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Extended Limitations Period Did Not Apply to Omissions of Foreign Income

(Parker Tax Publishing January 2018)

The Tax Court held that the IRS was barred by the three-year statute of limitations period from assessing deficiencies and accuracy-related penalties on a taxpayer's omission of income earned on foreign assets in years before the enactment of the foreign account reporting requirement in Code Sec. 6038D. The Tax Court found that the six year statute of limitations under Code Sec. 6051 for such omissions applies only to years for which there was a Code Sec. 6038D foreign asset reporting requirement. Rafizadeh v. Comm'r, 150 T.C. No. 1 (2018).

Mehrdad Rafizadeh filed tax returns for 2006-2008, the years at issue, but did not report income earned on a foreign account. In December 2014, the IRS issued a notice of deficiency determining deficiencies and accuracy-related penalties on underpayments for the years at issue. The IRS conceded that the notice was issued after the expiration of the general three year statute of limitations for each year.

Under Code Sec. 6501, the IRS generally has three years from either the date a return was due or the date it was filed to assess tax. An exception applies under Code Sec. 6501(e)(1)(A)(ii), which extends the period to six years if the taxpayer omits income attributable to an asset "with respect to which information is required to be reported under section 6038D."

Both the Code Sec. 6038D reporting requirement and the six year limitations period under Code Sec. 6501(e)(1)(A)(ii) were added by the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act). The reporting requirement applies to tax years beginning after March 18, 2010, the date of enactment, and the six year limitations period applies to returns filed after March 18, 2010. Thus, the December 2014 notice of deficiency was timely only if the six year limitations period applied.

Rafizadeh argued that the plain language of Code Sec. 6038D provides that the six year period applies only if there was a Code Sec. 6038D reporting requirement at the time the income was omitted. The IRS countered by pointing out the addition of a cross reference to Code Sec. 6038D in Code Sec. 6501(c)(8). Under that provision, which applies to failures to comply with certain information reporting provisions, the limitations period does not expire until three years after the required information is provided. The HIRE Act added Code Sec. 6308D information reporting to the other information reporting provisions. According to the IRS, the incorporation of the Code Sec. 6038D reporting requirement into Code Sec. 6501(c)(8) showed Congress did not intend to make the six year statute of limitations in Code Sec. 6501(e)(1)(A)(ii) dependent on a taxpayer's failure to satisfy Code Sec. 6038D.

The Tax Court held that the wording of the effective date for Code Sec. 6501(e)(1)(A)(ii) limits its application to years for which the Code Sec. 6038D reporting requirement is effective. In the court's view, the most natural reading of the phrase "assets with respect to which information is required to be reported under section 6038D" in Code Sec. 6501(e)(1)(A)(ii) is that the six year period applies only when there is a Code Sec. 6038D reporting requirement. The court reasoned that Code Sec. 6501(e)(1)(A)(ii) does not simply incorporate the definition of assets in Code Sec. 6038D; it also specifies that it applies to assets that are subject to the reporting requirement. If Congress intended simply to incorporate the definition in Code Sec. 6038D of the assets to be covered, it could have said so in the statute, according to the court.

The Tax Court found that the cross reference in Code Sec. 6038D to Code Sec. 6501(c)(8) did not undercut its interpretation. The court explained that the trigger in Code Sec. 6501(c)(8) is the failure to report, and that failure results in a different limitations period. By contrast, the trigger for the six year period in Code Sec. 6501(e)(1)(A)(ii) is the omission of income from assets that are subject to the Code Sec. 6038D reporting requirement. In the court's view, the contrasting language in these two provisions did not shed any more light on how to read Code Sec. 6501(e)(1)(A)(ii) than the wording of the statute itself. Nor did the court agree that its decision rendered the March 18, 2010, effective date meaningless, because that date also applies to other statutory changes.

The court noted that it had addressed a similar issue with cross referencing to a Code section with a different effective date in Blak Invs. v. Comm'r, 133 T.C. 431 (2009). In that case, the Tax Court considered whether the effective date of Code Sec. 6707A precluded application of the extended limitations period in Code Sec. 6501(c)(10). The taxpayer argued that because Code Sec. 6501(c)(10) cross referenced Code Sec. 6707A, the effective date of Code Sec. 6707A controlled. However, the court concluded that applying the Code Sec. 6707A effective date to Code Sec. 6501(c)(10) would render the different effective date in Code Sec. 6501(c)(10) meaningless.

The Tax Court noted two key differences in Blak Invs. that required a different result. First, the wording of the two provisions differed; Code Sec. 6501(c)(10) includes the phrase "for any taxable year," while the application of Code Sec. 6501(e)(1)(A)(ii) is not so broadened. Second, the taxpayer in Blak Invs had a preexisting obligation to report certain information and failed to do so, resulting in the limitations period remaining open for the years at issue. In this case, Rafizadeh had no preexisting obligation to report the information required by Code Sec. 6038D. The differences between the statutory wording and the reporting regimes, in the court's view, required a different result in this case.

For a discussion of the foreign asset reporting requirements, see Parker Tax ¶203,175.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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