Tax Court holds that use of foreign bank accounts provides basis for fraud exception to statute of limitations

Nov 14, 2011   

In Browning v. Commr, T.C. Memo 2011-261, Judge Halpern in a 55 page opinion sustained most of the IRS assessments of additional tax, penalties and interest.

The facts are as follows:

In December 1995, Mr. Browning, the principal shareholder, president, and CEO of SBE, a Vermont-based manufacturing corporation, on the advice of its promoters and his own tax adviser, entered into an offshore employee leasing (OEL) arrangement whereby he agreed to lease his services to an Irish corporation that subleased his services to a U.S. employee leasing company that subleased his services back to SBE. During the audit years (1995-2000), in consideration of Mr. Brownings services, SBE paid the leasing company annual amounts equivalent to what SBE had paid Mr. Browning as wages in prior years. The leasing company paid a portion of those amounts to Mr. Browning, who reported those payments as wages. The leasing company remitted the balance after deducting certain amounts, including the payroll taxes owed with respect to its payments to Mr. Browning, to the Irish corporation for deposit in a deferred compensation or retirement account for Mr. Brownings benefit (the retirement account). The retirement account was opened in the name of a Bahamas subsidiary of the Irish corporation. Mr. Browning and his wife received and used, during 1998-2000, credit cards in the name of the Irish subsidiary. Money from Mr. Brownings retirement account funded the bank account used to pay the credit card charges, many of which Mr. Browning recognized were personal. During all of the audit years, Mr. Browning continued to represent himself to third parties as an employee and president of SBE, and he acted on behalf of SBE in the same manner as before adoption of the OEL arrangement. He also determined the amounts to be deposited in the retirement account and he effectively controlled the manner in which the assets in the account were invested. During 1998-2000, he exercised his unrestricted access to the funds in the account by means of the Bahamas bank credit cards.

Both the 3- and 6-year periods of limitations on assessment under I.R.C. sec. 6501(a) and (e) had expired before the IRS issued the notices of deficiency (the notices) to Mr. Browning. However, the IRS alleged that the notices were timely issued by reason of the application of I.R.C. sec. 6501(c), which permits assessment of tax at any time in the case of a false or fraudulent return. The IRS also alleged that, for all open audit years, Mr. Browning (1)underreported his income, (2) is liable for the I.R.C. sec. 6663 fraud penalty, and (3) alternatively, is liable for the I.R.C. sec. 6662 accuracy-related penalty.

The Tax Court held as follows:

1. For all audit years, Mr. Browning was in constructive receipt of (1) amounts equal to the excess of SBEs payments to the leasing company for his services on behalf of SBE over the sum of the amounts he reported as wages plus the employer portions of the Social Security and Medicare taxes that the leasing company paid with respect to those reported wages and (2) the capital gains and investment income generated by the assets in the retirement account.

2. Mr. Brownings 1998-2000 returns were fraudulent by reason of Mr. Brownings concealment of the Bahamas bank account and associated credit cards by means of which he had, and intended to exercise, his unrestricted access to the constructively received amounts described in holding 1.

3. Mr. Brownings 1995-97 returns were not fraudulent with the result that IRSs determinations and adjustments regarding those years are barred.

4. Mr. Browning is subject to the I.R.C. sec. 6663 fraud penalties for 1998-2000 with respect to all the constructively received amounts described in holding 1.

5. Finally, the I.R.C. sec. 6663 fraud penalties to Mr. Brownings total underpayments for 1998-2000, and the I.R.C. sec. 6662 accuracy-related penalties do not apply for those years.

The significance of this case is that for those taxpayers who may have used offshore (non-domestic) accounts, especially in tax haven jurisdictions (such as the Bahamas, the British Virgin Islands, the Cayman Islands, and Switzerland), the IRS may be able to avoid both the 3 year statute of limitations provision against assessment, and the extended 6 year statute of limitations provision against assessment for those that understated income by more than 25%, by asserting that the taxpayers use of the offshore bank accounts was fraudulent and, as a result, there is no statute of limitations provision protecting the taxpayers from additional tax, penalties, and interest.

The full opinion can be found here.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with the IRS for taxpayers with under-reported income and undeclared foreign bank accounts. The attorneys at Fuerst Ittleman likewise have experience litigating in both the U.S. Tax Court, the U.S. District Courts, and the U.S. Circuit Courts. You can contact an attorney by emailing us at: