44 T.C. 513 (1965)

A consolidated tax return filed in good faith, even if later deemed invalid as a consolidated return, can still qualify as a valid separate return for each subsidiary within the affiliated group for the purpose of starting the statute of limitations on tax assessment, provided it discloses sufficient information for tax computation.

Summary

General Manufacturing Corp. (GMC), a subsidiary of B.B. Rider Corp. (Rider), filed a consolidated tax return with Rider for the fiscal year ending October 31, 1957. The IRS later determined the consolidated return was invalid because GMC did not formally consent and Rider improperly changed its accounting period. Subsequently, the IRS issued a deficiency notice to GMC more than three years after the consolidated return was filed, arguing the statute of limitations had not begun because no valid return was filed by GMC. The Tax Court held that the consolidated return, despite its invalidity as such, constituted a valid separate return for GMC, thus the statute of limitations had expired, barring the deficiency assessment.

Facts

General Manufacturing Corp. (petitioner) was a subsidiary of B.B. Rider Corp. (parent). Petitioner operated on a fiscal year ending October 31, while Parent historically filed tax returns on a calendar year basis. For the tax year ending October 31, 1957, Parent filed a consolidated return including Petitioner. Petitioner did not file Form 1122 to formally consent to the consolidated return regulations. Parent had not obtained IRS approval to change its accounting period to a fiscal year. The consolidated return disclosed separate income and deductions for both Parent and Petitioner. The IRS issued a deficiency notice to Petitioner on September 5, 1963, more than three years after the consolidated return was filed.

Procedural History

The IRS determined a deficiency against Petitioner, asserting the consolidated return was invalid and the statute of limitations had not started. Petitioner contested the deficiency in Tax Court, arguing the consolidated return was sufficient to start the statute of limitations and the deficiency notice was untimely. The Tax Court ruled in favor of Petitioner, holding the deficiency assessment was barred by the statute of limitations.

Issue(s)

1. Whether the consolidated income tax return filed by B.B. Rider Corp. for the fiscal year ended October 31, 1957, which included General Manufacturing Corp., was valid as a consolidated return for General Manufacturing Corp.
2. Whether, if the consolidated return was invalid, it could be considered a valid separate return for General Manufacturing Corp. for the purpose of starting the statute of limitations on assessment under Section 6501(a) of the Internal Revenue Code.

Holding

1. No, because General Manufacturing Corp. did not make a timely consent to the filing of a consolidated return, and B.B. Rider Corp. did not obtain approval to change its accounting period to a fiscal year basis.
2. Yes, because the consolidated return was filed in good faith and disclosed sufficient items of income and deductions of Petitioner necessary for tax computation; therefore, it constituted a return sufficient to start the statute of limitations.

Court’s Reasoning

The court reasoned that while the consolidated return was invalid as such due to lack of consent from the subsidiary and improper accounting period change by the parent, it still served as a valid separate return for statute of limitations purposes. The court emphasized that for a return to start the statute of limitations, it need not be perfectly accurate or complete, citing Zellerbach Paper Co. v. Helvering and Germantown Trust Co. v. Commissioner. The court relied heavily on Commissioner v. Stetson & Ellison Co., which held that a consolidated return making substantial disclosure is considered the return of each constituent corporation for limitation purposes. The Tax Court noted that the consolidated return here provided schedules detailing income and deductions for both corporations, enabling tax computation. The IRS actually used this information to calculate the deficiency. The court concluded, quoting Harvey Coal Corporation, that there was no “concealment or misrepresentation” preventing the IRS from issuing a timely deficiency notice within the normal 3-year period. Therefore, the notice issued almost 4 years and 8 months after filing was untimely.

Practical Implications

This case clarifies that a good-faith attempt to file a consolidated return, even if procedurally flawed, can still protect taxpayers from indefinite exposure to tax assessments. For legal practitioners, it highlights that the substance of disclosure in a tax filing is crucial for triggering the statute of limitations, not merely the formal correctness of the filing type. It reinforces the principle that tax returns are not solely judged on technical compliance but also on whether they provide the IRS with sufficient information to assess tax. This decision is particularly relevant in situations involving affiliated groups with complex intercompany transactions or inadvertent errors in consolidated filing procedures. Later cases would likely distinguish situations where there is a lack of good faith or insufficient disclosure, but General Manufacturing Corp. stands for the proposition that substantial compliance in disclosing income and deductions in a consolidated filing is enough to start the clock on the statute of limitations for each entity, even if the consolidated return itself is later invalidated.