The recent case of Lamprecht v Commissioner highlights some interesting nuances in applying the statute of limitations on assessment when a taxpayer files an amended return and the IRS uses a John Doe summons to gather information about taxpayers.
The Lamprechts came to the IRS’s attention as part of the government’s efforts to detect US citizens and residents who had Swiss and other jurisdictions’ bank accounts and income associated with those accounts that went unreported.
In 2010 the Lamprechs, Swiss citizens who had green cards and a residence in Tiburon, California, filed amended 2006 and 2007 returns that reported previously omitted income from their Swiss UBS accounts. IRS examined the returns and proposed accuracy-related penalties for both years. The taxpayers timely petitioned to Tax Court, challenging the penalties on multiple grounds, including that that their amended returns were “qualified amended returns”, that any proposed assessment of the accuracy-related penalties for 2006 and 2007 would be barred by the statute of limitations, and the IRS did not receive proper supervisory approval for the penalties under 6751(b) (note I will not discuss the 6751 issue in this post).
The procedural posture that triggered this opinion involved cross motions for summary judgment. The motions focused on the substantial understatement of income tax penalty (the government’s answer had also alleged a fraud penalty but the government later conceded the fraud penalty).
Lamprecht involves a John Doe summons (JDS), a topic I have been discussing here lately (see First Circuit Finds Anti-Injunction Act Does Not Bar Challenge to IRS’s Use of John Doe Summons That Gathered Taxpayer’s Virtual Currency Transactions and which also is discussed extensively Saltzman and Book IRS Practice and Procedure in Chapter 13). The Lamprechts’ 2006 and 2007 original 1040’s were short by about $6 million in interest, capital gains and commissions that flowed through their UBS accounts. The amended returns included the previously unreported income.
The Lamprechts’ amended returns in 2010 came after the ex parte IRS 2008 filing in federal district court to allow use of the JDS process to get identifying information about US taxpayers with accounts at UBS or its affiliates. After getting authorization, IRS issued the JDS to UBS in July of 2008. After the government initiated a February 2009 enforcement proceeding, the government of Switzerland joined in the enforcement suit as amicus curiae. In August of 2009 the enforcement suit was resolved by two agreements. The first agreement established a process for the exchange under the US –Swiss treaty that included the Swiss Federal Tax Administration and would in its terms “achieve the U.S. tax compliance goals of the UBS [John Doe] Summons while also respecting Swiss sovereignty.” The second agreement provided that “the IRS would “withdraw with prejudice” the UBS John Doe summons after receiving information concerning bank accounts from UBS pursuant to the treaty request for administrative assistance.”
In November of 2010, when IRS obtained the information it sought, the IRS formally withdrew the JDS (as we will see below, these different dates matter for SOL purposes).
Against this background, as most readers know under Section 6501(a)(1) the time period for assessing additional tax is generally three years from the filing of a return. For “substantial omissions” from gross income (greater than 25% of the amount of gross income stated in the return) that period is doubled to six years. In addition, when IRS serves a summons, and that summons is not resolved within six months of service, then the period of limitations for assessment is suspended from the six-month anniversary of service of the summons until its final resolution.
The Lamprechts agreed that the omission with respect to their original returns was substantial, though they and the IRS differed on the application of the SOL in light of their amended returns and the summons suspension issue.
Qualified Amended Returns
Section 6662 provides that a “substantial understatement” is determined by reference to “the amount of the tax imposed which is shown on the return”. Regulations provide that a taxpayer who files a qualified amended return can use the amount of tax shown on those returns for determining whether the understatement is substantial. The regs, however, provide that an amended return is not a qualified amended return if the amended return was filed after the service of a JDS relating to a tax liability of a group that includes the taxpayer if the “taxpayer claimed a direct or indirect tax benefit from the type of activity that is the subject of the summons…”
There was no question that the Lamprechts’ amended return filing was after the service of the JDS; the Lamprechts, however, argued that their omission of the overseas income did not constitute a direct or indirect tax benefit.
The opinion rejected the Lamprechts’ position on a few grounds, essentially concluding that:
[t]he Lamprechts omitted all foreign source income from their original 2006 and 2007 tax returns, thereby substantially understating their gross income and corresponding tax liabilities, and in doing so they received the benefit of understated tax liabilities. Furthermore, during the examination of their 2006 and 2007 income tax returns, when the Lamprechts filed amended returns for 2006 and 2007 to report foreign income previously unreported, their representative asserted that Mr. Lamprecht “did not report his foreign source income and earnings on his originally filed returns because he thought that ‘everything Swiss was not taxable in the U.S.’”
The opinion went on to discuss how the omission of income directly led to their affirmatively claiming itemized deductions that would otherwise have been phased out, thus also undercutting the Lamprechts’ position that they failed to claim a benefit.
Impact of the Summons on the SOL
Once concluding that the understatement was substantial, the opinion went on to discuss whether the proposed assessment was timely given that the 2006 and 2007 were filed in April of 2007 and 2008 respectively and the IRS issued the notice of deficiency for both years more than six year later, in January of 2015. The timeliness of the potential assessment turned on whether and when the running of the six-year limitations period was suspended by the service and final resolution of the UBS JDS.
The Lamprechts argued initially that there should be no suspension of the SOL because in its view the JDS was issued without a valid purpose, just to extend the SOL. The opinion swiftly brushed that aside, noting that there was no precedent for the use of a collateral proceeding against a taxpayer in the John Doe class to raise that challenge. Alternatively the court reasoned that under the liberal Powell standard they had not shown that the summons was issued for an invalid purpose.
That still left open precisely when the SOL was suspended. Under Section 7609(e) the service of the summons suspended the period of limitations for assessment once the summons had remained unresolved after 6 months from service; that six-month date was January 21, 2009. The suspension ends on when the summons is finally resolved; the parties disagreed on when the matter was finally resolved.
The regs provide that a summons proceeding is finally resolved “when the summons or any order enforcing any part of the summons is fully complied with and all appeals or requests for further review are disposed of, the period in which an appeal may be taken has expired or the period in which a request for further review may be made has expired.”
The Lamprechts claimed that the final resolution occurred in August of 2009, when the district court ordered dismissal of the government’s summons enforcement suit.
The government argued that final resolution occurred when IRS formally withdrew the summons on November 15, 2010, after it received the documents pursuant to the treaty and the matter was dismissed with prejudice. That over one-year difference mattered, because under the government’s position the SOL was suspended from January 21, 2009, to November 15, 2010 (i.e., for 664 days), with the six-year SOL for assessment for the 2006 and 2007 years thus still open when the IRS mailed the notices of deficiency in January of 2015, which further suspends the SOL.
The Tax Court agreed with the government, stating that the Lamprechts did “not assert (nor make any showing of) an earlier date by which UBS had “fully complied” with the summons and “all appeals or requests for review” had been “disposed of”.
This is an important government victory. This opinion is significant as it explores SOL issues in the context of aggressive IRS pursuit of taxpayers who have failed to report income in overseas accounts. The intersection of the qualified amended return rules and the somewhat unusual posture by which the government obtained documents pertaining to the Lamprechts on the surface make this a somewhat novel opinion. I suspect, however, that practitioners representing similarly situated taxpayers with overseas accounts, unreported income, amended returns and hefty penalties will carefully study this opinion.