United States District Court, D. Arizona
Stephen T. May, Plaintiff,
United States of America, Defendant.
NEIL V. WAKE, District Judge.
Before the court are the parties' cross-motions for summary judgment regarding the statute of limitations. For the reasons that follow, the court will deny the Government's Motion (Doc. 63) and grant Plaintiff's Motion (Doc. 57) in full.
Section 6707A of the Internal Revenue Code provides, "Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty." 26 U.S.C. § 6707A(a). The statute defines "reportable transaction" as "any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion." Id. § 6707A(c)(1). Any reportable transaction that "is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011" is known as a "listed transaction." Id. § 6707A(c)(2).
Plaintiff Stephen T. May filed his federal income tax return for 2004 on July 22, 2005. (Doc. 64 at 2; Doc. 64-1 at 2.) May eventually acknowledged to the Internal Revenue Service on September 26, 2011, that he had neglected to include in that return $165, 000 of pass-through income from Tornado Alley, Inc., a corporation with which he was "affiliated." (Doc. 64-1 at 26; Doc. 64 at 2; Doc. 1-1 at 4.) Specifically, May did not file an IRS Form 8886 disclosing one of Tornado Alley's transactions for that year ("Challenged Transaction"). (Doc. 64-1 at 37-38.) The details of the Challenged Transaction are not important. For purposes of the pending motions, the parties have stipulated that the Challenged Transaction qualifies as a "listed transaction" as that term is defined in 26 U.S.C. § 6707A. (Doc. 56.) The IRS attempted over the course of several years to collect various penalties and assessments from May, including a § 6707A penalty for failing to disclose the Challenged Transaction on his 2004 return.
Section 6501 of the Internal Revenue Code prescribes the statutes of limitations that apply to different tax penalties and assessments. Under that section, the IRS and a taxpayer may agree, before the expiration of the relevant limitations period, to extend the time in which the IRS can seek an assessment. 26 U.S.C. § 6501(c)(4)(A). As part of his ongoing communication with the IRS, May on March 23, 2010, executed an IRS Form 872, "Consent to Extend the Time to Assess Tax." (Doc. 58-1 at 84-85.) That form provided that the "amount of any Federal Income & Excise tax due on any return(s) made by or for [May] for the period(s) ended December 31, 2003 and December 31, 2004 may be assessed at any time on or before December 31, 2011." ( Id. at 84.) The IRS agent who prepared this form-whom the parties, for confidentiality reasons, have agreed to refer to simply as Julie (Doc. 58 at 2 n.3)-testified during discovery that she was not relying on it to extend the § 6707A statute of limitations for tax year 2004; rather, she believed that statute of limitations could be extended merely by the operation of 26 U.S.C. § 6501(c)(10), discussed below. (Doc. 58-1 at 25-26.) When she intended to extend a § 6707A statute of limitations, Julie testified, she would ensure the Form 872 referenced that provision expressly. ( Id. at 30.) Indeed, at the same time that she obtained the Form 872 described above, she also procured May's signature on a second Form 872 that contained the following language: "The amount of any IRC section 6707A penalty due with respect to any return(s) made by or for [May] for the period(s) ended December 31, 2005 and December 31, 2006 may be assessed at any time on or before December 31, 2011." ( Id. at 90.)
On May 2, 2011, May's representative signed a third Form 872, also prepared by Julie, allowing the "amount of any IRC section 6707A penalty due with respect to any return(s) made by or for [May] for the period(s) ended December 31, 2005 and December 31, 2006" to "be assessed at any time on or before September 30, 2012." ( Id. at 101; Doc. 58 at 6.) A fourth Form 872, signed by May's representative on June 2, 2011, stipulated that the "amount of any Federal Income and Excise tax due on any return(s) made by or for [May] for the period(s) ended December 31, 2003, December 31, 2004, December 31, 2005 and December 31, 2006 may be assessed at any time on or before December 31, 2012." (Doc. 58-1 at 87.) Mary Linda Hosler, the IRS agent who prepared that latter form, was involved in seeking unpaid income taxes from May but had no involvement in assessing-or seeking an extension of the statute of limitations for- any § 6707A penalty. ( Id. at 94-95.) Although she was somewhat evasive during her deposition, the only fair reading of Hosler's testimony is that it was not her purpose, in obtaining the 2011 Form 872, to extend the statute of limitations for May's § 6707A penalty. ( See id. at 96-99.) She was interested only in extending the limitations period for the assessment of other taxes. ( See id. )
The Government acknowledges that by March 2010 it had sufficient information from which to determine that May had engaged in a listed transaction. ( Id. at 28.) On March 10, 2010, the IRS sent May a "30-day letter" informing him that it would assess a § 6707A penalty relating to the Challenged Transaction if he did not object in writing within thirty days. ( Id. at 37-39.) The Government also concedes that "there was no information necessary to assess a penalty pursuant to Internal Revenue Code § 6707 A that the IRS did not have in its possession prior to February 6, 2011." ( Id. at 33.) Nevertheless, it was not until February 6, 2012, that the Government assessed May a $18, 563 penalty under § 6707A for failing to disclose his participation in the Challenged Transaction. (Doc. 67 at 2; Doc. 1 at 2.)
May paid the penalty in full, including accrued interest, on June 4, 2013, and submitted a refund claim to the IRS on August 19, 2013. (Doc. 1 at 2; Doc. 1-1 at 2.) He subsequently filed suit in this court on April 29, 2014, seeking a refund on the grounds that the § 6707A penalty for tax year 2004 was improperly assessed and was barred by the applicable statute of limitations. (Doc. 1.) By stipulation, the current round of summary judgment motions addresses only the latter claim. (Doc. 56.)
II. LEGAL STANDARD
A motion for summary judgment tests whether the opposing party has sufficient evidence to merit a trial. At its core it questions whether sufficient evidence exists from which a reasonable jury could find in favor of the party opposing the motion. Summary judgment should be granted if the evidence reveals no genuine dispute about any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a).
A material fact is one that might affect the outcome of the suit under the governing law, and a factual issue is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The nonmoving party must produce evidence to support its claim or defense by more than simply showing "there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The court must view the evidence in the light most favorable to the nonmoving party, must not weigh the evidence or assess its credibility, and must draw all justifiable inferences in favor of the nonmoving party. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Anderson, 477 U.S. at 255. Where the record, taken as a whole, could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial. Matsushita, 475 U.S. at 587.
The parties make two separate arguments regarding the limitations period for May's § 6707A penalty, which ...