decided: January 25, 1993.
SHELDON B. BUFFERD, PETITIONER
COMMISSIONER OF INTERNAL REVENUE
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT.
White, J., delivered the opinion for a unanimous Court.
JUSTICE WHITE delivered the opinion of the Court.
On his 1979 income tax return, petitioner, a shareholder in a Subchapter S corporation, claimed as "pass-through" items portions of a deduction and a tax credit reported on the corporation's return. The question presented is whether the 3-year period in which the Internal Revenue Service is permitted to assess petitioner's tax liability runs from the filing date of the individual return or the corporate return. We conclude with the Tax Court and the Second Circuit Court of Appeals that the relevant date is that on which petitioner's return was filed.
Subchapter S of the Internal Revenue Code, 26 U.S.C. §§ 1361-1379, was enacted in 1958 to eliminate tax disadvantages that might dissuade small businesses from adopting the corporate form and to lessen the tax burden on such businesses. The statute accomplishes these goals by means of a pass-through system under which corporate income, losses, deductions, and credits are attributed to individual shareholders in a manner akin to the tax treatment of partnerships. See §§ 1366-1368.*fn1 In addition, since 1966, "S corporations" have been liable for certain capital gains and other taxes. 80 Stat. 111, 113; 26 U.S.C. §§ 1374, 1378.
Petitioner was treasurer and a shareholder of Compo Financial Services, Inc., an S corporation. On February 1, 1980, Compo filed a return for the tax year of December 26, 1978 to November 30, 1979 as required by § 6037(a) of the Code.*fn2 On that return, Compo reported a loss deduction and an investment tax credit arising from its partnership interest in a venture known as Printers Associates. Petitioner and his wife filed a joint return for 1979 on April 15, 1980.*fn3 Their return claimed a pro rata share of the deduction and credit reported by Compo pursuant to the pass-through provisions of Subchapter S.
Code § 6501(a) establishes a generally applicable statute of limitations providing that the Internal Revenue Service may assess tax deficiencies within a 3-year period from the date a return is filed.*fn4 That limitations period may be extended by written agreement. § 6501(c)(4). In March 1983, before three years had passed from the time the joint return was filed, petitioner agreed to extend the period in which deficiencies arising from certain claims on the return could be assessed against him. No extension was obtained from Compo with respect to its return for the 1978-1979 tax year.
In 1987, the Commissioner determined that the loss deduction and credit reported by Compo were erroneous and sent a notice of deficiency to petitioner based on the loss deduction and credit that he had claimed on his return. In the Tax Court, petitioner contended that the Commissioner's claim was time barred because the disallowance was based on an error in Compo's return, for which the 3-year assessment period had lapsed. The Tax Court found for the Commissioner, relying on its decision in Fehlhaber v. Commissioner, 94 T.C. 863 (1990), aff'd, 954 F.2d 653 (CA11 1992). See App. 61. The Court of Appeals for the Second Circuit affirmed, holding that, where a tax deficiency is assessed against the shareholder, the filing date of the shareholder's return is the relevant date for purposes of § 6501(a). 952 F.2d 675 (1992). Because another Court of Appeals has a contrary view, we granted certiorari. 505 U.S. . . . (1992).*fn5
Title 26 U.S.C. § 6501(a) states simply that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed. . . ." The issue before us is whether "the" return is that of petitioner or that of the corporation which was the source of the loss and credit claimed on petitioner's return. Petitioner's position is that the Commissioner had three years from the date his return was filed to object to that return in any respect except the loss and credit items passed through to him by the corporation. To disallow those items, petitioner argues, the Commissioner must have acted within three years of the filing of the corporate return. Under this approach, "the" return referred to in § 6501(a) becomes two returns, and petitioner claims that there is adequate statutory basis for his submission. We have no doubt that the courts below properly concluded, as the Commissioner argued, that it is the filing of petitioner's return that triggers the running of the statutory period.
The Commissioner can only determine whether the taxpayer understated his tax obligation and should be assessed a deficiency after examining that taxpayer's return. Plainly, then, "the" return referred to in § 6501(a) is the return of the taxpayer against whom a deficiency is assessed. Here, the Commissioner sought to assess taxes which petitioner owed under the Code because his return had erroneously reported a loss and credit to which he was not entitled. The fact that the corporation's return erroneously asserted a loss and credit to be passed through to its shareholders is of no consequence. In this case, the errors on the corporate return did not and could not affect the tax liability of the corporation, and hence the Commissioner could only assess a deficiency against the stockholder-taxpayer whose return claimed the benefit of the errors. Under the plain language of § 6501(a), the Commissioner's time to make the assessment ran from the filing date of petitioner's return.*fn6
By contrast, the S corporation's return, which petitioner asserts triggers the beginning of the limitations period, is deficient precisely because it does not contain all of the information necessary to compute a shareholder's taxes. If the Internal Revenue Service were required to rely on that return, it would be forced to conduct its assessment on the basis of incomplete information:
"While [the corporate return] may show petitioner's distributive share of losses, it does not indicate his adjusted basis in his corporate stock, which is information necessary to determine if the loss is deductible. Nor does it show petitioner's income, losses, deductions, and credits from other sources. Moreover, the information return of the S corporation does not relate to the same taxable period as petitioner's return. . . ." Fehlhaber, supra, at 869 (citation omitted).
As noted in analogous cases, tax returns that "lack the data necessary for the computation and assessment of deficiencies" generally should not be regarded as triggering the period of assessment. Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 188, 1 L. Ed. 2d 746, 77 S. Ct. 707 (1957) (citing Commissioner v. Lane-Wells Co., 321 U.S. 219, 88 L. Ed. 684, 64 S. Ct. 511 (1944)).*fn7
Petitioner asserts that § 6501(a) supports a contrary view when read in light of two related Code provisions pertaining to S corporations. Section 6012(a)(2) requires both Subchapter C and Subchapter S corporations to file income tax returns.*fn8 Section 6037(a) specifies the information that each S corporation's return must provide (including "each shareholder's pro rata share of each item of the corporation") and further states that: "Any return filed pursuant to this section shall, for purposes of [26 U.S.C. §§ 6501-6531], be treated as a return filed by the corporation under section 6012."
We do not see that these provisions aid petitioner's cause. Read together, §§ 6012(a)(2), 6037(a), and 6501(a) establish only that each S corporation must file a tax return containing certain information and that a Commissioner desiring to make an assessment must act within three years of filing. Nothing on the face of these provisions demonstrates that an individual's income tax return is brought within the compass of § 6037(a)'s reference to "any return" simply because a portion of that return reports income and losses that have passed through from the return of an S corporation. If anything, the phrase "any return filed pursuant to this section," coupled with the fact that § 6037(a) is concerned with describing the contents of the corporation's return, indicates that the provision is not meant to determine when the assessment period for a shareholder's individual tax return begins.
Petitioner argues that this reading of the relevant provisions runs afoul of the fact that, prior to 1966, S corporations were not subject to taxation. According to petitioner, no purpose would have been served by establishing an assessment period that applied to returns reporting corporate income on which no taxes could be assessed but not to the returns of corporate stockholders. This argument fails because even in the period when the S corporation could not be taxed, examination of a corporation's return was necessary to determine if it could lay valid claim to Subchapter S status. Section 6037(a) thus originally functioned to set the starting date of the 3-year period within which that determination had to be made. See United States v. Adams Building Co., 531 F.2d 342, 343, n. 2 (CA6 1976); see also 952 F.2d, at 677 (citing Fehlhaber, 94 T.C. 863).*fn9 Petitioner maintains that such a function would be superfluous because, if the election of S corporation status were found invalid, the corporation's return would "automatically be subject to the existing rules for C corporations." Brief for Petitioner 38. But this proposition is hardly self-evident, and petitioner cites no authority to support it. In the absence of § 6037(a), the Internal Revenue Service could claim that a corporation which files a return containing an erroneous election of Subchapter S status has failed to file any return, which would allow the Service to issue a notice of deficiency with respect to the return "at any time." See § 6501(c)(3); cf. Germantown Trust Co. v. Commissioner, 309 U.S. 304, 307, 84 L. Ed. 770, 60 S. Ct. 566 (1940); Mason v. United States, 801 F. Supp. 718, 721 (ND Ga. 1992).*fn10
The Ninth Circuit's rejection in Kelley v. Commissioner, 877 F.2d 756 (1989), of the view adopted by the Commissioner was prompted in part by a concern to avoid unfairly burdening shareholders, who might find it difficult to obtain corporate records necessary to defend against a deficiency assessment based on an adjustment made to a corporation's return years after it was filed. The Fifth Circuit's opinion by Judge Goldberg in Green v. Commissioner, 963 F.2d 783 (CA5 1992), neatly summarizes the appropriate response to that concern:
"First, it is not unfamiliar in the world of tax to have 'an individual's income tax return . . . dependent on records maintained by another entity.' Fehlhaber, 954 F.2d at 658 (citing partnership and trust taxation as examples). Second, the rule generally does not impose an undue burden on the corporation or the share-holder. . . . A shareholder can 'take the necessary steps to ensure that the corporation preserves the relevant records.' Id. Such protective steps simply do not constitute an overly oppressive task for the shareholder. Bufferd, 952 F.2d at 678. . . . Finally, we reject any suggestion that we elevate the 'perceived unfairness to taxpayers' over our duty to strictly construe in favor of the government a statute of limitation when the petitioner seeks application of the statute so as to bar the rights of the government. Fehlhaber, 954 F.2d at 658." Id., at 789.*fn11
As found by the courts below, the plain language of § 6501(a) supports the Commissioner. The statutory evidence and policy considerations proffered by petitioner offer no basis for questioning this conclusion. We hold that the limitations period within which the Internal Revenue Service must assess the income tax return of an S corporation shareholder runs from the date on which the shareholder's return is filed. The judgment of the Court of Appeals is affirmed.
It is so ordered.
952 F.2d 675, affirmed.