BEFORE THE OFFICE OF TAX APPEALS

STATE OF ALASKA

IN THE MATTER OF:

COLLEGE UTILITIES CORPORATION

Corporate Income Tax

9709

)

)

)

)

)

Case No. 29-OTA-99

DECISION

This appeal challenges a Department of Revenue ("DOR") informal conference decision that upheld a five-percent penalty for late payment of a short-period corporate income tax return. The taxpayer, College Utilities Corporation, was acquired before the end of the 1997 tax year by a corporation that is part of a consolidated group. As a result, College Utilities had to file a short-period return reflecting its separate income for the portion of the tax year before the acquisition. Federal income tax regulations govern the filing and payment due date for acquired corporations filing short-period returns. In this case the taxpayer and DOR dispute the correct payment due date under the federal rules for the taxes that College Utilities reported on its 1997 short-period return. The parties also disagree about whether reasonable cause exists to abate the penalty assuming the taxes were paid after the correct due date.

This decision concludes that the payment was not late and, even if the payment was a month late, reasonable cause exists to excuse the late payment because the regulations governing short-period returns are unclear concerning the payment due date.

This appeal was submitted for decision on October 21, 1999, after briefing was completed on the taxpayer’s motion for summary judgment. Summary judgment is appropriate because the material facts are not disputed.

Therese Sharp and Kevin Walsh of the accounting firm, Walsh, Kelliher & Sharp represented College Utilities. Tim Cottongim, Appeals Officer, represented the Department of Revenue.

On October 6, 1997 Fairbanks Sewer and Water acquired College Utilities Corporation ("College Utilities") as part of the privatization of the Fairbanks Municipal Utilities System. If the acquisition had not occurred, College Utilities’ fiscal and tax year would have ended November 30, 1997 and its 1997 income tax return and tax payment would have been due on February 15, 1998. Because College Utilities was acquired before the end of its tax year by a corporation that was part of a consolidated group, College Utilities was required to file a short-period return on its separate income before the acquisition.

In December 1997, after the acquisition, College Utilities applied to the IRS for an automatic extension of time to file its 1997 income tax return. College Utilities paid its estimated federal taxes at that time. College Utilities received an extension until August 17, 1998 to file its 1997 return.

On December 22, 1997, the DOR received a payment from College Utilities in the amount of $5,600. This amount represented the estimated Alaska tax owed with the extension request for the short period ending October 6 but was not accurate. The taxpayer’s accountants, Walsh, Kelliher & Sharp, made an inadvertent computation error, using the estimated federal tax due, instead of federal taxable income, to calculate the estimated state taxes. This error resulted in underestimating College Utilities’ state tax liability for the period preceding the acquisition.

On March 12, 1998, College Utilities filed its Alaska return for the short period ending October 6, 1997, and included a tax balance payment of $28,677.

The tax year for Fairbanks Water & Sewer was the calendar year ending December 31, 1997. The normal filing and payment due date was March 15, 1998, but the filing date was extended until September 15, 1998. On August 9, 1998, Fairbanks Water & Sewer filed its 1997 consolidated Alaska return. The consolidated return included the income and attributes of College Utilities from October 6 through December 31.

DOR initially determined that the due date for the short-period return was December 15, 1997 and assessed a 15 % failure-to-pay penalty for the late payment. College Utilities disputed the penalty and requested an informal conference.

The informal conference decision, dated June 15, 1999, concluded that the correct payment due date on the short-period return was February 15, 1998, and reduced the penalty to 5%. February 15 is the filing and payment date that College Utilities would have had on its separate return if the acquisition had not occurred.

On July 15, 1999, College Utilities, through Walsh, Kelliher &Sharp, appealed the informal conference decision to the Office of Tax Appeals.

ANALYSIS

The payment due date issue.

The parties agree that the short-period return was timely filed but dispute the correct payment due date for the taxes reported on that return. College Utilities contends that the payment due date is March 15, the normal filing date for the consolidated return of Fairbanks Sewer and Water. If so, the payment on March 12 was timely and the penalty must be abated. The Department contends that the payment due date was February 15, the normal filing date for College Utilities’ separate return, without regard to the acquisition.

The payment-date dispute revolves around Treasury Reg. §1.1502-76 (c), the IRS regulation that governs the time for filing separate returns for tax periods not included in a consolidated return. That regulation has three parts. The first part, §1.1502-76(c) (1) addresses the situation in which a consolidated return is filed by the due date for a subsidiary’s separate return. The second part, §1.1502-76 (c) (2), addresses the situation in which a consolidated return is filed after the due date for the separate return and the subsidiary must file an amended or substituted short-period return to conform the separate return with the consolidated return. The third part contains examples that illustrate how the rule applies in specific circumstances, none of which precisely fit the facts in this case.

DOR argues that subpart (c)(2) offers the most reasonable guidance concerning the payment due date for College Utilities" short-period return. Subsection (c)(2) indicates that the payment due date for additional tax due under an amended or substituted return for a short period is the acquired corporation’s normal payment due date. DOR concedes that (c) (2) does not directly apply in this case because College Utilities filed an original return for the short period, not an amended or substituted return. But DOR reasons that the payment due date should be the same regardless of whether the acquired corporation files an original or amended return for the short period.

College Utilities argues that (c) (2) is entirely irrelevant because it applies only to amended or substituted returns. College Utilities contends that (c) (1) directly controls. That subsection states that a subsidiary’s short-period return must be filed by the due date of the consolidated return if the group files a consolidated return on or before the due date for the subsidiary’s separate return, including extensions of time. The facts in this case apparently fit this basic scenario because the consolidated return was filed on July 9, before the August 15 extended due date for College Utilities’ separate return. Subsection (c) (10 does not mention a payment due date but, as College Utilities points out, the Internal Revenue Code specifies that the date fixed for filing a return is the payment date, unless a different payment date is specified or the filing date is extended.

DOR agrees that (c) (1) governs the filing date for the short-period return but argues that (c) (1) does not control the payment due date. DOR reads the subsection as setting an extended filing date for the subsidiary’s separate return. As DOR interprets the rule, the filing date for the subsidiaries’ short period return is extended to the due date for the consolidated return but the payment due date remains the original due date for the subsidiary’s separate return.

The IRS regulations governing the filing of short-period returns are confusing. This is clearly demonstrated by the summary of the arguments above and by the record in this appeal. Since assessing the late-payment penalty in this case, DOR has changed its position regarding the payment due date. Likewise, the record indicates that the accounting firm advising the taxpayer in this matter initially thought the due date was earlier than March 15.

The taxpayer and DOR have each offered reasonable interpretations of the confusing regulations but the taxpayer’s position regarding the payment date is more persuasive for several reasons. First, the taxpayer’s position is based on a literal reading of the regulations. Subsection (c) (1), by its plain language, sets a filing date for a short-period return, rather than providing for an extension of the filing date as DOR contends.

Second, DOR’s position that subsection (c) (1) sets an extended filing date for the short-period return is contradicted by the example in subsection (c) (3) which illustrates application of (c) (1). In the example, a consolidated return including the income of an acquired corporation for part of the 1967 tax year is filed on March 15, 1968, before the June 15, 1968 due date for the subsidiary’s separate return. Subsection (c) (3) states that the separate return for the short period must be filed by March 15, the filing date for the consolidated return. Thus, the example indicates that the due date for the short-period return will be shortened, instead of extended, if the consolidated return for the group is due and filed before the normal due date for the separate return.

Finally, under the taxpayer’s reading of the rules, the filing and payment due dates for its 1997 short-period return are the same as for the 1997 consolidated return. This is consistent with the ostensible purpose of the regulations to coordinate filing of a subsidiary’s separate return with the parent’s consolidated return.

For these reasons, I conclude that March 15, the tax due date for the consolidated return, was the correct payment due date for taxes due under College Utilities’ separate return. Because College Utilities filed its short-period return and paid its taxes on March 12, payment was timely. But, for the reasons explained below, even if DOR’s position concerning the tax due date is correct and the March 12th payment was late, the uncertainty surrounding the payment due date is sufficient ground to abate the late-payment penalty.

Reasonable Cause.

College Utilities contends that reasonable cause exists to abate the late-payment penalty because the taxpayer reasonably relied on their accountants for expert advice concerning compliance with the complex filing requirements under the federal consolidated return regulations.

DOR concedes that the payment date issue is "relatively complex and confusing" but argues that the complexity of the legal issue is immaterial in determining reasonable cause. According to DOR, the real reason that College Utilities failed to pay its taxes in full before the due date was the computation error that the accounting firm made in determining the estimated Alaska tax liability. DOR argues that the computational error, not confusion over the filing and payment dates, caused College Utilities to underpay its Alaska taxes, so confusion over the payment date is immaterial to the "reasonable cause" determination.

DOR’s argument would be persuasive if the accounting firm had made the computational error in reporting taxes on the short-period return that was filed on March 12. Under that scenario, it would be clear that the failure to pay by the assumed March 15 deadline was caused by the computational error, not any confusion over the due date. But in this case the computational error was actually made months before any arguable due date in estimating the taxpayer’s 1997 liability for an extension request, not in reporting taxes on the short-period return. The return that was filed on March 12 correctly reported and paid the taxes due for the short tax period in 1997. Under these circumstances, the uncertainty surrounding the payment due date is a critical factor in the reasonable cause analysis.

Given the complex rules governing consolidated and short-period returns, it is clear that College Utilities reasonably relied on its accountants to timely file the short-period return. It is true that the accounting firm erred in computing estimated tax liability when requesting a filing extension in December. But, firm corrected the error and filed an accurate short period return and paid the taxes on March 12. In so doing, the accounting firm acted reasonably and prudently to file on time when a reasonable reading of the ambiguous regulations indicated the due date was March 15. If the regulations had clearly indicated that the payment due date was February 15, instead of March 15, it is reasonable to assume that the accounting firm would have reviewed the estimated tax computations, prepared a correct return, and paid the additional taxes by February 15. In this case the confusing regulations failed to provide the taxpayer with adequate notice of the due date.

College Utilities has demonstrated reasonable cause to abate the late-payment penalty. Even assuming the payment due date was February 15, as DOR contends, the taxpayer cannot be penalized for paying on March 12, given the fact that the regulations governing short-period returns were confusing and failed to clearly indicate the due date.

For the reasons discussed above, I conclude that College Utilities paid its short-period taxes for 1997 on time. But even if the March 12^th payment was late, reasonable cause exists to abate the penalty. The penalty assessed against College Utilities must be abated in full.

This is the hearing decision of the Administrative Law Judge (ALJ) under AS 43.05.465 (a). Unless the ALJ orders reconsideration, this decision will become final 60 days from the date of service of this decision. A request for reconsideration may be filed in accordance with AS 43.05465(b) within 30 days of the date of service of this decision.

It is so ordered.

I CERTIFY that on April ___, 2000, a true and correct copy was mailed by first class mail, or inter-departmental mail, to:

Therese T. Sharp, CPA

Walsh, Kelliher & Sharp, APC

P.O. box 73530

330 Barnette Street, Suite 101

Fairbanks, AK 99707-3530

Tim Cottongim, Appeals Officer

Income and Excise Audit Division

Department of Revenue

P.O. Box 110420

Juneau, AK 99811-0420