Sec.

473.0 Numbering of sections.

473.1

473.2

473.3

REVENUE ACT OF 1943

SEC. 513. PERIOD OF LIMITATIONS IN CASE OF RELATED TAXES UNDER CHAPTER 1 AND CHAPTER 2. (a) In general. The Internal Revenue Code is amended by inserting at the end of Chapter 38 a new section to read as follows:

SEC. 3807. PERIOD OF LIMITATIONS IN CASE OF RELATED TAXES UNDER CHAPTER 1 AND CHAPTER 2. (a) Definitions. As used in this section(1) The term "tax previously determined" shall have the meaning assigned to such term by section 3801 (d).

(2) The term "the same taxable year" shall include any taxable year which coincides in whole or in part with the taxable year for which the determination referred to in subsection (b) is made.

(b) Extension of period of limitations. If

(1) under a determination in respect of a tax imposed by Chapter 1 or Chapter 2, a deficiency is assessed or a credit or refund of an overpayment is allowed, within the period of limitations properly applicable thereto, and

(2) the application of the law or facts determined in the ascertainment of such deficiency or overpayment to any other such tax of the taxpayer under Chapter 1 or Chapter 2 for the same taxable year would result in an increase or decrease in the amount of the tax previously determined in respect of such other tax, and

(3) on any date prior to the expiration of one year from the assessment of a deficiency or the allowance of a credit or refund in respect of the tax referred to in paragraph (1), the assessment of a deficiency or the allowance of a credit or refund in respect of the tax referred to in paragraph (2) is prevented (except for the provisions of section 3801 or 734) by the operation (whether before, on, or

after the date of enactment of the Revenue Act of 1943) of any law or rule of law other than this section and other than section 3761 (relating to compromises),

then upon such date the increase or decrease in the tax referred to in paragraph (2) shall be considered a deficiency or an overpayment, as the case may be. Such deficiency may be assessed and collected or such overpayment may be credited or refunded as if on the date the deficiency is assessed or the credit or refund allowed in respect of the tax referred to in paragraph (1) one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund in respect of the tax referred to in paragraph (2) for the same taxable year.

(c) Adjustment unaffected by other items, etc. In determining whether an increase or decrease in the amount of the tax previously determined shall be considered to result from the application of the law or facts under a determination referred to in subsection (b) (1) changes shall be made in items which are the subject of such determination and in items which are affected thereby, and in no others. The amount which may be assessed or allowed as a credit or refund under subsection (b) shall not be diminished by any credit or set-off based upon any item which was not the subject of such determination or affected thereby. Such amount, if paid, shall not be recovered by a claim or suit for refund or suit for erroneous refund based upon any item which was not the subject of such determination or affected thereby, except in connection with a subsequent application of this section.

(d) Application to affiliated groups. As used in subsection (b) the term "any other such tax of the taxpayer" shall, if the taxpayer was a member of an affiliated group, also include any other such tax of any other member of the group.

(b) Taxable years to which applicable. The amendment made by this section shall apply to taxable years beginning after December 31, 1939.

§ 473.0 Numbering of sections. Inasmuch as the regulations in this part constitute Part 473 of Title 26 of the Code of Federal Regulations, each section of the regulations bears a number beginning with 473 and a decimal point. References to sections preceded by "473” are references to sections of the regulations in this part. References to sections not preceded by "473" and references to chapters are references to sections and chapters of the Internal Revenue Code unless otherwise expressly indicated.

§ 473.1 Purpose and scope of section 3807. Section 3807 provides for an adjustment under the circumstances specified in section 3807 (b) with respect to

any tax imposed by chapter 1 or chapter 2 when one or more provisions of law, such as the statute of limitations, or one or more rules of law, such as res judicata, would otherwise prevent such adjustment. Section 3807 and these regulations are applicable to taxable years beginning after December 31, 1939.

§ 473.2 Tax previously determined. For purposes of section 3807, the term "tax previously determined" shall have the meaning assigned to such term by section 3801 (d).

§ 473.3 The same taxable year. For purposes of section 3807, the term "the same taxable year" includes any taxable year which coincides in whole or in part with the taxable year for which the determination specified in section 3807 (b) is made.

§ 473.4 Extension of period of limitations. If as a result of a determination (including a determination under section 124, 3801, 3806, or 3807 itself) in respect of any tax imposed by chapter 1 or chapter 2 (hereinafter referred to as "the first tax”) a deficiency is assessed or a credit or refund of an overpayment of such tax is allowed, within the period of limitations properly applicable thereto, certain adjustments described in § 473.5 may be made in certain instances for the same taxable year in respect of any other tax of the same taxpayer imposed by chapter 1 or chapter 2. If (1) the application of the law or facts which were the subject of such determination to any other tax imposed by chapter 1 or chapter 2 of the same taxpayer for the same taxable year would result in an increase or decrease in the amount of such other tax as previously determined, and if (2) on the date such deficiency in respect of the first tax was assessed, or credit or refund allowed, or at any time within one year from such date, the assessment of a deficiency, or the allowance of a credit or refund, as the case may be, in respect of such other tax is prevented (except for the provisions of section 3801 or 734) by the operation of any provision of law or rule of law (other than section 3807 or section 3761, relating to compromises), then upon the date the deficiency was assessed, or credit or refund allowed, in respect of the first tax the increase or decrease specified in (1) of this sentence in such other tax shall be considered a deficiency or any overpayment, as the case may be, in respect of such other tax. Such deficiency may

be assessed and collected, or credit or refund of such overpayment allowed, as if on the date the deficiency is assessed, or credit or refund allowed, in respect of the first tax one year remained before the expiration of the period of limitations upon assessment, or filing claim for refund of overpayment, of the tax in respect of which the increase or decrease is determined.

All provisions of law, for example, the suspension of the running of the statute of limitations under the provisions of section 277 in case a statutory notice of deficiency is sent to the taxpayer, not inconsistent with the provisions of section 3807, will be applicable to the assessment of such increase or the refunding of such decrease. Such increase may be assessed, or decrease refunded, notwithstanding any provision of law, such as section 272 (f) or 322 (c), or any rule of law, e. g., res judicata, other than section 3807 itself or section 3761, relating to compromises.

Any increase determined under section 3807 may be assessed and collected, or any decrease may be credited or refunded, even though no deficiency, as defined in section 271, or no overpayment, as the case may be, in respect of the given tax for the given taxable year would be found to exist were consideration permitted of all the factors which enter into the computation of the tax liability for the given taxable year, including those items in which no change may be made under the provisions of section 3807 (c). If an assessment or a refund, as the case may be, is permissible during all or part of the above one-year period without regard to section 3807, then on any date during such period on which an assessment or a refund could be made or allowed without regard to section 3807 only such an amount may be assessed as a deficiency or allowed as a credit or refund as could be assessed or allowed without regard to the provisions of section 3807. If an assessment or refund could be made or allowed without regard to section 3807 during part of such one-year period and not during the remainder of such period, any increase or decrease determined under section 3807 may be assessed or credited or refunded during such remainder of the one-year period without regard to whether or not any deficiency, as defined in section 271, or any overpayment, as the case may be, in respect of the given tax for the given taxable year would be found to exist were consideration permit

ted of all the factors which enter into the computation of the tax liability for the given taxable year, including those items in which no change may be made under the provisions of section 3807 (c).

If a deficiency has been assessed, or a credit or refund allowed, in respect of any tax imposed by chapter 1 or chapter 2, the adjustments permitted under section 3807 may be made even though such assessment or such credit or refund is made or allowed pursuant to a determination prior to the time such determination becomes final.

The extension of the period of limitations upon making an assessment, or allowing a refund, under the provisions of section 3807 may be illustrated by the following example:

Example. Corporation X on March 15, 1941 filed a return and paid a tax as a personal holding company for the calendar year 1940. The period of limitations provided in section 322 upon filing a claim for refund of such personal holding company tax expired on March 15, 1944. The Commissioner within the applicable period of limitations asserted a deficiency against Corporation X in respect of the excess profits tax for such taxable year. On March 1, 1946, it was determined under a decision of The Tax Court of the United States that Corporation X was not a personal holding company and was therefore subject to excess profits tax. Such excess profits tax was assessed on May 1, 1946 Under the provisions of section 3807 Corporation X may file a claim for refund of the personal holding company tax which it paid, or credit or refund may be allowed or made if no claim is filed, as if the period of limitations upon filling claim for credit or refund, or the allowing of credit or refund if no claim is filed, did not expire until May 1, 1947.

§ 473.5 Types of adjustments permissible under section 3807. If as a result of a determination in respect of any tax imposed by chapter 1 or chapter 2 (hereinafter referred to as "the first tax") a deficiency is assessed, or a credit or refund of an overpayment of such tax is allowed, within the period of limitations properly applicable thereto, adjustments which may be made for the same taxable year in respect of any other tax (hereinafter referred to as "the second tax") of the same taxpayer imposed by chapter 1 or chapter 2 include the following:

(a) The item, or items, which was the subject of the determination in respect of the first tax shall be treated in conformity with such determination in com

puting the amount of income subject to the second tax;

(b) If the first tax is allowable as a deduction in computing the amount of income subject to the second tax, or if the income subject to the first tax is a credit against net income for purposes of computing the amount of income subject to the second tax, the amount which may be deducted or credited, as the case may be, shall be the amount of the first tax paid or accrued, or the amount of income subject to the first tax, as the case may be, determined after making the adjustments in the first tax resulting from the determination specified in (a); and

(c) In computing any deduction or credit which is limited to or by net income or the amount of income from property, the amount to or by which such deduction or credit is limited shall be the net income or the amount of income from property computed after making the adjustments specified in (a) and (b).

The adjustments permissible under section 3807 may be illustrated by the following example:

Example. Assume that Corporation X, which makes its income and excess profits tax returns on the calendar year basis, filed returns on March 15, 1942 for the year 1941 showing a net income of $1,500,000 before taking into account the deduction for contributions, a net income of $1,425,000 after taking such deduction into account, and an excess profits tax of $1,000,000. Corporation X made charitable contributions of $100,000 in 1941, and deducted 5 percent of $1,500,000, or $75,000, in respect of such contributions in computing its normal tax net income and its surtax net income. On March 1, 1944 a deficiency in income tax due to an adjustment in respect of long-term capital gains was assessed pursuant to a decision of The Tax Court of the United States which had become final. This adjustment did not affect the excess profits tax since long-term capital gains are not subject to such tax.

In computing its net income, Corporation X deducted from gross income an amount of $100,000 as depreciation on a given property. It was later determined that the correct amount which should have been deducted for such depreciation is $50,000. A deficiency of $30,000 in excess profits tax was assessed pursuant to such determination on March 1, 1945. The following adjustments may be made under section 3807 in respect of Corporation X's income tax, i. e., normal tax and surtax, for the year 1941:

(1) $50,000 instead of $100,000 shall be allowed as a deduction for depreciation in

computing normal tax net income and surtax net income;

(2) $1,030,000 instead of $1,000,000 shall be allowed as a deduction for excess profits tax paid or accrued in computing normal tax net income and surtax net income; and

(3) $76,000, or 5 percent of $1,520,000, shall be allowed as a deduction for contributions.

Corporation X's normal tax net income and surtax net income each is therefore to be increased by $19,000 (i. e., $50,000 less $30,000 less $1,000), and the increase in normal tax and surtax computed on the basis of such increased normal tax net income and surtax net income over the amount of normal tax and surtax previously determined is to be considered a deficiency under the provisions of section 3807. The amount of such increase shall be determined and shall be assessed in accordance with the provisions of section 3807 (b) and (c) and of §§ 473.4 and 473.6.

Section 3807 may operate several times upon the same tax and, likewise, may operate simultaneously upon several taxes. However, an adjustment under the provisions of section 3807 in respect of any tax for a given taxable year does not of itself authorize an adjustment in any tax for any prior or subsequent taxable year by reason of a carry-over or a carry-back of a net operating loss or of an unused excess profits credit or a carry-over of a net capital loss from the given taxable year to such prior or subsequent taxable year. Adjustments in such prior or subsequent taxable year may be made only if the assessment of a deficiency or the allowing of a credit or refund, as the case may be, in the case of such prior or subsequent taxable year, is not prevented by the operation of any law or rule of law.

§ 473.6 Ascertainment of amount of increase or decrease. The tax previously determined must be recomputed to ascertain the increase or decrease in tax, if any, resulting from the adjustments specified in section 3807 (b) and in § 473.5. The difference between the tax previously determined and the tax as recomputed after such adjustments have been made will be the amount of the increase or decrease. In recomputing the tax previously determined to ascertain whether any increase or decrease in the amount of the tax previously determined shall be considered to result from the adjustment specified in section 3807 (b) and in § 473.5, only those items which were the subject of the determination specified in section 3807 (b) (1) and in § 473.4 or which were affected by such determination, and no other

items, shall be considered in making such recomputation. If the treatment of any item upon which the tax previously determined was based, or if the application of any provision of the internal revenue laws with respect to such tax depends upon the amount of income or the amount of income from property (e. g., charitable contributions, depletion, or foreign tax credit), readjustments must be made in such items as part of the recomputation in conformity with the change in the amount of income or the amount of income from property which results from the correct treatment of the item or items in respect of which the above determination was made. Interest on any increase or decrease shall be assessed or allowed under the general rule applicable to the assessment of interest in connection with amounts determined as deficiencies and to the allowance of interest in connection with amounts determined as overpayments.

The amount of any increase or decrease determined under section 3807 and under these regulations shall not be diminished by any credit or set-off based upon any item which (1) was not the subject of the determination specified in section 3807 (b) (1) and in § 473.4, or (2) was not affected by such determination. For example, if the Commissioner asserts a deficiency in respect to any tax imposed by chapter 1 or chapter 2 under the provisions of section 3807, no question relating to a deficiency or an overpayment of tax, unless based upon an item which (1) was the subject of the determination specified in section 3807 (b) (1) and in § 473.4, or (2) was affected by such determination, may be raised either by the Commissioner or by the taxpayer in a proceeding before The Tax Court of the United States. The fact that an adjustment is made in a given tax for a given taxable year under the provisions of section 3807 shall not mean, however, that any deficiency which could otherwise be assessed, or any refund which could otherwise be allowed, without regard to section 3807 cannot be assessed or allowed either simultaneously with or on some date after the adjustment in such tax is made under the provisions of section 3807. Thus, if the taxpayer petitions The Tax Court for a redetermination of a deficiency which the Commissioner has asserted under the provisions of section 3807, the decision of The Tax Court shall not be res judicata as to the

taxpayer's liability in respect of the given tax for the taxable year in question, and neither such decision of The Tax Court nor section 322 (c) shall prevent the taxpayer from being allowed a credit or refund otherwise allowable in respect of such tax for such taxable year or from instituting suit in any court for the recovery of any part of such tax, except in respect of items which were the subject of the determination specified in section 3807 (b) (1) and in § 473.4 or which were affected by such determination.

If the Commissioner has assessed and collected the amount of any increase under section 3807, no part thereof may be recovered by the taxpayer in any suit for refund (except in connection with the subsequent application of section 3807) based upon any item other than the one which was the subject of the determination specified in section 3807 (b) (1) and in § 473.4 or was affected by such determination. If the Commissioner has refunded the amount of any decrease under section 3807, the amount so refunded may not subsequently be recovered by the Commissioner in a suit for erroneous refund (except in connection with a subsequent application of section 3807) based upon any item other than the one which was the subject of the determination specified in section 3807 (b) (1) and in § 473.4 or was affected by such determination.

If any decrease in tax is determined under the provisions of section 3807, it may be credited, under the applicable law and regulations thereunder, against any tax imposed by chapter 1 or chapter 2, including the tax in respect of which the decrease was determined, on installment thereof, due from the taxpayer. Likewise, if any increase in tax is determined under the provisions of section 3807, any overpayment by the taxpayer of any tax imposed by chapter 1 or chapter 2, including the tax in respect of which the increase was determined, may be credited against the amount of such increase in accordance with the applicable law and regulations thereunder. (See section 322 and the regulations promulgated thereunder.) Accordingly, it may be possible for the Commissioner and the taxpayer to settle at one time the taxpayer's tax liability with respect to all the taxes imposed by chapter 1 and chapter 2 for the taxable year for which the determination specified in section 3807 (b) (1) and in § 473.4 was made.

Adjustments permitted by section 3807 are in addition to and do not affect other adjustments in the tax increased or decreased which are permissible under any other law or rule of law. Thus, if any decrease in tax determined under section 3807 is to be credited against an amount due from the taxpayer in respect of the same tax, or if any overpayment of tax is to be credited against an increase in respect of the same tax determined under section 3807, such decrease or such overpayment shall not be so credited until all other items, including barred deficiencies and barred overpayments, have been taken into account in determining the amount of such tax due from the taxpayer or the amount of overpayment in respect of such tax. The rule that adjustments made under section 3807 in the tax previously determined do not affect other adjustments to such tax which may be made under any other law or rule of law is illustrated by the following example:

Example. Corporation X filed its income tax return for the calendar year 1940 on March 15, 1941 and on that date paid the full amount of tax shown on such return. The Commissioner granted Corporation X an extension of six months for filing its excess profits tax return for the calendar year 1940. Corporation X filed its excess profits tax return for 1940 on September 15, 1941 and on that date paid the full amount shown on such return. On March 1, 1943 Corporation X paid a deficiency of $1,500 in respect of its income tax for 1940.

It was determined on June 1, 1944 that there was a deficiency in respect of excess profits tax, and such deficiency was assessed on September 15, 1944. Adjustments which could be made in the income tax for 1940 under the provisions of section 3807 as a result of such assessment of excess profits tax would produce an increase of $750 in such income tax as previously determined. On October 1, 1944 Corporation X filed a claim for refund of $1,000 in respect of its income tax for 1940 based upon an adjustment in respect of long-term capital gains, and the Commissioner agreed that such adjustment would be a proper one. The Commissioner asserts, however, and Corporation X agrees, that Corporation X claimed a deduction for interest on its income tax return for 1940 to which it was not entitled and that Corporation X's income tax for 1940 would properly be increased by $400 if such deduction were eliminated. This $400 cannot be assessed inasmuch as the ordinary period of limitations upon assessment of income tax for 1940 expired on March 15, 1944. However, such $400 can be used to offset the $1,000 which Corporation X claims is an overpayment of income tax. There is, therefore, an overpay