Lamprecht v Comm’r: Statute of Limitations, Qualified Amended Returns And The Issuance Of A John Doe Summons

The recent case of Lamprecht v Commissioner highlights some interesting nuances in applying the statute of limitations on assessment when a taxpayer files an amended return and the IRS uses a John Doe summons to gather information about taxpayers.

The Lamprechts came to the IRS’s attention as part of the government’s efforts to detect US citizens and residents who had Swiss and other jurisdictions’ bank accounts and income associated with those accounts that went unreported.

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In 2010 the Lamprechs, Swiss citizens who had green cards and a residence in Tiburon, California, filed amended 2006 and 2007 returns that reported previously omitted income from their Swiss UBS accounts. IRS examined the returns and proposed accuracy-related penalties for both years.  The taxpayers timely petitioned to Tax Court, challenging the penalties on multiple grounds, including that that their amended returns were “qualified amended returns”, that any proposed assessment of the accuracy-related penalties for 2006 and 2007 would be barred by the statute of limitations, and the IRS did not receive proper supervisory approval for the penalties under 6751(b) (note I will not discuss the 6751 issue in this post).

The procedural posture that triggered this opinion involved cross motions for summary judgment. The motions focused on the substantial understatement of income tax penalty (the government’s answer had also alleged a fraud penalty but the government later conceded the fraud penalty).

Lamprecht involves a John Doe summons (JDS), a topic I have been discussing here lately (see First Circuit Finds Anti-Injunction Act Does Not Bar Challenge to IRS’s Use of John Doe Summons That Gathered Taxpayer’s Virtual Currency Transactions and which also is discussed extensively Saltzman and Book IRS Practice and Procedure in Chapter 13). The Lamprechts’ 2006 and 2007 original 1040’s were short by about $6 million in interest, capital gains and commissions that flowed through their UBS accounts. The amended returns included the previously unreported income.

The Lamprechts’ amended returns in 2010 came after the ex parte IRS 2008 filing in federal district court to allow use of the JDS process to get identifying information about US taxpayers with accounts at UBS or its affiliates. After getting authorization, IRS issued the JDS to UBS in July of 2008. After the government initiated a February 2009 enforcement proceeding, the government of Switzerland joined in the enforcement suit as amicus curiae. In August of 2009 the enforcement suit was resolved by two agreements. The first agreement established a process for the exchange under the US –Swiss treaty that included the Swiss Federal Tax Administration and would in its terms “achieve the U.S. tax compliance goals of the UBS [John Doe] Summons while also respecting Swiss sovereignty.” The second agreement provided that “the IRS would “withdraw with prejudice” the UBS John Doe summons after receiving information concerning bank accounts from UBS pursuant to the treaty request for administrative assistance.”

In November of 2010, when IRS obtained the information it sought, the IRS formally withdrew the JDS (as we will see below, these different dates matter for SOL purposes).

Against this background, as most readers know under Section 6501(a)(1) the time period for assessing additional tax is generally three years from the filing of a return. For “substantial omissions” from gross income (greater than 25% of the amount of gross income stated in the return) that period is doubled to six years.  In addition, when IRS serves a summons, and that summons is not resolved within six months of service, then the period of limitations for assessment is suspended from the six-month anniversary of service of the summons until its final resolution. 

The Lamprechts agreed that the omission with respect to their original returns was substantial, though they and the IRS differed on the application of the SOL in light of their amended returns and the summons suspension issue.

Qualified Amended Returns

Section 6662 provides that a “substantial understatement” is determined by reference to “the amount of the tax imposed which is shown on the return”. Regulations provide that a taxpayer who files a qualified amended return can use the amount of tax shown on those returns for determining whether the understatement is substantial. The regs, however, provide that an amended return is not a qualified amended return if the amended return was filed after the service of a JDS relating to a tax liability of a group that includes the taxpayer if the “taxpayer claimed a direct or indirect tax benefit from the type of activity that is the subject of the summons…”

There was no question that the Lamprechts’ amended return filing was after the service of the JDS; the Lamprechts, however, argued that their omission of the overseas income did not constitute a direct or indirect tax benefit.

The opinion rejected the Lamprechts’ position on a few grounds, essentially concluding that:

[t]he Lamprechts omitted all foreign source income from their original 2006 and 2007 tax returns, thereby substantially understating their gross income and corresponding tax liabilities, and in doing so they received the benefit of understated tax liabilities. Furthermore, during the examination of their 2006 and 2007 income tax returns, when the Lamprechts filed amended returns for 2006 and 2007 to report foreign income previously unreported, their representative asserted that Mr. Lamprecht “did not report his foreign source income and earnings on his originally filed returns because he thought that ‘everything Swiss was not taxable in the U.S.’”

The opinion went on to discuss how the omission of income directly led to their affirmatively claiming itemized deductions that would otherwise have been phased out, thus also undercutting the Lamprechts’ position that they failed to claim a benefit.

Impact of the Summons on the SOL

Once concluding that the understatement was substantial and thus triggered the 6-year SOL, the opinion went on to discuss whether the proposed assessment was timely given that the 2006 and 2007 were filed in April of 2007 and 2008 respectively and the IRS issued the notice of deficiency for both years more than six year later, in January of 2015.  The timeliness of the potential assessment turned on whether and when the running of the six-year limitations period was suspended by the service and final resolution of the UBS JDS.

The Lamprechts argued initially that there should be no suspension of the SOL because in its view the JDS was issued without a valid purpose, just to extend the SOL. The opinion swiftly brushed that aside, noting that there was no precedent for the use of a collateral proceeding against a taxpayer in the John Doe class to raise that challenge. Alternatively the court reasoned that under the liberal Powell standard they had not shown that the summons was issued for an invalid purpose.

That still left open precisely when the SOL was suspended. Under Section 7609(e) the service of the summons suspended the period of limitations for assessment once the summons had remained unresolved after 6 months from service; that six-month date was January 21, 2009.  The suspension ends on when the summons is finally resolved; the parties disagreed on when the matter was finally resolved.

The regs provide that a summons proceeding is  finally resolved “when the summons or any order enforcing any part of the summons is fully complied with and all appeals or requests for further review are disposed of, the period in which an appeal may be taken has expired or the period in which a request for further review may be made has expired.”

The Lamprechts claimed that the final resolution occurred in August of 2009, when the district court ordered dismissal of the government’s summons enforcement suit.

The government argued that final resolution occurred when IRS formally withdrew the summons on November 15, 2010, after it received the documents pursuant to the treaty and the matter was dismissed with prejudice. That over one-year difference mattered, because under the government’s position the SOL was suspended from January 21, 2009, to November 15, 2010 (i.e., for 664 days), with the six-year SOL for assessment for the 2006 and 2007 years thus still open when the IRS mailed the notices of deficiency in January of 2015, which further suspends the SOL.

The Tax Court agreed with the government, stating that the Lamprechts did “not assert (nor make any showing of) an earlier date by which UBS had “fully complied” with the summons and “all appeals or requests for review” had been “disposed of”.

Conclusion

This is an important government victory. This opinion is significant as it explores SOL issues in the context of aggressive IRS pursuit of taxpayers who have failed to report income in overseas accounts. The intersection of the qualified amended return rules and the somewhat unusual posture by which the government obtained documents pertaining to the Lamprechts on the surface make this a somewhat novel opinion. I suspect, however, that practitioners representing similarly situated taxpayers with overseas accounts, unreported income, amended returns and hefty penalties will carefully study this opinion.

Failure to Timely Raise Financial Disability Argument

We have written on several occasions about the exception to the two and three-year lookback periods of IRC 6511 that exist as a possibility if the taxpayer can show financial disability.  You can find posts on the subject here, here and here.  This year my clinic represented someone making the financial disability argument in Tax Court, where petitioners can make refund claims but do so less frequently than through district court litigation.  We succeeded in obtaining a concession of the refund despite the client’s primary use of providers not described in Rev. Proc. 99-21; however, the case of Schmidt v. Internal Revenue Service, No. 2:20-cv-02336 (E.D. CA. 2021) provides another example in the government’s streak of victories against individuals seeking to extend the statute of limitations through financial disability.  Like the majority of litigants raising this issue, she proceeded pro se.

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Ms. Schmidt filed her 2013 return late on February 22, 2015.  On December 15, 2017, she filed an amended return seeking a refund of $31,904.  The IRS sent her a letter informing her that it intended to disallow her claim due to lateness.  She wrote back, obviously confused by the somewhat confusing construct of IRC 6511, arguing that she filed her amended return timely within three years of the filing of her tax return.  She did file the amended return within three years of filing her original return for 2013; however, the filing of the return within three years was not the important fact here.  Most important, as the IRS pointed out, was the three-year lookback rule of IRC 6511(b)(2), which limited her refund to payments with three years.  Since the payments occurred on the original due date of the return because withholding credits get credited on that date, she filed her amended return too late to recover any money even though she filed her amended return within three years of filing the original return.

Once Ms. Schmidt understood the lookback rule, she pivoted and began arguing that she missed the time period for timely filing the amended claim due to financial disability.

Plaintiff acknowledges the Refund Claim did not demonstrate financial disability to the IRS and argues it would have been illogical to submit the information at that time because she was still sick and still meeting the requirements for financial disability for all of 2017.1 In addition, when plaintiff received notice of the IRS’s intent to disallow the Refund Claim, plaintiff believed the IRS was rejecting the Refund Claim for a reason other than the time limits of 26 U.S.C. § 6511(b)(2).  Plaintiff asks the court to consider the evidence submitted with her complaint of her financial disability based on the special circumstances of her case, including the fact that the IRS issued a Private Letter Ruling (PLR) declaring the 2013 disability income tax-exempt.

Now, she hits another roadblock for those seeking a refund – variance.  While I think the court imposes the variance rule against her, it does not use that term, but instead discusses how her refund claim fails to meet the onerous requirements of Rev. Proc. 99-21.  It lists the requirements set forth in the Rev. Proc. and notes that she met none of them.  She submitted no information about financial disability with her amended return.  The court does not offer her a chance to submit it at this point.  Some of the prior cases in which IRC 6511(h) has been raised did allow the taxpayer to supplement their submissions, though in those cases the taxpayer may have engaged in more signaling about the possibility of financial disability than Ms. Schmidt did in filing her amended return.

She appears to have disability issues.  The information in the opinion does not provide a basis for deciding if she might have succeeded had she submitted her request with the amended return.  It also does not make clear whether she has a valid refund claim.  I don’t blame the court for these omissions since that information has nothing to do with the basis for denial of her claim; however, the result is harsh.  A pro se individual will struggle to take the correct procedural steps.  A disabled and sick pro se individual will struggle even more.  The law does not need to require such precision that she must file with her claim a full blown statement as required by the Rev. Proc. and the Rev. Proc. does not need to make the requirements as draconian as it does.

I have sympathy for Ms. Schmidt but the financial disability provision designed to assist people struggling to make life work offers little sympathy.  The mismatch between the purpose for the law and the administration of the law continues.

Unsigned and Electronically Signed Refund Claims

Last year I blogged on the case of Gregory v. United States, 149 Fed. Cl. 719 (2020), in which the Court of Federal Claims denied a refund claim because the taxpayers did not sign the amended return.  It turns out the Gregory case is part of a larger group of cases involving the same or similar issues.  The tax clinic at Harvard filed an amicus brief in the Federal Circuit regarding one of the cases in the group, Brown, on behalf of the Center for Taxpayer Rights.  The Court of Federal Claims has recently addressed another case in the group and one that has a slightly different fact pattern.

In Mills v. United States, No. 1:20-cv-00417 (Fed. Cl. 2021), the CFC issued another opinion in the long line of cases caused by accountant and lawyer John Anthony Castro, who is doing contingency fee refund suits involving IRC 911 exclusions for numerous people overseas. The first case decided by the Court of Federal Claims was last year and Gregory was among the first wave.

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In the earlier cases, the problem was that the Forms 1040X were substantively reviewed by the IRS and denied on their merits.  Only when the cases got to the CFC did the DOJ object that Castro signed the Forms 1040X, though his POA did not authorize him to sign for the taxpayers.  In these earlier cases, the taxpayers, relying on a Supreme Court opinion from the 1940s, Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945), argued that the IRS waived the signature defect by disallowing the claims on the merits rather than based on the lack of signature. 

In all of the cases decided so far, the Court of Federal Claims has held that the signature requirement is jurisdictional and not subject to waiver.  The judges dismissed all such suits without deciding whether a waiver might have occurred if the requirement were not jurisdictional.  An appeal to the Fed. Cir. has been taken only in one such suit, Brown, where the Center for Taxpayer Rights, as amicus, has argued that the whole requirement to file a refund claim is no longer jurisdictional under recent Supreme Court case law, so the signature requirement is also one that can be waived or forfeited by IRS inaction.

The Center cited, among other things, an opinion of the Fed. Cir. from 2020 named Walby, a case Carl Smith blogged here.  In Walby v. United States, 957 F.3d 1295 (Fed. Cir. 2020), a pro se tax protester case, a panel of the Federal Circuit joined a panel of the Seventh Circuit in Gillepsie v. United States, 670 F. Appx. 393 (7th Cir. 2016), in questioning, in dicta, their Circuits’ precedents holding that the administrative tax refund claim filing requirement at section 7422(a) is a jurisdictional requirement to the bringing of a refund suit, as probably no longer good law under recent Supreme Court case law

Mills differs from the prior cases in that, after the first set of Forms 1040X were signed by Castro, the IRS denied them on the grounds that Castro improperly signed them — i.e., not on the merits.  So, there could be no argument in Mills (unlike in the prior cases) that the IRS waived the signature requirement.  Castro responded by getting the CFC to dismiss without prejudice a prior suit Mills had brought and tried again. 

Mills filed new Forms 1040X on which to bring suit.  Mills was in Afghanistan, however, where he could not print out the Forms 1040X and sign them.  So, he affixed his digital signature to the new Forms 1040X.  This was done before the IRS authorized using digital signatures on Forms 1040X.  Waiting more than 6 months after the second amended returns were filed, Mills brought suit for refund.  The opinion just issued (which had initially been issued 2 weeks ago as a sealed opinion, but is no longer sealed) again holds that the claim filing requirement is jurisdictional — citing prior Fed. Cir. case law, but not mentioning Walby.  The court goes on to hold that Forms 1040X at the time these were filed could not be electronically signed.  Thus, the court dismisses this second Mills suit for lack of jurisdiction. All may not be lost for Mills, however, who can now, if he so chooses, go back and perfect his Forms 1040X for the third time, this time complying with IRS procedures for electronic signatures.

It is Carl’s view that Mills would not make a good test case for asking the Fed. Cir. to overrule its prior precedent on whether claim filing is jurisdictional to a refund suit because there is no possible way for Mills to argue for waiver on these facts (and, indeed, no waiver argument was ever made by Mills in this case).  Although the Court of Federal Claims in Mills may have been wrong to call the requirement jurisdictional, in any appeal, the Fed. Cir. would likely duck the jurisdictional question as not necessary to decide the case — just as it did in Walby.  In Brown, deciding whether or not the filing requirement is jurisdictional cannot be avoided, since the taxpayer has an argument for waiver that has not yet been considered by the CFC.

Fellow blogger, Jack Townsend, wrote to Les and I with the following comment:

In the conclusion, the court says:

“This result here is admittedly harsh. Mr. Mills was working overseas under difficult circumstances and made demonstrable efforts to sign the returns as best he could. The IRS could have accepted his digital initials as an appropriate signature but chose not to do so. If it is to process millions of tax-forms each year, the IRS may insist on strict compliance with its procedural requirements. The plaintiff’s second amended returns did not comply with IRS requirements and were therefore not duly filed. Under these facts, the Court lacks jurisdiction over the plaintiff’s refund suit and must dismiss the complaint.” (emphasis added by Jack)

In the bold-face, the court says IRS had authority/discretion to accept the returns but chose not to do so.  Could that decision be reviewed under the APA arbitrary and capricious standard or some review of discretionary decisions?

Les responded “I would think that an APA claim under 706(2)(A) could have been brought as part of the refund suit. Having failed to raise it the taxpayer is out of luck as the APA would not confer independent jurisdiction.”

Unintentionally, a whole group of taxpayers has been keeping lawyers interested in procedural issues occupied.  It’s possible that the Brown case could create some new precedent in the Federal Circuit that could have an impact on other circuits.  The digital signature problem faced by Mr. Mills is in some ways similar to the mailing problem faced by Guralnik and Organic Cannabis.  In both situations, the rules changed shortly after their failure to follow the old rules.  The old rules were changed because they no longer fit the circumstances but the last taxpayers to incorrectly attempt action under the old rules are paying the price.

The Newest Time Machine

Yesterday in Part 1Monte A. Jackel, discussed issues relating to the extension of deadlines due to COVID-19. In today’s post Monte considers whether in light of retroactive law changes in CARES the IRS can force a partner to amend a return when the original tax return filed was correct. Les

Revenue Procedure 2020-23 (originally discussed on PT by Marilyn Ames) sets forth the terms and conditions for a partnership subject to the BBA audit regime to file an amended tax return for the 2018 and 2019 tax years. The revenue procedure provides welcome relief for cases where the retroactive law changes allowing 5-year loss carrybacks and the technical correction for QIP (qualified improvement property) would not otherwise have been available because section 6031(b) generally disallows amended returns by such partnerships; AARs are the preferred route. 

The revenue procedure, however, assumes that all partners would favor such retroactive relief. However, that may not always be the case. This brings to the forefront the issue of whether one or more partners of such a partnership that wants to file an amended form 1065 must also ensure that all of its partners file amended form 1040s. That is not directly addressed in the revenue procedure. There is only a reference to section 6222 and the amended form 1065 substituting for the original form 1065. This strongly suggests that the IRS believes that the partners have a legal duty to file amended form 1040s. 

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Revenue Procedure 2020-25 sets forth the options for taxpayers, including partnerships, to obtain relief due to the retroactive law change making QIP eligible for bonus depreciation under section 168(k). This revenue procedure essentially provides for amended forms 1040 or 1065 or automatic changes via a form 3115 to obtain relief due to the retroactive QIP change in the law. The revenue procedure assumes, without citing any supporting law, that when the law relating to a timing of income statute, such as section 168(k), is retroactively changed by Congress, that the taxpayer is now using an impermissible method of accounting. There does not appear to be any law that expressly supports that treatment although it may be the correct policy result. 

Further, there does not appear to be any law that expressly supports mandating the filing of an amended tax return where the original return  was true and correct at the time it was filed. Both reg. §§1.451-1(a) and 1.461-1(a)(3) state that to correctly treat an item of income or deduction in a different tax year than originally reported, the taxpayer “should”, if within the period of limitations, file an amended return. The word “shall” is not in the regulations; only “should”. (See, also, reg.§1.453-11(d) (an amended return for an earlier year “may” not “must” be filed.)

Further, under sections 6662 and 6694, the taxpayer tests a position of substantial authority either at the end of the tax year or when the tax return is filed, and the return preparer tests the level of authority when the tax return is filed. And, at those times, the method of accounting for QIP over a long useful life was the only permissible method to use. The retroactive law change does not change that. And neither Circular 230 or the ABA model rules of professional conduct change that result either.

If the taxpayer does not want to amend either a form 1040 or a form 1065 and the government cannot force the taxpayer to amend its tax return, what is the government remedy? There has been no change in method initiated by the taxpayer and the taxpayer properly adopted the original method and never changed that method. How is the government to force the taxpayer from the retroactively determined impermissible method to the now permissible method? And AARs are voluntary. It is not uncommon for revenue procedures to mandate accounting method changes where there is a prospective change in the law. And, at times, accounting method changes have been mandated (such as the Rule of 78s issue in the 1980s) where the method change applies to a tax year but a return for the prior year may or not have been already filed before the mandate to change (the issue is not discussed). However, I am not aware and could not find any authority that deals with a statutory retroactive law change and applying that change to a prior year where a true and correct tax return containing the prior treatment has already been filed. 

If the taxpayer  cannot be forced off the 39-year method, what does the taxpayer report for future years? Zero or 1/39? If the property is sold after year one but before year 39, section 1245 will only recapture the depreciation actually taken. It would seem that the duty of consistency would mandate continuing to depreciate over a 39-year period although the same tax adviser for year one may not be able to continue to advise the taxpayer because that person would arguably be perpetuating an error. 

The solution may be to mandate the filing of an amended return because the government can only collect from the partnership an imputed underpayment spread over the remaining years in the 39-year period because presumably there is no underpayment in year one by imposing bonus depreciation in that earlier year. But forcing an amended return will create a huge quagmire.

AndA, as noted earlier, what if one or more partners do not want to amend their 1040s but the partnership does amend its form 1065 under Rev. Proc. 2020-23? This revenue procedure does reference the duty to file consistent returns under section 6222, but is this to be read as mandating the filing of an amended tax return? It seems so but doing that would be an issue of first impression to me under existing law. A true time machine.