6-Year Return Adequate Disclosure By Reference to Other Returns (8/23/13)

The normal statute of limitations in tax matters is 3 years from the date the return was filed.  There are exceptions.  One is the six-year statute that applies if there is 25% omission rule that figured most prominently in the recent Home Concrete case,  Section 6501(e)(1)(A)(i), here; see United States v. Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012).  Even where there is a 25% omission, the six-year statute does not apply if the taxpayer made adequate disclosure.

In CCA 201333008, here, the author discusses the disclosure requirements in the context of a flow-through entity return (partnership or S corporation).  To use the S-corporation context discussed in the CCA, if the shareholder reports income from the S-Corporation, it will usually be a number with no explanation other than identifying the S-Corporation.  The S-Corporation return (Form 1120-S) will have the detail and any disclosures about any income omissions.  The question is whether the Form 1120-S disclosures, if otherwise adequate to put the IRS on notice, will be deemed notice as to the shareholder's return which does not include the disclosures.  The answer is yes.  The CCA does a very good job of discussing the authority supporting that answer.

The caveat noted in the CCA is that the Form 1120-S must have been filed on or before date of the shareholder's return.  The reason for this spin on the incorporation by reference rule is that the law is "well-settled" that an amended return disclosure will not suffice to ex post facto supply an adequate disclosure if the original return did not make the disclosure.  See Houston v. Commissioner, 38 T.C. 486, 489 (1962). The CCA takes the position -- logically it seems to me -- that an 1120-S filed after the shareholder's return is filed is conceptually the equivalent for purposes of the notice requirement to an amended shareholder return.  In other words, the shareholder must make sure that, in filing his or her original return, the "disclosure by reference" is to a return that has been filed (rather than one that will be filed later).

I have just revised my Tax Procedure text discussion to include the following paragraph inspired by the CCA (footnotes omitted):\

The disclosure contemplated is one filed on or with the taxpayer’s own original return which contains the substantial omission.  For this reason, the filing of an amended return will not cure the original return failure to disclose that caused the extended statute of limitations.  (Students will recall that the same concept applies with respect to the filing of a nonfraudulent amended return where the original return was fraudulent; the amended return does not cure the fraud that triggers the unlimited statute of limitations.)  Where, however, the taxpayer’s original return provides a reference to another return that has been filed on or before the date the taxpayer’s return is filed, the references can constitute adequate notice. For example, where a taxpayer reports on his return items from a flow-through entity such as a partnership or an S-corporation, the information on the referenced entity return filed on or before the filing of the taxpayer’s return can be considered in assessing whether the taxpayer has made adequate disclosure.