Badaracco v. Commissioner of Internal Revenue

PETITIONER:Badaracco
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

ADVOCATES:
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

Question

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.

Barry I. Fredericks:

You have come forth and filed an amended return.

Albert G. Lauber, Jr.:

We think it is clear that it could not possibly be contended that had the Commissioner got this useful, correct information from a third party, the three-year rule would then all of a sudden applied in the fraud case.

Barry I. Fredericks:

You have given the government all of the information they need on the civil side to determine what the tax is and there is no justification at that point for allowing the government to sit back, armed with the information necessary to determine the tax, to allow them to sit back ad infinitum.

Albert G. Lauber, Jr.:

We think there is no reason on grounds of tax policy for a different result merely because that data happens to be contained in the vehicle of an amended return.

Barry I. Fredericks:

Here is a situation where the taxpayer has come forward and filed his amended return.

Albert G. Lauber, Jr.:

In short, our view is that the Commissioner’s need for an unlimited period of assessment in fraud cases is not materially diminished by the filing of an amended return.

Barry I. Fredericks:

He has given them the information requested and there is no justification for the open-ended statute of limitations suggested by the government.

Albert G. Lauber, Jr.:

And, we think there is no reason to hold that amended returns of all the manifold documents and data that might bear on tax fraud has the unique effect, the singular effect, of shortening to three years the unlimited period that governs fraud cases generally.

Barry I. Fredericks:

Now, they still have their criminal remedy.

Albert G. Lauber, Jr.:

We think there is a second and discreet reason for holding on grounds of tax policy, that the three-year rule should not come into play in tax fraud cases.

Barry I. Fredericks:

We are not suggesting for one moment that the filing of the amended tax return deprives the government of its right to prosecute the individual criminally or to impose its civil 50 percent penalty.

Albert G. Lauber, Jr.:

This has to do with the Commissioner’s duty to pursue criminal tax enforcement.

Barry I. Fredericks:

What we are suggesting is that the filing of the amended return, as in the case of Bennett, the filing of what the government called a delinquent return, should prevent the government from sitting on their hands forever and a day until they decide they want to take action,–

Albert G. Lauber, Jr.:

As this Court has noted in the past, Congress has charged the Commissioner with pursuing both criminal and civil aspects in tax fraud.

Barry I. Fredericks:

We suggest that there is no distinction between that case that is supported in either logic or law to say that a fraudulent filer who files an amended return shouldn’t be treated in the same light and under the same circumstances.

Albert G. Lauber, Jr.:

Limitations period for prosecuting criminal tax fraud is not three but six years.

Barry I. Fredericks:

And there is nothing in the policy considerations rendered by the government.

Albert G. Lauber, Jr.:

As a result, it will often be impossible on a practical ground and unwise as a matter of efficient and sound tax administration for the Commissioner to close down his civil audit within three years of getting an amended return on the taxpayer.

Barry I. Fredericks:

There is nothing in the statute to indicate to the contrary.

Albert G. Lauber, Jr.:

The practical problems here we think are fairly evident.

Barry I. Fredericks:

I suggest to have a distinction drawn on the filing of a piece of paper moves away from the question of intent which is what these sections were to get to.

Albert G. Lauber, Jr.:

Once the Commissioner makes a referral to the Department of Justice for criminal prosecution, he loses his primary audit tool; that is his power to summons the books, records, and testimony of the taxpayers and third parties.

Barry I. Fredericks:

The question of intent was the underlying basis here in both Bennett and these sections, fraudulent intent.

Albert G. Lauber, Jr.:

This result is required by LaSalle Bank, from this Court, and by Congress’ later amendment of Code Section 7602.

Barry I. Fredericks:

Once that is dissipated and the taxpayer comes in and either files what is known as the delinquent return or the amended return–

Albert G. Lauber, Jr.:

But, that means, having lost the summons power, the Commissioner must in effect close down or suspend the civil audit because he has no way of getting information from the taxpayer.

But, apart from these practical problems, the Commissioner has long had a policy of suspending civil audit pending the completion of criminal proceedings.

Certainly if the return was fraudulent at the time it was filed, it is nonetheless fraudulent by virtue of an amended return being filed later, is it?

Albert G. Lauber, Jr.:

This policy is set forth in the Internal Revenue Manual and it stems from the difficulty of conducting at the same time a civil tax fraud litigation while a criminal tax fraud investigation is continuing.

And, the most obvious problem, of course, is the risk of killing the criminal case by making a premature disclosure of evidence to the potential defendant.

Barry I. Fredericks:

I don’t think there is any question about that.

Albert G. Lauber, Jr.:

If the three-year rule is held to apply here, the Commissioner, right in the middle of his criminal tax fraud investigation, is going to have to send a notice of deficiency to the taxpayer asserting civil tax fraud.

The taxpayer will then go into Tax Court or the District Court and the Commissioner will be required by the rules of those Courts to allege fraud affirmatively in the answer and then be subject to discovery, interrogatories and depositions, about his fraud theory.

I think it is pretty clear that if the Commissioner is required to open up his files right in the middle of the on-going criminal investigation, laying out his theory of fraud and the fact he expects to rely on in proving fraud, that criminal case could probably be killed.

Beyond that, we think there are other problems in maintaining an on-going criminal investigation and a parallel civil tax fraud litigation.

No, the attempt to escape punishment.

Albert G. Lauber, Jr.:

In the civil case, the taxpayer, for example, will probably assert the Fifth Amendment privilege barring any introduction of evidence on the issue of fraud.

That is what–

Albert G. Lauber, Jr.:

There could be problems with witnesses because of the premature disclosure of their names through potential defendant and finally there can be problems where the taxpayer puts up a defense as a beleaguered defendant in a criminal action asserting the Commissioner is trying to dun him on five different fronts at once, grab his money, and juries occasionally have been persuaded by that kind of evidence.

So, for all these reasons, we think that the Commissioner’s policy of suspending civil tax audit until the completion of criminal proceedings is salutary both on grounds of fairness to the taxpayer and on grounds of sensible administration of the tax laws.

Barry I. Fredericks:

If one would say he has abandoned his sins of yesterday, he has–

Albert G. Lauber, Jr.:

Petitioners’ argument here would effectively kill that policy.

And, finally, we think there is one last reason for tax policy that counsels in favor of a plain reading of the Code here.

And this has to do with the Commissioner’s overall duties to enforce the tax laws.

Barry I. Fredericks:

The criminal sanctions are still there, the 50 percent fraud penalty is still there.

Albert G. Lauber, Jr.:

Tax laws are complicated.

Barry I. Fredericks:

All we are saying is that it should end the government’s open-ended statute of limitations so that the government–

Albert G. Lauber, Jr.:

Taxpayers are well advised and sometimes devious and the Commissioner has limited resources.

Every year about two million amended returns are filed.

We think it would be a very bad idea to let amended returns to become yet another tool in the hands of people trying to evade the tax laws which they could use to manipulate the limitations period to their own advantage, depending on how, what, and when they file.

If there are no further questions, we think the decision below should be affirmed.

Barry I. Fredericks:

All we are asking–

Warren E. Burger:

Do you have anything further, Mr. Fredericks?

Barry I. Fredericks:

I think the government’s position is very simple.

They attempted to–

The imposition of a civil fraud penalty under Section 6635(b) of the Code does not necessarily indicate that the tax can be assessed at any time under Section 6501(c) even though the taxpayer was subject to the penalty for underpayment due to fraud.

It goes on to hold that that must be done within three years of… That was the Bennett case they were referring to, but within three years of the filing of the delinquent return.

Judge Stevens, your question concerning the original return which was subsequently modified by the amended return, that case, I believe, was decided in the Tenth Circuit, Alkire versus Nicholas, and in that case the Court held that it was the amended return since the original return was insufficient; that the amended return was the return that started the running of the statute of limitations.

I said–

We have cited that case in both the Badaracco brief and ours.

Barry I. Fredericks:

But, it was not as the government had indicated on that.

I said the filing of the amended return does not relieve the taxpayer of his exposure to that fraud penalty.

That is the exact ruling in Bennett and that is the ruling that the government has acquiesced in and has put forth in their own regulation.

If a return is fraudulent in any degree, it is deemed by the government to be totally fraudulent irrespective of the amount, irrespective of the issue, and, therefore, would be subject to this open-ended statute of limitations urged by the government.

I suggest that the government’s tax policies are not well taken and we have covered each of them in our briefs.

Now you say that is all right.

Barry I. Fredericks:

But, the point at hand is the government has several ways of avoiding this problem.

One, as the Chief Justice raised when they initially stepped to the podium, and that is don’t accept the amended return.

Two, the government can say, taxpayer, your time is about to run out, extend the statute of limitations.

Why do you say that?

Barry I. Fredericks:

They do it all the time on a regular basis.

Three, simply take your figures and assess the tax.

The fraud penalty, as set up by Congress, is not a penalty as such, it is a right to impose additional tax.

This is not an attempt in any way to inhibit the government’s criminal investigation.

The way the statute is worded it is not that there is a penalty, it is in computating the additional tax due the government has a right to add 50 percent.

It is not in any way inhibited to avoid penalties.

It is designed to say that a taxpayer who has seen the error of his ways and has filed an amended return shouldn’t be open to a statute of limitations that runs forever and the government shouldn’t be allowed to sit back and wait 10, 15, 20, 30 years and then come in and deny certain deductions that the taxpayer has made which places the burden on the taxpayer to prove the validity of those deductions.

We suggest that the position in Bennett acquiesced in by the government is identical here; that the policy considerations are, in fact, in favor of the taxpayer; that nothing we are requesting strains or prevents the government from enforcing the tax laws, and for those reasons we respectfully suggest that the decision of the Third Circuit be reversed and the decision of the lower courts be reinstated.

And, it must be imposed with the tax itself.

Thank you all.

And, that was the exact position that was taken by the Court in Bennett, exactly the question in Bennett where–

Are you arguing, just so I get your argument clear, that within the meaning of Section 6501(a) that the amended return is “a return”?

Barry I. Fredericks:

I think that there is much… a good point can be made that the amended return is a return.

That is why I am kind of puzzled.

Barry I. Fredericks:

I don’t think… It is not the best argument we could have made.

I think Bennett is more dispositive since that is a case that the government has agreed to and has passed a Revenue ruling and were identical.

But the problem with the argument is that the government will argue that the return is the original return which was fraudulently filed.

Why isn’t that your argument?

Barry I. Fredericks:

I accept that as my argument based upon Bennett because Bennett has decided the prior situation of the failure to file and if you analogize that the fraudulent return is not a return, then you fail to file, and once you file the amended return you are right within the square corners of Bennett.

And, to that extent–

Barry I. Fredericks:

I adopt the argument of the Tenth Circuit and that was the argument that they made in their opinion; that the return, the initial return was not a Zellerbach return, it wasn’t an honest evidence to file a return and it was the amended return that was, in fact, the first return filed.

I suggest that is in keeping with the position we have taken in Bennett and which the government has acquiesced and the logic of Bennett carries right through to that direction.

But, I certainly suggest that a return, an amended return can be reviewed as a return under the statute and then within the arguments of 6501(a) as taking this out of the exceptions that follow.

I would like to reserve the balance of my time for rebuttal.

Albert G. Lauber, Jr.:

This case presents a straight forward question of statutory construction.

Section 6501(a) provides in general that the Commissioner must assess the tax within three years of the date a return is filed.

Section 6501(c)(1) has an exception to this rule.

It says that in the case of a false or fraudulent return filed with the intent to evade tax, the tax may be assessed at any time.

The Code has allowed the Commissioner to assess the tax at any time in broad cases since 1918.

We think the words of the statute are clear and unambiguous.

Section 6501(c)(1), the at-any-time provision, plainly came into operation when the taxpayers filed their original returns here because those returns were, or are deemed for present purposes, to have been false and fraudulent.

And, there is nothing in that section which could serve to call off its operation by reference to a fraudulent filer’s later conduct, be it the filing of an amended return or doing anything else.

Likewise, Subsection (a), with the three-year rule, plainly did not come into play when taxpayers filed their original returns here because that section, by its terms, cannot apply when the return is false and fraudulent.

And, there is nothing in Subsection (a) which could cause its general three-year rule to come into effect later on depending on the filing of an amended return.

When one recalls that–

Why are you so sure of that?

Couldn’t one say that the amended return is a return within the meaning of the statute?

Warren E. Burger:

Mr. Fredericks, I think you may proceed whenever you are ready.

Couldn’t you say that?

Albert G. Lauber, Jr.:

We think that must fall because (c)(1) uses the phrase “fraudulent return”.

It must be a return within the meaning of the section we are construing.

In your view, is an amended return a return within the meaning of the Code?

Right.

Albert G. Lauber, Jr.:

But, one recalls that as this Court has held a limitations period must be construed strictly in favor of the government.

We think the plain language of the Code here, given a natural reading, indicates that once a false return has been filed, the Commissioner has an unlimited period to assess the tax, whatever the taxpayer does.

We think this natural reading of the statute is confirmed if one looks to the structure and operation of other Code provisions.

To begin with it is clear that a taxpayer who has filed a false return remains liable for criminal and civil fraud penalties on that account regardless of later repentant conduct.

The fraud is complete when the fraudulent return is filed.

In short, the case remains a case of a false or fraudulent return despite the filing of an honest amended return indefinitely for purposes of imposing substantive fraud liability.

We think it is logical to infer from that that the case should also remain a case–

You may have gotten it from an amended return.

Albert G. Lauber, Jr.:

We think it is just another form of information the Commissioner has to process in doing its fraud investigation.

What happened in Deleet–

In Deleet–

What Deleet did–

Because the amended return, we submit, has no relevance in determining the limitations period in fraud cases.

The statute says “at any time”.

What happened in the Deleet case was the amended return reported the omitted gross income of the corporation, but it also claimed a deduction in the exact same amount.

You just said your amended return doesn’t accurately state your taxes, so we are assessing additional taxes.

Suppose you do two things more than three years after the amended return is filed.

One, you say you didn’t state your taxes correctly, wholly aside form there being any fraud.

You say you failed to state your basic tax accurately in your amended return.

Also, we are assessing a fraud penalty.

Now, you say you can do both of those.

Albert G. Lauber, Jr.:

It would not be a second act of fraud if the amended return were honest.

That doesn’t matter.

We are going back to the antecedent fraud on the original return.

You would still say you can go on forever.

Albert G. Lauber, Jr.:

We have gotten all we can on–

–He thinks it is accurate but, you know, ten years later decide he overdeducted something like his automobile expense.

What I am saying is he substantially paid it.

You would still say that you go on forever.

Albert G. Lauber, Jr.:

A taxpayer can amend–

What is the starting date then?

Albert G. Lauber, Jr.:

The finishing date is perpetuity.

Our position is whenever the first return is fraudulent, we have forever to come against the taxpayer.

That is the language the statute requires.

I think this language is also supported by the fact that amended returns are not even recognized by the Code.

The Code does not permit, officially permit the taxpayer to file amended returns nor does it require the Commissioner to accept them if they are filed.

Indeed, this Court last term in Hillsboro Bank noted that amended returns are entirely creatures of IRS art and the Commissioner has discretion to reject them.

Albert G. Lauber, Jr.:

Now, because amended returns are not part of the structure that Congress enacted in the Code, and because the Commissioner can reject them in his discretion, we think Congress is very unlikely to have intended that these documents would have any kind of controlling effect on the operation of the limitations rules.

I said I wouldn’t, but I… Say you file an original return that is valid, you think it is valid, but you forgot something, so a year later you file an amended return correcting a mistake.

What period of time does the government have in which to… When does the three years–

Barry I. Fredericks:

Thank you, Mr. Chief Justice, and may it please the Court:

This matter comes to the Court from an appeal from the Third Circuit.

The facts in the case are not in dispute.

Basically it is a simple legal issue that is presented here today.

Simply put the question is one of whether an individual who has initially filed a fraudulent tax return and subsequently comes forth and files an amended tax return, whether by that act he begins the running of the three-year statute of limitations applicable under the Internal Revenue Code or, as the government alleges, he is forever open to an assessment of tax upon the filing of the initial fraudulent return.

Warren E. Burger:

Where would your argument take you if when the amended return was offered, tendered, the Commissioner refused to accept it?

Barry I. Fredericks:

I think, Your Honor, under that point the government could argue that there was no amended return filed and I think that we would be in a very difficult position to start the running of the amended return, the government could then say the amended return is not filed.

In this case and the cases that have taken place in the Second, Fifth, and Tenth Circuits that is not the facts that we have to deal with, in fact, in all of those cases, the amended return was taken and the tax that was due on the ammended return was collected by the Internal Revenue Service.

Warren E. Burger:

Do you think that barred them from taking any other position, is that your point?

Barry I. Fredericks:

Well–

Warren E. Burger:

+ By taking the ammended return.

Barry I. Fredericks:

–I think that the issue of the ammended return is one that the government presses which i have always thought has been a question of an ostrich type argument in so far as they can deny the existence of an ammended return except that the Internal Revenue Code at length refers to ammended returns and is a practice that has been going on for some time and has been recognized by the courts and in many cases has been used by the government in connection with their criminal prosecutions of the people who have been filing fraudulent tax returns in the first instance.

The Dowell case and the Klemp case, I believe, in both instances the government used the ammended return as part of their case in chief to establish the question of fraud.

I think the question the Chief Judge poses is an interesting one.

I really can’t answer the question of what would happen if the government refused to accept that amended return, which they may or may not have a right to do.

But, in this case and in the cases that have the issue as has been presented that has not been the situation.

The amended return has been fully accepted by the government.

And, we suggest that upon the filing of that amended return that the Tax Court ruling in Bennett, which was decided in 1958, and acquiesced in by the United States government, which was a case of the fraudulent failure to file a tax return at all and a criminal prosecution of that taxpayer for fraudulently failing to file.

In a subsequent filing of a non-fraudulent return, the Tax Court and the government concluded that at that point the three-year statute of limitations provided in 6501(a) began to run.

I suggest that there is no basis to distinguish that case from the case at bar.

Sandra Day O’Connor:

Well, Mr. Fredericks, the language of the two subsections is different.

Barry I. Fredericks:

I respectfully–

Sandra Day O’Connor:

In the case of the original non-filing of a return, the section says within three years after the return is filed.

There is language that doesn’t appear.

Barry I. Fredericks:

–No.

I think the subsection language is not different, Your Honor.

The subsection language, (c)(3) and (c)(1), are identical.

Barry I. Fredericks:

They both provide that the statute shall not run–

Sandra Day O’Connor:

Well, the language in 6501(a) does say that the tax will be assessed within three years after the return is filed, does it not?

Barry I. Fredericks:

–That is correct.

Sandra Day O’Connor:

And that language would then apply where there is originally no return filed, but later one is filed.

Now, I don’t see how, when you compare that with the language for the fraudulent return that is filed and subsequently an honest return filed, the language is so different that I don’t see how you can make the argument you are making.

Albert G. Lauber, Jr.:

Well, I don’t believe you… the language in 6501(c)(1) and (3) are identical.

What you are referring to–

Sandra Day O’Connor:

Right.

Barry I. Fredericks:

–is the initial language in the first section as to the statute of limitations.

Sandra Day O’Connor:

That is right.

Barry I. Fredericks:

And, I would suggest, Your Honor, that one must go back to 1918 when the statute was first enacted and at that time Congress provided a five-year statute of limitations and an exemption in the case of filing a fraudulent tax return.

No mention was made at all on failure to file.

In 1921, Congress then enacted what is now the predecessor of the sections we are dealing with.

And, it said the fraudulent failure to file or… I am sorry, the filing of a fraudulent return or the failure to file in a single sentence.

And, I suggest that that indicated an intention by Congress to deal with these two situations identically.

In fact, all of the Circuit Courts that have considered this matter have all concluded that the two sections must be read in pari materia.

I don’t think that is in question here.

It is only in 1954 when the ’54 Code comes into being that the two section, which were in one sentence, were split into two sections.

And, there is no substantial legislative history one way or the other to indicate why.

I suggest that the legislative history, which indicates that both of these sections were to be identically when they were initially enacted, indicates there should be identical treatment.

Therefore, when one fraudulently seeks to evade the tax law by failing to fraudulently file a tax return–

William H. Rehnquist:

By failing to fraudulently file a tax return?

Barry I. Fredericks:

–Well, that is what the facts were in Bennett.

The taxpayer, with an intent to evade the tax, filed a return.

William H. Rehnquist:

Isn’t there a difference between failing to fraudulently file and fraudulently failing to file?

I mean, failing to fraudulently file to me means–

Barry I. Fredericks:

No, no, I am sorry.

William H. Rehnquist:

–that you had planned to file a fraudulent report, but you didn’t.

Barry I. Fredericks:

I am sorry.

What the Bennett taxpayer did was with the intent to evade the tax, with the fraudulent intent failed to file the return.

Barry I. Fredericks:

What the taxpayers in this case did was file the fraudulently return and subsequently filed an amended return.

I suggest–

Sandra Day O’Connor:

Well, now, if a taxpayer simply negligently, not fraudulently, failed to include more than 25 percent of the income, then there is a six-year statute of limitations, right?

Barry I. Fredericks:

–Which begins to run from the day that return is filed irrespective of whatever transpires, that is correct.

Sandra Day O’Connor:

But, under you theory, you would be better off if you had a fraudulently intent than a negligent intent because then it would just be a three-year statute of limitations.

Barry I. Fredericks:

That is not true at all, because if you filed and it was fraudulent you have two other things, three things that have to come into play.

One, that you would be subject to criminal prosecution.

You would have six years in which the government could indict you and try you.

Two, you would be subject to the 50 percent penalty.

And, three, in order to have a statute of limitations to begin at all, you would have had to have filed an amended return.

Yes, if the fraudulent return was filed on April 15th and the amended return was filed on April 16th, now in that case there is no running of a statute from our position.

The 16th for three years would begin to run.

That taxpayer might be in better position than the fellow who negligently forgot his 25 percent, but that taxpayer came in immediately, rectified his situation, and gave the government the information it had.

Sandra Day O’Connor:

But, that difference and the fact that the Congress treated the negligent omission differently does give some meaning to the language that I referred to early.

I mean, the scheme holds together a little better, doesn’t it, if that is the case?

Barry I. Fredericks:

I suggest not for this reason.

Congress… There is some legislative history on the six-year… the reason for the six-year statute of limitations and that was that begins to run from the day it is filed whether the government discovers it or not.

So, the government, without having the benefit of the information, has got a six-year statute running on it and, therefore, Congress said we are going to give them additional time to catch up this possible mistake if it was negligent.

Obviously, if it is fraudulent, there is no statute of limitations of any kind.

John Paul Stevens:

Mr. Fredericks, can I ask on that point, what is the law with respect to this situation?

Suppose you negligently file a return with more than a 25 percent… you have got six years.

Then six months later you file a correct amended return.

What is the statute of limitations?

Barry I. Fredericks:

The statute of limitations on that is six years.

John Paul Stevens:

Still six years.

Barry I. Fredericks:

The Court’s ruling is that since it is a running statute that no act, be it either–

John Paul Stevens:

Those holdings are somewhat inconsistent with your position then.

Barry I. Fredericks:

–I think not.

I think not, because the statute is already running.

Our position is that there is no statute running.

Barry I. Fredericks:

We are saying, as in Bennett, where the filing of what the government characterizes as a delinquent return now starts the statute.

So, in my case, the filing of the amended return starts the statute.

In the 25 percent case, that statute begins to run the day the return is filed, whether the government discovers it or doesn’t discover it, no matter what happens, and neither the taxpayer nor the government can stay off the running of that statute.

In our case, the government’s position is that they have forever, literally forever, because if you buy the government’s position, the taxpayer can have died, his estate could have been passed on to three generations and still the statute of limitations on transferees don’t begin to run until one year after the initial statute would begin to run.

The government can go on down three generations to assess this tax if they so choose.

The other problem that we suggest exists is that by not having a statute of limitations of any kind the government is in a situation where they can come in after the amended tax return has been filed and make numerous denials of deductions claimed by the taxpayer and then that burden shifts to the taxpayer, which is exactly what happened in this situation.

The taxpayer has the burden of proof of establishing the propriety of certain deductions that he has made.

Having now been ten years down the road we run into the very reason that this Court says that statute of limitations exist so that no issue shall be tried at a time when evidence disappears, memories fade, and witnesses are not available.

To give the government an open-ended position after the amended return comes in, we suggest opens up a substantial area of government abuse and we suggest that when the government says–

William H. Rehnquist:

Of course, if that is the rule, Mr. Fredericks, I suppose the taxpayer has it within his control to avoid that abuse by simply not filing an amended return after he has filed a fraudulent return.

Barry I. Fredericks:

–Well, by not filing the amended and taking the risk of non-disclosure.

He could just sit back and hope the government never catches him.

William H. Rehnquist:

Yes.

He presumably took that risk in the first instance when he filed the fraudulent return.

Barry I. Fredericks:

Well, that comes another way around.

Since our policy for taxation is really based, as this Court has said many times, upon the voluntary assessment of the taxpayer of his tax, and in this case, a reassessment, we suggest, that I think your question highlights very nicely, that to take the government’s position puts a premium on silence.

It says to the taxpayer, don’t file the amended return because you have no benefit.

If anything, you are going to make an admission against your own interest, subject yourself to the 50 percent fraud penalties, and possibly criminal prosecution.

Sit back and run the risk of not being disclosed, and, therefore, you have no problem.

William H. Rehnquist:

Well, that is true of almost anybody who commits fraud in all of the variety of ways that fraud is prohibited, isn’t it?

That once they have committed the fraud, they have committed an act which submits them to rather extensive liability and there is very little way to recover from that.

Barry I. Fredericks:

Only if the government discovers you.

And, we suggest that one of the ways to recover it and not to avoid… We are not suggesting that the penalties change.

We are suggesting that by filing the amended return, yes, you are subject to criminal prosecution.

Yes, you are subject to the tax penalty.

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

You have come forth and filed an amended return.

You have given the government all of the information they need on the civil side to determine what the tax is and there is no justification at that point for allowing the government to sit back, armed with the information necessary to determine the tax, to allow them to sit back ad infinitum.

Here is a situation where the taxpayer has come forward and filed his amended return.

He has given them the information requested and there is no justification for the open-ended statute of limitations suggested by the government.

Barry I. Fredericks:

Now, they still have their criminal remedy.

We are not suggesting for one moment that the filing of the amended tax return deprives the government of its right to prosecute the individual criminally or to impose its civil 50 percent penalty.

What we are suggesting is that the filing of the amended return, as in the case of Bennett, the filing of what the government called a delinquent return, should prevent the government from sitting on their hands forever and a day until they decide they want to take action, particularly when that delay results in substantial prejudice to this taxpayer who has now gone through a self-assessment and has filed his return.

There is no government policy that warrants such an open-ended civil statute of limitations.

The government disagrees.

It says, well, it needs this in order to allow them to proceed with their criminal investigation.

We suggest that that is really not the case.

Certainly the criminal investigation, at the time that the government has referred the matter to the Department of Justice for criminal investigation, they will have gathered enough information to meet the civil burden which is far less than their criminal burden.

Secondly, the amended return gives the government one advantage.

It has an admission against interest by the would-be defendant to which they can compare with the original return and clearly determine right from the face of the amended return where the fraud was and in what directions they have to go.

At the time that the government seeks an indictment, it certainly has a more than prima facie case.

The government believes at the time it returns an indictment against a citizens that it can prove its case beyond a reasonable doubt.

The burden on the civil side is substantially less than that.

Has there been any indictment against either of these taxpayers?

Barry I. Fredericks:

The initial… Badaracco was, in fact, indicted and plead guilty.

Deleet was not.

Deleet is not a criminal case and there has been no criminal prosecution against Deleet.

Deleet was a situation where the taxpayer, which is a corporation, had a change in the upper echelons of management and they came forth and filed their amended returns.

There has never been a criminal prosecution in that regard.

But the point that we are making is that there is no need for the government to sit back and wait on these type of situations, particularly when armed with the amended return.

They have used the return in criminal prosecutions against the taxpayer.

And, to allow them on the civil side to wait when it is clearly going to prejudice the taxpayer, we suggest is illogical and unconscionable.

I mean, Bennett was a classic case of a criminal who was indicted, who had committed tax fraud, and the court said, well, once you filed a return and have given the government the very information it needs to apply the tax, there is no reason to keep the statute of limitations open.

Albert G. Lauber, Jr.:

Three years from the original return.

–So, if the government accepts an amended return two and a half years after the original one, why–

Albert G. Lauber, Jr.:

This Court held in a companion case to Zellerbach Paper that an amended return, if both the amended and original are honest, it does not give the Commissioner more time.

–Mr. Lauber, may I ask you whether fraud is easier to detect or to prove in the Bennett situation than in the situation involved in these cases?

Albert G. Lauber, Jr.:

Well, Bennett is where there is fraudulent failure to file any return at all.

What are the… What element is fraudulent failure to file have in it that a willful fail to file doesn’t?

Albert G. Lauber, Jr.:

Well, it is hard to make up a jury instruction on that.

But, fraud connotes intention to deceive, doesn’t it?

Albert G. Lauber, Jr.:

Yes.

Barry I. Fredericks:

Might I also add the Bennett case also dealt the amended return, yes, you are subject to criminal prosecution.

Why do you say fraudulent intent is dissipated by the filing of an amended return?

Barry I. Fredericks:

–Yes, but the… There is no question about that, but the at the point the taxpayer files his amended return, he has obviously abandoned his initial intent.

Well, you don’t have to a permanent intention to commit fraud.

Barry I. Fredericks:

No.

All you need is at the time you commit it.

Barry I. Fredericks:

Yes, I acknowledge that, but at the time he has filed the amended return, he has come forth and met his obligation as a taxpayer to give the government all of the information.

–It doesn’t remove the fact that he has committed fraud.

Barry I. Fredericks:

–But, it doesn’t remove the penalties either, Your Honor.

And prevent them from doing what?

Barry I. Fredericks:

–Sitting back and waiting–

Before they do what?

Barry I. Fredericks:

–Assess the tax.

Warren E. Burger:

Very well.

What did they try to do in this case?

Barry I. Fredericks:

Yes, I do, very briefly, Your Honor.

–They waited six and a half years to come in and assess the taxes.

Warren E. Burger:

You have four minutes remaining.

What did they try to assess?

Barry I. Fredericks:

I would like to just respond to one question that Justice White asked about the imposition of the fraud penalty and I read from the government’s Revenue ruling that I referred to earlier.

Well, they denied certain of the business deductions in question as to Deleet and they attempted to impose the tax fraud penalty in Badaracco.

That is what I am… Did you say that you could forever impose the 50 percent fraud penalty?

Barry I. Fredericks:

–No, I didn’t.

I thought you did.

Barry I. Fredericks:

–No.

The government disagrees with you on that though?

Barry I. Fredericks:

Well, I am just citing the case and giving Your Honor the authority for it.

But only for three years.

Thank you.

Barry I. Fredericks:

That is correct.

On the question of minimal tax fraud questions, there is no such thing as a minimal return.

The amended return is filed and the very next day the government goes back and assesses the… more than three years after the original failure to file or… They go back the next day after the amended return and impose the fraud penalties.

Barry I. Fredericks:

I said they have three years from the filing of the amended return.

I know you do.

Barry I. Fredericks:

Because it is the amended return that has given them the knowledge and information that they need to assess the tax.

It is still a fraud penalty, isn’t it, for committing fraud?

Barry I. Fredericks:

Right.

But, you say you can do that for three years after filing the amended return.

Warren E. Burger:

Thank you, gentlemen, the case is submitted.

Barry I. Fredericks:

That is the position that we take, Your Honor.

The Clerk:

The Honorable Court is now adjourned until tomorrow at 10:00.

May I ask you a question about the language of the statute?

Barry I. Fredericks:

–That was the position that the Tenth Circuit took in Dowell.

I just wonder if you are taking that position.

Barry I. Fredericks:

Well, I don’t want to abandon it since the Dowell decision was favorable to me.

Well, if it is, then don’t you just win from the plain language of 6501(a)?

Barry I. Fredericks:

I think we do except–

But, you don’t make that argument.

Barry I. Fredericks:

–Well, the reason I don’t make the argument is the problem that one comes into… Again, I am not abandoning the argument.

Well, but the… I don’t… I understand what they can argue, but you argue going back to these early statutes that a fraudulent return is not a return.

Barry I. Fredericks:

That is correct.

Just as no return at all was.

Barry I. Fredericks:

That is correct.

But then why don’t you say as soon as they file an amended return they have now filed a statutory return and the statute begins to run?

Barry I. Fredericks:

It is my argument based upon Bennett.

But, you don’t argue you are within the square corners of what Congress has said the correct rule should be.

Barry I. Fredericks:

–Well–

I think we would be more interested in the language of the statute than in sort of a convoluted reasoning from a bunch of cases.

Barry I. Fredericks:

–Well, I think that, Your Honor–

But, you don’t make the argument in any event?

Barry I. Fredericks:

–No.

Warren E. Burger:

Mr. Lauber?

Albert G. Lauber, Jr.:

Mr. Chief Justice, and may it please the Court:

Let me stop you right there.

Albert G. Lauber, Jr.:

–Well, we would agree, Justice Stevens, it is a return, but the phrase used in (a) is “the return”, and the Court early on–

But that is the only statutory return then.

Albert G. Lauber, Jr.:

–You are presupposing the argument that Dowell made that the fraudulent return was not a return.

Let me just ask one question and I won’t interrupt any more.

Albert G. Lauber, Jr.:

Our view is that an amended return, if accepted by the Commissioner, is a return for the tax year, but it is not the return referred to in (a).

But it is not the return.

Albert G. Lauber, Jr.:

That is because Congress, by using a definite article, we think, indicated that it meant the original return for the year, not an amended return.

So, your argument would fall if instead of the word 6501(a), that Congress had selected the word “a”.

Albert G. Lauber, Jr.:

No, because then we would still be covered by (c)(1).

But, it wouldn’t be quite as clear.

Albert G. Lauber, Jr.:

It wouldn’t be quite as clear.

You place a lot of weight on “the”.

Albert G. Lauber, Jr.:

It would give us only one string rather than two to our bow which I think we have now.

It just doesn’t make any difference where you got your information that a fraud had been committed.

Albert G. Lauber, Jr.:

–Or from an anonymous tip or a third party or bank or an accounting firm or anyone.

In assessing any additional taxes in either one of these cases, is there additional taxes assessed after the filing of the amended return other than the fraud penalty?

Albert G. Lauber, Jr.:

Yes.

So, you don’t accept the accuracy of the amended return?

Albert G. Lauber, Jr.:

–I believe after we investigated the return of Badaracco, I think that turned out to be accurate.

Because you couldn’t really, after three year, have assessed any additional taxes on the amended return, could you?

Albert G. Lauber, Jr.:

–Yes, we could have.

Why?

Albert G. Lauber, Jr.:

Because the Commission is empowered not only to assess the fraud penalty but the tax at any time in a fraud case.

Well, I know, but there may be… You might be able to impose the fraud penalty but could you… Say you made a mistake in calculating your tax on the amended return other than the fraud penalty.

Albert G. Lauber, Jr.:

That is what happened in Deleet, Justice White.

How can you do that after three years from the amended return?

Albert G. Lauber, Jr.:

–Why?

Well, it seems to me arguably at least there could be a difference between assessing more taxes than shown on the amended return and assessing some penalty for the fraud that was committed prior.

Albert G. Lauber, Jr.:

No, there cannot, Justice White, because, as counsel for Petitioner–

Well, that is your position.

Albert G. Lauber, Jr.:

–Well, Congress might have done that, but they didn’t, because a fraud penalty is a colloquial phrase to refer to an addition to the tax on account of fraud.

I understand that.

Albert G. Lauber, Jr.:

It is all one ball of wax.

Suppose you hadn’t attempted to impose any fraud penalty at all.

Albert G. Lauber, Jr.:

Then there would be no–

And, you did it more than three years after the filing of the amended return.

Albert G. Lauber, Jr.:

–If there were no finding of fraud, we wouldn’t have the unlimited period.

Why not?

Albert G. Lauber, Jr.:

Because it only applies in cases of a false or fraudulent return.

Well, then I would tell you again.

Albert G. Lauber, Jr.:

You make another amended return.

No, we just say… you do two things.

Albert G. Lauber, Jr.:

We are saying if there is fraud in the original return, we can assess additional tax itself plus what we call the fraud penalty indefinitely, no matter how many amended returns the taxpayer files.

On the basis of the original return though.

Albert G. Lauber, Jr.:

Exactly.

And, you say that even at the time of filing the amended return the taxpayer voluntarily pays the fraud penalty.

Albert G. Lauber, Jr.:

Well, if the taxpayer voluntarily pays… If his return is accurate and he voluntarily pays–

He first filed a fraudulent return.

Albert G. Lauber, Jr.:

–Right.

And six months later he files an accurate amended return and voluntarily tenders the fraud penalty.

Albert G. Lauber, Jr.:

If that return is completely accurate and it correctly computes the fraud penalty, there is nothing left for the government to do.

Suppose–

Albert G. Lauber, Jr.:

–Well, then he would have incorrectly computed his fraud penalty because if we audit the return further and determine that he got the deficiency wrong, although he tried to be honest, he got it wrong, he got the fraud penalty wrong too.

He said the fraud penalty only gave half a million where he should have given an extra $500 say.

Albert G. Lauber, Jr.:

We would.

Is there anything to prevent a taxpayer from filing his initial return and then an amended return and then a second amended return?

Albert G. Lauber, Jr.:

No.

It is a matter of grace whether it will be accepted.

Albert G. Lauber, Jr.:

–Accepted, that is right.

Now, suppose he put out a fraudulent return initially, as you claim here, a less fraudulent or correct return the second time, and still a fraudulent one later, the third one.

Albert G. Lauber, Jr.:

Well, the starting date is the first return.

May I ask one other question?

Albert G. Lauber, Jr.:

The first return is not fraudulent, but inaccurate?

Not fraudulent, but just inaccurate.