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KURALT v. UNITED STATES

April 1, 1994

CHARLES KURALT and SUZANNA KURALT, Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.


McKENNA


The opinion of the court was delivered by: MCKENNA

McKENNA, D.J.

 I.

 The facts are, with only minor exceptions, undisputed. Plaintiffs timely filed a joint federal income tax return for the calendar year 1983. In 1983, Charles Kuralt was a shareholder in Country Music, Inc. ("Country"), a Subchapter S corporation. On March 15, 1984, Country timely filed its federal income tax return for the calendar year 1983. On or about September 20, 1986, Seymour Klempner executed a document entitled "Consent to Extend the Time to Assess Tax" ("Extension"), purportedly on behalf of Country. Defendant claims, while Plaintiffs contend that Defendant in fact fails to sufficiently allege, that Klempner was the tax matters person for Country at the time; accordingly, Defendant argues, and Plaintiffs deny, that Klempner's execution of the document extended the time for the Internal Revenue Service ("IRS" or "Service") to assess tax with respect to Country to December 31, 1987. *fn1"

 On April 14, 1987, the IRS issued a Notice of Final S Corporation Administrative Adjustment ("FSAA") to Klempner, adjusting Country's treatment of Subchapter S items *fn2" for its 1983 taxable year. On May 8, 1987, Klempner, purportedly acting as tax matters person for Country, filed a petition in the United States Tax Court challenging the FSAA. Plaintiffs did not participate in the Tax Court proceeding. On February 14, 1989, the IRS and Klempner, acting on behalf of Country, entered into a stipulation and decision under Tax Court Rule 248(a) with respect to taxable year 1983. As a result, on February 12, 1990, the Service assessed tax against Plaintiffs in the amount of $ 35,591.00 (the "Subject Tax"), plus interest in the amount of $ 30,465.57. Plaintiffs paid the Subject Tax in full on April 17, 1990. On May 4, 1990, Plaintiffs, in response to the February 12, 1990, interest demand and an additional demand made on April 23, 1990, paid $ 32,288.44 for interest and payment penalty on account of the Subject Tax. On January 25, 1991, Plaintiffs filed a claim for a refund asserting that the FSAA for Country was not timely issued by the IRS, due to the expiration of the applicable statute of limitations. The Service denied the refund claim on October 4, 1991.

 II.

 The instant action implicates Subchapter S corporation audit and litigation procedures of the Internal Revenue Code ("Code"), which provide for uniform treatment of Subchapter S items among the shareholders of an S corporation. See 26 U.S.C. § 6241 et seq. The tax treatment of Subchapter S items is generally determined at the corporate level by way of a unified proceeding, rather than in separate proceedings for each shareholder. See 26§ U.S.C. § 6241.

 
A Subchapter S item is defined as any item of an S corporation which by Regulation the Service determines is more appropriately determined at the corporate level as opposed to the shareholder level. A shareholder of an S corporation is required to treat Subchapter S items on his or her return in a manner consistent with the treatment of such items on the [S corporation's] corporate return or notify the [IRS] of the inconsistency.

 13 Mertens The Law of Federal Income Tax § 49B.44 (Wendi Hangebrauck, et al. eds. 1994) (footnotes omitted). 26 U.S.C. § 6244 makes certain partnership provisions of the Code applicable to Subchapter S corporations. Consequently, individual S corporation shareholders may not claim refunds based on Subchapter S items determined at the corporate level, except under the circumstances delineated in 26 U.S.C. § 7422(h). Section 7422(h) prohibits suits by individual shareholders to recover erroneously or illegally assessed taxes attributable to Subchapter S items unless brought in accordance with 26 U.S.C. § 6228(b) or § 6230(c). The Code thus contains three circumstances under which such a refund claim may be initiated by an S corporation shareholder individually: (1) a suit for refund under § 6228; (2) a suit pursuant to § 6230(c)(1)(A) resulting from denial of a claim of mathematical error; (3) a suit for refund under § 6230(c)(1)(B) due to the failure of the IRS to credit or refund to a shareholder an overpayment attributable to a settlement, court decision, or defaulted FSAA.

 III.

 In pressing their claim of entitlement to a refund, Plaintiffs contend that

 
assuming arguendo both (i) that § 6244 makes § 7422(h) applicable to "subchapter S items" as well as to "partnership items" and (ii) that neither of the stated exceptions of § 7422(h) is applicable in the instant case, it still does not follow that the Court is without power to order the requested refund.

 Pls.' Mem. Law Opp'n at 24. Plaintiffs' unwillingness definitively to concede the point notwithstanding, § 6244 does incorporate § 7422(h). Moreover, none of the three circumstances under which § 7422 permits a refund claim suit by a Subchapter S shareholder concerning a Subchapter S item exists in the instant action. First, § 6228 permits an S corporation shareholder to file suit for a refund upon the denial by the Service of an administrative adjustment request ("AAR") previously filed by the shareholder pursuant to 26 U.S.C. § 6227. Section 6227 provides, however, that an S corporation shareholder must file an AAR within three years of the date the S corporation filed its return, or, if later, the last date the S corporation had to file its return. See 26 U.S.C. 6227(a)(1). Because Plaintiffs' refund claim was made on January 25, 1991, nearly seven years after Country filed its 1983 federal income tax return, Plaintiffs cannot rely on § 6228 as basis upon which to file their refund claim. Second, § 6230(c)(1)(A) provides that an S corporation shareholder may file a refund claim if the ground for the claim is that the IRS "erroneously computed any computational adjustment" that was required under certain narrow circumstances ...


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