Omega Forex Grp., LC v. United States

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS October 22, 2018
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
OMEGA FOREX GROUP, LC, by and
through Robert K. Flath, a Partner other
than a Tax Matters Partner,
Plaintiff - Appellant,
v. No. 17-4066
UNITED STATES OF AMERICA,
Defendant - Appellee.
_________________________________
Appeal from the United States District Court
for the District of Utah
(D.C. No. 2:14-CV-00915-BSJ)
_________________________________
Michael D. Black (April M. Medley, with him on the briefs), Parr Brown Gee &
Loveless, P.C., Salt Lake City, Utah, appearing for Appellant.
Anthony T. Sheehan, Attorney, Tax Division (Richard E. Zuckerman, Principal Deputy
Attorney General, Travis A. Greaves, Deputy Assistant Attorney General, Gilbert S.
Rothenberg and Bruce R. Ellisen, Attorneys, Tax Division, with him on the brief), United
States Department of Justice, Washington, DC, appearing for Appellee.
_________________________________
Before BRISCOE, BALDOCK, and EID, Circuit Judges.
_________________________________
BRISCOE, Circuit Judge.
_________________________________
Plaintiff Omega Forex Group LC (Omega), appearing by and through partner
Robert Flath (Flath), appeals from the district court’s decision affirming two Notices
of Final Partnership Administrative Adjustment (FPAA) issued by the Internal
Revenue Service to Omega. The two FPAAs, on the basis of fraud at the partnership
level, eliminated large losses reported by Omega on its tax returns for years 1998 and
1999, and imposed penalties on Omega. Exercising jurisdiction pursuant to 28
U.S.C. § 1291, we affirm the district court’s decision.
I
Factual background
a) The parties
Omega is a limited liability company organized under the laws of the State of
Utah, with its principal place of business in Sandy, Utah. Omega was formed on or
about June 23, 1994, by an attorney named Dennis Evanson. Capital West, LLC,
another limited liability company controlled by Evanson, was the managing partner
of Omega.
Flath, at all times relevant to this action, was an endodontist in private practice
in Utah. More specifically, Flath was a corporate officer at Rocky Mountain
Endodontic Associations (RME), where he practiced with other dentists. Flath also
practiced dentistry as a sole practitioner under the name Rock Springs Endodontics
(RSE).
b) Flath’s “investment” in Omega
At some point in 1997 or 1998, one of the endodontists in Flath’s practice
suggested that Flath meet with Evanson. Flath’s partner described Evanson as an
expert “in options trading and general business organization and planning, tax
2
planning and asset protection.” Supp. App. at 51. Flath and Evanson met in the last
quarter of 1998. Evanson provided Flath with various materials regarding Omega’s
purported investment program, including an opinion letter from a law firm allegedly
confirming the validity of the program. Flath and Evanson continued to talk during
the last quarter of 1998 about the Omega program. According to Flath, Evanson
indicated that Flath would have a “chance of making money” in the Omega program
“based on [futures] contracts” and foreign currencies. Id. at 53.
On November 8, 1998, Flath sent a facsimile to Evanson stating that his goals
included reducing his taxes, engaging in United States transactions while keeping his
profits tax free, and funding his children’s educations. Flath summarized his
understanding of Evanson’s proposed investment scheme and noted, in particular,
that he would pay Evanson an initial fee of $18,000 to $20,000 and that Evanson
would also receive a fee equal to 20% of Flath’s tax savings.
Flath, using his RSE business account, subsequently paid Evanson a $19,700
base fee that purportedly gave Flath the right to become a capital-contributing
member of Omega.
On December 20, 1998, Flath signed the paperwork to become a partner in
Omega. That paperwork, however, was incomplete. In particular, it failed to specify
the amount of Flath’s capital contribution and Evanson never countersigned the
paperwork to make Flath a partner.
3
Omega’s general ledgers for 1998 show that Flath contributed a $200,000
promissory note to Omega during 1998. 1 There is no evidence, however, that Flath
ever paid this amount to Omega. Instead, the evidence indicates that on December
22, 1998, Flath made an oral promise to contribute $165,000 in stocks to Omega
before the end of 1998. But Flath did not actually contribute the stocks to Omega
until late March of 1999. And at the time of the actual contribution, the value of the
stocks was approximately $30,000 greater than its value in late December of 1998.
Beginning in January of 1999, Flath’s group and solo practices, RME and
RSE, began making monthly payments totaling $8,000 to an Evanson-controlled
entity called Commonwealth Professional Reinsurance Ltd. (Commonwealth) for the
ostensible purpose of purchasing professional liability insurance (this despite the fact
that both RME and RSE already had another malpractice insurance in place at that
time, for which they paid a total annual premium of $1,400). Flath treated the
monthly payments by RME as insurance premium payments and deducted those
payments as business expenses on his federal tax returns for RME. Commonwealth
in turn deducted twenty percent (20%) from each premium payment and then
declared a dividend to another Evanson-controlled entity based in the Cayman
1
Participants in Omega’s “investment” scheme “either paid cash or signed a
promissory note to become a partner in an Evanson company.” United States v.
Evanson, 584 F.3d 904, 906 (10th Cir. 2009). “If the participant paid cash, his
payment, less [Evanson’s] fee, was credited to his account.” Id. “If he signed a
promissory note, he was under no obligation to make payments on the underlying
loan; on the contrary, if a participant made a ‘loan payment,’ the amount was credited
to his account and, as a bonus, frequently reported as a home-mortgage-interest
deduction.” Id.4
Islands called International Capital Group (ICG). That dividend was allocated by
ICG to Flath’s fund in ICG.
Flath, through an Evanson-controlled entity called Cottonwood Financial, was
able to receive fake loans that effectively allowed him to access his “investment”
money in the Omega scheme. In addition, Flath utilized yet another Evanson-
controlled entity, Children’s Charities, to effectively pay his children’s school
tuition. More specifically, Flath would make purported tax-deductible donations to
Children’s Charities and Children’s Charities in turn would give purported
scholarships or loans to Flath’s children.
Lastly, Flath was able, using the money he had allegedly invested in Omega, to
buy and sell other stocks through ICG in order to avoid having to report the trading in
his tax returns. Evanson allegedly advised Flath that this process was legal.
In sum, Evanson, in exchange for Flath’s agreed payments, “manufactured
fictitious transactions to conceal income [for Flath] and create apparent [tax]
deductions [for Flath].” Evanson, 584 F.3d at 905.
c) Flath’s 1998 and 1999 tax returns
In February of 1999, Omega sent Flath a 1998 K-1 tax form stating that he had
contributed capital during 1998 totaling $200,000 and that his capital account at the
end of 1998 was $49,881. On September 27, 1999, Omega filed a Form 1065 United
States Partnership Return of Income for the 1998 tax year indicating, in pertinent
part, that Flath had contributed $200,000 to join Omega. The K-1 tax form further
stated that Omega had sustained a loss of $4,698,325 during 1998 as a result of
5
foreign currency speculation, that Flath’s percentage of that loss was 3.19%, and that
the resulting amount of Flath’s loss in dollars was $150,119. On March 25, 1999,
Flath and his wife filed a joint federal tax return for 1998 in which they claimed a
pass-through loss from Omega in the amount of $149,856. In doing so, Flath falsely
assured his accountant and tax preparer, Gail Anger, that he had contributed “at least
that much to” Omega during 1998. Supp. App. at 149.
Flath’s solo business, RSE, filed a 1998 tax return that listed as an ordinary
and necessary expense the $20,000 fee that Flath paid to Evanson. Flath did not
inform Anger of the true nature of the expense.
For tax year 1999, Flath told the IRS that he contributed $100,000 in cash to
Omega. In fact, however, Flath made no such cash contributions to Omega. Instead,
Flath’s endodontic businesses, RME and RSE, paid a total of $72,000 (comprised of
nine monthly payments of $8,000 each) to Commonwealth during 1999.
In February of 2000, Omega sent Flath a 1999 K-1 tax form stating that Flath’s
share of Omega’s “[q]ualified nonrecourse financing” liabilities was $249,713. Id. at
101.
On March 13, 2000, Flath and his wife filed a joint federal tax return for 1999
in which they claimed a pass-through loss from Omega in the amount of $86,724.
On June 19, 2000, Omega filed a Form 1065 United States Partnership Return
of Income for the 1999 tax year.
In preparing the 1998 and 1999 returns, Flath was not completely forthcoming
with Anger, his tax accountant. For example, Flath did not tell Anger that Flath was
6
a member of an offshore company called ICG, or that Flath’s businesses were
purportedly paying for supplemental malpractice insurance through Commonwealth.
d) Flath’s purported withdrawal from Omega
Flath made no further investments in Omega and took no deductions related to
Omega after 1999. In 2002, Flath allegedly ended his investment in Omega. At no
time during his involvement with Omega, however, did Flath actually take the steps
necessary to become a member of Omega. In particular, Flath never signed and
executed a required Operating Agreement. Further, although Flath signed a Capital
Contribution Agreement, it was never executed by Evanson, Omega’s managing
member. In addition, the Capital Contribution Agreement “[was] blank where an
amount of not less than $10,000 must be recorded.” Aplt. App. at 90. Lastly, Flath
never made the required $10,000 capital contribution in money to Omega.
e) The indictment of Evanson
In 2005, a grand jury indicted Evanson and other individuals related to Omega.
In February 2008, Evanson was convicted of conspiracy to commit mail and wire
fraud, tax evasion, and assisting in the filing of false tax returns.
f) IRS action against Evanson and Omega
On November 9, 2009, the IRS issued to Evanson, as the Tax Matters Partner
for Omega, a Notice of Beginning of Administrative Proceeding (NBAP). The
NBAP essentially notified Evanson that the IRS was beginning an audit of Omega’s
partnership tax returns. A copy of the NBAP was also sent to Flath.
7
On August 11, 2014, the IRS issued two FPAAs that made adjustments to
Omega’s 1998 tax return (the 1998 FPAA) and 1999 tax return (the 1999 FPAA).
The 1998 FPAA indicated that the IRS was eliminating entirely Omega’s alleged
$4,698,325 loss for tax year 1998 due to fraud at the partnership level. Similarly, the
1999 FPAA indicated that the IRS was eliminating entirely Omega’s alleged
$3,058,405 loss for tax year 1999 due to fraud at the partnership level.
Evanson did not file a petition for readjustment within the ninety days allowed
by 26 U.S.C. § 6226(a), and no partner of Omega other than Flath attempted to
challenge the FPAAs. 2
g) Flath’s response to the FPAAs
On December 16, 2014, Flath’s counsel sent a letter to the IRS “remit[ting] the
amount of $93,687.00 . . . and designat[ing] th[e] remittance as a deposit under IRC
§6226 [sic].” Id. at 42. The letter stated that “[t]he amount of the deposit was
calculated by multiplying the amount of all deductions related to Omega that were
claimed on . . . Flath’s 1998 and 1999 tax returns and multiplying that amount by
39.6%, the highest marginal rate in effect during those years.” Id.
On April 8, 2015, Flath made a deposit with the IRS related to the FPAAs in
the amount of $252,076.86. On March 12, 2015, the IRS issued Notices of
Computational Adjustment to Flath and his ex-wife.
2
At that time, § 6226(a) was entitled “Petition by tax matters partner” and it
gave “the tax matters partner” ninety days within which to “file a petition for a
readjustment of the partnership items” listed in an FPAA. 26 U.S.C. § 6226(a)
(2013). Section 6226(a) has since been amended.
8
II
Procedural background
On December 18, 2014, Omega, appearing by and through Flath, initiated this
action by filing a complaint in federal district court against the United States. The
complaint was captioned “PETITION FOR READJUSTMENT OF PARTNERSHIP
ITEMS UNDER INTERNAL REVENUE CODE SECTION 6226.” Id. at 13. The
complaint purported to “challenge[] the adjustments that the [IRS] . . . determined
should be made to the Form 1065 partnership tax returns filed by Omega for the
taxable years ended [sic] December 31, 1998 and December 31, 1999.” Id. at 13–14.
The complaint alleged that “[t]he issues in th[e] case [we]re whether the statute of
limitations for assessment ha[d] expired as to . . . Flath’s interest in Omega, whether
the IRS should be barred under the doctrine of laches from pursuing the assessments,
and whether the adjustments [outlined in the two FPAAs] [we]re valid and correct.”
Id. at 14. The complaint requested a refund of Flath’s deposits related to the FPAA
assessments, as well as attorneys’ fees pursuant to 26 U.S.C. § 7430.
The parties filed cross-motions for summary judgment. On August 7, 2015,
the district court issued an order granting partial summary judgment in favor of the
United States “on the issue of whether the defense of laches bar[red] the United
States from enforcing its tax claims” against Flath. Id. at 54.
After additional discovery, the parties filed a second round of summary
judgment motions. On December 20, 2016, the district court issued an order denying
the motions on the grounds that there “[we]re issues of fact and credibility necessary
9
to the resolution of the motion[s] that c[ould] only be resolved at trial.” Id. at 58.
The district court did rule as a matter of law, however, “that the taxpayer must have
the requisite intent [to commit fraud] in order to extend the statute of limitations
pursuant to 26 U.S.C. §6501(c)(1) [sic].” Id. “Specific to this case,” the district
court stated, “the [United States] must prove that . . . Flath had the requisite intent in
order to extend the statute of limitations for his joint returns in 1998 and 1999.” Id.The United States’ position was that “Flath’s 1998 and 1999 returns were false
or fraudulent and [his] intent to evade tax relating to these returns ke[pt] the statute
of limitations open under Section 6501(c) for the IRS to make assessments on th[o]se
returns.” Id. at 60. The United States further alleged “that Flath participated
indirectly in the preparation of the Omega . . . return[s]” and that those “returns d[id]
not qualify as returns under the relevant test.” Id. at 61.
The matter proceeded to a bench trial on February 6, 2017. The purpose of the
trial was “to consider [Flath’s] use in his returns of pass through losses created by
Omega.” Omega Forex Grp., LC v. United States, No. 2:14-CV-00915-BSJ, 2017
WL 927604 at *1 (D. Utah Mar. 8, 2017). More specifically, the trial court focused
on “whether or not by clear and convincing evidence Flath intended to defraud the
United States of rightfully owed taxes for each year.” Id. After hearing all of the
evidence, the district court concluded that “[t]he short answer as to intent [wa]s yes.”
Id. In support of this conclusion, the district court found that “[w]hen Flath signed
his 1998 tax return on March 25, 1999, his purported $200,000 capital contribution
used as the basis to allocate his loss was non-existent.” Id. (footnote omitted). The
10
district court in turn found that “what [wa]s important [wa]s that the $165,000—less
a fee to Evanson—by some special form of bookkeeping sleight of hand, ended up in
a protector account in a Cayman Island entity called . . . ICG.” Id. That ICG
account, the district court found, “was controlled by Evanson but subject to the will
of Flath.” Id. “In short,” the district court found, “the capital contribution [of Flath],
whenever it was made, passed through to [ICG] for the benefit of Flath, who suffered
no loss at all.” Id. Thus, the district court found, “Flath kept substantially all of his
capital contribution less Evanson’s fee.” Id. The district court also found that Flath
“did not tell [Anger, his accountant,] about a protector account located in the Cayman
Islands where $165,000—paid thereafter—would be placed on deposit free from
currency speculation and available for use for the purchase of stock shares or the
payment of the more mundane expenses of life such as tuition for a child.” Id. at *2.
As for Flath’s 1999 tax return, the district court found that “[t]he experience
was similar.” Id. Although “the K-1” form issued by Omega to Flath “showed
Flath’s share of [Omega’s purported] loss to be $85,793,” the district court found that
Flath sustained no such loss. Id. Specifically, the district court found that “[t]he
initial balance of [Flath’s] ICG account for 1999 had been augmented by periodic
transfers from” Commonwealth, and that “Commonwealth . . . purportedly sold . . . to
Flath and his endodontic practices a secondary malpractice policy with a monthly
premium of $8,000 per month.” Id. But, the district court found, “[t]hat monthly
premium payment amount, less a fee to Evanson, was periodically transferred to
Flath’s ICG account.” Id. In other words, the district court found that “[t]hrough
11
creative bookkeeping, the insurance premium payments made by Flath’s endodontic
practices to Commonwealth . . . ended up, less Evanson’s fee, as capital contributions
for Flath’s personal interest in Omega . . . and as amounts in Flath’s ICG account that
Flath could continue to draw down upon.” Id.The district court further found as follows:
Flath was a college graduate, a retired naval officer of twenty years, and
a private dentist with a practice that produced revenues of several
hundred thousand dollars per year. Had he made a capital contribution
in 1998 of $200,000 to Omega . . . for currency speculation, as noted in
the 1998 K–1 provided to him, he would have been aware of it. Had he
made a contribution of $100,000 in 1999 to Omega . . . for currency
speculation, as noted in the 1999 K-1 provided to him, he would have
been aware of it. What he did pay through stock sales, less fees to his
tax expert Evanson, ended up on deposit with ICG subject to his control.
Flath’s “at risk” capital contribution—purportedly lost—was used by
him from time to time to buy stocks and to pay family expenses. Flath
knew that as well.
Id.The district court rejected Flath’s assertion that “he relied on ‘expert advice’—
namely, Evanson and CPAs Gail Anger and Bryce Olson—which [could have]
negated fraudulent intent.” Id. at *3. The district court noted that “[i]t is a strange
form of ‘expertise’ which suggests one may still spend what is lost.” Id. In any
event, the district court found that “[i]n reality, what Evanson was providing Flath
was tax deductions purportedly from unsuccessful currency speculations by Omega .
. . with a guaranty that money purportedly at risk was not at risk at all.” Id. “As to
CPAs Gail Anger and Bryce Olson,” the district court found that Flath did not supply
them with “accurate and complete information.” Id.12
Based on these findings, the district court denied the claims for relief asserted
in the petition and upheld “the adjustments in the Omega . . . FPAAs that
disallow[ed] the fraudulent Section 988 losses.” Id. The district court also
“determine[d] that the fraud penalty [wa]s applicable to such losses,” and that “the
statute of limitations as to Flath [wa]s still open to make the assessments relating to
such adjustments.” Id.Final judgment was entered on March 27, 2017. Flath filed a notice of appeal
on April 27, 2017.
III
Flath, on behalf of Omega, raises three issues on appeal: (1) whether the
district court erred in holding that the FPAAs issued by the IRS to Omega were not
barred by the applicable statute of limitations; (2) even assuming the district court
applied the proper statute of limitations, whether it incorrectly applied the legal
standards for determining whether Flath had fraudulent intent as to his personal tax
returns; and (3) whether the district court erred in determining the asserted fraud
penalty at the partnership level. 3 For the reasons discussed below, we reject all of
these arguments.
3
In the “Statement of Issues” section of Flath’s opening brief, he identifies six
issues on appeal. But the first two issues he identifies—whether the district court
“err[ed] in holding that the statute of limitations remained open for assessment of
the” FPAAs and whether the district court “appl[ied] the incorrect statute of
limitations to the FPAAs by failing to apply 26 U.S.C. § 6229”—are the same. Aplt.
Br. at 2. Consequently, we will treat them as one issue. Likewise, the third, fourth,
and fifth issues identified by Flath—whether the district court “err[ed] in finding that
[he] had fraudulent intent as to his personal tax returns,” whether the district court
13
The Code’s framework for taxing partnerships and partners
Before addressing the issues raised by Flath on appeal, we begin by briefly
reviewing the Code’s framework for the taxation of partnerships and partners.
“Unlike individuals and corporations, partnerships are not separately taxable
entities.” Chai v. Comm’r, 851 F.3d 190, 196 (2d Cir. 2017). “A partnership’s
income and expenses pass through to the individual partners, who must pay a tax on
their proportionate shares of net gain or may claim a deduction for their shares of net
loss.” Id. Until recently, “[p]artnership tax [wa]s subject to the procedures set forth
in the Tax Equity and Fiscal Responsibility Act of 1982 (‘TEFRA’), Pub. L. No. 97-
248, 96 Stat. 324 (codified as amended at I.R.C. §§ 6221–6234).” Id. Congress
enacted TEFRA “to promote consistent tax treatment of partners and to avoid
duplicative litigation.” Prati v. United States, 603 F.3d 1301, 1305 (Fed. Cir. 2010).
Although TEFRA was recently repealed (effective January 1, 2018), its provisions
still apply to the case at hand.
TEFRA “require[d] partnerships to file informational returns reflecting the
distributive shares of income, gains, deductions, and credits attributable to its
partners.” Curr-Spec Partners, L.P. v. Comm’r, 579 F.3d 391, 394 (5th Cir. 2009)
(quotations omitted). “Accordingly, the individual partners [we]re responsible for
“exceed[ed] the scope of its subject matter jurisdiction in this partnership-level
proceeding by evaluating Flath’s outside tax basis in his Omega partnership interest,”
and whether the district court “appl[ied] the incorrect legal standard to determine
whether [his] reliance on expert advice negated a finding that he had fraudulent intent
as to his personal tax returns”—are related and will be treated as one general issue.
Id. at 2-3.
14
reporting their pro rata share of tax on their income tax returns.” Id. (quotations
omitted). “Items more appropriate for determination at the partnership level [we]re
designated ‘partnership items,’ which [we]re to be treated at the partnership level;
other items [we]re designated ‘nonpartnership items,’ which [we]re to be treated at
the individual partner level.” Id.
“To initiate adjustments to partnership items, TEFRA require[d] the IRS to
conduct a unitary audit of the partnership and issue a final partnership administrative
adjustment (‘FPAA’) to the partners, which the partners [could] challenge in a single
judicial proceeding . . . .” Chai, 851 F.3d at 196. Thus, an FPAA “[wa]s analogous
to the statutory notice of deficiency furnished to individuals.” Curr-Spec, 579 F.3d at
394. “After the FPAA bec[ame] final, the Commissioner [could] assess tax to the
individual partners whose tax returns for the year or years in question remain[ed]
open under IRC § 6501(a), for those partners’ distributive shares of the adjusted
partnership items.” Id. at 394–95.
Under TEFRA, each partnership was required to designate a “tax matters
partner” (TMP). 26 U.S.C. § 6231(a)(7). The TMP was authorized to take actions on
behalf of the partnership, but TEFRA also required that the other partners be given
notice of, and be allowed to participate in, administrative and judicial proceedings
regarding the partnership. Partners with a 1% or greater interest in the partnership
were classified as “notice partners” entitled to notice from the IRS of the TEFRA
partnership proceeding, including the FPAA. 26 U.S.C. §§ 6223(b), (d), 6224(a).
15
If the TMP did not file a petition contesting an FPAA within 90 days after the
IRS mailed it, any notice partner could file a suit in the Tax Court, the Court of
Federal Claims, or the appropriate district court within the 60-day period following
the expiration of the 90-day period given to the TMP. 26 U.S.C. § 6226(a), (b). If a
notice partner petitioned in the district court or the Court of Federal Claims, he or she
had to first deposit with the IRS the amount by which his or her taxes would be
increased if the court were to uphold the adjustments set forth in the FPAA. 26
U.S.C. § 6226(e)(1). The court overseeing the petition had jurisdiction to determine
all partnership items for the partnership taxable year, the proper allocation of those
items among the partners, and the applicability of any penalty or other addition to tax
related to an adjustment of a partnership item. 26 U.S.C. § 6226(f). Of special
importance to the case at hand, the court also had jurisdiction to adjudicate an
assertion by a participating partner that the limitations period for assessing
partnership-related taxes against him or her had expired. 4 26 U.S.C. § 6226(d)(1)(B)
(stating that “any person treated under subsection (c) as a party to an action shall be
permitted to participate in such action . . . solely for the purpose of asserting that the
period of limitations for assessing any tax attributable to partnership items has
expired with respect to such person, and the court having jurisdiction of such action
shall have jurisdiction to consider such assertion”).
4
As the government notes, “each partner could have his own limitations period
for partnership-related assessments against him, and limitations defenses regarding
such assessments were adjudicated at the partnership level.” Aple. Br. at 34.
16
In this case, Evanson, who was Omega’s TMP, did not file a petition
contesting the two FPAAs issued by the IRS to Omega. But Flath, a notice partner of
Omega, exercised his right to challenge the FPAAs by filing this suit and depositing
the specified amount with the IRS. The district court in this case then resolved the
specific issues raised by Flath, including whether the FPAAs were properly issued,
whether Omega was subject to a penalty, and whether the statute of limitations had
run against Flath personally.
Does the statute of limitations bar the FPAAs issued to Omega?
In his first issue on appeal, Flath argues that the district court erred in holding
that the statute of limitations did not bar the FPAAs issued by the IRS to Omega. We
review de novo the district court’s application of a statute of limitations. Leathers v.
Leathers, 856 F.3d 729, 757 (10th Cir. 2017).
Internal Revenue Code § 6501(a) establishes a default three-year statute of
limitations for the assessment 5 and collection of taxes: “Except as otherwise provided
in this section, the amount of any tax imposed by this title shall be assessed within 3
years after the return was filed . . . .” 26 U.S.C. § 6501(a). Other Code provisions,
however, serve to extend, toll, or create exceptions to this default three-year period of
limitations. In particular, if a return is “false or fraudulent . . . with the intent to
evade tax, the tax may be assessed . . . at any time.” 26 U.S.C. § 6501(c)(1).
5
An “assessment” is the official recording of a taxpayer’s liability by the IRS.
26 U.S.C. § 6203.
17
Flath argues, however, that this case is governed by what he characterizes as a
separate and distinct statute of limitations set forth in now-defunct (but still
applicable to this case) § 6229. Section 6229 was enacted as part of TEFRA. 6
Section 6229 was entitled “Period of limitations for making assessments,” and
subsection (a) thereof stated:
(a) General rule.—Except as otherwise provided in this section, the
period for assessing any tax imposed by subtitle A with respect to any
person which is attributable to any partnership item (or affected item)
for a partnership taxable year shall not expire before the date which is 3
years after the later of—
(1) the date on which the partnership return for such taxable year was
filed, or
(2) the last day for filing such return for such year (determined without
regard to extensions).
26 U.S.C. § 6229(a).
Subsection 6229(c), entitled “Special rule in case of fraud,” provided, in
pertinent part:
(1) 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 which includes a false or fraudulent item—
(A) in the case of partners so signing or participating in the preparation
of the return, any tax imposed by subtitle A which is attributable to any
partnership item (or affected item) for the partnership taxable year to
which the return relates may be assessed at any time, and
(B) in the case of all other partners, subsection (a) shall be applied with
respect to such return by substituting “6 years” for “3 years.”
26 U.S.C. § 6229(c)(1).
6
The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054(2017), amended the Code and eliminated § 6229. The parties agree, however, that
the pre-2017 Code provisions are applicable to this dispute.
18
Flath argues that where, as here, a case involves a partnership return, “[t]he
first step in computing each tax partner’s statute of limitations is to refer to the
primary limitations statute found in . . . § 6501.” Aplt. Br. at 14. “The second step,”
Flath asserts, “is to determine whether any extensions to the statute of limitations
apply.” Id. But, he asserts, none of those extensions “apply to partnership
proceedings” because, in his view, § 6501 “applies solely to the personal return filed
by the taxpayer.” Id. “In other words,” he argues, “the Omega partnership return
and items on that return are not considered for purposes of [§] 6501.” Id. at 15.
“Instead,” Flath asserts, § “6501(n)(2) refers one to the TEFRA partnership
provisions to determine whether any extensions apply.” Id. Section 6501(n)(2)
stated (prior to the recent amendments): “For extension of period in the case of
partnership items (as defined in section 6231(a)(3)), see section 6229.” 7 26 U.S.C.
§ 6501(n) (2015). Flath argues that, “[r]eading Section 6501 and Section 6229
together, the computation of a tax partner’s statute of limitations with respect to a
partnership item (such as the currency trading losses here) starts with the general 3
year assessment period and is extended beyond that solely according to Section
6229.” Aplt. Br. at 15.
Flath in turn argues that “Section 6229(c) sets two different limitations periods
related to partnership items depending on the partner’s involvement in an allegedly
fraudulent partnership: culpable partners who help prepare the partnership return are
7
Section 6501(n), as recently amended, now makes no reference to
partnerships or the non-existent § 6229.
19
subject to an indefinite limitations period; all other partners are subject to a six year
period.” Aplt. Reply Br. at 3. Flath argues that “[h]ere, the IRS has not shown (nor
did the District Court find) that Flath falls into the group of culpable partners,
therefore he is in the ‘other’ category” and, consequently, “the statute of limitations
(normally three years) was only extended to six years and expired before the FPAAs
were issued.” Id.
The government, not surprisingly, has an entirely different view of how § 6229
should be interpreted and, as well, how §§ 6501 and 6229 were intended to operate
together. According to the government, § 6229 “was not” intended by Congress as
“an independent statute of limitations for assessing partnership-related taxes,” but
rather worked in conjunction with § 6501 to extend the general three-year statute of
limitations under certain circumstances in cases involving partnerships. Aple. Br. at
30. In other words, the government argues, § 6229 was not intended by Congress to
“shorten the three-year period of §6501(a),” but rather was intended to “extend that
period by establishing a minimum time for assessing partnership-related taxes.” Id.
at 31.
Three federal appellate courts have addressed this issue and all agree with the
government’s position. Most recently, the Fifth Circuit rejected the notion “that IRC
§ 6229(a) is an independent three-year limitations period for the issuance of an
FPAA, which period begins to run on the later of the date that the partnership files its
informational return or the date that it is due.” Curr-Spec, 579 F.3d at 396. Instead,
the Fifth Circuit concluded:
20
The unambiguous language of IRC § 6229(a) and IRC § 6501(a)
mandates our conclusion that IRC § 6501(a) creates a three-year
limitations period within which the Commissioner must assess “any tax”
on individual partners—a period which IRC § 6229(a) can never
shorten, regardless of the length of time that might have elapsed
between the filing of the partnership’s informational return and the
Commissioner’s issuance of an FPAA. Rather, IRC § 6229(a)
establishes only the minimum time period that, when necessary,
extends, i.e., supercedes [sic], the general three-year limitations period
of IRC § 6501(a). For partnership items, the otherwise applicable
limitations period of IRC § 6501(a) “shall not expire before the date
which is 3 years after the later of . . . the date on which the partnership
return . . . was filed” or the date on which it was due.
Id. (alteration in original). The Fifth Circuit agreed with the Tax Court that
“[s]ection 6229 provides a minimum period of time for the assessment of any tax
attributable to partnership items (or affected items) notwithstanding the period
provided for in section 6501, which is ordinarily the maximum period for the
assessment of any tax,” and that, consequently, “[t]he section 6229 minimum period
may expire before or after the section 6501 maximum period.” Id. at 397 (quoting
Rhone-Poulenc Surfactants & Specialties, L.P. v. Comm’r, 114 T.C. 533, 542 (2000)
(en banc) (emphasis added by Tax Court)).
Similarly, the Federal Circuit held that, “[b]ased on the plain text of the
statute, § 6229(a) does not create an independent statute of limitations.” AD Global
Fund, LLC ex rel. N. Hills Holding, Inc. v. United States, 481 F.3d 1351, 1354 (Fed.
Cir. 2007). The court noted that “[u]nlike the unequivocal language creating a statute
of limitations in § 6501, § 6229(a) contains no mandatory words establishing a time
within which assessments must be made.” Id. at 1354. More specifically, the court
noted that “the three-year limitations period in § 6229(a) does not unambiguously
21
define an end date for making an assessment because it uses the phrase ‘shall not
expire before’ and thus leaves open the possibility that the applicable limitations
period may expire after the periods set forth therein.” Id. (quotations omitted).
The Federal Circuit also explained that the scheme outlined in TEFRA, which
included § 6229, “contemplate[d] that adjustments to partnership items are made in
one proceeding before assessments are made at the individual partner level.” Id. at
1355. This interpretation, the Federal Circuit noted, “may extend the regular statute
of limitations in § 6501(a) for assessments to individual partners, but it does not alter
the statutory scheme of determining partnership items in one partnership-level
proceeding.” Id. This construction, the Federal Circuit thus held, “is consistent with
a statutory scheme that intends that adjustments to a partnership tax return be
completed in one consistent proceeding before individual partners are assessed for
partnership items.” Id.
Lastly, the D.C. Circuit also “affirm[ed] the Tax Court’s interpretation” of
§§ 6501 and 6229. Andantech, L.L.C. v. C.I.R., 331 F.3d 972, 976 (D.C. Cir. 2003).
More specifically, the D.C. Circuit agreed with the Tax Court “that § 6501 provides a
general period of limitations for assessing and collecting any tax imposed by the
Code, and that § 6229(a) sets forth a minimum period for assessing any income tax
with respect to any person that is attributable to any partnership item or affected
item.” Id. In other words, “the ‘shall not expire’ language of § 6229, together with
the broad application of § 6501 work in conjunction to provide for a minimum or
extension of the § 6501 period, not an independent statute of limitations for
22
partnership items.” Id. at 977. “This interpretation,” the D.C. Circuit noted,
“ensure[s] that the IRS could assess a partnership tax against a late or non-filing
partner.” Id.
Notably, Flath offers no arguments that seriously undercut the reasoning of
these three decisions. Indeed, Flath mentions only the Curr-Spec decision in his
appellate pleadings and, in doing so, does not attempt to challenge its key holding.
He makes no mention at all of AD Global or Andantech. He does cite to a different
Federal Circuit court opinion, Prati v. United States, 603 F.3d 1301 (Fed. Cir. 2010),
for the proposition “that 26 U.S.C. §§ 6229 and 6501 operate in tandem to provide a
single limitations period—not a menu from which the IRS can choose.” Aplt. Reply
Br. at 3. Curiously, however, that proposition, which is correct, actually undercuts
Flath’s argument that the statute of limitations in this case is controlled exclusively
by § 6229. See Prati, 603 F.3d at 1307 (“[T]he limitations period is the period
defined by section 6501, as extended when appropriate by section 6229. Sections
6501 and 6229 do not operate independently to allow a taxpayer to assert one in
isolation and thereby render an otherwise timely assessment untimely.”).
We conclude that the interpretation urged by the government and adopted by
the Fifth, Federal and D.C. Circuits is sound and should be applied in this case.
Under that interpretation, the applicable limitations period is defined by § 6501 and,
because Flath’s individual return was determined to be “false or fraudulent . . . with
the intent to evade tax,” the limitations period is endless, i.e., “the tax may be
assessed . . . at any time.” 26 U.S.C. § 6501(c)(1).
23
Did the district court correctly apply the legal standards to determine
whether Flath had fraudulent intent as to his personal tax returns?
In his second issue on appeal, Flath argues that, even assuming the district
court applied the correct statute of limitations, the district court “incorrectly applied
the legal standards to determine whether Flath had fraudulent intent as to his personal
returns.” Aplt. Br. at 17–18. In support, Flath asserts that the district court
“exceed[ed] its jurisdiction by evaluating and determining Flath’s outside tax basis—
which is not a partnership item properly considered in a TEFRA partnership level
proceeding.” Id. at 18–19. Flath further asserts that “the District Court applied the
wrong legal standard in evaluating whether [his] reliance on expert advice negated
any fraudulent intent with respect to his personal returns.” Id. at 19.
Flath is wrong in asserting that the district court lacked jurisdiction to consider
his outside tax basis, i.e., the value of the assets that he contributed to the Omega
partnership, for purposes of determining whether he had fraudulent intent as to his
personal returns. See Marriott Int’l Resorts, L.P. v. United States, 586 F.3d 962, 972
(Fed. Cir. 2009) (“A partnership’s basis in its assets is referred to as its ‘inside basis,’
and a partner’s basis in his or her partnership interest is called his or her ‘outside
basis.’”). As previously noted, § 6226(d) provided the district court with jurisdiction
to adjudicate Flath’s assertion that the limitations period for assessing Omega’s
partnership-related taxes against him had expired. That grant of jurisdiction
necessarily allowed the district court to examine any and all items on Flath’s personal
returns for purposes of determining whether Flath had fraudulent intent in filing those
24
returns. In doing so, the district court properly considered the entirety of Flath’s
relationship with Omega, including the value and timing of the assets he actually
contributed to Omega (i.e., his outside tax basis in Omega), versus the amounts that
Omega reported in its records and that Flath reported on his personal tax returns. The
district court also properly considered Flath’s transactions with the other Evanson-
controlled entities because, as the government notes, “those matters were relevant to
the issue whether Flath committed fraud on his individual returns.” Aple. Br. at 39.
Flath is also wrong in arguing that the district court erred in considering his
reliance on outside accounting and legal advice. Flath argues that “[t]he District
Court should have stopped when it found that [he] relied on Evanson’s and Anger’s
advice, and the District Court should have found that Flath lacked fraudulent intent as
to his personal returns.” Aplt. Br. at 24. In other words, Flath argues, “no matter
whether the advice was good or reasonable, Flath did not procure it fraudulently, and
no facts were introduced at trial or found by the District Court to support such a
finding.” Id. As for Anger (Flath’s accountant) specifically, Flath argues that “[i]f
Anger needed additional information” from Flath, “it was [Anger’s] obligation to
request it.” Id. “It certainly cannot be considered fraud,” Flath argues, “to fail to
affirmatively provide that which is not requested.” Id.
Flath’s arguments, however, ignore a key point of law, as well as the evidence
presented at trial. As this court indicated long ago in Davis v. Comm’r, 184 F.2d 86,
88 (10th Cir. 1950), taxpayer reliance on expert advice hinges, in part, on the
taxpayer making “a full disclosure to the expert preparing” his tax return. In the case
25
at hand, however, the evidence presented by the government at trial established, and
the district court expressly found, that Flath actively concealed information from
Anger (and Olson) that was relevant to preparation of Flath’s personal tax returns.
For example, the evidence indicated that Anger expressly told Flath that Anger was
claiming the $149,857 Omega loss on Flath’s 1998 personal tax return “based on
[Flath’s] statement that [he] had contributed at least that much to [Omega].” Supp.
App. at 149. The evidence, however, clearly established that Flath had not made the
requisite capital contribution to Omega, but nevertheless failed to disclose this
information to Anger. The evidence also clearly established that Flath failed to
inform Anger that he suffered no loss at all, and that the capital contribution Flath
eventually made to Omega ended up in a protector account in the Cayman Islands
and available for Flath’s use. Flath also, with regard to the 1998 tax return, failed to
tell Anger that a $19,700 deduction for legal expenses on the tax return was actually
the amount that Flath paid to Evanson as the membership fee to join the Omega
investment scheme. As for Flath’s 1999 tax return, the evidence of him concealing
information from Anger was even more egregious. In short, Flath lied to Anger
about “the source of his purported $100,000 contribution to Omega,” “repatriated
untaxed or already deducted income under labels calculated to deceive the IRS,” and
“excluded from income or deducted the alleged insurance premiums that landed in
his ICG membership.” Aple. Br. at 51. In sum, because Flath failed to disclose all
relevant financial information to Anger, he is in no position to argue that he
reasonably relied on Anger’s tax advice.
26
As for Flath’s purported reliance on “legal advice,” he is referring to a letter
that Evanson provided him from a law firm. The district court found, however, that
the letter “did not relate to Omega . . . and [thus] d[id] not help Flath.” Dist. Ct.
Docket No. 83 at 6. Notably, Flath does not challenge this factual finding on appeal.
And a review of that letter, which is included in the government’s supplemental
appendix, indicates that it discusses “the material federal income tax consequences to
[Evanson] in connection with the Euro Pacific Corporation,” not Omega. Supp. App.
at 109. Thus, it is clear that Flath did not receive or rely on any “legal advice”
stating that the Omega scheme was proper, let alone any advice indicating that the
entries on his personal tax returns were proper.
In the section of his opening brief that argues the district court “incorrectly
applied the legal standards to determine whether Flath had fraudulent intent as to his
personal tax returns,” Aplt. Br. at 17–18, Flath also asserts, in passing, a separate and
distinct issue that is not mentioned in his table of contents or Statement of Issues, i.e.,
that “[t]he District Court should have focused on whether the currency trading losses
[by Omega] were allowable at the partnership level and fraudulent as to Flath,” and
that “[t]he District Court did not make sufficient findings to disallow the losses at the
partnership level.” Id. at 20. Assuming, for purposes of argument, that this is
intended by Flath to be a separate and distinct issue on appeal, we conclude there is
no merit to it.
As the government notes in its appellate response brief, the assessments made
by the Commissioner in the two FPAAs issued to Omega are presumed to be correct,
27
and it was Flath’s burden, as the petitioner in this case, to prove that those
assessments were wrong. Welch v. Helvering, 290 U.S. 111, 115 (1933); Crescent
Holdings, LLC v. Comm’r, 141 T.C. 477, 485 (T.C. 2013) (“The Commissioner’s
determinations in an FPAA are generally presumed correct, and a party challenging
an FPAA has the burden of proving that the Commissioner’s determinations are in
error.”). Notably, Flath makes no attempt in his appellate brief to explain why
Omega’s currency trading losses should have been allowable, nor does he cite to any
portions of the trial transcript relevant to that issue. In other words, as the
government argues in its response brief, “Flath makes no attempt in his brief to make
an affirmative case why, on the evidence, the District Court erred in upholding the
IRS’s disallowance of the losses.” Aple. Br. at 54. Thus, the issue appears to have
effectively been waived by Flath.
Did the district court err in determining the asserted fraud penalty at
the partnership level?
In his third and final issue on appeal, Flath argues that, “[s]eparate from the
entire question of whether the District Court properly upheld the FPAAs[’]
disallowance of the trading losses on the Omega partnership returns, the District
Court also upheld the IRS’[s] assessment of the fraud penalty at the partnership level
in the FPAAs.” 8 Aplt. Br. at 26. Flath argues that “[t]his exceeded the District
8
In the FPAAs, the IRS determined that Omega’s claimed currency trading
losses were fraudulent at the partnership level, and the FPAAs asserted that Omega
was subject to a fraud penalty pursuant to 26 U.S.C. § 6663(a). Section 6663(a)
imposes a penalty of 75% of the portion of any underpayment of tax attributable to
fraud.
28
Court’s jurisdiction and was error.” Id. That is because, Flath argues, a “fraud
penalty is not a partnership item, and is not included in that grant of jurisdiction.” Id.We disagree.
As relevant to this case (and prior to its recent repeal), Section 6226(f) of the
Code stated:
A court with which a petition is filed in accordance with this section
shall have jurisdiction to determine all partnership items of the
partnership for the partnership taxable year to which the notice of final
partnership administrative adjustment relates, the proper allocation of
such items among the partners, and the applicability of any penalty,
addition to tax, or additional amount which relates to an adjustment to a
partnership item.
26 U.S.C. § 6226(f) (2016) (emphasis added).
In United States v. Woods, 571 U.S. 31 (2013), the Supreme Court held that “a
court in a partnership-level proceeding [under TEFRA] has jurisdiction to determine
not just partnership items, but also ‘the applicability of any penalty . . . which relates
to an adjustment to a partnership item.’” Id. at 39 (quoting § 6226(f)). The Court
also held that “[p]rohibiting courts in partnership-level proceedings from considering
the applicability of penalties that require partner-level inquiries,” such as outside
basis, “would be inconsistent with the nature of the ‘applicability’ determination that
TEFRA requires.” Id. at 40. “Under TEFRA’s two-stage structure,” the Court
explained, “penalties for tax underpayment must be imposed at the partner level,
because partnerships themselves pay no taxes . . . [a]nd imposing a penalty always
requires some determinations that can be made only at the partner level.” Id. “Yet,”
the Court continued, “notwithstanding that every penalty must be imposed in partner-
29
level proceedings after partner-level determinations, TEFRA provides that the
applicability of some penalties must be determined at the partnership level.” Id. at
40–41. Thus, the Court stated, “[t]he applicability determination is therefore
inherently provisional; it is always contingent upon determinations that the court in a
partnership-level proceeding does not have jurisdiction to make.” Id. at 41. In short,
“[b]arring partnership-level courts from considering the applicability of penalties that
cannot be imposed without partner-level inquiries would render TEFRA’s
authorization to consider some penalties at the partnership level meaningless.” Id.
In light of § 6226(f) and Wood, we conclude that the district court in this case
did not exceed its jurisdiction in considering and upholding the fraud penalties set
forth in the two FPAAs.
IV
The judgment of the district court is AFFIRMED.
30