Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (1/16/23; 1/19/23)

Updated 1/19/23 with Court docket entry stating that the claim Liberty Global wanted to assert should not be filed.  See Comment #2 below.

I recently wrote on the Government’s Collection Suit against Liberty Global. Government Files Collection Suit in Liberty Global Raising Procedural Issues (Federal Tax Procedure Blog 10/8/22; 10/12/22), here. In their respective positions in pre-filing letters to the court, the parties address Liberty Global’s claim that a collection suit cannot be commenced without assessment of the tax and the assessment must be preceded by a notice of deficiency which did not occur here. Liberty Global’s letter of 12/20/22 at Docket Entry 15 is here; the Government’s response letter of 1/11/23 at Docket Entry 19 is here. (I noted in paragraph 9 of my initial blog that the complaint did not allege assessment of the tax liability.)  The docket entries in the case are here.

The letters are short and recommended reading. The gravamen of the competing claims are

• Liberty Global’s Claim. Timely notice of deficiency and assessment are required to precede a collection suit, citing § 6213(a), here (“no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer”).
• The Government’s Claim. The Government claims that neither notice of deficiency nor assessment is required before filing a tax collection suit within the assessment period, citing § 6501(a), here (“no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such [three-year] period”)

Basically, on the face of the claims, § 6213(a) and § 6501(a) seem to conflict. Which is it?

We’ll see.

JAT Comments:

Does the Form 872 Statute Extension to Date Certain Control If Normal 3-Year from Return Date Is Later? (8/17/21)

In United States v. Davitian (D. D.C. 8/13/21), here, the Court identified but did not decide an interesting tax procedure issue.

The issue is whether, if a taxpayer provides a Form 872, Consent to Extend the Time to Assess Tax, here (authorized under § 6501(c)(4)), to a date certain and thereafter filed a delinquent return after the stated end-time in Form 872, does the § 6501(a) three-year statute after return filing apply or the statute expiration date in the Form 872.

The relevant facts highly summarized are:

• Tax year 2003.
• Taxpayer signed Form 872 extending assessment date to April 15, 2009.
• Taxpayers filed 2003 return on September 26, 2007.
• The IRS then assessed tax (presumably the tax reported on the return which would not require the notice of deficiency or SFR procedures).

The district court said (p. 5 n.1):

   n1 The court notes that Defendants have not argued that, even if they had filed a return in September 2007 as Plaintiff claims, such filing as a matter of law would not have restarted the assessment period under 26 U.S.C. § 6501(a) because Defendants previously had agreed to extend the period to a date certain and had not agreed to a further extension of time. See 26 U.S.C. § 6501(c)(4)(A) (“Where, before the expiration of the time prescribed for the assessment of any tax imposed by this title, . . . both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.”). The court takes no position on this legal question.

No Overpayment For Tax Timely Assessed OR Collected (12/29/12)

In ILM 201252015, here, the IRS reached some interesting conclusions regarding the statute of limitations.  The ILM blazes no new legal trails, but is a helpful reminder of the rules that it applied.

I tried to develop a simplified set of facts that would illustrate the facts in the ILM but could not because there are some confusing dates which are identified by pseudonyms rather than actual dates.  If I had the actual dates it would likely not be confusing.  So, I will simply state the key legal propositions asserted in the ILM.

1. The normal statute of limitations is 3 years.  Section 6501(a).
2. The normal statute may be extended by agreement.  Section 6501(c)(4).  In this case it was by Form 872 Consent, which extends to a date stated.
3. In the case of an amended return filed within the 60 day window of the statute expiration date (whether the normal statute or the extended statute), the assessment date expires no later than 60 days after the amended returns.  Thus, for example, say that the year 01 return was timely filed on 4/15/02 and the normal statute date is 4/15/05.  If the taxpayer files an amended return on 4/1/05, the statute to assess the tax reported on the amended return does not expire before 5/31/05 (60 days after 4/1/05).
4. Tax actually collected by the IRS while the assessment statute is still open is not an overpayment even if the IRS does not assess the tax until after the statute expiration date.  Thus, in the above example,  assume that the same example, except that (i) the taxpayer sent a payment of $100,000 with the amended 01 return filed 4/1/05; (ii) the IRS posts the payment to the year 01 on 4/3/05; but (iii) the IRS does not assess until 9/1/05 (well after the period for assessment, even after the Section 6501(c)(7) 60 minimum extension).  There is still no overpayment because the IRS timely collected the tax.

With that background, the following legal analysis in the ILM is helpful.

Reminder on Sweep of Form 872-I, Partner Level Consent to Extend Statute of Limitations (11/23/12)

The Tax Court recently issued a decision reminding taxpayers and practitioners how sweeping the scope of the Form 872-I is.  WHO515 Investment Partners v. Commissioner, T.C. Memo. 2012-316, here.  The Form 872-I, here, is titled titled Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership.  The Form is executed by the partner in the partnership and thus, by extending the Section 6501, here, limitations periods with special reference to partnership adjustments, in effect, pre-empts the special minimum partnership limitation provisions in the TEFRA rules.  The Form 872-I thus specifically says:

Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see section 6231 (a)(3)), affected items (see section 6231 (a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231 (b)). 

I have modified my Federal Tax Procedure book as follows (with the context indicating the new materials in bold):

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

In Allen v. Commissioner, 128 T.C. 37 (2007), here, the Tax Court (Judge Kroupa) held that Section 6501(c)(1) imposes an unlimited statute of limitations for the preparer's fraud in preparing the tax return.  This blog asserts that that holding is incorrect.  I should note that the opinion has only sporadically been referred to and there are no authoritative decisions other than Allen to test the validity of its analysis or my arguments for that analysis being incorrect.

The background is straightforward and known to most readers of this blog.  Section 6501(a), here, creates a general rule that the statute of limitations is three years from the date of filing the return.  Section 6501(c) creates certain exceptions, the pertinent of which is:

(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 other significant civil consequence of fraud is the 75% civil fraud penalty in 6663(a), here.  That statute is:

(a) Imposition of penalty.  If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

The Allen Court read Section 6501(c)(1) according to what it claimed was a "plain meaning analysis."  The statute does not limit the fraud to the taxpayer's fraud.  If the return is fraudulent, the unlimited statute applies regardless of whose fraud is involved.  The preparer's fraud suffices.

In my view, the Allen Court is wrong.  First, one consequence of reading this statute literally, would logically mean that the fraud penalty applies when the preparer's rather than the taxpayer's fraud was involved.  The IRS did not assert the fraud penalty in Allen, so the Tax Court did not have to come to grips with this issue.  However, there is nothing in the bare text of the civil fraud penalty that limits the term "fraud" on the return to the taxpayer's fraud.  Of course, the taxpayer's own fraud has always been required for the civil fraud penalty.  (Cf. Section 6663(c) ("In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.").)  Still, so far as we can tell, Allen was the first time the IRS urged that a nontaxpayer's fraud with respect to a return can open the statute of limitations under Section 6501(c)(1), so it is not inconceivable that the same analysis might apply to the civil fraud penalty.  In this regard, the IRS wisely did not assert the civil fraud penalty.  I say wisely because such heavy handedness might have caused it to lose the statute of limitations issue.  Still, as I shall note, given the correlation of the two consequences of fraud, it seems to me illogical to treat the two consequences differently.  I think that given the choice of both to apply or neither, the only logical one from a tax policy standpoint is that neither should apply.