Badaracco v. Commissioner of Internal Revenue Deleet Merchandising Corp v. United States

• Citation: 104 S.Ct. 756,464 U.S. 386,78 L.Ed.2d 549
• Decision Date: 17 January 1984
• Docket Number: Nos. 82-1453,82-1509,s. 82-1453
• Parties: Ernest BADARACCO, Sr., et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE. DELEET MERCHANDISING CORP., Petitioner, v. UNITED STATES
• Court: United States Supreme Court

464 U.S. 386

104 S.Ct. 756

78 L.Ed.2d 549

Ernest BADARACCO, Sr., et al., Petitioners,

v COMMISSIONER OF INTERNAL REVENUE.

DELEET MERCHANDISING CORP., Petitioner,

v. UNITED STATES.

Nos. 82-1453, 82-1509.

Argued Nov. 28, 1983.

Decided Jan. 17, 1984.^*

Syllabus

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." In No. 82-1453, petitioners conceded, for purposes of this litigation, that they had filed fraudulent partnership and individual income tax returns for the years 1965-1969. However, in 1971 they filed nonfraudulent amended returns and paid the additional basic taxes shown thereon. In 1977, the Commissioner of Internal Revenue issued notices of deficiency, asserting liability under § 6653(b) of the Code for the addition to tax on account of fraud of 50% of the underpayment in the basic tax. Petitioners sought redetermination in the United States Tax Court of the asserted deficiencies, contending that § 6501(c)(1) did not apply because of the filing of the nonfraudulent amended returns, and that the Commissioner's action was barred by § 6501(a) because the deficiency notices were issued more than three years from the date of filing of the amended returns. The Tax Court agreed with petitioners. In No. 82-1509, petitioner filed timely corporation income tax returns for the years 1967 and 1968, but in 1973 it filed amended returns disclosing certain receipts that had not been reported on the original returns. In 1979, the Commissioner issued a notice asserting deficiencies in tax and additions under § 6653(b) for 1967 and 1968. Petitioner paid the alleged deficiencies and brought suit for refund in Federal District Court, which granted summary judgment for petitioner on the ground that the Commissioner's action was barred by § 6501(a), regardless of whether the original returns were fraudulent. The Court of Appeals, consolidating the appeals, reversed in both cases.

Held: 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 or not more than three years have expired since the filing of the amended return. Pp. 391-401.

(a) The plain and unambiguous language of § 6501(c)(1) permits the Commissioner to assess "at any time" the tax for a year in which the taxpayer has filed "a false or fraudulent return," despite any subsequent disclosure the taxpayer might make. Nothing is present in the statute that can be construed to suspend its operation as a consequence of a fraudulent filer's subsequent repentant conduct. Neither is there anything in the wording of § 6501(a) that itself enables a taxpayer to reinstate the section's general 3-year limitations period by filing an amended return. Moreover, the substantive operation of the fraud provisions of the Code itself confirms the conclusion that § 6501(c)(1) permits assessment at any time in fraud cases regardless of a taxpayer's later repentance. Pp. 391-396.

(b) Nothing in the statutory language, the structure of the Code, or the decided cases supports petitioners' contention that a fraudulent return is a "nullity" for statute of limitations purposes and that therefore the amended return is necessarily "the return" referred to in § 6501(a). Pp. 396 -397.

(c) There is no need to twist § 6501(c)(1) beyond the contours of its plain and unambiguous language in order to comport with good policy, for its literal language is supported by substantial policy considerations—the increased difficulty in investigating fraud cases as opposed to cases marked for routine audits; the fact that the filing of a document styled "amended return" does not fundamentally change the nature of a tax fraud investigation; and the compounding of the difficulties that attend a civil fraud investigation where the Commissioner's initial findings lead him to conclude that the case should be referred to the Department of Justice for criminal prosecution. Pp. 397-400.

(d) Petitioners' argument 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, cannot prevail. Section 6501(c)(3)—which provides that in a case of failure to file a return, the tax may be assessed "at any time"—has been construed as ceasing to apply once a return has been filed for a particular year, regardless of whether that return is filed late and even though the failure to file a timely return in the first instance was due to fraud. However, the language employed in the respective subsections of § 6501 establishes that Congress intended different limitations results under § 6501(c)(1). Pp. 400-401.

693 F.2d 298 (3rd Cir.1982), affirmed.

Barry I. Fredericks, New York City, for petitioners.

Albert G. Lauber, Jr., Washington, D.C., for respondents.

Justice BLACKMUN delivered the opinion of the Court.

These cases focus upon § 6501 of the Internal Revenue Code of 1954, 26 U.S.C. § 6501. Subsection (a) of that statute establishes a general three-year period of limitations "after the return was filed" for the assessment of income and certain other federal taxes.¹ Subsection (c)(1) of § 6501, however, provides an exception to the three-year period when there is "a false or fraudulent return with the intent to evade tax." The tax then may be assessed "at any time."²

The issue before us is the proper application of §§ 6501(a) and (c)(1) to the situation where a taxpayer files a false or fraudulent return but later files a nonfraudulent amended return. May a tax then be assessed more than three years after the filing of the amended return?

I

No. 82-1453. Petitioners Ernest Badaracco, Sr., and Ernest Badaracco, Jr., were partners in an electrical contracting business. They filed federal partnership and individual income tax returns for the calendar years 1965-1969, inclusive. "[F]or purposes of this case," these petitioners concede the "fraudulent nature of the original returns." App. 37a.

In 1970 and 1971, federal grand juries in New Jersey subpoenaed books and records of the partnership. On August 17, 1971, petitioners filed nonfraudulent amended returns for the tax years in question and paid the additional basic taxes shown thereon. Three months later, petitioners were indicted for filing false and fraudulent returns, in violation of § 7206(1) of the Code, 26 U.S.C. § 7206(1). Each pleaded guilty to the charge with respect to the 1967 returns, and judgments of conviction were entered. United States v. Badaracco, Crim. No. 766-71(DNJ). The remaining counts of the indictment were dismissed.

On November 21, 1977, the Commissioner of Internal Revenue mailed to petitioners notices of deficiency for each of the tax years in question. He asserted, however, only the liability under § 6653(b) of the Code, 26 U.S.C. § 6653(b), for the addition to tax on account of fraud (the so-called fraud "penalty") of 50% of the underpayment in the basic tax. See App. 5a.

Petitioners sought redetermination in the United States Tax Court of the asserted deficiencies, contending that the Commissioner's action was barred by § 6501(a). They claimed that § 6501(c)(1) did not apply because the 1971 filing of nonfraudulent amended returns caused the general three-year period of limitations specified in § 6501(a) to operate; the deficiency notices, having issued in November 1977, obviously were forthcoming only long after the expiration of three years from the date of filing of the nonfraudulent amended returns.

The Tax Court, in line with its then-recent decision in Klemp v. Commissioner, 77 T.C. 201 (1981), appeal pend- ing, (CA9 No. 81-7744), agreed with petitioners.³ 42 TCM 573, ¶ 81,404 P-H Memo TC (1981).

No. 82-1509. Petitioner Deleet Merchandising Corp. filed timely corporation income tax returns for the calendar years 1967 and 1968. The returns as so filed, however, did not report certain receipts derived by the taxpayer from its printing supply business. On August 9, 1973, Deleet filed amended returns for 1967 and 1968 disclosing the receipts that had not been reported.⁴ Although the taxpayer corporation itself was not charged with criminal tax violations, and although no formal criminal investigation was initiated as to it, there were criminal and civil investigations that centered on certain former officers of the taxpayer. After the completion of those investigations, the Commissioner, on December 14, 1979, issued a notice of deficiency to Deleet. App. 71a. The notice asserted deficiencies in tax and additions under § 6653(b) for 1967 and 1968.

Deleet paid the alleged deficiencies and brought suit for their refund in the United States District Court for the District of New Jersey. On its motion for summary judgment, Deleet contended that the Commissioner's action was barred by § 6501(a). It claimed that no deficiencies or additions could be assessed more than three years after the amended returns were filed, regardless of whether the original returns were fraudulent.

The District Court agreed and granted summary judgment for Deleet. 535 F.Supp. 402 (1981). It relied on the Tax Court's decision in Klemp v. Commissioner, supra, and on Dowell v. Commissioner, 614 F.2d 1263 (CA10 1980), cert. pending, No. 82-1873.

The Appeals. The Government appealed each case to the United States Court of Appeals for the Third Circuit. The cases were heard and decided together. That court, by a 2 to 1 vote, reversed the decision of the Tax Court in Badaracco and the judgment of the District Court in Deleet. Badaracco v. Commissioner, 693 F.2d 298 (1...