Limitations Period for Year End Conversion Outlined

[2] Section 6501(a) provides generally that except as otherwise provided in this section, the amount of any tax imposed by Title 26 shall be assessed within 3 years after the return was filed, and no proceeding shall be begun after the expiration of such period. Section 6501(b)(1) provides generally that for purposes of determining the period for assessment, a return of tax filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered as filed on such last day.

[3] Section 6501(c)(4) provides for the extension of the period of limitations for assessment by agreement of the parties. To be valid, the Service and the taxpayer must have consented to extend the period, in writing, before the expiration of the time for assessment of tax. Section 6501(a) and Treas. Reg. 301.6501(c)-1(d). Although the agreement need not be in any particular form nor be limited to any set length of time, parties generally use Form 872, Consent to Extend the Time to Assess Tax, or Form 872-A, Special Consent to Extend the Time to Assess Tax, for this purpose.

[4] Section 6501(g)(2) provides that if a taxpayer determines in good faith that it is an exempt organization and files a return as such under section 6033, and if such taxpayer is thereafter held to be a taxable organization for the taxable year for which the return is filed, such return shall be deemed to be the return of the organization for purposes of section 6501.

[5] Section 6033(a) provides the general rule that every organization exempt from taxation under section 501(a) shall file an annual return. Pursuant to section 6033(a) the annual return to be filed by a trust which is part of an employee benefit plan described in section 401(a) or a custodial account described in section 401(f) is Schedule P, Annual Return of Fiduciary of Employee Benefit Trust. Treas. Reg. 1.6033-2(a)(1). The Instructions for the Schedule P provide that it must be attached to a Form 5500, Annual Return/Report of Employee Benefit Plan. Form 5500 is required to be filed by the last day of the seventh month after the plan year ends.

[6] The filing of Schedule P with Form 5500 will start the period of limitation on assessment under section 6501(a) if the form and schedule are filed in good faith and the trust is later determined not to be tax-exempt. See section 6501(g)(2). Because the period for assessment under section 6501(a) begins with the filing of the Schedule P and Form 5500, to be valid a consent to extend such period must be executed by the parties within three years from the filing date of the Form 5500. Section 6501(c)(4).

[7] The taxable year of a trust is generally a calendar year end. Section 645(a). However organizations described in section 401(a), which are exempt from tax under section 501(a), may operate on a fiscal year end. Section 645(b) If a plan fails to satisfy the requirements of section 401(a) its related trust does not satisfy section 501(a), and the trust must convert to a calendar year end for purposes of determining its taxable income. The first year of the taxable trust is a short year. See Notice 88-18, 1988-1 C.B. 486.

[8] As a practical matter, the Service need only protect the time within which an assessment can be made in situations in which a trust will be taxable. Therefore, the Service need only obtain consents to extend the time within which to assess for trusts that are required to convert to calendar year end trusts. Such consents will be valid only if timely obtained, as discussed above. Although the period of limitation for assessment is actually triggered by the good faith filing of the Form 5500 on a fiscal year end basis, in the event a trust is determined to be taxable, its taxable income will be determined on a calendar year end basis.

[9] However, the Service will be precluded from making an assessment of the tax ultimately determined unless the period of assessment is open either directly or via a valid consent. Therefore, it is imperative that consents be timely obtained within three years of the filing date of the Form 5500 and Schedule P.

[10] A consent executed by the parties, intended to extend the period of limitations for assessment for returns improperly filed on a fiscal year end basis, which makes no reference to a calendar year end liability will not be sufficient to suspend the period for assessment with respect to the proper calendar year end. See Atlas Oil and Refining Corporation v. Commissioner, 22 T.C. 552 (1954), nonacg., 1955-2 C.B. 10. However, we think a properly worded consent will make clear that the taxable period to which the consent relates is the period necessitated by section 645.

[11] The above analysis can be illustrated by the following example.

[13] If you have any questions regarding our analysis please contact Don Parkinson of my staff at 622-6090 or 622-3887 at your earliest convenience.