Refund Claims and Section 7508A – Progress!

April 10, 2023 by Leave a Comment

We welcome back Bob Probasco as today’s guest blogger.  Bob has written several guest posts parsing the code with a particular emphasis on issues involving interest.  He teaches at Texas A&M Law School where he is a Senior Lecturer and Director of the Tax Dispute Resolution Clinic.  Today, he parses the IRS guidance on when a taxpayer can successfully file a refund claim three years after COVID changed normal tax return filing deadlines.  Keith

Relax – you have more time to file a refund claim for the 2019 tax year.  For many taxpayers, April 15, 2023, is no longer a hard deadline.  But you still need to pay attention to exactly what relief the IRS offered; there are some situations in which taxpayers may assume they have more time than they do.

The IRS issued Notice 2023-21 on February 27, protecting taxpayers from falling into an inadvertent trap that might have precluded recovery for some refund claims.  The IRS website tells us that it has this effect for 2019 income tax returns:

  • If taxpayers filed their 2019 return after April 15, 2000, but on or before July 15, 2020, they can recover the maximum amount if they file their claim within 3 years of the date the original return was filed.
  • If taxpayers filed their 2019 return after July 15, 2020, they can recover the maximum amount if they file their refund claim by July 17, 2023.

The Notice also adjusts the date by which refund claims for the 2020 tax year must be filed to ensure full recovery.  For this blog post, though, I’m focusing on the 2019 tax year, and income tax returns for individuals, for simplicity.

This is welcome relief although short of a complete solution.  The National Taxpayer Advocate’s blog had some observations, praising the Notice and pointing out what more still has to be accomplished.  I have a few thoughts as well.

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Background

Why was this a problem?  Because of the COVID emergency declaration and IRS responses, most taxpayers had until July 15, 2020, to file their 2019 tax returns and until May 17, 2021, to file their 2020 tax returns.  And most taxpayers have been conditioned to assume, from multiple reminders over the years, a general rule that they must file refund claims (including filing an original return claiming a refund) within three years of the original filing due date to receive that refund.  Thus, some were likely to assume that they had until July 15, 2023, to file refund claims for the 2019 tax year.  Before Notice 2023-21 was issued, that was not a safe assumption, and still isn’t for some taxpayers.

This problem was identified more than a year ago.  The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  The Purple Book included a legislative recommendation (starting at page 30) to address problems with the interaction between section 7508A and refund claims.  Notice 2020-23 allowed taxpayers with 2019 tax returns due on April 15, 2020, to be filed as late as July 15, 2020.  As a result, refund claims for 2019 would satisfy the section 6511(a) deadline if filed within three years after the return was filed, potentially (I’ll come back to this adverb later) as late as July 15, 2023. 

Unfortunately, even when a refund claim is filed by the section 6511(a) deadline, section 6511(b)(2)(A) limits the amount of the recovery to the amounts paid within “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  Thus, a refund claim for 2019 filed on July 15, 2023, could only recover amounts paid by the taxpayer (including refundable credits) by July 15, 2020. Most payments (including income tax withholding and estimated tax payments) and refund credits for the 2019 tax year are deemed to have been paid as of April 15, 2020.  As a result, that timely filed refund claim might result in no recovery.  In effect, we would be forcing taxpayers to file the refund claim earlier than the section 6511(a) deadline and most taxpayers wouldn’t realize that.

I looked at the Purple Book suggestion back in January 2022 and concluded that there were some arguments, even before Notice 2023-21, to protect the unwary taxpayer.  TL;DR summary: section 7508A(a)(3) arguably provided the IRS the authority to provide relief regarding the lookback rule, and Regulation § 301.7508A-1(f), Example 5 provided an example where the suspension period was disregarded in determining the lookback period.  But that example was of a situation in which the section 7508A suspension period included the section 6511(a) deadline; it didn’t address situations in which the suspension period under section 7508A included the deadline for filing the original return.  Could you make an argument for the latter even without legislative or regulatory change?  Sure, but it might not succeed and taxpayers without representation wouldn’t even know to make that argument if their refund claim were denied.

Notice 2023-21 – details

The new Notice takes a straightforward approach to solving the problem.  As with the previous COVID questions, it defines Affected Taxpayers and then specifies the relief.  Affected Taxpayers are:

  • “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2020-23 to July 15, 2020”
  • “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2021-21 to May 17, 2021”

Notice 2020-23 applied to filing and payment obligations due, including as a result of a valid extension, on or after April 1, 2020, and before July 15, 2020; Notice 2021-21 was more narrowly focused on filing and payment obligations normally due on April 15, 2021, or June 1, 2021, but didn’t take into account extensions.  (This is a vast over-simplification; it’s always best to carefully parse any such notices.)

Essentially, under Notice 2023-21, all individual taxpayers for both years are Affected Taxpayers and some entities are Affected Taxpayers with respect to the 2019 tax returns.  The relief granted was to disregard the two different suspension periods in determining the beginning of the lookback period.  But the two different suspension periods were stated in separate sentences and the relief granted was qualified as “relating to the tax for which the return filing or payment due date was postponed.”

That last phrase, I assume, was because the lookback period for individual taxpayers filing a refund claim for the 2019 tax year included both suspension periods.  The IRS apparently decided that they should be allowed to disregard the first suspension period (4/1/2020 – 7/15/2020) but not the second suspension period (4/15/2021 – 5/17/2021).

I was particularly interested in how this relief affected a couple of our clients who had not yet filed their original 2019 tax returns, which would show overpayments.  The only example in Notice 2023-21 wasn’t very helpful, as it involved a taxpayer who filed the 2019 tax return on June 22, 2020.  The notice doesn’t specify anywhere that relief was not available who had not filed their original returns by the postponed due date, but the absence of “no” doesn’t always mean “yes.”  But the description on the IRS website did say “yes” to this question.

Some observations

I began looking at this with a vague impression that the interaction of Notice 2020-23 (suspending the period for filing and payment obligations for the 2019 tax year) and Notice 2023-21 (disregarding the suspension period for purposes of determining the lookback period for refund claims) might lead to some strange results.  After close reading of Notice 2023-21, it seems to have been very well drafted.  I think it achieves the IRS’s immediate goals, in terms of resolving issues of a specific, nationwide emergency that affects imminent (normal) deadlines for refund claims.  The NTA is still advocating for a solution that is statutory, permanent, and inclusive of all section 7508A relief.  Tax professionals would like the same thing.  But Notice 2023-21, if nothing more, has been a useful exercise in starting to work through the complexity.

However, I still have a few concerns.

Policy choice leading to (somewhat) strange results?

A suspension of the section 6511(a) deadline for filing refund claims – such as was included in Notice 2020-23 for the 2016 tax year, normally due 4/15/2020 – automatically results in disregarding the suspension period when determining the lookback period.  That’s in the regulation above, which relies on language that mirrors section 7508A(a)(3).  That keeps the two deadlines in sync, so that a timely filed return followed by a timely filed refund claim will always be able to recover the maximum amount.

A suspension of the deadline for filing the tax return would – once the principles of Notice 2023-21 are implemented more broadly by regulation or legislation – automatically result in disregarding the suspension period when determining the lookback period.  A suspension of the deadline for filing the tax return, however, would not change the section 6511(a) deadline.  The two deadlines would not be in sync. 

You can see that in looking at the effect on three different hypothetical taxpayers.  Consider A, B, and C, all of whom are Affected Taxpayers for purposes of Notice 2023-21.  A filed his 2019 return on 4/15/2020; B filed her 2019 return on 6/1/2020; and C filed his 2019 return on 7/15/2020.  All three returns were filed timely because of Notice 2020-23.  For all three returns, the lookback rule allows a refund claim filed by 7/15/2023 to reach all payments and refundable credits.  Yet section 6511(a) requires that A must file his refund claim by 4/15/2023; B must file her refund claim by 6/1/2023; and C can file his refund claim as late as 7/15/2023.  In effect, C is rewarded for filing his return later than A and B filed theirs.

The Code includes several provisions to ensure that a timely filed refund claim, following a timely filed return, can recover all payments and refundable credits:

  • Amounts paid before the filing due date are deemed to have been paid as of the filing due date.
  • An extension of the filing due date results in an extension of the deadline for filing a refund claim and of the lookback period.
  • The lookback period is also adjusted for several special circumstances leading to a later deadline for filing a refund claim – e.g., section 6511(d)(1)(B), (2)(A), (3)(B), and (4)(A).

Notice 2023-21 does not do the same thing, because it disregards the suspension period with respect to section 6511(b) but not with respect to section 6511(a).  This leads to a relatively rare situation in which section 6511(b) would not limit the amount of a refund, but section 6511(a) would preclude any refund at all.

I assume this was a deliberate choice; the example in Notice 2023-21, as well as the description on the IRS website, both state that refund claims must be filed within three years of the date they filed the original return, with an outer limit of July 15, 2023.  The argument for the IRS choice here may be that, in the example above, taxpayers A and B evidently didn’t need the postponed due date.  The counter-argument might be that we don’t apply the same principle with respect to the original due date.  For the 2022 tax year, for example, taxpayers could file returns as early as January 23, 2023, but would still have until April 15, 2026, to file refund claims.

I perhaps would have preferred a different policy choice here.  In part to treat taxpayers equally with respect to COVID relief that was made available to everyone, not just those who needed extra time.  In part because of the potential for misunderstanding.  Let’s turn to that topic.

Communicating to taxpayers

I commend the IRS for their efforts to publicize the effects of Notice 2023-21, as well as many others who have been spreading the word.  But I still have some concerns about whether that message will be received by taxpayers, particularly since most of them do not read the IRS website, let alone Notice 2023-21.  They get their information (condensed and simplified) from other sources and don’t always read closely for the details.

For example, one of our clients – with a more sophisticated understanding than most taxpayers – heard about the postponement of the filing date for 2019 tax returns to July 15, 2020.  Unfortunately, he did not catch the qualification, that the postponement was for acts due between Apri1 1, 2020, and July 15, 2020.  That took care of his personal tax return but he and his wife also had a small partnership.  The partnership return was still due March 15, 2020, and he filed late.  There was no partnership activity or taxable income to pass through to their Form 1040 but the partnership was hit with a $1,640 penalty under section 6698(a)(1).  (The IRS refused to abate the penalty but there was still a happy ending when the IRS eventually issued Notice 2022-36, a general abatement of penalties for late filing.)

We will almost certainly have similar misunderstandings with some aspects of this relief that may not be intuitively clear for some taxpayers, despite all of our best efforts.  If they reach out to tax professionals, we can explain in the context of their particular facts, but some won’t until it’s too late.

Filed Under: Disaster, refund claim, Statutes of Limitation Tagged With:

Extending the Statute of Limitations on Collection

April 6, 2023 by Leave a Comment

In a pair of recent cases, taxpayers argued unsuccessfully that before the IRS brought suit against them the statute of limitations on collection had expired.  We have written before about the difficulty in calculating the statute of limitations in collection cases and about the government’s penchant for bringing the cases close to the statute expiration period.  You can find earlier posts here, here, here and here.  If a taxpayer is uncertain whether the statute of limitations on collection has expired prior to the bringing of the suit, there is little downside to the taxpayer of putting the government to its proof regarding the statute of limitations.  The government almost always wins these cases because the lawyers in Chief Counsel and Department of Justice Tax Division do a good job at calculating the statute.  In the two cases I will discuss today, the government attorneys again calculated the time period correctly though different statute of limitation provisions governed each case.  In both cases the taxpayers raised as a defense to suspension of the statute the IRS failure to suspend collection when it should have.

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In United States v. Sparkman, No. 5:21-cv-00788 (C.D. Cal. 2023) the taxpayer owed over $600,000 stemming from a Tax Court decision in 2005, Sparkman v. Commissioner, TC Memo 2005-136.  He substantially reduced his liabilities in the Tax Court case but still had a sizable liability which he did not pay.  Because of his outstanding liability and the inability of the IRS to collect on it administratively, the government filed a suit in May 2021 seeking to reduce the liability to assessment.

After the Tax Court decision, Mr. Sparkman appealed to the 9th Circuit and continued to seek redress in the Tax Court where there are just as many docket entries after the decision as before.  More importantly for purposes of this case, the IRS sent him a CDP levy notice in August 2006 and he timely requested a hearing.  The IRS issued a determination letter in March 2008.  Running on a parallel track was a CDP lien notice just a couple months later and a determination letter issued at the same time as the letter issued with respect to the levy.  He timely filed Tax Court petitions with respect to both determinations and the Tax Court issued decisions on both in December 2009.

In January 2012 he sought an installment agreement.  The discussion regarding the installment went on for some time.  The decision details all of the back and forth which principally centered around the view of the IRS that he should sell some property to pay down his debt.  In June of 2013 a deal was struck regarding an acceptable installment agreement amount and in January 2014, he began to make the payment.  In making the payments, Mr. Sparkman designated them to be applied to his 2007 liability which was assessed in 2013 after an audit.  This designation violated the installment agreement since it essentially meant he was not making payments on the liabilities covered by that agreement.  The IRS terminated the installment agreement in March 2016.

The IRS framed the issues as follows: 1) whether the CDP hearings and Tax Court cases suspended the statute of limitations on collection and 2) whether the installment agreement request and subsequent discussions also suspended the statute.  Mr. Sparkman argued that the IRS failed to honor his CDP request and engaged in illegal collection activities.  Without deciding if the IRS engaged in illegal collection activities, which it said was irrelevant, the court found that the CDP request and Tax Court case suspended the collection statute of limitations for the period stated by the IRS.  This was a relatively simple and straightforward calculation that really raised no new issues.

With respect to the installment agreement suspension, things get a little stickier as is normal with this basis for suspension of the collection statute.  Section 6502 suspends the statute for the period during which a proposed installment agreement is pending and for 30 days immediately following the termination of an installment agreement.  Treasury Regulation 301.6331-(4)(a)(2) provides that an installment agreement is pending when accepted for processing.  The court cited to “IRS Practice and Procedure” at 15.06[1] to find the three circumstances supporting acceptance for processing: 1) a request for an installment agreement is received before a case is referred by the IRS to the Department of Justice; 2) the request contains sufficient information for the IRS to decide if the proposal is acceptable and 3) the IRS has not returned the proposed installment agreement.  Mr. Sparkman said the installment agreement was not pending for the entire period because at some points in the discussion the IRS told him his proposal was unacceptable; however, the court finds that there was an ongoing negotiation for 546 days leading to the acceptance of the installment agreement.

This is murky water.  The court finds a period most beneficial to the IRS.  I cannot say that it is wrong but only that the concept of pending installment agreement is one that places a heavy burden on parties trying to nail down the statute of limitations.

A second case decided was decided not long after Sparkman.  The case of United States v. Colasuonno, No. 7:21-cv-10877 finds that the government timely filed a suit to collect based on the suspension of the statute of limitations caused by a bankruptcy filing.  The IRS brought this suit on December 20, 2021, seeking to reduce its liability to judgment.  Mr. Colasuonno has a substantial liability for Trust Fund Recovery Penalty and was successfully prosecuted in conjunction with the liability.  He filed a chapter 7 petition on July 24, 2009.  Because the TFRP liability is entitled to priority status no matter how old it is and because BC 523(a)(1)(A) excepts from discharge all taxes entitled to priority status, the bankruptcy had no ability to assist him in removing the TFRP liability.  Nonetheless, it suspends the statute of limitations on collection since the bankruptcy automatic stay prevents the IRS from pursuing collection which it is in effect.  He received a discharge in the bankruptcy case on June 8, 2011.  The discharge would lift the automatic stay with respect to collection action against Mr. Colasuonno though not necessarily against assets in the bankruptcy estate.

Similar to the argument made by Mr. Sparkman, Mr. Colasuonno takes the position that the IRS should not receive the benefit of an extended statute of limitations by virtue of the bankruptcy because it violated the automatic stay and sought to collect from him by filing a notice of federal tax lien after the filing of the bankruptcy petition.  The IRS argues that if it violated the automatic stay Mr. Colasuonno could bring an action against it with respect to the violation but that has nothing to do with the statute extension caused by the filing of his bankruptcy petition.  The court analyses the relevant statutory provisions and agrees with the IRS.  It finds that Mr. Colasuonno’s remedy for a stay violation is to bring a specific suit for an injunction and/or to recover damages caused by the violation but that he cannot use the stay violation to change the statutory calculation of the time of the suspension. Calculating the suspension of the statute based on the period of the bankruptcy stay, the court finds that the suit was timely filed.

I agree with the decision of the court here as well.  It is unfortunate for both defendants that they did not, or allegedly did not, receive the full measure of the stay on collection that they should have received by filing a CDP or bankruptcy case.  They have the right to be compensated for the IRS missteps but that right does not stop the clock on a suspension described by statute.  These cases point out the different actions by a taxpayer that can suspend the statute of limitations on collection as well as the conclusion that the suspension goes into effect whether or not the IRS complies with the reason for granting the suspension.

Filed Under: Collection Activity, Statutes of Limitation

Wartime Suspension of Limitations Act (“WSLA”)

April 4, 2023 by Leave a Comment

Today’s post is from Jack Townsend. Jack is a practitioner whose blogs on tax procedure inspired us to start Procedurally Taxing back in 2013. In addition to working with me as the principal contributing author for the chapter in Saltzman and Book on criminal tax penalties, Jack writes widely on issues of tax procedure and tax crimes. In this post focusing on tax crimes, Jack alerts practitioners to the potential application of the Wartime Statute of Limitations Act. 18 USC 3287, the text of which applies to federal crimes “involving fraud or attempted fraud against the United States.” That text would clearly include tax evasion and conspiracy to commit tax evasion. It might also apply to the defraud conspiracy. Jack has offered this post on his blog, and we are reposting it here. Les

I have written before about the Wartime Suspension of Limitations Act (“WSLA”), 18 USC 3287, here, that suspends certain criminal statutes of limitations while “the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).” The statutes of limitations are suspended in relevant part for crimes “(1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not.” My blogs on this subject discussing the potential application of this WSLA suspension for tax crimes are collected by relevance here and reverse chronological order here. In those blogs, I have noted that the WSLA’s literal application to certain tax crimes involving “fraud” would mean that the WSLA could have a pervasive effect permitting the charging of tax crimes far before the normal suspensions often encountered for tax crimes. See also, Michael Saltzman & Leslie Book, IRS Practice and Procedure, ¶ 12.05[9][a][iii] Suspension and tolling (discussing normal suspensions and discussing § 3287 at n. 933); and John A. Townsend, Federal Tax Procedure (2022 Practitioner Ed.) 317-387 (August 3, 2022). Available at SSRN: https://ssrn.com/abstract=4180710.

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1. The blog supplements those discussions until the next revisions of those respective books (note that I am the principal author of the Saltzman and Book chapter). Since I have already brought the discussion up to date in the 2023 working draft for the Federal Tax Procedure Book (2023 Practitioner Ed.), I will just offer the following from the 2023 draft (which should be finalized by early August 2023). The last sentence in the carryover paragraph will be changed to and a footnote added as follows (note that I link the blog entries and key case entries in this blog but will not link them in the book):

This provision [WSLA] might apply to the Iraqi and Afghanistan engagements, but its application to tax crimes with elements of fraud or attempted fraud is notable only because of the many cases in which it could have been applied but is rarely, very rarely, asserted where statute of limitations defenses are asserted. fn

   fn E.g., Appeals Arguments Over Whether Government Brought Evasion and Tax Conspiracy Charges Within Statute of Limitations With No Mention of WSLA (Federal Tax Crimes Blog 9/19/21), here. Further, the WSLA is not even mentioned in the DOJ Criminal Tax Manual. SEE DOJ CTM 7.00 Statute of Limitations (viewed 3/31/23), here. Apparently because of its rarity of use in tax crimes, the ABA has recommended ”Guidance making it clear that the Service’s Criminal Investigations division will not recommend prosecution for charges that otherwise would be untimely except through the operation of the Wartime Suspension Limitations Act,” I discuss and link this recommendation in ABA Tax Section Recommendation to IRS for Priority Guidance to Disavow Application of WSLA and Further Comments Re Same (Federal Tax Crimes Blog 7/23/21), here; and  More on the Wartime Suspension of Limitations Act (WSLA) (Federal Tax Crimes Blog 2/20/21), here.  Nevertheless, the WSLA has been applied in some tax offense and defraud conspiracies. See in addition to cases in the cited blogs, e.g., Daugerdas v. United States,  2021 WL 603068 (S.D. N.Y. 2/16/21), here (noting the Afghanistan and Iraq resolutions and stating: “Accordingly, beginning in September 2001, the WLSA tolled the statute of limitations on the conspiracy to defraud the United States [for tax objects of conspiracy] and mail fraud charges. See Wells Fargo Bank, 972 F. Supp. 2d 593 at 613–14 (holding that the WSLA suspended the ten-year statute of limitations for certain fraud claims arising prior to June 25, 2002 because hostilities had not ended).)”; and United States v. Wellington, 2022 WL 3345759 (D. N.M. 2022), here (Defendant charged “violation of 18 U.S.C. § 371, Conspiracy to Commit Tax Evasion and Defraud the United States;” held WSLA applied based on holding in United States v. Nishiie, 996 F.3d 1013, 1028 (9th Cir. 2021), cert. denied, 142 S. Ct. 2653 (U.S. Apr. 25, 2022) and also citing Wells Fargo.)

Although the Government rarely invokes the WSLA, I presume it did in Daugerdas and know it did in Wellington. For example, see U.S. Response in Wellington asserting WSLA (at pp. 2-3), here:

2. The key to those potential applications is “war or Congress has enacted a specific authorization for the use of the Armed Forces.” The United States is not now at war, but there are some specific authorizations for the use of military force. As news reports have recently discussed, the Senate has voted to revoke the AUMF for the Iraqi War. See Barbara Sprunt & Susan Davis, Senate votes to repeal Iraq War authorization (NPR 3/29/23), here (discussing the Senate action and noting that the House must now act). Just focusing on that Iraq War AUMF, if the revocation is enacted (must pass House), it will cause the WSLA 5-year statute on that AUMF to start. But there was a separate AUMF for the 9/11/01 attack (Afghanistan) and even earlier AUMFs that have not been repealed. See P.L. 107-40, 115 STAT. 224 9/18/01, here; and see the Caveat in BA Tax Section Recommendation to IRS for Priority Guidance to Disavow Application of WSLA and Further Comments Re Same (Federal Tax Crimes Blog 7/23/21), here, that are still effective and could potentially still require suspension of the criminal statutes of limitations even if the Iraq AUMF is revoked.

3. I have stated my concern that § 371’s defraud conspiracy will not support application of the WSLA because the term “defraud” in 18 USC § 371 (defining offense and defraud conspiracies) is broader than the term “fraud” as generally used in criminal or related statutes such as § 3287. See More on the Wartime Suspension of Limitations Act (WSLA) (2/20/21), here, ¶¶ 3 and 4. In both Daugerdas and Wellington the courts thought it did to apply the WSLA to the defraud conspiracy. I think that was simply a gut holding assuming that “fraud” in § 3287 and “defraud” in § 371 are coextensive; the two terms are not coextensive because of the atypical and broader interpretation the Court put on § 371’s use of “defraud” in Hammerschmidt v. United States, 265 U.S. 182 (1924). 

a: Upon reflection, I am not sure that the Hammerschmidt holding that the § 371 “defraud” conspiracy is boader than “fraud” as used in the WSLA will foreclose using a defraud conspiracy to invoke the WSLA. Conceivably, the “defraud” conspiracy as interpreted in Hammerschmidt includes two types of objects:  (i) a defraud conspiracy with an object to commit fraud; and (ii) a defraud conspiracy with an object to defraud without an object to commit fraud. A special interrogatory or a question on the verdict form might answer which of the two types were used. Cf. United States v. Pursley, 22 F.4th 586, 591-593 (5th Cir. 1/13/22). A special interrogatory could be used to determine ensure that the jury determines which type of object is involved.

b. Use of special interrogatories in criminal cases have received much judicial and scholarly discussion, the concern being that special interrogatories can “lead” the jury to conviction and thus are anti-defendant.  They are used, nevertheless for specialized needs such as the statute of limitations which is a jury issue if the defense of the statute of limitations is in issue in the case and a defendant requests an appropriate submission of the statute of limitations issue to the jury. I won’t get into the nuances of the concerns about special interrogatories, but just cite generally a recent article:  But see e..g. Charles Eric Hintz, Fair Questions: A Call and Proposal for Using General Verdicts with Special Interrogatories to Prevent Biased and Unjust Convictions, 4 U.C. Davis L. Rev. Online 43 (2021), here; and Kate H. Nepveu, Beyond “Guilty” or “Not Guilty”: Giving Special Verdicts in Criminal Jury Trials, 21 Yale L. & Pol’y Rev. 263 (2003), here.

c. I offer an example of how a special interrogatory may be framed in a defraud conspiracy case potentially involving the WSLA and the distinction between defraud and fraud. The judge would give the jury standard jury instructions about the defraud conspiracy (based on the Hammerchmidt broad reading of defraud and explaining the that defraud conspiracy includes both actual fraud or the broader defraud definition of Hammerschmidt (this type of iinstruction would be required to properly instruct the jury that it could convict for defraud which does not require fraud).  The judge would submit to the jury a general jury verdict (Guilty/Not Guilty) form. The judge contemporaneously would submit a sealed envelope with a separate form to be opened and completed only if and after the jury rendered a unanimous general Guilty verdict for the defraud conspiracy defined per Hammerschmidt.  determines unanimously Guilt for the defraud conspiracy. The form inside the sealed envelope would ask whether the jury can find beyond a reasonable doubt that the defraud conspiracy for which the jury found the defendant guilty included at least one overt act with the intent to commit actual fraud (properly defined) after the starting date for the applicable statute of limitations (based on the WSLA).

Filed Under: Statutes of Limitation Tagged With:

Out of Time: The Government (Mostly) Wins at the District Court in Govig

March 30, 2023 by 2 Comments

We welcome back previous guest blogger Susan C. Morse, who is the Angus G. Wynne Sr. Professor in Civil Jurisprudence and Associate Dean for Academic Affairs at the University of Texas at Austin School of Law.  Today’s post provides insight for those interested in challenging regulations and a cautionary tale if the regulations have been on the books for some time.  Keith

On March 23, Senior District Judge David G. Campbell of the District Court of Arizona decided Govig v. United States. He correctly dismissed as time-barred two administrative procedure claims because of 28 U.S.C. § 2401(a), the default six-year limitations period for suits against the federal government. As I’ve written in a forthcoming paper, Old Regs, this is the first time that a court has considered this six-year time bar for administrative procedure claims in a tax case. It shouldn’t be the last, given taxpayers’ interest in challenging the administrative procedure bona fides of Treasury and IRS actions taken decades ago and the government’s interest in raising the 6-year time bar as a defense. (Prior Procedurally Taxing coverage here.)

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Govig involves penalties that the government proposed to impose on taxpayers for failing to report their use of an employee welfare benefit tax plan that is a “listed transaction” under Notice 2007-83. The taxpayers engaged in the listed transaction in 2015, and the government applied the Notice to them in 2019. The key time-bar question is when the “right of action first accrues” for purposes of 28 U.S.C. § 2401(a). The taxpayer said 2019. The government said 2007. The taxpayer won as to one claim, and the government as to two claims. Govig not only breaks new ground as the first case to time-bar an administrative procedure claim in tax, but also contributes a clear explanation and illustration of how to distinguish between earlier-accrual and later-accrual cases. 

Before reaching the limitations period question, Judge Campbell considered the effect of both Mann Construction Inc. v. United States and the Anti-Injunction Act. He held that Mann Construction did not produce a win for the plaintiffs, and that the Anti-Injunction Act did not produce a win for the government. These analyses are described briefly below before the discussion returns to the limitations period issue.

Mann Construction, a Sixth Circuit 2022 case authored by Chief Judge Jeffrey Sutton, concluded that the IRS could not apply Notice 2007-83 to a plaintiff because the Notice was not issued under the notice-and-comment provisions of the APA. The question for Judge Campbell in Govig was whether Mann Construction established a nationwide set-aside ruling that invalidated the application of the same Notice in Govig, even though Govig arose outside the Sixth Circuit. Judge Campbell held that Mann Construction did not mean that Notice 2007-83 was set aside for purposes of the Govig case. Judge Campbell quoted Judge Sutton’s concerns about nationwide injunctions drawn from a concurring opinion in another case, where Sutton wrote that the “set aside” language of APA § 706(2) was ambiguous and that Sutton “would be inclined to stand by the long understood view of equity – that courts issue judgments that bind the parties in each case over whom they have personal jurisdiction.”

The Anti-Injunction Act bars many tax claims related to assessment and collection, and the government argued that it barred various claims in Govig. But Judge Campbell concluded that the Anti-Injunction Act does not block the plaintiffs from challenging reporting requirements far removed from the process of tax assessment and collection, particularly where criminal penalties are possible. This follows the logic of the 2021 Supreme Court case CIC Services v. IRS and reaches a result consistent with decisions in the First and Sixth Circuits. Judge Campbell concluded that the Anti-Injunction Act barred only one claim brought in Govig, which related to a claim for refund of tax penalties.

Judge Campbell then proceeded to analyze the limitations period issue. Perhaps he covered it last rather than first because the Ninth Circuit’s view is that 28 U.S.C. § 2401(a) is not jurisdictional. The D.C. and Sixth Circuits also hold the non-jurisdictional view, based on their interpretation of the Supreme Court’s Irwin v. Department of Veterans’ Affairs and United States v. Kwai Fun Wong precedents. The non-jurisdictional view is probably the better view, although the Fifth Circuit disagrees. If 28 U.S.C. § 2401(a) is not jurisdictional, as in the Ninth Circuit, then a court is not required to raise it sua sponte and the government may waive it. Govig, notably, is the first tax / administrative procedure case in which the government raised (rather than waiving) the six-year time bar as a defense.

The Govig court correctly explained the “two accrual rules for APA claims” in the Ninth Circuit. The first rule comes from Shiny Rock Mining Corp. v. United States, a 1990 case:  

[I]f a claim challenges the procedures the agency used in issuing the rule or the policy behind the rule, the claim accrues when the rule is issued.

The second rule comes from Wind River Mining Corp. v. United States, a 1991 case:

[A] plaintiff may challenge the substance of an agency rule as exceeding statutory or constitutional authority by bringing an APA claim within six years of the agency’s application of the rule to the plaintiff.

Together, these cases are known as the Wind River doctrine: 28 U.S.C. § 2401(a) accrues at the time of rulemaking for claims relating to procedure contemporaneous with rulemaking, but accrues later, at the time the rule is applied, for claims that the substance of agency rulemaking violates the Constitution or exceeds the bounds of the authorizing statute. In addition to the Ninth Circuit, the Second, Fourth, Fifth, Sixth, Eleventh, and Federal Circuits have also endorsed the Wind River doctrine. The D.C. Circuit and the Supreme Court, however, have not squarely addressed the time-of-accrual issue.

Judge Campbell’s cogent restatement of the Wind River doctrine supported his clean application of the time-bar defense to three claims in Govig:

First, the plaintiffs claimed that the IRS violated the notice-and-comment requirements of APA § 553 when it issued Notice 2007-83. This claim that the IRS did not use notice-and-comment procedure is a classic claim within the first category, i.e., that an agency did not follow proper procedure in issuing a rule. Thus, it accrued in 2007 and was time-barred.

Second, the plaintiffs claimed that the IRS Notice exceeded the authority of IRC § 6707A , which asked the IRS to identify “listed transactions,” ”because the notice failed to describe the listed transactions with the specificity required by the statute.” Judge Campbell held that this second claim amounted to a claim that the IRS exceeded the authority of the authorizing statute, like the ultra vires question presented by Wind River, where a plaintiff argued that a regulation was invalid because it applied to an area that was not “roadless” as required by the substantive statute. Thus, the second claim accrued in 2019 and was not time-barred.

Third, the plaintiffs claimed that the IRS acted arbitrarily and capriciously in violation of APA § 706(2)(A) because it did not give “adequate reasons” for the Notice and did not solicit public comments. This claim that the IRS acted in an arbitrary and capricious manner was also a rulemaking-contemporaneous procedural claim, because the alleged lack of reason-giving related to the procedures used at the time the agency issued the rule. Thus, the third claim accrued in 2007 and was time-barred.

The district court was not swayed by the fact that the Govig taxpayers did not have standing to sue in 2007. It acknowledged that the limitations period may run against a plaintiff for administrative procedure claims even before the plaintiff is injured. This at first may seem strange, but it is the only way that there can be an effective time limit on challenges to the procedures the agency used in issuing the rule. Otherwise, a plaintiff could always come into existence at a later date, acquire standing at that later date, and raise the stale administrative procedure question. If the rule violates the authorizing statute or the Constitution, that is different, because these are controlling forms of law that offer continued requirements or protections. Administrative procedure, in contrast, offers a general public right to participate in decisionmaking when that decisionmaking occurs. It relates to a particular moment in time – the moment when the agency issues a rule.

The Govig court also considered and rejected the plaintiffs’ equitable tolling claim. This exception provides the main avenue to relief from 28 U.S.C. § 2401(a). (Equitable estoppel is another exception sometimes raised, but it apparently was not in this case.) The Govig opinion explains that “because Plaintiffs did not diligently pursue their procedural challenges, they are not entitled to equitable tolling.” This is a good start, although it does not consider another important equity factor, which has to do with the defendant rather than the plaintiff. The court might have exercised its equity muscles more thoroughly.

For instance, the court could have used the Supreme Court’s two-part disjunctive test for equitable tolling in Irwin: 

We have allowed equitable tolling in situations where the claimant has actively pursued his judicial remedies by filing a defective pleading during the statutory period or where the complainant has been induced or tricked by his adversary’s misconduct into allowing the filing deadline to pass. [Emphasis added]

The Govig plaintiffs meet neither part of this disjunctive test. They did not file any pleading (or take any other relevant action) during the statutory period, which expired in 2013. And also, the government did not engage in any misconduct which would have delayed these plaintiffs’ ability to file within the statutory period. Equitable tolling has been allowed, for example, when the government fraudulently concealed facts or when a government office required to furnish a plaintiff with a form for filing a claim failed to provide the form. In contrast, in Govig, the government did not block or delay the plaintiffs’ ability to bring their administrative procedure challenge.

The district court’s careful application of Ninth Circuit precedent meant that it did not have to deconstruct the Wind River doctrine’s conclusion that 28 U.S.C. § 2401(a)’s reference to “first accrues” means the time when a rule is issued for administrative procedure claims. But if future courts – including the Supreme Court – consider this issue from a statutory interpretation perspective, they should conclude that a careful textual reading of the statute supports the Wind River reading, as explained further here. Judge Campbell’s holding correctly time bars the non-ultra vires APA claims in Govig.

Filed Under: Administrative Procedure Act (APA), Statutes of Limitation Tagged With:

Failure to File Information Returns For Foreign Trust Keeps Statute Of Limitations Open For Individual’s Income Tax

February 28, 2023 by Leave a Comment

Fairbank v Commissioner  is the latest in a long line of important cases originating from the IRS’s use of the John Doe Summons (JDS) process to gather information about US individuals who had money parked in overseas accounts.

Fairbank involves Section 6501(c)(8). That section provides that an individual who fails to file information returns with respect to certain activities, including owning a foreign trust and receiving distributions from an overseas trust, faces an exception to the normal three-year statute of limitation (SOL) on assessment.  When a taxpayer fails to file those information returns, instead of three years from the filing of the income tax return, the clock on the SOL on assessment for income tax does not begin to run until the taxpayer furnishes information to the IRS about the trust investments.

The taxpayer in Fairbank was no stranger to overseas investments and accounts.  In the early 1980’s, when Mrs. Fairbank was married to her first spouse, IRS had issued jeopardy assessments approaching $15 million after the IRS discovered that her ex husband had shifted substantial assets to New Zealand and Switzerland and had not filed tax returns for a few years.

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Fast-forward a bit. Mrs. Fairbank and her ex divorced, and as per the divorce negotiations and settlement the ex transferred cash to Mrs. Fairbank. The cash went to a Swiss-based UBS account in the name of Xavana Establishment, an entity formed in Liechtenstein.

In 2008 a federal court approved the IRS issuance of a JDS to UBS, which provided Fairbank’s name to the IRS. That triggered an income tax examination, and Fairbank eventually filed FBAR forms and information returns relating to ownership of and distributions from a foreign corporation, but not the filing of Forms 3520 or 3520A, relating to the ownership of and distributions from a foreign trust.

In 2018, after determining that there was additional income tax due to the overseas accounts, IRS issued notices of deficiency for 2002-09 with taxes and penalties stemming from the income approximating about $120,000. Fairbank had timely filed those individual returns, and in the absence of an exception to the three-year SOL, any assessment with respect to income tax liability would be time barred.

IRS argued that Fairbank’s failure to file the trust information forms meant that Section 6501(c)(8) applied and thus its stat notices preserved the possibility of a timely assessment. Fairbank argued that she effectively provided the information that the IRS required under Section 6048 pertaining to trust ownership and distributions. (As an important aside, she also argued, unsuccessfully, that Xavana was a corporation and not a trust; the opinion found that her control over the corpus and income rendered the trust a grantor trust and not a corporation—much of the opinion digs into entity classification issues.)

In finding that 6501(c)(8) controlled and the SOL on assessment was still open, the opinion declined to definitively state that taxpayers had to file Forms 3520 and 3520 A to avoid the exception in 6501(c)(8) to apply. In footnote 32, however, the opinion did state that analogous case law provides that information can be considered a return for purposes of the SOL rules even if it is not on the specific form the IRS typically requires.

That substance over form approach did not help Fairbank, however, as the opinion concluded that they had not provided enough information about Xavana’s activities:

We conclude that Mrs. Fairbank, as the deemed U.S. owner of Xavana Establishment, has failed to provide any written return to respondent setting forth a full and complete accounting of Xavana Establishment’s activities for the years at issue. See I.R.C. §6048(b)(1).

Similarly, we conclude that Mrs. Fairbank, as Xavana Establishment’s U.S. beneficiary, has failed to make any return that includes the name Xavana Establishment and which outlines the aggregate amount of distributions she received during each of the tax years at issue from Xavana Establishment.

Parting Thoughts

Whether a taxpayer can satisfy the 6501(c)(8) requirement in the absence of filing a specific form presents an interesting issue. While the opinion suggests that a taxpayer who has sufficiently demonstrated that the IRS received all of the information that a form would have provided might have prevailed, in footnote 33 the opinion cautions that even if “we were to accept petitioners’ argument that a specific form is not required to trigger the running of the period of limitations, we would create uncertainty in an area of the law where absolute clarity benefits both the IRS and taxpayers.”

I suspect that Fairbank would be ok with that uncertainty, and while the SOL rules are meant to provide a date certain, it is hard to see why the IRS should have additional time to assess if it has elsewhere received all the information it would have received on a specific form. That issue awaits resolution in another case, however.

One final point. The opinion notes that in 2010 Congress added a reasonable cause exception to 6501(c)(8), but in footnote 30 it states that the taxpayer “did not adequately raise the issue.”  That is tough. The reasonable cause analysis would lean heavily on standards developed in the context of civil penalties, including the seminal 1985 Supreme Court Boyle case. While Boyle generally provides that you cannot delegate tax return filing obligations to a third party, perhaps in Fairbank counsel’s advice in 2014 to only file an information return with respect to a foreign corporation, and not a return with respect to a foreign trust, would have amounted to substantive legal advice, rather than nondelegable advice concerning filing deadlines that was directly at issue in Boyle.

Filed Under: Statutes of Limitation

Tax Court Issues Another 17-0 Ruling Regarding The Jurisdictional Nature Of Filing A Tax Court Petition

November 29, 2022 by 1 Comment

Today the Tax Court ruled in Hallmark v. Commissioner, 159 T.C. No. 6 (2022) that the time period for filing a petition in a deficiency case is jurisdictional.  The Court relies heavily on history and on 7459.  We will write more as we digest the full opinion but once again the Court does not find Supreme Court case law regarding jurisdiction, including the recent decision in Boechler, to deter it from the conclusion that the time period for filing a petition is jurisdictional.  The decision will no doubt set off litigation in the circuit courts around the country and may lead again to a decision by the Supreme Court which last time reversed the 17-0 decision of the Tax Court in Guralnik v. Commissioner with a 9-0 decision in Boechler.

Filed Under: Last Date to perform act, Statutes of Limitation, Tax Court

Out of Time? APA Challenges to Old Tax Guidance and the Six-Year Default Limitations Period

September 19, 2022 by 3 Comments

We welcome back previous guest blogger Susan C. Morse, who is the Angus G. Wynne Sr. Professor in Civil Jurisprudence and Associate Dean for Academic Affairs at the University of Texas at Austin School of Law.

Is it ever too late to raise an administrative procedure challenge to an old tax regulation?

Consider the pair of cases that has produced a circuit split between the Sixth and the Eleventh Circuits over the adequacy of notice-and-comment for a conservation easement final regulation. (Prior Procedurally Taxing coverage here and here.) The Sixth Circuit held in Oakbrook that the notice-and-comment process was sufficient. In contrast, the Eleventh Circuit concluded in Hewitt that Treasury “violated the Administrative Procedure Act’s requirements” when it promulgated the regulation and that therefore the IRS Commissioner’s application of the regulation was “invalid.” But neither court addressed the question of time. The regulation was promulgated in 1986 – decades before any of the facts arose in either case.

Does time ever limit taxpayers’ ability to raise administrative procedure challenges long after the promulgation of a regulation? Consider 28 U.S.C. § 2401(a), the default limitations period for suits against the federal government. It provides that “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.”

The limitations period analysis turns on when the “right of action” to raise an administrative procedure challenge to a regulation “first accrues.” For instance, in Oakbrook and Hewitt, if this right accrued in 1986, when Treasury promulgated the regulation at issue, then the taxpayers’ claims should have been time-barred. On this theory, the taxpayers were allowed to litigate because the government did not raise 28 U.S.C. § 2401(a) as a defense. (The government can waive the defense, as it’s not jurisdictional.) If the government had raised the six-year limitations period defense, the Oakbrook or Hewitt taxpayer would have had to argue that the right of action first accrued later, when the regulation was applied to the taxpayer’s case, or that an exception to the limitations period should apply.

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Now the government has begun to raise the six-year limitations period defense, first in July 2022, in the Govig case, pending in the federal district court in Arizona. Govig involves Notice 2007-83, which was issued nine years before penalties were first proposed on Govig for the 2016 tax year, relating to the employee welfare benefit arrangement established by the taxpayer in 2015. In Govig, the taxpayer claims that the Notice is invalid because it was issued without notice and comment, and relies on the Sixth Circuit’s decision in Mann Construction. In Mann Construction, though, the government did not raise the six-year limitations period defense.

More than half the Courts of Appeal – the Second, Fourth, Fifth, Sixth, Ninth, Eleventh, D.C., and Federal Circuits – have accepted that for administrative procedure claims, the default six-year limitations period begins to run when the challenged regulation or guidance issues, in other words at the time of final agency action. This limitations period statute exists against the background of sovereign immunity, meaning that it is an exercise of Congressional power to specify on what terms the federal government may be sued. In contrast, for certain other claims, such as claims that the agency exceeded its statutory authority, the limitations period begins to run when the regulation or guidance is applied. This is called the Wind River doctrine after a key 1991 Ninth Circuit case. The Wind River doctrine would say that the limitations period for an administrative procedure challenge to Notice 2007-83 began to run in 2007 and expired in 2013, before any relevant facts arose in the Govig case.

It may seem an awkward reading to suggest that a “right of action first accrues” with the earlier issuance of a Notice, especially when the specific controversy between the taxpayer and the government arises from later enforcement proceedings. And yet that is what the cases hold. As an example, consider Sai Kwan Wong, a 2009 Second Circuit case where the plaintiff sought to challenge a Medicaid rule that treated social security disability income as an amount that offsets Medicaid funding of nursing home care, even if that income was deposited into a special needs trust. The Department of Health and Human Services had promulgated a rule providing this offset treatment in 1980, apparently without using notice and comment. The plaintiff did not have standing until 2006, when his legal guardian began to direct the plaintiff’s disability income to a special needs trust, thus raising the question of whether the offset rule would apply. The Second Circuit held that the six-year limitation period began to run in 1980, when the guidance issued, and not in 2006, when the plaintiff had standing. It then barred the plaintiff’s administrative procedure claim.

The theory that underpins cases like Sai Kwan Wong is articulated in Shiny Rock, a 1990 Ninth Circuit case that preceded Wind River by one year. There, the court explained that any injury “was that incurred by all persons .. in 1964” when the Bureau of Land Management issued a public land order – not in 1979, when Bureau applied the order to deny the plaintiff’s mineral patent application. The Shiny Rock court suggests that the rights that are vindicated by an administrative procedure challenge are the general public rights to participate in the administrative procedure process. A later-accrual approach, added the Shiny Rock court, “would virtually nullify the statute of limitations,” since it would always be possible for the old administrative order to applied later, to a new plaintiff who had later gained standing. Viewed this way, the case law consensus that the limitations period begins to accrue when a regulation is promulgated makes sense.

An alternative reading of 28 U.S.C. § 2401(a) might be that a particular plaintiff’s right of action cannot accrue until the plaintiff has standing. This reading is grounded in a private law understanding of the statutory provision, which envisions the government as party to a contract or tort action that arises from a specific transaction or interaction between the government and a plaintiff. But administrative procedure violations are not like these private law causes of action. They arise not from a specific interaction between government and plaintiff, but rather from the alleged failure of a process that is supposed to serve the general public function of producing better administrative law.

Thus, in Govig, if the District of Arizona follows Ninth Circuit precedent, it should conclude that the administrative procedure challenge to Notice 2007-83 is time-barred – unless, of course, the Govig plaintiffs can persuade the court that an exception to the limitations period applies. There is little in the facts of Govig that would support an equitable tolling or equitable estoppel argument. For instance, the government did not hide information or delay enforcement in order to wait out the limitations period. Instead, the facts of the case did not arise until after the limitations period had expired.

An issue that may arise in Govig relates to intervening case law. This is because the Govig plaintiff arguably relies on CIC Services, a 2021 Supreme Court case that held that some facial or pre-enforcement challenges are permitted in tax, despite the Anti-Injunction Act. (Prior Procedurally Taxing coverage here, here, and here).Historically, intervening case law has restarted the 28 U.S.C. § 2401(a) limitations period when a case has only prospective effect – but not if the case has (as is typical) retroactive effect. Plus, more recent Supreme Court precedent emphasizes that its applications of federal law “must be given full retroactive effect …as to all events, regardless of whether such events predate or postdate the announcement of the rule.” The intervening case law argument seems unlikely to offer the Govig plaintiff an exception to the time limitation of 28 U.S.C. § 2401(a).

The Govig case is one to watch. If the Arizona federal district court follows prevailing case law, it will likely allow the government’s limitations period defense and time bar the plaintiff’s administrative procedure claim. The availability of such time bars would reshape the landscape of administrative procedure in tax by putting APA claims on the clock and replacing the assumption that the government will waive the 28 U.S.C. § 2401(a) limitations period defense.

For further reading, if of interest: I have posted a preliminary draft here with additional analysis of this limitations period issue.

Filed Under: Administrative Procedure Act (APA), Statutes of Limitation Tagged With:

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

September 9, 2022 by 3 Comments

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, 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.

Filed Under: Amended Returns, Civil Penalties, Statutes of Limitation
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