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).