The six-year assessment period for omitted subpart F income opens the entire return, but a section 6501(c)(4) extension does not revive an already-expired refund-claim period

Plain-English summary

This Chief Counsel Advice answers two statute-of-limitations questions for a corporate taxpayer that filed amended returns omitting subpart F income. First, when the six-year assessment period under section 6501(e)(1)(C) applies because of omitted subpart F income, does it open the whole return or only the subpart F item? The advice concludes it opens the entire return: the prefatory language of section 6501(e)(1) refers to "any tax imposed by subtitle A," and the Tax Court's reasoning in Colestock (interpreting the parallel section 6501(e)(1)(A)) applies equally, so the IRS may adjust unrelated items within the six years. Second, does an agreement to extend the assessment period under section 6501(c)(4) also extend the taxpayer's time to file a refund claim under section 6511? The advice concludes no: under section 6511(c) and Estate of Chism, a Form 872 extends the refund-claim period only if it is signed within the section 6511(a) period; here the refund claims were already untimely, and the deposit in the nature of a cash bond was not a "payment." So the assessment period is extended, but the taxpayer's refund claims are barred.

Ruling snapshot

• Question: Does the six-year assessment period for omitted subpart F income reach the entire return, and does a section 6501(c)(4) extension also extend the section 6511 refund-claim period?
• Outcome: Advice given (entire return: yes; refund period extended: no)
• Key authorities: IRC § 6501(e)(1)(C); IRC § 6501(c)(4); IRC § 6511(a), (c); Colestock v. Commissioner, 102 T.C. 380; Estate of Chism v. Commissioner, 322 F.2d 956 (9th Cir. 1963)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 202142009
       Release Date: 10/22/2021
       CC:PA:01:CWhitcomb                           Third Party Communication: None
       POSTN-109172-21                              Date of Communication: Not Applicable

UILC: 951.00-00, 6501.00-00, 6501.05-12, 6501.18-00, 6511.03-03, 6511.03-06, 6511.05-00,
6511.09-00

date: July 26, 2021

 to:    Anthony J. Kim
        Senior Counsel (San Francisco)
        The Office of Chief Counsel
        (Large Business & International)

from: Elizabeth Girafalco Chirich, Branch Chief (Branch 1)
(Procedure & Administration)

subject: Statute of Limitations on Assessment under Section 6501(e) and Claims for Credit
or Refund under Section 6511

       This Chief Counsel Advice responds to your request for assistance asking whether ------
       ---------------------------------------------failure to report subpart F income on several income
       tax returns, which failure extends the statute of limitations under section 6501(e)(1)(C),
       extends the statute for all items on the returns. You also asked whether the refund
       period of limitations was extended by virtue of the parties’ agreement to extend the
       assessment period under section 6501(c)(4). This advice may not be used or cited as
       precedent.

       ISSUES

       1. Where the extended six-year assessment period under section 6501(e)(1)(C) applies
          as a result of omitted subpart F income, does the extended assessment period apply
          to the entire return or just to items related to omitted subpart F income?
       2. Does an agreement to extend the period of limitations for assessment under
          section 6501(c)(4) also extend the limitations period for filing a claim for credit or
          refund when the agreement was entered into before the 6-year assessment period
          had expired but after the credit or refund limitations period under section 6511(a) had
          passed?

POSTN-109172-21 2

CONCLUSIONS

1. Yes, based on the prefatory language in section 6501(e)(1), the six-year period for
   assessment under section 6501(e)(1)(C) applies to the entire return and is not limited
   to the omitted subpart F income item.
2. No. Under section 6511(c)(1) and relevant case law, for the statutory period for filing
   a claim for credit or refund under section 6511(a) to also be extended, the agreement
   to extend the assessment period under section 6501(c)(4) must be made before the
   statutory period for filing a claim for credit or refund under section 6511(a) has
   expired.

FACTS

-------------------------------------------------(“Taxpayer”) --------------------------------------------------

----------- For all relevant periods addressed in this memorandum, Taxpayer operated
on a calendar year ending December 31.

•    For the ------- tax year, Taxpayer made a $--------------estimated tax payment on --
     ---------------------------and timely filed its Form 1120 on ---------------------------,
     reporting tax due. Taxpayer filed an amended return on --------------------------------
     ----------------------------------------------------------------------------------------------------that
     included adjustments to previously claimed credits, resulting in a refund, which
     Taxpayer received. On --------------------------, Taxpayer filed a second amended
     return, reporting an omission of dividend income (subpart F income) and claiming
     additional credit and credit adjustments. This second amended return was filed
     after the three-year period of limitations on assessment under section 6501(a)
     had expired, but before the six-year period of limitations had expired under
     section 6501(e)(1)(C). Because of the omitted subpart F income, Taxpayer’s
     amended returns resulted in a net underpayment for the ------- tax year, which
     Taxpayer has not yet paid.

•    For the ------- tax year, Taxpayer made a $--------------estimated tax payment on --
     -------------------and timely filed its Form 1120 on ---------------------------, reporting
     tax due. Taxpayer filed an amended return on ---------------------------that included
     adjustments to previously claimed credits, resulting in a refund, which Taxpayer
     received. On --------------------------, Taxpayer filed a second amended return,
     reporting an omission of dividend income (subpart F income) and claiming
     additional credit and credit adjustments. This second amended return was filed
     after the three-year period of limitations on assessment under section 6501(a)
     had expired, but before the six-year period of limitations had expired under
     section 6501(e)(1)(C). Because of the omitted subpart F income, Taxpayer’s
     amended returns resulted in a net underpayment for the ------- tax year, which
     Taxpayer has not yet paid.

POSTN-109172-21 3

 •    For the ------- tax year, Taxpayer timely filed its Form 1120 on -------------------------
      -------, reporting a fully-paid tax liability. On -----------------------, Taxpayer made an
      $----------------deposit in the nature of a tax bond for the ------- tax year. Taxpayer
      filed an amended return on --------------------------, reporting an omission of
      dividend income (subpart F income) and claiming additional credit and credit
      adjustments . Because of the omitted subpart F income, the amended return
      reported an underpayment for the ------- tax year. This amended return was filed
      after the three-year period of limitations on assessment under section 6501(a)
      had expired, but before the six-year period of limitations had expired under
      section 6501(e)(1)(C).

In -------, the IRS began an examination of Taxpayer’s --------------------------tax years.
Because of the omitted subpart F income shown on Taxpayer’s amended returns, the
IRS determined, and Taxpayer agreed, that the six-year assessment period under
section 6501(e)(1)(C) applied for each year -------------------------.1 Before the six-year
period of assessment expired, Taxpayer and the IRS consented to extend the
assessment period of limitations, signing in ---------------a Form 872 (Consent to Extend
Time to Assess Tax) for the ------- tax year. They signed additional Forms 872 for the ---
------------------------------tax years in ----------------------------------------, so that the period of
limitations on assessments for tax years --------------------------is extended to -----------------
---------------------------.

In examining the tax returns in issue, the IRS has proposed to adjust other items
unrelated to the omitted subpart F income and questions whether section 6501(e)(1)(C)
extends the assessment period with respect to Taxpayer's entire tax liability for the tax
returns in issue. In other words, does the IRS have until ----------------------------to issue a
deficiency notice determining a deficiency attributable to items unrelated to the
unreported subpart F income?

LAW AND ANALYSIS

 1. Application of the six-year period of limitations under section 6501(e)(1)(C) to the
    entire return

Section 6501 generally requires the IRS to assess a tax within three years after the
filing of a return. There are several exceptions to this general rule. For example,
section 6501(c)(1) provides that there are no time limitations on the assessment of tax
arising from a false or fraudulent return; and section 6501(h) provides a limited
exception to the general three-year rule for a deficiency attributable to a net operating
loss.

Section 6501(e) also provides an exception to the general three-year limitations period:
section 6501(e)(1)(A) provides a six-year limitations period where there is a substantial
omission of gross income on a taxpayer’s return; and section 6501(e)(1)(C)—at issue

1 Under section 6501(a), the assessment periods for the ---------------------------tax years would have

expired on ---------------------------, ----------------------------, and ---------------------------, respectively.
POSTN-109172-21 4

here—applies a six-year limitations period if a taxpayer omits amounts that must be
included in income under the subpart F rules (I.R.C. §§ 951 et. seq.).

Courts have found that, based on the statutory language, some of the extended
limitation periods described above apply to the entire return, while others only apply to a
specific item of omitted income. For example, section 6501(c)(1) states that, in the
cases of fraud, “the tax may be assessed . . . at any time.” (emphasis added). Courts
have interpreted that provision to mean that, when section 6501(c)(1) applies to a
particular year, the IRS can determine a deficiency with respect to all items on the
return. See Rhone-Poulenc Surfactants and Specialties, L.P. v. Comm’r, 114 T.C. 533,
548 (2000), citing Lowy v. Comm’r, 288 F.2d 517, 520 (2d Cir. 1961) (“[I]f
section 6501(c)(1) applies to a particular tax year, it clearly permits an open-ended
period for any assessment of tax even if part of the assessment was based on
nonfraudulent . . . items.”).

In contrast, section 6501(h) states that, where a deficiency is attributable to a net
operating loss, “such deficiency may be assessed at any time before the expiration of
the period within which a deficiency for the taxable year of the net operating loss which
results in the carryback may be assessed.” (emphasis added). Thus, this exception
has been interpreted “as a limited exception to the general 3-year period of limitations
and is applicable only with respect to a deficiency attributable to the extraordinary items
listed therein.” Colestock v. Commissioner, 102 T.C. 380, 385-86 (1994), citing
Deakman-Wells Co. v. Comm’r, 213 F.2d 894, 898 (3d Cir. 1954), rev’g and remanding
20 T.C. 610 (1953); see also, Thomas H. Jones v. Comm’r, 71 T.C. 391, 396-97 (1978)
(“This Court has interpreted [section 6501(h)] to prevent the Commissioner from
assessing a deficiency in a year to which a carryback applies where the deficiency is
attributable to errors having no relationship to the circumstances giving rise to the
carryback . . . .”).

In Colestock, the Tax Court determined that the exception under section 6501(e)(1)(A)
opens all items on a taxpayer’s return for the determination of a deficiency, not just
those items that created the deficiency. Colestock, 102 T.C. at 385-86. The court
focused on the prefatory language of section 6501(e)(1) that applies the substantial
omission exception to “any tax imposed by subtitle A.” Based on this language, the
court explained, “[W]e interpret the phrase ‘the tax may be assessed * * * at any time
within 6 years after the return was filed’ as referring to any tax imposed by subtitle A for
the particular taxable year.” Id. at 388. The court distinguished this language from the
language used under section 6501(h), which specifically limits the extended limitations
period to items related to a net operating loss. Id.

The court found support for its conclusion in the legislative history related to
section 6501(e)(1)(A). Id. at 388-90. The legislative history does not include any
explanation related to section 6501(e)(1)(C), see H.R. Rep. 108-548 (June 16, 2004);
H.R. Conf. Rep. 108-755 (Oct. 7, 2004). But section 6501(e)(1)(C) shares the same
prefatory language referring to “any tax imposed by subtitle A,” which makes the
analysis under Colestock regarding the scope of the limitations period under section
POSTN-109172-21 5

6501(e)(1)(A) equally applicable to section 6501(e)(1)(C). See U.S. v. American Truck
Associations, 310 U.S. 534, 543-44 (1940) (statutes are to be construed so as to give
effect to their plain and ordinary meaning).

Therefore, like section 6501(e)(1)(A), the phrase “the tax may be assessed . . . at any
time within 6 years after the return was filed” refers to all income taxes reflected on a
return. Thus, the six-year limitations period under section 6501(e)(1)(C) applies to the
entire tax liability for a particular tax year and is not limited to the specific subpart F
items constituting the omission from gross income.

2. Availability of claims for credit or refund under section 6511 when statute of
   limitations on assessment is extended under sections 6501(e)(1) and 6501(c)(4)

The Secretary of the Treasury is authorized to make credits or refunds when a taxpayer
overpays taxes. I.R.C. § 6402(a). But refunds of overpayments "may not be allowed or
made after the expiration of the statutory period of limitations properly applicable,
unless, before the expiration of such period, a claim therefor has been filed by the
taxpayer.” Treas. Reg. §301.6402-2(a)(1).

A taxpayer seeking a claim for credit or refund of overpaid taxes ordinarily must file a
timely claim for a refund with the IRS under section 6511. Specifically, a taxpayer must
file a claim for credit or refund

    within 3 years from the time the return was filed or 2 years from the time
    the tax was paid, whichever of such periods expires later, or if no return
    was filed by the taxpayer, within 2 years from the time the tax was paid.

I.R.C. §§ 6511(a) and (b)(1).

Taxpayer’s ------------------------------claims for credit, filed on --------------------------, are
untimely because they were filed more than three years after the tax returns for those
years were filed. Taxpayer’s claims for ---------------------were also filed more than two
years after the tax was paid on -----------------------------------------------------and on ------------
--------------------------------. Although Taxpayer remitted $----------------for the ------- tax
year on -----------------------, this was a deposit in the nature of a cash bond, not a
payment of tax for purposes of a claim for credit or refund. Thus, this is not considered a
payment for purposes of section 6511(a).2

2 See Baral v. United States, 528 U.S. 431, 436 (2000); Rev. Proc. 2005-18, §4.01 provides that a

taxpayer may make a deposit under section 6603 by remitting to the IRS Center a check accompanied by
a written statement designating the remittance as a deposit. The written statement must include a
statement described in §7.02 identifying the amount of and basis for the disputable tax. A remittance that
is not designated as a deposit (aka, “undesignated remittance”) will be treated as a payment. Rev. Proc.
2005-18, §4.01(2). Any undesignated remittance that is made while the taxpayer is under examination,
but before a liability is proposed to the taxpayer in writing (e.g., before the issuance of a revenue agent’s
or examiner’s report), will be treated by the Service as a deposit if the taxpayer has no outstanding
liabilities. Rev. Proc. 2005-18, §4.01(1).
POSTN-109172-21 6

Although Congress generally intended for the assessment period under section 6501
and the refund period under section 6511 to run concurrently,3 section 6511 does not
contain an extended refund period of limitations when the 6-year assessment period of
limitations under section 6501(e)(1) is extended by agreement under section 6501(c)(4).

Section 6511(c) provides special rules related to the credit or refund limitations period
where the parties agree to extend the assessment period under section 6501(c)(4).
Specifically, section 6511(c)(1) provides:

    The period for filing claim for credit or refund or for making credit or refund
    if no claim is filed, provided in subsections (a) and (b)(1), shall not expire
    prior to 6 months after the expiration of the period within which an
    assessment may be made pursuant to the agreement or any extension
    thereof under section 6501(c)(4).

I.R.C. §6511(c)(1) (emphasis added).

But section 6511(c) also requires that the agreement under section 6501(c)(4) be
executed “within the period prescribed in subsection (a) for the filing of a claim for credit
or refund”—i.e., within three years from filing the return or two years from paying tax—in
order for the credit or refund period to be extended by agreement. I.R.C. § 6511(c);
Treas. Reg. §301.6511(c)-1(a).

An agreement to extend the assessment period must be made before the relevant
assessment period has expired. I.R.C. § 6501(c)(4). Thus, an agreement to extend the
assessment period under section 6501(e)(1) is valid so long as it is made before the six-
year period expires. Under section 6511(c), however, unless a Form 872 was signed
within the credit or refund limitations period under section 6511(a), the extension of the
assessment period does not automatically extend a taxpayer’s time to claim a credit or
refund.

The Ninth Circuit addressed this intersection of the assessment and refund periods in
Estate of Chism et al. v. Comm’r, 322 F.2d 956 (9th Cir. 1963). In this case, the estate
and the IRS entered into a consent agreement, Form 872, with respect to Mr. and
Mrs. Chism’s 1952 tax year, in November 1957. This November date was more than
three years but less than five years after the filing and due date of the Chism’s 1952
return. Under the consent agreement, the time for making an assessment was
extended to June 30, 1959. In March 1959, the IRS timely issued a notice of deficiency
for tax years 1952 through 1956.

3 For example, the legislative history of section 6501(h) establishes that Congress intended the limitations

period for the assessment of deficiencies attributable to NOL carrybacks and the limitations period for
credit or refund of overpayments attributable to NOL carrybacks to be “coextensive.” See H. Rep. 79-
849, 79th Cong. 1st Sess. 1945 C.B. 588.
POSTN-109172-21 7

The estate petitioned, challenging that the deficiency for 1952 was barred by the statute
of limitations. The estate also raised a new issue that, if allowed by the Tax Court,
would have resulted in a refund for all years.

The Tax Court held that the assessment was not barred, because there was an
omission in excess of 25 percent of the gross income reported on the 1952 return. Thus
section 275(c) [under the Internal Revenue Code of 1939 (the predecessor to
section 6501(e)(1)(A))] applied; and before the expiration of the 5-year period under
section 275(c), the parties entered into a consent agreement, extending the assessment
period to June 30, 1959; and before June 30, 1959, the Commissioner issued his notice
of deficiency. The Tax Court also disallowed the claim for overpayment of taxes. The
estate appealed, arguing that the extension agreement for 1952 was void for lack of
mutuality because it did not also operate to extend the time during which a claim for
refund could be filed. Estate of Chism, 322 F.2d at 962.

The Ninth Circuit rejected the taxpayers’ argument. The court explained that the Code
did not require mutuality under these circumstances and that, for the refund period to be
extended, section 322(b)(3), the predecessor to section 6511(c), clearly required the
extension agreement to be entered into within the period of limitation for refund claims
“prescribed in paragraph 1 … three years from the time the return was filed by the
taxpayer * * *.” Id. at 963. The court noted that, in contrast, an agreement to extend the
assessment period is valid so long as it is made within an applicable assessment period
under section 275 (i.e. either the general three-year period or an extended period).
Because that agreement to extend the assessment period was executed before the five-
year assessment period under section 275(c) had expired, it was valid. Id. Although
this result lacks mutuality, the court explained that:

     Thus, in situations in which the five-year statute is applicable,
     agreements to extend the assessment period can be made at any time
     before the five-year statute has run…..But refunds are authorized only if
     the claim has been filed within the three years after the return was filed,
     or within a period as extended by an agreement made within that three-
     year period. A congressional intent to require mutuality in every case
     would be incompatible with this statutory framework. It would
     effectively preclude any agreement extending the five-year period for
     assessing deficiencies from being made more than three years after the
     return had been filed. We will not impute such an intent to Congress in
     the face of its contrary statutory language. The agreement extending
     the assessment period in this case was an effective one and
     assessment of the deficiency for 1952 is not barred.

Estate of Chism, 322 F.2d 956 at 963 (emphasis added).

Here, the facts mirror those in Estate of Chism. Although the instant case involves the
six-year limitations period under section 6501(e)(1)(C), whereas Estate of Chism
involved the predecessor to section 6501(e)(1)(A), the Ninth Circuit’s reasoning applies
POSTN-109172-21 8

because both provisions operate in the same way under the statute. Applying both the
plain language of section 6511(c) and Estate of Chism, Taxpayer’s ---------------------------
claims for credit for tax years ------------------------------are untimely.4

Conclusion

Case law and statutory interpretation suggest that the six-year assessment period under
section 6501(e)(1)(C) applies to Taxpayer’s entire return for each of the ---------------------
------- tax years. Both sections 6501(e)(1)(A) and (C) share the same prefatory
language and the Tax Court’s reasoning in Colestock logically applies to both
provisions.

Taxpayer’s claims for credit filed on ---------------------------were untimely under
section 6511(a) and these claims could not be extended by the parties’ consent
agreements. Section 6511(c) clearly provides that an agreement to extend the
limitations period for assessment will only extend a taxpayer’s time to file a claim for
credit or refund when it is executed within the limitations period under section 6511(a).
The assessment statute for the --------------------------tax years, however, was extended
because the parties’ Forms 872 were executed before the six-year assessment period
under section 6501(e)(1)(C) had expired. Further, Estate of Chism applied these
principles to a nearly identical set of facts.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call Christopher Whitcomb at (202) 317-4210 if you have any further questions.

4 The IRS is not required to substantiate Taxpayer’s potential offsets because the amended returns filed

on ----------------------------do not involve overpayments and the IRS is proposing adjustments within the
assessment period of limitations. See Lewis v. Reynolds, 284 U.S. 281 (1932) (holding the IRS can
offset a taxpayer’s refund claim even when the assessment period of limitations has expired).