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.
Under IRC §6501(e)(1)(A)(ii) the statute of limitations for the IRS to assess tax is expanded to six years from three years if the understatement:
(I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and
(II) is in excess of $5,000…
There was no question that the taxpayer in this case had failed to report income from foreign accounts in the years in question and that the failure had created a tax understatement of more than $5,000. But since the above provision and IRC §6038D that it references were enacted as part of the Hiring Incentives To Restore Employment Act of 2010 (HIRE Act) in 2010, did it apply to extend the statute for 2006-2009, the years the IRS was attempting to collect tax from.
You might think the question is whether Congress would have the power to retroactively change the statute, but that’s not really an issue. Congress has often extended statutes to apply in any case where a statute had not already expired by the effective date of the law.
Here the taxpayer argued that the wording of the law meant it could only apply to years where there was a reporting requirement under IRC §6038D. As the Court notes:
Specifically petitioner argues that the defining phrase in section 6501(e)(1)(A)(ii) (“assets with respect to which information is required to be reported under section 6038D”) also limits application of the six-year limitations statute to assets for which there was a reporting requirement under section 6038D (or there would be a requirement but for specified exceptions) at the time the income was omitted.
That is, the underreporting did not relate to an asset required to be reported under IRC §6038D since, for 2006-2009, there was no such information reporting requirement.
The Court found that reading the law as the taxpayer suggested was the most reasonable interpretation. As the Court noted:
While the effective date of section 6038D was not imported by the cross-reference to section 6038D, we conclude that the most natural reading of this phrase is that the six-year statute of limitations applies only when there is a section 6038D reporting requirement (or would be barring an exception that is to be disregarded). Section 6501(e)(1)(A)(ii) does not simply incorporate the definition of assets in section 6038D; it also specifies that the assets are subject to the reporting requirement (or would be but for an exception that is disregarded). We agree with petitioner that had Congress intended simply to incorporate the definition in section 6038D of the assets to be covered, Congress could have used other more straightforward wording, such as the defined term itself. Cf. Leslie v. Commissioner, 146 F.3d 643, 650-651 (9th Cir. 1998) (limiting cross-reference in section 6621(c)(3)(A)(iii) to “any straddle (as defined in section 1092 * * *)” to the definition of straddle in section 1092, and declining to import the effective date of section 1092 as well), aff'g T.C. Memo. 1996-86.