Court Holds $2.3 Million Tax Shelter Penalty Assessment Not Barred by Statute of Limitation

Posted on June 22, 2017

In a recent case, the United States District Court for the Northern District of Illinois held that a $2.3 million penalty assessed against a tax shelter promoter was not barred by the 3-year statute of limitation for assessing and collecting taxes under the Internal Revenue Code.

In the case Philip Groves v. United States of America, Groves was in the business of purchasing and selling Chinese investments. The government determined that Groves unlawfully promoted or failed to register transactions as tax shelters for the taxable years 2002, 2004 and 2005.

As a result, the IRS assessed a $2.3 million penalty against him under Internal Revenue Code §6700. In order to assess a penalty against the taxpayer under I.R.C. §6700, the government must prove that the taxpayer was involved in an abusive tax shelter and that the taxpayer made statements about the tax benefits investors would receive if they participated in the shelter which the taxpayer knew or had reason to know were false or fraudulent.

Groves argued that the IRS could not collect the penalty assessed against him, arguing that the 3-year statute of limitation under I.R.C. §6501(a) barred any such action. Normally, the IRS has three years from the date a tax return is filed to make an assessment against a taxpayer, including the assessment of any penalties.

However, the assessment of a penalty under I.R.C. §6700 does not require the filing of a tax return. Instead, the penalty under I.R.C. §6700 arises from an individual who falsely touts a tax shelter’s benefits, not the filing of a tax return. The Court upheld the assessment of the penalty in the amount of $2.3 million against Groves.

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