Since Allen, the courts addressing the issue have been sparse, but seemed to accept the validity of Allen's holding that fraud on the return triggers the unlimited statute of limitations even if it was not the taxpayer's fraud. Allen involved a run of the mine fraudulent preparer, but the more prominent instances where the holding could apply involves the plethora of bullshit / fraudulent tax shelters that were popular with the wealthy in the 1990s and in the early 2000s. Apparently not anticipating the holding in Allen, the IRS walked away from making adjustments to taxpayers investing in those shelters where it could not find an open statute of limitations under the other rules. The IRS did try to get some relief by asserting the 6 year statute, but came up short on that in U.S. v. Home Concrete & Supply, LLC, ___ U.S. ___, 132 S.Ct. 1836 (2012), here. (See The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (Federal Tax Crimes Blog 4/25/12), here.) Then, the IRS belatedly discovered the implications of Allen.
In BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here, the Court of Federal Claims rejected Allen and held that the unlimited statute in Section 6501(c)(1) required the taxpayer's fraud. That holding, of course, warmed the hearts of taxpayers who invested in bullshit / fraudulent tax shelters -- a win on the audit lottery they willing and joyously played. For prior discussions of BASR, see Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (Federal Tax Crimes Blog 10/3/13), here, and Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (Federal Tax Crimes Blog 11/14/13; revised 11/16/13), here.
The Government appealed BASR to the Court of Appeals for the Federal Circuit. That case is now pending. But it has been briefed. I offer today in this blog entry the briefs of the parties and of Amicus Curiae (arguing that the Allen holding is incorrect). Those briefs are:
- Government Opening Brief, here.
- BASR Answering Brief, here.
- ACTL Amicus Curiae Brief, here.
- Bryan Camp Amicus Curiae Brief, here.
- Government Reply Brief (Responding to BASR Brief and Amicus Brief), here.
Government's Opening Brief:
Our tax system relies on self-reporting and self-assessment, and reflects a bargain of sorts: provided that tax returns are a good-faith attempt to report relevant information and the tax owed, the IRS has a limited amount of time in which to investigate and assess additional tax if necessary. That system, however, is completely thwarted in the case of a fraudulent return, filed with the intent to evade tax. This case boils down to the simple notion that a fraudulent tax return should not begin the running of the statute of limitations on assessing tax, and thus should not permit the avoidance of tax rightfully owed, regardless of whose fraudulent intent is involved.
The Pettinatis participated in a fraudulent Son-of-BOSS tax shelter designed to eliminate the tax on the sale of their business, Page Printing. The transaction lacked any legitimate business purpose and economic substance, and Mayer, the promoter who sold them the scheme, knew it. He admits to having implemented the transaction with the intent to defraud the Government through returns that hid the Pettinatis’ correct tax liability, and he did it cleverly. The IRS only uncovered the deception years later, after the general three-year statute of limitations for assessing the tax against the Pettinatis had run. Fortunately, I.R.C. § 6501(c)(1) extends the limitations period indefinitely “[i]n the case of a false or fraudulent return with the intent to evade tax.” That is the case here.
1. The Court of Federal Claims misread I.R.C. § 6501(c)(1) as requiring that the taxpayer who filed the fraudulent return must have had a fraudulent intent, and therefore concluded that the statute does not apply in this case, where the fraud is alleged to have been perpetrated by the tax attorney the Pettinatis hired, rather than the Pettinatis themselves. The court erred in several ways. First and foremost, I.R.C. § 6501(c)(1), by its terms, does not require an intent to evade tax on the part of the taxpayer; indeed, the word “taxpayer” is not even mentioned. The plain language addresses the fraudulent nature of the return, without regard to who intended the fraud. Moreover, the requirement interpolated by the Court of Federal Claims contravenes the rule that limitations statutes be construed strictly in favor of the Government. Second, the purpose of I.R.C. § 6501(c)(1) is to lift the time limit on assessing the correct tax liability in the case of a false or fraudulent return because of the special disadvantage the IRS faces in detecting and investigating these types of returns. Requiring fraudulent intent on the part of the taxpayer undermines that
purpose – and finds no support in legislative history – because the disadvantage to the IRS is the same regardless whether the fraud was intended by the taxpayer or someone else. Third, other courts have consistently read I.R.C. § 6501(c)(1) as we do here, imposing no such requirement.
[Argument 2 omitted]BASR's Brief:
This Court should affirm the judgment for any of four different reasons.
[First, Partnership argument omitted]
Second, even assuming that Section 6501(c)(1) has any role to play here, the statutory scheme, its history, and almost 100 years of judicial precedent dictate that section only applies when a return is false or fraudulent and the taxpayer intended to evade tax. The government has not even alleged, however, that the Pettinatis intended to evade tax. Instead, the government alleges only that Mayer intended to evade the Pettinatis’ taxes. Mayer’s intent is not relevant. Thus, the government failed to meet the requirements of Section 6501(c)(1) even it could be applicable.
[Third and Fourth Arguments dealing with failure to prove the returns were fraudulent and an APA arbitrary and capricious claim that this taxpayer should be let off because other taxpayers got away with it, which seems to me to end the arguments on a very weak note.]Amicus Brief
Taxpayers who act in good faith and file what they believe to be accurate tax returns are entitled to some measure of finality with respect to the ability of the government to audit their returns and assess additional tax. The government should not be permitted to bypass the statute of limitations on assessment based on the fraudulent conduct of third parties where the taxpayer had no knowledge of the fraud. This is particularly true where the third party may be motivated to admit to fraudulent intent as to specific returns to gain an advantage in a proceeding unrelated to the taxpayer whose return is at issue.
Allowing the evisceration of the statute of limitations on assessment where the taxpayer is not involved in the fraudulent conduct and has no influence over the third party alleged to have the fraudulent intent puts taxpayers in a position of being unable to disprove the allegation of fraudulent conduct, regardless of its veracity, and unduly burdens unsuspecting taxpayers victimized by unscrupulous tax return preparers and other tax advisors. In the end, the government’s position in this case, while motivated by a good faith desire to assess and collect tax, undermines fair tax administration and sound public policy.Gov't Reply Brief - No Summary, but the excerpts from the Introduction serving somewhat as a summary are:
The Government’s argument in support of that conclusion is straightforward: the plain language of I.R.C. § 6501(c)(1) requires only a “fraudulent return with the intent to evade tax,” not that the taxpayer in particular intended to evade tax. The statute is unambiguous. Besides, “limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government,” Badaracco v. Commissioner, 464 U.S. 386, 392 (1984), which is to say that additional restrictions should not be read into the fraud exception. Here, as the Court of Federal Claims recognized (JA 16), the Pettinatis’ returns fraudulently reported their capital gain from the sale of Page Printing. And Mayer orchestrated that fraud with the intent to evade the Pettinatis’ taxes. Thus, this case falls squarely within the ambit of I.R.C. § 6501(c)(1).
The purpose and history of I.R.C. § 6501(c)(1) further emphasize the point. The fraud exception is intended to provide unlimited time for the IRS to assess the correct tax liability in the case of a fraudulent return because of the special disadvantages the IRS faces in detecting and investigating such returns. The source of the fraud has no bearing on the difficulties that a fraudulent return presents for determining tax rightfully owed, as this case illustrates. Accordingly, the fraud exception should, and does, apply based on Mayer’s intent to evade the Pettinatis’ taxes.
The fraud exception under I.R.C. § 6501(c)(1) does nothing more than allow for the collection of the Pettinatis’ taxes while denying them the windfall that they seek. The fraud penalty, on the other hand, is intended to punish and deter wrongful conduct, and therefore applies only if the taxpayer is culpable. This distinction between the fraud exception to the statute of limitations and the fraud penalty has existed throughout their history beginning with their shared origins in the Revenue Act of 1918, Pub. L. No. 65-254, § 250(b), (d), 40 Stat. 1057, 1082-84, which bars application only of the fraud penalty – and not application of the fraud exception – when a fraudulent return “is not due to any fault of the taxpayer.” Id. at § 250(b).
Still further, the Government’s position has the uniform support of case law, most notably, City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013), and Allen v. Commissioner, 128 T.C. 37 (2007), in which the courts applied I.R.C. § 6501(c)(1) under similar circumstances involving returns that the taxpayer’s hired tax professional caused to be fraudulent with the intention to evade tax.
* * * *
On appeal, BASR and the amici defend the result reached by the Court of Federal Claims, though all of them largely abandon the court’s primary reasoning. BASR argues that the phrase “intent to evade tax” in I.R.C. § 6501(c)(1) is implicitly limited to the taxpayer’s intent, not by virtue of the definition of the word “return” for purposes of the statute of limitations, as the Court of Federal Claims believed, but because Congress supposedly made it clear in the fraud penalty in the Revenue Act of 1918, and more generally, that the taxpayer must have intended the fraud. (BASR Br. 33-39.) BASR further insists that Allen and City Wide were wrongly decided (BASR Br. 41-45, 49-52), and contrary to prior case law (BASR Br. 39-41). Finally, BASR argues that policy considerations counsel in favor of its approach. (BASR Br. 45-49.)
* * * *The balance of the brief mounts a strong attack on the arguments of BASR and Amicus. I recommend highly a read of the entire brief.