The first published Tax Court decision of 2018 deals with an issue that likely won’t impact a whole lot of taxpayers, but does give a look at how the court interpret a statute.  The case of Rafizadeh v. Commissioner, 150 TC No. 1 looks at how the expansion of the statute of limitations for cases involving a failure to report income from foreign financial assets applies to years before the information reporting for those assets applied.

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The federal transfers (gift and estate) are computed based on lifetime transfers—thus, in order to compute the current year’s gift tax the gifts made during the year are reported along with gifts made in prior years.  In Chief Counsel Advice 201643020 the IRS was looking a situation where a taxpayer had reported the proper amount of current year’s gifts but had omitted prior years gifts from the Form 709.

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The Tax Court in the case of Finnegan v. Commissioner, TC Memo 2016-118 a question the court had dealt with before in the 2007 case of Allen v. Commissioner, 128 TC No. 4. If the taxpayer hires a “less than fully ethical” tax preparer that, in an effort to gain and retain business, prepares returns that fraudulently understate the taxpayer’s tax, can the IRS use the fraud rule to argue that the statute of limitations on that return never closes—even if the taxpayer was never aware of the fraudulent nature of the return?

In Allen the Tax Court held that the answer was yes—a fraudulent return keeps the statute open even if the taxpayer him/herself did not have the required fraudulent intent in filing the return to evade the payment of tax. So you’d expect this would be a simple question for the Court to answer—but in the interim a federal appeals court in the case of BASR Partnership v. United States, CA FC (2015), 116 AFTR 2d ¶2015-5100 had rejected that view in dealing with flow through items from a partnership return where there had existed fraudulent intent at the partnership level.

In the case of Kunkel, et, al v. Commissioner, Case No. 15-2232, the Seventh Circuit affirmed the Tax Court’s decision in the case of Hartland Management Services, et al v. Commissioner, TC Memo 2015-8. 

Under IRC §6501(c)(9) the IRS has an unlimited statute of limitation to assess gift taxes on a gift that is not reported on a gift tax return absent adequate disclosure, even if a Form 709 was filed for the year in question to report other gifts. 

However, what happens if the omitted gift does not create gift taxes in the year in question but the omission of that gift from the prior gifts on later returns causes the taxes for that year to be understated?  Does the IRS get an unlimited statute on those later returns to collect the tax that would have been due if the omitted gift had been included in the “prior gifts” portion of the gift tax calculation for those later years?

The effect of a restriction imposed on the IRS as part of an agreement to extend the statute of limitation was the matter before the court in the case of Hamilton v. United States, US DC Colorado, Civil Action No. 13-cv-00051-REB-KMT, 117 AFTR 2d ¶ 2016-341.

Quite often a taxpayer will be asked by the IRS to extend the statute of limitations on assessing tax during an exam or, as in this case, while the matter is pending before appeals.

In Legal Advice Issued by Field Attorneys 20152201F the IRS conclude disclosures related to a gift were inadequate on the gift tax return that was filed by the taxpayer.  That is important because, under IRC §6501(c)(9) if there is inadequate disclosure of a gift on a gift tax return the statute of limitations stays open indefinitely.

The implications of the provision found in IRC §6501(c) regarding the statute of limitation on assessing tax when the IRS is faced with a fraudulent tax return is generating much action and disagreement among the courts about exactly whose fraudulent intent can trigger the extended statute and what the nature of such a fraud must be to do so.  Since triggering §6501(c) gives the IRS an unlimited period of time in which to assess the tax, the matter is one of true concern if, truly, a taxpayer may find him/herself stuck with the statute due to a fraud committed that they weren’t aware of.

The Eighth Circuit, in the case of Heckman v. Commissioner, Docket No. 14-3251, affirming TC Memo 2014-131, held that a taxpayer did not escape the six year statute of limitations for assessments when the taxpayer claimed the IRS had been made aware of the underlying issues during an examination of the retirement plan from which the taxable distribution arose.  The IRS, per the taxpayer, became aware of the existence of the distribution during that exam prior to the expiration of the standard three-year statute of limitations.   But the Eighth Circuit found that the IRS was not required to pursue needles in the haystack of information that might otherwise be vaguely available to the agency.

The plan in question as an employee stock ownership plan which, during the examination in question, had its status as a qualified plan revoked.  The plan in question had not filed a Form 5500 for 2001-2003, a fact the IRS did not notice until April 2007 during an unrelated examination.