Sect. 183 special limitation period modifies general three-year SOL.

• Author: Fiore, Nicholas J.

C filed a timely 1983 return and included Form 5213 (which postpones determination of whether a Sec. 183 activity is engaged in for profit). In January 1989, C and the IRS extended the assessment period (through Form 872) until Dec. 31, 1989.

When a deficiency for 1983 was assessed, C challenged the extension, arguing that the general three-year period to assess tax had expired. The Service argued that the extension was valid, since it was given before the expiration of the special period to assess tax provided under Sec. 183(e)(4).

The Tax Court (opinion Halpern, J.) rules for the IRS; since Sec. 183(e)(4) extended the normal three-year assessment period to a five-year period, an agreement to extend made within that five-year period was timely made and bound C.

Normally, the period for assessing tax expires three years after a return is filed. That period can be extended by agreement. Sec. 183 disallows certain deductions associated with activities not engaged in for profit (so-called "hobby losses"). Sec. 183(d) establishes a presumption that an activity is engaged in for profit if a gross income test can be passed for two out of five consecutive years (seven consecutive years for certain horse-related activities). In the case of a new activity, a taxpayer can elect to delay a determination as to application of the presumption until the five- (or seven-) year period has expired. If a taxpayer makes such an election, the presumption will apply to each year in the test period. The usual period for assessing tax is extended to accommodate the delayed determination. The period for assessing tax with respect to the activity does not expire before the expiration of two years after a return is due (determined without extensions) for the last year in the test period.

Temp. Regs. Sec. 12.9(c) provides that, generally, an election to delay application of the presumption provided for in Sec. 183(d) can be made within three years after a return is due for the year in which the taxpayer first engages in the activity in question. C first engaged in the activity here in question in 1982. C made the required election by including Form 5213 with his timely filed 1983 return. Accordingly, C's election was timely. By virtue of that election, the period for assessing tax with respect to the activity in question was extended until Apr. 15, 1989.

It is C's argument that Sec. 183 does not provide for any extension of the Sec. 183(e)(4) period and an agreement...