BUFFERD v. COMMISSIONER OF INTERNAL REVENUE
Legal provision: Internal Revenue Code
Argument of Stuart Jay Filler
Chief Justice Rehnquist: We'll hear argument next in number 91-7804, Sheldon Bufferd v. the Commissioner of Internal Revenue.
Mr. Filler, you may proceed whenever you're ready.
Mr. Filler: Mr. Chief Justice, and may it please the Court:
This is a statute of limitations case.
Petitioner recognizes that this Court in the Badaracco case decided that a statute of limitations should be strictly construed in favor of the Government.
In this case, however, this Court must add phrases to an otherwise clear and unambiguous set of statutory provisions in order to affirm the opinion of the Second Circuit below.
Petitioner believes that this Court did not intend in their prescription in Badaracco to mean that every time there is a statute of limitation issue, the Government wins.
The question presented is whether the three sections of the Internal Revenue Code provide a statute of limitations which bars adjustments to a shareholder's income tax return with respect to items appearing on an S corporation's income tax return.
The three provisions are section 6501(a), section 6037, and section 6012 of the Internal Revenue Code of 1954, as amended and in effect for 1979, the taxable year at issue in this case.
All three provisions are on page 1 and 2 of petitioner's brief on the merits, if the Court wishes to refer to them.
It is important to note that Congress in 1958 created an entirely new entity for Federal tax purposes.
This entity was separate and distinct from its shareholders.
The IRS, not Congress, created a form 1120S which is separate and distinct from the form 1040 filed by the shareholders.
Congress... the IRS, not Congress, also created a form K-1 and required the corporation to provide the shareholders annually with a form K-1 which reported the bottom line results of the S corporation for the taxable year, and the shareholder was required to attach this form K-1 to the shareholder's form 1040 and report on the shareholder's return the bottom line results of the S corporation for the taxable year.
While examining the shareholder's return, an IRS employee must retrieve the form 1120S, must examine the form 1120S, and must adjust the form 1120S.
Pursuant to section 6501(a) of the code, these adjustments must be made within the 3-year period of limitations.
Only then can the IRS adjust the return of the shareholder with respect to the items appearing on the S corporation return.
If additional time is required for an adjustment to be made, the IRS employee may obtain an extension of the period of limitations for either the S corporation return, the shareholder's return, or both returns.
In fact, that is exactly what the Internal Revenue Service did in the case at bar in 1980, the taxable year following the year in dispute in this case, and the 1980 taxable year is not before this Court.
Unknown Speaker: Mr. Filler, can I ask you a question?
What if this were a subchapter C corporation?
What is the normal treatment of... I report something on my personal income tax return which turns out to be wrong because the subchapter C corporation gave me information, which it also reported on its return, that turns out to be wrong?
Mr. Filler: Okay.
Unknown Speaker: Now, what if it's more than 3 years ago that the subchapter C corporation did that?
Mr. Filler: I think the Government would not dispute, frankly, Your Honor, that if this were a C corporation and an adjustment of the C corporation were necessary in order to adjust a shareholder's return... and I provided such an example in my brief with respect to a dividend, okay?
If it was necessary to adjust a C corporation's return, that they would not and could not adjust a C corporation's shareholder's return with respect to the item after the C corporation's period of limitations has expired.
Unknown Speaker: Well, you cited--
--Why is that?
Mr. Filler: Why is that?
Because section 6012(a)(2) of the code provides that a C corporation, or a corporation subject to taxation... and by the way, provided that much prior to 1958, when the S corporation was created and carved out--
Unknown Speaker: Okay, now, but you're trying to answer my question, I take it.
Mr. Filler: --Yes, I am.
Unknown Speaker: Why don't you continue--
Mr. Filler: And section 6501(a) of the code provides that a 3-year period of limitations from that return... from the filing of that return is applicable to the C corporation's return.
Unknown Speaker: --Well, but why should the running of the statute of limitations on the C corporation's return prevent an adjustment in the taxpayer's return when the taxpayer... when an extension was obtained with respect to him?
Why is the Government bound with respect to the individual taxpayer about some item on the C corporation's return?
Mr. Filler: Congress created two separate and distinct entities.
In the case of a C corporation, when originally created, it was what we call a separate and distinct taxable entity.
It reports its items of income and deductions and pays a tax at the C corporation level.
Distributions to the shareholders are only taxed to the shareholders if they can be treated as a dividend within the meaning of the Internal Revenue Code.
Adjustments at the C corporation level must be made within the C corporation's separate entity return within the period of limitations or section 6012(a) has no meaning.
Unknown Speaker: You've made that statement, but I simply don't... I must say I don't follow your reasoning.
I don't understand from what you've said what statutory provision or what case it is that you rely on to say that the Government is bound in adjusting an individual taxpayer's return, which it has extended the time for, by the figures in a C return, which it has not extended the time for.
Mr. Filler: I'm sorry I haven't made it clear, Your Honor, but let me try one more time, Mr. Chief Justice.
Unknown Speaker: Well, maybe you've made it as clear as it can be.
Mr. Filler: Section 6012(a)(2) of the code requires a corporation subject to taxation to file a return.
Unknown Speaker: I know that.
Mr. Filler: Okay.
And section 6501(a) says, okay, that the period of limitations with respect to that return is 3 years from the date of filing that return, that adjustments to assess a tax within that period, whether the tax is on the C corporation or the C corporation's shareholders, must be made within the 3-year period applicable to the C corporation return.
And frankly, Your Honor--
Unknown Speaker: 6501(a)(2) says... 610--
Mr. Filler: --6501(a).
Unknown Speaker: --6501 says all of what you have just said?
Mr. Filler: I believe it does, sir, and I believe it says it clearly.
Unknown Speaker: I had the same problem as the Chief Justice did.
In your brief at page 12, you give this example, but you cite--
Mr. Filler: The petitioner's brief on page 12?
Unknown Speaker: --Yes.
Mr. Filler: With the C corporation.
Unknown Speaker: Yes, but you cite absolutely no authority, no text, no statute, no regulations, no case.
It's just an assertion.
Now, the Government doesn't frontally deny what you say.
It may do so at oral argument, but it just seems to me that's the whole issue in the case.
Suppose that a corporation makes a distribution.
It treats it as not out of earnings and profits.
The corporation's tax year closes, and it's then found that there was... it is very clear that this was a distribution made out of earnings and profits.
It is not clear to me why the shareholder can't be charged with a dividend.
Mr. Filler: I think I know the answer, Your Honor.
In fact, in order to have a case for me to cite, the Government would have had to attempted at least to assess such a tax against the shareholder after the C corporation's return was filed.
In all my research, Your Honor, I was unable to determine... or find such a case, and I provided that example--
Unknown Speaker: But that indicates that that's the very question before us to be decided.
You state as a premise what is really the question in this case.
Mr. Filler: --Well, I think, Your Honor, that there is authority in the terms of corporate tax textbooks and other materials which are in use as acceptor of other authorities that have always I think interpreted the C corporation's period of limitations under 6501(a) to be the filing of the return, the date of the filing of the return under 6501(a), and that in order to adjust the C corporation's return with respect to tax imposed either on the C corporation... it's a separate taxable entity... or the shareholder, it must be done within the period of limitations of the C corporation--
Unknown Speaker: Mr. Filler--
Mr. Filler: --which is 3 years from date of filing.
Unknown Speaker: --6501(a) to me does not say what you said it said.
It does not say that the Government is bound not to examine into the taxpayer's return on matters that are covered in the C return just because the C return period is expired.
Mr. Filler: Well, it says except as otherwise provided in this section.
I'll go to reading it just for a moment.
The amount of any tax imposed by this title shall be assessed within 3 years--
Unknown Speaker: Okay, now, stop there.
Mr. Filler: --Okay.
Unknown Speaker: Is that the critical language?
Is that the critical--
Mr. Filler: The critical language is 3 years after the return was filed.
What the Government wishes--
Unknown Speaker: --Is that the critical language right there?
Mr. Filler: --Yes.
Unknown Speaker: They are assessing this under an extension of the 3-year period on the individual.
Mr. Filler: Yes, Your Honor, but they are two separate and distinct entities, and I don't think you can fail to recognize that.
They are two separate and distinct taxable entities in the case of a C corporation.
Unknown Speaker: I know, but you are simply stating, so far as I know, without pointing to any statutory authority that the Government cannot reexamine anything that comes out of a C return on an individual's return if the time for examining the C return hasn't been extended.
Now, I simply don't see in your reference to 6501(a) anything that deals with that.
Maybe you derived some implication from it, but it certainly isn't express.
Mr. Filler: Well, I can only say, Your Honor, that in thorough research, that there is nothing from anyone or any source or any material written to believe that Congress was not clear.
I mean, of course, 6501(a) and C corporations were created back at the... almost at the beginning of the history of the income tax, back in the late teens... 1914, 1915 was the whole concept developed... that this C corporation was a separate taxable entity.
The S corporation that we are confronted with today is an entity created only in 1958 where, in effect, you might say part of the heart of the C corporation was pulled out and part of the provisions of the... for the S corporation were enacted, okay, to change the implications in some ways for a C corporation.
But many of the similarities of C corporate tax treatment are the same for S corporations as they are for C corporations.
Unknown Speaker: We'll resume there at 1:00.
Chief Justice Rehnquist: Mr. Filler, you may continue.
Mr. Filler: Mr. Chief Justice, and may it please the Court:
Prior to the lunch break, we were discussing the critical language of section 6501(a) which provides that the period of limitation for assessment is 3 years from the date the return... the return... was filed.
The real issue then before the Court is identifying what Congress meant by the term, the return, in section 6501(a).
Petitioner's position is that the return can only be identified in the case of an S corporation with reference to the second sentence of section 6037 of the code which provides that any return filed pursuant to this section, which must mean every 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.
There is nothing in the language of section 6501(a) that refers to the shareholder's income tax return as the relevant return for purposes of beginning the running of the period of limitations.
Only by adding the phrase... only by adding the phrase... against whom the tax is imposed to the language of section 6501(a) may this Court reach the conclusion of the Second Circuit and affirm the opinion of the Second Circuit that it's the shareholder's return that's referred to in section 6501(a).
They would have to add the phrase so that section 6501(a) read as follows: the amount of any tax imposed by this title shall be assessed within 3 years after the return against whom the tax is imposed was filed.
That language is not present in section 6501(a).
Unknown Speaker: It seems to me it's quite natural to read it in by implication, though.
Mr. Filler: I think, Your Honor, that that ignores the fact that there are two separate and distinct taxable entities.
Under section 65... 6012, rather, (a)(1) of the code, the shareholder is a separate taxable entity and must file a return that has the period of limitations under 6501(a).
Section 6012(a)(2) creates a separate return for a separate taxable entity, the corporation, the C corporation, which must also file a return, or by reference to the second sentence of section 6012, the S corporation return is treated as a corporate return under section 6012 for purposes of the period of limitation.
Unknown Speaker: Can you help me out on one thing?
Why is the taxpayer's return treated as a return filed, quote, pursuant to this section under 6037?
Mr. Filler: I'm sorry now.
It's the corporate return, the S corporation return, that's treated as a return.
Unknown Speaker: That's what I thought.
Mr. Filler: That's what I said.
Unknown Speaker: So, it's only the S corporation's return that is referred to in the second sentence, isn't it?
Mr. Filler: That's correct.
It is the S corporation's return that is treated as a corporate return filed pursuant to section 6012 that is the return in the language of 6501(a) that begins the running of the period of limitations from the date that return, that S corporation return, was filed.
Unknown Speaker: Mr. Filler, you say that you don't want to add in that phrase in 6501(a), but it seems to me it's necessary to read in some phrase, because it says within 3 years after the return was filed.
What... I mean, the question comes immediately to mind, what return?
It doesn't... it does not say within 3 years after all relevant returns were filed, but after the return was filed.
Mr. Filler: Nor does it say, as the Second Circuit held, Your Honor, that the relevant return is the return against whom the tax is imposed.
But reading the language in the way the Court has implied and the Second Circuit held would require the Commissioner to make an annual examination of all the financial transactions on a return that's filed, and if the Commissioner could adjust the returns such that a tax could be imposed against that return, then the Second Circuit and respondent argue that that return has a period of limitations.
If there is no tax that could be imposed against the S corporation return, the Second Circuit held and the respondent would argue that there is no period of limitations.
There's nothing in the language of section 6037, 6012, or 6501(a) that indicates that Congress intended, okay, that this one return have two separate and distinct period of limitations: one when a tax was assessed--
Unknown Speaker: Well, but I--
Mr. Filler: --and one when the tax was not assessed--
Unknown Speaker: --Can I interrupt you?
May I interrupt you, Mr. Filler?
I don't really follow your argument.
There's nothing that says about two different periods of limitations, but it's one or the other each time.
In the S corporation, there's no tax assessed against it, at least during the time involved here.
So, you don't need a period of limitations.
Mr. Filler: --Well, then if... reading it that way, Your Honor, you've ignored the... or read out of the code, in effect, repealed effectively, I think the second sentence of section 6037 which says, any return filed pursuant to this section, which means every S corporation return, whether it's subject to tax or whether it's not subject--
Unknown Speaker: That's any return filed pursuant to 6037.
Mr. Filler: --Which, if you read the first sentence of... is the return required to be filed annually by every S corporation.
Unknown Speaker: All right.
Mr. Filler: Okay.
So, the first sentence says they must file a return, and then Congress added a second sentence that says any return filed pursuant to this section, okay, has a period of limitations for purposes of section 6501(a) as a corporation.
Unknown Speaker: Where do you get--
Mr. Filler: The return is treated as a corporate return.
Unknown Speaker: --Where do you get the cross reference to 6501(a)?
Mr. Filler: Because section 6501(a) provides the period of limitations for all returns required to be filed whether... and all returns that--
Unknown Speaker: Just let me go one step at a--
Mr. Filler: --are required to be filed are under section--
Unknown Speaker: --May I go one step at a time with you?
Mr. Filler: --I apologize, Your Honor.
Unknown Speaker: Where do you get the reference to 6501(a) out of 6037?
Mr. Filler: Because section 6037 says it shall be a corporate return... it shall be treated as a corporate return under section 6012, and when you go to section 6012, and you have a corporate return filed, the period of limitations for the filing of that return and all returns filed under 6012 is section 6501(a).
So, section 6037 puts us in 6012, which puts us in 6501 because there's no other way to create a period of limitations for that--
Unknown Speaker: You mean it's implicit, it's not explicit.
Mr. Filler: --It has to be implicit, Your Honor, because there's no way to ever create a limitation period for that return even if it was capable of a tax being assessed.
If you don't get to 6012, okay, from--
Unknown Speaker: What purpose does the limitations period serve with respect to a return for which no tax is... pursuant to which no tax is paid?
Mr. Filler: --The purpose of the period of limitations, as is true of all periods of limitations, is to create a deadline, a deadline upon which the two parties to, in this case, a tax transaction, but any period of limitations... in which each party must act in order to bring finality to the process, in this case the tax return or the taxable year in question in a case.
And the subchapter S corporation is a separate entity, distinct from its shareholders, okay, and has a period of... Congress provided a period of limitations.
The Second Circuit errs by attempting to analogize the return of an S corporation to that of a partnership rather than a C corporation.
Section 6031 of the code provides that a partnership must file an annual return similar to that filed under the first sentence of section 6037 for an S corporation.
However, Congress did not add a second sentence to section 6031 that it did to section 6037, and Congress specifically provided in that second sentence that every return filed by a subchapter S corporation has a period of limitations.
We cannot ignore the clear and unambiguous language of that section.
Unknown Speaker: But that language, Mr. Filler, no one is trying to impose a tax on the subchapter corporation here.
Mr. Filler: I understand that no one is trying to impose a tax, but they must make... let me see if I can state it this way.
In order to impose the tax on the shareholder, they must first make adjustments to the S corporation return.
Only by determining--
Unknown Speaker: Why--
Mr. Filler: --that an error was made on the S corporation return and adjusting that and therefore reaching a different bottom line result for the operations of the S corporation as reported on its form may they then adjust the shareholder's return.
Unknown Speaker: --Now, just stop a minute, Mr. Filler, and let me ask.
It seems to me you're making another assumption here that I don't know of any authority for... maybe you know of some... that in order to assess the taxpayer, they have to make adjustments on the subchapter S return even though they're not trying to impose any tax on the subchapter S corporation.
Why do they have to do anything with the subchapter S return?
Mr. Filler: Well, when Congress created, Your Honor, the second sentence of section 6037 in 1958, there was no income tax imposed on an S corporation, no tax at all.
And yet, they added the second sentence of section 6037, which says that a return filed pursuant to that section, which can only... cannot include, rather, a return upon which a tax was assessed.
In 1958 when they... and your interpretation or your attempted interpretation of that sentence effectively repeals the sentence from 1958 until 1966 when for the first time Congress added a tax directly on an S corporation.
If there are no further questions, I wish to reserve--
Unknown Speaker: I have just one question.
Mr. Filler: --Yes, sir, Justice Kennedy.
Unknown Speaker: Assume that X owes Y on a promissory note.
Mr. Filler: Okay.
Unknown Speaker: And X pays $1,000.
Let's say it's a $100,000 promissory note.
And Y, the recipient, says this is principal, I'm not going to report any interest, and Y's tax year has closed.
X leaves his year open.
Can the Government go back and say that this is not interest, that it's just principal?
Mr. Filler: I'm sorry, Your Honor.
In following that... was X a corporation?
Unknown Speaker: No.
Mr. Filler: I'm sorry.
Unknown Speaker: Just two individuals.
Mr. Filler: Oh, two individuals.
Unknown Speaker: Yes.
Mr. Filler: One... X loans Y money and Y pays... and X pays Y interest?
Unknown Speaker: There's nothing that says they have to be treated consistently, is there?
Mr. Filler: Is there anything that says that the debtor and the creditor in a case must be treated consistently?
Unknown Speaker: Right, assuming one year... one person's year is closed so the IRS can't do anything about it.
Mr. Filler: The... yes, I believe that that is correct, that should the payee, shall we say, of the interest not have reported it, but the payor deducted it, okay, and the period of limitations lapsed on the payee, the IRS could not come in and add that to the payee's income.
If that's your question.
Unknown Speaker: Yes.
Mr. Filler: I'm sorry.
I hope I answered it.
Unknown Speaker: In other words, if there are two parties to a transaction, the tax year for one can close and the other remain open, and the IRS is not foreclosed from adjusting one... the open taxpayer's return, is it?
Mr. Filler: I know, but there's no interrelationship in the very real sense of a shareholder and owner of a corporation between two individuals who simply loan and borrow money, I don't think, Your Honor.
I'm not sure the analogy flows.
The Congress specifically created under section 6037 a requirement that this whole new entity it created in 1958, the S corporation, have a period of limitations separate and distinct from that of its shareholders, and that the entities were separate and distinct for purposes of income taxation.
So, I'm not sure... at least having the question first thrown at me at this moment, I'm not sure that there's... the analogy follows.
I think that's the best way I can respond.
Unknown Speaker: Professor Filler, if you should prevail here, I suppose all the Government will do in the future is to get an 872 out of the corporations.
Mr. Filler: Yes, sir, and in fact, they've done it.
They've done it on many occasions.
In our case, in the very case at bar, in 1980, the tax year following the year at issue, the Service did obtain an extension for the S corporation's return, were able then to make adjustments to the return, were able to adjust the taxpayer's return.
In order to make the adjustments for an S... I mean, for a tax shareholder, they've got to have the S corporation return right in front of them.
They can't make it just by guessing.
They examine the books and records.
At that time, if they're running out of time, they can obtain such an extension.
Unknown Speaker: Well, so all you're winning here is a procedural thing except for the present case, of course.
But the Government can make up for it just by changing its procedures.
Mr. Filler: And I think it's clear, Your Honor, that that's what Congress intended the Government to do in 1958 when it created the second sentence of section 6037, and any other holding ignores that second sentence to the extent that I really and truly believe it repeals that second sentence of section 6037.
If I may reserve--
Unknown Speaker: Very well, Mr. Filler.
Mr. Filler: --I appreciate the opportunity.
Unknown Speaker: Mr. Jones.
Argument of Kent L. Jones
Mr. Jones: Mr. Chief Justice, and may it please the Court:
Under section 6501, the Service has 3 years from the filing of any return to make an assessment of the taxes imposed on that return.
To understand the meaning of this statute, you need to know what an assessment is.
An assessment is merely an administrative record filed in the office of the Secretary of the Treasury.
Based upon the Service's review or audit of the taxpayer's taxable income, the assessment records, as this statute states, the amount of taxes imposed on that income.
Nothing in section 6501 suggests that by limiting the time for recording an assessment, the statute in any manner limits the amount of taxes imposed on the taxable income of the taxpayer by the other provisions of the code.
I'd like to give you an example.
Assume that a corporation files a return claiming a deduction of $10,000 for compensation that it paid to a certain employee.
If the corporate return is in error and the employee actually received $50,000 of compensation, nothing in section 6501 would prohibit the Service from making an adjustment to the taxpayer's return to include that $50,000 as his taxable income.
This compensation is taxable income under the code and a tax is imposed on that income under the code even if the corporate return failed accurately to report it.
As the courts held in the Green, Fehlhaber, Bufford, Durovic, and Leonhart cases, the fact that the return of some other entity or person contains an error in reporting the same transaction does not excuse the taxpayer of his duty to properly state his own income on his own return.
Unknown Speaker: In your hypothetical, if the corporation had been audited and its... excuse me... its return closed and its year closed and then the employee was assessed the extra $40,000, could the corporation on its... now, wait.
Could the corporation reopen its year and claim a deduction?
Mr. Jones: Well, I understood your question to premise that the corporate return had... the period had closed for that year.
Unknown Speaker: Yes.
Mr. Jones: And the answer to your question is that if that corporation's return period has closed, it cannot be reopened.
We mention in our brief certain mitigation provisions that could apply when... in other circumstances, but those wouldn't apply here.
This Court reached a similar conclusion in the Bull v. United States case which held that the Commissioner properly could assess an income tax on an item that had been previously, but erroneously reported as an estate tax item on a different return that was no longer open for correction.
The point... the general point is that under 6501 each return starts a period of limitations and the Service is responsible for determining the taxable income and the amount of tax to be imposed on that return regardless of whether the same information is reported incorrectly somewhere else.
Unknown Speaker: Mr. Jones, would you clarify for me what the rule would be with respect to a so-called subchapter C, or an ordinary corporation?
Mr. Jones: The rule that we are describing is identical for subchapter C, subchapter S partnerships.
Whatever other return has been filed, the information on that return does not prevent the commissioner on a timely basis with respect to the individual who received that income from adjusting... making adjustments on the individual's return.
Unknown Speaker: So, you disagree with the petitioner's reading of the statute and his description of what the rule would be for a different type of corporation.
Mr. Jones: Yes.
We disagree with his reading of 6501.
We also disagree with his reading of 6037 which deals only with subchapter S's.
Unknown Speaker: And do you have any authority for the answer that you've given to Justice O'Connor?
Mr. Jones: Well, the... this Court's opinion in the Munter case is the closest direct authority on that question, although we think that the proposition is answered by all of the cases that I've already cited, which hold that an error on some other return doesn't prevent an adjustment on the taxpayer's return.
The Munter case held that the Service could recharacterize income as dividend income even though it had been claimed to be a return of capital by the taxpayer.
The Service was allowed to adjust the shareholder's return many years after the events had occurred that were the basis of this characterization issue.
The events that were the basis of the characterization issue was how the corporation had reported its earnings and profits over the prior decade.
So, the fact that the corporation in the Munter case had taken a certain position with respect to its earnings and profits and... did not prevent the Commissioner from restating... from adjusting the shareholder's return properly to state the shareholder's income.
Unknown Speaker: The Commissioner gets an extension of time from the corporation and makes an adjustment in the... and finds that there was... should have been more... that the return was in error in terms of how much dividends were paid out?
Mr. Jones: Yes, sir.
Unknown Speaker: You can't adjust the shareholder's return unless you've got an extension from him too.
Mr. Jones: Those are utterly independent issues.
Unknown Speaker: Yes.
Mr. Jones: You need an extension if you want... from the corporation if you want to adjust its return.
You need an extension from the individual if you want to adjust his return.
Unknown Speaker: No matter what you do to the corporation's return.
Mr. Jones: That's correct.
Petitioner's argument really misses the point in asserting that section 6501 prevents adjustments to the return of a subchapter S corporation after the time for assessing taxes against the subchapter S corporation has expired.
When the Service adjusts a taxpayer's return and assesses tax against the shareholder's income, it is not adjusting the subchapter S corporation return.
The adjustments and the assessment are made on the individual's return, not on the corporation's.
The income involved is the individual's income, not the corporation's, and the tax is imposed on the individual, not on the corporation.
The Second Circuit summarized this issue in the Siben case when they said the return that starts the running of the limitations period is that of the taxpayer whose liability is being assessed and not that of a third person who also reports the transaction.
The subchapter S return is obviously not the return upon which tax can be assessed upon the individual shareholder.
The corporate return doesn't contain any of the individualized information or any of the information about other sources of income that are required to assess a tax against the individual.
In the Automobile Club case in this Court, the Court held that an information return that lacks the data necessary for the calculation and assessment of deficiencies is not a tax return within the contemplation of section 6501.
In this respect, the subchapter S return is not functionally different from a W-2 return filed by an employer reporting wages under section 6041 of the code or by... or from a form 1099 filed by a bank reporting interest income under section 6049 of the code.
In all of these situations, the information that has been provided to the Service is relevant to the calculation of the individual's taxes, but none is sufficient to determine the taxpayer's taxable income.
They, therefore, cannot constitute the return that commences the period for assessment of taxes against the individual.
Turning to section 6037, which deals specifically with S corporations, under that statute the return of the S corporation serves two separate functions.
It serves as an information return providing data relevant to the calculation of the shareholder's taxes.
Indeed, section 6037 is contained within chapter 61, part 3 of the Internal Revenue Code, which is entitled, Information Returns.
The return of the subchapter S corporation also serves as the tax return of the S corporation in the narrow circumstances when that corporation is subject to tax.
As Congress explained in enacting section 6037 in 1958, when the S corporation is itself subject to tax, the return of the S corporation commences the period of limitations for assessment of tax against the shareholders.
Petitioner's suggestion that our interpretation of section 6037, which is simply Congress' interpretation of that statute, somehow renders the statute meaningless simply ignores the legislative history.
The legislative history says when the statute works and what it does.
Unknown Speaker: Mr. Jones, what about the private taxpayer, the individual taxpayer, who is relying on the information return?
Do I understand the situation to be thus, that if there is a mistake in the information return that is against the Government's interest, the Government can ignore that mistake and make believe it never happened and go against the individual as though the S corporation had filed properly?
Mr. Jones: I believe that's correct.
Unknown Speaker: Now, what if the mistake is in the other direction?
What if there is a mistake that's against the Government's interest?
Mr. Jones: In that situation, the shareholder, if he overreported his income, would be entitled to seek, if appropriate, a refund.
Unknown Speaker: Can he do that?
I mean, he does not have to get a new information return somehow filed by the corporation?
He can challenge the accuracy of the corporation's return even after it has been closed?
Mr. Jones: Certainly.
The information return is just that.
It's not binding.
It's not a finding.
It's not a determination.
Unknown Speaker: Okay.
Mr. Jones: It's information.
Unknown Speaker: I assume from your position that if the shareholder knows or should have known of an error in the sub S return that you could assess a negligence penalty against him for filing it?
Mr. Jones: Yes.
In fact, one of the cases that we have cited to you involves that situation.
I think it was Leonhart, but it might have been Durovic.
But in those... yes, if the subchapter S return contains an erroneous information and if the shareholder has a... if there is a basis for ascribing knowledge to the shareholder of that error, that would be a basis for a penalty assessment against the individual.
In enacting the unified accounting procedures for large partnerships and large S corporations in 1982 in the statute known as TEFRA, Congress agreed with the case law in stating that under present law the filing of... by the corporation of its return does not--
Unknown Speaker: Mr. Jones, it would help me if you could lift your voice a little bit and--
Mr. Jones: --I'm sorry.
Unknown Speaker: --don't speak quite so softly.
Mr. Jones: How far back should I go?
I'll start the whole sentence.
In enacting the unified accounting procedures for large S corporations and large partnerships in 1982 in the statute known as TEFRA, Congress agreed with the case law in stating that under present law the filing by the corporation of its return does not affect the statute of limitations for the individual shareholders.
In a limited category of cases for years after 1982, Congress changed that result.
In the ordinary case, however, involving 95 percent of subchapter S corporations that have five or fewer shareholders, Congress retained the preexisting provisions of section 6037.
Thus, the prior law that Congress described in enacting TEFRA is still the current law for most S corporations.
And as petitioner recognizes, Congress' description of section 37 is thus authoritative for years after 1982.
Petitioner conceded that in footnote 47 of their brief.
Giving section 6037 the same meaning before 1982, as it has after 1982, is appropriate, as this Court said in the West Virginia University Hospital case, to make sense rather than nonsense out of the corpus juris.
Moreover, the interpretation that Congress provided of section 6037, both in 1958 and in 1982, is a reasonable and logical one.
It was made by Congress in performance of its legislative function in enacting intertwining amendments to a complex statutory scheme, and under this Court's decisions in Seatrain Shipbuilding and Red Lion Broadcasting, Congress' views should be given great weight.
I should point out that petitioner's contrary interpretation of section 6037 would mean that Congress enacted a nullity when it enacted TEFRA and applied it to the unified statute of limitations provisions for large S corporations after 1982 because, under petitioner's view, the same unified statute of limitations would be reached for all large and small S corporations both before and 1982 if section 6037 had the meaning for which they contend.
Petitioner didn't have time to mention it, but the case that's on his side in this area is the Kelley case decided by the Ninth Circuit.
And what the Kelley decision held was that it was more fair if the statute of limitations for the shareholder and for the S corporation were coterminus.
The court reasoned that the shareholder may have difficulty obtaining necessary books and records after the period of limitations has expired for assessing taxes against the corporation.
The courts of appeals in the Green, Fehlhaber, and in this case all explain why that concern has no weight.
Taxpayers often need information from third parties.
There's nothing exceptional about that, and indeed, in the context of S corporations, they have even a greater ability to obtain the information that they desire because by definition there are few shareholders, each of whom is likely to have a greater input in the operations of the corporation.
In fact, in this case, Mr. Bufferd is the secretary and treasurer of Compo.
He quite obviously had the ability to obtain and retain any records that he wanted.
And just to gild the lily, the records in this case have no meaning because petitioner conceded from the outset that the deficiencies that the Service found in their return were correct on the merits.
He hasn't contended that the books and records would somehow change that.
In any event, whatever force the concerns expressed in the Kelley case might be, they provide no basis for ignoring the plainly limited language of section 6501 or the clear history of 6037 and its clear provisions.
By limiting the time for assessing taxes, section 6501 does not limit the amount of taxes to be assessed on a proper accounting of the taxpayer's income.
I would only like to make one other point in response to a question by Justice Blackmun.
Justice Blackmun brought up the fact that it is possible, it is conceivable for the Service to obtain extensions from S corporations and thereby avoid this issue.
While it may be possible and conceivable, the Commissioner has no leverage over S corporations to require them to cooperate and provide an extension for the simple reason that the S corporation has no liability for taxes.
In the normal case, it is possible to obtain... it is possible that a taxpayer might have an interest in granting an extension because if he doesn't, the Commissioner will then have to assess the highest supportable level of taxes, but there is no such reason or ability to coerce or obtain an agreement from an S corporation because it has no exposure to taxes and the Commissioner has no basis to require it to give an extension.
I... since time permits, I'll just take one other second to talk about the suggestion that the legislative history of section 6037 only contains one example and that our position relies upon only that example.
What the history of section 6037 says is that the return of the corporation will constitute the return of the... rather, the return of the corporation will commence the statute running against the corporation when it is not entitled to subchapter S treatment.
There's more than one reason why a corporation would not be entitled to subchapter S treatment, but in addition, a subchapter S that is entitled not to pay a tax can have that... even in 1958, can have that entitlement terminated if he receives... if that corporation receives too much income from what are called passive sources or from foreign sources.
And those provisions are also set out in footnote 17 of petitioner's brief.
Thank you very much.
Unknown Speaker: Thank you, Mr. Jones.
Mr. Filler, you have 1 minute remaining.
Rebuttal of Stuart Jay Filler
Mr. Filler: I can only go back to the beginning, and that is that the second sentence of section 6037 provides any return filed by an S corporation shall be treated as a return of a corporation pursuant to section 6012.
The Second Circuit makes a major... and the respondent... major chronological error by attempting to interpret section 6037 in 1958 as a provision that only applies to a corporation when it is subject to tax.
In 1958, the subchapter S corporation was not subject to tax.
It was not until 1966, 8 years afterwards, that a tax was first imposed on an S corporation.
Unknown Speaker: No, but Mr. Filler, he makes the point that it might not have thought it was subject to tax, but it didn't qualify as S corporation status, and therefore you need to limit the period in which a tax might be assessed against it when it made that mistake.
Mr. Filler: The committee reports in the 1958 legislation specifically provide that the Congress knew that a subchapter S corporation was not subject to tax.
Unknown Speaker: No, but the taxpayer might have made a mistake in thinking it was qualified.
The person who prepared the S corporation return might have erroneously thought it was qualified as an S corporation when, in fact, it was not, and the period of making that determination is then set by the statute of limitations.
Mr. Filler: Yes, but in that case, the Congress could not have drafted the second sentence saying any return filed pursuant to this section or every return filed pursuant to this section because every return would have to include returns in which the corporation had properly elected to be an S corporation.
Unknown Speaker: Thank you, Mr. Filler.
Mr. Filler: Thank you, Your Honor.
Chief Justice Rehnquist: The case is submitted.