Tax Law

IRS Queasiness Over the Reaches of Allen

I have recently blogged on the issue of whether the fraud of some person other than the taxpayer signing the return which makes the return fraudulent allows the IRS an unlimited statute of limitations under Section 6501(c)(1), here.  I list below the blogs that deal with that issue.  In Allen v. Commissioner, 128 T.C. 37 (2007), the Tax Court held that a preparer's fraud with no fraud on the taxpayers' part can invoke the unlimited statute of limitations under 6501(c)(1).  In my blogs, I questioned that holding and noted some of the possible other situations that, if correct, the Allen holding could and logically should apply.  Specifically, I mentioned that proliferation of abusive tax shelters such as Son-of-Boss that, in criminal cases, have resulted in convictions of the promoters for tax evasion with respect to the taxpayers' returns.  Even if one were to assume that the taxpayers were not guilty of fraud (the Government conceded that for purposes of the criminal case), the promoters' fraud that resulted in the returns being fraudulent seems to comfortably fit the Allen holding if Allen is correct.

The IRS has released a new internal guidance legal memorandum, ILM 201238026,
here.  In that memorandum, one of the owners of an S Corporation had caused income to be falsely underreported and hence, when the underreported income was passed through to the two shareholders, their returns underreported the income.  With respect to the underreported income, the culpable partner had been convicted of "one count of 18 U.S.C. § 371, Conspiracy to Commit Mail Fraud and Tax Fraud, one count of 26 U.S.C. § 7201, Tax Evasion, one count of 26 U.S.C. § 7206(1), Filing a False Individual Tax Return, and one count of 26 U.S.C. § 7206(1), Filing a False Corporate Tax Return for the year 2001."  The issue addressed in the memorandum was whether the nonculpable owner who reported the fraudulently understated net income on his return (1040) was subject to the unlimited states of limitations under Section 6501(c)(1).


Finally, of course, as I noted, in terms of the statutory text (i.e., silence as to whose fraud is required), Section 6501(c)(1) cannot be differentiated in any way from Section 6663,
here.  Yet, we know that Section 6663 requires the taxpayer's fraud. The IRS strategically did not attempt to assert the fraud penalty in Allen, but it would seem to apply just from the text.  Of course, the need for additional time to discover the fraud is not directly relevant, but that is an extra-textual notion imported into the Section 6501(c)(1) text.  Textualists like Justice Scalia and others might well be inclined to impose a fraud penalty on the extrapolation that, if Section 6501(c)(1) is basically the same text and if we don't dig for some hidden reasons to interpret text differently, then the fraud penalty applies.  But, I think, even Justice Scalia would balk at the application of the fraud penalty.  Which, is precisely why we should balk at the application of the unlimited statute of limitations because there is not enough in the extra-textual sources that would indicate a clear congressional intent that it apply when the taxpayer is innocent.  Congress has provided ample penalties for preparers and others fraud (including tax evasion and aiding and assisting of which preparers and promoters can be found guilty).

I submit that Section 6501(c)(1) is more properly read to require the taxpayer's fraud.  As I have noted, in Allen, the IRS took a poorly formulated position, picked the best case it could (including one that it knew would likely not be well litigated or briefed), and smoked it past the Tax Court in a division opinion (T.C.), so that now, until reversed, it is precedent in the Tax Court.  I hope that cases in the pipeline will not accept that misguided opinion and will shoot for full court review in the Tax Court.

For more detailed refutation of the Allen holding, see Professor Bryan Camp's articles:  Bryan T. Camp, Presumptions and Tax Return Preparer Fraud, 120 Tax Notes 167 (2008);
here and Bryan T. Camp, Tax Return Preparer Fraud and the Assessment Limitation Period, 116 Tax Notes 687 (Aug. 20, 2007). here.

... subscribers can access Lexis enhanced versions of the Allen v. Comm'r, 128 T.C. 37 (T.C. 2007) and Transpac Drilling Venture v. United States, 83 F.3d 1410 (Fed. Cir. 1996) decisions with summaries, headnotes, and Shepard's.

View Jack Townsend's opinion in its entirety on the Federal Tax Crimes blog site.

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