Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (10/3/13)

BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here, the Court of Federal Claims (Judge Susan G. Braden), in a partnership TEFRA proceeding, held that Section 6501(c)(1), here, required the taxpayer's fraudulent intent in order for the unlimited statute of limitations to apply.  In so holding, the Court rejected the reasoning and holding of Allen v. Commissioner, 128 T.C. 37, 40 (2007), here and here., and of the Second Circuit in City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013), here and here.  (Note:  I think the is Judge Braden's bottom-line holding, although one has to work through the TEFRA context and special Section 6229 rules to get there; see the TEFRA summary at the end of the blog.)

In BASR, the partnership reported a fraudulent tax shelter item that, under the partnership reporting rules found its way to the ultimate taxpayer's returns in a way that was less visible to the IRS.  Apparently in order to test the legal position that Section 6501(c)(1) applied at the partnership level solely by virtue of the return finding its way to individual taxpayer's return, the IRS did not urge that the taxpayers signing the ultimate returns had the required fraudulent intent.  Hence, the only issue was whether the reporting of a fraudulent item on the ultimate taxpayers' returns was alone sufficient to invoke Section 6501(c)(1).

The statutory text at issue is as follows (Section 6501(c)(1)):

(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.

Textually, there is no requirement that the requisite intent be the taxpayer's intent.  Read literally, therefore, fraud on the return will invoke Section 6501(c)(1).  Essentially, that is the holding of the Judge Kroupa in Allen.  Judge Kroupa in Allen just could not find any other persuasive interpretive sources that could permit her to say that the statute should be read to limit the "intent" to the taxpayer's intent.

A literalist or strict constructionist such as Justice Scalia would, I project, have reached the same conclusion as Tax Court Judge Kroupa.  The statute appears plain on its face and contains no explicit or implicit ambiguity regarding who must be the author of the fraud that is on the return.

The question is whether there are other sources for interpretation that would permit a court to hold that a limitation that it be the taxpayer's fraudulent intent can be read into the text (meaning, I supposed, that the text is not so plain when the other sources are consulted).  When and how courts undertake such an extra-textual inquiry is a broad subject in the law, so I cannot do little more than say that it is undertaken if the reviewing court finds the text itself not to be plain.  It all depends upon what plain is.  That is the process that Judge Braden undertook.

Judge Braden started her analysis with Section 6501(a) which states the general rule that the assessment statute of limitations is three years from the date the return is filed.  Judge Braden noted the following text in Section 6501(a) that the return in question is  "the return to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer received an item of income gain, loss, deduction, or credit)."  In other words, for example, a partnership return does not affect the application of Section 6501(a) to the partner's return even though the partner reports partnership items.  That is an unstartling proposition.

A Stupid -- At Least Unfair -- IRS OVDI/OVDP Trick; Denying Overpayment Credit for Barred Years (8/13/12)

I write to rant about a practice inside the OVDI/OVDP civil penalty structure.  I start with the relevant Code sections, 6501, here, and 6511, here.  Section 6501(a) provides a 3 year statute of limitations for assessments.  Section 6501(c) provides certain exceptions to the 3 year limitations on assessments.  The key exception for present purposes is the Section 6501(c)(1) "a false or fraudulent return with the intent to evade tax," for which there is no statute of limitations.  (I ignore the 6 year statutes of limitations that might apply, and assume for present purposes they do not apply.)  Section 6511(a) provides a statute of limitations for refunds.  Basically, the taxpayer filing a timely original return and paying the tax has 3 years in which to file a claim for refund of the tax.

The OVDI/OVDP programs have involved a lookback window from 2003 forward.  (I ignore the possibility of a later starting date under 2012 OVDP but even if a later starting date were involved, the concepts discussed in this blog would still apply.)  The taxpayer is required to file amended returns during that lookback period and pay all applicable taxes.

Commenters to other blog entries have noted that, if there are refunds due for years for which refund is barred under the above rules, the IRS will not give the taxpayer credit for those refunds against taxes reported on the amended returns for years in the lookback window.  Here is an example:

2003 – additional tax reported on the OVDP/OVDI amended return - $1,000.
2004 – refund of tax paid with original return but claimed for first time on OVDP/OVDI amended return – ($1,000)
2005 – additional tax reported on the OVDP/OVDI amended return - $1,000.

Assume the years 2003-2005 are closed for assessments and refunds.  As to assessments, assume that the IRS has not made a specific finding of fraud as to the taxpayer and, should it investigate, could not prove fraud by clear and convincing evidence so as to invoke Section 6501(c)(1).   In this case, the IRS will not give the taxpayer credit for the $1,000 overpayment for 2004, even though it collects the underpayments for 2003 and 2005.

Does the Preparer's Fraud Invoke the Unlimited Statute of Limitations? (8/5/12)

Readers of this blog may be interested in this blog that I just posted to my Federal Tax Procedure Blog:  Does the Preparer's Fraud Invoke the Unlimited Statute of Limitations? (8/5/12), here.

To summarize the Tax Procedure Blog entry, I argue error in the Tax Court's holding in Allen v. Commissioner, 128 T.C. 37 (2007), here,that the preparer's fraud can, alone, invoke the unlimited statutes of limitations for a fraudulent return in Section 6501(c)(1), here, .  In the discussion, I discuss the relationship of the unlimited statute of limitations for fraud in Section 6501(c)(1) to the civil fraud penalty in Section 6663(a), here.  I also discuss the potential applicability of the Allen argument to abusive tax shelters such as involved in United States v. Home Concrete, ___ U.S. ___ 132 S.Ct. 1836 (2012), here, where the Supreme Court held that the Section 6501(e) six-year statute of limitations did not apply to overstated basis in abusive tax shelters where, at least in many of the cases, the returns were fraudulent because of actions other than the taxpayers (the enablers).

I had an earlier posting on this general subject on this Federal Tax Crimes Blog, Civil Tax Statute of Limitations for Fraudulent Tax Shelters (12/19/09), here.

Civil Tax Statute of Limitations for Fraudulent Tax Shelters (12/19/09)

I address in this blog the civil statute of limitations for tax shelters. I start with the basics:

1. General. The general statute of limitations is 3 years. § 6501(a).

2. 25% Omission. In the case of a 25% omission of income, the statute of limitations is 6 years. § 6501(e). Many of the shelters exploited basis overstatements which, the cases have held, do not invoke this section, but the IRS may have put the quietus on those holdings by Regulation. See T.D. 9466, 2009-43 I.R.B. 551.

3. False Return. "In the case of a false or fraudulent return with the intent to evade tax," the statute of limitations is unlimited. § 6501(c)(1).

4. Willful Attempt to Evade Tax. "In case of a willful attempt in any manner to defeat or evade tax," the statute is unlimited. § 6501(c)(2).

I focus here on the third and fourth exceptions – principally the third – because the IRS imagines many of these abusive shelters -- the poster child being Son-of-Boss in its various iterations -- as fraudulent and somebody in the mix among the enablers and taxpayers had fraudulent intent to evade tax and thus necessarily willfully attempted to evade or defeat tax.

In Allen v. Commissioner, 128 T.C. 37 (2007), here, the Tax Court held that a tax return preparer's fraud would invoke the unlimited period of limitations in § 6501(c)(1) even if the taxpayer had no fraudulent intent. The court applied what it called a plain meaning interpretation of the statutory language quoted above.

The question in the case of fraudulent tax shelters is whether the taxpayer's standard defense that other professionals were involved so that he or she lacked fraudulent intent will avoid the application of the unlimited statute of limitations. Of course, the Government imagines that the taxpayers (or at least most of them who were not comatose) intended to defraud the Government of tax, but has not chosen so far to indict the taxpayers. I hear that the Government simply missed or did not timely pursue many of the abusive tax shelters within the applicable period -- 3 years or 6 years, as appropriate. Can the Government now pursue these shelters under an unlimited civil statute of limitations inspired by the Allen decision? Although certainly not authoritative, the Tax Notes publication of Allen was under the caption "Limitations Period Extended Regardless of Who Commits Fraud." I think a more technical analysis would get there also under Allen.