February 8, 2013
The Bergmanns participated in a listed transaction promoted by KPMG, known as the Short Option Strategy. When the Bergmanns filed their amended return in March 2004, the IRS had already served KPMG with summonses targeted at KMPG’s promotion of the Short Option Strategy. As discussed in an earlier post, the Tax Court held that the Bergmanns failed to timely file a qualified amended return and thus were subject to the 20-percent accuracy related penalty. Under the regulations in effect when the taxpayers filed their return, the time for filing a qualified amended return terminated when “any person described in § 6700(a) (relating to the penalty for promoting abusive tax shelters) is first contacted by the Internal Revenue Service concerning an examination of an activity described in § 6700(a) with respect to which the taxpayer claimed any benefit on the return . . . .” Treas. Reg. § 1.6664-2(c)(3)(ii). The Tax Court rejected the Bergmanns’ argument that the promoter provision of the qualified amended return regulations required the IRS to establish that KPMG was liable for the § 6700 promoter penalty.
On appeal, the Bergmanns’ principal argument is that the Tax Court erroneously applied the current qualified amended return regulation rather than the regulation in effect when the amended return was filed. The current regulation, Treas. Reg. § 1.6664-2(c)(3)(i)(B), which applies to amended returns filed on or after March 2, 2005, treats as a terminating event the “date any person is first contacted by the IRS concerning an examination of that person under § 6700 . . . for an activity with respect to which the taxpayer claimed any benefit on the return,” rather than the date “any person described in § 6700(a)” is contacted. The Bergmanns acknowledge that their amended return would be untimely under the current regulations.
The Bergmanns argue that the Tax Court must have relied on the current regulations because its paraphrase of the regulation tracks the language of current regulation. In its brief, the Government argues that it was clear from both the post-trial briefing and the Tax Court’s decision that the Tax Court was fully aware of which regulation was controlling and in fact cited the correct version. The Government then argues that the Tax Court correctly interpreted the operative regulation. Because the terminating event is the “first contact” with the promoter, the timing should not turn on the ultimate results of the § 6700 investigation of the promoter. And, the Government argues, any ambiguity in the regulations should be resolved by deference to the agency’s interpretation of the regulation. The Treasury Decision accompanying the amended version of the promoter provision explained that the new language was intended to “clarify the existing rules,” and, specifically, that the language “clarifies that the period for filing a qualified amended return terminates on the date the IRS first contacts a person concerning an examination under section 6700, regardless of whether the IRS ultimately establishes that such person violated section 6700.” T.D. 9186, 2005-1 C.B. at 791-82. The taxpayers’ reply brief largely ignores the Government’s arguments. Oral argument has not yet been scheduled.