Appeal from the United States Tax Court. Tax Ct. No. 2345-90. William M. Fay, Tax Court Judge, Presiding.
Before: Stephen Reinhardt, David R. Thompson and Andrew J. Kleinfeld, Circuit Judges. Opinion by Judge Kleinfeld.
KLEINFELD, Circuit Judge:
The main issue in this case is whether tax treatment of a subchapter S corporation with five or fewer shareholders proceeds at the entity level or the shareholder level. A regulation provides for shareholder level treatment, but does not apply to the period at issue in this case. An issue of who is the "tax matters person" also arises.
Twenty-three Nineteen Creekside, Inc. is a subchapter S corporation. During its fiscal year at issue in this case, ending June 30, 1984, Michael L. Baldigo owned 72% of its shares, Alvis M. Rushton owned 25%, and another individual owned 3%. After the fiscal year ended, but before calendar year 1984 ended, Mr. Rushton acquired all the shares from the other two shareholders.
Near the end of the statute of limitations period, the IRS obtained from Mr. Rushton and Mr. Baldigo their signed consent to extend the time to assess tax attributable to the corporation. Then in 1989, the IRS sent a notice of final S corporation administrative adjustment, proposing to adjust the income of the corporation upward by $206,733. Identical copies of the notice of adjustment were mailed to Mr. Baldigo at various addresses the IRS had for him and to the "Tax Matters Person" at the corporation's address.
The Internal Revenue Code provides for designation of one of the individuals associated with a partnership or subchapter S corporation as "tax matters partner" or "tax matters person." See 26 U.S.C. § 6231(a)(7); 26 U.S.C. § 6244; 26 C.F.R. § 301.6231(a)(7)-1. The tax matters person has authority to take various actions on behalf of the entity in dealings with the Internal Revenue Service. 26 U.S.C. § 6226. Mr. Baldigo took the position that he was not the "tax matters person" for the corporation.
Despite his claim that he was not the tax matters person for the corporation, Mr. Baldigo took steps to preserve the corporation's rights. Within the 90 day period prescribed by 26 U.S.C. § 6226 for petitions made by the tax matters person, Mr. Baldigo filed a petition in the Tax Court for readjustment. He claimed that the IRS had erred in the disallowances of deductions and other determinations underlying the $206,733 adjustment. On the signature line, he signed as "Michael E. Baldigo for" the corporation. In the caption, a rubber stamp below his name says "A Person(s) Other Than the Tax Matters Person." Mr. Baldigo filed a second petition for readjustment after the 90-day period. This second petition was filed in accord with the time limits prescribed for a person other than the tax matters person to obtain review. See 26 U.S.C. § 6226(b).
Only the procedural disputes, not the amount of the tax, have been put at issue in this appeal. The Tax Court consolidated the two petitions, and decided after a hearing that Mr. Baldigo was the tax matters person. The Tax Court then held that tax treatment of the corporation was properly done at the entity, rather than the shareholder, level.
All of the issues are questions of law, which we review de novo. Ann Jackson Family Foundation v. CIR, 15 F.3d 917, 920 (9th Cir. 1994).
Mr. Baldigo took the position that Mr. Rushton, not he, was the tax matters person. The corporation had not designated a tax matters person for its fiscal year ending June 30, 1984, the tax year at issue. Mr. Baldigo owned a majority of the shares of stock during that fiscal year, ...