Klemp v. Commissioner

Wilbur, J.,

concurring in part and dissenting in part: I concur in the interpretation of section 6501(c) by the majority. Respondent would leave the statute open for that portion of eternity concurrent with the taxpayer’s life, whether he lives 3 score and 10 or as long as Methuselah. In most religions, one can repent and be saved, but in the peculiar tax theology of respondent, no act of contrition will suffice to prevent the statute from running in perpetuity. Merely to state the proposition is to refute it, unless some very compelling reasons of policy require visiting this absurdity on the taxpayer. The majority makes it clear that the reasoning of Bennett v. Commissioner, 30 T.C. 114 (1958), applies to the question presented in this case.

However, I cannot subscribe to the result the majority reaches under section 6501(e). I believe that, based on our decision in Goldring v. Commissioner, 20 T.C. 79 (1953), respondent should have 6 years from the date the original 1973 return was due in which to assess, and, therefore, the notice of deficiency was timely when mailed on July 9, 1979. On March 15,1946, the petitioners in Goldring filed their 1945 income tax returns omitting more than 25 percent of the gross income stated therein. On June 16, 1947, petitioners filed amended returns for the 1945 taxable year which purported to correct, in part, the original omission so as to reduce it below 25 percent. Respondent issued a notice of deficiency for 1945 on March 15, 1951, more than 3 years after the amended return was filed but less than 5 years after the filing of the original return. We held that the deficiency notice was timely under section 275(c) (the predecessor of sec. 6501(e)) since it was issued within 5 years after the original return was filed, although more than 3 years after the amended return. We stated that the 5-year limitation period under section 275(c) started to run upon the filing of the original return and that the filing of the amended return had no effect for statute of limitations purposes.¹

Similarly, in Houston v. Commissioner, 38 T.C. 486 (1962), the taxpayer’s wife filed a joint 1953 return on February 10, 1954, having been properly authorized to do so by her husband who was serving in a combat zone. The return reported only the wife’s income of $3,968.53. Subsequently, the taxpayer filed a joint return (on June 27, 1955), reporting only his own salary of $7,670.82. A consent to extend the statute of limitations to June 30, 1960, was signed on February 4, 1959. The Commissioner sent a notice of deficiency for 1953 on November 24, 1959. We rejected petitioner’s arguments that the statute of limitations had run prior to his signing the consent to an extension. Having found that more than 25 percent of gross income had been omitted from the original 1953 joint return filed by the taxpayer’s wife, it was held that the statute of limitations ran for 5 years from the due date for the original return (the original return having been filed early):

Petitioner’s second 1953 return is at best an amended return. It is settled law that an amended return does not operate to prevent section 275(c) of the 1939 Code from applying to the original return. Ira Goldring, 20 T.C. 79 (1953). As for the case of Charles F. Bennett, 30 T.C. 114 (1958), urged upon us by the petitioner, it is sufficient to point out that there we applied the 3-year statute of limitations to an original, albeit delinquent, return. [Houston v. Commissioner, supra at 489.]

It is thus clear that in the section 6501(e) situation, the original return starts the limitation period and that for such purpose the subsequent amended return is ignored. Goldring and Houston cannot be read any other way, and Houston makes it clear that Bennett — on which the majority specifically relies — does not alter this result. Even considered on a clean slate, the majority decision on section 6501(e) is wrong; how it can possibly be reached with Goldring and Houston on the books is beyond me.

The present case involves facts virtually identical to Gold-ring, and the parties agree that the taxpayers’ original return contained' a substantial omission within the meaning of section 6501(e). Goldring and Houston make it clear that the 6-year statute of limitations applies and a deficiency notice is timely even though it is sent out more than 3 years after the amended return is filed. These cases plainly state that the subsequent filing of an amended return will not affect the limitations period under section 6501(e). Yet the majority now holds under precisely the same circumstances (except that the dereliction is also accompanied by fraud) that the Commissioner is barred from assessing although the 6-year statute of limitations has not yet run. Not only is this impossible to reconcile with Goldring and Houston, and the purpose and policy of section 6501, it is anomalous in the extreme to rule that when fraudulent intent accompanies a 25-percent omission, the taxpayer’s period of exposure under the statute is shortened.

The majority makes short work of the section 6501(e) issue, merely stating that "section 6501(e) explicitly does not apply to situations covered by section 6501(c).” But the statutory language says that the 6-year period provided in section 6501(e) applies "Except as otherwise provided in subsection (c).” (Emphasis added.) This simply makes clear the obvious— that where the 6-year period of subsection (e) and the unlimited period of subsection (c) are both applicable, the taxpayer may not confine the respondent to the shorter period. To effectuate this objective, Congress has simply stated that the 6-year period is inapplicable when a period in perpetuity already applies.²

Additionally, the majority has compounded its misreading of section 6501(e) with a catch-22 twist that should not be overlooked. It holds that section 6501(e) "does not apply to situations covered by section 6501(c)” — that is where the statute runs in perpetuity. But it has at this point already held the statute doesn’t run in perpetuity, that the terms of section 6501(c) are inapplicable. The majority holds not only that the statute applicable to petitioners’ 1973 return fails to run in perpetuity, but also that it expired on October 17,1977 — about 3% years after the original return was filed. Put another way, we are told in one breath that the 6-year statute is inapplicable because under section 6501(c) the statute runs in perpetuity, and in the next breath, that the statute doesn’t run in perpetuity, but for less than 4 years.

Logic and precedent are not the only casualties of this approach, for commonsense must be added to the list of the wounded. While Congress has provided the longest period for assessment where fraud is involved — the majority has reversed the procedure! According to the majority, absent fraud, the respondent would have had 6 years to assess under section 6501(e); since it was stipulated fraud was present, he only had Sy2 years as to 1973. Why fraud should be rewarded over inadvertence or negligence escapes me.

The majority notes that in The Colony, Inc. v. Commissioner, 357 U.S. 28, 36 (1958), the Supreme Court explained the purpose of section 6501 as being—

to give the Commissioner an additional two years to investigate tax returns in cases where, because of a taxpayer’s omission to report some taxable item, the Commissioner is at a special disadvantage in detecting errors. In such instances the return on its face provides no clue to the existence of the omitted item.

In Houston v. Commissioner, 38 T.C. 486, 490, we added:

As a general proposition, the Commissioner is always at a "special disadvantage” where an item of income is omitted from a return, for whatever reason that item is omitted. We find no rule enunciated here requiring specific prejudice to the Commissioner before section 275(c) becomes applicable.

By providing a period of limitations substantially shorter than the 6-year period afforded by section 6501(e), even though there has admittedly been a 25-percent omission as required by that subsection, the majority simply misinterprets the statute ignoring prior precedent along the way. For these reasons, I respectfully dissent.

1 Similarly, it is well settled that the filing of an amended return does not alter the period of limitations under sec. 6501(a) (and predecessor section) which started to run upon the filing of the original return. See, e.g., Vitamin Co. v. Commissioner, 21 B.T.A. 311 (1930); Lancaster Lens Co. v. Commissioner, 10 B.T.A. 1153 (1928). Both sec. 6501(a) and sec. 6501(e) contain definite periods of limitations, and, thus, the filing of an amended return (which has no statutory basis, see Goldring v. Commissioner, 20 T.C. 79 (1953)) could not alter the period of limitations that started upon the filing of the original return. However, since sec. 6501(c) is not a statute of limitations, no period ever began running at the filing of the original return, and, thus, the filing of a nonfraudulent amended return changes the character of the original fraudulent return thereby triggering the normal 3-year period of limitations under sec. 6501(a).

2 This is borne out by the respondent’s regulations under sec. 6501(e) which provide: "(c) Exception. The provisions of this section do not limit the application of section 6501(c).” Sec. 301.6501(e)-l(c), Proced. & Admin. Regs. Emphasis added.