We are coming up on the two-year anniversary of the first post on the blog, Welcome to Procedurally Taxing. In that post, I discussed how Stephen, Keith and I are all involved in updating and writing books on tax procedure and how we hoped to discuss “developments that may not jump out at the reader….[and] highlight some of these less obvious developments and provide analysis and context reflective of our many years of practice in the area.” We hope that we have done that over the last two years.
One of the projects is rewriting and updating the Thomson Reuters treatise IRS Practice and Procedure, originally by Michael Saltzman; the other is the ABA published Effectively Representing Your Client Before the IRS. We all update Saltzman (now Saltzman/Book) three times a year, and with the help of some terrific contributing practitioners have also been regularly rewriting chapters (e.g., this update sees the release of the new chapter on criminal tax penalties principally written by Jack Townsend). The new Saltzman/Book edition with just about every chapter rewritten will be out next year. In the meantime print subscribers get rewritten chapters as we release them (on average about 3/year over the past few years); Checkpoint subscribers also get access to the rewritten and updated chapters. Keith as senior editor of Effectively Representing has brought that book into its 6th edition, which was recently released. Effectively Representing features chapters written by Keith as well as a team of top tax practitioners and academics.
The next Saltzman/Book update is due soon, and we have been reviewing developments and thinking about what is treatise-worthy. Some of the treatise content makes it into the blog. One of the areas we have written about in PT previously is the Section 6707A penalty imposed for failing to include “on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return…”
While we only have written on 6707A in the blog occasionally, when we rewrote the civil penalty chapter in Saltzman/Book a few years ago we wrote extensively on that topic. Generally, under 6707A, if the taxpayer fails to include any information with respect to a listed transaction required to be disclosed under Section 6011 of the Code, the taxpayer is subject to a penalty of 75% of the tax savings from the transactions. There is a statutory minimum of $5,000 for individuals and $10,000 for other taxpayers. There are also maximum penalties of up to $100,000 for individuals and $200,000 for entities (lesser maximums apply to reportable transactions).
The topic is timely. For example, last week, in Notice 2015-47 the IRS identified basket option contracts (an option transaction that converts short-term gain to long term and also offers some deferral possibilities) as a listed transaction, triggering the disclosure rules and possible 6707A penalties for failing to disclose participation. Taxpayer disclosure for avoiding the 6707A penalty is generally accomplished on Form 8886.
What triggered my interest in the issue is our write up for Saltzman/Book of a recent case from the District Court in Arizona, May v US. May highlights one of the sticky issues under the 6707A penalty, namely the statute of limitations that applies to taxpayers that have participated in listed transactions (there is also another important procedural issue in the May case that goes beyond the special statute of limitations; that has to deal with the way courts interpret sol extensions and how contract principles control. I will discuss that in a separate post). While the general statute of limitations for assessment is 3 years under 6501(a), a different statute of limitations applies to listed transactions. That is found in 6501(c)(10), and essentially says that if a taxpayer fails to include on a return information with respect to a listed transaction the time for assessment shall not expire before the date which is 1 year earlier than (1) the date on which the Secretary is furnished the information or (2) the date in which a material advisor meets requirements of Section 6112 (relating to furnishing investor information).
The May case turns on (1) above (or 6501(c)(10)(A) ), and in particular if the IRS gets the information from a source other than Form 8886 whether the special statute of limitations applies under 6501(c)(10) or the general 3-year rules apply.
When I wrote the chapter on 6501(c)(10) originally I did not anticipate this issue and framed the discussion and deadline as being triggered from the taxpayer’s filing the form itself.
In May, however, the IRS stipulated that it received the information that would have been required to have been disclosed in the 8886 from other sources. Was that enough to trigger the one-year special rule?
Naturally, IRS said nope, it needed Form 8886 from the taxpayer to start the 1-year period. The district court disagreed with the government. Here is why.
The district court first looked to the language in the statute:
The Government’s argument is without support in the text of the statute. Section 6501(c)(10) refers to tax returns that lack “information . . . required under section 6011.” The “general rule” announced in that section reads as follows: “When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.” 26 U.S.C. § 6011(a) (emphasis added). The language of § 6011 clearly distinguishes between “information” on the one hand and “forms” on the other. Information is the raw data a taxpayer must supply regarding a disputed transaction; forms are merely a vessel through which that information is conveyed to the IRS.
Then the court considered the IRS’s argument in light of the language:
It therefore makes no sense to interpret § 6501(c)(10)—which speaks of failure to include “information . . . required under section 6011″ and of furnishing the Secretary “the information so required” under that section—as requiring a taxpayer to file any particular form. Under the plain language of § 6501(c)(10), the IRS’s preference for how it receives a taxpayer’s “information” is irrelevant. The § 6011 requirement to use certain forms when filing returns cannot change the fact that under § 6501(c)(10)(A), it is the furnishing of information, and not the submission of a particular form, that triggers the limitations period.
The court also brushed aside the IRS’s arguments that the taxpayer himself had to submit the information, noting that the key in the statute was whether the IRS had the information it needed, and distinguishing from the disclosure rules that relate to material advisors, where the statute clearly states that the advisor himself has to furnish the requested information.
IRS had also argued that the regs required the information to be submitted on the form itself; the court disagreed. Looking to administrative law principles and citing Mayo the court said that in any event the statute was clear so even if the regs said what the IRS claimed it said, the court would not be bound.
The case suggests that taxpayers who have not filed the Form 8886 and who face the possible application of the special statute of limitations under 6501(c)(10) should dig to see if the IRS had information in its possession. Has the disclosure occurred, for example, in the context of the examination?
I will return to discuss the other issue in the case, namely how the courts look to and apply contract principles in interpreting the reach of completed Forms 872, dealing with extensions of the statute of limitations on assessment.