Tenth Circuit Raises Possible Defense to IRS Levying Bank Account with Veteran’s Disability Payments

Thanks to celebrity shills such as Alan Thicke even non-tax experts know the reach of IRS’ collection powers. That power extends to allow it to levy on a taxpayer’s property unless that property is subject to a specific exemption in Section 6334(a). Included in that exemption list are things like workers’ compensation and unemployment benefits. Veterans’ disability payments are also on that list.

Last week’s 10th Circuit’s Maehr v Koskinen involved an IRS levy on a bank account that had received the taxpayer’s VA disability deposits. Maehr had challenged the IRS assessment and intention to levy on some of his assets. Maehr appears to be a serial tax protestor, and the order dispenses with the frivolous arguments quickly though not the issue of the levy on the bank account that held his VA payments.

That issue requires a bit more context and analysis. Maehr had an account at Wells Fargo that received his VA disability payments. Under Section 6334(a)(10), IRS is precluded from directly levying on certain armed force connected disability benefits. Maehr argued that Section 6334(a)(10) should protect the assets in the bank account since the funds were comprised of VA disability benefits that are exempt from levy.


The government raised two arguments against Maehr’s challenge to that levy:

(1) the IRS did not place a direct levy on any exempt VA disability payments; and (2) even if the IRS is improperly levying exempt disability payments, the only remedy available to the taxpayer would be full payment of the assessment of his tax liability followed by a suit for refund in district court.

The arguments are closely related. The second of the arguments relates to the Anti-Injunction Act (AIA), which, is codified at Section 7421 and provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” In other words, taxpayers unhappy with IRS enforced collection actions are generally unable to get a court to enjoin the IRS from going forward with its collection powers, including levy. We have discussed the AIA on numerous occasions, as courts in the past few years have been poking holes in that restriction. Even before some of the recent exceptions, then Chief Justice Warren in the Williams Packing case crafted a two-pronged common law exception to the AIA: 1) that under no circumstances could the Government ultimately prevail and 2) that equity jurisdiction otherwise exists. Courts have generally looked at that last part of Williams Packing as requiring the taxpayer to prove irreparable injury stemming from the IRS’s proposed collection action.

Taxpayers subject to collection action for excise and employment taxes that were outside the deficiency procedures have often faced the AIA’s reach when IRS sought to collect even while a refund proceeding was in the works. In a 1977 case called Marvel v US the 10th Circuit used the AIA to dispense with a taxpayer trying to challenge the IRS’s levying of business’s assets during a district court refund suit following a partial payment of employment taxes. In Maehr, the 10th Circuit distinguished Marvel on the facts, noting that Maehr also had a cause of action in addition to injunction (I assume a wrongful collection claim as well).

Despite the distinction, the 10th Circuit addressed the broader AIA issue and found that Maehr satisfied the Williams Packing narrow exception allowing the suit to continue:

If the IRS had placed a direct levy on Appellant’s VA disability benefits, we have little doubt that Appellant would have been able to satisfy the Williams Packing test and obtain injunctive relief. We see no possibility of the government prevailing on the merits in such a case, and a disabled veteran will likely be able to show that he will suffer irreparable injury if the government is not enjoined from illegally levying the VA benefits on which he relies for his maintenance and survival. See Comm’r v. Shapiro, 424 U.S. 614, 627 (1976)…

What about the government’s argument that the IRS was not directly going after the VA disability benefits, since the funds were sitting in a bank account? The Tenth Circuit briefly addressed that:

However, here the government has not directly levied Appellant’s VA benefits, and it suggests that it may do indirectly what it may not do directly—that it may wait until exempt VA disability benefits have been directly deposited into Appellant’s bank account and then promptly obtain them through a levy on all funds in the bank account, despite their previously exempt status. The government cites no authority to support this argument, and the few cases we have found adopting such a rule, see, e.g., Calhoun v. United States, 61 F.3d 918 (Fed. Cir. 1995) (unpublished table decision); United States v. Coker, 9 F. Supp. 3d 1300, 1301–02 (S.D. Ala. 2014); Hughes v. IRS, 62 F. Supp. 2d 796, 800–01 (E.D.N.Y. 1999), have not considered whether this result is consistent with the Supreme Court’s opinion in Porter Aetna Casualty & Surety Co., 370 U.S. 159 (1962), or with 38 U.S.C. § 5301’s prohibition against the levy of veterans’ benefit payments either before or after receipt by a beneficiary.

I was not familiar with either the Porter case or 38 U.S.C. § 5301, and this opinion nudged me to look at both. Porter v Aetna Casualty involves a private creditor and not the IRS but it held that VA disability benefits paid to an incompetent veteran and deposited in a federal savings and loan association were exempted from attachment by 38 U.S.C. § 3101(a) [now codified at 38 USC 5301(a)(1)]. That statute provides that payments administered by the VA “shall be exempt from taxation, shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary. The preceding sentence shall not apply to claims of the United States arising under such laws nor shall the exemption therein contained as to taxation extend to any property purchased in part or wholly out of such payments.” (emphasis added).

So Title 38 has its own protection of VA disability benefits that goes beyond the Internal Revenue Code. As I said, Porter did not involve an IRS levy (instead it involved a private creditor) but it did directly consider the reach of the Title 38 protection when the disability benefits were held after payment. The savings and loan rules at issue in Porter treated the depositor as a shareholder, requiring a 30-day demand before the S&L shareholder could reach the proceeds. Porter considered whether the deposit of the VA disability payments in a savings and loan essentially constituted after-acquired property that was no longer protected by Title 38. Porter discusses the earlier case of Lawrence v. Shaw, 300 U. S. 245 (1937), where the Court held that “bank credits derived from veterans’ benefits were within the exemption, the test being whether, as so deposited, the benefits remained subject to demand and use as the needs of the veteran for support and maintenance required.” On the other hand, the Court had held in a prior case that a veteran’s purchase of bonds with the VA proceeds removed the protection of the statute and those bonds constituted an after-acquired investment.

Porter resolved the issue as to whether the S&L account was more like the bank deposit case or the after-acquired investment:

Since legislation of this type should be liberally construed… to protect funds granted by the Congress for the maintenance and support of the beneficiaries thereof… we feel that deposits such as are involved here should remain inviolate. The Congress, we believe, intended that veterans in the safekeeping of their benefits should be able to utilize those normal modes adopted by the community for that purpose — provided the benefit funds, regardless of the technicalities of title and other formalities, are readily available as needed for support and maintenance, actually retain the qualities of moneys, and have not been converted into permanent investments.

Back to Maehr and the IRS’s Collection Powers

The Tenth Circuit remanded the case back to the District Court to consider whether the reach of Porter and whether the “IRS has improperly levied exempt VA disability benefits by placing a levy on all funds in the bank account where Appellant’s disability benefits are deposited.” It left open the question of remedy, expressing “no opinion on the ultimate resolution of this claim or on the unresolved questions regarding the availability of the types of relief Appellant has sought or may seek in an amended Complaint.”

This is an interesting opinion and raises a possible defense to collection on a certain kind of asset, i.e., a bank account that holds veteran’s disability payments. It seems that IRS at the district court should emphasize Section 6334(c), which provides that “[n]otwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).” Likewise the regulations under Section 6334 provide that “no other property or rights to property are exempt from levy except the property specifically exempted by section 6334(a).”

IRS has a longstanding position that once the funds move from the excepted payor to the taxpayer, the funds lose their exemption. The Porter case and Maehr’s unearthing it suggest a possible barrier to the vast collection powers that IRS generally has when there is a bank account that has solely as the source of its deposits disability payments the IRS would be unable to reach directly. Given the explicit language in Section 6334(c) and IRS’s longstanding view that the exempted property loses its character when the funds reach the taxpayer I would expect a vigorous challenge to extending Porter to include protection from the reach of an IRS levy. In addition, even if that protection were extended, there could be some interesting second order questions. Query for example  the tracing problems if the account has other funds beyond the disability payments or if the IRS were to show that the taxpayer had other funds that he used to meet his necessities beyond the disability payments.

Form 2848: The First Hurdle

Today we welcome back guest blogger Caleb Smith.  Caleb is a fellow this year in the Harvard Federal Tax Clinic.  We have seen some interesting power of attorney issues in our clinic recently and Caleb provides some insight on problems that arise in this area.  Keith

The IRS is planning to implement new security measures (originally set for October 24 target date, but since pushed back) for its online services. In anticipation of these changes (and potential complications) it seems timely to devote some thought to one particularly important gateway for information gathering activities with the IRS: the Form 2848.


Sometimes you just can’t avoid calling a general number of the IRS, especially if the 2848 hasn’t been processed by CAF yet or when there is an ID Theft Indicator on the account. When contacting such a call center, one of the first questions asked is whether you have POA on file for the entity you are calling about. The IRS employee will usually offer a personal fax number for you to send the 2848 (if you have one) so that they can continue to assist you. Once the 2848 is received what happens next can be downright Kafka-esque depending on the reticence and training of the IRS employee on the other line.

Recent calls to the IPSU unit of the IRS have yielded these Halloween-worthy responses:

1). We can’t speak to you because there is no signature from the taxpayer on your 2848. The signature you have is from the previous attorney [that was granted the power to substitute or add-in new representatives]

My charitable take on this is that the IRS employee was misunderstanding the core concept of the taxpayer granting their representative the power to substitute other attorneys. Who can sign a 2848 has been dealt with here before. The continued misunderstanding of certain IRS employees, unfortunately, is not an unusual occurrence for me. The idea that someone the taxpayer specifically said could substitute attorneys for them is now substituting an attorney for them somehow smacks of foul-play. In one instance, I directed an IRS employee to the 2848 instructions specifically stating that the taxpayer doesn’t need to sign the 2848 for a subbed-in representative. The IRS employee referred to that as a “loophole.” Further attempts to explain that requiring the taxpayer to sign my 2848 would obviate the whole point of granting representatives authority to substitute attorneys were fruitless. Perhaps I should have referred the employee to IRM, which reads in relevant part “Only the taxpayer can grant a recognized representative the additional authority to substitute or delegate authority. The notice of substitution or delegation must be signed by the representative appointed on the power of attorney.”

2). We can’t speak to you because a 2848 automatically expires after 45 days(!)

My charitable take on this is that the IRS employee was misunderstanding the rule that a 2848 is invalid if the taxpayer signature is dated more than 45 days before the representative’s (See IRM As that wasn’t the case, my less charitable take is that the IRS employee just wanted to cut the call short. I am inclined to this less charitable take in part because the employee only brought up the 2848 issue after already speaking to me for several minutes about the client in a case where the IRS behavior looked somewhat bad.


All of this is to say that if an IRS employee wants to challenge your Power of Attorney they can put up a pretty big and pretty immediate roadblock. Yes, you can call back and almost certainly get a different person on the phone, but wait-times often make that impractical. During a recent visit from our local taxpayer advocate, our clinic (Harvard Legal Services Center) voiced concern about IRS employees that didn’t seem to understand how Form 2848 works and the barrier this caused for providing services. When such problems arise we were advised to request to be escalated to the employee’s manager, and that TAS would look into making sure that employees were well trained on 2848 issues. This is about as good as can be hoped for, but I’m not sure it is enough to provide a whole lot of relief. (A few weeks after that advice I attempted to put it into action and asked to be escalated to the manager on two separate occasions. On the first one, I was cut off after being put on hold. On the second, I was told (after being put on hold) that the manager wasn’t available.)

Of course, much of this can be avoided if your 2848 is on file with CAF, in which case, the main hurdle is submitting a 2848 that will be accepted and processed in the first place. Though this seems like it should be a fairly easy task (and generally it is), complications do arise.

Most recently, I’ve seen 2848s rejected for:

  1. Appearing to have a “stamp or electronic” signature of the representative (it wasn’t: it just looked that way because the form had been faxed so many times). See IRM
  2. Having the taxpayer signature dated more than 45 days before the representative’s (it was, but only because the client signed with the wrong year) IRM again. Note that the problem doesn’t arise if the taxpayer’s signature is more current than the representative’s.
  3. Form was illegible (a product of the Form 2848 being faxed multiple times, and perhaps my poor penmanship)
  4. Student Authorization Form missing for LITC Student Attorney (These generally result only in the student being unable to call the IRS: as an attorney, my authorization has generally still been processed.)

The first time I ever submitted a Form 2848 I was under the impression that the CAF fax basically fed into an enormous scan-tron type machine that checked for initial processing requirements. My belief in that was based (1) on the sheer volume of 2848s that must be sent and (2) the fact that the Treasury Regulations provide that a substitute for Form 2848 can be used (problem for the scan-tron theory), but an actual 2848 must be attached if submitted to CAF (see Treas. Reg. 601.503(b)(2)). In fact, actual humans do process and input the Form 2848, although the number of these dedicated souls may not be sufficient for the task (see TAS report here). Beyond just taking the IRS’s word on this, other evidence of a human touch can be found in the handwritten “OK” marked next to certain areas and practically undecipherable scribbles marked next to others on 2848s that have been sent back to me from CAF.

One problem is obviously the turn-around time for figuring out whether CAF is going to process the 2848 sent. Usually, the practitioner has no way of knowing the 2848 isn’t processed until either (1) weeks pass and they are still unable to access accounts via e-services, or (2) the taxpayer receives a letter from the IRS mentioning the unprocessed 2848 (a letter which also generally serves to freak out the taxpayer). Might this be an area for the IRS “Future State” (see post on Future State here) to bring in a greater degree of automation to speed up the process? On the one hand, the sensitive data at play may warrant keeping a greater human touch. On the other hand, I’m not really sure how humans do much of anything to prevent ID theft in this context: I am fairly confident that the person at CAF isn’t comparing signatures of the taxpayer and representative to a signature database.

Another problem has less to do with the time it takes to process the 2848, and more to do with the actual processing. I have seen numerous rejection notices for 2848s supposedly lacking the proper student authorization page, when it appears from the fax records that such authorization was in fact sent. Several comments on the ABA LITC listserv have also mentioned this issue. One commenter suggested creating a “2848 Sandwich” with the student authorization page placed between page 1 and 2 of the 2848, the rationale being that it is much harder to miss the authorization page in those circumstances. I have never tried this, and cannot vouch for its efficacy, but am always a fan of creative solutions.

One area that I HAVE had experience with and can vouch is in submitting Form 2848 as a substitute representative for the original attorney of the taxpayer. As mentioned above, a taxpayer may grant their attorney the power to substitute or add representatives (see line 5a of Form 2848). Doing so, obviously, gets rid of the need for the taxpayer to sign a new 2848 for the substituted representative. The instructions (and logic) make this clear: the new attorney “can send in a new Form 2848 with a copy of the Form 2848 you [the taxpayer] are now signing, and you do not need to sign the new Form 2848.” [emphasis added.] Reading the instructions literally, one might think that all the new attorney need do is fill out a new 2848 and include a copy of the old one with it. But IRM requires a little more. For CAF to process the new 2848 you will need to send (1) the original 2848 signed by the taxpayer, and (2) a new 2848 signed by the original attorney. I usually have the original attorney sign on line 7 along with listing their CAF number. I have not found anywhere in the IRM that says this is the proper way to include the signature of the appointing attorney. But it has worked with CAF, and that is good enough for me.

When you need to speak with someone at the IRS about a client and the validity of your power of attorney is put at issue, you are essentially confronted with a brick wall. Systemic changes to how 2848s are processed by the IRS may be ideal, but in the absence of that practitioners are generally left with trading war-stories and tricks-of-the-trade. I invite anyone with such advice or stories to post below.



Using the IRM to Help Taxpayers During Audits Exploring a Taxpayer’s Unreported Income

Today we welcome first time guest poster David Breen, the Acting Director of Villanova’s Federal Tax Clinic, former Senior Counsel with the IRS Office of Chief Counsel in Philadelphia and longtime adjunct faculty member in Villanova’s Graduate Tax Program. In addition to his Counsel experience, Dave began his career with Exam. He has taught courses in Villanova’s graduate tax program for years, including Tax Procedure and our innovative trial litigation simulation course. While Keith has been visiting at Harvard, Dave has ably directed our tax clinic. In today’s guest post, he discusses some of the IRS’s own rules relating to examinations that focus on unreported income as well as some of the powers practitioners can but rarely do exercise in the context of those examinations. Les

The country is approaching the half way point of the NFL season and during the Eagles games I’ve watched so far, I can’t help but again notice the tendency of coaches to cover their mouths while talking to one another. This practice, which dates back to at least 2000, prevents opposing teams from employing lip readers to intercept the play the opposition is calling. Stealing plays in a game? By professional lip readers? Really? A bit of overkill, don’t you think? But football is not alone in this type of larceny. Less than one month into this year’s baseball season, the Padres were accused of positioning a spy inside the scoreboard with binoculars to telegraph pitches to San Diego batters.

This got me to thinking about the lengths that professional athletes will go to increase ever so slightly an edge over their opponents. And with that in mind, it made me look to my own profession as a tax attorney for whatever edge, legally, of course, that I could exploit as well. I didn’t have to look far.


When I was an IRS Revenue Agent back in the 1970s, the Internal Revenue Manual was IRS’s playbook, containing well-guarded tips, resources, recommendations, and directions on how to audit taxpayers. As a Senior Counsel in IRS’s Office of Chief Counsel from 1987 to my retirement in 2014, Part 35 of the IRM, also called the CCDM, provided the same practical guidance and advice for IRS attorneys. Today the IRM continues to guide IRS employees in the performance of their duties and thanks to the Freedom of Information Act (FOIA) it can be an invaluable resource for practitioners as well. In my experience, however, I find that many practitioners fail to avail themselves of this resource. In other words, they don’t take advantage of the ability to read IRS’s lips from across the gridiron to see what IRS’s next step will be.

When it comes to an IRS audit, particularly in the SBSE division which includes self-employed Schedule C filers, unreported income is the name of the game. From 2008 – 2010 the average annual tax gap was $458 billion, up from $450 billion in 2006. IRS revenue agents are given discretion in deciding which deductions to scrutinize on a return. Proof for deductions that are LUQ (large, unusual, or questionable) is sure to be requested. Examiners do not, however, have discretion in examining gross income. Unlike deductions, gross income must be examined in all audits. It is one of the relatively few mandatory items examiners must investigate.

This article discusses how a practitioner can utilize the IRM to represent clients more competently during an audit of gross income. I am limiting my comments to IRM Part 4 – Examining Process, but the advantages of being well-versed in IRS’s own procedures applies well beyond this area.

The law is clear on gross income: all income from any source is taxable unless specifically excluded somewhere in the Code. Taxpayers are required to maintain books and records to support items on their returns. If a taxpayer refuses to provide books and records, IRS may issue a summons to the taxpayer and third parties to compel production of documents and to give testimony under oath. Finally, before an examiner may use financial status or economic reality examination techniques to determine the existence of unreported income there must be an indication that there is a likelihood of unreported income.

While the above paragraph would score well on a law school tax final, it provides little insight into how the law is put into action. Let’s put some flesh on the bones by looking at how examiners are taught to audit returns.

To insure that returns are examined within the 3 year statute of limitations, IRM requires that the examination and disposition of individual income tax returns be completed within 26 months after the due date of the return or the date filed, whichever is later. For example, if an examiner is assigned a timely filed 2015 return, the audit should not be started if it cannot be completed by June 2018 (26 months from April 15, 2016). This includes, however, the time to process the return, select it for examination, ship it to the examination group closest to the taxpayer’s location, assign it to an examiner, and schedule an appointment. To add additional incentive to IRS to examine returns promptly, interest is suspended if the Service fails to notify the taxpayer of a liability within 36 months of the later of the date the return is filed, or the due date for the return without regard to extensions. Like soggy hors d’oeuvres once the main course is served, returns falling short of this timeframe are forgotten about, “surveyed” as excess inventory and replaced by fresher, more current work. The lesson here is that despite the three year statute of limitations on assessment of tax, the likelihood of a return being audited is actually much less than three years after its filing under the 26 month cycle rule.

For those returns that are audited, however, examiners are given specific guidelines for verifying gross income. How does an IRS examiner decide how detailed the gross income investigation must be? To answer, we have to consider one more Code section, IRC § 7602(e), enacted as part of the IRS Structuring and Reform Act of 1998:

(e)Limitation on examination on unreported income

The Secretary shall not use financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the Secretary has a reasonable indication that there is a likelihood of such unreported income.

Prior to the enactment of IRC § 7602(e) examiners could (and often did) investigate gross income by engaging in intrusive inquiries into a taxpayer’s private life and finances. Interviews of business associates, co-workers, lenders, and even neighbors were conducted, sometimes without the taxpayer’s knowledge. Time consuming, intensive, expensive requests for voluminous records were the norm rather than the exception.

IRC § 7602(e) put the brakes on IRS examiners. Before an examiner may conduct an in-depth, intrusive examination – what the statute refers to as financial status or economic reality techniques – the examiner must first have some reason to suspect that a taxpayer has not reported all gross income. So called “indirect methods” are economic reality techniques. How does an IRS agent determine if there is a likelihood of unreported income to gain entrée into a detailed investigation? The answer is in the IRM.

IRM 4.10.4 sets forth a number of mandatory “minimum income probes” examiners must perform. If the minimum income probes indicate a likelihood of unreported income, the examiner must consult with a group manager. They jointly determine whether to conduct a more in-depth examination of income and document their findings in the workpapers. This more in-depth examination may include, but is not limited to a bank deposits and cash expenditures analysis, a source and application of funds analysis, or a net worth analysis – what IRS calls a formal indirect method of proof. ( Note, however, that IRC § 446(b) allows IRS to use any reasonable method. The high water mark of reasonable may have been IRS’s Atlantic City Tip Income Project back in the 1980s when IRS reconstructed cocktail waitress tip income by placing undercover special agents in casinos to watch how much tip income waitresses typically received during a shift and applying those findings to compute tip income for a “normal waitress.”).

All practitioners want to dissuade examiners from conducting time-consuming, costly, detailed indirect methods. Volumes have been written on defending a client when IRS determines under one of these methods that a taxpayer hasn’t reported all income. But remember, the minimum income probes are the gateway to the use of a formal indirect method of proof. For that reason, they should be the first line of defense in representing clients.

What are these “MIPs”? It depends on the type of taxpayer. The minimum income probes for individual business returns, i.e. Schedule C taxpayers, include: preparing a financial status analysis; conducting an interview with the taxpayer or representative; touring the business; evaluating internal controls; reconciling the income per return to the taxpayer’s books and records; testing gross receipts by tying original source documents to the books; preparing an analysis of the taxpayer’s personal and business bank and financial accounts; preparing an analysis of business ratios; and determining if there is Internet use and e-commerce income activity.

I present two ways for the minimum income probes to be used proactively by representatives.

  1. Lay the groundwork during return preparation. Most return preparers send some form of tax organizer to clients which clients complete (or at least are supposed to complete) as part of having their returns filed. I encourage preparers to include questions concerning the minimum income probes in their client surveys. Gathering information on internal controls, bank accounts, business ratios, and e-commerce activity will serve as reminders to clients on what they records they should be keeping and also identify potential weak areas in the client’s operations. Weaknesses that can be corrected or anticipated in the event of an audit.
  2. Challenge the examiner’s conclusions regarding the use of an indirect method. If early in the audit, say after the initial meeting and taxpayer interview, an examiner issues a detailed, voluminous information document request (IDR) clearly focused on income or personal living expenses, that is a clear indication that the examiner is “ramping up” the examination of gross income. Representatives should not simply shrug and hope for the best. I encourage representatives to ask the examiner in writing, if the examination has extended into IRC § 7602(e) territory. If the examiner answers affirmatively, or doesn’t answer at all, the representative should take the offensive and request a meeting with the group manager, request the examiner’s workpapers detailing the minimum income probe analysis and the discussion with the group manager green-lighting the indirect method, file a FOIA request for the workpapers, or all of the above. A taxpayer should be given an opportunity to respond to an examiner’s determination that the minimum income probes reflect unreported income. If the agent’s analysis is flawed, it is better for IRS and your client to not waste time on needless issues. To date, however, I have yet to find a representative who has taken any of these pre-emptive steps. My suspicions were confirmed when my opinion search of 7602(e) on the Tax Court’s website produced a single case which dealt only with the effective date of the statute.

In summary, as a representative you should adhere to the old adage, “Forewarned is forearmed” and study the IRM as if it were the Cowboys playbook and you were the coach of the New York Giants.

Former Tax Court Judge Kroupa Pleads Guilty to Conspiracy

We have written before about the indictment of former Tax Court Judge Kroupa and the collateral impact of her indictment.  Her husband pled guilty last month and on Friday, October 21, she also pled guilty.  If you have never gone to a guilty plea hearing, you should take the time to read the transcript of this hearing.  You will see how detailed the court is when accepting a plea seeking to foreclose all opportunity for the defendant to later argue that they were not really guilty of the count(s) to which they made a guilty plea.  Between the judge and the Assistant U.S. Attorney, it takes over 40 pages of transcript to get in all of the questions.  As you will see, the answers are short and sweet.


Occasionally, I have clients or prospective clients in the clinic who have pled guilty to a tax crime. Some tell me they were not really guilty but just pled to end the process.  I remind them of their conversation with the judge at the taking of the plea.  Although most profess little memory of the event, I know they had to answer the essentially the same questions posed to former Judge Kroupa.  While many motivations to plea exist, after going through the plea process the defendant really has little room to wriggle.  In a recent HBO series, The Night Of, involving the taking of a state rather than a federal plea, the defendant cannot make the necessary statements of guilt and ends up going to trial.  Former Judge Kroupa gave all the right answers.  The Court accepted her guilty plea.  Now a sentence report must be written and a sentencing hearing held.

What does Former Judge Kroupa get by pleading guilty? She gets a reduction in the sentencing guidelines, she gets only one felony conviction, and she gets to avoid the stress and cost of trial.  Let’s look at each of the things she gets but not forget that in all likelihood she also gets to go to prison.  The guilty plea is not something she will go home and celebrate about.

Sentencing Guidelines

The Supreme Court decided several years ago that the federal sentencing guidelines provide guidance to federal judges in imposing criminal sentences; however, the guidelines do not impose mandatory time periods that the judges must follow. Despite the non-binding nature of the guidelines, most judges pay careful attention to them and for that reason so do most defendants.

For tax crimes the guidelines usually start with the amount of tax the defendant has underpaid due to their criminal action. That amount usually provides a baseline number in the guidelines which translates into a recommended sentence.  That, however, is just the start.  In the case of someone like former Judge Kroupa, the guidelines provide for enhancements because of her special knowledge of the tax laws and her special position in the system.  Because of these factors she received a higher number under the guidelines which translates into a higher sentence.  By pleading guilty, she receives a reduction because of acceptance of responsibility.  If you read the plea transcript you will see a discussion of the enhancements and the reduction.

Building on the base amount and the adjustments, the guideline in her case result in a recommended sentence of 30-37 months. The judge carefully explained in the plea hearing that she will not necessarily follow the guideline and the ultimate sentence could end up higher or lower.  The defendant receives no guarantees.  The sentencing report will influence the judge as could anything that happens between now and the time of sentencing; however, making the guilty plea does have the effect of reducing the guideline amount from what a guilty verdict would produce.  That provides motivation for pleading guilty in weighing the pros and cons.


In pleading guilty former Judge Kroupa received the opportunity to plea to one count and have the remaining counts dismissed. This allows her to control the count to which she pleads guilty and the collateral impact of the plea.  She did not plead guilty to the felony of evasion of tax under IRC 7201 which carries with it the consequence of collateral estoppel on the fraud penalty.  I wrote recently about a very unusual case in which a guilty plea did not result in collateral estoppel.  By negotiating a plea agreement, she had several counts drop away.  This may prove beneficial to her although the Department of Justice need not be criticized for entering into the plea since the number of counts may have had little or no impact on the sentence and on the payment of the fraudulently unreported tax.

The IRS may not need collateral estoppel here in order to collect the proper amount of tax. She has already made some tax payments.  The 2010 change in the law regarding restitution allows the IRS to assess without having to issue a notice of deficiency the amount order for restitution.  When the IRS pursues a criminal tax case, it sets the civil case to the side until the criminal matter ends.  The end of her criminal case will mark the renewal of the civil tax audit.  Of course, she can agree to the taxes and penalties proposed by the IRS at the end of that audit and terminate the civil case without a fight.

If it does come to a fight about the imposition of the fraud penalty or additional amounts of tax not included in the restitution order, the IRS will issue a notice of deficiency and former Judge Kroupa will have the opportunity to litigate the correctness of the notice before the Tax Court. In such a case the Chief Counsel attorney will wish the plea included the IRC 7201 counts and former Judge Kroupa will undoubtedly wish that she did not have to go to Tax Court to get an opinion on the issue.  Of course, she can always pay and go to district court via the refund procedure.

Stress and Cost

The plea agreement transcript contains a detailed list of the medications former Judge Kroupa now takes. I do not know if she took any of these drugs before the criminal investigation but getting investigated for a criminal tax violation is extremely stressful.  I would not be surprised to learn that all or most of the drugs assist in dealing with the stress of the investigation.  With the plea agreement life will not turn into a bed of roses but the bleakest period may have passed.

Trying a criminal tax case not only creates additional stress but often depletes the bank account of the accused. Already, she will have paid handsomely for the representation she has received.  Many former criminal cases produce little tax revenue for the IRS because the defendant spends all of their money on the defense and has very limited job prospects after the conviction.  Ending the case with a plea saves some of the costs and may preserve assets to deal with the unpaid taxes and other necessary expenses.


The guilty plea brings the criminal phase of former Judge Kroupa’s case near to conclusion. The IRS has obtained the thing it wants most in a criminal case – publicity.  A case like this draws far more attention than the ordinary criminal tax prosecution.  Perhaps the silver lining for the tax system in this case is that is may provide more deterrence and this painful event will influence others to file their taxes correctly.


Combining an LLC with a Corporation

Today’s guest post is by Jim Maule, Professor Emeritus at Villanova Widger School of Law and one of the original tax law bloggers. This post, which originally appeared on Mauled Again, on October 10, 2016, discusses who is liable for employment tax when an LLC fails to remit employment taxes following a merger of a C Corp with a single-member LLC. It sweeps in some interesting procedural issues, including the importance of filing required forms to ensure that an LLC is treated as a corporation if one wants it to be treated as a corporation and the uphill battle facing taxpayers who claim IRS should be estopped from taking a position because it has accepted a filing in past years. Les

A recent Tax Court decision, Costello v. Comr., T.C. Memo 2016-184, provides helpful instructions about what to do and not to do when combining an LLC with a corporation. Though it’s too late for the taxpayer in that case, there are lessons that should prove helpful to others facing the issue in the future.

The case involved collection actions for employment tax liabilities. The resolution required identifying the tax status of the employer. Though the amount of the tax liabilities was undisputed, the issue required identification of the responsible taxpayer.


In 1989, the taxpayer’s father incorporated Heber E. Costello, Inc. (HECI). The taxpayer’s father was thesole shareholder of HECI. HECI filed Form 1120 for each of its taxable years. At some point before 2004, the taxpayer’s father died and the taxpayer became the sole owner of HECI.

On December 31, 2003, the taxpayer formed an LLC. He was the sole member. The LLC never filed Form 8832, Entity Classification Election. On December 31, 2003, HECI and LLC merged – though the better word would be “combined” – and HECI ceased to exist. After the combination, the LLC filed Forms 1120 using HECI’s employer identification number. The taxpayer filed Forms 940 and 941 on behalf of the LLC but did not make sufficient tax deposits or pay the tax due for its employment tax liabilities for the first three quarters of tax years 2007 and 2008 or pay the tax due for its employment tax liabilities for the periods ending December 31, 2006 and 2008. The IRS issued a notice of intent to levy (NOIL) on June 1, 2011, for all of those periods and a notice of Federal tax lien (NFTL) filing on December 13, 2011, for all those periods other than 2006. The taxpayer timely submitted Forms 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing), on June 26, 2011, and January 6, 2012, in response to the NOIL and the NFTL filing, respectively. The taxpayer indicated he could not pay the liabilities and wanted either an installment agreement or an offer-in-compromise (OIC). Though it was unclear if an OIC was submitted, it appears that any OIC would have been based on his argument that he was not individually liable for the LLC’s employment tax liabilities, which is the same argument he made before the Court. The taxpayer’s CDP hearing requests indicated he wanted Appeals to consider the abatement of taxes. Though asked to do so, the taxpayer did not submit a Form 433-A or any collection alternatives before the hearing. When an Appeals official met with the taxpayer’s representative, the taxpayer did not submit an OIC or any other collection alternatives to Appeals, nor did he present any argument with respect to the abatement of taxes. Instead, the taxpayer argued that the LLC, and not the taxpayer personally, is liable for the LLC’s employment taxes. The IRS issued the notices of determination upholding the proposed lien and levy actions on November 28 and December 3, 2012, respectively. Petitioner timely filed a petition for review of the determination.

After dealing with procedural issues, the Tax Court turned to the substantive question of whether the LLC or the taxpayer was liable for the employment taxes. The court explained that a single-member LLC is disregarded as a separate entity for federal tax purposes unless it elects to be treated as a corporation. The LLC did not file the election. Therefore, it was a disregarded entity.

The taxpayer, however, advanced three arguments in support of his position that the LLC should be treated as a corporation. The Tax Court rejected all three.

First, the taxpayer argued that the combination of HECI and the LLC was a valid F reorganization, and that the resulting entity was a corporation. The court concluded that regardless of whether the combination qualified as a F reorganization, the failure of the LLC to file Form 8832 electing to be a corporation kept it from being a corporation. Though the court did not directly answer the question, is it possible for a disregarded entity to enter into an F reorganization? Logically, the conclusion would appear to be no, because an F reorganization requires a mere change in identity, form, or place of incorporation, and in this case HECI disappeared, and the LLC did not change its identity or form, nor did it have a place of incorporation to change.

Second, the taxpayer argued that by filing Form 1120 for the first taxable year after the combining of HECI and the LLC was a valid election by the LLC to be treated as a corporation. The Tax Court concluded that the election to be treated as a corporation must be made on Form 8832 and is not made simply by filing a Form 1120.

Third, the taxpayer argued that the doctrine of equitable estoppel prevented the IRS from arguing that the LLC is not a corporation because of its “tacit acquiescence” to the filings of Forms 1120 for the year of the combination and subsequent years. The Tax Court concluded that equitable estoppel did not apply, because it requires proof that the IRS made a false representation or wrongful misleading silence, proof that the error was in a statement of fact and not in an opinion or a statement of law, proof that the taxpayer was ignorant of the true facts, and proof that the taxpayer was adversely affected by the acts or statements of the person against whom estoppel is claimed. The court explained that the IRS made no false statements to the taxpayer, and its failure to reject the LLC’s Forms 1120 was not a wrongful misleading silence. The court also explained that the taxpayer knew that the LLC had never filed a Form 8832 to be treated as a corporation.

For wages paid in the years in question, the activities of a disregarded entity are treated in the same manner as those of a sole proprietorship, branch, or division of the owner. Thus, the sole member of an LLC and the LLC itself are a single taxpayer or person personally liable for purposes of employment tax reporting and wages paid before January 1, 2009 [Ed: Regulations now provide that as of January 1, 2009, limited liability companies that are disregarded for all other purposes are treated as corporations for Federal employment tax purposes]. That left the taxpayer liable for the LLC’s unpaid employment tax liabilities.

The lesson is clear. If the member or members of an LLC want the LLC to be treated as a corporation, file Form 8832. There is no alternative. As complicated as tax law is, the filing of Form 8832 is one of the easier tasks to undertake. Though deciding whether to treat the LLC as a corporation requires somewhat more sophisticated judgments, projections, and planning, once the decision is made, the filing of the form is not difficult.



Getting Disbarred from Tax Court

Carl Smith brought to my attention the case of Aka v. United States Tax Court in the D.C. Circuit which is coming up for oral argument on November 18 based on Mr. Aka’s claim that he was denied due process because the order disbarring him does not explain what he can do to be reinstated.  The Tax Court revoked the license of Mr. Aka to practice before it.  The linked document contains 35 pages of painful details chronicling his actions that led to disbarment.  He also argues in his brief that remedy was unsuited to his actions because this sanction was too harsh in addition to the fact that the Court failed to explain what he could do to ever get back into the bar of the Tax Court.  In his brief, he spends a large segment comparing his sanction with that of another lawyer who only received a suspension.  Because I worked on the earlier case, in an aspect prior to the sanction proceeding, the citation to the earlier case caught my eye.

The difference in sanctions between the license revocation Mr. Aka received and the suspension received in the earlier case he cites reminded me of advice my trial tactics teacher provided to me 40 years ago. My teacher was Judge Robert R. Merhige, Jr. a Federal District Court judge in Richmond, Virginia and one of the most famous and certainly most colorful graduates of my law school.  He practiced as a trial lawyer in Richmond for many years before being appointed to the bench by President Johnson.  Judge Merhige issued many important rulings on civil rights and other issues during his long period of service on the bench.  Judge Merhige talked about the importance of telling the truth in his courtroom even if the person coming before him had done reprehensible things before arriving in his court.  His advice to the class relates to Mr. Aka’s situation not because Mr. Aka lied to the Tax Court but because his behavior occurred in the Tax Court and directly impacts the function of the Court.  In contrast, the actions of the person receiving a suspension of his ability to practice before the Tax Court involved issues on his individual return and did not relate to issues involving his practice before the Tax Court.

That distinction is an important distinction in understanding what motivates a court to sanction an attorney appearing before it and the severity of the sanction. A quick examination of the two cases will illustrate the issue that Mr. Aka has yet to grasp.


Mr. Aka proved himself a poor representative in Tax Court cases because he did not show up for Tax Court hearings and he did not respond to requests for responses in his cases.  His failures in this regard did not just happen in one or two cases, but in seven.  It is easy to understand why the Tax Court would want to police its bar for these types of failures just as the IRS wants to police those who prepare returns sent to it.  A practitioner like Mr. Aka can wreak havoc with a case because the Court does not want to unduly punish a taxpayer for the failings of counsel.  More important to the understanding of the decision of the Tax Court to revoke his ability to practice before it, is what it says to the court when you do not show up for your case.  It says loud and clear that you do not respect the court.  If you make such a statement to the court seven times, you should expect the maximum penalty because you have shown the maximum amount of disrespect both to the judge handling the case and to the court as an institution.

Mr. Aka complains that his punishment demonstrates the Tax Court’s failure to appropriately respond to poor behavior because he should have received a lesser punishment than another tax lawyer, Robert Grossman. Mr. Aka spends a good portion of his brief explaining what Mr. Grossman did and how Mr. Grossman’s actions only resulted in a suspension from practice.  Because Mr. Aka believes that Mr. Grossman’s actions far exceeded those of Mr. Aka in their severity, Mr. Aka argues that the Tax Court inappropriately determined that suspension rather than revocation provides the correct response to his failures.

Mr. Grossman’s Tax Court case leading to his suspension was handled by the Richmond District Counsel’s office when I served as the District Counsel. The notice of deficiency in his case asserted the fraud penalty with respect to his personal income tax returns.  I attended the trial as the supervisor of John McDougal who tried the case for the office.  I will write a tribute to John later this year as he retires from Chief Counsel’s office and I will say here only that he is the best trial lawyer I encountered during my 30+ years working in Chief Counsel’s office.  One of the most unusual aspects of Mr. Grossman’s case involved the amount of time it took the Tax Court to decide the case.  It took almost five years before an opinion came out.  The amount of time it took the Court to decide this case by far exceeded the time for any other case with which I was involved and I thought it unfortunate that this case took so long because I expected that if the Tax Court found fraud, some sanction would follow.  It seemed odd to delay for so long in deciding a case where the practitioner continued to represent clients during the interim.

When the opinion came out, the Tax Court did find fraud.  Mr. Grossman appealed the case to the 4th Circuit but the fraud penalty stood up to that challenge and the Tax Court eventually did sanction Mr. Grossman by suspending his license to practice before it.  Mr. Aka picked this case out of the cases in which the Tax Court has sanctioned attorneys practicing before it and argues that his failure to appear in court does not equate to filing a fraudulent return.  Since failing to appear for seven hearings is not as bad as filing a fraudulent return, the sanction imposed against him should be reduced.

I think Mr. Aka misses the point of how his actions occurred in the Tax Court and demonstrated disrespect to the Tax Court. His actions did not result in civil or criminal penalties outside of the Tax Court.  Mr. Grossman received a fraud penalty assessment because of his actions and the Tax Court sanction came as a collateral consequence.  Mr. Grossman did nothing that I know of to disrespect the judges at the Tax Court or the Tax Court itself but he did something outside the court that impacted his ability to represent others.  In contrast, Mr. Aka presented a direct affront to the Court and to the petitioners of the Court he represented.  While I think you could make a valid argument in the abstract that a tax practitioner filing fraudulent returns may have committed a more morally reprehensible act than the practitioner who repeatedly fails to appear in court when he should, the weighing of the two acts on a moral scale of which act is worse is not the task put to the Tax Court when it hands out sanctions.  The Tax Court seems perfectly justified in handing out sanctions based on the actions before it just as Judge Merhige gave greater punishment to those who chose to come into his court and lie.

The rules governing practice will always relate to respect for the institution before whom you are practicing. Certainly, things you do outside the court can bring disrespect to the institution and can result in sanctions, but it will always be the things you do before the court that have the most impact.  When Mr. Aka sees that, he will be on the road to reinstatement.  But it may be a long road.


Ex Tyco CFO Swartz on the Hook for Tax For Millions “Borrowed”

An earlier version of this post originally appeared on the Forbes Procedurally Taxing site on October 18, 2016

 When Tyco was synonymous with greed, Mark Swartz and his boss Dennis Kozlowski were vilified as all that was wrong with corporate America. Swartz and Kozlowski were both released on parole in the last couple of years. Swartz, Tyco’s former CFO and Kozlowski’s right-hand man, has had a long-simmering dispute with the IRS over the tax consequences of $12.5 million he helped himself to back when he and Kozlowski were raiding the corporate coffers. This past week the Tax Court in Swartz v Commissioner resolved in favor of the IRS a partial summary judgment motion relating to the $12.5 million, and I will briefly describe it below.


Back when Tyco was flying high, Swartz was participating in Tyco’s key executive loan program. The receipt of loan proceeds, however, is not gross income. The problem for Swartz was that he took steps that suggested he had no intent of repaying some of those proceeds:

In August 1999, a handwritten journal entry in Tyco’s accounting records mysteriously reduced Mr. Swartz’s outstanding loan balance by $12.5 million. Swartz did not make any payments on this loan to Tyco during the year at issue. He also did not include the $12.5 million on his Form 1040 (for example, as cancellation-of-debt income), and Tyco did not include the amount on Mr. Swartz’s W-2.

Tax Court Judge Mark Holmes, in his direct style, describes the hot water that Swartz found himself in:

In 2001, Mr. Swartz became a member of Tyco’s board of directors. Not too long afterward, the directors learned that Kozlowski was the target of a criminal investigation for possible state sales-tax violations by the district attorney in Manhattan. Kozlowski was indicted only a few days after this information surfaced and promptly resigned from the board. His replacement — John Fort — immediately retained a law firm to undertake a full and complete investigation of Tyco’s business including compensation and transactions between Tyco and its officers and directors. This led to a conversation (the details of which are unknown on this motion) between the law firm and Swartz about the mysterious 1999 journal entry. And the conversation led to the reversal of the journal entry. Mr. Swartz then repaid the money with interest.

Kozlowski and Swartz were the subject of a multi-count indictment, including one that alleged that Mr. Swartz stole the $12.5 million from Tyco and another that alleged the conduct amounted to grand larceny under New York law.

At trial, Swartz argued that he thought the $12.5 million loan reduction was part of his bonus; after a hung jury in the first trial a second jury found Swartz guilty of those counts (and others) and sentenced him to 8 to 25 years.

What of the tax consequences of the $12.5 million? It is black-letter law that ill-gotten gains are gross income. In the tax dispute, Swartz took a different approach than what he argued in the criminal trial. In Tax Court he argued that his eventual repayment of the proceeds and Tyco’s actions in 2002 showing after the fact that a repayment obligation existed meant that his actions back in 1999 were null and void and thus there was no gross income in the first instance.

He did not raise this argument in the criminal trial, and IRS sought to use the doctrine of collateral estoppel to prevent him from arguing it in Tax Court.

The order lays out the general conditions for collateral estoppel:

  • an issue of law or fact in the second case is the same as one in the first case;
  • there has been a final judgment in the first case;
  • the party to be precluded is the same or in privity with a party in the first case;
  • the issue that is precluded was actually litigated in the first case; and
  • the controlling facts and legal principles are unchanged.

Swartz argued that there was no identity of issue or actual litigation because he did not make the argument he wanted to make in Tax Court in the criminal case. There was no dispute about elements 2 and 4. The focus was on whether the issue was the same in both matters. Finding in favor of the IRS, the order notes that “a party’s failure to make an argument about an issue in the first case doesn’t mean that he gets a do-over in the second.”

As the Restatement (Second) of Judgments, §27cmt.c (Am.LawInst.1982), concisely summarizes “if the party against whom preclusion is sought did in fact litigate an issue of ultimate fact and suffered an adverse determination, new evidentiary facts may not be brought forward to obtain a different determination of that ultimate fact. . . . And similarly if the issue was one of law, new arguments may not be presented to obtain a different determination of that issue.”

Parting Thoughts

The order notes that there are some cases which suggest that a thief’s agreement to return stolen property in the same year as the original taking can serve as an exception to the general rule that ill-gotten gains are gross income. It was possible that the argument Swartz sought to make may not have mattered for state law purposes but in fact may have mattered for tax purposes. Yet, the order notes that as a matter of law Swartz’s position did not address that narrow exception, as there was no agreement to return the funds to Tyco until 2002, “after he was caught.” If there were allegations that the facts may have led to a material difference under federal tax law, I suspect the order would have concluded differently.

Often the government argues that a conviction should serve to collaterally estop a taxpayer from arguing that the ill-gotten gains were not gross income. Keith discussed the somewhat unusual case of Senyszen v Commissioner where the Tax Court looked at the impact of a tax evasion conviction on the amount of the civil liability owed by the taxpayers and held that the IRS cannot use collateral estoppel to impose a liability where it otherwise does not exist.  As that case makes clear, courts have discretion to not apply it even when the basic conditions are satisfied. Moreover, sometimes embezzlement type convictions do not have the specificity in terms of the amount at issue, which could generate a separate dispute. Here as Judge Holmes notes, the amount itself was specific in the indictment, and Swartz is left to face the tax consequences of that conviction, though his later repayment of the $12.5 million may generate a deduction that perhaps will soften the blow somewhat.



Procedure Grab Bag – Making A Grab for Attorney’s Fees and Civil Damages

Your clients love the idea, and always think the government should pay, but it isn’t that easy.  Below are a summary of a handful of cases highlighting many pitfalls, and a few helpful pointers, in recovering legal fees and civil damages from the government (sorry federal readers) that have come out over the last few months.


3rd Party Rights

The Ninth Circuit, in US v. Optional Capital, Inc., held that a third party holding a lien on property could not obtain attorney’s fees for an in rem proceeding to determine its rights in real estate that had also been subject to government liens pursuant to the Civil Asset Forfeiture Reform Act, 28 USC 2465(b)(1)(A), or Section 7430.  The Court determined the 3rd party was not the prevailing party “in any civil proceeding to forfeit property,” as required by CAFRA.  The government had lost in a related hearing regarding the lien, but the 3rd party had “not pointed to any work it performed that was ‘useful’ or ‘necessary to secure’ victory against the Government,” so it was not the prevailing party.  It would seem, however, this leaves open the possibility of other 3rd parties prevailing, if meaningful work was done in the underlying case.  This case is a good reminder of another potential option under CAFRA in attempting to claim fees in certain collection matters.

As to Section 7430, the Court found, contrary to the 3rd party’s claims, it had not actually removed the government’s liens from the property, and therefore could not be considered the prevailing party, which is required under Section 7430 to obtain fees.

When You Are Rich Is Important

In Bryan S. Alterman Trust v. Comm’r, the Tax Court held that a trust could not qualify to recover litigation costs under Section 7430 because its net worth was over $2MM.  Section 7430 references 28 USC 2412(d)(2)(B), which states an individual must have under $2MM in net worth in order to recover litigation costs.  That is extended to trusts by Section 7430(c)(4)(D).  The taxpayer argued the eligibility requirement should be as of the time the deficiency notice was issued or the date the petition was filed.  That “reading” of the statute was found incorrect, as Section 7430(c)(4)(D)(i)(II) states the provision applies to a trust, “but shall be determined as of the last day of the taxable year involved in the proceeding.”  At that time, the trust had over $2MM in net worth, saving the IRS from potentially having to shell out capital.  And, that’s why I always keep my trust balances below $2MM…and right around zero dollars.

Key Questions: Are you the Taxpayer?  Did you Exhaust the Administrative Remedies?

The District Court for the Northern District of Illinois dismissed the government’s motion for summary judgment in Garlovsky v. United States on fees under Section 7433, but also gave clear indication that the claim is in danger.  In Garlovsky, the government sought collection on trust fund recovery penalties against an individual for his nursing home employer that allegedly failed to pay employment taxes.  Prior to that collection action, the individual died, and notices were sent to his surviving spouse (who apparently was some type of fiduciary and received his assets).  The taxpayer’s wife paid a portion, and then sued for a refund.  As to damages, the Court found that the taxpayer’s wife failed to make an administrative claim for civil damages before suing in the District Court, which is required under Section 7433.

In addition, although the surviving spouse received the collection notices, none were addressed to her and the Service had not attempted to collect from her.  Section 7433 states, “in connection with any collection of…tax…the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provisions of this title…such taxpayer may bring a civil action…”  The Court found that the spouse was not “such taxpayer”, and likely did not have a claim.  Although I have not researched this matter, I would assume the estate of the decedent could bring this claim (unlike Section 7431, pertaining to claims for wrongful disclosure of tax information, which some courts have held dies with the taxpayer – see Garrity v. United States –a case I think I wrote up, but never actually posted).

Qualifying as a Qualified Offer

The 9th Circuit held that married taxpayers were not entitled to recover attorney’s fees under Section 7430 in Simpson v. Comm’r, where the taxpayer did not substantially prevail on its primary argument, even though they did prevail on an alternative argument.  In Simpson, the wife received a substantial recovery in an employment lawsuit.  The Simpsons only included a small portion as income, arguing it was workers comp proceeds (not much evidence of that).  The Tax Court held 90% was income.  This was upheld.  The 9th Circuit held that the taxpayer was clearly not successful on its primary claim.  They did raise an ancillary claim during litigation, which the IRS initially contested, but then conceded.  The Court held the Service was substantially justified in its position, as the matter was raised later in the process and was agreed to within a reasonable time.  Finally, the Court held that the taxpayer’s settlement offer did not qualify as a “qualified offer”, since the taxpayers indicated they could withdraw it at any time.  Qualified offers must remain open until the earliest of the date it is rejected, the date trial begins, or the 90th day after it is made.  Something to keep in mind when making an offer.

Making the Granite State Stronger – No Fees For FOIA

Granite seems pretty sturdy, but Citizens for a Strong New Hampshire are hoping for something even sturdier.  The District Court for the District of New Hampshire in Citizens for a Strong New Hampshire v. IRS has denied Strong New Hampshire’s request for attorney’s fees under 5 USC 552(a)(4)(E)(i) for fees incurred in bringing its FOIA case.  That USC section authorizes fees and litigation costs “reasonably incurred in any case under [FOIA] in which the complainant has substantially prevailed.”  The statute defines “substantially prevailing” as obtaining relief through “(I) a judicial order, or an enforceable written agreement or consent decree; or (II) a voluntary…change in position by the agency…”

Strong New Hampshire requested documents through a FOIA request regarding various New Hampshire politicians.  It took the IRS a long time to get back to Strong New Hampshire, and it withheld about half the applicable documents as exempt under FOIA.  Strong New Hampshire continued to move forward with the suit, and the Service moved for summary judgement arguing it complied.  Aspects remained outstanding, but the Court held that the Service had not improperly withheld the various documents.  The IRS did a second search, moved for summary judgement, and Strong New Hampshire did not contest.

The Court held that the voluntary subsequent search by the Service did not raise to the level of substantially prevailing by Strong New Hampshire.  As required by the statute, there was not a court order in favor of Strong New Hampshire, and the actions taken by the Service unilaterally in doing the second search was not sufficient to merit fees.