Badaracco v. Commissioner of Internal Revenue

RESPONDENT: Commissioner of Internal Revenue
LOCATION: Spofford Juvenile Center

DOCKET NO.: 82-1453
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 464 US 386 (1984)
ARGUED: Nov 28, 1983
DECIDED: Jan 17, 1984

Albert G. Lauber, Jr. - on behalf of the Respondents
Barry I. Fredericks - on behalf of the Petitioners
The Clerk - on behalf of the petitioners -- rebuttal

Facts of the case


Media for Badaracco v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - November 28, 1983 in Badaracco v. Commissioner of Internal Revenue

Albert G. Lauber, Jr.:

It is three years from the original return's filing date.

Now, because we think that language of the Code is clear and unambiguous and because we think that the plain reading of the statute is confirmed by the operation of other Code provisions, there is no need here to go on to look at tax policy as a basis for decision.

I guess I would have to say it is not easier to detect fraud there.

But, what happens in practice is the Commissioner brings very, very few actions, prosecutions on the criminal front for fraudulent non-filing.

The reason for that is that it is very hard to get a jury to buy the fact that a guy committed fraud if he did nothing at all.

So, in fact, there are only a handful of those prosecutions.

What the government does is alternatively bring a prosecution for willful failure to file where fraud need not be proven and this is only a misdemeanor rather than a felony.

So, in practice, the way we deal with that problem is to go the other route.

Willfull, I guess, is intentional violation of a known legal duty and fraud connotes something about bad acts beyond that.

But, in effect, the Commissioner generally does not indict for fraudulent failure to file.

Now, of course, the Petitioners, of course, base their entire case on tax policy.

Their view is that once the Commissioner has an amended return that ultimately turns out to be non-fraudulent, he doesn't need the additional time provided by Section (c)(1).

At that point, Petitioners contend that the Commissioner's fraud investigation should be limited by the three-year rule that applies in non-fraud cases.

We think this argument is wrong and that the Court of Appeals was correct in determining that, in fact, strong reasons of tax policy support a plain reading of the statute.

First of all, the filing of an amended return, however honest it ultimately proves to be, does not really change the nature of a tax fraud investigation.

Congress chose to permit assessment at any time in fraud cases for very good reasons.

Fraud is hard to investigate, both because the controlling issue is one of intent and because fraud is often accompanied by its badges such the falsification or destruction of records.

Beyond that the Commissioner has the burden of proof on the fraud issue.

But, the reasons that lead Congress to enact the at-any-time rule in fraud cases persists even though the taxpayer files an amended return.

The case is still a fraud case with all the attendant problems of examination and the Commissioner still has the burden of proof.

An amended return comes with no imprimatur upon it.

Indeed, it comes from a taxpayer who has already made false statements under penalties of perjury.

In our view the data on the amended return are no different from any other data that come into the Commissioner's hand during a tax fraud investigation.

It must be examined just as carefully.

That point might be illustrated by the facts of the cases before us today.

In these cases, the fraud consisted of diverting business receivables into the secret bank accounts maintained on behalf of the company's employees.

Barry I. Fredericks:

Yes, you are subject to the tax penalty.

Albert G. Lauber, Jr.:

Now, the Commissioner could have been alerted to that fraud, both the facts of the fraud and the amount of the diverted receipts in any number of ways.

Barry I. Fredericks:

But, no, you should not be subject to an open-ended statute of limitations.

Albert G. Lauber, Jr.:

It could have been a tip from an unhappy employee, as indeed almost happened in Deleet, it could have been a tip from a competitor or supplier or customer of the business, or it could have come from a bank or accounting firm.