Ninth Circuit to Rule on Timing for Filing a Qualified Amended Return for an Undisclosed Listed Transaction
May 1, 2012
The taxpayers in Bergmann v. Commissioner are appealing an adverse Tax Court decision, 137 T.C. No. 10, holding that they failed to timely file a qualified amended return for 2001 and thus are liable for the 20-percent accuracy related penalty. The taxpayers participated in a listed transaction promoted by KPMG, known as the Short Option Strategy. In 2004, two years after the IRS issued a summons to KPMG specifically identifying the Short Option Strategy transaction, the Bergmanns filed an amended return disclaiming the tax benefits of the transaction. The case concerns the interpretation of Treas. Reg. § 1.6664-2(c)(3)(ii) (2004), which establishes rules on the timing of filing a qualified amended return for undisclosed listed transactions. If an amended return is filed before certain terminating events, additional tax reported on the amended return will be treated as if it were reported on the original return. Under the “promoter provision,” the amended return must be filed before the IRS first contacts a person concerning liability under section 6700 (a promoter investigation). The Tax Court rejected the taxpayers’ argument that the IRS must establish that the target of the promoter investigation is in fact liable for a promoter penalty. The Tax Court also held that, in investigating the promoter, the IRS need only identify the “type” of transaction in which the taxpayer engaged, not the specific transaction or the identity of the taxpayer.
In 2000-2001, taxpayer Jeffrey Bergmann was a tax partner in KPMG’s Stratecon Group, which the Tax Court characterizes as “focused on designing, promoting and implementing aggressive tax planning strategies for high-net-worth individuals.” In tax years 2000 and 2001, Bergmann entered into a “Short Option Strategy” transaction promoted by fellow KPMG partner Jeffrey Greenberg. This transaction was identified by the IRS as an abusive tax shelter in Notice 2000-44, 2000-2 C.B. 255 (transactions generating losses by artificially inflating basis). The taxpayers (Bergmann and his wife) claimed losses for the 2000 and 2001 Short Option Strategy transactions on their 2001 return, but filed an amended return in March 2004 removing the losses attributable to the transactions and paying approximately $200,000 in additional tax. The IRS treated the qualified amended return as untimely and assessed accuracy-related penalties.
Under Treas. Reg. § 1.6664-2(c)(3)(ii), as in effect when the Bermanns filed their amended return, the time to file a qualified amended return terminates when the IRS first contacts a person “concerning” liability under section 6700 (a promoter investigation) for an “activity” with respect to which the taxpayer claimed a tax benefit. The IRS served KPMG with two summonses in March 2002, one of which was specifically targeted at KPMG’s involvement in promoting transactions covered by Notice 2000-44. Attempting to disassociate their transaction from those that were the subject of the KPMG investigation, the taxpayers argued that Greenberg acted in his individual capacity in advising them, not as an agent of KPMG. The Tax Court rejected this argument, concluding that the transactions in which the taxpayers engaged were within the scope of Greenberg’s responsibilities as a KPMG partner and also concluding that KPMG had not limited Greenberg’s authority to engage in Notice 2000-44 transactions with other KPMG partners, including Bergmann. The Tax Court also rejected the taxpayers’ argument that the promoter investigation must specifically identify the “activity” that gave rise to the tax benefit. The Tax Court held that the summons need only refer to the “type” of transaction in which the taxpayer participated. The court found that the March 2002 summons met this requirement because it specifically identified the transaction as the same or substantially similar to the transaction identified in Notice 2000-44.
The Tax Court noted that disclosure of the transaction after the Notice 2000-44 summons was served on KPMG would not have been voluntary. The Tax Court explained that the purpose of the promoter provision is to encourage taxpayers to voluntarily disclose abusive tax shelters. That purpose is effectuated by terminating the period to file a qualified amended return when disclosure would no longer be voluntary.
The Tax Court addressed a second issue as well. At first glance, the taxpayers appeared to be subject to the 40% gross overvaluation penalty because the scheme depended on what was found to be an artificially inflated based. They argued, however, that the tax underpayment was not “attributable to” the overvaluation because the Commissioner contended (and the taxpayers eventually conceded) that the entire transaction should be disallowed for lack of economic substance, thereby making the valuation irrelevant. The Tax Court noted that this type of bootstrapping argument has been rejected by several circuits, which have held that the 40% penalty applies when overvaluation is intertwined with a tax avoidance scheme, but that Ninth Circuit precedent has accepted the argument. Keller v. Commissioner, 556 F.3d 1056. Accordingly, the Tax Court rejected the IRS’s attempt to impose a 40% penalty, and the taxpayers were assessed only the standard 20% accuracy-related penalty. The IRS has not appealed this issue.
The taxpayers’ opening brief is due on May 16. The case is docketed in the Ninth Circuit as No. 12-70259.