Amendment to Sec. 6501 not retroactive

Sec. 6501(l)(4), which was added to the Code by the Consolidated Appropriations Act, 2023, P.L. 117-328, does not apply retroactively and applies to tax returns filed on or after Dec. 29, 2022, the date of the enactment of the act.

Background

Clair Couturier was employed as a corporate executive until at least 2004 and participated in multiple deferred compensation arrangements. One of these was an employee stock ownership plan (ESOP) in which he owned 4,586 shares. In 2004, as part of a corporate reorganization, Couturier was offered a buyout from his company for $26 million in exchange for his ESOP stock and for his relinquishment of interests he held in certain nonqualified plans. The payment was made in a $12 million cash payment and a $14 million promissory note, which was paid in full in 2005, to his individual retirement account (IRA).

On April 11, 2005, Couturier filed his federal income tax return for 2004, on which he characterized the $26 million payment as a nontaxable rollover contribution. He also did not put anything on line 59, “Additional tax on IRAs, other qualified retirement plans, etc.” He also left that line blank on the returns he filed for 2005–2008. Additionally, he did not include a completed Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with any of these returns.

The IRS examined Couturier’s returns and found that most of the $26 million received by his IRA was attributable to his relinquishment of rights under the non-ESOP deferred compensation plans, which were not eligible for tax-free rollover. As a result, the IRS concluded that approximately $25 million of the $26 million he had rolled over to his IRA was a Sec. 4973 excess contribution. Accordingly, the IRS issued Couturier two notices of deficiency that determined, for tax years 2004–2008 and 2009–2014, respectively, Sec. 4793 excise tax deficiencies in an aggregate amount of $8,476,705, plus associated additions to tax and penalties.

Couturier petitioned the Tax Court to challenge the IRS’s determination. In 2017, he moved for summary judgment, arguing that the notices were untimely because they were issued after the expiration of the Sec. 6501(a) three-year limitation period or the Sec. 6501(e)(3) six-year limitation period. The IRS, in a counter-motion, took the position it could assess the excise taxes “at any time” because Couturier had failed to report his excess contributions on Form 5329, which is a tax “return” for Sec. 6011 purposes. The Tax Court denied both motions, concluding that the limitation period issue was “intertwined with the merits,” i.e., with the question of whether Couturier had made excess contributions reportable on Form 5329.

After filing a second motion for summary judgment, which the Tax Court also denied (Couturier, T.C. Memo. 2022-69), Couturier filed a third motion for partial summary judgment. In it, he requested that the court rule that the assessment limitation period imposed by the newly enacted Sec. 6501(l)(4) rendered the notice of deficiency for tax years 2004–2008 untimely. However, he did not challenge on statute-of-limitation grounds the excise tax deficiencies determined for 2009–2014.

The Tax Court’s decision

The Tax Court held that Sec. 6501(l)(4) applies prospectively only to tax returns filed on or after Dec. 29, 2022, and thus it did not apply in Couturier’s case. Therefore, the statute did not prevent the IRS’s assessment of the Sec. 4973 excise tax for Couturier’s 2004–2008 tax years.

Sec. 4973(a) imposes “for each taxable year a tax in an amount equal to 6 percent of the amount of the excess contributions to such individual’s accounts.” “Excess contributions,” as defined in Sec. 4973(b)(1), are the excess of the amount contributed to an IRA for the tax year (other than to a Roth IRA or as a rollover contribution) over the amount allowable as a deduction under Sec. 219 for such contributions.

The IRS generally is required under Sec. 6501(a) to assess tax “within 3 years after the return was filed,” subject to various exceptions. If a taxpayer fails to file a return, the tax may be assessed at any time (Sec. 6501(c)(3)).

Prior to 2022, the Tax Court, interpreting the Code as it existed at that time, held that a taxpayer’s failure to file Form 5329 (or provide the required information elsewhere on Form 1040, U.S. Individual Tax Return) caused the limitation period for assessment of Sec. 4973 excise tax to remain open indefinitely. However, this changed in 2022 when Congress amended Sec. 6501(l), which sets forth special period-of-limitation rules for certain excise taxes. Specifically, in 2022, Congress amended Sec. 6501(l) in Section 313(a) of the act, by adding new Sec. 6501(l)(4). Under the amended statute, the filing of an income tax return on Form 1040, even if no Form 5329 is filed, will start the running of the statute of limitation. However, the act establishes a six-year, rather than a three-year, limitation period when no Form 5329 is filed. 

Section 313(b) of the act provides the effective date for Sec. 6501(l)(4). It specifies that the amendment “shall take effect on the date of the enactment of this Act,” i.e., on Dec. 29, 2022. The question presented by Couturier, which the Tax Court stated was one of first impression, was “whether Congress manifested an intent that section 6501(l)(4) apply retroactively, i.e., that it apply ‘to all pending disputes between taxpayers and the IRS as of the date of enactment.’”

For a framework for its analysis of that question, the Tax Court turned to the Supreme Court case Landgraf v. USI Film Products, 511 U.S. 244 (1994), in which the Court clarified the steps a court should take to ascertain whether retroactive application of a statute is appropriate. The first step is determining “whether the statute contains an express statement as to its temporal reach.” If Congress, in the new statute, has clearly provided that it applies retroactively, a court must give effect to this intent.

The Tax Court pointed out that because the amendment by Section 313(b) of the act provides that Sec. 6501(l)(4) “shall take effect on the date of the enactment of this Act,” i.e., on Dec. 29, 2022, and because this amendment specifies the consequences of filing tax returns, it is most naturally read to apply in the case of returns filed on or after the effective date. The court further pointed out that in the numerous times Congress had amended Sec. 6501, it had explicitly stated in the effective-date provision when the amendment applied to returns filed before the date of enactment.

While Couturier claimed Congress intended that Sec. 6501(l)(4) apply to all Sec. 4973 disputes with the IRS that were pending as of the date of enactment, the Tax Court found this argument was belied by the fact that, in the effective-date provisions for previous amendments to Sec. 6501, Congress had specifically referred to “pending cases.” Because Congress did not use wording referring to pending cases in the statute’s effective-date provision, the court found that the statutory text did not support Couturier’s characterization of congressional intent.

Couturier also argued that it was significant that Section 313(b) of the act lacks explicit wording that “delimits its temporal scope.” He contrasted it with other effective-date provisions in the act that specify the years to which certain amendments will apply.

Absent text in the act specifying that Sec. 6501(l)(4) applies to future years or future tax returns, Couturier maintained that Congress must have intended Sec. 6501(l)(4) to apply with respect to returns filed for prior years as well.

The Tax Court found there was no logical basis for this argument. Couturier cited provisions in which the amendment in question applied prospectively to tax or calendar years beginning after the effective date of the act. As the court observed, many taxpayers have fiscal years that differ from the calendar year for tax purposes, and to avoid ambiguity, Congress specified in these provisions precisely how prospective application of each amendment would work. According to the court, Congress did not need to do this in the act’s effective-date provision because the amendment that it governs, Sec. 6501(l)(4), applies to tax returns, not tax years.

The Tax Court found that Couturier also appeared to argue that the statutory amendment should be interpreted as effective not for tax returns filed on or after Dec. 29, 2022, but for assessments made on or after that date. As a rule, the court noted, the IRS can make no “assessment” until a tax controversy has been finally resolved. Thus, Couturier further contended that this led again to the conclusion that Congress intended Sec. 6501(l)(4) to apply to “all disputes with the IRS … that were pending as of the date of enactment.”

The Tax Court acknowledged that Sec. 6501 imposes assessment limitation periods but stated that here the concern was Sec. 6501(l)(4)’s effective date in particular, not the assessment limitation periods. Sec. 6501(l)(4), the court observed, says nothing about “assessment” and does not include that word. Rather, it provides that, for purposes of Sec. 4973, “the return referred to in this section [i.e., in Sec. 6501] shall include the income tax return filed by the person” allegedly subject to excise tax. This amendment, the court stated, effected a substantive change in the law by providing that a different type of tax return, Form 1040, regardless of its content, would trigger the running of a period of limitation for assessment of the Sec. 4973 excise tax.

Thus, the Tax Court found Sec. 6501(l)(4) specified the consequences of filing tax returns. Because Congress provided that this amendment “shall take effect on the date of the enactment,” the court concluded that the amendment is logically read to apply to tax returns filed on or after that date.

Although the Tax Court held that Sec. 6501(l)(4) did not apply, as it was ruling on a motion for summary judgment, it considered whether, interpreting the statute in the best light for Couturier (i.e., if the statute was ambiguous), it would have a retroactive effect.

A statute has retroactive effect if it “would impair rights a party possessed when he acted” (Landgraf, 511 U.S. at 280). If it is determined that a statute would have retroactive effect, the court must consider whether “clear congressional intent” militates in favor of retroactive application (id.). A presumption applies that Congress did not intend for a statute affecting substantive rights to operate retroactively, and giving retroactive effect to a statutory amendment adversely affecting a party’s substantive rights would contravene principles of fair notice, reasonable reliance, and settled expectations (id. at 265–73). Thus, congressional enactments will not be considered to have retroactive effect unless their language requires that result (id. at 272).

Under the specific facts of Couturier’s case, if Sec. 6501(l)(4) were treated as prospective, the IRS’s notice of deficiency would be timely. However, the Tax Court found that the text of the amendment “evinces no indication, much less a clear manifestation of congressional intent, that the amendment is to apply retroactively,” noting that the Supreme Court had stated, “A statement that a statute will become effective on a certain date does not even arguably suggest that it has any application to conduct that occurred at an earlier date” (Landgraf, 511 U.S. at 257).

On the other hand, if the statute were treated as retroactive, the notice would be untimely, imposing upon the IRS a six-year limitation period that did not exist when the notice of deficiency was issued. The IRS, the Tax Court found, “could not possibly have been aware, during an examination that concluded in 2016, that its right to assess tax would be restricted by a six-year period of limitations enacted in 2022.” Thus, applying Sec. 6501(l)(4) as Couturier urged the court to do, would again go against the principles of fair notice, reasonable reliance, and settled expectations.

The Tax Court therefore concluded that the most natural reading of the act’s effective-date provision is that Sec. 6501(l)(4) applies purely prospectively, i.e., with respect to returns filed on or after the date of enactment. The court found no evidence in the act or its legislative history that Congress intended Sec. 6501(l)(4) to apply retroactively and that the text of Section 313(b) of the act does not “remotely suggest” a retroactivity requirement. Further, the court found that “even if section 313(b) were thought ambiguous, the ‘presumption against retroactivity’ would attach because section 6501(l)(4) would operate to alter the IRS’s substantive right to assess tax by imposing upon it a six-year period of limitations that did not previously exist.” The court thus held that Sec. 6501(l)(4) applies prospectively only and consequently did not preclude the assessment of the Sec. 4973 excise tax against Couturier for the 2004–2008 tax years.

Reflections

Five of the Tax Court judges joined in a concurring opinion, finding that the majority had wrongly expanded Section 313(b) of the act to read “tak[ing] effect [with respect to returns filed] on [or after] the date of the enactment of this Act” instead of “tak[ing] effect on the date of the enactment of this Act.”

Therefore, according to the concurring judges, the court had, in making its decision, incorrectly concluded that Sec.

6501(l)(4) focuses on the consequences of filing tax returns rather than the IRS’s power to assess. This, the concurring judges stated, led the majority to view the question presented as “whether Sec. 6501(l)(4) applies retroactively,” when the right question was “whether the adoption of section 6501(l)(4) made section 6503(a)(1) (and also section 6215) inapplicable to this case,” the answer to which the concurring judges said was no.

Two judges, in a thundering dissent, determined that the majority erred in finding that Sec. 6501(l)(4) applied only prospectively and that a natural reading of the text of Section 313(b) of the act, which provides the effective-date rule, contained nothing that limited the applicability of Sec.

6501(l)(4) to tax returns filed on or after Dec. 29, 2022. Accordingly, as Couturier had filed only Forms 1040, the IRS was required to assess a Sec. 4973 liability or send a notice of deficiency before the expiration of the six-year period in Sec. 6501(l) (4). It had not done so; therefore, the dissenters found that Couturier’s motion for summary judgment should be granted.

Couturier, 162 T.C. No. 4 (2024)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.