No limitations period bars pre-AJCA section 6707 penalties

Plain-English summary

Counsel considered whether the Supreme Court's Gabelli decision supported a limitations period for section 6707 penalties imposed before statutory changes made by the American Jobs Creation Act. The advice concluded that Gabelli did not establish a general rule against unlimited assessment periods. Pre-change section 6707 penalties were not based on a filed return, so section 6501 did not supply a workable limitations period. Counsel also relied on prior advice and promoter-penalty cases holding that neither section 6501 nor 28 U.S.C. § 2462 limited assessment of comparable penalties.

Ruling snapshot

• Question: Did Gabelli or another limitations statute bar assessment of pre-AJCA section 6707 tax-shelter registration penalties?
• Outcome: Advice given
• Key authorities: IRC §§ 6501, 6700, 6701, 6707; 28 U.S.C. § 2462

Full text (IRS public release)

ID: CCA_2015081814112728 [Third Party Communication:

UILC: 6707.01-00 Date of Communication: Month DD, YYYY]

Number: 201538018
Release Date: 9/18/2015
From:
Sent: Tuesday, August 18, 2015 2:11:27 PM
To:
Cc:
Bcc:
Subject: FW: Gabelli and Section 6707

Below please find our thoughts on the Gabelli case. Please let us know if you have any
further questions.

In Gabelli, the question was whether a five-year limitations period on fraud penalties
against investment advisors begins to run when the fraud is complete or when the fraud
is discovered. The opinion does not support the contention that there cannot be an
indefinite statute of limitations for civil penalties.

First, Gabelli involved a limitations statute that all agreed was applicable. In contrast,
there is no limitations statute readily identifiable that applies to section 6707 penalties
prior to AJCA changes. The language of limitations statutes in the Code just don’t fit the
section 6707 penalty. For example, section 6501 runs from the filing of a return. But
there is no return on which the pre-AJCA penalty is based. So, there is no way to know
what the limitations period would be.

Second, the Court drew a distinction between when the government is a victim and
when the government is bringing an action in which others were victims. In the former
case, the law recognizes that it would be improper for a limitations period to run when
the fraud subject to penalty was so effective that the victim didn’t know the fraud had
occurred. This rationale did not have the same force when the government was not the
victim. For section 6707 penalties, it is the government that is the victim. The
government is unable to timely investigate tax shelter schemes to determine whether
proper tax is being paid to the government if promoters do not timely inform the
government of the shelters they are promoting. In Gabelli, however, the government
was not the victim of fraud; the victims were the clients of the investment advisors.

Third, the Court quotes John Marshall as condemning an unlimited period to bring a
penalty action. However, that is not the holding in Gabelli. It clearly isn’t a rule of law
because section 6501(c)(1) plainly allows for an unlimited statute to seek a section 6663
fraud penalty. Additionally, Chief Justice Marshall appears to have been addressing
penalties that punish rather than those that extract compensation and the section 6707

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penalty is designed to roughly compensate the government for the time and expense in
discovering tax shelters and revenue lost from failing to do so when a promoter did not
register the tax shelter. With respect to penalties relating to promoters, courts have
acknowledged that while an unlimited period of limitations “may seem a harsh result,”
the result is “in accordance with jurisprudence regarding the applicability of statutes of
limitations to causes of action in favor of the government” and that the result “furthers
the interests of Congress in combatting fraud relating to the filing of various tax
documents.” Mullikin v. United States, 952 F. 2d 920, 929 (6th Cir. 1992).

In Chief Counsel Advice issued in 2001, the Service provided advice regarding whether
there was a period of limitations under section 6707(a)(1) for the failure to register a tax
shelter. CCA 200112003 (Nov. 28, 2000). The CCA concludes that there is no period
of limitations for assessing the penalty under section 6707(a)(1). This is based on the
conclusion that the penalty under section 6707(a) is not a return-based liability, so it is
not governed by the general period of limitations in section 6501. The CCA also notes
that the Service has successfully argued that no period of limitations applies to promoter
penalties under sections 6700 and 6701 and that these penalties may be assessed at
any time. Courts have rejected both the application of section 6501 and 28 U.S.C. 2462
to such penalties. See, e.g., Mullikin v. United States, 952 F. 2d 920 (6th Cir. 1991)
(concluding that the Congress did not intend the statute of limitations contained in 28
USC 2462 to apply to the assessment of penalties under section 6701); Lamb v. United
States, 977 F. 2d 1296 (8th Cir. 1992) (following Mullikin and concluding that the period
of limitations in 28 USC 2462 does not apply to the assessment of penalties under
sections 6700 or 6701); Capozzi v. United States, 980 F. 2d 872 (2d Cir. 1992) (finding
that 28 USC 2462 does not impose a period of limitations on assessments under
section 6700 because (1) 28 USC 2462 applies only to an “action, suit, or proceeding”
which is different from an assessment, which is an ex parte act, and (2) 28 USC 2462
applies only to adversarial proceedings for the enforcement of any civil fine, penalty, or
forfeiture, but an assessment is not an enforcement but is merely the determination of a
penalty); Sage v. United States, 908 F. 2d 18 (5th Cir. 1990) (holding that no period of
limitations applies to the penalty under section 6700).