An Illinois administrative law judge (ALJ) agreed with the Illinois Department of Revenue's interpretation of the Illinois statute of limitations, holding that the statute of limitations period includes any automatic extension for filing.1 Thus, because Illinois provides an automatic seven-month extension for corporations,2 the statute of limitations for the corporate taxpayer expired three years and seven months from the original (unextended) due date of the return.
Background
The taxpayer filed its corporate income tax return for the tax years ended December 31, 2006 and 2007 on March 13, 2007 and March 14, 2008, respectively. Upon audit, the Department issued Notices of Deficiency dated May 17, 2010 that assessed tax for each of the years at issue.
The taxpayer asserted that the Department's Notice of Deficiency for the 2006 tax year was time barred and not issued within the three-year statute of limitations prescribed by Illinois law.3 In addition, the taxpayer argued that the assessment for the 2007 tax year was barred by the statute of limitations, claiming that the assessment modified net income reported in 2004, a closed year under the same three-year statute of limitations.
Illinois Statute of Limitations
In order to resolve the issue of whether or not the statute of limitations had run, the ALJ had to determine the proper construction of the statute. The applicable section of the statute provides:
In general. Except as otherwise provided in this Act:
- A notice of deficiency shall be issued no later than 3 years after the return was filed, and
- No deficiency shall be assessed or collected with respect to the year for which the return was filed unless such notice is issued within such period.4
Further, the statute provides:
Time return deemed filed. For purposes of this Section a tax return filed before the last day prescribed by law (including any extensions thereof) shall be deemed to have been filed on such last day.5
The Department has adopted a long-standing regulation that interprets the above statutory provisions. The regulation states in part:
In General. With respect to a taxable year for which a taxpayer filed a return, no deficiency shall be assessed or collected except as otherwise provided in this Act unless the Department issues a notice of deficiency not later than 3 years after the later of the last day prescribed for filing or the date the return was filed. See subsection (h) regarding when a return is deemed filed.6
With respect to when a return is deemed to be filed, the regulation provides:
Time return deemed filed. For purposes of this Section, a return filed before the last day prescribed by law (including any extensions of time for filing) shall be deemed to have been filed on such last day. The last day prescribed for filing shall include any automatic extension of time for filing.7
In other words, the regulation provides that a notice of deficiency is timely if made no later than three years from the "last day prescribed for filing" a return. Pursuant to the regulation, the "last day prescribed for filing" a return includes any "automatic extension for filing."
The Department claimed that under the regulation, the statute of limitations for the taxpayer's 2006 return did not expire until three years from the extended due date of the taxpayer's return, October 15, 2010. The taxpayer, on the other hand, claimed that the regulation only extended the limitations period for assessment to three years from the extended due date when the taxpayer requested an extension and filed its return after the due date.
ALJ Rejects Taxpayer's Interpretation
The ALJ employed the rules on statutory construction in concluding, if possible, statutes and regulations should be construed so that no word is rendered meaningless or superfluous.8 The ALJ noted that the regulation specifically states that the statute of limitations expires three years from the "last day prescribed for filing" and also defines the "last day prescribed for filing" to include any automatic extensions. Because the taxpayer's interpretation would disregard the "automatic extension" language, the ALJ held that the regulation must be construed to include the automatic extension due date for filing in the statute of limitations period. Accordingly, the Department issued the Notice of Deficiency for the 2006 tax year within the statute of limitations.
For the 2007 tax year, the taxpayer maintained that the Department was precluded from assessing tax, asserting that doing so would modify its net income reported in the 2004 tax year, which had closed under the statute of limitations. In support of its argument, the taxpayer claimed that Illinois law provides that "no deficiency shall be assessed with respect to a taxable year for which a return was filed unless a notice of deficiency for such year was issued no later than the date prescribed in section 905."9
The ALJ disagreed with the taxpayer's argument, noting that while the section bars any modification to a prior year return changing any amount of tax due for a prior year in which a notice of deficiency was not timely issued, the language on its face only bars the issuance of a notice of deficiency pertaining to a prior year. In this case, the Department made a modification to the income reported for 2004 to disallow the amount of net operating loss reported. Although such modification affected the amount of net income attributable to that year, the Department did not issue a notice of deficiency pertaining to 2004. Rather, the Department issued a timely notice of deficiency for the 2007 tax year that was made within the period prescribed by the statute of limitations.
Commentary
This decision confirms that the Illinois Department of Revenue uses a statute of limitations period of three years from the extended due date of a return without regard to whether an extension was requested or granted.10 In other words, the statute of limitations for assessments and refunds is not three years, but three years and six months (seven months for corporations) from the original filing deadline.
While the inclusion of the automatic extension period may be detrimental to taxpayers facing assessment by the Department, it benefits taxpayers in a refund situation, as the same interpretation presumably would be applicable.11 Under the Department's regulation, taxpayers have an additional six or seven months to file refund claims. It is important for taxpayers to consider the automatic extension date when filing their income tax returns so as to be aware of the correct expiration date of the statute of limitations.
Footnotes
1 Administrative Hearing Decision No. IT 11-07, Illinois Department of Revenue, Aug. 8, 2011.
2 Illinois grants an automatic extension of six months (seven months for corporations). ILL. ADMIN. CODE tit. 86 § 100.5020(b).
3 35 ILL. COMP. STAT. 5/905(a).
4 Id.
5 35 ILL. COMP. STAT. 5/905(h).
6 ILL. ADMIN. CODE tit. 86 § 100.9320(a). This regulation was last amended by the Department in 1990.
7 ILL. ADMIN. CODE tit. 86 § 100.9320(h) (emphasis added).
8 See M.A.K. v. Rush-Presbyterian-St. Luke's Medical Center, 764 N.E.2d 1 (Ill. 2001).
9 35 ILL. COMP. STAT. 5/903(b).
10 35 ILL. COMP. STAT. 5/505(1). In Illinois, the Department of Revenue grants an automatic six-month extension (seven-month extension for corporations). ILL. ADMIN. CODE tit. 86 § 100.5020(b).
11 Note that Illinois has a parallel regulation that covers the statute of limitations on claims for refund. ILL. ADMIN. CODE tit. 86 § 100.9410. Effective February 25, 2011, the "time return deemed filed" subsection was amended to provide that the "[t]he last day prescribed for filing returns shall include any automatic extensions of time for filing." ILL. ADMIN. CODE tit. 86 § 100.9410(e).
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