Statute of Limitations on Taxpayers' Claims Against Enablers of Bullshit Tax Shelters Starts on Issuance of FPAA (4/12/13)

In McMahan v. Deutsche Bank, 2013 U.S. Dist. LEXIS 49439 (ND IL 2013), here, the plaintiffs sued certain tax shelter-enablers for damages from their promotion to plaintiffs of certain Daugerdas related Son-of-Boss shelters (also called bull-shit tax shelters).  (Readers will recall that Daugerdas and some of his colleagues were prosecuted and convicted for SOB shelters; all but one of the convictions were reversed for juror misconduct, but the defendants whose convictions were reversed will be retried and one has already pled guilty.)

The defendants in this civil case, being displeased with having been sued, moved to dismiss some of the claims.  The court granted some of the defendants requests and denied others.  I focus on the defendants' motion to dismiss because the suit was outside the statute of limitations.

The key facts (accepted by the judge to test the motions; as I present some of these, they are extrapolations from the sparse facts offered in the opinion but the extrapolations are almost certainly in the complaint) are that the plaintiffs were promoted into the bogus tax shelter by the defendants who knew the shelters were bogus but did not warn the plaintiffs.  Indeed, not only did they not warn, they affirmatively misrepresented that the shelter worked (well, at least that it more likely than not worked).  The IRS ultimately discovered the false claims on the returns.

On October 26, 2010, the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA), in which Plaintiffs were advised that an increase in tax basis of $2,075,000 relating to the Son of BOSS investment was disallowed. As a result, Plaintiffs owed the IRS hundreds of thousands of dollars in additional taxes, penalties, and interest payments.

Plaintiffs assert that defendants' misbehavior is actionable on various a host of grounds.

The court rejected the defendants' statute of limitations argument as follows:

All Defendants have moved to dismiss on the grounds that Plaintiffs' claims are time-barred. The statute of limitations is an affirmative defense. "While complaints typically do not address affirmative defenses, the statute of limitations may be raised in a motion to dismiss if the allegations of the complaint itself set forth everything necessary to satisfy the affirmative defense." Brooks v. Ross, 578 F.3d 574, 579 (7th Cir. 2009) (citation omitted). 

Four of Plaintiffs' causes of action are common law tort claims (civil conspiracy, fraud, negligent misrepresentation and assisting breach of fiduciary duty), subject to a five-year limitations period under Illinois law. See 735 ILCS 5/13-205. The complaint also asserts a claim under the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), which is subject to a three-year statute of limitations. See 815 ILCS 505/10a(e). 

On October 16, 2012, I stayed this case pending the Illinois Supreme Court's decision in Khan v. Grant Thornton, LLP. 2012 IL 112219, 978 N.E.2d 1020, 365 Ill. Dec. 517 (Ill. 2012). At issue in Khan was the proper application of Illinois's "discovery rule," which establishes the start of the period of limitations, to tort claims brought by investors who had suffered losses in a similar abusive tax shelter. The Khan court held that the limitations period did not begin to run against the investors' claims until they received a notice of deficiency from the IRS. Id. at 533. It was not until the deficiency notice issued, the Court held, that the taxpayer is "on notice that he has suffered an injury and that the injury was wrongfully caused." Id. 

In the instant case, Plaintiffs received the notice of deficiency on October 26, 2010. Plaintiffs filed their complaint on March 26, 2012. Under Khan, all claims in this case are timely.

JAT Comments:

1. I am not an expert in this genre of taxpayer claims against advisors, but I think many states have a discovery rule.  I don't know whether all or even many states with a discovery rule interpret the discovery rule the same as Illinois.  Obviously the plaintiffs had to know the IRS was going to act prior to the issuance of the FPAA on October 26, 2010.  But, that FPAA is the first formal notice of action.  And,  without that type of notice that the IRS would make its claims, the claims against the enablers may not have matured sufficiently to permit a suit.  In this regard, it is the TEFRA partnership equivalent of a statutory notice of deficiency and is formal action clearly evidencing the IRS position.
2. Under the discovery rule as so interpreted, there are a lot of bullshit shelter promoters at risk even now and indefinitely into the future.  Why?  Because under the Allen case, the IRS can  still yet assert additional tax liabilities, penalties and interest against the investors in these bullshit shelters who thought they had otherwise dodged the tax statute of limitations and, as to their claims against the enablers, the statute for some claims subject to a discovery rule will not commence until the IRS takes action sometimes indefinitely into the future.