Couple Can't Avoid Accuracy-Related Penalties Based on Filing of Amended Returns

(Parker Tax Publishing September 2022)

The Tax Court held that a couple's amended tax returns which reported income not disclosed on their original returns were not "qualified amended returns" under Reg. Sec. 1.6664-2(c)(3), precluding liability for accuracy-related penalties, because the returns were filed after the service of a John Doe summons. The court also held that the six-year statute of limitations for substantial omissions of income was suspended under Code Sec. 7609(e) until the summons was finally resolved by the IRS's withdrawal of the summons. Lamprecht v. Comm'r, T.C. Memo. 2022-91.

Background

Johannes and Linda Lamprecht are citizens of Switzerland who lawfully resided in the United States during 2006 and 2007. Johannes worked in the United States as an investment consultant. In addition to his salary and other income, Johannes received commissions from the Swiss bank UBS AG (UBS) for business referrals. The commissions were deposited into one of Johannes's UBS accounts. Johannes was also the beneficial owner of a UBS bank account as the owner of an entity incorporated in the British Virgin Islands.

On their original joint tax returns for years 2006 and 2007, the Lamprechts did not report income from commissions Johannes's UBS commissions received or from his foreign-source interest, dividends, and capital gains. On their returns for both years, the Lamprechts answered "No" to the question of whether they had an interest in or signature authority over a foreign financial account.

In July 2008, the IRS served a John Doe summons on UBS seeking information regarding United States taxpayers who had signature or other authority with respect to any UBS financial accounts. In February 2009 the Department of Justice filed a suit in a district court to enforce the summons. The enforcement suit was ultimately resolved through two out-of-court agreements between the United States and Switzerland executed in August 2009. The IRS formally withdrew the UBS John Doe summons in November 2010.

In December 2010, after UBS had given its information to the IRS and the John Doe summons had been withdrawn, the Lamprechts filed amended tax returns for 2006 and 2007. On the amended returns, the Lamprechts reported their previously unreported income and answered "Yes" to the question of whether they had an interest in a foreign financial account. The Lamprechts paid the increased tax liabilities for 2006 and 2007 that they reported on their amended returns, but did not report a liability for penalties nor pay them. In 2015, the IRS assessed accuracy-related penalties under Code Sec. 6662 against the Lamprechts for 2006 and 2007.

The Lamprechts challenged the penalties in the Tax Court. They argued that (1) the IRS failed to comply with Code Sec. 6751(b)(1) requiring written supervisory approval of penalties, (2) that their amended returns were "qualified amended returns" under Reg. Sec. 1.6664-2(c)(3), precluding any tax liability, and (3) that assessment of the penalties was barred by the statute of limitations under Code Sec. 6501.

Under Code Sec. 6662(a), a 20 percent penalty applies for "substantial understatements" of tax. A substantial understatement means the greater of 10 percent of the tax or $5,000. Under Code Sec. 6662(d)(2)(A), a substantial understatement is determined by reference to "the amount of the tax imposed which is shown on the return." Reg. Sec. 1.6664-2(c)(2) provides that the amount shown as the tax by the taxpayer on his return includes an amount shown as additional tax on a "qualified amended return" as defined in Reg. Sec. 1.6664-2(c)(3). Thus, if the Lamprechts' amended returns were "qualified amended returns," then they made no understatement that gave rise to an underpayment of tax. Under Reg. Sec. 1.6664-2(c)(3)(i), a "qualified amended return" must be filed before the date on which the IRS serves a John Doe summons relating to the tax liability of a person, group, or class that includes the taxpayer with respect to an activity for which the taxpayer claimed any tax benefit on the return directly or indirectly.

Code Sec. 6501(e)(1)(A) provides a six-year statute of limitations for substantial omissions from gross income. Code Sec. 7609(e) suspends the limitations period if a summons was issued but remains unresolved. Under Reg. Sec. 301.7609-5(e)(3), "final resolution" with respect to a summoned party's response to a third-party summons occurs when the summons is fully complied with and all appeals or requests for further review are disposed of.

The Lamprechts contended that the UBS John Doe summons was not a summons described in Reg. Sec. 1.6664-2(c)(3) because they did not claim a tax benefit directly or indirectly on their original 2006 and 2007 tax returns. They argued that they made no affirmative statement on their original returns claiming a tax benefit and that merely omitting items from their returns was not the same thing as claiming a tax benefit. With regard to the statute of limitations, the Lamprechts argued that the UBS John Doe summons was invalid and unenforceable because it was issued for the improper purpose of extending the limitations period. They also argued that final resolution of the summons occurred not in November 2010 (when the IRS withdrew it) but rather in August 2009 when the district court dismissed the summons enforcement case.

In a motion for summary judgment, the IRS argued that the Lamprechts' amended returns were not "qualified amended returns" because they were filed after the issuance of the UBS John Doe summons. According to the IRS, the John Doe summons was served on UBS in July 2008, but the Lamprechts did not file their amended returns until December 2010 - long after service of the summons. The IRS also argued that under Code Sec. 7609(e), the six-year statute of limitations was suspended until the final resolution of the UBS John Doe summons which, according to the IRS occurred when the IRS formally withdrew it in November 2010.

Analysis

The Tax Court held that the Lamprechts' amended returns were not "qualified amended returns" under Reg. Sec. 1.6664-2(c)(3)(i)(D) because they were filed after the service of a John Doe summons. The court further held that assessment of the penalties was not barred by the statute of limitations because the limitations period was suspended by the service of the John Doe summons under Code Sec. 7609)(e)(2). In addition, the court held that the IRs complied with the written supervisory approval requirement of Code Sec. 6751(b)(1).

The court found that the Lamprechts were members of the class of persons targeted by the UBS John Doe summons, claimed a tax benefit either directly or indirectly with respect to the activity identified in the in the summons, and did not file their amended returns before the summons was served. According to the court, the Lamprechts received the tax benefit of understated tax liabilities by omitting all of their foreign source income from their original 2006 and 2007 returns. Further, the Lamprechts' omission of their foreign source income was, in the court's view, an invalid claim of the foreign earned income exclusion under Code Sec. 911. The court rejected the Lamprechts' argument that an "affirmative statement" is required under Reg. Sec. 1.6664-2(c)(2), reasoning that the broad language of the regulation argued against such a narrow construction.

The court rejected the Lamprechts' argument that the John Doe summons was issued for an improper purpose. The court noted that neither UBS nor the Swiss government contested the validity of the summons and found no evidence that the IRS served the summons for the sole purpose of extending the period of limitations for assessment. The court further found that the final resolution of the John Doe summons occurred in November 2010 when the summons was withdrawn after the IRS received the requested records from UBS through the means agreed to in the U.S.-Switzerland agreement. According to the court the Lamprechts did not assert or make any showing of an earlier date by which UBS had fully complied with the summons and all appeals or requests for review had been disposed of under Reg. Sec. 301.7609-5(e)(3).

The court also concluded that the IRS satisfied Code Sec. 6751(b)(1) after finding that the letter in which the IRS firs formally communicated the penalties to the Lamprechts was predated by Forms 5345 - D bearing the immediate supervisors' signatures which reflected the initial determinations of the Lamprechts' liability for the penalties.

For a discussion of the definition of a "qualified amended return, see Parker Tax ¶ 250,265. For a discussion of the IRS's summons authority, see Parker Tax ¶263,120. For a discussion of the written supervisory approval requirement, see Parker Tax ¶262,195.

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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