BADARACCO v. COMMISSIONER, BADARACCO v. COMMISSIONER,

464 U.S. 386 (1984)464 U.S. 386 (1984)

Todd HarrisTodd Harris

July 23, 2007July 23, 2007

Tax 8020Tax 8020

FactsFacts

Ernest Badaracco, Sr., and Ernest Badaracco, Jr., Ernest Badaracco, Sr., and Ernest Badaracco, Jr., partners in an electrical contracting business partners in an electrical contracting business

In 1970, federal grand juries subpoenaed books and In 1970, federal grand juries subpoenaed books and records of partnershiprecords of partnership

In 1971, partnership filed amended returns for In 1971, partnership filed amended returns for 1965-1969 and paid the additional basic taxes for 1965-1969 and paid the additional basic taxes for those yearsthose years

Income tax returns from 1965-1969 conceded to be Income tax returns from 1965-1969 conceded to be fraudulent by Badaracco partnershipfraudulent by Badaracco partnership

In 1977, IRS claimed deficiencies under 6653(b) for In 1977, IRS claimed deficiencies under 6653(b) for tax years listed 1967, 1968, requiring 50% of the tax years listed 1967, 1968, requiring 50% of the underpayment in the basic taxunderpayment in the basic tax

IssueIssue

Section 6501(a) of the Internal Section 6501(a) of the Internal Revenue Code of 1954 establishes a Revenue Code of 1954 establishes a general 3-year period of limitations general 3-year period of limitations "after the return was filed" for the "after the return was filed" for the assessment of federal income taxes. assessment of federal income taxes.

However, 6501(c)(1) provides that However, 6501(c)(1) provides that when there is "a false or fraudulent when there is "a false or fraudulent return with the intent to evade tax," return with the intent to evade tax," the tax then may be assessed "at the tax then may be assessed "at any time." any time."

Petitioner ArgumentPetitioner Argument Petitioners claims first fraudulent return is nullity, Petitioners claims first fraudulent return is nullity,

and 3 year limit should apply to amended returnand 3 year limit should apply to amended return They claimed that 6501(c)(1) did not apply because They claimed that 6501(c)(1) did not apply because

the 1971 filing of nonfraudulent amended returns the 1971 filing of nonfraudulent amended returns caused the general 3-year period of limitations caused the general 3-year period of limitations specified in 6501(a) to operatespecified in 6501(a) to operate

The deficiency notices in November 1977 were long The deficiency notices in November 1977 were long after the expiration of three years from the date of after the expiration of three years from the date of filing of the nonfraudulent amended returns. filing of the nonfraudulent amended returns.

Petitioners argue that a literal reading of 6501(c) Petitioners argue that a literal reading of 6501(c) would elevate one form of tax fraud over another would elevate one form of tax fraud over another because it produces a disparity in treatment between because it produces a disparity in treatment between a taxpayer who in the first instance files a fraudulent a taxpayer who in the first instance files a fraudulent return and one who fraudulently fails to file any return and one who fraudulently fails to file any return at all return at all

Court RulingsCourt Rulings District Court agreed with Petitioner, District Court agreed with Petitioner,

stating 6501(c)(1) barred Commissioner stating 6501(c)(1) barred Commissioner action regardless of fraudulent nature of action regardless of fraudulent nature of original returnoriginal return

33rdrd Circuit Court of Appeals reversed ruling Circuit Court of Appeals reversed ruling --Where a taxpayer files a false or Where a taxpayer files a false or fraudulent return but later files a fraudulent return but later files a nonfraudulent amended return, nonfraudulent amended return, 6501(c)(1) applies and a tax may be 6501(c)(1) applies and a tax may be assessed "at any time," regardless of assessed "at any time," regardless of whether more than three years have whether more than three years have expired since the filing of the expired since the filing of the amended returnamended return

Supreme Court RulingSupreme Court Ruling

7-2 decision citing with IRS and 7-2 decision citing with IRS and Appeals Court, 6501(c)(1) states “at Appeals Court, 6501(c)(1) states “at any time”, no mention of repetenceany time”, no mention of repetence

Amended return does not change Amended return does not change status of fraudstatus of fraud

Code is clear on measures on not Code is clear on measures on not filing return as compared to filing filing return as compared to filing fraudulent returnfraudulent return

ConclusionConclusion

6501(c)(1) allows for no statute of 6501(c)(1) allows for no statute of limitations on amending and limitations on amending and penalizing fraudulent returnpenalizing fraudulent return

Amended returns have no impact on Amended returns have no impact on IRS’s ability to audit original IRS’s ability to audit original fraudulent returnfraudulent return