Taxpayer Wins Offshore Tax Case Completely; Tax Court Rejects IRS Proposed Assessment and Throws Out IRS Interpretation of the Statute of Limitations
By Jeffrey M. Glassman on January 24, 2018
In Rafizadeh v. Commissioner (here), the Tax Court analyzed the effective date provision of a statute and agreed with the taxpayer’s interpretation. The result: a complete taxpayer win. As background, the IRS generally has only three years to determine that a taxpayer owes more money than they reported on their tax return. There are, however, exceptions to the general three-year period. One of those exceptions, Section 6501(e)(1)(A)(ii), which was enacted in March 2010, relates to the reporting of certain specified foreign financial assets for which information is required to be reported under Section 6038D. If the taxpayer omits more than $5,000 from its gross income attributable to one or more such assets, the IRS has an additional three years—that is, six years in total. The statute of limitations is also extended under Section 7609(e)(2) beginning six months after the service of a John Doe summons and ending with final resolution of that summons.
The taxpayer in Rafizadeh filed his tax returns for 2006, 2007, 2008, and 2009 (the “tax years at issue”) on time, but he did not report income earned on a foreign account he held. Through John Doe summons procedures, the IRS requested and obtained information about the taxpayer’s account. On December 8, 2014, the IRS issued a notice of deficiency, determining that the taxpayer owed additional tax and penalties for the tax years at issue. There was no dispute that with a six year statute of limitations, the IRS determination would have been timely. But, as the IRS conceded, its determination would be untimely with a three year statute of limitations.
Section 6038D was added to the Tax Code in 2010 and is effective for taxable years beginning after March 18, 2010. Section 6501(e)(1)(A)(ii) was added by the same legislation, but has a different effective date. It applies to returns filed after March 18, 2010 and also to returns filed on or before March 18, 2010 if the statute of limitations under Section 6501 had not expired as of that date.
The taxpayer argued that the phrase of Section 6501(e)(1)(A)(ii) that applies the six year statute of limitations to items for which information was required to be reported under Section 6038D also limited the application of the six-year statute of limitations to assets for which there was a reporting requirement under Section 6038D at the time. Per the taxpayer, because Section 6038D was not in effect as of March 18, 2010, Section 6501(e)(1)(A)(ii) could not extend the statute of limitations based on a reporting requirement that did not yet exist. In other words, Section 6501(e)(1)(A)(ii) extends the statute of limitations only where there is an omission of more than $5,000 of gross income related to items required to be reported under Section 6038D. And until tax years beginning after March 18, 2010 (i.e., the 2011 tax year for the taxpayer here) no items were required to be reported under Section 6038D.
The Tax Court agreed with the taxpayer’s argument. Per the court, a “natural reading” of the effective date provisions in Section 6501(e)(1)(A)(ii) limited its application to years for which the reporting requirement of Section 6038D was also effective. In this case, the reporting requirement of Section 6038D did not apply to any of the tax years at issue. The court therefore reaffirmed its commitment to the well-accepted canon of statutory construction that a statute should be construed if possible so that “no clause, sentence, or word shall be superfluous, void, or insignificant.” Accordingly, the Tax Court rejected the IRS’s interpretation, holding that the IRS’s determinations were untimely and that the tax should not be assessed against the taxpayer.
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