The Tax Court in Brief – August 29th – September 2nd, 2022

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Tax Litigation: The Week of August 29th, 2022, through September 2nd, 2022

Dern v. Comm'r, T.C. Memo. 2022-90| August 30, 2022 | Vasquez, J. | Dkt. No. 7595-20

Johannes Lamprecht and Linda Lamprecht, v. Comm'r, T.C. Memo 2022-91| August 31, 2022 | Gustafson, J. | Dkt. No. 14410-15

Short Summary: This case discusses the submission of a "qualified amended return" after the service of a "John Doe" summons.

Mr. Lamprecht (petitioner or taxpayer), a Swiss citizen and a green card holder during the 2006-2007 taxable years (the tax periods), held a foreign account at UBS AG (UBS), a Swiss bank, where he received commissions for referring business to UBS. He failed to report these commissions on its original 1040s for the tax periods.

In 2008, the Department of Justice (DOJ) filed an Ex Parte Petition for Leave to Serve John Doe Summons. The petition requested authorization to serve a "John Doe summons" (summons) to U.S. taxpayers that held accounts with UBS during the 2002-2007 period. The respective District Court authorized the service of the summons, which was served in July 2008 to UBS. An enforcement suit of such summons followed, which was eventually resolved through an exchange of information agreement (the U.S.-Switzerland Agreement), and an agreement between the U.S., the IRS and UBS, under which UBS would produce the information requested in the summons (the U.S.-UBS Agreement).

In 2010, the taxpayers filed amended tax returns to report the commissions income received during 2006-2007. The returns were selected for examination and eventually, the IRS issued a Notice of Deficiency and proposed accuracy-related penalties for those years. The taxpayers timely filed suit in the Tax Court, and after discovery, both the IRS and the taxpayers filed cross-motions for summary judgment (MSJ). In deciding such MSJs, the Tax Court found in favor of the IRS, ruling that the amended returns filed by the taxpayers were not "qualified" as provided by Treas. Reg. § 1.664-2(c)(3).

Key Issues:

Whether an amended return is "qualified" as provided by Treas. Reg. § 1.664-2(c)(3), if submitted after a John Doe summons was served on UBS.

Primary Holdings: The submission of an amended return after a John Doe summons is served, prevents such amended return from being "qualified" for purposes of Treas. Reg. § 1.664-2(c)(3).

Key Points of Law:

The main issue at discussion was whether the 2010 amended returns submitted by the taxpayers were "qualified amended returns" under the language of Treas. Reg. § 1.6664-2(c)(3).

A qualified amended return is an amended return filed after the due date of the return and before the earliest of certain events, generally before the IRS contacts the taxpayers concerning an examination of the return. Treas. Reg. § 1.664-2(c)(3)(i). One of those events is "the date on which the IRS serves a summons described in section § 7609(f) relating to the tax liability of a class that includes the taxpayer, with respect to an activity for which the taxpayer claimed any tax benefit on the return". Treas. Reg. § 1.664-2(c)(3)(i)(D)(1).

A John Doe summons is a third-party summons that does not identify the person with respect to whose liability the summons is issued. I.R.C § 7609(f).

The requirements of the summons under the language of Treas. Reg. § 1.6664-2(c)(3) are: First, that the summons is related to a class that includes the taxpayer. Here, the Court determined that the taxpayer was a member that was included within the class object of the summons, which was U.S. taxpayers with signature or other authority over accounts maintained at UBS in Switzerland. Mr. Lamprecht had various accounts with UBS in Switzerland, thus this requirement was met.

Second, the John Doe summons must be in respect to an activity for which the taxpayer claimed any tax benefit on the return. The Court discussing Example 5 in Treas. Reg. § 1.6664-2(c)(5), stated that even in cases where the only difference between the original and the amended return was an increase in federal income tax liability, the "tax benefit claimed" was represented by the lower income tax liability showed in the original return. Under such perspective, the taxpayers claimed a benefit in their original return by showing a lower tax liability, which eventually increased in their amended returns. The Court went ahead and ruled that the "affirmative statement" contained in the text of the regulations only required the claim of a tax benefit on the original return, either directly or indirectly (by means of showing a lower tax liability, such as this case). Caselaw cited by the taxpayers, specifically Colony and Home Concrete, which construed omissions from gross income for purposes of an extended period of statute of limitations, were held to be not applicable to the question of whether a tax benefit was claimed on a return for purposes of the "qualified amended return" definition.

Finally, the Court ruled that the facts of the case did not translate in a distinction between the omission of income and an affirmative claim of tax benefit. Rather, because the taxpayers failed to report substantial income in their original returns, as consequence, those returns were permitted to claim itemized deductions, which the taxpayers were not entitled to if they had reported their full income. This claim constituted the "affirmative statement" required by the regulations.

Insight: This case reaffirms the importance of preventing noncompliance with foreign bank reporting. Here, although the taxpayers actually submitted their amended returns before the IRS contacted them directly, they were already late because of the John Doe summons. Taxpayers need to be aware that cases such as this, time is of the essence, and after the discovery of the failure to report, the best course of action is to immediately discuss possible alternatives to enter in compliance.

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