Sometimes I get irritated. When I do I speak in short sentences. Really short. So when I read Judge Buch’s opinion in the recent case of Gary Gaskin and Jessie Gaskin v. Commissioner, T.C. Memo. 2018-89 (June 20, 2018), I was struck by his frequent use of short sentences. Really short. Kinda like he was really irritated. And why wouldn’t he be? Mr. Gaskin had filed admittedly fraudulent tax returns but now wanted to contest the fraud penalties! Mr. Gaskin thought he should escape fraud penalties because he had later filed amended returns that had, in his view, cured the fraud. Judge Buch's opinion teaches an important lesson we should all learn. I call it the “one return rule.” It’s a short lesson. You will find it below the fold.
I am always bemused when tax protestor “hobbyists” argue that the income tax is voluntary. Often they look at §1, see that it just sets out tax tables, and conclude the Code does not impose a requirement to pay the taxes in the tables. They need to read further in. Section 61 establishes what constitutes “gross income” and §6012 specifies that pretty much anyone “having for the taxable year gross income which equals or exceeds the exemption amount...” must file a return.
The return is a critical document for tax administration. Taxpayers who fail to file required returns are called “non-filers.” Taxpayers who file a return with the intent to evade tax are called "fraudsters." (Note: taxpayers who do not have to file returns at all are called “poor.”)
When a taxpayer files a return, §6201(a) permits the IRS to use that return as the basis for an immediate assessment of tax. Then, as a general rule, §6501(a) gives the IRS three years after the return is filed to examine it for errors. If the errors are serious enough, §6501(e) gives the IRS six years. And if the taxpayer files a required return with the intent to evade tax, §6501(c) gives the IRS gets unlimited time.
But there can be only one return. I think of returns as being like a Last Will and Testament. There may be multiple documents that purport to be someone’s Will, but only one of those documents gets to be the legal Will. Same for returns. There may be multiple documents to choose from, but only one gets to be "the" return for limitation period purposes and penalty purposes. And if that document was the one filed with the taxpayer’s intent to evade tax, that’s going to be a fraudulent return. No later document can be “the return.” That’s the “one return rule.”
The seminal Supreme Court case on this point is Badaracco v. Commissioner, 464 U.S. 386 (1984). There, between 1965 and 1969 the taxpayers had filed returns with the intent to evade tax. The taxpayers later had a change of heart---no doubt prompted by their indictment by a grand jury---and filed corrected amended returns in 1971. More than three years after that, in 1977, the IRS came in and sent out an NOD. The only proposed assessment was of fraud penalties. The taxpayers argued that their amended return triggered the general three year period of limitations so the NOD was untimely. The Tax Court actually agreed with that argument. But the Supreme Court disagreed and, invoking the one return rule, explained its basis in this pithy paragraph: "Any other result would make sport of the so-called fraud penalty. A taxpayer who had filed a fraudulent return would merely take his chances that the fraud would not be investigated or discovered, and then, if an investigation were made, would simply pay the tax which he owed anyhow and thereby nullify the fraud penalty."
One caveat. The ”one return rule” does not mean that every fraudulent filing is irretrievable. In Haggar Co. v. Helvering, 308 U.S. 389 (1940), the Supreme Court decided that if the taxpayer files a timely amended return, that would be “the return.” In SCA 1998-024 the IRS applied that idea to the six year limitation period in §6501(e). The SCA advises that if a taxpayer files a return before its due date, and then files an amended return also before the original return’s due date (thus the phrase “timely amended return”), the Service will consider the amended return as “the return” relevant for limitation period purposes, and will apply the three year assessment limitation period and not the six year period. If the Service holds to that position in fraud cases, then it would seem a taxpayer could also avoid imposition of the fraud penalties by filing a timely amended return.
>Mr. Gaskin was a fraudster. He probably would not have been if he had corrected his fraud by filing timely amended returns. That is, if he had filed correct returns before their due date, then I think he would have had an excellent argument that he should not have been subject to penalties. As it was, however, Mr. Gaskin filed his amended returns waaaaay too late. His case thus becomes a lesson about the one return rule. Judge Buch sums it up with these short sentences: “In his plea agreement Mr. Gaskin admitted to filing fraudulent returns. He agreed that from 2008 to 2011 he underpaid his taxes by over $100,000 and that the underpayment for each year was due to fraud. As a result the fraud penalty applies to each of the fraudulent returns. An amended return cannot erase the fraud he committed.”
Coda: Many great writers use short sentences. Ernest Hemingway was famous for it. So it may be that Judge Buch’s short sentences do not really indicate irritation. Maybe Judge Buch was simply going for the Ernest Hemingway writing award. Perhaps Judge Buch is even now working on a novella: “The Old Man and The Schedule C.”
Bryan Camp is the George H. Mahon Professor of Law (and darned proud of it!) at Texas Tech University School of Law