Let's start with the statute. Normally, the statute provides a three year statute of limitations. § 6501(a). There is a six-year statute of limitations for 25%+ gross income omissions, but the Supreme Court held in United States v. Woods, U.S. , 134 S. Ct. 557 (2013) that magic basis creation shelters such as Son-of-Boss (involved in BASR) did not result in a 25% omission. Section 6501(c)(1) provides an unlimited statute of limitations as follows:
(c) ExceptionsThe issue in BASR was whether these words required the taxpayer's personal fraud (or at least the fraud of someone closer to the taxpayer than Mayer) or whether Mayer's fraud alone would suffice. From a pure textual standpoint, the text does not require the fraud of the taxpayer or someone closer than Mayer. The return has to be "false or fraudulent . . . with the intent to evade tax." There was no question that Mayer intended to evade the taxpayer's tax liability. Since the bare text of the statute did not require the taxpayer's fraud.or the fraud of anyone closer to the taxpayer, this textualist reading would permit the unlimited unlimited statute of limitations to apply. That was the reasoning of the Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007).
(1) False return
In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.
The Court of Appeals for the Federal Circuit reached a different result based by going beyond the text to discern an interpretation that required the taxpayer's fraud (or, possibly, the fraud of someone closer to the taxpayer). This is a classic statutory interpretation clash. I think the opinions reasonably lay out the approaches. I could offer readers nothing of value by summarizing the approaches or critiquing them. So I urge readers with an interest in the subject to review the opinions -- the majority, the concurrence also discussing a different issue not resolved in the case and the dissent on the issue resolved in the case. Basically, the majority opinion concludes that, based on all the context other than the text that it finds material, it can bend the text to supply the requirement for taxpayer fraud (or fraud of someone closer to the taxpayer than Mayer). The dissenter concludes that, based on all of the context that she finds material, she can justify reading the text as written -- not to require the taxpayer fraud.
I think you just take your pick depending upon your predilections, but the majority has spoken for the Federal Circuit until reversed or questioned by some court with the authority or the persuasive power to do so.
I have to say that it seems to me the key underlying issue is whether § 6501(c)(1) is punitive in that it metes out punishment for personal misbehavior (invoking the notion that someone should not be punished for someone else's misconduct) or remedial rather than punitive in that it simply gives the IRS an additional period to collect tax that is otherwise due and owing. I think the majority viewed it as punishment -- much like the civil fraud penalty which clearly is a penalty designed to impose a cost beyond the tax otherwise due and owing. I think the dissent viewed it as a remedial measure -- simply allowing a longer period to collect because fraud is, generally, harder to detect.
Here are some additional points:
1. I said that the majority has spoken for the Federal Circuit. That means that that will be the law for those taxpayers with the financial condition to pursue Government claims of an open statute of limitations. Those taxpayers can bring their judicial contest of the Government's claim in the Court of Federal Claims. However, should the Government proceed aggressively against taxpayers buying these bullshit fraudulent shelters in the mid-1990s forward, some or even many may have to litigate in the Tax Court either by deficiency redetermination or by CDP proceeding. Allen remains the law in the Tax Court. Whether the Tax Court would then reconsider is an open issue, but Allen was not a reviewed opinion of the Tax Court, so the full Tax Court has not yet spoken. I suspect that the Tax Court would be a more favorable forum for the Government even if the Tax Court were to reconsider. If it gets the issue again, I suspect that, in light of BASR, the Tax Court will issue a reviewed opinion one way or the other.
2. The Court did not resolve the issue of whether someone close or closer to the taxpayer than Mayer -- like an agent -- could have the requisite fraud for the statute to apply even if the taxpayer did not intend to evade. In p. 8 fn. 3, the majority opinion says:
Importantly, we need not decide whether the term "taxpayer," as used in § 6501(c)(1), can be interpreted to encompass the actions of a taxpayer's authorized agents. The government does not allege -- nor under the undisputed facts could it allege -- that Mayer acted as an authorized agent of BASR or the Pettinatis in connection with the filing of the tax returns at issue here. The government simply argues that the "intent to evade tax" referenced in § 6501(c)(1) can be untethered to the filing of the return itself -- i.e., can be the intent of someone proffering investment advice, but not making decisions regarding or making representations on the tax returns themselves. Because we reject that broad reading of § 6501(c)(1), we need not decide whether the intent of some other third party -- one more closely connected to the tax preparation and filings themselves -- might be relevant. But see Loving v. IRS, 742 F.3d 1013, 1017 (D.C. Cir. 2014) ("Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer's behalf. They cannot legally bind the taxpayer by acting on the taxpayer's behalf.")3. I am not sure why Mayer -- a promoter-lawyer -- would be outside the ambit thus described in the quote in ¶ 2. The lawyer rendered an opinion to his client that included an indication of how the fraud should be reported on the return. My recollection is that lawyers rendering such opinions are, for some purposes, treated as return preparers as to the items on which they opine for return reporting purposes. Apparently, that issue was not addressed in the parties' briefings, perhaps because the Government wanted to avoid such fact intensive inquiries as to relationship in order to reach a legal holding that focused only on the fraud reported on the return. And, if the majority were willing to consider the text met by the conduct of an agent, if the agent had fraud within the scope of the agency, wouldn't the taxpayer be personally fraudulent?
4. The Court noted that the Government did not urge that the taxpayer's preparer committed fraud. As suggested above, I had thought that a person other than the preparer assembling and signing the return could be a preparer as to key items reported on the return. In this regard, as I understand it, in many or most of the cases, the promoters, although not formally signing the returns as preparers, were heavily involved in helping preparers present the position on the returns. That they did not sign the returns as preparers cannot be a meaningful difference.
5. The Government conceded in the case that the particular taxpayers lacked the intent to evade tax. That may have been a strategic concession in the case to have the court focus only on the issue of whether a nontaxpayer's fraud was sufficient under § 6501(c)(1). But, whether the Government will be willing to make that concession in future cases may be problematic. In most of the cases where the courts have addressed taxpayer culpability, they have said that the taxpayer surely knew that the creation of deductions or basis from thin air was too good to be true. My impression is that, in most case, they knew it was too good to be true and paid the exorbitant fees for the transaction solely to buy civil and criminal fraud insurance for a raid on the fisc. Maybe in future cases, the Government will pursue that angle more vigorously in the civil cases both for statute of limitations and civil fraud penalty purposes. (One of the interesting aspects of that is that many of the taxpayers sought independent advice from excellent tax lawyers who surely recognized that the shelters were bullshit / fraudulent; if those taxpayers mount a reliance on counsel defense, they will open their counsel's advice to scrutiny and that may not be so pretty; I understand that the gravamen of some of those opinions was that the shelter itself was bullshit (they did not use that term, but that's what they meant) but that the opinion letter from the promoting attorneys like Mayer would give the taxpayers a reasonable shot at avoiding civil and criminal penalties.) So, if the Government wants to pursue this while the law is in a state of uncertainty, it should open with both barrels -- Allen, correctly interpreted § 6501(c)(1) and, in any event, the taxpayer's fraud is involved. Also, as an additional argument, I think the Government should better hone the argument that the promoter, particularly if in privity to render an opinion to the taxpayer, is close enough to the taxpayer that the promoter's fraud is within the ambit of culpability for the taxpayer for purposes of § 6501(c)(1).
6. The Court rejected the Court of Federal Claims' reasoning that Section 6501(a) supplied the requirement of the taxpayer's fraud. Thus, in p. 7 fn. 2 it said.
In reaching its decision, the Claims Court noted that § 6501(a) defines the term "return" as "the return required to be filed by the taxpayer." The Claims Court then incorporated this definition into § 6501(c)(1) and thereby concluded that the statutory language limited the suspension to cases where the taxpayer possesses fraudulent intent. BASR P'ship, 113 Fed. Cl. at 192 ("Because the language of 6501(a) is expressly limited to a return filed by the 'taxpayer,' the fraudulent intent referenced in I.R.C. § 6501(c) is by implication limited to fraud by the taxpayer."). Although we disagree that this definition renders the meaning of § 6501(c)(1) clear and unambiguous, the inquiry into the plain meaning of this statute does not end here.7. The concurring opinion would have held that § 6229(c)(1) overrides and leaves no space for the application of § 6501(c)(1). That was not accepted by either the majority writer or the dissenter. Hence, the prior Circuit law that § 6229 merely provides minimum statutes and permit § 6501 to operate full bore at the taxpayer-partner level.
8. One picky point is the majority opinion's reference to the Claims Court. The lower court's name is United States Court of Federal Claims. The court was previously named the Claims Court and U.S. Claims Court, but in 1992 was named the United States Court of Federal Claims. In its opening paragraph, the majority opinion indicates that it will refer to the Court of Federal Claims as the Claims Court. It is unclear why the majority opinion does that, since it does not seem to be a standard in the Court. (E.g., I did a search on "Claims Court' for the period from 1/14/14 to present and got only 116 hits, some of which might involve references to the period when Claims Court was its name). Interestingly, the concurring opinion does use the correct terminology -- Court of Federal Claims. Picky-picky.
9. I have discussed or at least mentioned the application of § 6501(c)(1) to nontaxpayer fraud in a number of earlier blog entries. For those wanting to read more of my bullshit about bullshit tax shelters involving that issue, see (in reverse chronological order):
- BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (Federal Tax Crimes Blog 8/26/14), here.
- More on the Allen Issue - Oral Argument in BASR (Federal Tax Crimes Blog 4/17/15), here.
- Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (Federal Tax Crimes Blog 10/3/13), here.
- Second Circuit Holds That Fraud on the Return -- Even If Not the Taxpayer's -- Causes an Unlimited Civil Assessment Statute of Limitations to Apply (Federal Tax Crimes Blog 2/4/13; Material Corrections on 2/5/13), here.
- IRS Queasiness Over the Reaches of Allen (Federal Tax Crimes Blog 9/22/12), here.
- Civil Tax Statute of Limitations for Fraudulent Tax Shelters (Federal Tax Crimes Blog 12/19/09), here.
This blog entry was revised and expanded on 7/31/15 at 5:15pm.