BADARACCO v. COMMISSIONER, 464 U.S. 386 (1984)

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Presentation transcript:

BADARACCO v. COMMISSIONER, 464 U.S. 386 (1984) Todd Harris July 23, 2007 Tax 8020

Facts Ernest Badaracco, Sr., and Ernest Badaracco, Jr., partners in an electrical contracting business In 1970, federal grand juries subpoenaed books and records of partnership In 1971, partnership filed amended returns for 1965-1969 and paid the additional basic taxes for those years Income tax returns from 1965-1969 conceded to be fraudulent by Badaracco partnership In 1977, IRS claimed deficiencies under 6653(b) for tax years listed 1967, 1968, requiring 50% of the underpayment in the basic tax

Issue Section 6501(a) of the Internal Revenue Code of 1954 establishes a general 3-year period of limitations "after the return was filed" for the assessment of federal income taxes. However, 6501(c)(1) provides that when there is "a false or fraudulent return with the intent to evade tax," the tax then may be assessed "at any time."

Petitioner Argument Petitioners claims first fraudulent return is nullity, and 3 year limit should apply to amended return They claimed that 6501(c)(1) did not apply because the 1971 filing of nonfraudulent amended returns caused the general 3-year period of limitations specified in 6501(a) to operate The deficiency notices in November 1977 were long after the expiration of three years from the date of filing of the nonfraudulent amended returns. Petitioners argue that a literal reading of 6501(c) would elevate one form of tax fraud over another because it produces a disparity in treatment between a taxpayer who in the first instance files a fraudulent return and one who fraudulently fails to file any return at all

Court Rulings District Court agreed with Petitioner, stating 6501(c)(1) barred Commissioner action regardless of fraudulent nature of original return 3rd Circuit Court of Appeals reversed ruling -Where a taxpayer files a false or fraudulent return but later files a nonfraudulent amended return, 6501(c)(1) applies and a tax may be assessed "at any time," regardless of whether more than three years have expired since the filing of the amended return

Supreme Court Ruling 7-2 decision citing with IRS and Appeals Court, 6501(c)(1) states “at any time”, no mention of repetence Amended return does not change status of fraud Code is clear on measures on not filing return as compared to filing fraudulent return

Conclusion 6501(c)(1) allows for no statute of limitations on amending and penalizing fraudulent return Amended returns have no impact on IRS’s ability to audit original fraudulent return