Johannes Lamprecht & Linda Lamprecht ( 2022 )

United States Tax Court
T.C. Memo. 2022-91JOHANNES LAMPRECHT AND LINDA LAMPRECHT,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 14410-15. Filed August 31, 2022.
—————
Ps are citizens of Switzerland who lawfully resided
in the United States, where P–H worked as an investment
consultant managing investments for himself and his
clients. Ps filed U.S. income tax returns for 2006 and 2007
which understated their income in both years by omitting
income that Ps treated as foreign sourced.
In 2008 the IRS issued to Swiss Bank a John Doe
summons which sought to discover the identities of U.S.
taxpayers using foreign entities and Swiss bank accounts
to avoid reporting income on their U.S. tax returns.
In 2010 Ps filed amended returns for 2006 and 2007
on which they reported the previously omitted income.
Upon examination of Ps’ 2006 and 2007 returns, R
determined an accuracy-related penalty under I.R.C.
§ 6662 against Ps for each year on the basis of the tax
attributable to the income omitted from the original
returns, and issued to Ps a notice of deficiency. Ps timely
filed a petition to challenge the penalty determinations in
the notice of deficiency, arguing (1) that the IRS failed to
comply with I.R.C. § 6751(b)(1) requiring written
supervisory approval of penalties, (2) that their amended
returns for 2006 and 2007 are “qualified amended returns”
within the meaning of Treas. Reg. § 1.6664-2(c)(3),
Served 08/31/22
2
[*2] precluding penalty liability, and (3) that assessment of the
accuracy-related penalties for 2006 and 2007 is barred by
the statute of limitations under I.R.C. § 6501.
Held: The amended returns are not “qualified
amended returns” under Treas. Reg. § 1.6664-2(c)(3)(i)(D)
because they were filed after the service of a John Doe
summons.
Held, further, assessment of the accuracy-related
penalties is not barred by the statute of limitations under
I.R.C. § 6501 because the limitations period was suspended
by the service of the John Doe summons pursuant to I.R.C.
§ 7609(e)(2).
Held, further, the IRS complied with the written
supervisory approval requirement of I.R.C. § 6751(b)(1).
Held, further, Ps are liable for the I.R.C. § 6662
accuracy-related penalties as determined by R for the 2006
and 2007 years.
—————
Lloyd De Vos, for petitioners.
Lindsey D. Stellwagen, for respondent.
MEMORANDUM OPINION
GUSTAFSON, Judge: This case is before the Court pursuant to
section 6213(a) 1 for redetermination of accuracy-related penalties under
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code (“the Code”, Title 26 of the United States Code) as in effect at the relevant times;
references to regulations are to Title 26 of the Code of Federal Regulations (“Treas.
Reg.”) as in effect at the relevant times; and references to Rules are to the Tax Court
Rules of Practice and Procedure. Some dollar amounts are rounded. Citation in this
opinion to a “Doc.” refers to a document so numbered in the Tax Court docket record of
this case, and a pinpoint citation therein refers to the pagination as generated in the
portable document format (“PDF”) file.
3
[*3] section 6662(a) that the Internal Revenue Service (“IRS”)
determined against petitioners, Johannes and Linda Lamprecht, for the
tax years 2006 and 2007. Pursuant to section 6212(a), the IRS mailed a
statutory notice of deficiency (“NOD”) to the Lamprechts on January 9,
2015, determining accuracy-related penalties under section 6662(a) of
$124,294 for 2006 and $376,449 for 2007. The NOD determined these
penalties on the basis of substantial understatements of income tax
under section 6662(b)(2) and (d). 2 Both parties have moved for summary
judgment under Rule 121, and the issues for decision are whether a
genuine dispute of material fact exists with respect to: (1) whether the
Lamprechts are liable for the accuracy-related penalties imposed by
section 6662 for the 2006 and 2007 years, and, if so, (2) whether
assessment of those penalties is barred by the statute of limitations
under the provisions of section 6501. We hold that the Lamprechts are
liable for the section 6662 accuracy-related penalties for 2006 and 2007
as determined by the Commissioner, and that assessment of the
penalties is not barred by the statute of limitations. For the reasons
stated below, we will grant the Commissioner’s motion, deny petitioners’
motion, and enter judgment for the Commissioner as a matter of law.
Background
The following facts are derived from the pleadings and the parties’
respective motions, memorandums, and accompanying declarations
(including the exhibits attached thereto). Unless noted otherwise, these
facts are not in dispute.
The Lamprechts’ business activities
The Lamprechts are, and have always been, citizens of
Switzerland. In 2006 and 2007, they held visas entitling them to lawful
permanent residence in the United States (i.e., “green cards”). The
Lamprechts maintained residences in Tiburon, California, and
St. Moritz, Switzerland, and periodically rented their St. Moritz
residence to third parties.
Mr. Lamprecht worked in the United States as an investment
consultant for Trais Fluors Investment Services, Inc. (“Trais Fluors”), a
2 The NOD also determined, as an alternative basis for the penalties,
negligence under section 6662(c), but we will grant the Commissioner’s motion and
sustain the penalties without reaching the issue of negligence. In his answer the
Commissioner also asserted fraud penalties under section 6663, but he later conceded
them.
4
[*4] California corporation for which he was both an officer and the sole
shareholder. Mr. Lamprecht received a salary from Trais Fluors, as well
as interest, dividends, and capital gains from his personal investment
activities.
Mr. Lamprecht and UBS
In the years at issue, Mr. Lamprecht also received commissions
from the Swiss bank UBS AG (“UBS”) for referrals of business to it. The
commissions were deposited into one of Mr. Lamprecht’s UBS accounts.
(As we set out below, the Lamprechts did not report these commissions
on their original 2006 and 2007 Forms 1040, “U.S. Individual Income
Tax Return”, but did report them on their Forms 1040–X, “Amended
U.S. Individual Income Tax Return”.) 3
Mr. Lamprecht is an owner of Paro, Inc. (“Paro”), 4 an entity
incorporated under the laws of the British Virgin Islands. In the years
at issue, Paro maintained a UBS bank account, of which Mr. Lamprecht
was a beneficial owner.
Departure from the United States
Mr. Lamprecht departed the United States on December 9, 2009,
and submitted U.S. Citizenship and Immigration Service Form I–407,
“Abandonment of Lawful Permanent Resident Status”, to the American
Embassy in Bern, Switzerland, on December 21, 2009. Mr. Lamprecht
also filed Form 8854, “Expatriation Information Statement”, with the
IRS in December 2010. Mrs. Lamprecht departed the United States on
October 17, 2010, and surrendered her green card to the U.S. authorities
in Switzerland on November 30, 2010.
3 In opposition to the Commissioner’s motion for summary judgment, the
Lamprechts submitted, as Exhibit 15, a declaration by Mr. Lamprecht that stated: “the
amounts that I reported on Schedule C[, “Profit or Loss From Business”,] of my
amended 2006 and 2007 tax returns . . . are commissions that I was paid by UBS A. G.
(‘UBS’) for placing business with them. The amounts all appear on the UBS
statements that . . . appear on Exhibit 13”. That “Exhibit 13” appears in our record as
Doc. 127.
4 The parties disagree on the percentage of Mr. Lamprecht’s ownership of Paro.
The Lamprechts contend they own 100% of Paro as community property under the
laws of the State of California. We need not resolve this dispute.
5
[*5] The Lamprechts’ original 2006 and 2007 federal income tax returns
The Lamprechts engaged a return preparer to prepare their
original federal income tax returns for the 2006 and 2007 years, and
they filed those returns early. The 2006 return is treated as having been
filed on the due date in April 2007, and the 2007 return is treated as
having been filed on the due date in April 2008. See § 6501(b)(1).
Their original 2006 return reported income totaling $1,073,761,
and their original 2007 return reported income totaling $1,705,314. (As
they now admit, and as we show below, that reporting was short by
about $1 million for 2006 and about $5 million for 2007.) The original
returns did not report income from commissions Mr. Lamprecht received
from UBS (and that were deposited into his UBS accounts) or from
foreign-source interest, dividends, and capital gains. 5 On Schedule A,
“Itemized Deductions”, to each return, they claimed itemized
deductions.
On their original 2006 return on Schedule B, “Interest and
Ordinary Dividends”, Part III, “Foreign Accounts and Trusts”, the
Lamprechts completed line 7a (“At any time during 2006, did you have
an interest in or a signature or other authority over a financial account
in a foreign country, such as a bank account, securities account, or other
financial account?”) by putting an X in the “No” column. They left blank
line 7b (“If ‘Yes,’ enter the name of the foreign country”). They did the
same on their original 2007 return.
The 2008 John Doe summons proceeding
The Department of Justice (“DOJ”) filed an “Ex Parte Petition for
Leave to Serve John Doe Summons” 6 in the U.S. District Court for the
Southern District of Florida, styled as “In the Matter of the Tax
Liabilities of: John Does”, No. 08-21864 (June 30, 2008). The petition
5 The Lamprechts do not attribute these omissions to their paid return
preparer, nor do they otherwise assert “reasonable cause” for their errors under
section 6664(c). Mr. Lamprecht informed the IRS during examination that the reason
for his non-reporting was that he “thought that ‘everything Swiss was not taxable in
the U.S.’” However, because we need not reach in this opinion the issues of negligence
or fraud, we need not determine his subjective reasons for the errors.
6 A “John Doe summons” is a third-party summons that “does not identify the
person with respect to whose liability the summons is issued.” § 7609(f).
6
[*6] requested authorization to serve a John Doe summons on UBS
seeking information regarding the following class of persons:
United States taxpayers, who at any time during the years
ended December 31, 2002 through December 31, 2007, had
signature or other authority . . . with respect to any
financial accounts maintained at, monitored by, or
managed through any office in Switzerland of UBS AG or
its subsidiaries or affiliates and for whom UBS AG or its
subsidiaries or affiliates (1) did not have in its possessions
Forms W–9 executed by such United States taxpayers, and
(2) had not filed timely and accurate Forms 1099 naming
such United States taxpayers and reporting to United
States taxing authorities all reportable payments made to
such United States taxpayers.
Finding that the UBS John Doe summons met the requirements of
section 7609(f), the district court authorized its service upon UBS by
order dated July 1, 2008. UBS did not participate in this ex parte
proceeding (nor did the Swiss government).
Service of the summons on UBS
The IRS served the John Doe summons on UBS on July 21, 2008,
requesting records regarding: (1) the identities of U.S. taxpayers in the
specified class; (2) foreign entities established or operated on behalf of
each U.S. taxpayer in the class; (3) the opening of financial accounts,
monthly or other periodic statements of activities of such accounts, and
annual summaries of such accounts; and (4) referrals of each U.S.
taxpayer in the class to UBS offices in Switzerland. The summons
required appearance before the IRS in Miami, Florida, on August 8,
2008, for testimony and production of the requested records.
The 2009 summons enforcement proceeding
On February 19, 2009, 7 DOJ filed a petition in District Court for
the Southern District of Florida to enforce the UBS John Doe summons,
7 In this same general period, the IRS announced the Offshore Voluntary
Disclosure Program (“2009 OVDP”). See Statement, IRS Newsroom, “Statement from
IRS Commissioner Doug Shulman on Offshore Income” (Mar. 26, 2009),
https://www.irs.gov/newsroom/statement-from-irs-commissioner-doug-shulman-on-
offshore-income. Through the 2009 OVDP, taxpayers with previously unreported
7
[*7] styled as United States v. UBS AG, No. 09-20423. The government
of Switzerland joined in the enforcement suit as amicus curiae. The
enforcement suit was ultimately resolved through two related out-of-
court agreements, both executed August 19, 2009:
The first agreement, known as the “U.S.-Switzerland
Agreement”, 8 established an agreed mechanism for exchanging
information that would “achieve the U.S. tax compliance goals of the
UBS [John Doe] Summons while also respecting Swiss sovereignty.”
Under the U.S.-Switzerland Agreement, the IRS would deliver “a
request for administrative assistance pursuant to Article 26 of the 1996
Convention Between the United States of America and the Swiss
Confederation for the Avoidance of Double Taxation with Respect to
Taxes on Income” 9 to the Swiss Federal Tax Administration (“SFTA”)
seeking information regarding accounts of U.S. taxpayers maintained at
UBS in Switzerland.
The second agreement, known as the “U.S.-UBS Agreement”, was
the settlement agreement between the United States, the IRS, and UBS,
by which the parties agreed to three terms pertinent to this opinion:
First, as to the information sought by the summons, they agreed that
UBS would produce the documents requested in the UBS John Doe
summons to the SFTA on a rolling basis pursuant to an agreed-upon
schedule and that UBS’s compliance would be monitored by the Swiss
Federal Office of Justice and the Swiss Financial Market Supervisory
Authority.
offshore income could avoid potential criminal prosecution if they notified the IRS and
met other conditions. Taxpayers who did not participate in the 2009 OVDP would be
subject to the full extent of civil and criminal liability and all available penalties for
each year. The extended deadline for taxpayers to participate in the 2009 OVDP was
October 15, 2009. See IRS News Release IR-2009-84 (Sept. 21, 2009). The Lamprechts
did not participate in the 2009 OVDP, and they have asserted in this case that the
reason for their non-participation was that they were unable to obtain necessary
documents from UBS, a contention that the Commissioner argued they are barred from
making. The parties did not address the 2009 OVDP in their briefing of the cross-
motions for summary judgment, so we do not address it further here.
8The U.S.-Switzerland Agreement does not appear in our record, but it is
described in the second agreement discussed here—the U.S.-UBS agreement.
9 See generally Convention for the Avoidance of Double Taxation with Respect
to Taxes on Income, Switz.–U.S., Oct. 2, 1996, T.I.A.S. No. 97-1219.
8
[*8] Second, as to the summons enforcement case, the parties agreed
to its dismissal and expressed their understanding about the effect of
that dismissal. They agreed as follows:
Immediately upon the execution of this Settlement
Agreement, and in no event more than 5 business days
after its execution, UBS and the United States will file a
Stipulation of Dismissal, pursuant to Fed. R. Civ.
P. 41(a)(l)(A)(ii), with the United States District Court for
the Southern District of Florida. . . . The Parties
understand that the dismissal of the Action pursuant to
this paragraph 1 shall, in and of itself, have no effect on the
UBS Summons or its enforceability.
Third, as to the UBS John Doe summons itself, the parties agreed
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.
However, the parties agreed that “if UBS fails to comply in any material
respect with any of its obligations” to produce information, then “the IRS
is not obligated to withdraw the UBS Summons”. That is, under this
agreement, although the summons enforcement suit would be promptly
dismissed, the summons itself would remain pending and potentially
enforceable until it was “withdrawn with prejudice” after UBS provided
the information.
The IRS formally withdrew the UBS John Doe Summons, “with
prejudice”, on November 15, 2010. Information produced by UBS in
response to the John Doe summons included the Lamprechts’ account
information.
The Lamprechts’ amended 2006 and 2007 federal income tax returns
In December 2010—after UBS had given its information to the
IRS and the John Doe summons had been withdrawn—the Lamprechts
filed amended federal income tax returns for the 2006 and 2007 years,
which were prepared by a paid preparer. On the amended returns, the
Lamprechts reported their previously unreported income. Certain
amounts they reported on their original and amended returns for 2006
and 2007 compare as follows:
9
[*9] Item 2006 original 2006 amended 2007 original 2007 amended
Adjusted
$1,073,652 $2,816,833 $1,705,172 $6,930,169
gross income
Itemized
187,338 152,481 202,497 128,460
deductions
Total tax 240,393 861,864 461,798 2,344,041
Thus, the amended returns showed increases in tax liability of
$621,471 for 2006 and $1,882,243 for 2007. On lines 7a and 7b of
Schedule B to their amended returns, the Lamprechts answered “Yes”
to the question whether they had an interest in “a financial account in
a foreign country” and entered “Switzerland” as the name of the foreign
country. The Lamprechts concurrently filed Forms TD F 90-22.1,
“Report of Foreign Bank and Financial Accounts” (“FBAR”), 10 for 2006
and 2007 to report previously undisclosed foreign bank accounts.
When they filed their amended returns in December 2010, the
Lamprechts paid the increased tax liabilities for 2006 and 2007 that
they reported. (They did not report a liability for penalties nor pay
them.)
IRS examination
The Lamprechts’ 2010 federal income tax return, filed in or before
April 2011, was selected for examination and was assigned to Revenue
Agents (“RA”) Norbert Nyereyemhuka and Sandra Lyons. The
Lamprechts did not participate in the examination of their federal
income tax return by phone conference—only through their attorney,
Mr. De Vos, who traveled to Dallas, Texas, in September 2014, for a
meeting with the examiners.
In a Form 4564, “Information Document Request”, dated
December 12, 2013, RA Nyereyemhuka requested that the Lamprechts
provide copies of their original and amended tax returns for the 2003,
2004, 2005, 2006, 2007, and 2008 years. On February 12, 2014,
RA Nyereyemhuka submitted to his immediate supervisor, Robert
Davis, a Form 5345–D, “Examination Request-ERCS (Examination
Returns Control System) Users”, requesting that the Lamprechts’
return for the 2007 year be opened for examination for the purpose of
assessing the section 6662 accuracy-related penalty. The form states,
10 Form TD F 90-22.1 was the appropriate FBAR form for 2006 and 2007, but
it was replaced by FinCEN Form 114 starting in January 2014.
10
[*10] as the “Reason for Request: To open up 2007 tax year to assess
penalties on amended return that does not meet the qualified amended
return criteria.” (Emphasis added.) The form then states: “Follow-Up
Actions: Open up tax year / Assess accuracy penalty.” (Emphasis added.)
Mr. Davis approved RA Nyereyemhuka’s request by signing the form.
RA Nyereyemhuka made an identical request to open the Lamprechts’
return for the 2006 year for examination to assess the section 6662
accuracy-related penalty via a Form 5345–D dated April 10, 2014, which
Acting Supervisory Revenue Agent Michael Anderson approved that
same day by signing the form.
The IRS first communicated to the Lamprechts its determination
that they were liable for the section 6662 accuracy-related penalties for
the years 2006 and 2007 in a Letter 950 dated July 18, 2014, which
included copies of Form 4549, “Income Tax Examination Changes”, and
Form 886–A, “Explanation of Items”, detailing the facts and law
supporting its determination.
RA Nyereyemhuka’s group manager later signed a “Civil Penalty
Approval Form” dated November 4, 2014, again approving assessment
of the section 6662 accuracy-related penalties against the Lamprechts
for the 2006 and 2007 years.
The Statutory Notice of Deficiency for 2006 and 2007
On January 9, 2015, the IRS mailed to the Lamprechts an NOD
determining the section 6662 accuracy-related penalties for 2006 and
2007. Attached to the NOD were Forms 4549–A, “Income Tax
Examination Changes”, determining section 6662 accuracy-related
penalties for 2006 and 2007, and Form 886–A providing
RA Nyereyemhuka’s analysis of the facts and law supporting his
decision to assert section 6662 accuracy-related penalties for 2006 and
2007.
The Lamprechts’ petition
The Lamprechts challenged the IRS’s determination by timely
filing a petition with the Tax Court. When they filed their petition, the
Lamprechts resided in Switzerland. 11 The Lamprechts do not dispute
the arithmetic of the IRS’s calculations of the accuracy-related penalties
11 Absent stipulation pursuant to section 7482(b)(2), venue for an appeal in this
case would be the U.S. Court of Appeals for the District of Columbia. See § 7482(b)(1).
11
[*11] for 2006 and 2007 as shown on the NOD, but they dispute the
applicability of those penalties. The petition makes two primary
contentions challenging the accuracy-related penalties. First, the
petition claims that the Lamprechts fixed their own errors and should
not be penalized. It contends that their amended returns for 2006 and
2007 are “qualified amended returns” within the meaning of Treasury
Regulation section 1.6664-2(c)(3), and that therefore there is no
underpayment to which the accuracy-related penalties may apply.
Second, the petition claims that assessment of the accuracy-related
penalties for 2006 and 2007 is barred by the statute of limitations under
section 6501.
The parties’ cross-motions for summary judgment
Following a lengthy series of discovery disputes, 12 the
Commissioner filed his motion for summary judgment, and the
Lamprechts cross-moved. Stated simply, the issue for decision is
whether the Lamprechts are liable for 20% accuracy-related penalties
(under section 6662(a)) for “substantial understatements” of tax (under
section 6662(b)(2)) on their original returns for 2006 and 2007. 13 The
Lamprechts do not dispute that the understatements on their original
returns were “substantial” (i.e., exceeding the greater of 10% of their tax
or $5,000, see § 6662(d)), and they do not raise a defense of “reasonable
basis” under section 6662(d)(2)(B)(ii)(II) nor “reasonable cause” under
section 6664(c). Rather, they make three other contentions, any one of
which would carry the day.
First, the Lamprechts contend that the “initial determination” of
the penalties was not given written supervisory approval as required by
section 6751(b)(1) (an issue not raised in the petition, but on which the
Commissioner bears the burden of production). Second, the Lamprechts
contend (as in their petition) that their amended returns were “qualified
amended returns” that cured their errors and preclude penalty liability.
And third, they continue to contend that the statute of limitations bars
the assessment of the determined penalties. These are the issues that
we address in this opinion.
12 See our orders appearing in the docket record as Docs. 61, 90, 108, 131, 150,
and 155.
13 The Commissioner also maintains his alternative position that the penalties
are warranted by “negligence” under section 6662(b)(1), but he does not assert that
more fact-intensive contention in his motion for summary judgment.
12
[*12] Discussion
I. General principles of law
A. Jurisdiction
The Lamprechts’ petition was filed pursuant to section 6213(a),
which grants the Court jurisdiction to redetermine a deficiency in
federal income tax as determined in an NOD. However, the Lamprechts
paid their increased federal income tax liabilities for 2006 and 2007
when filing their amended returns, and the only liabilities at issue are
the section 6662 accuracy-related penalties. Section 6665(a) provides
that “the . . . penalties provided by this chapter [68, titled “Additions to
Tax, Additional Amounts, and Assessable Penalties”] shall . . . be
assessed, collected, and paid in the same manner as taxes”, and further
that “any reference in this title [26 U.S.C.] to ‘tax’ imposed by this title
shall be deemed also to refer to the additions to the tax, additional
amounts, and penalties provided by this chapter.” Under these
provisions the Commissioner’s determination that the Lamprechts are
liable for the section 6662 accuracy-related penalties for 2006 and 2007
is equivalent to his determining a deficiency in federal income tax for
those years; and upon the timely filing of their petition, we have
jurisdiction to redetermine that deficiency. See §§ 6213(a), 6665(a).
B. Summary judgment
The purpose of summary judgment is to expedite litigation and
avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C.
678, 681 (1988). The Court may grant summary judgment when there
is no genuine dispute as to any material fact and a decision may be
rendered as a matter of law. Rule 121(b); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
The moving party bears the burden of showing that no genuine
issue of material fact exists, and the Court will view any factual material
and inferences in the light most favorable to the nonmoving party.
Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). Since we will grant
the Commissioner’s motion for summary judgment, we will draw
inferences in favor of the Lamprechts.
C. Accuracy-related penalty
Section 6662(a) imposes an “accuracy-related penalty” equal to
20% of the portion of the underpayment that is attributable to various
13
[*13] factors, including a “substantial understatement of income tax”.
§ 6662(b)(2). For the purposes of section 6662(b)(2) and (d)(1)(A), an
understatement 14 of income tax is “substantial” if it exceeds the greater
of “10 percent of the tax required to be shown on the return” or $5,000.
§ 6662(d)(1)(A). There is no dispute that the understatements on the
Lamprechts’ original returns for 2006 and 2007 were substantial, by
comparison to the corrected amounts that the Lamprechts themselves
reported on their amended returns.
The Commissioner bears the burden of production with respect to
the liability of an individual for any penalty. § 7491(c). To satisfy his
burden, the Commissioner must present sufficient evidence to show that
it is appropriate to impose the penalty in the absence of available
defenses. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once
the Commissioner meets his burden of production on penalties, the
taxpayer must come forward with persuasive evidence that the
Commissioner’s showing is incorrect. Rule 142(a); Higbee, 116 T.C.
at 447.
Compliance with the written supervisory approval requirement
of section 6751(b)(1) is an element of the Commissioner’s burden of
production on penalties. Graev v. Commissioner, 149 T.C. 485, 493
(2017), supplementing and overruling in part 147 T.C. 460 (2016).
Section 6751(b)(1) provides:
No penalty under this title [26 U.S.C.] shall be assessed
unless the initial determination of such assessment is
personally approved (in writing) by the immediate
supervisor of the individual making such determination or
such higher level official as the Secretary may designate.
As the Tax Court has construed section 6751(b)(1), it requires written
supervisory approval to be obtained before the IRS formally
communicates to the taxpayer its determination that the taxpayer is
liable for the penalty. Clay v. Commissioner, 152 T.C. 223, 249 (2019),
aff’d, 990 F.3d 1296 (11th Cir. 2021). 15 The IRS’s compliance with
14 An “understatement” is defined as the excess of the amount of tax required
to be shown on the return over the amount of tax which is shown on the return.
§ 6662(d)(2)(A).
15 Formal communication of an IRS penalty determination implicating
section 6751(b)(1) may come in any one of multiple forms. In Clay, 152 T.C. at 249, we
14
[*14] section 6751(b)(1) is appropriately considered in a deficiency case.
See Graev, 149 T.C. at 493. And if, in so considering, we conclude that
the IRS failed to secure written supervisory approval for a penalty
subject to section 6751(b)(1), then we cannot sustain the penalty. See
id.D. Summons enforcement
“For the purpose of ascertaining the correctness of any return . . .
[or] determining the liability of any person for any internal revenue tax,”
section 7602(a)(2) authorizes the Secretary of the Treasury (“the
Secretary”), acting through the IRS, to summon
any person having possession, custody, or care of books of
account containing entries relating to the business of the
person liable for tax . . . to appear before the Secretary at
a time and place named in the summons and to produce
such books, papers, records, or other data, and to give such
testimony, under oath, as may be relevant or material to
such inquiry.
Where the summons identifies the person as to whose tax liability the
information is sought, the IRS issues the summons without any court
involvement. However, where the IRS needs information from a third
party about the tax liability of a person whose identity it does not yet
know, it may attempt to obtain that information from the third party by
means of a “John Doe summons”, i.e., a summons “which does not
held “that the initial determination for purposes of section 6751(b) was . . . when
respondent issued the RAR [revenue agent’s report] to petitioners proposing
adjustments including penalties and gave them the right to protest those proposed
adjustments.” Written supervisory approval must precede the IRS’s initial formal
communication of a penalty determination to an individual taxpayer, regardless of the
means of communication. In considering supervisory approval of an assessable penalty
under section 6707A, the Court of Appeals for the Ninth Circuit construed
section 6751(b)(1) differently from the Tax Court, so that the burden on the IRS was
less demanding. See Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th
1066, 1070–1071, 1071 nn.4 & 5 (9th Cir. 2022) (rejecting this Court’s formal
communication standard for the section 6707A penalty for failure to report
participation in a listed transaction, and indicating that the initial determination in a
deficiency case is likely embodied in the NOD), rev’g 154 T.C. 68 (2020). Although this
case is not appealable to the Ninth Circuit, see § 7482(b)(1), even if we applied the
Ninth Circuit’s reasoning in Laidlaw’s the Commissioner would still meet his burden
of production to show compliance with the supervisory approval requirement of
section 6751(b)(1). We therefore have no occasion here to reconsider our opinions in
Laidlaw’s or Clay.
15
[*15] identify the person with respect to whose liability the summons is
issued.” § 7609(f). Before the Secretary can serve a John Doe summons,
section 7609(f) requires him to establish the following in a court
proceeding: 16
(1) the summons relates to the investigation of a
particular person or ascertainable group or class of
persons,
(2) there is a reasonable basis for believing that such
person or group or class of persons may fail or may have
failed to comply with any provision of any internal revenue
law, and
(3) the information sought to be obtained from the
examination of the records or testimony (and the identity
of the person or persons with respect to whose liability the
summons is issued) is not readily available from other
sources.
Pursuant to section 7609(h)(1), “the United States district court for the
district within which the person to be summoned resides or is found
shall have jurisdiction to hear and determine any proceeding brought
under subsection . . . (f) [regarding issuance of a John Doe summons].”
That proceeding for approval of a John Doe summons is “ex parte”, and
the court’s determinations are “made solely on the petition and
supporting affidavits.” § 7609(h)(2).
When a summons is served, the receiving party may sometimes
voluntarily provide the requested information, and in that circumstance
the summons will never be judicially enforced. But if the recipient does
not produce the requested information, then section 7402(b) authorizes
the United States to bring suit in the appropriate district court to
enforce the summons, if necessary.
E. Statute of limitations for assessment of tax
Section 6501(a) provides the general rule that “the amount of any
tax imposed by this title [26 U.S.C.] shall be assessed within 3 years
after the return was filed.” There is, however, an exception to this
general 3-year rule in the case of substantial omissions from gross
16 In such a proceeding, the Secretary is represented by the DOJ, pursuant to
28 U.S.C. § 516.
16
[*16] income under section 6501(e)(1)(A). For the purposes of
section 6501(e)(1)(A), an omission from gross income is “substantial” if
it is “in excess of 25% of the amount of gross income stated in the
return”—the circumstance that the Lamprechts acknowledge exists
here. Where there is a substantial omission from gross income,
section 6501(e)(1)(A) provides that “the tax may be assessed . . . at any
time within 6 years after the return was filed.” The parties agree that
this 6-year period of limitation applies in this case.
Additionally, section 7609(e) suspends the period of limitations
for assessment of tax if a summons was issued but remains unresolved.
Section 7609(e)(2) reads:
(2) Suspension After 6 Months of Service of
Summons.—In the absence of the resolution of the
summoned party’s response to the summons, the running
of any period of limitations under section 6501 . . . with
respect to any person with respect to whose liability the
summons is issued . . . shall be suspended for the period—
(A) beginning on the date which is 6 months
after the service of such summons, and
(B) ending with the final resolution of such
response.
Accordingly, if the IRS serves a summons, and that summons is not
resolved within six months of service, then the period of limitations for
assessment under section 6501 is suspended from the six-month
anniversary of service of the summons until its final resolution. (The
parties disagree about whether such a suspension occurred in this case.)
II. Analysis
The Lamprechts’ amended returns reported tax liabilities of
$665,400 for 2006 and $2,031,194 for 2007, whereas their original
returns reported tax liabilities of $43,929 for 2006 (understating the tax
by $621,471) and $148,951 for 2007 (understating the tax by
$1,882,243). Because the Lamprechts’ understatements of income tax
on their original returns greatly exceed 10% of the tax required to be
shown (i.e., the tax eventually reported on their amended returns), those
understatements are “substantial” and are therefore subject to the
accuracy-related penalty of section 6662(a) and (b)(2). See § 6662(d).
Arithmetically speaking, the parties agree on the amounts of the
17
[*17] accuracy-related penalties for the 2006 and 2007 years as
calculated by reference to the tax on the original returns. However, the
Lamprechts dispute their liability on the grounds that we now discuss.
A. Written supervisory approval under section 6751(b)(1)
Because the only liabilities at issue in this case are penalties, the
Commissioner bears the burden of production. See § 7491(c). As we
have noted, the Commissioner’s burden of production also includes the
burden to show compliance with the requirement of section 6751(b)(1)
that the “initial determination” of the penalty be approved in writing by
the “immediate supervisor”.
1. The Commissioner’s showing
The IRS first formally communicated its determinations of
section 6662 accuracy-related penalties to the Lamprechts in the
Letter 950, dated July 18, 2014, which included an examination report
showing proposed changes to the Lamprechts’ 2006 and 2007 tax
returns. (The Lamprechts do not point to any previous communication
that could have embodied the “initial determination”.)
Section 6751(b)(1) is satisfied where written supervisory approval of the
“initial determination” of the penalty is obtained before the first formal
communication of the penalty determination to the taxpayer. Clay,
152 T.C. at 249. To show that such approval was obtained here, the
Commissioner proffers Forms 5345–D, which state that the “Reason” for
opening the Lamprechts’ 2006 and 2007 returns for examination was “to
assess penalties on amended return that does not meet the qualified
amended return criteria”, and that the “Follow-up Actions” would be to
“Open up tax year” and “Assess accuracy penalty”—i.e., the section 6662
accuracy-related penalty. (Emphasis added.) This form sufficiently
identifies the penalty being determined, the reasoning for doing so, and
the proposal that it is to be “assess[ed]”, thereby demonstrating an
initial determination that the Lamprechts were liable for section 6662
accuracy-related penalties for 2006 and 2007. The Forms 5345–D bear
the immediate supervisors’ signatures, and they are dated February 12,
2014 (for the 2007 approval), and April 10, 2014 (for the 2006 approval),
which both predate the Letter 950 issued in July 2014. Because the
Forms 5345–D reflect initial determinations of the Lamprechts’ liability
for the section 6662 accuracy-related penalties for 2006 and 2007 and
predate the first formal communication of the penalties to the
Lamprechts, the Commissioner has met his burden of production to
show compliance with section 6751(b)(1).
18
[*18] 2. The Lamprechts’ criticisms
The Lamprechts resist this conclusion with three criticisms that
are not well grounded:
a. The nature of Form 5345–D
First, the Lamprechts complain that Form 5345–D, which is used
to open an examination, is not properly used for supervisory approval of
a penalty. It is true that Internal Revenue Manual (“IRM”) 20.1.5.1.6(4)
(Jan. 24, 2012) suggests that “written managerial approval . . . should
be documented on the Civil Penalty Approval, leadsheet”; but three
considerations must be kept in view: First, it is also true that in certain
circumstances the IRM expressly stated that Form 5345–D is used to
secure supervisory approval of certain penalties. 17 Second, “[i]t is a well-
settled principle that the Internal Revenue Manual does not have the
force of law, is not binding on the IRS, and confers no rights on
taxpayers.” See, e.g., McGaughy v. Commissioner, T.C. Memo. 2010-183,
100 T.C.M. (CCH) 144, 148. Third, we have held that no particular form
is required for written supervisory approval under section 6751(b)(1).
See, e.g., Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C. 75, 86
(2019). The Commissioner made a showing that, for each year at issue,
the form twice expressly requested approval to open an examination “to
assess penalties on amended return” and to “[a]ssess accuracy penalty”.
(Emphasis added.) The forms that the examining agent produced thus
reflected not just a request to start an examination but rather his initial
determinations to assess penalties, and those initial determinations
were approved by the signatures of his supervisors before formal
communication of those determinations to the Lamprechts. The
Lamprechts raise no “genuine dispute” as to these facts.
17 See, e.g., IRM 20.1.12.6(1) (Aug. 27, 2010) (“If the examiner determines a
penalty [applicable to incorrect appraisals] is warranted, the examiner will prepare
Form 5345–D . . . and secure the group manager’s approval”); IRM 4.32.2-12 (June 8,
2012) (“Use Form 5345–D . . . to establish each tax year there will be a penalty
assessed”); IRM 4.24.16.1.11 (Sept. 12, 2013) (establishing that supervisory approval
of proposed penalties in excise tax examinations is given using Form 5345–D). The
IRM is a sprawling instruction manual, the various parts of which are amended at
different times, and its penalty-related provisions are scattered throughout. The
year after these Forms 5345–D were signed, the IRM included an express provision
that examiners “gain their manager’s approval to open a penalty case” (the action
taken by Form 5345–D) “[a]fter [the] examiners determine that a penalty is
warranted.” IRM 20.1.9.2.1(1) (July 8, 2015) (emphasis added).
19
[*19] b. The IRS’s handling of Form 5345–D
Second, the Lamprechts question the sequence of events. They
point out that electronic time-stamps of the digital signatures on the
Forms 5345–D show that the supervisors signed the forms before the
agent who made the initial determination of the penalty, and they
contend that a “manager cannot approve an action which has not yet
taken place.” This scrutiny of the process is misdirected.
Section 6751(b)(1) requires a signature from the supervisor approving
the penalty, not from the individual making the initial determination.
See Palmolive Bldg. Invs., LLC, 152 T.C. at 86 (“The statute does not
require any particular writing by the individual making the penalty
determination, nor any signature or written name of that individual”).
If the examiner signs the form at all (as to which section 6751(b)(1) is
indifferent), it does not matter whether he does so before he submits the
document to the supervisor or afterwards when he then moves the
process along.
c. The Commissioner’s discovery responses
Third, the Lamprechts argue that, even if these Forms 5345–D
would otherwise satisfy the Commissioner’s burden of production under
section 6751(b)(1), we should preclude the Commissioner from relying
on these documents. The Forms 5345–D were first produced to the
Lamprechts on February 12, 2021, when the Commissioner filed his
motion for summary judgment. The Lamprechts say that he failed to
produce them earlier in response to a discovery request or in response
to our order ruling on their motion to compel production of documents,
and they ask us therefore to preclude the Commissioner from relying on
them now. This argument ostensibly implicates the important subjects
of a litigant’s duty to respond conscientiously and honestly to his
opponent’s discovery requests and the necessity of the Court’s enforcing
its discovery rules and orders—with preclusive sanctions, where
appropriate. However, the Lamprechts’ contentions do not fairly
present the document request or our order on the motion to compel.
i. Document Request No. 7
The document request that the Lamprechts rely on did not
expressly request Forms 5345–D, nor did it more generally request
documents to be relied on to show compliance with section 6751(b)(1) (a
subject that the Lamprechts addressed in a roughly contemporaneous
motion for summary judgment). Rather, Document Request No. 7
20
[*20] requested “[a]ll documents on which you intend to rely at trial.”
However, because we will grant the Commissioner’s motion for
summary judgment, there will be no trial in this case, and the set of
documents to be “rel[ied on] at trial” will be an empty set.
Moreover, Document Request No. 7 is very broad, difficult for
even a conscientious recipient to respond to comprehensively when a
case is not yet ready for trial. What a party will rely on at trial will
depend on (among other things) what the party learns or obtains before
that trial, what the parties will stipulate under Rule 91, what the party-
opponent eventually disputes, and what the Court holds in pretrial
orders. In the Tax Court, the final deadline to announce the exhibits to
be offered at trial is provided in a Standing Pretrial Order (which was
issued in this case on two previous occasions when trial dates were set
but later continued) that gives a deadline for the pretrial exchange of all
documents to be used at trial. Of course, a party is entitled to obtain
documents, through discovery, ahead of that deadline; but discovery
requests should seek specific information, rather than simply
attempting to revise the Court’s schedule and move up the deadline for
the disclosure of all trial exhibits.
ii. Motion to compel and order
The Lamprechts invoke our order with the following contention:
18. By its order entered on September 26, 2017,
the Court ordered Respondent to produce certain classes of
documents requested by Petitioners and not previously
produced by Respondent. The Court further stated “The
Court would expect to preclude Respondent from relying at
trial upon any responsive document not produced by
October 13, 2017”. . . .
....
20. Respondent did not produce the Forms
5345–D by October 13, 2017.
21. Respondent did not produce the Forms
5345–D on or reasonably after February 20, 2018, the date
on which he stated that he had written managerial
approval for the substantial understatement penalty that
satisfied the requirements of Section 6751(b)(1). . . .
21
[*21] 22. Respondent never produced the Forms
5345–D in discovery.
23. Consistent with the Order of the Court,
Respondent should be precluded from relying upon the
Forms 5345–D to prove compliance under Section 6751(b)
because the documents were not produced by October 13,
2017 or a reasonable time thereafter.
It was not incorrect for the Lamprechts to say that we ordered
production of “certain classes of documents”—but those classes did not
include “[a]ll documents on which you intend to rely at trial” (their
Request No. 7). Rather, we ordered
that petitioners’ motion to compel production of documents
is denied, except that it is granted . . . [as to certain
documents requested in] Request No. 1 . . . . The Court
would expect to preclude respondent from relying at trial
upon any responsive document not produced by October 13,
2017.
That is, our order denied the Lamprechts’ motion to compel production
of documents as to Request No. 7 (the request with which they allege
the Commissioner failed to comply), and the preclusion (at trial) of which
we warned related to the responsive documents that we did compel.
Seeing no violation of our order, we will not preclude the Commissioner
from relying on the Forms 5345–D to show compliance with
section 6751(b)(1).
Since there is no genuine dispute, for purposes of Rule 121(b),
that the Commissioner has met his burden of production as to written
supervisory approval, we turn to the Lamprechts’ other two contentions.
B. “Qualified amended returns”
1. Definition and effect
A penalty-generating “substantial understatement” under
section 6662(d)(1)(A) is determined by reference to “the amount of the
tax imposed which is shown on the return”. § 6662(d)(2)(A)(ii). An
amount not “shown on the return” may yield a penalty. The Lamprechts
argue that we should look not to the amounts of tax shown (and not
shown) on their original returns but rather to the amounts of tax shown
on their amended returns for 2006 and 2007, which reported their entire
22
[*22] liabilities and reflected no understatements. The Lamprechts
contend that these are “qualified amended returns” within the meaning
of Treasury Regulation section 1.6664-2(c)(3) 18 and as such are the
proper basis for reckoning whether there was an underpayment to which
the section 6662 accuracy-related penalty may apply. Section 1.6664-
2(c)(2) provides: “The amount shown as the tax by the taxpayer on his
return includes an amount shown as additional tax on a qualified
amended return (as defined in paragraph (c)(3) of this section)”; and if
the Lamprechts’ amended returns are “qualified amended returns” as
they contend, then they indeed made no “understatement” (under
section 6662(b)(2)) that gave rise to an “underpayment” (under section
6662(a)).
The Commissioner contends that the amended returns were not
“qualified amended returns” because they were filed after the issuance
of the UBS John Doe summons. 19 He relies for this contention on
Treasury Regulation section 1.6664-2(c)(3)(i), which defines a “qualified
amended return” thus:
A qualified amended return is an amended return . . . filed
after the due date of the return for the taxable year
(determined with regard to extensions of time to file) and
before the earliest of–
....
(D)(1) The date on which the IRS serves a
summons described in section 7609(f) [i.e., a John
Doe summons] relating to the tax liability of a
person, group, or class that includes the taxpayer . . .
with respect to an activity for which the taxpayer
18Treasury Regulation section 1.6664-2(c) was a temporary regulation in 2006,
see Treas. Reg. § 1.6664-2T (2006), and was finalized on January 8, 2007, see T.D. 9309,
2007-1 C.B. 497. The temporary and final versions contain the same text and are
nearly identical in format. The final version is reproduced here.
19 The Lamprechts “[a]ssum[e] for purposes of this argument that the UBS
Summons was a valid and enforceable summons”, Doc. 163, para. 48; and they refer in
a footnote, id. n.2, to their “discussion of whether the UBS Summons was a valid and
enforceable summons” which is given in connection with the statute-of-limitations
issue. We follow their lead and discuss the validity of the summons in the statute-of-
limitations context. But if they mean to apply the invalidity argument to this
“qualified amended return” issue also, then we reject that argument in this context for
the reasons we discuss below in part II.C in the context of the statute of limitations.
23
[*23] claimed any tax benefit on the return directly or
indirectly.
(2) The rule in paragraph (c)(3)(i)(D)(1) of this
section applies to any return on which the taxpayer
claimed a direct or indirect tax benefit from the type
of activity that is the subject of the summons,
regardless of whether the summons seeks the
production of information for the taxable period
covered by such return . . . .
(Emphasis added.)
In this case the IRS served the UBS John Doe summons on
July 21, 2008, but the Lamprechts did not file their amended returns
until December 2010—long after service of the summons. Therefore, if
the UBS John Doe summons met the terms of subparagraph (3)(i)(D)(1),
then the Lamprechts’ amended returns fail to qualify.
2. “[C]lass that includes the taxpayer”
That UBS John Doe summons clearly “relat[ed] to the tax liability
of a person, group, or class that includes the taxpayer”: It sought
information regarding U.S. taxpayers with signature or other authority
over accounts maintained at UBS in Switzerland for whom UBS did not
have on file a Form W–9, “Request for Taxpayer Identification Number
and Certification”, and did not issue Forms 1099 for tax years 2002
through 2007. Consequently, the Lamprechts are clearly within the
“class” of persons identified in the UBS John Doe summons because:
(1) they were U.S. taxpayers; (2) Mr. Lamprecht maintained at UBS
personal and business accounts over which he had signature authority;
(3) unreported income was deposited into those accounts; and (4) the
Lamprechts do not allege that UBS either had a Form W–9 on file for
Mr. Lamprecht or issued to him a Form 1099 reporting income he
received from UBS.
3. “[C]laimed any tax benefit”
The Lamprechts argue, however, that they did not (in the words
of subparagraph (3)(i)(D)(2) of the regulation) “claim[] a direct or
indirect tax benefit from the type of activity that is the subject of the
[UBS John Doe] summons”. According to the Lamprechts, in order to
“claim[] a . . . tax benefit” one must make “some affirmative statement
on the tax return that the taxpayer is entitled to the tax benefit claimed
24
[*24] [or] there must be some misstatement on the return itself that
causes the understatement of tax liability.” The Lamprechts would have
us distinguish “between a person who omits items or gains from his tax
return and a person who claims a tax benefit on their tax return,” and
would have us hold that a taxpayer who omits substantial items of gross
income on his return does not thereby “claim[] a tax benefit”.
In our view this argument for a narrow construction triggered
only by an “affirmative statement” or “misstatement” is not supported
by the text of the regulation nor by the caselaw and is not actually borne
out in the facts of the Lamprechts’ returns.
a. The text of the regulation
Treasury Regulation section 1.6664-2(c)(3)(i)(D)(1), as quoted
above, establishes that, in order to be considered a “qualified amended
return”, the amended return must be filed before “[t]he date on which
the IRS serves a [John Doe] summons . . . relating to the tax liability of
a . . . class that includes the taxpayer . . . with respect to an activity for
which the taxpayer claimed any tax benefit on the return directly or
indirectly.” Example 5 of Treasury Regulation section 1.6664-2(c)(5)
shows the application of that principle and illustrates our issue. In
Example 5, the IRS serves a section 7609(f) John Doe summons on a
credit card company requesting the identities of, and information
concerning, U.S. taxpayers who had signature authority over credit
cards issued by, through, or on behalf of certain offshore financial
institutions. The credit card company provides information about the
taxpayer in response to the John Doe summons. The taxpayer files an
amended return showing increased tax liability before the IRS contacts
him concerning an examination of his income tax return, but after the
John Doe summons had been served on the credit card company.
Example 5 concludes that, “[u]nder paragraph (c)(3)(i)(D) of this section,
the amended return is not a qualified amended return because it was
not filed before the John Doe summons was served on [the credit card
company].” In Example 5 the only difference described as having been
reported on the amended return is “an increase in . . . Federal income
tax liability”, so that the only “tax benefit . . . claimed” on the original
return was (by implication) a lower income tax liability.
Here, the UBS John Doe summons sought information about U.S.
taxpayers who were underreporting gross income using foreign entities
and offshore UBS accounts. The Lamprechts understated their gross
income for 2006 and 2007 by omitting all foreign source income from
25
[*25] their tax returns, and accordingly they claimed a tax benefit,
either directly by maintaining implicitly that they were entitled to the
section 911 foreign earned income exclusion (discussed below), or
indirectly by understating their tax liabilities and receiving tax savings
through underpayments. Because the Lamprechts were members of the
class of persons targeted by the UBS John Doe summons, claimed a tax
benefit either directly or indirectly with respect to the activity identified
in the UBS John Doe summons, and did not file their amended returns
before the UBS John Doe summons was served, their amended returns
for 2006 and 2007 are not “qualified amended returns”; and therefore,
the reporting on those amended returns of the originally omitted income
and the resulting additional tax does not result in that additional tax
being included in the Lamprechts’ “amount shown as the tax” on their
returns, for purposes of Treasury Regulation section 1.6664-2(c)(2) and
section 6662 of the Code. Accordingly, the Lamprechts substantially
understated their income tax for 2006 and 2007 and are liable for section
6662 accuracy-related penalties. See § 6662(a), (d).
U.S. taxpayers are subject to tax on world-wide income. See Huff
v. Commissioner, 135 T.C. 222, 230 (2010) (quoting § 61) (“Gross income
for the purpose of calculating taxable income is defined as ‘all income
from whatever source derived.’”). Under section 7701(b)(1)(A)(i), a
lawful permanent resident (such as the Lamprechts were in the years
at issue) “shall be treated as a resident of the United States.” See also
Cook v. Tait, 265 U.S. 47, 56 (1924). The 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.’”
There is such a thing as an “[e]xclusion from gross income”,
provided in section 911, which excludes “foreign earned income”; but this
exclusion—this tax benefit—is available only for a “qualified
individual”, § 911(a), which is defined as someone whose tax home is in
a foreign country, see § 911(d)(1), and Mr. Lamprecht was not such an
individual in 2006 and 2007. One could say that the Lamprechts’
omission of their foreign source income was an invalid claim of the
foreign earned income exclusion under section 911—which amounts to
26
[*26] claiming a tax benefit whether affirmatively stated on the return
or not. To properly claim such an exclusion, one would have to file with
his income tax return a Form 2555, “Foreign Earned Income”, which the
Lamprechts did not file. By their reckoning, apparently the taxpayer
who erroneously excludes the earned income and files the Form 2555
thereby makes a damning “affirmative statement” that constitutes the
claiming of a benefit (so he is ineligible thereafter to fix the error on a
“qualified amended return”); but the person who likewise erroneously
excludes the earned income but obscures his omission by not reporting
it on Form 2555 is deemed eligible to fix the error on a “qualified
amended return” and thereby to avoid the penalty otherwise due on his
understatement. If this were the rule, it would create a surprising and
perverse incentive to hide one’s erroneous exclusions. We do not see that
“affirmative statement” rule in the text of the regulation, which looks
only to see whether the taxpayer “claimed any tax benefit on the
[original] return directly or indirectly”. Treas. Reg. § 1.6664-
2(c)(3)(i)(D)(1) (emphasis added).
b. The caselaw
As support for their argument that omitting items from a tax
return is not the same thing as “claim[ing] any tax benefit,” the
Lamprechts cite Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), and
United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012). In
Colony the Supreme Court held that understating gross income on an
income tax return by misstating costs items or basis is not an “omi[ssion]
from gross income [of] an amount properly includible therein” for the
purposes of extending the period of limitations under section 275(c) of
the 1939 Code (later reenacted as section 6501(e)(1)(A) in the
1954 Code). Colony, Inc. v. Commissioner, 357 U.S. at 36–37. The
Supreme Court later extended the holding of Colony to
section 6501(e)(1)(A) in Home Concrete & Supply LLC, 566 U.S. at 490.
These cases both construe an “omi[ssion] from gross income” for the
purposes of extending the period of limitations under section
6501(e)(1)(A); they do not address (even tangentially) the question
whether a taxpayer’s omissions from gross income constitute the
“claim[ing of] any tax benefit on the return directly or indirectly” for the
purposes of Treasury Regulation section 1.6664-2(c)(3)(i)(D). The
Lamprechts cite these cases for the proposition that “an omission from
gross income [is] not the same as an overstatement of basis,” and with
that we agree. Not every error in tax reporting is the same.
27
[*27] However, section 1.6664-2(c)(3)(i)(D) looks for a nonspecific “tax
benefit”. The holdings of Colony and Home Concrete that a
misstatement of basis is not the same thing as an omission of income do
not shed any light on how we should construe “claimed any tax benefit”;
and we conclude that the broad reach obviously intended by the
regulation—i.e., “any tax benefit” and “directly or indirectly”—tends
against a narrow construction of “claimed any tax benefit”.
Furthermore, in imputing an officer’s tax fraud to a corporation, the
Court of Appeals for the Tenth Circuit in Ruidoso Racing Ass’n, Inc. v.
Commissioner, 476 F.2d 502, 506 (10th Cir. 1973), aff’g in part,
remanding in part T.C. Memo. 1971-194, explained that “[a] tax benefit
[to the corporation] could arise in two ways, understatement of income
and overstatement of business expense deductions”, in concluding that
a corporate officer’s “failure to report bar income reduced total income
and, hence, produced a tax benefit for the corporation.” Ruidoso did not
involve a “qualified amended return” analysis, but it illustrates in its
different context the potential breadth of a “tax benefit”. We are
satisfied that an understatement of income by omission claims a tax
benefit within the meaning of Treasury Regulation section 1.6664-
2(c)(3)(i)(D).
c. Affirmative statements on the Lamprechts’
amended returns
The Lamprechts’ position about the meaning of “claim[ing] any
tax benefit” presumes a clean distinction between a mere omission of
income and an affirmative claim of a tax benefit. The actual facts of the
Lamprechts’ returns, however, do not bear out this distinction. As is
often the case, the omission of income from the Lamprechts’ original
returns affected other reporting on the returns and resulted in their
originally claiming—affirmatively, one must say—deductions in
amounts to which they were not entitled (and which they later had to
reduce on their amended returns).
As is shown on the table supra p. 9, the Lamprechts elected under
section 63(e) to itemize deductions on their original and amended
returns for both 2006 and 2007. The amount of itemized deductions that
an individual may claim will be limited by section 68(a) if his “adjusted
gross income [“AGI”] exceeds the applicable amount”. In 2006 that
28
[*28] applicable amount was $150,500; in 2007 it was $156,400. 20
Where AGI exceeded those amounts, the greater one’s AGI, the greater
was the limitation, resulting in increasingly reduced itemized
deductions. On their original returns the Lamprechts incorrectly
reported AGI of $1,073,652 for 2006 and $1,705,172 for 2007; but on
their amended returns they correctly reported much larger AGI of
$2,816,833 for 2006 and $6,930,169 for 2007. Consequently, the
itemized deductions to which they were entitled were overstated on the
original returns for 2006 as $187,338 and for 2007 as $202,497, and they
were corrected on the amended returns to $152,481 for 2006 and
$128,460 for 2007. That is, on their original returns they claimed
excessive itemized deductions of $34,857 for 2006 and $74,037 for
2007—totaling $108,894 for the two years.
In sum, because the Lamprechts incorrectly failed to report on
their original returns for 2006 and 2007 almost $7 million of their
foreign income, those returns also claimed (one can say “affirmatively
claimed”) itemized deductions totaling over $100,000 to which the
Lamprechts were not entitled. If, as the Lamprechts argue, we must
look for “some affirmative statement on the [original] tax return that
the taxpayer is entitled to the tax benefit claimed”, we find such an
“affirmative statement” on the Schedules A to their 2006 and 2007
returns. The Lamprechts’ subsequent corrections on the amended
returns were their admission that, because of the actual magnitude of
their originally unreported income, they were not entitled to those
greater amounts of deductions affirmatively claimed on the original
returns. Therefore, even under the Lamprechts’ narrower construction
of Treasury Regulation section 1.6664-2(c)(3)(i)(D)(2), their original
returns “claimed a direct or indirect tax benefit from the type of activity
that is the subject of the [UBS John Doe] summons”. As a result, the
amended returns—not filed until after the John Doe summons—were
not “qualified amended returns”; and we therefore look not to the
amended returns but to the erroneous original returns to determine
whether there were substantial understatements of “the amount[s] of
tax imposed which [were] shown on the return[s]”. We hold that there
was.
20 See §§ 1(f)(3), 68(b)(2); IRS Pub. 501, “Exemptions, Standard Deduction, and
Filing Information” at 1 (2006) (“Some of your itemized deductions may be limited if
your adjusted gross income is more than $150,500”); IRS Pub. 501, “Exemptions,
Standard Deduction, and Filing Information” at 1 (2007) (“$156,400”).
29
[*29] C. The period of limitations and the UBS John Doe summons
1. The ordinary running of the six-year period of
limitations
The returns at issue here were deemed timely filed in April 2007
and April 2008, and the parties agree that the six-year limitations
period imposed by section 6501(e)(1)(A) applies. However, the NOD was
not mailed until January 2015—i.e., more than six years after the filing
of both of those returns. 21 The Lamprechts contend that assessment of
the section 6662 accuracy-related penalties against them is barred by
the statute of limitations for assessment under section 6501. The
Commissioner contends that, under section 7609(e)(2), the running of
the six-year limitations period was suspended by the service of the UBS
John Doe summons, 22 and the Lamprechts argue that it was not.
2. The parties’ positions as to the UBS John Doe
summons under section 7609(e)
Because (as we explained above) the Lamprechts were members
of the class of taxpayers identified in the UBS John Doe summons who
participated in activities that were the subject of the summons, the
Commissioner contends that, pursuant to 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.
21 For 2006 (for which the return was deemed filed in April 2007) the six-year
period would end in April 2013, which is 21 months short of the January 2015 issuance
of the NOD. For 2007 (for which the return was deemed filed in April 2008) the six-
year period would end in April 2014, which is nine months short of the January 2015
issuance of the NOD. The Commissioner’s position requires that he show a suspension
or extension of the period of limitations of no less than 21 months.
22 The Commissioner has in fact three rejoinders to the Lamprechts’ statute-
of-limitations contention, two of which we do not address here: (1) In his motion for
summary judgment, the Commissioner asserts that the Lamprechts’ failure to file a
Form 5741, “Information Return of U.S. Persons with Respect to Certain Foreign
Corporations”, for an entity called Paro Inc. extended the period of limitations under
section 6501(c)(8). Because we hold for the Commissioner on the section 7609(e)(2)
issue, we need not reach section 6501(c)(8). (2) The Commissioner contends—but does
not advance in his motion for summary judgment—that the period of limitations for
assessment is open for the Lamprechts’ 2006 and 2007 years under section 6501(c)(1)
because of fraudulent positions taken on their original returns. The Commissioner
reserves this argument for trial should his motion for summary judgment be denied.
The Lamprechts’ cross-motion asks us to hold that fraud is absent and does not extend
the period; but since we hold for the Commissioner on other grounds, we need not reach
this fraud issue.
30
[*30] The parties agree that the 6-month anniversary of service of the
UBS John Doe summons is January 21, 2009, but they disagree as to
the date of the final resolution of the summons. The Commissioner
asserts that the UBS John Doe summons was not resolved until the IRS
formally withdrew the summons almost 22 months later on November
15, 2010. By that reckoning, 22 months is added to the limitations
period, and the NOD is rendered timely as to both 2006 and 2007.
The Lamprechts argue, first, that the UBS John Doe summons is
invalid and unenforceable because it was issued for an improper purpose
and therefore cannot operate to extend the period for assessment under
section 7609(e). The Lamprechts also argue that final resolution of the
UBS John Doe summons occurred not in November 2010 (when the IRS
withdrew it) but rather on August 19, 2009, when the district court
entered its order dismissing the summons enforcement case on the basis
of the stipulation of dismissal filed by DOJ. By that reckoning, the
service of the summons could have added only about 7 months to the
limitations period, a suspension that would not render the NOD timely
for either 2006 (which needed 21 months) or 2007 (which needed 9
months). We now consider each of the Lamprechts’ two contentions.
3. Validity of the summons
The Lamprechts contend that the John Doe summons did not toll,
or suspend, the period of limitations because the summons lacked any
valid purpose. Relying on the declaration of the “head of legal and
international affairs of the Swiss Federal Banking Commission, a senior
position in the Swiss Federal government”, the Lamprechts assert that
“representatives of the Internal Revenue Service” stated that “the UBS
Summons would be issued to interrupt the running of the statute of
limitation” and admitted “that no enforcement activity for the UBS
Summons would take place as long as discussions were underway
between the United States and Switzerland relating to obtaining
documents from UBS.” The Lamprechts observe that the documents
that UBS did eventually produce were the result not of the summons
but of a simultaneous request by the U.S. government pursuant to
the tax treaty between the United States and Switzerland,
and not unilateral measures such as the UBS
Summons. . . . The IRS stated, however, that they would
not withdraw the UBS Summons because the withdrawal
would undo the extension of the statute of limitations that
it wanted to achieve by issuing the UBS Summons as a
31
[*31] John Doe Summons. They also wanted to use the UBS
Summons as leverage against Switzerland to ensure that
UBS met its obligations under the UBS Settlement
Agreement.
According to the Lamprechts, issuing a John Doe summons solely
to extend the period of limitations for assessment is an improper
purpose which undermines its validity and vitiates any effect it might
have had on the period of limitations. The Lamprechts cite United
States v. Powell, 379 U.S. 48, 58 (1964), for the proposition that an
improper purpose is “to harass the taxpayer or to put pressure on him
to settle a collateral dispute,[23] or for any other purpose reflecting on
the good faith of the particular investigation.”
However, the Supreme Court’s opinion in Powell addressed a
validity challenge by the summoned party in the district court summons
enforcement proceeding, not by a class member in his own later tax case.
The Lamprechts cite no authority for their doubtful propositions
(1) that, after a district court has approved the validity of a John Doe
summons for purposes of enforcement against a record-holder (here,
UBS), the validity may later be challenged by a taxpayer in the John
Doe class (here, the Lamprechts) in his own collateral proceeding, 24 nor
(2) that a consequence of a successful challenge of invalidity by a
member of the John Doe class would be that the summons would have
no effect on the period of limitations. In the instant case, both UBS and
the Swiss government were alert and well aware of the district court
suit for enforcement of the summons, and there is no reason to suppose
that they overlooked a colorable challenge to the validity of the summons
at the time and that we therefore ought to remedy their oversight by
entertaining such a challenge from a member of the John Doe class. But
if we were to entertain that challenge here, we think that the
Lamprechts have not made a showing to support the premise of their
23 Because the summons at issue was a John Doe summons, it could not have
been issued with an intention to harass in particular the Lamprechts (about whom the
IRS was apparently ignorant) or to pressure them to settle any collateral dispute.
Rather, the Lamprechts contend that the improper purpose in this instance was the
extension of the period of limitations.
24 Cf. Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 321 (1985)
(“[Section] 7609(f) provides no opportunity for the unnamed taxpayers to assert any
‘personal defenses,’ such as attorney-client or Fifth Amendment privileges that might
be asserted under §[] 7609(a) and (b) . . . . What § 7609(f) does is to provide some
guarantee that the information that the IRS seeks through a summons is relevant to
a legitimate investigation, albeit that of an unknown taxpayer”).
32
[*32] challenge: They have not shown that the IRS’s sole purpose for
the UBS John Doe summons was extending the period of limitations for
assessment, nor that doing so was an improper purpose.
The Lamprechts’ own characterization of the IRS’s purpose was
two-fold: The IRS “wanted to achieve . . . the extension of the statute of
limitations . . . by issuing the UBS Summons as a John Doe Summons.
They [i.e., the IRS] also wanted to use the UBS Summons as leverage
against Switzerland to ensure that UBS met its obligations under the
UBS Settlement Agreement.” (Emphasis added.) The IRS had two
potential means 25 to obtain information from UBS—i.e., the John Doe
summons and the U.S.-Switzerland Agreement provisions—and it
employed both. The extension of the period of limitations was one of the
congressionally intended effects of the John Doe summons, and the IRS
employed the John Doe summons in order to take advantage of that
consequence, lest its investigation be rendered moot before it could be
completed. But the IRS also (by the Lamprechts’ account) used the
pendency of the summons as leverage to prompt Switzerland to
cooperate with the production of information under the U.S.-
Switzerland Agreement. The fact that the information was eventually
produced pursuant to the U.S.-Switzerland Agreement is no indication
that the John Doe summons was not helpful to that production and is
no indication that the summons was not issued in good faith.
The 2009 OVDP and the district court’s holding that the UBS
John Doe summons satisfied the requirement of section 7609(f) indicate
the good faith nature of the IRS’s investigation into U.S. taxpayers with
unreported foreign income. Furthermore, the decision of the parties to
the enforcement suit to leave the UBS John Doe summons open
indicates that suspending the statutory period for assessment was not
the sole purpose of the summons; rather, the IRS was evidently working
to obtain information (and to maintain its ability to do so). In addition,
leaving the UBS John Doe summons open was also obviously meant to
assure compliance with the request for information specified in the U.S.-
Switzerland Agreement, as is evidenced by the IRS’s eventual
withdrawal of the summons after the information was obtained from
25 Where the law grants two means, it is not inherently improper for a party to
employ both means. For example, a taxpayer may sometimes properly pursue
information from the IRS both through civil discovery in litigation and through a
request under “FOIA”—the Freedom of Information Act, 5 U.S.C. § 552. Under FOIA
he may avoid objections of irrelevance that might hinder discovery requests, but using
FOIA to avoid a relevance dispute is not improper.
33
[*33] UBS through the agreed channels. We see no impropriety in the
UBS John Doe summons.
We hold that the six-year statute of limitations for assessment
under section 6501(e)(1)(A) was suspended by the operation of
section 7609(e) because of the issuance of the UBS John Doe summons.
4. Final resolution
Treasury Regulation section 301.7609-5(e)(3) 26 provides:
For purposes of section 7609(e)(2)(B), final resolution with
respect to a summoned party's response to a third-party
summons occurs 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 contend that final resolution of the UBS John
Doe summons occurred on August 19, 2009, when the district court
ordered dismissal of the summons enforcement suit following entry of
the stipulation of dismissal. (They suggest no alternative date.)
However, the settlement agreement between the parties to the
enforcement suit specified that dismissal of the suit would “in and of
itself, have no effect on the UBS [John Doe] Summons or its
enforceability” and contemplated compliance with the summons after
dismissal of the suit through the method agreed to in the US-
Switzerland Agreement. Because the UBS John Doe summons was not
yet fully complied with at the time the enforcement suit was dismissed,
that dismissal of the suit was not the final resolution of the summons.
The Commissioner contends that final resolution of the UBS John
Doe summons occurred when the IRS formally withdrew the summons
on November 15, 2010, after receiving the requested records from UBS
through the means agreed to in the U.S.-Switzerland Agreement. The
Lamprechts do 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”. Accordingly, on the record
before us, we hold that final resolution occurred upon withdrawal of the
26 Applicable as of April 30, 2008. Treas. Reg. § 301.7609-5(f).
34
[*34] summons on November 15, 2010. Accordingly, the periods of
limitation for assessment of tax for 2006 and 2007 were suspended by
section 7609(e) from January 21, 2009, to November 15, 2010 (i.e., for
664 days), and thereafter the periods of limitation for assessment of tax
(as suspended) were set to expire on February 7, 2015 (for 2006), and
February 7, 2016 (for 2007). Before those expiration dates, the IRS
mailed the NOD to the Lamprechts on January 9, 2015, within the
statutory period for assessment, and therefore assessment of the
section 6662 accuracy-related penalties for 2006 and 2007 is not barred
by the statute of limitations.
III. Conclusion
Finding no genuine dispute of material fact, we will grant the
Commissioner’s motion for summary judgment, will deny the
Lamprechts’ motion for summary judgment, and will enter decision for
the Commissioner as a matter of law.
To reflect the foregoing,
An appropriate order and decision will be entered.