January 16, 2014
That didn’t take long. Less than two weeks after learning that the parties would not be mediating their dispute (see our previous report here), the Ninth Circuit issued a brief five-page unpublished opinion affirming the Bergmann case in favor of the government. The court held that the time for filing a qualified amended return for an undisclosed listed transaction terminates when the promoter (here, KPMG) is first contacted by the IRS about examining the transaction, not when the IRS later determines the transaction is a tax shelter.
To recap the issue (see our original report here), under Treas. Reg. § 1.6664-2(c)(3)(ii), as in effect when the Bergmanns filed their amended return, the time to file a qualified amended return terminates when the IRS first contacts a “person” concerning liability under 26 U.S.C. § 6700 (a promoter investigation) for an activity with respect to which the taxpayer claimed a tax benefit. The Bergmanns claimed tax benefits from a Short Option Strategy promoted by KPMG on their 2001 tax return. The IRS served summonses on KPMG in March 2002 for its role in promoting the Short Option Strategy transactions. The Bergmanns did not file their qualified amended return until March 2004, shortly after KPMG identified the Bergmanns as among those taxpayers who participated in the transaction. The Bergmanns argued that “person” as used in the regulation meant only those persons liable for a promoter penalty under 26 U.S.C. § 6700.
The Ninth Circuit quickly dispatched the taxpayers’ argument, characterizing their interpretation of the regulation as “impermissibly rendering its text and purpose nonsensical.” Under the express language of the regulation, it applies when the promoter is “first contacted,” not found liable. The court of appeals concluded by observing that the purpose of qualified amended returns is to encourage and reward taxpayers who “voluntarily disclose abusive tax practices, thereby saving IRS resources.” Here, the taxpayers did not amend their return until after KPMG gave their names to the IRS.