Statute of Limitations - Allen v. Commissioner, 128 T.C. No. 4 (2007)

The facts in Allen are rather straight forward: Taxpayer was a truck driver. Taxpayer gave his Form W-2, section 401(k) statement, mortgage interest statement, and property statements to his accountant. Accountant prepared and filed taxpayer's returns with the IRS.

Taxpayer’s returns claimed false and fraudulent Schedule A - false deductions included deductions for charitable contributions, meals and entertainment, and pager and computer expenses, as well as various other expenses. Accountant was subsequently convicted of Section 7206(2).

A notice of deficiency was issued to the Taxpayer beyond the three period of section 6501. The notice did not seek a fraud penalty from the taxpayer but did rely on section 6501(c)(1). The issue in Allen was whether section 6501(c)(1) extended the statute of limitations.

Section 6501 provides in relevant part as follows:

(a) General rule.--Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term "return" means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

(c) Exceptions.--

(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 tax Court looked at the plain meaning of the statute. The Court further looked at Transpac Drilling Venture 1983-2 v. United States, 83 F.3d 1410, 1414-1415 (Fed.Cir. 1996) (extending limitations period for assessing taxes of partners attributable to partnership items under sec. 6229(c) where partner intended to evade taxes of other partners); Estate of Upshaw v. Commissioner, 416 F.2d 737 (7th Cir. 1969)(extending limitations period for assessment of taxes on joint returns where only one spouse committed fraud), affg. T.C. Memo.1968-123; United States v. McLean, 390 F. Supp. 2d 475 (D. Md.2005) (extending erroneous refund limitations period in sec. 6532(b) where fraud committed by a person other than the taxpayer); United States v. Southland Oil Co., 339 F. Supp. 2d 764 (S.D. Miss. 2004) (same).

Not surprisingly, the Tax Court held that held that the extended limitations period of section 6501(c)(1) for assessing taxes based on a fraudulent return applied to an individual even if the taxpayer had no intent to evade taxes but the taxpayer’s tax return preparer did have the fraudulent intent. The Court noted:

We do not find it unduly burdensome for taxpayers to review their returns for items that are obviously false or incorrect. It is every taxpayer's obligation. Petitioner cannot hide behind an agent's fraudulent preparation of his returns and escape paying tax if the Government is unable to investigate fully the fraud within the limitations period.

Taxpayer raised Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000) and in a way the Court did listen. In Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 548 – 549, the opinion states:



Section 6501(c)(1) applies to any taxpayer who files a false or fraudulent return with intent to evade tax. When a taxpayer files such a return, " § 6501(c)(1) would permit the Commissioner to assess 'at any time' the tax for a year in which the taxpayer has filed 'a false or fraudulent return" '. Badarracco v. Commissioner, 464 U .S. 384, 396 (1984). Section 6501(c)(1) would literally apply to a partner whose individual or corporate return was fraudulent regardless of whether the partnership return was fraudulent. Section 6501(c)(1) allows for an unlimited period for assessing any tax for the year in which a fraudulent return was filed regardless of whether some of the tax may be due to nonfraudulent items. See Lowy v. Commissioner, 288 F.2d 517 (2d Cir.1961), affg. T.C. Memo.1960-32; Colestock v. Commissioner, 102 T.C. 380    (1994). Thus, if section 6501(c)(1) applies to a particular taxable year, it clearly permits an open-ended period for any assessment of tax even if part of the assessment was based on nonfraudulent partnership items.

Section 6229(c)(1) deals specifically with partnership returns. It extends the period of limitations with respect to the partners if a partner, with intent to evade tax, signs or participates in the preparation of a fraudulent partnership return. Unlike section 6501(c)(1), section 6229(c)(1) applies only to tax attributable to partnership items or affected items. For a partner signing or participating in the preparation of a fraudulent partnership return, the period for assessing tax attributable to partnership items is unlimited, notwithstanding that the fraud does not result in a reduction of that partner's own taxes. See Transpac Drilling Venture 1983-2 v. United States, 83 F.3d 1410, 1414-1415 (Fed.Cir.1996) ("there is no requirement in § 6229(c)(1) that the taxes the signer of the partnership return intended to evade must have been the signer's own"). Certainly, section 6229(c)(1)(A) applies to tax attributable to partnership items if it is the signer's own taxes that will be reduced, but that possible limited overlap with section 6501(c)(1) is insufficient for us to conclude that section 6229(c)(1) is superfluous, given the disjunction between intent and underpayment contained in section 6229(c)(1). We also note that, unlike section 6501(c)(1), section 6229(c)(1)(B) provides a separate 6-year period for assessment of taxes for partners who did not sign or participate in the preparation of the fraudulent return. Moreover, it is unclear whether the "return" specified in section 6501(c)(1) included partnership returns, though we need not address that question here. See Stahl v. Commissioner, 96 T.C. 798, 801 (1991); Durovic v. Commissioner, 54 T.C. 1364, 1384-1385 (1970), affd. in part, revd. and remanded in part 487 F.2d 36 (7th Cir.1973).

Does anyone else the similarities between the two cases? As to the Court’s final question, I believe we know the answer. So what does this mean? Well for taxpayers that seek accountants or other agents of a certain credibility or lack thereof the answer is simple – the statute of limitations has not expired.

But the more difficult question is what of the taxpayer that engages in aggressive tax planning, such as the Son-of-Boss cases were the economics of the transaction when compared with the after-tax rates tend to indicate that the transaction may lack economic merit? If the Service proves the tax-return preparer’s fraudulent intent is the statute of limitations still open? Stated another way- Can the taxpayer rely on United States v. Boyle, 469 U.S. 241 (1985)?

In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court construed the terms “reasonable cause” and “willful neglect” in § 6651(a) and the phrase “ordinary business care and prudence” in Treas. Reg. § 301.6651-1(c)(1). Mr. Boyle, as executor of his mother's estate, relied on his experienced probate attorney to tell him when the federal estate tax return was due. Boyle, 469 U.S. at 242–43. The lawyer failed to timely notify Mr. Boyle of the date for filing the return, and Mr. Boyle filed the return late. Id. at 243. After paying the assessed penalty for the late filing, plus interest, Mr. Boyle filed suit for a refund of those amounts. Id. at 243–44.

The determinative legal issue was whether a taxpayer's reliance on an attorney constitutes “reasonable cause” under Section 6651(a) for failure to file a return when due, which would relieve the taxpayer of the incurred penalty for filing the return late. Id. at 246–47. The Supreme Court wrote that, as used in Section 6651(a), “willful neglect” means “a conscious, intentional failure or reckless indifference.” 469 U.S. at 245. The Supreme Court approved the interpretation of the term “reasonable cause” to mean “ordinary business care and prudence,” as set forth in Treas. Reg. § 301.6651-1(c)(1), and construed the term “reasonable cause” to require the “absence of ... carelessness” on the part of the taxpayer. 469 U.S. at 246 nn.3 & 4. The Supreme Court observed that a penalty assessment could only be avoided if the taxpayer showed, not merely an absence of willfulness and recklessness, but also an absence of fault:


A taxpayer seeking a refund must therefore prove that his failure to file on time was the result neither of carelessness, reckless indifference, nor intentional failure. Thus, the Service's correlation of “reasonable cause” with “ordinary business care and prudence” is consistent with Congress' intent, and over 40 years of case law as well. That interpretation merits deference. Id. at 246 n.4.

The Court in Allen seemed to surface Boyle when the Court noted that the “accountant’s” errors were so blatant that the taxpayer should have noticed the errors. It therefore seems the more complex the issue is the less likely the IRS will be able to rely on Allen and its related cousins. After all the IRS would have to prove that the advisors and accountants were engaged in fraudulent conduct. Oh wait isn’t that what the IRS is trying to do in United States v. Stein (the KPMG cases)? See Tax Blog on February 11, 2007. If the Government wins those cases it will be interesting to see the effect those convictions have on those taxpayers that believed they had escaped the Government’s wrath because of the statute of limitations. With Allen those dead cases may well just be alive and kicking – with interest.

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