Document Type

Article

Publication Date

1985

Abstract

When a taxpayer files an honest' federal income tax return for a taxable year, section 6501(a) of the Internal Revenue Code2 limits the period of time during which the Government can assess a tax for that year to a three-year period commencing with the date that the return was filed. The three-year limitations period is extended for an additional three years by section 6501(e)(1)(A) if the taxpayer's return omits properly includible gross income in an amount in excess of twenty-five percent of the gross income that was reported. If a taxpayer fails to file a return for a taxable year or files a fraudulent return, sections 6501(c)(1) and (c)(3) permit the tax for that year to be assessed at any time; in other words, there is no limitation on the time available to the Government to assess or collect the tax. If a taxpayer who failed to file a timely return for a taxable year subsequently fies an honest delinquent return, the three-year limitations period commences to run from the date that the delinquent return is fied no matter how tardy it is and irrespective of whether the taxpayer had a fraudulent purpose for failing to file on time.3 On the other hand, the Supreme Court recently held that a taxpayer who initially files a fraudulent income tax return cannot invoke a period of limitations by filing an honest amended return correcting the fraudulent aspects of the original return. The Supreme Court held in Badaracco v. Commissioner4 that once a fraudulent return has been filed, there is no limitation on the time available to the Government to assess a tax deficiency and penalties for that year regardless of corrective action taken by the taxpayer or by anyone else. Prior to the Supreme Court's decision in Badaracco, the Tax Court and two circuit courts of appeals had applied a limitations period once an honest amended return was filed,5 but two other circuit courts of appeals had held that no period of limitations is applicable in such cases.6 As will be shown below, the Supreme Court's eight-to-one decision in Badaracco was not merely poorly reasoned and erroneous; it was an egregious misapplication of the principles of statutory construction. The issue resolved by the Court is not one of great moment, and the Court's mishandling of that issue is not in itself of much consequence. What is interesting is- how eight justices of the Court could err in such a seemingly easy case and what that error suggests as to the importance of continuing to provide for Supreme Court review of tax litigation. The case also serves as a useful exemplar of the "do's" and "don'ts" of statutory construction. Before addressing the lessons to be derived from Badaracco, it is necessary to make good on the author's claim that it can be demonstrated to the satisfaction of a reasonably skeptical reader that the Court's decision was patently wrong and resulted from a poor technique of statutory construction. This is a heavy burden, especially since the decision was reached by an overwhelming majority of the Court and since two courts of appeals and at least one student law review note reached the same result.7 The reader must judge whether the author succeeds in satisfying it. This Article will first set forth the Court's reasoning and then will consider how the issue should have been resolved.


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