Category: Tax Returns, Examinations &
IRS Procedures; Accounting Periods & Methods; Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Issue Answer Discussion Revenue Ruling 57-589 provides that a C corporation which filed a tax extension (Form 7004) and made the necessary deposit of taxes due had adopted a taxable year. Revenue Ruling 68-125, 1968-1 CB 189, concerns itself with a taxpayer who kept its books on a fiscal year basis but failed to file its first tax return in a timely fashion. The ruling holds that the taxpayer is not precluded from adopting the fiscal year on which it keeps its books by virtue of having failed to file a timely first return. Ordinarily, filing a tax return or even an extension form establishes the taxpayer's tax year by virtue of Reg. Sec. 1.441-1T(b)(2) and Rev. Rul. 57-589. In this case, however, the return TP filed was rejected by the IRS because no S election had been made. It seems to me that this tax return establishes nothing. It seems to me that the IRS cannot simultaneously reject a return while at the same time maintaining that the same return establishes anything, including TP's tax accounting period. Where a taxpayer does not file a return, the manner in which the taxpayer keeps his books and records controls the accounting period for tax purposes. Rev. Rul. 68-125. As I understand it, the IRS has not yet made any substantive assertions at this point. They have merely billed the taxpayer based on the mechanical application of the information they have, i.e., calendar year period of accounting. They have not asserted, as I understand it, that some other period is not allowable. If my understanding is correct, I suggest filing a C corporation return based on the desired accounting period. Simultaneously, write a letter of explanation in response to the penalty notices and the requests for calendar year returns. The following points should be made. 1. TP erroneously filed Form 1120S for calendar year 1994. That return was rejected by IRS for lack of a valid S election. 2. TP maintains its books and records based on a fiscal year accounting period ended xx/xx/95. Form 1120S was filed based on a calendar year accounting period solely because of the requirement of Section 444. In any event, the calendar year filing was rejected. A rejected tax return establishes nothing, particularly a return filed in a manner inconsistent with the way the taxpayer maintains its books and records. 3. Form 1120 for the fiscal period ended xx/xx/95 was timely filed of yy/yy/95, and a copy pages 1 though 4 of the return is enclosed for your convenient reference. 4. Since TP has properly adopted a tax accounting period ending xx/xx and has timely filed Form 1120 on that basis, please take the following steps.
****** I would be happy to actually draft the necessary letter if that is desired. |
