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EMANUEL v. UNITED STATES

February 1, 1989

BERTRAM EMANUEL, Plaintiff,
v.
THE UNITED STATES OF AMERICA, Defendant


George M. Marovich, United States District Judge.


The opinion of the court was delivered by: MAROVICH

GEORGE M. MAROVICH, UNITED STATES DISTRICT JUDGE

 Plaintiff Bertram Emanuel ("Emanuel") brought suit against the United States of America to contest penalty assessments made against him by the Internal Revenue Service pursuant to 26 U.S.C. Section 6700 for allegedly promoting an abusive tax shelter, and pursuant to 26 U.S.C. Section 6701 for aiding and abetting in the understatement of the tax liability of another individual. Plaintiff has moved for summary judgment on the ground that the government's assessments are time barred. Plaintiff has moved, in the alternative, for partial summary judgment on the appropriate method of calculating plaintiff's penalties. Defendant has filed a cross motion.

 I. Statement of Facts

 Emanuel is a certified public accountant who provides tax planning service as well as prepares tax returns for his clients.

 During 1982, Emanuel allegedly sold, or participated in the sale of, interests in a tax shelter known as the Energy Tax Sheltered Investment Program ("ETSIP") to sixty of his clients. Plaintiff also allegedly invested in the ETSIP. Emanuel received approximately $ 84,060 in commissions as a result of placing these investors into the ETSIP.

 On September 8, 1986, the Internal Revenue Service assessed against Emanuel a $ 61,000 penalty pursuant to 26 U.S.C. Section 6701 for promoting an abusive tax shelter. On September 29, 1986, Emanuel paid the required 15% of the asserted $ 61,000 penalty and filed a refund claim for the amount paid. The Internal Revenue Service later conceded that it erred by designating the $ 61,000 penalty as a Section 6701 penalty. Plaintiff's claim was later amended to substitute the proper code section, 26 U.S.C. Section 6700.

 On September 15, 1986, the Internal Revenue Service assessed against Emanuel a penalty pursuant to 26 U.S.C. Section 6701 in the amount of $ 126,000. The Internal Revenue Service, on September 29, 1986, assessed another penalty under Section 6701 in the amount of $ 20,000. On October 15, 1986, Emanuel paid the Internal Revenue Service the required 15% of the combined $ 146,000 penalty against im At the same time, he filed a claim for refund in the amount of $ 21,900.

 After the Internal Revenue Service took no action for six months, Emanuel filed suit in this court. The parties now cross move for summary judgment, requesting this court to address the following issues:

 
1) Whether the penalty assessments against Emanuel pursuant to Sections 6700 and 6701 of the Internal Revenue Code are barred by the three-year statute of limitations provided in Section 6501(a).
 
2) Whether the Internal Revenue Service Properly computed the Section 6700 and Section 6701 penalties.

 II. Statute of Limitations

 Emanuel first moves for summary judgment on the ground that the government's assessment of penalties under Sections 6700 and 6701 is untimely, as it was assessed against him more than three years after the filing of his clients' tax returns

 Although Sections 6700 and 6701 were enacted with no express statute of limitations, Emanuel urges this court to apply a three-year statute of limitations provided in 26 U.S.C Section 6501(a) Emanuel argues that the three-year limitation period is based on Section 6671(a), which declares that penalties "shall be assessed and collected in the same manner as taxes," and Section 6501(a), which provides that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed. . . ." (emphasis added) Plaintiff asserts that if Sections 6700 and 6701 penalties are to be assessed in the same manner as taxes, then the Section 6501(a) statute of limitation applies.

 The government argues that Section 6671 does not apply to the statute of limitations provision of Section 6501(a). The government further argues that the three-year limitation period is inapplicable because Section 6501(a) depends upon the filing of a tax return while the penalties under Sections 6700 and 6701 do not. Finally, the government contends that Sections 6700 and 6701 are essentially fraud penalties for which there is an unlimited statute of limitations specifically set forth in the Code.

 Recently, two courts in Kuchan v. United States, 679 F. Supp. 764 (N.D. Ill. 1988), and Agbanc, Ltd. v. United States, 707 F. Supp. 423 (D. Ariz. 1988), have directly ruled on whether the statute of limitations in 26 U.S.C. Section 6501(a) ...


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