Signing a Form 872 (S corp in Ch 7 bankruptcy)?

[Famspear]

I have a new case, an S corporation in Chapter 7 bankruptcy. The S corporation filed its pre-petition 2004 Form 1120S in September of 2005. A revenue agent is asking the bankruptcy Trustee (my client) for a signed Form 872 extension of the statute on assessment (it would be only about a three month extension of time). But the entity is brand new to me -- I have no information on it, not even a copy of the 2004 Form 1120S return. No idea whether the S corporation used to be a C corporation; no information about anything that could affect or create federal income tax liability for the S corporation itself.

The revenue agent became upset on the phone when I asked why the IRS wanted the 872. The agent said that the IRS had no information at all, except that this concerns an examination of an unnamed related entity, the tax adjustments for which could affect "my" S corporation. The RA became very upset when I stated that I am hesitant to recommend to the Trustee that the Trustee agree to extend the statute -- without more specific information.

Despite my years of tax practice, I almost never deal with Form 872 issues. Anybody have any thoughts? Is it normal for an IRS revenue agent to be this cryptic when asking for an 872?

[Famspear]

I forgot to mention that the Revenue Agent is insistent that the Form 872 be provided to the IRS TODAY. The Agent was repeatedly insistent on wanting the 872 TODAY, and seemed upset. (The statute does not expire until some time in September.)

[BBFlatt]

I'd say it's rather abnormal in a couple of respects. One, if the RA has waited until there are less than 2 months remaining on the SOL to request an extension, he's deep in the weeds (which could explain his frustration with you during your phone conversation). The IRS has systems in place to track and remind the persons holding a return of imminent SOL expirations, action is generally required six months before the expiration date. It may be because your client is a related entity to the entity that is being exmained that led to this, still it strikes me as odd.

The other thing is that only a 3 month extension is being requested (I assume to Dec 31). What does the IRA hope to accomplish given an extra 90 days on an entity for which he has "no information at all".

If he's requested an extension, he's actually required to have provided you with a publication that clearly indicates that your client has the right to decline to extend the statute. Usually that's a bad choice to make, since the service will just go ahead and issue a stat notice for what it thinks the deficiency might be and let you dipute it in tax court, but this situation might be an exception, given the apparent discombobulation of the RA's case.

[BBFlatt]

Publication 1035 - Extending the Tax Assessment Period

http://www.irs.gov/pub/irs-pdf/p1035.pdf

[Famspear]

Thanks!

Now, here's some more information: The RA says that the IRS had been trying to contact the Bankruptcy Trustee for months, but had received no response. Since I was not retained on this case until literally last week (had never even heard of the case before last week), I can understand the RA's frustration. Also, the RA said that he didn't know that the entity was in bankruptcy, but I forgot to ask the RA when he found out about that (was the news received from me, just today on the phone?).

I suspect that the RA might actually have some idea about what the adjustments would be, but just won't tell me. Also, it's entirely possible that the adjustments would affect only the income and deductions of the S corporation without a tax effect to the S corporation itself, with the tax effect going to the shareholder(s) as is normally the case with an S corporation (e.g., assuming no problem with an invalid or terminated S corporation election, assuming no problem with subchapter C earnings & profits, etc.).

[BBFlatt]

Don't forget built in gains tax or passive investment income (IRC 1375).

What 872 varient were you requested to sign? An 872-S or plain 872? Is your client subject to TEFRA unified audit procedures?

I still think the RA is in the weeds, if he really knew what adjustments he was going to porpose, the case should've been forwarded to counsel for issuance of the stat notice at about the 90 mark, sometime in June.

[Famspear]

If he's requested an extension, he's actually required to have provided you with a publication that clearly indicates that your client has the right to decline to extend the statute. Usually that's a bad choice to make, since the service will just go ahead and issue a stat notice for what it thinks the deficiency might be and let you dipute it in tax court, but this situation might be an exception, given the apparent discombobulation of the RA's case.

Dear BBFlatt: The form is just the "regular" 872, and the request is to extend the statute to December 31, 2009. I had misread it to say "2008." Sorry about that.

Another aspect of this is that since the "tax" if any would be pre-petition, the IRS would have to file a proof of claim with the Court in order to be paid. This is a Chapter 7 liquidation, so there's virtually no hope for the IRS to collect anything unless the IRS participates in the bankruptcy. And a 90 day letter would not impose any obligation on the Trustee to litigate in Tax Court; the matter would generally be litigated (if at all) in the Bankruptcy Court under 11 USC 505(a) (although I guess the parties could ask the Bankruptcy Court to let the Tax Court hear it instead).

In due time, the IRS could issue the 90 day letter (per 11 USC 362(a)(9)(B)) and (per 11 USC 362(a)(9)(D)) could even assess the tax, but as a general rule no federal tax lien with respect to any particular item of property of the estate would be created as a result of the assessment.

[BBFlatt]

This is getting further and further from my area of expertise, but an 872 generally would only extend the SOL for taxes assessed at the S Corp level, like the built in gains tax, you'll notice that it says nothing about the impact of any flow through items on the shareholders.

Thanks for the bankrupcy refresher, I was going to ask whether a proof of claim had been filed.

[Famspear]

BBFlatt, thanks for your help!

[BBFlatt]

Please to be of service, hope it was useful.

btw, please forget I mentioned TEFRA, I was caught in a little time warp when I asked about that.