Statute of Limitations on Assessment Does Not Apply to Tax Shelter Promoter Penalty

(Parker Tax Publishing May 2023)

The Eleventh Circuit affirmed a judgment of the Tax Court holding that the IRS's assessment of penalties against a taxpayer in connection with his promotion of a tax shelter scheme was not time-barred by either the three-year statute of limitations on assessments under Code Sec. 6501(a) or the five-year statute of limitations under 28 U.S.C. Section 2462. The court found that Code Sec. 6501(a) did not apply because the conduct penalizable under Code Sec. 6700 does not pertain to any particular tax return or tax year; the court also found that 28 U.S.C. Section 2462, which requires the government to commence an action to enforce a penalty within five years of the date when the claim first accrued, was inapplicable because Code Sec. 6502(a) requires collection of tax penalties within 10 years of assessment. Crim v. Comm'r. 2023 PTC 108 (11th Cir. 2023).

Background

During 1999-2003, John Crim promoted a tax shelter scheme involving domestic and offshore trusts. He did so by marketing, selling, and servicing "trust packages." These packages instructed clients to engage in sham paper transactions and falsely represented that these transactions would enable clients to eliminate their federal income tax liabilities. Crim was indicted for conspiracy to defraud the United States and for a corrupt endeavor to interfere with the administration of the tax laws. In 2008, he was convicted and sentenced to prison, where he remained until he was released in 2014.

In 2010, the IRS assessed penalties against Crim under Code Sec. 6700 for promoting an abusive tax shelter scheme. The IRS filed a notice of federal tax lien and mailed a lien notice to Crim in prison. After a collection due process (CDP) hearing, the IRS sustained the collection action. Crim took his case to the Tax Court, where he filed a motion to recuse and disqualify all Tax Court judges on separation of powers grounds and raised statute of limitations defenses. In Crim v. Comm'r, T.C. Memo. 2021-117, the Tax Court denied the motion and granted summary judgment for the IRS, rejecting Crim's statute of limitations defenses. The Tax Court ruled that Crim's statute of limitations defenses were challenges to his underlying liability which were forfeited under Code Sec. 6330(c)(2)(B) because he failed to raise them at his CDP hearing.

Crim appealed to the Eleventh Circuit. He argued that the presidential power to remove Tax Court judges under Code Sec. 7443(f) violates the separation of powers. Alternatively, Crim contended that the assessment of Code Sec. 6700 penalties in 2010 for his activities in 1999-2003 was time-barred by either the three-year statute of limitations under Code Sec. 6501(a) or the five-year statute of limitations under 28 U.S.C. Section 2462. Code Sec. 6501(a) provides that taxes must be assessed within three years after the return was filed, whether or not the return was filed on or after the due date. The statute of limitations under 28 U.S.C. Section 2462 applies to an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture "except as otherwise provided" by Congress. Crim argued that, because penalties are assessed and collected in the same manner as taxes under Code Sec. 6671(a), Code Sec. 6501(a) applies to Code Sec. 6700 tax shelter-promotion penalties.

Analysis

The Eleventh Circuit affirmed the Tax Court's judgment. The court rejected Crim's separation of powers argument after noting that in Kuretski v. Comm'r, 755 F.3d 929 (D.C. Cir. 2014), the D.C. Circuit held that the President's removal power does not violate the constitutional separation of powers. The D.C. Circuit found that Tax Court judges neither exercise "judicial power" for purposes of Article III of the Constitution, nor legislative power under Article I. Because the Tax Court exercises its authority as part of the executive branch, the D.C. Circuit reasoned, removal does not involve the prospect of presidential removal of officers of another branch.

Turning to Crim's statute of limitations arguments, the Eleventh Circuit joined the Second, Fifth, and Eighth Circuits in holding that Code Sec. 6501(a) does not apply to an assessment of Code Sec. 6700 penalties. The court noted that Code Sec. 6501(a) is triggered only when a return is filed. However, the conduct penalizable under Code Sec. 6700 does not pertain to any particular tax return or tax year. The court found that liability turns on the promoter's activities or gross income derived by the promoter, not on whether a promoter's client decides to claim such benefit on a tax return. Were Code Sec. 6501(a) applicable to Code Sec. 6700 penalties, the court reasoned, the limitations period on assessment would begin to run in view of factors unrelated to the source and scope of penalty liability.

The court found that the exceptions to Code Sec. 6501(a)'s statute of limitations underscore that it does not apply to Code Sec. 6700 and demonstrate that a promoter's client's return could not trigger the statute of limitations. Under Code Sec. 6501(c), the statute of limitations does not apply to a false or fraudulent return with intent to evade the tax, a willful attempt to defeat or evade a tax, or failure to file a return. According to the court, these exceptions align with the Code's general approach of exempting fraudulent activity from statutes of limitations. The court also observed that in Mullikin v. U.S., 952 F.2d 920 (6th Cir. 1991), the Sixth Circuit held Code Sec. 6501(a) inapplicable to the closely analogous Code Sec. 6701 penalties for aiding and abetting understatement of tax liability, relying part on the Code's approach to fraudulent activity.

The Eleventh Circuit also concluded that the five-year statute of limitations under 28 U.S.C. Section 2462 does not apply to Code Sec. 6700 penalty assessments because that statute applies only where Congress has not "otherwise provided" a relevant statute of limitations, and Congress has "otherwise provided" a statute of limitations in Code Sec. 6502(a) that requires collection of an assessed tax penalty within ten years of assessment.

Dissenting Opinion

In a dissenting opinion, one judge argued that the statute of limitations on assessments in Code Sec. 6501(a), coupled with Code Sec. 6671(a)'s definition of taxes to include penalties, leads to the conclusion that the IRS's assessment of penalties against Crim was subject to the three-year statute of limitations. The dissenting judge reasoned that the ten-year limitations period for collections under Code Sec. 6502(a) applies to collections of tax shelter promotion penalties because Code Sec. 6671(a) defines taxes to include penalties. In addition, the dissenting judge observed that the statute of limitations for assessments expressly applies to the penalty under Code Sec. 6672 for an employer's failing to collect and pay over withholding taxes - a penalty that does not require the filing of a return. The dissenting judge acknowledged that it is difficult to determine which return would trigger the statute of limitations on assessment of tax shelter promotion penalty but suggested that it could be triggered by the a return filed by a tax shelter's client and said that he would leave that question for the Tax Court to decide on remand.

The majority responded to the dissent by pointing out that Code Sec. 6502(a) applies to collection of Code Sec. 6700 penalties, and Code Sec. 6502(a) does not make the filing of a return the triggering event for its limitation period. Rather, Code Sec. 6502(a)'s triggering event is "assessment." The majority also disagreed with the dissenting judge's reliance on the Code Sec. 6672 penalty, which applies to an employer's failure to remit withholding taxes. The majority pointed out that where an employer has a withholding obligation under Code Sec. 6672, it is required to file Forms 941, Employer's Quarterly Federal Tax Return, which are returns that account for the amount withheld in the taxable period. Thus, the court reasoned that Form 941 is the relevant return for the statute of limitations period and the filing of the Form 941 triggers the period of limitation applicable to the Code Sec. 6672 penalty.

For a discussion of the penalty for promoting an abusive tax shelter, see Parker Tax ¶253,170. For a discussion of the statute of limitations on assessments, see Parker Tax ¶260,130.

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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