United States: Whose Intent To Evade Tax Is It?

On July 29, 2015, the Federal Circuit, rejecting the Tax Court's decision in Allen v. Commissioner, 128 T.C. 37 (2007), held in BASR Partnership v. United States, No. 2014-5037, that section 6501(c)'s suspension of the three-year period of limitations for assessment for fraud or false returns applies only when the taxpayer — and not a third party — acts with the requisite "intent to evade tax."

In BASR Partnership v. United States, Erwin Mayer, of the now defunct Jenkens & Gilchrist, proposed a tax-advantaged transaction to a family about to realize a large capital gain from the sale of their printing business, and provided a tax opinion. The family's accountant had no prior relationship with Mayer or Jenkens & Gilchrist and prepared the partnership and individual tax returns based on the legal opinion. After Mayer was convicted, he provided an affidavit stating that he acted with the intent to fraudulently evade the federal income tax that the family would otherwise owe on the capital gains from the sale of their business. The Internal Revenue Service (IRS) issued a notice of final partnership administrative adjustment (FPAA) ten years after the partnership return was filed, but claimed that Mayer's intent to evade tax suspended the limitations period for the assessment for the partnership items.

Statute of Limitations for Assessment

Ordinarily, the IRS must assess tax three years after the tax return is filed. Section 6501(a) provides as a general rule that "the amount of any tax imposed by this title shall be assessed within three years after the return was filed (whether or not such return was filed on or after the date prescribed) . . ."

Section 6501(c)(1) provides, "In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."

Additionally, section 6501(n)(2) provides a cross-reference to section 6229 for extensions of period in the case of partnership items. Section 6229(c)(1) provides a special rule for the period of assessment for partnership items in the case of a false return. If any partner has, with the intent to evade tax, signed or participated directly or indirectly in the preparation of a partnership return that include a false or fraudulent item, the partner so signing or participating in the preparation of the return may be assessed the tax attributable to the partnership item or affected item at any time, and in the case of all other partners, the general three year statute is extended to six years.

Federal Circuit Rejects Allen v. Commissioner

The majority opinion rejects the limitations period in section 6229(c) of the Tax Equity and Fiscal Responsibility (TEFRA) rules as the controlling provision and then construes section 6501(c)(1) as requiring the taxpayer have the "intent to evade tax."

The majority opinion reviewed the evolution of section 6501 from its origin as section 250(d) of the Revenue Act of 1918, and concluded that the context provided by the predecessor statute confirms that Congress intended that only the taxpayer's intent to evade tax could trigger the unlimited limitations period that now appears in section 6501(c)(1). In this regard, the majority points out that the fraud penalty predecessor to section 6663 and the fraud suspension of the statute of limitations predecessor to section 6501(c)(1) appeared together in section 250 and that it was clear that these provisions referred to the intent of the taxpayer. Thus, when these provisions were separated and recodified into separate statutory provisions, there was nothing in the recodification to alter the meaning of "intent" and "fraudulent" as used in this predecessor statute.

Moreover, the majority was perturbed by the government's disparate interpretations of these provisions. The government submitted that the section 6663 fraud penalty applies only when the taxpayer, not a third party, commits fraud, but the fraud exception in section 6501 applies when a third party has an intent to evade tax. The majority found nothing in the statute or legislative history supporting a result by the IRS to interpret the fraud penalty as allowing the imposition of a fraud penalty only for the taxpayer's own fraud but on the other hand prolonging indefinitely the IRS' ability to assess against the taxpayer for fraud committed by others.

The concurring opinion agrees with the majority's interpretation of Section 6501(c)(1), but holds that section 6229(c) is the controlling authority and that this section clearly limits the assessment period to six years for a partner who has not "with an intent to evade tax, signed or participated directly or indirectly in the preparation of a partnership return which includes a false or fraudulent item."

The dissent agrees with the Tax Court's decision in Allen v. Commissioner, and contends that the pro-government rule of construction for limitations period requires a broad interpretation of the "intent to evade tax" provision.

Parting Thoughts

It should not be a surprise if the government files a motion for rehearing en banc, considering the lack of unanimity by the panel. In any event, the government may continue to litigate its position in the hopes of obtaining a split in the circuit court and eventual consideration by the U.S. Supreme Court.

The majority opinion may have correctly determined that the limitations period in section 6501(c) was controlling, and not Section 6229(c), but the fact that the government's construction of section 6501(c) would render section 6229(c) superfluous is another powerful reason for finding that the taxpayer's intent to evade tax is required in section 6501(c).

Under the government's rationale, the fraudulent intent of one partner can suspend the period of limitations for assessment under section 6501(c) for each of the partners, and thus, this construction of section 6501(c) renders superfluous section 6229(c)(1)(B) which gives the IRS six years, instead of three years, to assess tax attributable to a partnership items for all other partners.

Whose Intent To Evade Tax Is It?

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