Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)

In Finnegan v. Commissioner, ___ F.3d ___ (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert the the § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations.  Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:

"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 held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required.  The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.

The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return.  In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return.  In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.

The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR.  So, the merits of the issue is still open.  The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1).  The Government's brief is here.  I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):

[*2]  

"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." 

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[*15] 

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SUMMARY OF ARGUMENT 

This case boils down to the principle that the fraud exception to the statute of limitation on assessing tax lifts the limitations period in the case of a fraudulent return, regardless whether it was the taxpayer or the taxpayer’s return preparer who intended to evade tax. 

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[*17] 

2. Should the Court nevertheless decide to reach the merits, taxpayers’ attempt to read into the fraud exception the requirement that the taxpayer personally intend to evade tax is flawed. The statute, by its terms, does not impose such a requirement or even mention the word “taxpayer.” Rather, the exception is conditioned on the fraudulent nature of the return, without regard to who intended to evade tax, and taxpayers’ argument for departing from the plain language contravenes the rule construing statutes of limitations strictly in favor of the Government. Moreover, limiting the exception to fraud by the taxpayer would undermine its purpose to protect the public fisc in the case of a false or fraudulent return, which puts the IRS at a special disadvantage in detecting and investigating an underpayment of tax. The disadvantage to the IRS is the same regardless of who intended to evade tax, and therefore the requisite intent is not confined to the taxpayer. Taxpayers’ circuitous arguments cannot get around these bedrock principles.

JAT Comments:

1.  I have not dug into the waiver issue.  The substantive issue is the important issue, but the court ducked that issue.

2.  The issue of the interpretation of § 6501(c)(1) is incredibly important.  Think of the waive of abusive tax shelters in the 1990s going over into the 2000s.  Think BLIPS, etc.  Most of the major accounting firms has some variation of the shelters.  Many of the shelters were fraudulent, and some of the promoter/enablers of the shelters were successfully prosecuted.  So the Government can certainly prove fraud by clear and convincing evidence for the more abusive ones.  Since the returns reported shelter benefits that were fraudulent, the unlimited statute of limitations could apply and taxpayers who have long since thought they dodged the bullet could be at risk.  The poster child of such a taxpayer is United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012).  That taxpayer won the audit statute of limitations lottery (because the Supreme Court rejected the regulations applying the six-year statute of limitations).  But, my research indicates that, if the Government ultimately prevails on the interpretation that § 6501(c)(1) requires only fraud on the return and does not require the taxpayer's fraud, then the statutes of limitations for that wave of fraudulent shelters can be opened up.  Indeed, the statute of limitations for the Home Concrete taxpayers can be opened up.  I speculate that there are likely billions of dollars out there already known to the IRS that can be picked up with an unlimited statute of limitations for the fraudulent shelters.  And, for those otherwise not already known to the IRS, there may be "whistleblowers" willing to inform the IRS.