Wednesday, April 25, 2012

The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (4/25/12)

I write today on the Supreme Court's decision in United States v. Home Concrete, 2012 U.S. LEXIS 3274 (2012), here.  The bottom line is that the Supreme Court held that overstating basis, thereby reducing income from a transaction in the property, is not an omission of income subject to the extended six-year statute of limitations in Section 6501(e), here.  That section provides the a 6  year period for tax assessments rather than the usual 3-year period if the taxpayer omits 25% of the gross income reported on the return.

There are some interesting aspects of the opinion that only lawyers -- preferably paid, well paid  lawyers -- could love.  (I'm not sure judges love this stuff, but they do have to decide it.)  I am sure that over next few months there will be a lot of discussion of those nuances.  (I plan to add some discussion in the next version of my Federal Tax Procedure book that will be posted by early August 2012 for the next UH Law School class.)  But, I won't discuss here the reasoning -- some plain; some twisted -- that the majority Justices used to justify their bottom-line holding (nor will I discuss the minority's reasoning for a different conclusion).  For more timely analysis, see Robert W. Wood, HUGE Taxpayer Win: Supreme Court Tells IRS 3 Years to Audit is Plenty (Forbes 4/25/12), here. See also the quick but studied opinions of two experts on this blog,
Kristin Hickman & Steve Johnson: Initial Observations on Today's Supreme Court Decision in Home Concrete (Tax Prof Blog 4/25/12), here.

I do note editorially that this is another case in a line of Supreme Court cases where the Supreme Court proves once again that tax cases are too important to let the Supreme Court play with them.  Poster children for this editorial statement are Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978); Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991); United States v. Consumer Life Insurance Co., 430 U.S. 725 (1977); and Gitlitz v. Comm'r, 531 U.S. 206 (2001).

This is a Federal Tax Crimes blog, so I will try to relate my further comments to the subject of the blog.  (There is some editorial comment in the entire blog, so bear with me.)

First, I note first that it has not been clear to me why the IRS was so hell bent in capturing the tax with the blunt and uncertain Section 6501(e) 6-year statute.  Most --  perhaps all -- of the cases in which the IRS pressed the issue were basis enhancement hokey tax shelter strategies.  None of them have ultimately been sustained.  The basis enhancement served two key roles -- (i) it hid the ball from the IRS (I won't get into the weeds on that one); and (ii) it gave the taxpayer the opportunity to exploit the 3 year statute of limitations which, they hoped (and now have proved right), would defeat the IRS's ability to catch the raid on the fisc.  If that were all that were involved, the law as now interpreted by the Supreme Court would compel a victory for these taxpayers when they succeeded in hiding the ball for 3 years.

But, as readers of this blog know, there is another potentially applicable exception to the 3-year statute of limitations period.  Section 6501(c)(1) and (2), here, provides an unlimited statute of limitations in the case of an attempt in any manner to evade tax.  Tax lawyers often refer to this as civil fraud, which both invokes the unlimited statute of limitations and invokes the civil fraud penalty of 75% (which is, after all 35% higher than the basis overstatement penalty that would apply in these large dollar cases without civil fraud).  Normally, determining whether the fraud exception applies in any case is a detailed factual inquiry.  But there is a glaring candidate for the presence of fraud in these cases.  In most, if not all, a condition of the hokey but foggy tax opinions that were rendered was that the taxpayer personally represent to the opinion writer that the taxpayer had a profit motive apart from the tax benefits for entering the transaction(s) which generated the imagined tax benefits.  In truth, there was little economic substance in these deals and the taxpayer was really motivated by the hokey tax savings.  So, the taxpayer was not really telling the truth in many -- probably most, if not all -- of these shelters when the taxpayer made that representation about his or her profit motive.  Without that untruth, the hokey tax opinion would not have been uttered and the hokey shelter claims would not have been made and the fisc would not have been raided.  So the question has to be asked why the IRS did not pursue civil fraud in at least some of these cases -- to get the unlimited statute and a civil penalty more fitting to the egregious conduct being punished.

Second, and perhaps more topical to most of the readers of this blog, consider the massive raid on the Treasury that the Supreme Court just blessed in Home Concrete and ask yourself why these taxpayers deserve better than the IRS is forcing on minnow taxpayers in the OVDP and OVDI programs all because of some technical legal mumbo jumbo where the taxpayers in the tax shelters clearly intended a massive raid on the Treasury.  As I have said before, it is only the worst of the bunch that get the real benefits of OVDP and OVDI.  Yet, proportionately, the guys who get treated the worst are the minnows, often with little if any culpability.  And, to return to Home Concrete, proportionately the guys who got treated the best are these taxpayers intentionally raiding treasury in very large amounts, for which all of the minnows in the country are punished with higher taxes (or perhaps debt).


  1. I wish I had been the first forbes contributor to post on Home Concrete, but I stayed up late and got this in

    Those deals were really offensive to me as a CPA because they seemed to be based on one-sided entries. I hope the Service does go after them on the unlimited statute.

  2. Having read the decision, I think this was the right answer on statutory interpretation (the words lead one to a 3 year statute), but wrong result on the merits (my dog knows that 3 years is not enough time to discover, audit and prosecute basis inflation shelters). Yet another example of hard cases making bad law.

    To Jack's point, the IRC is totally biased in favor of those who can pay a lot for aggressive tax advise. The IRS is outgunned and outmanned, and the Supreme Court continues to sink the ship of state by poking increasingly larger holes in the keel.

    This is a multi-billion loss for Treasury. Jack is right that a condition of any of these ridiculous shelter opinions is a representation to the opinion writer, a representation prepared by the opinion writer with an eye, and perhaps a nod, to his or her insurer, that there was a "profit motive" independent of tax savings considerations for the transaction. Hell, one wouldn't do the deal if that were true!

    In general, I have noticed a trend in American society, also reflected in tax planning, of what I will call "nuance ad absurdum." We are asked on a scale of say 1-5 how we liked a movie say, and grade it accordingly. I am not a black and white type guy, never was or will be TG. I like nuance very much, but I have never, and I mean never, watched a movie that I either liked or didn't like, no kinda oks. But most importantly I try to understand why I did or didn't like such and such a movie. And on those scales I give a movie 1 (why isn't there a 0) or 5. Its always that simple after a little thought.

    After reflecting on the subject of tax shelters for more time than was necessary or healthy, it seems to me that, as with the English common law system, and European civil systems also (the US is actually a hybrid of both), a deal either works, or it doesn't. I have reviewed 1000s of deals for their tax implications and for planning purposes Except for one of the thousands, I always knew whether it worked or didn't, after a little thought.

    But with layers of opinions; reporting position, substantial authority, more likely than not, should, will, etc., I always had an option to render an opinion even if I knew a transaction or scheme did not work, if I wanted to and charge the client. For the record, only once when I was forced to do so under threat of termination, did i give a substantial authority opinion for a transaction that I knew didnt work, but the facility of others to do so always amazed me. Perhaps too little work chasing too many tax professionals?

    It seems to me that were the opinion process reduced to "it works" or "doesn't work", with severe penalties for being wrong, much of the tax shelter mess would be eliminated. In other words, true professionals always know what the right answer is, and others shouldn't be in the game.

    And of course that would have the interesting benefit of reducing the possibility of the Supreme Court mucking things up, in a completely confusing and incoherent fashion.

    But it's late and this ain't Kansas.

    1. Thanks, Patrick. Very thoughtful!

      Jack Townsend


    You really inspried me. I would really appreciate it if you stopped by and commented. One guy whose clients are saving 40 million from the decision said that I "miised the point" becaus I was upset about the one sided entries winning the day.

    I do like the decision standing alone since there are situations where basis can be a little sketchy and you should be able to rest easy after three years, but of course that is not what the IRS was going after in these cases.

  4. Given that the Supreme Court's decision was both consistent with the plain language of the statute and controlled by binding precedent, I fail to understand the need for the snarky remark that "this is another case in a line of Supreme Court cases where the Supreme Court proves once again that tax cases are too important to let the Supreme Court play with them."

    1. My point is that the Supreme Court had a choice of interpretations. It could choose one that is consistent with good administration of the tax laws. Or it could bury its head in the sand and come up with a technocrat interpretation of the law.

      The only thing that surprised me is that Justice Breyer voted with the majority. While I don't think this was or should have been a political opinion, I always thought Justice Breyer could think about consequences. He could not in this case and even wrote the opinion justifying his position. (OK, I know he had to accommodate 4 others to make sure his was a majority opinion rather than a minority opinion.)

      Still, it seems to me if we are going to honor the Chevron notion that deference should be given to the agency's administration of complex laws, this was the case to do it in. Basically, to bottom line it, these taxpayer's knew better. They were well-heeled and well-advised and for them to skate on their obligations to this country is outrageous. Hence, having the tools to deal with their blatant attempts to hide their raids on the fisc was and should have been recognized as appropriate.

      The Supreme Court had a perfectly legitimate path -- fully consistent with the administration of the tax laws -- to get there and chose not to.

      I share the conclusion reported in today's papers that the public's view of the Supreme Court is at its lowest. My perspective is very narrow -- only in tax cases. But, in my mind, the Supreme Court has shown a startling propensity to come up with very bad decisions in the tax context.

      The consensus of the bar when Frank Lyon was decided was that Frank Lyon was wrong and wrong-headed. Think about how much havoc the Frank Lyon decision imposed on this country -- and how much the fisc lost as a result of it. Indeed, I dare say the son-of-boss cases probably would not have even been imagined except for Frank Lyon which breathed false hope into every goofy tax shelter known to mankind. The notion was that if Frank Lyon worked, anything with a lot of paper should work.

      Hopefully, the Home Concrete decision will be viewed as a one-off decision bringing no more havoc than it brought in the confines of the precise issue decided. I think the majority opinion was crafted that way. But I also think that the majority opinion in Frank Lyon was drafted to try to limit it to the facts of the case, but as we all know it took on a life of its own in many contexts.

      Thanks for your comment. I appreciate your comment. I just disagree.

      Jack Townsend

    2. It's your forum, and I certainly appreciate your letting me and others comment.

      My perspective is that its not "technocrat[ic]" for the Court to follow the law as written, and to leave it to Congress to fix things if the effect on the Treasury is unfortunate. Congress spoke of an omission of an item of gross income, not an understatement of tax due. There is a difference.

      That these taxpayers were "well-heeled" and "knew better" is besides the point. It is the function of statutes of limitations to defeat stale calims, even if those claims were valid. You don't need a statute of limitations to defeat a baseless claim.


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