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Failure to Disclose Listed Transaction on Form 8886 Prevented Statute from Running

(Parker Tax Publishing June 2017)

The Ninth Circuit reversed a district court and held that a taxpayer was not entitled to a refund of a penalty because the statute of limitations had not expired on his failure to disclose a listed transaction to the IRS. The court found that because the taxpayer never provided the required information on a completed Form 8886, the statute of limitations had not yet begun to run. U.S. v. May, 2017 PTC 241 (9th Cir. 2017).


Steven May filed his federal income tax return for 2004 on July 22, 2005. May eventually acknowledged to the IRS on September 26, 2011, that he had neglected to include in that return $165,000 of pass-through income from a corporation with which he was affiliated. Specifically, May did not file an IRS Form 8886, Reportable Transaction Disclosure Statement, disclosing the transaction as a listed transaction as defined in Code Sec. 6707A. The IRS attempted over the course of several years to collect various penalties and assessments from May, including a Code Sec. 6707A penalty for failing to disclose the listed transaction on his 2004 return.

On February 6, 2012, the IRS assessed an $18,563 penalty under Code Sec. 6707A for May's failure to disclose his participation in the listed transaction. The IRS acknowledged that by March 2010, it had sufficient information from which to determine that May had engaged in a listed transaction. On March 10, 2010, the IRS sent May a "30-day letter" informing him that it would assess a Code Sec. 6707A penalty relating to the listed transaction if he did not object in writing within 30 days. The IRS also conceded that "there was no information necessary to assess a penalty pursuant to Code Sec. 6707A that the IRS did not have in its possession before February 6, 2011. Nevertheless, it did not assess the penalty until a year later.

May paid the penalty in full, including accrued interest, and submitted a refund claim to the IRS, which the IRS rejected. He subsequently filed suit in a district court seeking a refund on the grounds that the Code Sec. 6707A penalty for 2004 was improperly assessed and was barred by the applicable statute of limitations.


Ordinarily, under Code Sec. 6501(a), the IRS may only assess a tax within three years after a tax return is filed (whether or not such return was filed on or after the date prescribed). However, a different statute of limitations, found in Code Sec. 6501(c)(10), governs listed transactions. Under that provision, if a taxpayer fails to include on any return or statement for any tax year any information with respect to a listed transaction which is required under Code Sec. 6011 to be included with such return or statement, the time for assessment of any tax with respect to such transaction does not expire before the date which is one year after the earlier of -

(i) the date on which the IRS is furnished the information so required; or

(ii) the date that a material advisor meets the requirements of Code Sec. 6112 with respect to a request by the IRS under Code Sec. 6112(b) relating to such transaction with respect to such taxpayer.

The IRS maintained that the statute of limitations never even began to run because neither of the two conditions was ever met. The IRS argued that the first condition had still not been satisfied because May did not disclose the required information to the IRS on a Form 8886. May countered that the IRS's collection of the needed information through means other than a Form 8886 put the IRS on constructive notice and started the running of Code Sec. 6501(c)(10)'s one-year limitations period.

The district court agreed with May and ordered the IRS to refund May's payment. According to the court, because no valid extension had been agreed to by March 10, 2011 (i.e., one year after the mailing of the 30-day letter), the statute of limitations had expired before the IRS assessed a Sec. 6707A penalty on February 6, 2012. The parties' overt acts, the district court said, established definitively that there was no mutual assent to extend the Code Sec. 6707A limitations period for tax year 2004. The IRS appealed.

The Ninth Circuit reversed the district court's decision. According to the court, Code Sec. 6501(c)(10)(A), read in isolation, is unclear to the extent it does not define or explain the term "the information so required," and "is furnished." That subparagraph, the court said, must be read in the context of the rest of Code Sec. 6501(c)(10) and in conjunction with Code Sec. 6011, to which it expressly refers.

The Ninth Circuit said that the meaning of the phrase "the information so required" is made clear by referring back to the introductory paragraph of Code Sec. 6501(c)(10), which in turn refers to Code Sec. 6011 explaining that what must be filed to begin the running of the limitations period is that "which is required under section 6011 to be included with [a] return or statement." Code Sec. 6011, the court noted, instructs that taxpayers "shall make a return or statement according to the forms and regulations prescribed by the Secretary" and that "[e]very person required to make a return or statement shall include therein the information required by such forms or regulations." Thus, in Code Sec. 6501(c)(10) and Code Sec. 6011(a), Congress expressly required taxpayer compliance with the IRS's determination of how listed transactions are to be reported. The court looked to Reg. Sec. 1.6011-4(d) which clarifies that the passive phrase "is furnished" means that the taxpayer must provide the information and that a completed Form 8886 is "the information so required."

For a discussion of the statute of limitations for listed transactions, 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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