# U ni te d S ta te s Co ur t of A pp ea ls

For the Eig hth Circu it

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No. 1 4- 32 51

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Tho m as J. Heck m an ,

ll ll ll ll ll ll ll ll ll ll l

App el la nt

,

v.

Co m m is si on er o f In te rn al Rev en ue ,

ll ll ll ll ll ll ll ll ll ll l

App el le e

.

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App eal Fro m

The Un it ed Sta te s Tax Co ur t

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Su bm it te d: Apri l 1 3, 2 01 5
Fil ed : J un e 1 0, 2 01 5

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Befo re MUR PHY, COLLOTO N, and KELLY , Cir cu it Ju dg es

.

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COLLOTON, Ci rcu it Ju dg e.

Thi s ap pe al in vo lv es a ta x di sp ut e th at tu rn s o n t h e ap pl ic ab le st at ut e of

li m it at io ns

. Tho m as Heck m an di d no t rep or t cert ai n gr os s in co m e on a ta x ret ur n fo r

20 03 th at he fil ed in Aug us t 20 04

. The In te rn al Rev en ue Serv ic e is su ed Heck m an a

no ti ce of de fic ie nc y in Ju ly 20 10

. Heck m an pe ti ti on ed th e ta x co ur t, arg ui ng th at th e
de fic ie nc y no ti ce was un ti m el y , be cau se th e st at ut e of li m it at io ns ex pi red th ree y ears

aft er th e fil in g of hi s ret ur n. The ta x co ur t de te rm in ed th at a si x -y ear st at ut e ofl i mi ta ti on s ap pl ie d, an d th at th e no ti ce was th eref or e ti m el y

. The ta x co ur t he l d

Heck m an li ab le fo r a de fic ie nc y of $3 8,6 23 fo r ta x y ear 20 03

, an d Heck m an ap pe al s.

Heck m an pa rti ci pa te d in an em pl oyee st oc k own ers hi p pl an es ta bl is he d by hi s

co m pa ny, KC In ve st m en t Man ag em en t, in 20 01

. In 20 03

, th e pl an acq ui red a 10 0%

in te res t in Prai rie Cap it al

, LLC, an d th en di st rib ut ed it s in te res t in Prai rie Cap it al to

Heck m an ’s indivi dua l re tirem en t acco un t. The pl an di st rib ut io n was wor th $1 37 ,72 6.

Heck m an fil ed hi s 20 03 Fo r m 1 0 4 0 ta x ret ur n, al on g wit h acco m pa nyin g

sc he du le s, in Aug us t 20 04

. On th e ret ur n, Heck m a n om it te d th e pl an di st rib ut io n

fro m hi s gr os s in co m e. Heck m an al so di d no t di sc lo se th e di st rib ut io n or hi s in te res t

in Prai rie Cap it al on hi s in di vi du al ret ur n. Fo r ta x y ear 20 03

, Prai rie Cap it al fil ed a

Fo rm SS-4 ap pl ic at io n fo r an Em pl oyer Id en ti fic at io n Num be r an d a Fo rm 10 65

in fo rm at io n ta x ret ur n. Th e f o rm s id en ti fie d Heck m an an d Heck m an ’s in di vi du al

ret ire m en t ac co un t, re sp ect iv el y , as m em be rs of P rai rie Cap it al

.

The IRS le arn ed of th e pl an di st rib ut io n th ro ug h or al an d writ te n st at em en ts

th at Heck m an pr ov id ed du rin g an un rel at ed au di t in Apr il 20 07

. In Ju ly 20 10

, m or e

th an th ree y ears bu t fewer th an si x y ears aft er Heck m an fil ed hi s 20 03 ret ur n, th e IRS

is su ed Heck m an a no ti ce of de fic ie nc y fo r ta x y ear 20 03

. The pa rti es no w ag ree th at

th e em pl oyee st oc k own ers hi p pl an was no t el ig ib le fo r fav or ab le ta x tre at m en t un de r

26 U.S.C. § 40 1( a), an d th at th e di st rib ut io n co ns ti tu te d ta xa bl e in co m e to Heck m an

in 20 03

.

In th e ta x co ur t, Heck m an arg ue d th at th e no ti ce of de fic ie nc y was un ti m el y

un de r th e th ree- y ear st a t u t e of li m it at io ns of 26 U.S.C. § 65 01 (a) (2 00 0)

. The ta x

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-co ur t ap pl ie d th e si x- y ear li m it at io ns pe rio d pr es cri be d by § 65 01 (e)( 1) (A) an d ru le d

th at th e n ot ic e was ti m el y

. *

Und er 26 U.S.C. § 65 01 (a) (2 00 0)

, th e IRS m us t as se ss a ta x de fic ie nc y wit hi n

th ree y ears aft er th e rel ev an t ta x ret ur n was fil ed

. Sect io n 65 01 (e)( 1) (A) ex te nd s th e

li m it at io ns pe rio d to si x y ears if th e ta xp ay er “ om it s fro m gr os s in co m e” an am ou nt

in ex ces s of twen ty-fiv e pe rcen t of th e gr os s in co m e st at ed on th e ret ur n. The pa rti es

st ip ul at e th at th e pl an di st rib ut io n ex ceed ed twen ty-fiv e pe rcen t of Heck m an ’s gr os s

in co m e fo r 20 03

. An am ou nt is no t co ns id ered “ om it te d” fro m gr os s in co m e,
ho wev er, if it is “ di sc lo se d in th e ret ur n, or in a st at em en t at ta ch ed to th e ret ur n, in a

m an ne r ad eq ua te to ap pr is e th e Secr et ary of th e na tu re an d a m ou nt of su ch it em .”
§ 65 01 (e)( 1) (A)(i i). W e rev ie w th e ta x co ur t’s in te rp ret at io n of § 65 01 de no vo , an d

it s fact ua l fin di ng s fo r cl ear erro r. Sc he rb ar t v. Co mm’r

, 45 3 F.3 d 98 7, 98 9 (8 th Ci r.

20 06 ).

H e c km an fir st arg ue s th at § 65 01 (e)( 1) (A)’s si x- y ear li m it at io ns pe rio d do e s

no t ap pl y be cau se th e IRS ga in ed act ua l k no wled ge of th e di st rib ut io n— du rin g th e

un rel a t e d a u d i t

— wit hi n th ree y ears of th e da te whe n he fil ed hi s 20 03 ta x ret ur n.

Thi s arg um en t is pr em is ed on la ng ua ge in Co lo ny
, In c. v. Co mmis si on er , 35 7 U.S. 28
(1 95 8)

, whi ch co ns tru ed § 27 5( c) of th e In te rn al Rev en ue C o d e o f 19 39

. Sect io n

27 5( c) pr ov id ed fo r an ex te nd ed st at ut e of li m it at io ns (fi ve y ears rat he r th an th ree)

whe n a ta xp ay er “ om it s fro m gr os s in co m e an am ou nt pr op erl y in cl u d i b l e t he rei n
whi ch is in ex ce s s o f 25 pe r cen tu m of th e am ou nt of gr os s in co m e st at ed in th e

ret ur n.”

Sect io n 65 01 (e)( 1) (A) was la te r red es ig na te d as § 65 01 (e)( 1) (B), Pu b. L. 11 1- *

14 7, Tit le V, § 51 3( a) (2 01 0)

, bu t we refe r to th e Co de in effe ct whe n Heck m an fil ed
th e ret ur n a t i ss ue

.

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-C o lo ny he ld th at whe n an un de rs ta te m en t of ta x aro se fro m an erro r i n

rep or ti ng an it em di sc lo se d on th e face of th e ret ur n, th e fiv e-year li m it at io ns pe rio d

di d no t ap pl y

. The Co ur t reas on e d th at “ in en act in g § 27 5( c) Co ng res s m an ife st ed

no br oa de r pu rp os e th an t o gi ve th e Co m m is si on er an ad di ti on al two y ears to

in ve st ig at e ta x ret ur ns in cas es whe re, be cau se of a ta xp ay er’s om is si on to rep or t

so m e ta xa bl e it em , th e Co m m is si on er is at a sp eci al di sa dv an ta ge in de te ct in g erro rs .”

35 7 U.S. at 36

. Heck m an co nt en ds th at th e IRS in th is cas e was no t “at a s pe ci al

di sa dv an ta ge ” in de te ct in g hi s erro r wit hi n th e or di na ry th ree- y ear li m it at io ns pe rio d,

be cau se th e go ve rn m en t ob ta in ed act ua l kn owl ed ge of th e di st rib ut io n be fo re th e

th ree- y ear pe r i o d ex pi red

. On th at ba si s, Heck m an co nt en ds th at Co ng res s di d no t

in te nd to gi ve th e Co m

m is si on er si x y ears to in ve st ig at e hi s ret ur n, an d th at th e lo ng er

li m it at io ns pe rio d d oe s n ot ap pl y

.

The sh or t an swe r to Heck m an ’s co nt en ti on is th at Co lo ny co ns tru ed a di ffer en t

st at ut e th at was s up ers ed ed by § 65 01 (e)( 1) (A). Lik e th e 1 93 9 C od e, th e su cces so r

st at ut e pr ov id es fo r an ex te nd ed st a t u t e o f li m it at io ns whe n a ta xp ay er om it s an

am ou nt fro m gr os s in co m e th at ex ceed s 25 pe rcen t of th e rep or te d gr os s in co m e. Bu t

un li ke th e 19 39 Co de

, § 65 01 (e)( 1) (A) sp el ls ou t pr eci se ly wha t am ou nt s sh ou ld be

ta ke n in to acco un t in de te rm in in g th e am ou nt om it te d fro m gr os s in co m e. Su bs ect io n ( i i ) p r o v i de s th at an am ou nt is ex cl ud ed in de te rm in in g “ th e am ou nt om it te d fro m

gr os s in co m e” on ly if th e am ou nt “ is di sc lo se d in th e ret ur n, or in a st at em en t at ta ch ed

to th e ret ur n.” § 65 01 (e)( 1) (A)(i i). The re is no pr ov is io n th at sa y s an am ou nt is

ex cl ud ed if th e Co m

m is si on er is no t “ at a sp eci al di sa dv an ta ge ” in de te ct in g th e erro r,

or if th e Co m

m is si on er le arn s of th e am ou nt wit hi n th e or di na ry th ree- y ear li m it at io ns

pe rio d. Co lo ny , m or eo ve r, co nc ern ed an am ou nt th at wa s di sc lo se d on th e face of th e

ta xp ay er’s ret ur n, id

. at 36

, so th e Co ur t un su rp ris in gl y vi ewed it s de ci si on as “ in

ha rm on y ” wit h t he lat er en act ed § 6 50 1( e)(1 )(A). Id . at 3 7 & n.3

.

Heck m an ’s pr op os ed in te rp ret at io n of § 65 01 (e)( 1) (A) can no t be reco nc il ed

wit h th e te xt an d st ru ct ur e of th e st at ut e. The st at ut e of li m it at io ns ru ns fro m th e da te

-4

-whe n th e ta xp ay er’s “ ret ur n was fil ed ,” § 65 01 (a), (e)( 1) (A), th us al lo win g th e

Co m m i s s i o ne r ei th er th ree y ears or si x y ears to in ve st ig at e a ret ur n, de pe nd in g on
whi ch li m it at io ns pe rio d ap pl ie s. Und er Heck m an ’s ap pr o a c h, ho wev er, if th e

Co m m is si on er ga in s act ua l kn owl ed ge ab ou t an am ou nt om it te d fro m a ret ur n at so m e
da te aft er th e ret ur n is fil ed (s ay , two y ears an d 36 4 da y s la te r), th en th e

Co m m is si on er wou ld b e l e f t w i th on ly th e rem ai ni ng ti m e (e.g

., on e da y ) to

in ve st ig at e an d act on th e om is si on , no t th e th ree y ears co nt em pl at ed by th e st at ut e.

I t is no an swe r to sa y , as Heck m an do es in th e al te rn at iv e, th at th e Co m m is si o n e r

co ul d si m

pl y be gr an te d an o t h e r th ree y ears aft er th e da te whe n th e go ve rn m en t

acq ui res act ua l kn owl ed ge of th e om is si on

. The Co de pr ov id es on ly two st at ut es of

li m it at io ns : th ree y ears or si x y ears af te r th e re tu rn wa s fi le d

, no t th ree y ears aft er th e

acq ui si ti on of a ct ua l k no wled ge

.

Heck m an arg ue s al te rn at iv el y th at hi s di st rib ut io n fro m the pla n w as “ dis clos ed

in th e ret ur n,” as co nt e mp la te d by § 65 01 (e)( 1) (A)(i i), be cau se it was al le ge dl y
di sc lo se d in Prai rie Cap it al ’s 20 03 ta x fil in gs

. He rel ie s on Ben de ro ff v. Uni te d

St at es , 39 8 F.2 d 13 2 (8 th Ci r. 19 68 ), whi ch co ns id ered bo th ta xp ay ers ’ in di vi d u al

ret ur n s a n d a n in fo rm at io n ret ur n fil ed by a co rp or at io n in de te rm in in g whe th er a

co r p o r a t e di st rib ut io n to th e ta xp ay ers was “ di sc lo se d in th e ret ur n

. . . i n a m an ne r
ad eq ua te to ap pr is e th e Sec ret ary

. . . of th e na tu re and am ou nt of su ch it em .” Id

. at

13 4- 35 (in te rn al qu ot at io n m ark om it te d)

. In Ben de ro ff

, th e ta xp ay ers di sc lo se d th ei r

st at us as sh areh ol de rs of th e co rp or at io n an d rep or te d th ei r res pe ct iv e sh ares of

un di st rib ut ed co rp or at e in co m e o n t he ir i nd iv id ua l t ax ret ur ns , bu t fa il ed to in cl ud e

a co rp or at e di st rib ut io n th at th ey rece iv ed

. Id

. at 13 5. Thi s co ur t reas on ed th at th e

co rp or at e in fo rm at io n ret ur n sh ou ld be co ns id ered al on g wit h th e in di vi du al ret ur ns

in an al y zi ng th e st at ut e of li m it at io ns , b ecau se th e pu rp os e of th e co rp or at e

in fo rm at io n ret ur n was to al lo w th e go ve rn m en t to ve rif y t h e accu racy of th e
sh areh ol de rs ’ in di vi du al ret ur ns , an d be cau se th e in di vi du al ret ur ns m ad e “ ad eq ua te

refe ren ce t o t he co rp or at e in fo rm at io n re tu rn .” Id

.

-5

-In co nt ras t to t he si tu at io n in Ben de ro ff

, Heck m an ’s ret ur n co nt ai ne d no

refe ren ce to Prai rie Cap it al or to th e di st rib ut io n. Neit he r Heck m an ’s ret ur n no r an y

at ta ch ed st at em en t ga ve th e Co m m is si on er a cl ue th at Prai rie Cap it al ’s fil in gs were
rel ev an t to Heck m an ’s ta x li ab il it y

. Bec au se Heck m an ’s in di vi du al ret ur n m ad e no

refe ren ce to Prai rie Cap it al ’s fil in gs , th e la tt er are no t co n s i d ered in de te rm in in g
whe th er Heck m an ’s ret ur n di sc lo se d th e d i s t r ib ut io n in a m an ne r “ ad eq ua te to

ap pr is e” th e C o mm is si on er of th e am ou nt om it te d fro m Heck m an ’s ret ur n. Se e

Ta yl or v. Uni te d S ta te s , 41 7 F .2d 99 1, 9 94 (5t h C ir. 1 96 9) (“ Si nc e th e Gov ern m en t

in th is cas e ex am in ed an in di vi du al in co m e ta x ret ur n gi vi ng n o s u g g e st io n or

in fere nc e th at rel ev an t in fo rm at io n m ay ha ve be en co nt ai ne d el se whe re, it can no t be

se rio us ly co nt en de d th at th e ‘adeq ua te di sc lo su re’ refe rred to in se ct io n

65 01 (e)( 1) (A)(i i) was m ad e.”); Co nn el l Bus

. Co

. v. Co mm’r

, 87 T.C.M. (CCH) 13 84

, 13 87 (T.C. 20 04 ).

Heck m an al so po in ts to Rev en ue Ru li ng 55 -4 15

, 1 9 5 5

- 1 C

. B. 41 2 (1 95 5)

, whi ch sa id th at “ [a]ny pa rtn er’s sh are of th e gr os s in co m e rep or te d in th e pa rtn ers hi p

in fo rm at io n ret ur n sh ou ld be co ns id ered as ha vi ng be en ret ur ne d by th e ta xp ay er, as

su ch in fo rm at io n ret ur n is a ret ur n b y o r o n be ha lf of each pa rtn er.” Id

. at 41 3.

Alt ho ug h P rai rie Cap it al is a li m it ed li ab il it y co m pa ny, it is tre at ed as a pa rtn ers hi p

fo r fed eral in co m e ta x pu rp os es , a nd it fil ed a Fo rm 10 65 pa rtn ers hi p ta x ret ur n fo r

20 03

. Heck m an co nt en ds th at th e 1 95 5 re ve nu e ru li ng m ean s t ha t Pr ai rie Cap it al ’s

20 03 ta x retu rn is a ret ur n by or on be ha lf of Heckm an , so th at in co m e di sc lo se d on

th e Prai rie Cap it al ret ur n was n o t “o mi tt ed ” fro m hi s gr os s in co m e. The rev en ue

ru li ng , ho wev er, in te rp ret ed th e 19 39 Co de

. It di d no t ad dr es s whe th er in co m e
di sc lo se d in a pa rtn ers hi p ret ur n is di sc lo se d “ in th e ret ur n” or “ i n a st at em en t

at ta ch ed to th e ret ur n” fo r pu rp os es of t h e l a t e r

- en act ed § 65 01 (e)( 1) (A)(i i), whe re

“ th e ret ur n” refe rs to th e ret ur n fil ed by th e in di vi du al ta xp ay er. In an y ev en t, as th e

ta x co ur t ob se rv ed

, no ret ur n fil ed by Prai rie Cap it al fo r th e 20 03 ta x y ear di sc lo se d

th e di st rib ut io n f

ro m th e em

pl oyee st oc k own ers hi p pl an to Heck m an ’s in di vi du al

ret ire m en t ac co un t.

-6

-Heck m an ’s la st co nt en ti on is th at be cau se he reas on ab ly be li ev ed in 20 03 th at

th e pl an di st rib ut io n qu al ifi ed fo r a ta x- free ro ll ov er an d was no t gr os s in co m e, th e

am ou nt sh ou ld no t be tre at ed as “ om it te d” fro m hi s 20 03 ret ur n fo r pu rp os es of

de te rm in in g th e st at ut e of li m it at io ns

. It is no w un di sp ut ed

, h o w e v e r , th at th e
di st rib ut io n was ta xa bl e in co m e an d th at Heck m an ’s bel ie f whe n h e fi le d h is ret ur n

was in co rrec t. Sect io n 65 01 (e)( 1) (A) create s no ex cep ti on fo r om is si on s cau se d by

a ta xp ay er’s m is ta ke n ta x po si ti on

. Se e Ben so n v. Co mm’r

, 56 0 F.3 d 11 33

, 11 36 (9 th

Ci r. 20 09 ).

The ta x co ur t co rrec tl y co nc lu de d th at th e di st rib ut io n th at Heck m an rece iv ed

fro m hi s em

pl oyee st oc k own ers hi p pl an was an “ am ou nt om it te d fro m gr os s in co m e”

th at tri gg ered th e ex te nd ed si x- y ear st at ut e of li m it at io ns un de r § 65 01 (e)( 1) (A). The
jud gm en t o f th e ta x c ou rt i s t he refo re aff irmed.

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