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BADARACCO ET AL. v. COMMISSIONER INTERNAL REVENUE

decided*fn*: January 17, 1984.

BADARACCO ET AL
v.
COMMISSIONER OF INTERNAL REVENUE



CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT.

Blackmun, J., delivered the opinion of the Court, in which Burger, C. J., and Brennan, White, Marshall, Powell, Rehnquist, and O'connor, JJ., joined. Stevens, J., filed a dissenting opinion, post, p. 401.

Author: Blackmun

[ 464 U.S. Page 388]

 JUSTICE BLACKMUN delivered the opinion of the Court.

These cases focus upon § 6501 of the Internal Revenue Code of 1954, 26 U. S. C. § 6501. Subsection (a) of that statute establishes a general 3-year period of limitations "after the return was filed" for the assessment of income and certain other federal taxes.*fn1 Subsection (c)(1) of § 6501, however, provides an exception to the 3-year period when there is "a false or fraudulent return with the intent to evade tax." The tax then may be assessed "at any time."*fn2

The issue before us is the proper application of §§ 6501(a) and (c)(1) to the situation where a taxpayer files a false or fraudulent return but later files a nonfraudulent amended return. May a tax then be assessed more than three years after the filing of the amended return?

[ 464 U.S. Page 389]

     I

No. 82-1453. Petitioners Ernest Badaracco, Sr., and Ernest Badaracco, Jr., were partners in an electrical contracting business. They filed federal partnership and individual income tax returns for the calendar years 1965-1969, inclusive. "[For] purposes of this case," these petitioners concede the "fraudulent nature of the original returns." App. 37a.

In 1970 and 1971, federal grand juries in New Jersey subpoenaed books and records of the partnership. On August 17, 1971, petitioners filed nonfraudulent amended returns for the tax years in question and paid the additional basic taxes shown thereon. Three months later, petitioners were indicted for filing false and fraudulent returns, in violation of § 7206(1) of the Code, 26 U. S. C. § 7206(1). Each pleaded guilty to the charge with respect to the 1967 returns, and judgments of conviction were entered. United States v. Badaracco, Crim. No. 766-71 (NJ). The remaining counts of the indictment were dismissed.

On November 21, 1977, the Commissioner of Internal Revenue mailed to petitioners notices of deficiency for each of the tax years in question. He asserted, however, only the liability under § 6653(b) of the Code, 26 U. S. C. § 6653(b), for the addition to tax on account of fraud (the so-called fraud "penalty") of 50% of the underpayment in the basic tax. See App. 5a.

Petitioners sought redetermination in the United States Tax Court of the asserted deficiencies, contending that the Commissioner's action was barred by § 6501(a). They claimed that § 6501(c)(1) did not apply because the 1971 filing of nonfraudulent amended returns caused the general 3-year period of limitations specified in § 6501(a) to operate; the deficiency notices, having issued in November 1977, obviously were forthcoming only long after the expiration of three years from the date of filing of the nonfraudulent amended returns.

The Tax Court, in line with its then-recent decision in Klemp v. Commissioner, 77 T. C. 201 (1981), appeal pending,

[ 464 U.S. Page 390]

     No. 81-7744 (CA9), agreed with petitioners.*fn3 42 TCM 573 (1981), para. 81, 404 P-H Memo TC.

No. 82-1509. Petitioner Deleet Merchandising Corp. filed timely corporation income tax returns for the calendar years 1967 and 1968. The returns as so filed, however, did not report certain receipts derived by the taxpayer from its printing supply business. On August 9, 1973, Deleet filed amended returns for 1967 and 1968 disclosing the receipts that had not been reported.*fn4 Although the taxpayer corporation itself was not charged with criminal tax violations, and although no formal criminal investigation was initiated as to it, there were criminal and civil investigations that centered on certain former officers of the taxpayer. After the completion of those investigations, the Commissioner, on December 14, 1979, issued a notice of deficiency to Deleet. App. 71a. The notice asserted deficiencies in tax and additions under § 6653(b) for 1967 and 1968.

Deleet paid the alleged deficiencies and brought suit for their refund in the United States District Court for the District of New Jersey. On its motion for summary judgment, Deleet contended that the Commissioner's action was barred by § 6501(a). It claimed that no deficiencies or additions could be assessed more than three years after the amended returns were filed, regardless of whether the original returns were fraudulent.

[ 464 U.S. Page 391]

     The District Court agreed and granted summary judgment for Deleet. 535 F.Supp. 402 (1981). It relied on the Tax Court's decision in Klemp v. Commissioner, supra, and on Dowell v. Commissioner, 614 F.2d 1263 (CA10 1980), cert. pending, No. 82-1873.

The Appeals. The Government appealed each case to the United States Court of Appeals for the Third Circuit. The cases were heard and decided together. That court, by a 2-to-1 vote, reversed the decision of the Tax Court in Badaracco and the judgment of the District Court in Deleet. 693 F.2d 298 (1982). The Third Circuit's ruling is consistent with the Fifth Circuit's holding in Nesmith v. Commissioner, 699 F.2d 712 (1983), cert. pending, No. 82-2008. The Second Circuit has ruled otherwise. See Britton v. United States, 532 F.Supp. 275 (Vt. 1981), affirmance order, 697 F.2d 288 (CA2 1982). See also Espinoza v. Commissioner, 78 T. C. 412 (1982).*fn5 Because of the conflict, we granted certiorari, 461 U.S. 925 (1983).

II

[ 464 U.S. Page 392]

     Our task here is to determine the proper construction of the statute of limitations Congress has written for tax assessments. This Court long ago pronounced the standard: "Statutes of limitation sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government." E.I. du Pont de Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924). See also Lucas v. Pilliod Lumber Co., Page 392} 281 U.S. 245, 249 (1930). More recently, Judge Roney, in speaking for the former Fifth Circuit, has observed that "limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government." Lucia v. United States, 474 F.2d 565, 570 (1973).

We naturally turn first to the language of the statute. Section 6501(a) sets forth the general rule: a 3-year period of limitations on the assessment of tax. Section 6501(e)(1)(A) (first introduced as § 275(c) of the Revenue Act of 1934, 48 Stat. 745) provides an extended limitations period for the situation where the taxpayer's return nonfraudulently omits more than 25% of his gross income; in a situation of that kind, assessment now is permitted "at any time within 6 years after the return was filed."

Both the 3-year rule and the 6-year rule, however, explicitly are made inapplicable in circumstances covered by § 6501(c). This subsection identifies three situations in which the Commissioner is allowed an unlimited period within which to assess tax. Subsection (c)(1) relates to "a false or fraudulent return with the intent to evade tax" and provides that the tax then may be assessed "at any time." Subsection (c)(3) covers the case of a failure to file a return at all (whether or not due to fraud) and provides that an assessment then also may be made "at any time." Subsection (c)(2) sets forth a similar rule for the case of a "willful attempt in any manner to defeat or evade tax" other than income, estate, and gift taxes.*fn6

All these provisions appear to be unambiguous on their face, and it therefore would seem to follow that the present cases are squarely controlled by the clear language of § ...


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