically none for the tax years ending April, 1996 and 1997. 25 Therefore, for the Commissioner to challenge, as an unauthorized change in method, Brookshire's switch from straight line to declining balance under MACRS, he would have to have done so for 1993, the year for which that putative change was instituted. Yet, as noted, 1993 was closed by the time the Commissioner assessed a deficiency, barring the Commissioner from challenging the alleged change in method implemented for that year — specifically for purposes of this case, the change in depreciation treatment for the gas station properties that was instituted by Brookshire in the amended return for its now-closed year ending April, 1993. 26 As noted, Treas. Reg. § 1.446-1(e)(3)(i) requires the taxpayer to secure the Commissioner's consent during the taxable year in which the taxpayer desires to make the change in method of accounting (emphasis added). We conclude that, inasmuch as (1) the purported change now challenged by the Commissioner for the open years of 1996 and 1997 was not made in the returns for either of those years but instead was made in the return for the tax year ending 1993, and (2) there has been only that one change, the Commissioner is barred from challenging as unauthorized the change made first for purposes of the closed year of 1993. Stated differently, even if we assume that there was such a change and that the Commissioner could not be held to have consented to it by accepting amended returns and paying refunds for the years covered by such returns (i.e., no alternative or implied consent, no waiver, no preclusion), he is nevertheless (1) time barred from asserting lack of consent for the closed tax year ending in 1993, and (2) precluded from challenging the continued use of the putative 1993 change by assessing deficiencies in subsequent, open years, beginning with 1996. This is so because no change — either authorized or unauthorized — was made for any tax year after 1993: The depreciation method employed by Brookshire in the income tax returns for the years 1996 and following had been implemented for tax year 1993 and employed in all subsequent years without further change. Thus, even assuming arguendo that Brookshire Brothers violated IRC § 446(e) when it submitted its amended returns for 1993, 1994, and 1995, once those tax years closed, Brookshire Brothers had a legally unassailable history of accounting treatment that did not thereafter change, either in 1996 or in the original returns for that and subsequent open years. As such, Treas. Reg. § 1.446-1(e)(3)(i) plays no part in the analysis of those open years, because returns were timely prepared and filed without any change in the treatment of depreciation of the gas station properties. As the same treatment was employed consistently and without change in the taxpayer's returns covering of the three preceding (closed) years, there could be no change for 1996 and following. Simply put, we cannot approbate the Commissioner's collateral, back-door attack to get around the time bar for closed years.