Court Opinion

ID: 4486700
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:38.264087+00
Date Added: 2024-06-11T14:53:58.283656
License: Public Domain

Gerber, J., dissenting: I respectfully disagree with the majority’s interpretation of the ratio decidendi of Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989) (Kelley). I am in harmony with the majority’s discussion of section 6501(a), the explanation of this Court’s position on the subject issue, and the scholarly exposition on the Golsen doctrine. However, I respectfully submit that the holding in Kelley should result in our holding for petitioners under the Golsen doctrine. My disagreement with the majority opinion is sourced in the absence of rationale in the Kelley opinion. The Kelley opinion does not contain an explanation as to why the sub-chapter S corporation return was found to be “the return” referenced in section 6501(a). The only reasoning expressed in Kelley which may have been the rationale for deciding that the subchapter S return was the one referenced in section 6501 is a policy consideration. That policy consideration concerns the closing of taxable years to facilitate the disposition of old records. The Kelley court also discusses the inability of a shareholder to defend against the Commissioner’s determination because the corporation retains or controls the records. These policy considerations are no less applicable to trusts, partnerships, and subchapter C corporations than to subchapter S corporations. In addition to anomalous results, the majority’s holding is the least likely interpretation of the holding of the Circuit Court. If the Ninth Circuit were confronted with a case involving an entity other than a sub-chapter S corporation, it would be compelled to either reverse its Kelley holding or hold that the principle applies to all entities which are the source of the tax items. Because our Court is not in a position to “reverse” a Circuit Court’s holding, we should apply the rule of the circuit under our Golsen doctrine. The following considerations are advanced in support of this conclusion: (1) Concerning this Court’s position,1 two Circuit Courts have reversed and two Circuit Courts have affirmed. Although different types of entities were involved in some of the cases, the overall concept has been addressed in a consistent and similar manner. Those Circuit Courts which have affirmed have essentially adopted our position. Fehlhaber v. Commissioner, 954 F.2d 653 (11th Cir. 1992), affg. 94 T.C. 863 (1990) (Court reviewed) (concerning sub-chapter S corporations); Bufferd v. Commissioner, 952 F.2d 675 (2d Cir. 1992), affg. T.C. Memo. 1991-170, cert. granted 505 U.S. __, 112 S. Ct. 2990 (1992) (concerning a sub-chapter S corporation); Siben v. Commissioner, 930 F.2d 1034 (2d Cir. 1991), affg. T.C. Memo. 1990-435 (concerning a partnership). Those Circuit Courts which have reversed have held that the entity from which the tax item is derived controls the period for assessment. Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989), revg. and remanding T.C. Memo. 1986-405 (concerning a subchapter S corporation); Fendell v. Commissioner, 906 F.2d 362 (8th Cir. 1990), revg. and remanding 92 T.C. 708 (1989) (concerning a complex trust). It is most curious that the majority opinion contains no discussion of the holding and rationale in Fendell v. Commissioner, supra. In that case the Court of Appeals for the Eighth Circuit relies upon Kelley2 in support of its holding that a complex trust’s return controlled the period for assessment and not the return of the beneficiary for which the Commissioner had determined a deficiency. The Fendell court stated that Kelley embodied “the principle that in order for the Commissioner to adjust tax liability, he must be able to do so at the source of income, here the Trust, or will be prevented from doing so at the point where the income is distributed, in this case the beneficiary of the Trust.” Fendell v. Commissioner, supra at 364. The Eighth Circuit’s opinion goes on to point out that the “principle finds sound support in the concept of finality, as expressed by the Ninth Circuit in Kelley: ‘The statute of limitations exists, in part, so that after some time persons can be confident that their affairs are closed and they can dispose of old records.’ ” Id. (quoting Kelley v. Commissioner, supra at 758). Obviously, that policy consideration would not be limited to subchapter S corporations. (2) There are a number of parallels between subchapter S corporations (involved in Kelley) and grantor trusts (involved in these cases). Those parallels are a basis for applying the Kelley holding to a case involving a grantor trust. Most of the attributes of a trust, especially a grantor trust, are the same as a subchapter S corporation. Both entities: Are considered pass-through entities; are generally required to file a return; are generally not obligated for tax; and may be taxable under certain circumstances. These parallels also make it likely that the Ninth Circuit would reverse the holding of the majority opinion. It should also be noted that Fendell also involved a trust, albeit a complex trust. The majority has chosen to adopt a narrow and unlikely interpretation of Kelley. Of the several possible interpretations advanced in the majority opinion, the most logical interpretation is the more universal concept that the return referenced in section 6501 is that of the source entity of the tax items. Limiting this concept to subchapter S corporations is not mandated by sections 6037 or 6501(a) and causes anomalous and erratic results which the majority has not addressed.3  To distinguish Kelley from the circumstances here (which concern a trust), the majority places great reliance on the section 6037 distinctions involving subchapter S corporations. That reliance is misplaced because section 6037 does not resolve the question of which “return” is the one referenced in section 6501. Although the Kelley opinion is almost exclusively devoted to a discussion of section 6037, that discussion addresses why a pass-through entity can be subject to the assessment period limitations of section 6501. Section 6037 is used by the Ninth Circuit solely to address the Government’s pass-through entity argument, which we otherwise find irrelevant based upon our understanding of section 6501.4 Section 6037 states that “Any return filed pursuant to this section shall, for purposes of chapter 66 (relating to limitations), be treated as a return filed by the corporation under section 6012.” Section 6037 provides no guidance on the underlying question of which return is being referenced in section 6501(a). The majority cautions that the Golsen doctrine should be followed only where the Circuit Court’s holding is squarely on point. The majority then concludes that Kelley is distinguishable because it involves a subchapter S corporation and is therefore not squarely on point. Like the majority, I do not agree with the opinions of the Eighth and Ninth Circuits. However, like the Eighth Circuit I am unable to read the Ninth Circuit’s opinion as applicable only to subchapter S corporations. The Kelley case, to my way of thinking, is “squarely on point” and has been interpreted too narrowly by the majority. Quoting from the majority’s opinion, “it would be futile and wasteful”, majority op. p. 495, to require petitioners in these cases to proceed to the Court of Appeals for the Ninth Circuit to obtain the result I believe is inevitable.   Our position is that the relevant return for determining whether the period for assessment had expired under sec. 6501(a) is that of a taxpayer against whom respondent has determined a deficiency.    In Fendell v. Commissioner, 906 F.2d 362 (8th Cir. 1990), the court also referenced two other cases which it stated supported the same principle: Boatmen’s First Nat. Bank of Kansas City v. United States, 705 F. Supp. 1407 (W.D. Mo. 1988), and Illinois Masonic Home v. Commissioner, 93 T.C. 145 (1989).    For example, subchapter S shareholders in the Ninth Circuit’s jurisdiction would be subject to the period of limitations of the subchapter S corporation. As decided in Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989), the shareholder may benefit if the corporate tax year is closed at the time of the shareholder’s audit. If, however, no return is filed for the corporation, then the period for assessment of corporate items could remain open indefinitely for the corporation and shareholder. This Court has held that interpretation to be incorrect. However, under the majority’s interpretation of Kelley this result would only occur in the Ninth Circuit and only for shareholders of subchapter S corporations. Any benefits would not be available for other types of shareholders, beneficiaries, or individuals whose tax items are derived from some other form of entity.    The majority opinion correctly states this Court’s position that “the relevant return for determining whether * * * the period for assessment had expired under section 6501(a) ‘is that of petitioner against whom respondent has determined a deficiency’.” Majority op. p. 493 (quoting Fehlhaber v. Commissioner, 94 T.C. 863, 868 (1990) (Court reviewed), affd. 954 F.2d 653 (11th Cir. 1992)). The incidence of tax and pass-through aspects of an entity become relevant only when considering the source-of-income approach adopted by the Courts of Appeals for the Eighth and Ninth Circuits. To the extent that courts (including this Court) have relied upon sec. 6037 or considered whether an entity is a pass-through in deciding this issue, it has been addressed from the wrong perspective. Under the interpretation of this Court and two affirming Circuit Courts, it is unnecessary to consider whether the source entity does or does not file a return or whether that return commences the running of a period for assessment of tax against that entity.