In 1966 a predecessor to Fruit of the Loom sold assets to a purchaser that ultimately failed to pay $19 million. The loss justified a tax deduction. The problem here is that the IRS claims the company, due partly to procedural mishaps, was able to realize the full deduction twice, resulting in a “double counting.” We consider whether the Internal Revenue Service can invoke the mitigation provisions of the Internal Revenue Code to collect additional taxes, from taxpayer to rectify this “double counting” by assessing a tax
I.
A. Factual and Procedural Background
Some thirty years ago the Philadelphia & Reading Corporation originally claimed the tax deduction at issue in this ease.
In fall 1972 the Commissioner of Internal Revenue completed an audit of taxpayer’s 1964-68 taxable years. A principal issue in the audit was the $19 million reduction in sale price claimed for Extoy for 1966. The facts surrounding this audit are developed in detail in the tax court’s opinion, Fruit-Of-The-Loom, Inc. v. Commissioner,
During the audit one of Commissioner’s examining agents disallowed the Extoy loss deduction for 1966 on the ground that the reduction in sale price did not occur until 1967 and therefore was not properly deductible until that tax year. After a series of discussions, the parties agreed to resolve the issues raised in the audit, including the Ex-toy loss issue. The parties memorialized the terms of this resolution in an IRS Form 870, which listed deficiencies for tax years ending 1965, 1966, and 1968, and overassessments for tax years ending 1964 and 1967. Specifically with regard to the Extoy loss, taxpayer and the Commissioner аgreed that the $19 million deduction should be disallowed for 1966, but that $15.2 million of the reduction in sale price could be deducted in 1967 and the remaining $3.8 million would be allocated to a warrant taxpayer received to purchase stock.
Because taxpayer did not want Commissioner to assess the deficiencies until the Joint Committee on Internal Revenue Taxation (“Joint Committee”) approved the over-assessments, the Form 870 expressly delayed the assessments until the IRS authorized the overassessments. The parties exеcuted the Form 870 in December 1972.
As a result of an internal communication problem certain qualifying language in the Form 870 was overlooked. One of Commissioner’s employees assessed deficiencies in February 1973 without issuing taxpayer a notice of deficiency and while the Joint Committee was still reviewing the overassess-ments. After taxpayer complained about a bill for the premature assessments, the Commissioner’s employee abated them and sent notice of such to the taxpayer. In the meantime the Joint Committee approved a refund of the overassessments in June 1973. The Commissioner then secured an extension of the limitations period for the deficiency years 1965, 1966, and 1968 to September 30, 1973.
In June 1973 a second, more serious communication breakdown occurred. Unaware that the limitations period had been extended, the same employee of Commissioner reassessed deficiencies for the years 1965, 1966, and 1968. Despite being informed of the error, Commissioner refused to abate the assessment, although she did stay any сollection until the overassessments had been credited. The taxpayer must receive notice of such a deficiency before any assessment becomes final. However, Commissioner failed to issue a notice of deficiency for the 1965, 1966, and 1968 tax years before the extended statute of limitations expired on September 30,1973.
In November 1973 Commissioner initiated proceedings against taxpayer to collect the
Commissioner collected the net deficiency in 1983 by levying taxpayer’s bank account in Chicago. Taxpayer sued the United States in the United States District Court for the District of Delaware in November 1983 for a refund of the 1966 and 1968 deficiencies and later amended that complaint to request a refund of the 1965 deficiencies as well. The U.S. district court in Delaware found the June 1973 assessments illegal and invalid but denied relief to taxpayer on the ground that it had previously obtained the benefits of the оverassessments without suffering any material detriment. Philadelphia & Reading Corp. v. United States,
After P & R II, Commissioner issued a notice of deficiency to taxpayer for the 1966 tax year, asserting that the mitigation provisions of the Internal Revenue Code allowed it to reopen the closed 1966 tax year to determine a tax deficiency. Commissioner asserted that P & R II had allowed taxpayer a “deduction” for a loss taxpayer took in 1967, thus permitting the IRS to use the mitigation provisions to prevent a “double deduction” of that loss in 1966 and 1967. Taxpayer challenged this notice of deficiency in the tax court. The “doublе deduction” is at the core of this ease.
B. The Mitigation Provisions of the Internal Revenue Code
The mitigation provisions of the Internal Revenue Code, 26 U.S.C. §§ 1311-1314, “allow both the Commissioner and the taxpayer to correct an error made in a prior closed tax year and to obtain an adjustment to tax liability despite the running of the ordinary period of limitations.” O’Brien v. United States,
The party who attempts to invoke the mitigation provisions, in this case the Commissioner, bears the burden to prove that their specific requirements have been met. O’Brien,
1. An error must have occurred in a taxable year which cannot otherwise becorrected by operation of law; I.R.C. § 1311(a);
2. there was a determination for another year with respect to the item giving rise to the error; id.; see also I.R.C. § 1313(a) (definition of the term “determination”);
3. the determination was within one of the categories enumerated in I.R.C. § 1312 as a circumstance of a deduction; see I.R.C. §§ 1311(a), 1312(2); and
4. the party who prevailed in the determination maintained a position that-was adopted there and that was inconsistent with the erroneous treatment.
I.R.C. § 1311(b).
C. The Tax Court Opinion
The tax court considered only the second of the four requirements listed above and found that because the Commissioner had failed to meet her burden of proof as to this element, the Internal Revenue Service was not entitled to mitigation.
Commissioner argued below that an error occurred when the taxpayer deducted, and the Third Circuit allowed, $19 million in tax year 1966. She asserted that that amоunt should have been deductible instead for tax year 1967. The second requirement of the mitigation provision requires there to have been a “determination” for the earlier year. 1.R.C. § 1313(a) defines “determination” as:
1. a decision by the tax court or a judgment, decree, or other order by any court of competent jurisdiction which has become final;
2. a closing agreement;
3. a final disposition by the Secretary of a claim for refund; or
4. an agreement related to the liability with respect to the tax.
After consideration of the Commissioner’s submissions and detailed review of the record, the tax court concluded that the Delaware U.S. district court order upon remand and the Third Circuit opinion were not “determinations” because they did not address the issue of whether 1967 was the proper year for taxpayer to deduct a significant portion of the $19 million. Instead, any reference to taxpayer’s 1967 tax year in the decisions of either of these courts was to the source of the funds that taxpayer used to satisfy the assessment. Id. at 873.
Because a determination is necessary to invoke the mitigation provisions, and the statute of limitations is a fundamental and essential legal rule that cannot be easily ignored, the tax court concluded that decision should be entered for taxpayer.
The tax court properly had jurisdiction over this case pursuant to 26 U.S.C. § 7442. This court properly has jurisdiction pursuant to 26 U.S.C. § 7482(a)(1), and is the proper venue for this case pursuant to 26 U.S.C. § 7482(b)(1)(B).
II.
Taxpayer reduced its liability for tax year 1966 by claiming the Extoy loss. Taxpayer also filed a claim for refund for its 1967 tax year, and the final judgment in P & R II allowed taxpayer the loss deduction in 1967
On appeal Commissioner argues that she has met the requirements to invoke the mitigation provisions (see O’Brien,
This court applies “the same standards of review to a tax court’s decision that we apply to district court determinations in a civil bench trial: We review questions of law de novo; we review factual determinations, as well as application of legal principles to those factual determinations, only for clear error.” Cline v. Commissioner of Internal Revenue,
Our point of departure in this case is that, absent mitigation, the statute of limitations bars any assessment of taxes for taxpayer’s 1966 tax year. In enacting the mitigation provisions, Congress did not intend to рrovide plenary relief in each circumstance involving a double tax benefit. O’Brien,
A. The Final Judgment in P & R II As A “Determination” Under I.R.C. § 1313
The tax court concluded that P & R II did not involve any issues regarding taxpayer’s 1967 year, and that thе only question in that case was whether the 1966 assessment was illegal and invalid.
In this appeal Commissioner asserts that in P & R II the Third Circuit and the U.S. district court in Delaware on remand in faсt considered taxpayer’s 1967 tax year, and therefore that there was a “determination” made in this case for that year. Commissioner argues that the judgment in P & R II could not have been based solely on the 1965, 1966, and 1968 taxable years, but must have included 1967 as well (“albeit implicitly”; App.Br. p. 23).
Although an intriguing argument, the record — including Commissioner’s own stipulations — undercuts her reasoning. The parties stipulated that P & R II did not involve taxpayer’s 1967 tax liability. In the tax court the parties stipulated to the issues decided by the Third Circuit in P & R II. Among those stipulations is the following:
The sole basis asserted by P & R in the Third Circuit litigation for its entitlement to a refund was that the June 22, 1973, assessments in respect.of P & R’s 1965, 1966, and 1968 taxable periods were illegal and invalid and that no legal and valid assessments had been made in respect of those periods prior to the expiration of the applicable statute of limitations.
Apр.Ap. p. 13, ¶ 32. Commissioner also agreed that “[t]he litigation in the Third Circuit did not address the question of whether any deductions taken by [taxpayer] were proper.” Id. at ¶ 33. These stipulations by Commissioner preclude her from asserting that the Third Circuit in P & R II somehow considered taxpayer’s 1967 taxable year and made a “determination” thereon.
Commissioner responds to these facts by arguing that if the Third Circuit in P & R II did not in fact consider taxpayer’s 1967 tax year, it also could not have granted the relief it did: a $10.5 million refund. She reasons that when taxpayer amended its complaint in P & R II to claim a refund of an overpayment of $6.2 million, it placed its 1967 tax year at issue because the only timely claim for refund taxpayer filed for that overpayment was the one filed in March 1974 for its 1967 tax year. Commissioner concludes that by awarding taxpayer the relief it originally requested in its March 1974 administrative refund claim, the court in P & R II necessarily allowed taxpayer the Extoy loss deduction in 1967. She thus proposes that the logical consequence of the tax court’s reasoning is that the Third Circuit аwarded taxpayer a $4 million refund for 1966 based upon the invalidity of assessments, but could not have awarded an additional $6.2 million refund.
The record again belies Commissioner’s argument. First, the March 1974 administrative refund claim does not produce the dilemma proposed by Commissioner. If taxpayer paid $10.5 million in tax in 1983 by paying the net deficiency of $4 million,
Taxpayer’s amended complaint requested a total refund of approximately $10.5 million in tax, plus interest, an amount the Third Circuit understood had been illegally assessed on June 22, 1973, and did not include the 1967 tax year. The record is barren of any indication that the Third Circuit ruled on the
Based on the stipulated facts and the Third Circuit’s reasoning, the tax court concluded correctly that the courts in P & R II did not consider taxpayer’s 1967 tax year, and thus that Commissioner has not established that there was a “determination” made pursuant to I.R.C. § 1813 in this case for tax year 1967 with respect to the item giving rise to the alleged error in 1966.
B. The Final Judgment in P & R II As Allowing Taxpayer A Deduction For The Extoy Loss in 1967
Even if Commissioner had established the existence of a “determination” for 1967, this would be only the first hurdle to clear before she could invoke the mitigation provisions to permit an assessment of a tax deficiency when such an assessment would otherwise be barred by the applicable statute of limitations. The determination must also be “described in'one ... of the paragraphs of section 1312.” I.R.C. § 1311(a). Under I.R.C. § 1312(2) — the only relevant paragraph in that section — the “determination” for 1967 must “allow[ ] a deduction ... which was erroneously allowed to the taxpayer for another taxable year.” I.R.C. § 1312(2).
This section of the Internal Revenue Code mitigating the effect of a limitations period must be construed strictly in light of its legislative history and the accepted technical meaning of its terms. Sherover v. United States,
authoritative sanction to the inconsistent position presently maintained by the taxpayer ... and indicates that the previous treatment of the item was errоneous under the applicable provisions of the internal revenue laws.
H.R.Conf.Rep. No. 2330, 75th Cong., 3d Sess. 56 (1938), reprinted in 1939-1 C.B. (part II) 817, 835. Thus, to constitute an “allowance” of a deduction, the court’s decision must affirmatively approve the deduction in the year the court has under consideration, establishing that the deduction in another, closed year, was erroneous.
The tax court concluded correctly that a “determination” must involve a substantive decision on the merits, which establishes that the inconsistent position in the closed year is erroneous.
Given this law, to fulfill this requirement the Third Circuit’s decision must authoritatively establish that the Extoy loss was allowable in 1967 and not in 1966. Yet even a cursory review of the P & R II opinion demonstrates that the proper treatment of
Commissioner’s contention that the Third Circuit “implicitly” allowed a loss for 1967 also is not well-grounded. The P & R II opinion held only that the collection of assessed deficiencies for 1965, 1966, and 1968 was barred because Commissioner had failed to follow the procedures required for the lawful assessment of deficiencies.
C. Whether Taxpayer Took Inconsistent Positions In 1966 and 1967
Even if a determination had been made for the 1967 taxable yeаr, and that determination resulted in a “double deduction,” the Commissioner must also establish that the determination adopted a position maintained by taxpayer in 1967 which was inconsistent with the result in 1966. I.R.C. § 1311(b)(1)(B).
Commissioner avers that because taxpayer’s claim in P & R II allegedly was based in part on its administrative claim for refund for tax year 1967, taxpayer’s position that it was entitled to a refund for 1967 on account of its Extoy loss was inconsistent with the erroneous allowance of that deduction in 1966.
To satisfy this requirement, taxpayer would have had to claim a refund for 1967 based on the allowance of thе Extoy loss in 1967. But as we concluded above, P & R II did not address taxpayer’s 1967 taxable year. The amended complaint in P & R II did not request a refund for 1967 nor did it request a refund for the Extoy loss. Rather it was limited to a claim that the June 1973 assessments for 1965, 1966, and 1968 were illegal and invalid. Commissioner conceded each of these points. Because the treatment of the Extoy loss did not pertain to the Third Circuit’s decision in P & R II, it could not have adopted any arguments concerning that loss.
Any inconsistent treatment of the Extoy loss resulted not from Commissioner’s earlier decision to allow the Extoy loss in 1967, but her failure to issue a timely assessment for 1966. She conceded this in the tax court:
[Commissioner] acknowledges that the refund did not result from an inconsistent litigating position of [taxpayer] specifically with respect to the correct year for the deduction but instead from the effect of the running of the statute.
Resp.App. 34. We conclude that taxpayer has not maintained an inconsistent position with regard to the allowance of the Extoy loss in 1967. Accordingly, Commissioner has not sаtisfied this final requirement of the mitigation provisions.
III.
The tax court correctly held that P & RII did not involve a determination for taxable year 1967, and that the mitigation provisions therefore could not be applied to reopen the taxpayer’s 1966 tax year. Moreover, Commissioner has not borne her burden of proof on each of the other requirements necessary to invoke the mitigation provisions. As she conceded at oral argument, failure on even one of these requirements is fatal to her case. Accordingly, Commissioner cannot invoke the mitigation provisions of the Internal Revenue Code to permit an assessment of a tax deficiency against taxpayer which is barred by the applicable statute of limitations. The opinion of the tax court is
AFFIRMED.
Notes
. In 1985 Philadelphia & Reading merged into Northwest Industries, which later merged into Fruit-Of-The-Loom, Inc., a Delaware corporation with its principal place of business in Chicago, Illinois. For purposes of this opinion, Philadelphia & Reading and its successors will be referred to as “taxpayer.”
. This statute provides that a decisiоn of the tax court may be reviewed by the U.S. Court of Appeals for the circuit in which is located the case of a corporation seeking redetermination of tax liability, or the principal place of business of the corporation. The principal place of business of Fruit Of The Loom, Inc. (taxpayer) is Chicago, Illinois.
. Taxpayer argues that Commissioner has raised this argument for the first time on appeal. Our review of Commissioner’s briefs in the tax court convinces' us that she at least raised the argument thаt the final judgment in P & R II allowed taxpayer the Extoy loss in 1967 by awarding it a refund for that year.
. Application of the 1964 and 1967 refunds ($6.5 million) against the 1965, 1966, and 1968 deficiencies ($10.5 million), which results in a net deficiency of $4 million.
. The Commissioner makes a final stab to convince us that a determination has been made. She submits that even if taxpayer had not placed the 1967 tax year at issue in P & R II, the government put it in play by raising the doctrine of equitable recoupment as a defense to taxpayer’s refund claim. That doctrine "permit[s] a transaction which is made the subject of suit by plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole.” United States v. Dalm, 494 U.S. 596, 611,