Ninth Circuit Panel Finds Statute for IRS to Assess Listed Transaction Disclosure Penalty Does Not Start Unless Form 8886 Filed

The Ninth Circuit Court of Appeals reversed a District Court decision that determined the IRS had acted too late in attempting to assess a penalty in the case of May v. United States, CA9, Case No. 15-16599.  In a 2-1 split decision the panel decided that the one statute found in IRC §6501(c)(10)(A) does not begin to run until a taxpayer files a Form 8886 with the IRS, regardless of whether the IRS is already in possession of the information that is provided in that form.

The District Court found that the IRS had attempted to assess the penalty for failure to disclose a listed transaction more than one year after the IRS agent examining the taxpayer came into possession of information that would justify the imposition of the penalty.

IRC §6501(c)(10)(A) provides that the penalty must be assessed against the taxpayer within one year of the date “the Secretary is furnished the information so required.”  The majority opinion found:

The meaning of the phrase “the information so required” is made clear by referring back to the introductory paragraph of § 6501(c)(10), which in turn refers to § 6011 — explaining that what must be filed to commence the running of the limitations period is that “which is required under section 6011 to be included with [a] return or statement.” Section 6011 instructs that taxpayers “shall make a return or statement according to the forms and regulations prescribed by the Secretary” and that “[e]very person required to make a return or statement shall include therein the information required by such forms or regulations.” I.R.C. § 6011(a).

Thus, in §§ 6501(c)(10) and 6011(a), Congress expressly required taxpayer compliance with the IRS’s determination of how listed transactions are to be reported.

The majority opinion goes on to conclude:

In sum, § 6501(c)(10)(A)’s reference to “the information so required” under § 6011 functions as an incorporation by reference of the disclosure requirements of Treasury Regulation § 1.6011-4(d), which requires that a taxpayer disclosing a listed transaction do so on Form 8886 and send a completed copy of that disclosure to the OTSA. It is undisputed that May neither filed a Form 8886 nor sent it to the OTSA. For that reason, May failed to do what was required to start the running of the § 6501(c)(10)(A) statute of limitations. Thus, the one-year limitations period of § 6501(c)(10)(A) did not commence, and the IRS’s assessment of the penalty was timely.

However, the dissenting opinion does not agree with this view finding:

The position advocated by the Government and accepted by the majority exalts form over substance. The Government admitted as much in so many words at oral argument. The statute says that the limitations period starts running on “the date on which the Secretary is furnished the information so required.” 26 U.S.C. § 6501(c)(10)(a). But the Government insists that it doesn’t actually matter when the relevant information was provided to the appropriate IRS agents because the provision of information doesn’t count unless it is presented to the IRS on Form 8886. That’s not a logical reading of the statute.

The dissent notes that the judge does not necessarily believe that the taxpayer had shown the IRS was effectively in possession of the information—just that the act of filing the form should not be the sole method accepted for “providing the information” and starting the statute.

I have no quarrel with the Government’s position that the taxpayer should be required to provide the relevant information in a coherent form to the appropriate tax agents. An interpretation that started the limitations period as soon as some IRS office, somewhere, had the information or as soon as IRS agents collectively had the information would be both illogical and open to abuse. I don’t disagree that it might be appropriate to remand this case to the district court to apply a more precise interpretation of the statute. But I am not persuaded by the Government’s interpretation, especially in the context of a civil penalty, and cannot join my colleagues in adopting it.

Note that the case is not a published decision and is a split decision.  But it certainly suggests that a taxpayer facing the issue of whether a transaction wasa listed transaction requiring disclosure may need to file the Form 8886 to insure the IRS is “on the clock” for assessing any penalty, even if that filing would duplicate information the IRS already clearly possesses as part of the exam.