Six-year limitation period does not apply to years before Sec. 6038D’s enactment

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that the extended six-year period of limitation under Sec. 6501(e)(1)(A)(ii) applies only to omissions from gross income of amounts attributable to assets that are reportable under Sec. 6038D. Thus, the extended limitation period applies only to tax years in which the Sec. 6038D reporting requirement is effective.

Background

Mehrdad Rafizadeh timely filed his federal income tax returns for 2006, 2007, 2008, and 2009 but did not report on the returns income earned on a foreign account he held. The IRS found out about the account and the income through a John Doe summons. On Nov. 16, 2010, that John Doe summons was resolved. On Dec. 8, 2014, the IRS got around to issuing a notice of deficiency that determined deficiencies and accuracy-related penalties on Rafizadeh's underpayments due to the income from the foreign account for 2006, 2007, 2008, and 2009.

Under Sec. 6501, the IRS generally must assess tax within three years of the date a tax return was due, without extensions, or the date the return was actually filed, whichever is later. However, there are certain exceptions to this rule. One exception to the rule is that the limitation period is suspended beginning six months after the service of a John Doe summons and ending with the final resolution of that summons.

Under another exception in Sec. 6501(e)(1)(A)(ii), the IRS may assess tax within six years after a return is filed "[i]f the taxpayer omits from gross income an amount properly includible therein and . . . such amount (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D . . . , and (II) is in excess of $5,000." Sec. 6501(e)(1)(A)(ii) was added to the Code by the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act), P.L. 111-147. Under Section 513(d)(2) of the act, the provision applies to returns filed after March 18, 2010, and also to "returns filed on or before . . . [March 18, 2010] if the period specified in section 6501 . . . for assessment of such taxes has not expired as of such date."

Sec. 6038D requires taxpayers to report additional information relating to "specified foreign financial assets." The provision was also added to the Code by the HIRE Act, but under Section 511(c) of the act, it is effective for tax years beginning after March 18, 2010.

Rafizadeh challenged the IRS's determination in Tax Court. In court, the IRS conceded that Sec. 6501(e)(1)(A)(ii) did not apply to his 2009 tax year because the amount omitted from income was less than $5,000, but continued to argue that Sec. 6501(e)(1)(A)(ii) applied to the years 2006 through 2008.

Rafizadeh conceded that his foreign account is a specified foreign financial asset subject to Sec. 6038D and that the limitation periods for the years 2006 through 2008 were open on March 10, 2010. However, he further argued that the effective date of Sec. 6038D precluded application of that six-year period of limitation. Specifically, he claimed that the defining phrase in Sec. 6501(e)(1)(A)(ii) ("assets with respect to which information is required to be reported under section 6038D") also limits application of the six-year limitation period to assets for which there was a reporting requirement under Sec. 6038D (or there would be a requirement but for specified exceptions) at the time the income was omitted.

The Tax Court's decision

The Tax Court held that the six-year limitation period under Sec. 6501(e)(1)(A)(ii) did not apply to Rafizadeh's 2006 through 2008 tax years. The court found that under a plain-language interpretation of the statute, it would only apply to tax years in which the reporting requirement of Sec. 6038D was effective.

In its opinion, the Tax Court first explained that under Supreme Court precedent, in determining the meaning of a statutory provision, courts should look to the language of the provision, giving the words used their ordinary meaning. It further stated that it is a well-accepted canon of construction that a statute should be interpreted in such a way that no part of the statute should be superfluous, void, or insignificant.

Applying these principles, the Tax Court found that it must give effect to all of the words in the key phrase of the statute, "assets with respect to which information is required to be reported under section 6038D." While the effective date of Sec. 6038D was not imported into Sec. 6501(e)(1)(A)(ii) by the cross-reference in the statute to Sec. 6038D, the court concluded that the most natural reading of the phrase is that the six-year statute of limitation applies only when there is a Sec. 6038D reporting requirement (or would be barring an exception that is to be disregarded). It agreed with Rafizadeh that if Congress had simply meant to incorporate the definition in Sec. 6038D of the assets to be covered, it could have "used other more straightforward wording, such as the defined term itself."

The IRS argued that the incorporation of the Sec. 6038D reporting requirement into Sec. 6501(c)(8) showed that Congress did not intend to make the separate six-year statute of limitation in Sec. 6501(e)(1)(A)(ii) dependent on a taxpayer's failure to satisfy Sec. 6038D. Sec. 6501(c)(8) provides that in the case of failures to comply with certain information-reporting provisions, the limitation period does not expire until three years after the required information is provided, and the HIRE Act added the Sec. 6038D reporting to the other information reporting sections covered by Sec. 6501(c)(8).

The court found that the addition of Sec. 6038D to Sec. 6501(c)(8) did not undermine its interpretation of Sec. 6501(e)(1)(A)(ii). It noted that the trigger in Sec. 6501(c)(8) is the failure to report, that failure results in a different limitation period, and that the trigger for the six-year limitation period in Sec. 6501(e)(1)(A)(ii) is the omission of gross income from assets that are subject to the Sec. 6038D reporting requirement (or would be but for an exception thereto), and it extends the period to six years. According to the court, "the contrast between the wording in the two provisions does not tell us any more about how to read the latter than the words of the statute."

Finally, although the effective date in Section 513(d)(2) of the HIRE Act for Sec. 6501(e)(1)(A)(ii) did not apply for purposes of Sec. 6038D, the Tax Court found that this did not render the effective date meaningless. The court determined it was not meaningless because the effective date still applied to two other statutory changes in Section 513 of the HIRE Act, the expansion of Sec. 6501(c)(8)(A) to all items on a tax return and the addition to Sec. 6501(c)(8)(A) of reporting relating to passive foreign investment companies.

Reflections

In an earlier case involving straddle transactions, Leslie, 146 F.3d 643 (9th Cir. 1998), the taxpayers made the same basic argument as Rafizadeh, arguing that a cross-reference in Sec. 6621(c)(3)(A)(iii) to "any straddle (as defined in section 1092(c))" referred only to straddles entered into after the effective date of Sec. 1092. The Ninth Circuit disagreed, holding that the language in this cross-reference referred only to the definition of a straddle in Sec. 1092, and did not import the effective date of Sec. 1092 as well.

Rafizadeh, 150 T.C. No. 1 (2018)

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