Vincent Allen v. Commissioner , 128 T.C. No. 4 ( 2007 )

128 T.C. No. 4UNITED STATES TAX COURT
VINCENT ALLEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11016-05. Filed March 5, 2007.
P’s returns for the years at issue were false and
fraudulent due to the fraudulent intent of the return
preparer. P himself did not have fraudulent intent and
did not file the returns with the intent to evade
taxes. R issued P a deficiency notice after the
regular 3-year limitations period for assessing P’s
liabilities had expired.
Held: The limitations period is indefinitely
extended under sec. 6501(c)(1), I.R.C., if a return is
fraudulent, regardless of whether the fraud was
committed by the taxpayer or the taxpayer’s preparer.
Forest J. Dorkowski, for petitioner.
Caroline R. Krivacka, for respondent.
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OPINION
KROUPA, Judge: Respondent determined a $4,428 deficiency in
petitioner’s Federal income tax for 1999 and a $7,784 deficiency
in petitioner’s Federal income tax for 2000. We are asked to
decide for the first time whether the limitations period for
assessing income tax under section 6501(c)(1)1 is extended if the
tax on a return is understated due to the fraudulent intent of
the income tax return preparer. We conclude that it is.
Background
This case was submitted fully stipulated under Rule 122.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioner lived in Memphis,
Tennessee, at the time he filed the petition.
Petitioner, a truck driver for UPS during 1999 and 2000,
timely filed his returns for 1999 and 2000 (the years at issue).
Petitioner gave his Form W-2, Wage and Tax Statement, section
401(k) statement, mortgage interest statement, and property
statements to Gregory D. Goosby (Mr. Goosby), who prepared
petitioner’s returns for the years at issue and filed them with
respondent.
Mr. Goosby prepared petitioner’s returns for the years at
issue and claimed false and fraudulent Schedule A, Itemized
Deductions, for both years. The false deductions included
1
All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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deductions for charitable contributions, meals and entertainment,
and pager and computer expenses, as well as various other
expenses. Petitioner received complete copies of petitioner’s
returns for the years at issue after they had been filed, but he
did not file an amended tax return for either year.
Two special agents of respondent’s Criminal Investigation
Division interviewed petitioner concerning Mr. Goosby’s
preparation of his income tax returns. Mr. Goosby was indicted,
tried, and convicted of 30 violations of section 7206(2)
(willfully aiding and assisting in the preparation of false and
fraudulent income tax returns) in 2006, although petitioner’s
returns for the years at issue were not used as the basis for any
counts of the indictment.
Respondent issued a deficiency notice to petitioner on March
22, 2005, in which respondent disallowed numerous Schedule A
deductions petitioner claimed on his returns for each of the
years at issue. The deficiency notice did not assert the fraud
penalty under section 6663 against petitioner. The regular 3-
year limitations periods for assessment of taxes with respect to
petitioner’s returns for the years at issue expired on April 15,
2003, and April 15, 2004, respectively. Petitioner timely filed
a petition.
Petitioner has conceded all adjustments respondent made in
the deficiency notice other than one adjustment respondent
concedes was made in error. The parties agree that the false
deductions on petitioner’s income tax returns for the years at
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issue made petitioner’s returns false and fraudulent for the
years at issue. The parties also agree that petitioner himself
did not have the intent to evade tax, but Mr. Goosby claimed the
false deductions for the years at issue on petitioner’s returns
with the intent to evade tax.2
Discussion
The parties have stipulated that the returns petitioner
filed for the years at issue were fraudulent. The parties
disagree, however, whether the fraudulent intent required to keep
the limitations period open indefinitely under section 6501(c)(1)
must be that of the taxpayer, petitioner.
The Limitations Period
We shall begin by describing the general principles of the
limitations period for assessment of income taxes. The
Commissioner must generally make such an assessment within a 3-
year period after a taxpayer files his or her return. Sec.
6501(a). An exception to this general rule exists, however, for
a false or fraudulent return with the intent to evade tax. Sec.
6501(c)(1). In those situations, the Commissioner may assess the
tax, or commence a proceeding in court for the collection of the
tax, at any time. Sec. 6501(c).
Petitioner alleges that the limitations periods for
assessment of taxes with respect to petitioner’s returns for the
2
The Court ordered, and the parties filed, simultaneous
opening briefs. The Court also ordered the parties to each file
simultaneous answering briefs on or before Jan. 8, 2007.
Respondent timely filed an answering brief, but petitioner failed
to file an answering brief.
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years at issue expired before respondent issued petitioner the
deficiency notice. Respondent argues that the preparer’s
fraudulent intent to evade tax is sufficient to keep the
limitations periods open. Petitioner counters that only the
intent of the taxpayer, not the preparer, is relevant to whether
the returns were fraudulent so as to extend the limitations
period.
Plain Meaning Analysis
The statute provides that the tax may be assessed at any
time “[i]n the case of a false or fraudulent return with the
intent to evade tax.” Sec. 6501(c)(1). Notably absent from this
provision is any express requirement that the fraud be the
taxpayer’s.3
Nothing in the plain meaning of the statute suggests the
limitations period is extended only in the case of the taxpayer’s
fraud. The statute keys the extension to the fraudulent nature
3
Rules regarding the limitations period in the case of false
and fraudulent returns have been in the Code since the Revenue
Act of 1918. Revenue Act of 1918, ch. 18, sec. 250(d), 40 Stat.
1083. That provision addressed the statute of limitations that
applied “in the case of false or fraudulent returns” and did not
by its terms require that the fraud be that of the taxpayer. Id.The version of the Revenue Act of 1934 that passed the House Ways
and Means Committee would have amended this section to read: “If
the taxpayer * * * files a false or fraudulent return with intent
to evade tax * * * the tax may be assessed * * * at any time.”
H.R. 7835, 73d Cong., 2d Sess. sec. 276(a) (1934) (as passed by
House, Feb. 21, 1934). The Senate Committee on Finance discarded
this language, however, with no discussion. The enacted version
continued to focus on the return with no express requirement that
the fraud be the taxpayer’s and remains the language in sec.
6501(c)(1) today. Revenue Act of 1934, ch. 277, sec. 276(a), 48
Stat. 745; S. Rept. 558, 73d Cong., 2d Sess. 43-44 (1934), 1939-1
C.B. (Part 2) 586, 619.
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of the return, not to the identity of the perpetrator of the
fraud. Nor do we read the words “of the taxpayer” into the
statute to require the taxpayer to have the intent to evade his
or her own tax.4
Respondent argues, and we agree, that statutes of
limitations are strictly construed in favor of the Government.
Badaracco v. Commissioner, 464 U.S. 386, 391 (1984); Lucia v.
United States, 474 F.2d 565, 570 (5th Cir. 1973). An extended
limitations period is warranted in the case of a false or
fraudulent return because of the special disadvantage to the
Commissioner in investigating these types of returns. Badaracco
v. Commissioner, supra at 398. Three years may not be sufficient
for the Commissioner to investigate or prove fraudulent intent.
Id. at 399.
We agree with respondent that the special disadvantage to
the Commissioner in investigating fraudulent returns is present
if the income tax return preparer committed the fraud that caused
the taxes on the returns to be understated. Accordingly, taking
into account our obligation to construe statutes of limitations
strictly in favor of the Government, we conclude that the
4
Accountants who prepare fraudulent returns have
occasionally been convicted of tax evasion under sec. 7201 and
similar predecessor provisions. See United States v. Gordon, 242
F.2d 122, 125 (3d Cir. 1957) (accountants held liable for tax
evasion though tax intended to be evaded was not their own);
Tinkoff v. United States, 86 F.2d 868, 875-876 (7th Cir. 1936)
(same).
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limitations period for assessing petitioner’s taxes is extended
if the taxes were understated due to fraud of the preparer.5
Limitations Period and Fraud Penalty
Petitioner argues that the limitations period is only
extended if the fraudulent intent is that of the taxpayer, not
the preparer. Petitioner relies on cases in which the fraud
penalty was asserted against the taxpayer and the limitations
period was extended. See, e.g., Rhone-Poulenc Surfactants &
Specialties, L.P. v. Commissioner, 114 T.C. 533, 548 (2000)
(citing Chin v. Commissioner, T.C. Memo. 1994-54 (regarding the
predecessor to section 6663); Williamson v. Commissioner, T.C.
Memo. 1993-246 (same); Richman v. Commissioner, T.C. Memo. 1993-
32 (same); Callahan v. Commissioner, T.C. Memo. 1992-132 (same)).
The cases petitioner cites are inapposite, however. Those cases
define fraud with reference to the taxpayer’s actions because it
was the taxpayer who committed the fraud. The cases did not hold
that fraud for purposes of section 6501(c)(1) is limited to the
fraud of the taxpayer. Nor do we read these cases to require
5
Cases interpreting limitations periods in the Code have
extended them due to malfeasance of return preparers and other
third parties, not just taxpayers. See, e.g., Transpac Drilling
Venture 1983-2 v. United States, 83 F.3d 1410, 1414-1415 (Fed.
Cir. 1996) (extending limitations period for assessing taxes of
partners attributable to partnership items under sec. 6229(c)
where partner intended to evade taxes of other partners); Estate
of Upshaw v. Commissioner, 416 F.2d 737 (7th Cir. 1969)
(extending limitations period for assessment of taxes on joint
returns where only one spouse committed fraud), affg. T.C. Memo.
1968-123; United States v. McLean, 390 F. Supp. 2d 475 (D. Md.
2005) (extending erroneous refund limitations period in sec.
6532(b) where fraud committed by a person other than the
taxpayer); United States v. Southland Oil Co., 339 F. Supp. 2d
764 (S.D. Miss. 2004) (same).
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that the person who causes a return to be fraudulent under
section 6501 must be the person who owes the tax or against whom
the fraud penalty is asserted under section 6663.
Burden on Taxpayers
Petitioner also argues that extending the limitations period
for the fraudulent intent of the preparer would be unfairly
burdensome because it would require taxpayers to keep records
indefinitely. We disagree. Taxpayers are charged with the
knowledge, awareness, and responsibility for their tax returns.
Magill v. Commissioner, 70 T.C. 465, 479-480 (1978), affd. 651
F.2d 1233 (6th Cir. 1981); Teschner v. Commissioner, T.C. Memo.
1997-498. The taxpayer, not the preparer, has the ultimate
responsibility to file his or her return and pay the tax due.
Kooyers v. Commissioner, T.C. Memo. 2004-281. This duty cannot
generally be avoided by relying on an agent. Estate of Clause v.
Commissioner, 122 T.C. 115, 123-124 (2004); Am. Props., Inc. v.
Commissioner, 28 T.C. 1100, 1116-1117 (1957), affd. 262 F.2d 150(9th Cir. 1958). We do not find it unduly burdensome for
taxpayers to review their returns for items that are obviously
false or incorrect. It is every taxpayer’s obligation.
Petitioner cannot hide behind an agent’s fraudulent preparation
of his returns and escape paying tax if the Government is unable
to investigate fully the fraud within the limitations period.
The Commissioner has just as much need for an extended
limitations period to investigate and examine taxpayers who sign
and allow to be filed returns that greatly overstate expenses or
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include fictitious expenses whether the fraud was committed by
the taxpayer or the taxpayer’s preparer. To find otherwise would
allow a taxpayer to receive the benefit of a fraudulent return by
hiding behind the preparer. Taxpayers whose returns are
fraudulent owing to fraud committed by the preparers would escape
their tax liability if the Commissioner were unable to identify
or investigate the fraud within the normal 3-year period.
We finally note that respondent is seeking to collect only
the deficiency in tax from petitioner. Respondent is not
asserting the fraud penalty against petitioner. Petitioner is
therefore required to pay only the correct amount of tax plus
statutory interest and no more.
Conclusion
We conclude that the limitations period for assessment is
extended under section 6501(c)(1) if the return is fraudulent,
even though it was the preparer rather than petitioner who had
the intent to evade tax. The plain meaning of the statute
indicates that it is the fraudulent nature of the return that
extends the limitations period. We therefore find that the
limitations period for assessing tax against petitioner is
extended indefinitely.
To reflect the foregoing,
Decision will be entered
under Rule 155.