Uncertain Position and Statute of Limitaations

Technical topics regarding tax preparation.
#1
Nilodop  
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Sec 6012 requires corporations to file returns. Reg. 1.6012-2(a) includes this as of 2010:
(4) Disclosure of uncertain tax positions. A corporation required to make a return under this section shall attach Schedule UTP, Uncertain Tax Position Statement, or any successor form, to such return, in accordance with forms, instructions, or other appropriate guidance provided by the IRS.


Here is the required form. https://www.irs.gov/pub/irs-pdf/f1120utp.pdf
Here are the Instructions. https://www.irs.gov/instructions/i1120utp

If a corporation that is required to file the form does not do so, and decides not to file it in an amended return, would IRS be successful in arguing that that return is incomplete and therefore the section 6501 SOL is still open for assessing a deficiency?

I was long retired when that requirement came in so I have little to no expertise in it. Input appreciated.
 

#2
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No. A return with a good faith disclosure of income is a return. There could be penalties for not filing the requisite form, but that would not extend the SOL.
Steve
 

#3
dave829  
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I agree with gatortaxguy. The instructions say that filing the form when required is treated as if the return position was disclosed on a Form 8275 or 8275-R.
 

#4
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I'm far from a conclusion, but here are some of my thoughts based just on initial research.

RR 77-162 involved a 990 and in general is old and had different facts than OP. But its conclusion is
Therefore, under the circumstances described above, the organization's fil­ing of an incomplete return without reasonable cause is a failure to file a return for the purpose of imposing the penalty provided by section 6652(d)(1) of the Code. Because, under sec­tion 6652(d)(1), the organization is considered to have failed to file any return at all, the period of limitations on assessment and collection of tax under section 6501(c)(3) has not started.


TAM 9222002, however, points out
While the Service has long taken the position that filing an incomplete return is tantamount to failing to file the return, see e.g ., Rev. Rul. 77-162, 1977-1 C.B. 400, (filing of incomplete F990 constituted failure to file subject to section 6652(d)(1) penalty), this rule is generally inapplicable where the taxpayer has attempted to report, albeit incorrectly, an amount required to be disclosed on a return. The Supreme Court applied this principle in Zellerbach Paper Co. v. Commissioner , 293 U.S. 172 (1934), where in determining whether the statute of limitations on assessment had commenced when the validity of a return was at issue, the Court noted that:

Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such, and evinces an honest and genuine endeavor to satisfy the law. This is so though at the time of filing the omissions or inaccuracies are such as to make amendment necessary.


RR 72-161 involved payroll tax returns in 5 situations. Two of the 5 were deemed not valid returns for SOL purposes. Here's why.
Situation (2) is not a valid return for purposes of section 6501 of the Code, since the Service is not able, from that informa­tion alone, to determine whether any wages or tips subject to withholding or other com­pensation was paid and thus the document does not fully set forth the data required to be submitted pursuant to the regulations;

Situation (3) is not a valid return for purposes of section 6501 of the Code, since the Service is not able, from that informa­tion alone, to determine whether any tax should have been withheld or whether the $5,000 reported is "other compensation";


Service Center Advice 200304031 involved completely different facts from OP, but its analysis is useful.
In making the determination of whether a given document should be treated as a return for statute of limitation purposes, it is helpful to review the case law on this issue. In an early case addressing what constitutes a return for purposes of the statute of limitations on assessment, the Supreme Court indicated that a "defective" or "incomplete" return may be sufficient to start the running of the period of limitation if it is a specific statement of the items of income, deductions, and credits in compliance with the statutory duty to report information. To have such effect, however, the return must honestly and reasonably be intended as such. Florsheim Bros. Drygoods Co. v. United States , 280 U.S. 453 (1930).

In Zellerbach Paper Co. v. Helvering , 293 U.S. 172 (1934), the taxpayer filed its original income and profits tax return for its fiscal year ending April 30, 1921, in July 1921. Although the Revenue Act of 1921 required taxpayers to file a new or supplemental income and profits tax return if the original return had been prepared pursuant to the provisions of the Revenue Act of 1918 and additional tax was due under the Revenue Act of 1921, the taxpayer did not file a new or supplemental return. When the Commissioner issued a deficiency notice to the taxpayer in May 1928, the taxpayer alleged that the notice was barred because the period of limitations for assessment had expired. The Commissioner argued that the period of limitations for assessment had not begun because the return he received from the taxpayer in July 1921 was a nullity. The Supreme Court disagreed and determined that the period of limitations had expired. The Court concluded that, for purposes of the statutes of limitations,

perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such, and evinces an honest and genuine endeavor to satisfy the law. This is so even though at the time of filing the omissions or inaccuracies are such as to make amendment necessary.

293 U.S. at 180 (citation omitted).

The most recent Supreme Court reaffirmation of the test articulated in Florsheim and Zellerbach is found in Badaracco v. Commissioner, 464 U.S. 386 (1984). There, the taxpayer filed a return which he conceded was “false or fraudulent with the intent to evade law.” Id. at 393. He later filed a nonfraudulent amended return. The taxpayer argued that the original return, to the extent it was fraudulent, was a nullity for purposes of the statute of limitations. The Court disagreed, noting that the fraudulent original returns

"purported to be returns, were sworn to as such, and appeared on their faces to constitute endeavors to satisfy the law. Although those returns, in fact, were not honest, the holding in Zellerbach does not render them nullities.”

Id. at 397.

The lower courts have subsequently synthesized the criteria enunciated by the Supreme Court into the following four-part test for determining whether a defective or incomplete document is a valid return: "First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury." Beard v. Commissioner , 82 T.C. 766, 777 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986).

This generally accepted formulation of the criteria for determining a valid return is known as the "substantial compliance" standard. If a defective or incomplete document meets the substantial compliance standard, the document is a valid return for purposes of the statute of limitations on assessment and for purposes of determining the failure to file penalty of section 6651(a) of the Code. A document that does not meet the substantial compliance standard is a nullity for purposes of the Code.


Yes, these are old documents and some are not "authorities" for some purposes. And they all precede the 1.2012-2 reg. amendment in 2010. But they seem generally to be useful in analyzing the IRS position on my question.

Plus, and i do see this as pretty significant, the reg. excerpted above is very specific in requiring Schedule UTP in accordance with instructions. It's not a reg. that has been invalidated. It's authoritative and may be a game changer in OP facts.
 

#5
dave829  
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Nilodop, I don’t buy your argument. Announcement 2010-75, 2010-41 I.R.B. 428, provides further guidance regarding the reporting of an uncertain tax position (UTP). Here’s an excerpt:

The final Schedule UTP instructions state that a complete and accurate disclosure of a tax position on the appropriate year’s Schedule UTP will be treated as if the corporation filed a Form 8275 or Form 8275-R regarding the tax position and that a separate Form 8275 or 8275-R need not be filed to avoid certain accuracy-related penalties with respect to that tax position.

https://www.irs.gov/pub/irs-drop/a-10-75.pdf

So, failing to file Schedule UTP with the 1120 doesn’t invalidate the 1120 or turn it into an incomplete return. It simply makes the return subject to accuracy-related penalties as gatortaxguy said.

A return is valid if it meets each of the four prongs of the substantial compliance standard: (1) the return must provide sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must execute the return under penalties of perjury. See Beard, 82 T.C. 766, 777 (1984), aff'd 793 F.2d 139 (6th Cir. 1986).
 

#6
Nilodop  
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The fact that the UTP schedule also acts as an 8275 is not much more than an administrative convenience, so that neither taxpayer nor IRS have to deal with both. That makes perfect sense.

But it does not address my point, which is the specificity and rigor that seems to attach to the 6012 reg. excerpted above, making it an integral part of the return, as distinguished from simply a way to avoid penalty, which is all the 8275 is.

Here's the 8275 disclosure requirement to compare with the UTC one.
(f) Method of making adequate disclosure -

(1) Disclosure statement. Disclosure is adequate with respect to an item (or group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business) or a position on a return if the disclosure is made on a properly completed form attached to the return or to a qualified amended return (as defined in § 1.6664-2(c)(3)) for the taxable year. In the case of an item or position other than one that is contrary to a regulation, disclosure must be made on Form 8275 (Disclosure Statement); in the case of a position contrary to a regulation, disclosure must be made on Form 8275-R (Regulation Disclosure Statement).

(2) Disclosure on return. The Commissioner may by annual revenue procedure (or otherwise) prescribe the circumstances under which disclosure of information on a return (or qualified amended return) in accordance with applicable forms and instructions is adequate. If the revenue procedure does not include an item, disclosure is adequate with respect to that item only if made on a properly completed Form 8275 or 8275-R, as appropriate, attached to the return for the year or to a qualified amended return.

.

Let me try to make the distinction more clearly. The 8275 protects from penalty. The UTC does that too. But the UTC is required in a return without regard to any penalty. So its absence makes the return incomplete.
 

#7
dave829  
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Nilodop, I know from previous discussions with you that it's pointless to argue with you once you've made up your mind. Okay, so I give up. "Failure to file Schedule UTP with a 1120 when required to do so means that no return was filed." U I don't really believe this, but I'm crying "uncle."
Last edited by dave829 on 1-Dec-2021 5:47pm, edited 1 time in total.
 

#8
Nilodop  
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I try to acknowledge my errors. In this case, it's just my current view. I wonder ho else on TPT hs a view on it.
 

#9
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Yo, Nilodop,
There is no ambiguity here. The case law is clear. As a matter of law, a return is a return, regardless of any regulation to the contrary.
Steve
 

#10
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Yeah, I think we’d be looking at the Beard test to determine if we have a valid return.

If we have a complete return, we should be good. In that case, 6501(c)(3) wouldn’t apply. In addition, no other statutory exception under 6501(c) would apply either. Thus, the statute wouldn’t be tolled for failing to file a return, nor would the statute be tolled for any other reason.

So its absence makes the return incomplete.


I think you’d need to throw that idea up against Prong #1 in Dave’s 4-prong test in Post #5
 

#11
Nilodop  
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I'm starting to believe dave829's description of me as pointless to argue with. Actually, I'm just learning as I go, and I still have not concluded.

As to prong #1 from dave829, Jeff-Ohio, and even more, from the Beard case, wouldn't that test depend on the uncertain tax position in each case? Are there no possible tax positions that, absent a UTP form, would fail to
provide sufficient data to calculate tax liability
?
 

#12
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As to prong #1 from dave829

That’s one prong to explore. I agree the phrase, “the return must provide sufficient data to calculate tax liability” could be subject to interpretation. I definitely don’t think it should be read as, “the return must provide sufficient data to calculate the absolutely correct tax liability.” Instead, I tend to think it’s a pretty low standard to meet. In other words, if “sufficient data” is provided so that the Service could take that data and compute “a” tax, then that’s good enough. A contrary opinion would cause us to go down a rabbit hole, effectively rendering the first prong meaningless, except for perfect taxpayers.

What if a return inadvertently omitted income…or a good-faith position is taken that certain income is excludible, so it doesn’t show up on the return? In these cases, that “data” is missing from the return. Yet, I think we’d find that the return is still valid, since “a” tax could still be computed. The fact that we have a 6-year statute, for example, kind of proves that point. In other words, if income is omitted in one of the above fashions, and that return is not viewed as a valid return, then we wouldn’t need a 6-year statute. We’d be sitting here with an unlimited SOL. I think the courts, in the name of effective tax administration, would quash any attempt by the IRS to treat such a return as not a return.

In short, I don’t think OP’s situation has any issues with Prong #1.

And I don’t think we have any issues with Prong #2 or Prong #4.

With Prong #3, we could go down a rabbit hole with this one too. What exactly is meant by Prong #3? What is meant by “honest and reasonable?” What is meant by “the requirements of the tax law?” There’s a helluva lot of “requirements” in the tax law. And the fact is, when you file a return, you are literally attempting to comply hundreds or thousands of times. I mean, if the client has 1,000 transactions during the year, when you summarize those and put them on the tax return, you are according a tax treatment to each and every one of those underlying transactions. So, what if you make an honest and reasonable attempt with 1,000 tax law requirements on a return, but just blow off the UTP requirement (or inadvertently fail to comply with the requirement)? I tend to think you’d be fine. The “honest and reasonable” aspect of Prong #3 should be applied to the totality of what was filed.

This is from CCA 201545016:

In this case, the taxpayer's return satisfies the four-part test and should be treated as valid. The data reported by the taxpayer on the [Redacted Text] return was incorrect, but as long as the [Redacted Text] return “on its face plausibly purports to be in compliance,” the fact that it is incorrect or even fraudulent does not prevent it from being a valid return. See Badaracco, 464 U.S. at 396-97.

And from Badaracco:

There are numerous provisions in the Code that relate to civil and criminal penalties for submitting or assisting in the preparation of false or fraudulent returns; their presence makes clear that a document which on its face plausibly purports to be in compliance, and which is signed by the taxpayer, is a return despite its inaccuracies.
 

#13
Nilodop  
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If omission of the UTP schedule, in and of itself, carries no penalty, and the F8275 covers the 6662 penalty, what incentive is there for filing the schedule?
 

#14
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If omission of the UTP schedule, in and of itself, carries no penalty, and the F8275 covers the 6662 penalty, what incentive is there for filing the schedule?


It’s kind of like the question, “What’s the ramification of not filing a Sec 351 statement?”

In any case, see Announcement 2010-9 and also this article:

https://www.irs.gov/pub/irs-drop/a-10-09.pdf

https://www.journalofaccountancy.com/is ... e-utp.html
 

#15
Nilodop  
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I'm obviously a minority of 1 here, so I'll concede.

I have read all the stuff posted above.

My conclusion assumed not only a material item but one that IRS had never raised and would likely keep missing absent the schedule. i don’t mean fraud, that’s too obvious, but rather an item that, say, the company just identified because they hired you to replace their previous tax guy. i’ll link an example here. https://www.newsweek.com/vanguard-whist ... int-400901

I think it would be rare but is a risk in some circumstances. The missing 351 statement is not one of them.
 

#16
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I should have mentioned that the definition of a return is an important issue in criminal tax law; and I don't see a difference between the definition of a return for criminal and civil purposes. That's why is makes no sense to me to create an argument based on some regulation.
Steve
 


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