Ninth Circuit Reconsideration in Altera v. Commissioner

We welcome back guest blogger Stu Bassin. Stu has blogged with us on several occasions. He is a practitioner based in DC with an extensive controversy practice and provided a discussion of the Altera case earlier here. Les

Last week bought the latest twist in the saga of a challenge to a critical transfer pricing regulation—a rehearing by the Ninth Circuit of a since-vacated ruling upholding the regulation. The original unanimous reviewed decision by the Tax Court in Altera Corp. v. Commissioner, 145 T.C., No. 3 (2015), invalidated the regulation. A divided panel in the Ninth Circuit reversed, upholding the validity of the regulation over a strong dissent. The majority opinion was soon vacated and the case was reargued on October 16, 2018. Given the importance of the specific regulation at issue in transfer pricing cases, as well as the continuing discussion regarding questions concerning Administrative Procedure Act challenges to IRS regulations, the reargument has generated substantial attention in the tax community.

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The underlying dispute involves a cost-sharing agreement governing allocation of stock-based compensation costs between entities related to the taxpayer and invocation by the IRS of Section 482 to recharacterize the terms of that agreement. Section 482 provides:

In any case of two or more organizations . . . owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.

The taxpayer relied upon the undisputed fact that the terms of its cost-sharing agreement were consistent with the prices which unrelated parties would employ in comparable arms-length agreements, thereby satisfying the legal standard historically applied in evaluating cost-sharing agreements under Section 482. The IRS recharacterized the terms of the agreement, relying upon a regulation which specifically required affiliates to share stock-based compensation costs in a manner “commensurate with the income attributable to the intangible.” The taxpayer disagreed, contending that the regulation was invalid under the APA because it deviated from the comparable arms-length transaction test.

The Tax Court unanimously ruled in favor of the taxpayer, invalidating the regulation and rejecting the proposed Section 482 adjustment, focusing upon the second stage of the regulation validity inquiry mandated by Mayo Foundation v. United States, 562 U.S. 44 (2011) — whether the determinations reflected in the regulation were arbitrary and capricious. The opinion concluded that the regulation was invalid because the IRS failed to engage in actual fact-finding, failed to provide factual support for its determination that unrelated parties would share compensation costs in their cost-sharing agreements, failed to respond to significant comments, and acted contrary to the factual evidence before Treasury.

The IRS appeal to the Ninth Circuit was initially heard by a panel consisting of Chief Judge Thomas, Senior Judge Reinhardt, and Judge O’Malley of the Federal Circuit. Judge Thomas, joined by Judge Reinhardt, wrote the opinion for the court reversing the Tax Court opinion and upholding the validity of the regulation. He reasoned that the 1986 amendment of Section 482 (which added the language containing the “commensurate with income” standard) mandated that the IRS adopt regulations employing the commensurate with income standard in addition to the comparable arms-length transaction standard. Judge O’Malley dissented, urging invalidation of the regulation because it deviated from the arms-length standard.

Because the decisive vote was cast by Judge Reinhardt, who died after the argument and roughly 100 days before the opinion was issued. A footnote to the opinion states that “Judge Reinhardt fully participated in this case and formally concurred in the majority opinion prior to his death.” A procedural issue arose when Altera petitioned for rehearing. The remaining members of the panel were deadlocked, so the court withdrew the original opinion, assigned Circuit Judge Susan Graber (a Clinton appointee) to replace Judge Reinhardt on the panel, and scheduled the case for reargument last week.

At the argument, Judge Thomas was silent and Judge O’Malley appeared to reiterate the position stated in her dissent. So, all eyes focused upon Judge Graber, who was new to the panel and the likely decisive vote on the merits. She focused her inquiry upon statutory construction issues and the relationship between the historic standard of “comparable arms-length transactions” embodied in the first sentence of Section 482 and the “commensurate with income” standard embodied in the second sentence of Section 482. Noting that the statutory language of the second sentence applies only to “the income with respect to such transfer or license [of intangible property],” she questioned whether the cost sharing agreement was a “transfer or license” within the meaning of the statute. The taxpayer argued that its cost-sharing agreement was not a narrow “transfer or license” and that the second sentence’s “commensurate with income” standard was therefore inapplicable. In contrast, the government contended that the indirect role of the cost-sharing agreement in establishing the pricing on the arrangement between the two subsidiaries was sufficient to render the “commensurate with income” standard applicable and controlling.

Judge Graber also asked a series of questions focused upon reconciling the commensurate with income standard with the general requirement under Section 482 that the IRS must allocate costs in a manner consistent with the arms- length standard. The government argued that the legislative history reflects a congressional policy judgment and determination that, in those cases involving transfers of intangible property, only an allocation based upon the “commensurate with income” standard would satisfy the arms-length standard. The taxpayer countered by stating that the legislative history did not support such a construction and observed that, if the government’s construction were adopted, relatively few transactions would remain governed by the traditional arms-length standard.

Finally, Judge Graber inquired whether there was a factual basis or economic theory which supported the regulation’s finding that stock-based compensation costs must be allocated in a manner   commensurate with income to satisfy the arms-length standard. The taxpayer noted the absence of a factual record or economic theory supporting the IRS findings, arguing that the only evidence before the agency supported a finding that comparable arms-length transactions did not allocate stock-based compensation costs in the manner required by the IRS. In contrast, the government stated that such evidentiary support was not required to support the IRS determination.

Interestingly, the argument gave relatively little attention to the second stage of the Mayo analysis—the arbitrariness of the IRS determination. The degree of deference accorded regulations under Chevron was hardly discussed. Both sides and the court focused upon the statutory authority for the regulation. They all seemed to agree that, if the statute authorized the IRS to deviate from the arms-length standard, the regulation would survive.   Otherwise, the regulation was invalid.

The panel gave no indication of when it would render its decision. Full opinions on appeals to the Ninth Circuit tend to take a long time and the initial panel decision was not released until nine months after the argument. So, it seems likely that a decision will not be issued until early 2019.

 

Upcoming Appellate Arguments on Cases PT Has Blogged

Frequent guest blogger Carl Smith keeps us up to date with many items that he tracks. Carl is headed to Hawaii for a well-deserved vacation from his busy retirement but before he left he provided us with an update on a number of cases on which we have previously reported. Because we usually pick cases of some importance on which to write, it is not surprising that many of them continue on past the initial decision. For those interested in knowing what is happening on some of the cases on which we have blogged, Carl has left us with a guide to the cases moving forward to oral argument on appeal in the next couple of months.

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  1. The first case is one on which Les blogged here and here over two years ago. The issue in the case concerns the effect of fraud on the return by a third party and whether that fraud can hold open the statute of limitations even if the taxpayer did not commit fraud in filing the return. On Nov. 8, the 11th Cir. will hear the appeal of Finnegan v. Commissioner, T.C. Memo. 2016-188, in which the Tax Court held that the fraudulent conduct of a return preparer extended the SOL of 6501 indefinitely (per its Allen opinion).  The Tax Court refused to follow the Fed. Cir.’s BASR’s holding to the contrary, but which is possibly distinguishable as a TEFRA partnership case.  Frank Agostino will do oral argument for the taxpayers.  The DOJ argues that the Tax Court’s interpretation of 6501 is correct and that the taxpayers waived raising any argument that the Tax Court’s position in Allen is wrong.  The briefs are here and here. We note in our earlier posts that fellow bloggers Jack Townsend and Bryan Camp think Allen is wrong. I happen to think it is right. Aside from obviously turning on the language of the statute, the issue is one of where should the focus lie. Should the IRS receive an unlimited time period within which to make an assessment because of the deceit on the return or should the taxpayer have a normal statute of limitations since the taxpayer did not engage in fraud even if the taxpayer benefited from the action. It would not be surprising to find that this issue eventually ended up in the Supreme Court.
  2. On Nov. 9, the 9th Cir. will hear oral argument in Crim v. Commissioner, one of the cases in which Joe DiRuzzo is arguing the Kuretski issue.  Carl blogged about the case here mentioning the forthcoming oral argument and providing links to the briefs. The Kuretski issue for those of you not following it closely involves the power of the President to remove Tax Court judges which raises issues of separation of powers depending on where the Tax Court lands inside the government. Is it a part of the executive branch as the D.C. Circuit determined in Kuretski making the removal provision constitutional sound or is it a part of one of the other two branches of government as signaled by the Supreme Court in an earlier case not involving the removal provision. Should the 9th Circuit decide to place the Tax Court in the Judicial or Legislative branch, this case to could end up in the Supreme Court.
  1. Any regular reader of PT knows that the most blogged about issue in 2018 involves the Graev decision and its many permutations. On April 4, 2018, Carl blogged about the RERI case which involves the application of IRC 6751(b) to penalties imposed on partnerships. On Nov. 9, the D.C. Cir. will have oral argument in this TEFRA partnership case, among whose arguments are that the IRS did not prove compliance with 6751(b).  This may result in getting a Court of appeals to accept the Tax Court’s holding in Dynamo Holdings that 7491(c) does not put the burden on the IRS to prove compliance with 6751(b) because TEFRA partnerships are not “individuals”.
  1. On Nov. 13, the 2d Cir. hears oral argument in Borenstein v. Commissioner. I blogged about this case here. The Federal Tax Clinic at the Legal Services Center of Harvard Law School together with the tax clinic at Georgia State filed an amicus brief in the Tax Court and again in the Second Circuit.  This case has to do with the Tax Court’s overpayment jurisdiction under 6512(b) in an odd fact pattern in which the taxpayer filed a late return seeking a refund. The timing of the refund falls into a legislative donut hole because she requested an extension of time to file her return.  The case will not have broad applicability though it is possible that others could fall into this potential trap. The issue requires parsing the language of the statute and discerning its meaning in the overall context of filing a late tax return which contains a refund claim.
  1. On Dec. 4, the D.C. Cir. will hear oral argument from Joe DiRuzzo (again) in the whistleblower case of Myers v. Commissioner. Carl blogged this case on May 21, 2018 in which he linked to the appellants brief and to the brief filed by the Federal Tax Clinic at the Legal Services Center of Harvard, but not the later-filed appellee and reply briefs).  The issue in this case concerns whether the IRS sent a valid determination letter to the whistleblower. In whistleblower cases the statute does not make clear exactly what must be sent to provide a ticket to the Tax Court. The IRS sent him by regular mail a series of letters, none of which said that he should file in the Tax Court if he disagreed.  After many months contacting various other people in government for help with his claim, Mr. Myers eventually took a flyer on filing a Tax Court petition.  The Court decided that each letter in the series had been a ticket to the Tax Court, and Mr. Myers had filed late — dismissing his case for lack of jurisdiction. Because Congress has created new jurisdictional bases for the Tax Court in whistleblower and in passport revocation without setting out the type and formality of correspondence that the IRS must send to provide the ticket to court, these types of cases are needed in order to sort out when to come to court. Because Mr. Meyers is pro se, he may be one of many unrepresented individuals who will struggle to pick the right correspondence if the correspondence does not clearly alert him to its importance as a ticket to court.

 

 

 

Trump, Tax Crimes, and Tilting at Windmills

We welcome guest blogger Scott A. Schumacher. Professor Schumacher is the Associate Dean of the University of Washington Law School and has for many years headed the low income taxpayer clinic there as well as its graduate tax program. Prior to joining the faculty at the University of Washington Professor Schumacher worked for several years in the Criminal Section of the Tax Division of the Department of Justice. His work in his prior life provides him with an insider’s view of the workings of criminal tax cases which he shares with us today. Some of us are old enough to remember a criminal tax case that ended the political career of Vice President Spiro Agnew. While President Trump’s taxes continue to be the focus of much discussion, Professor Schumacher explains why the recent news story does not signal anything of current tax significance. Usually we leave the discussion of criminal taxes to the excellent federal tax crimes blog written by Jack Townsend but the currency of the recent article concerning the taxes of the President’s family causes us to veer temporarily into a different procedural area. Keith

Earlier this month, the New York Times published an extensive expose on the tax strategies allegedly employed by President Trump and his family in the 1990s. New York State tax authorities quickly announced that they were beginning an investigation into these matters, and the typical political and media firestorm followed. Among the questions raised were: Can Trump be prosecuted for this conduct? Can both the State of New York and the U.S. government prosecute him for the same conduct? If he is continuing to engage in similar strategies, can he be prosecuted for tax crimes? Are Fred Trump and former Secretary of State Dean Acheson the same person?

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As to the first question, there is virtually no chance of the conduct discussed in the New York Times article resulting in either a federal or New York State tax prosecution.  Under federal law, the statute of limitations for tax evasion and other tax crimes is six years, and it’s five years under New York law. The statute begins to run from the last act of evasion, which generally means the filing of the tax return for the year at issue. As noted, all of the events discussed in the Times article occurred in the 1990s, and the statute of limitations has long since run on those years.

As to the second question, there is nothing that absolutely bars both a federal and state tax prosecution for the same tax year. The laws of separate sovereigns have been violated, and the conduct involves separate criminal conduct –the filing of two different tax returns. Hence, the Double-Jeopardy Clause is not implicated.

Nevertheless, parallel or sequential federal and state tax prosecutions are rare. Under the Department of Justice’s Petite Policy (named after Petite v. United States, 361 U.S. 529 (1960)), federal prosecutors will generally not bring a case following a prior state prosecution based on substantially the same acts. The purpose of the policy is to promote the efficient use of resources, to encourage federal and state cooperation, and to protect persons from multiple prosecutions and punishments for essentially the same conduct. The Petite Policy is followed by the Tax Division of DOJ, which must approve indictments for all federal crimes.  As a result, it is extremely rare for a federal prosecution to follow a state prosecution in tax matters.  In reality, even without a formal policy, given that there are so few tax prosecutions, if someone has been convicted by either a state or federal government, it is highly unlikely that another prosecution for essentially the same conduct would be brought. They have bigger fish (or at least other fish) to fry.

What if the conduct described in the Times article continues to today, couldn’t that form a successful tax prosecution? Without getting into the specifics of the alleged conduct, which is well beyond the scope of the PT Blog, such a prosecution is highly unlikely. The heart of any tax prosecution is the mental state that the government is required to prove – willfulness. Willfulness is defined as an “intentional violation of a known legal duty.” Thus, the taxpayer and putative defendant must know what the law provides and intentionally violate the law. In this regard, reliance on the advice of a professional generally constitutes a complete defense to the element of willfulness.

Given the complexity of the tax laws, it is difficult for prosecutors to prove that someone who was advised by lawyers and accountants knew that their conduct violated the law and intentionally engaged in that conduct. Despite the President’s claim that he understands the complex tax laws better than anyone who has run for president, he has always been well represented by competent tax professionals.

Okay, nobody asked the final question, but Google it.

 

District Court Finds that Sanmina Waived Privilege Claims For Memos That Tax Counsel Prepared

Earlier this year in Ninth Circuit Defers on Important Privilege Waiver Case I summarized US v Sanmina Corp, a Ninth Circuit opinion that remanded a case to the district court to consider whether by disclosing the existence of purportedly protected documents the taxpayer waived various privilege claims it asserted with respect to memos that its in house tax counsel prepared. Earlier this month a federal district court in California issued an order holding that the taxpayer waived its privilege claims. The issue is important, especially for corporate taxpayers with layers of advisors touching different parts of a transaction or position taken on a tax return.

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As background, and as I repeat from my January post, the case arose out of Sanmina’s 2009 tax return, when it claimed about a half billion dollars in a worthless stock deduction in one of its subsidiaries. The purportedly worthless sub had two related party receivables with an approximate $113 million book value. Notwithstanding the healthy book value, Sanmina claimed that the FMV of the receivables was zilch.

IRS examined Sanmina’s tax return and sent an information document request for documents that supported the deduction. Sanmina gave to IRS a valuation report from DLA Piper, its outside counsel. That report (not surprisingly) supported the taxpayer’s view that the receivables had no fair market value. Included in the report was a footnote that referenced internal memos that Sanmina’s tax counsel had prepared, one in 06 and the other in 09.

IRS asked for those two memos; Sanmina resisted, leading to IRS to summons them and bring an enforcement action when Sanmina did not comply. In 2015, the district court held that both memos were protected by attorney client and work product privilege and that the “mere mention” of the memos in the DLA Piper valuation report did not amount to the party’s waiving the privilege.

The Ninth Circuit reversed and remanded the matter back to the district court, and specifically asked that the district court judge examine the documents in camera so it could provide a “more informed analysis” of the waiver claims.

[As  an interesting aside, the case has been festering for almost four years; the magistrate judge who originally wrote the order that the government appealed, Paul Grewal, has moved on to Facebook where he is Deputy General Counsel.]

After some additional back and forth with the Ninth Circuit about the scope of the remand, the district court has now issued its opinion. In brief fashion, the district court agreed with the taxpayer that the documents were subject to both attorney client privilege and work product protection, but it found that the privileges were waived in light of the DLA Piper valuation report for two main reasons:

  • When Sanmina gave the memos to DLA Piper it did so not with the hope of getting legal advice but for the purpose of getting a valuation for the stock of one of its subs; and
  • In any event when it gave the DLA Piper report to IRS it waived privilege for any of the materials that Piper used to reach its valuation, as the report explicitly stated that it based its conclusions (at least in part) on the two memoranda that were at issue.

Sanmina had attempted to minimize the DLA Paper’s report reliance on the memos, pointing to a Ninth Circuit case Tennenbaum v Deloitte and Touche that suggested that disclosing the existence of the memos was not tantamount to disclosing the contents themselves. The opinion’s framing of DLA Piper as relying on the memos (aided by the in camera review the Ninth Circuit suggested) led the court to reject that argument:

[In Tennebaum], our court of appeals held that a promise to waive privilege is not, in itself, a waiver, rather, it is disclosure that triggers waiver. Id. at 341. The court noted that waiver is rooted in notions of “fundamental fairness” and that its principal purpose is “to protect against the unfairness that would result from a privilege holder selectively disclosing privileged communications to an adversary, revealing those that support the cause while claiming shelter of the privilege to avoid disclosing those that are less favorable.” Id. at 340.

Here, Sanmina wishes to do just that. Sanmina relies on DLA Piper’s determination supporting a $503 million stock deduction, but it avoids disclosing the very foundational analysis that informed its conclusion. DLA Piper acknowledged that it based its conclusions on the memoranda in question. Thus, it would be fundamentally unfair for Sanmina to disclose the valuation report while withholding its foundation.

Conclusion

While the taxpayer may appeal this order, it serves as a cautionary tale for taxpayers who rely on both in house tax counsel and outside advisors. Valuation issues often are at the heart of many disputes with the IRS (and other parties) but when a client leans on outside advice for valuation and those advisors disclose their use of documents prepared in house it creates a road map for a waiver argument for the documents that would otherwise be protected from disclosure.

Tax Court Urged to Permit Limited Scope Appearances by Counsel

We welcome first-time guest blogger James Creech to Procedurally Taxing. James is a tax controversy attorney in solo practice in San Francisco and Chicago. He currently chairs the Individual and Family Tax Committee of the ABA Section of Taxation. Here James discusses comments submitted by the ABA Tax Section urging the adoption of a limited appearance rule in Tax Court, and he explains his support for the proposal from the perspective of a pro bono calendar call attorney. As one of the authors of the comments I hope the Court agrees with James. Christine

On October 3rd, the ABA Section of Taxation submitted comments to the Tax Court urging the court to amend Tax Court Rule 24 in order to create a new limited scope appearance. The comments are primarily aimed at allowing pro-bono volunteers to speak on the record during a calendar call without having to worry about broader ethical issues and without worrying about assuming responsibility beyond a solitary appearance. Importantly, while calendar calls are the primary focus, the Tax Section recommendation does not restrict the use of limited scope appearances to only calendar calls. The comments urge permission for limited scope representation in any situation where 1. the limitation is reasonable given the circumstances; 2. the limitation does not preclude competent representation or violate other rules; and 3. the client gives informed consent. This broader request would allow pro-bono volunteers to not only assist during the trial setting session but would open the door to assisting during trial itself, or during appeals hearings in docketed tax court matters.

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A limited scope representation rule could help a large number of taxpayers. According to the comment 69% of all petitioners are unrepresented. When looking only at S cases that number jumps to 91%. Currently during the typical calendar call session there is a limited amount of time where petitioners can meet with a pro-bono attorney and often they are overwhelmed with the process. Allowing limited scope representations would allow pro-bono volunteers to increase their assistance and reduce the burden on both petitioners and the Court.

Under the Tax Section’s proposal, beginning a limited scope representation would require the pro-bono volunteer to complete a Tax Court form that clearly identified the date, the time period of the representation, the activity, and the subject matter. On the sample forms attached to the comments, these lines are prominently displayed and are likely to reduce much of the client’s uncertainty the limited representation. This form would then be signed by the pro-bono attorney and served on both the Court and opposing counsel. For representations that are part of the calendar call program, the ABA Tax Section comment language specifically states that the representation ends at the conclusion of the calendar call. If a practitioner wishes to extend the representation through trial a separate notice of completion must be filed with the Court and served upon respondent.

As a frequent calendar call volunteer, the recommendations made in the ABA Tax Section comment are welcome and frankly overdue. One of the biggest frustrations of a calendar call pro-bono attorney is the inability to speak to the court on behalf of a pro-se litigant even when it comes to something as simple as requesting a continuance. Calendar Call volunteers often spend a significant amount of time with a pro-se litigant teaching them the basics of Tax Court procedure, what facts are relevant, and what the roles of Chief Counsel attorneys and the Court are. At the conclusion of the meeting it is not unusual to wait in the back of the courtroom only to watch them step up to the podium and start rehashing irrelevant facts that are unhelpful to the Court. It then takes time for the Judge to give the opportunity for the litigant to speak, inform them why they are in court today, and to ask questions about what their goals are. Often what should be a two minute request for a specific trial day or a continuance can turn in to ten minutes of the Judge trying to get a sense of the evidentiary issues and if trial is the fairest way to resolve the case. Allowing a pro-bono attorney to approach the podium with the petitioner would eliminate these issues. I believe a limited scope rule would give petitioners a better sense that they were able to communicate their needs and that they had a fair opportunity to be heard both of which are essential to due process.

Enacting the ABA Tax Section’s proposal for limited scope representation would benefit volunteers, pro-se taxpayers, chief counsel, as well as the Court. Volunteers would more certainty that their time would be put to good use. Pro se litigants would get a fairer outcome because they would be able to better communicate their needs to the Court and explain the relevant facts in their case. Finally, the Court would benefit from increased efficiency and a trial record that better reflected what the parties believed the facts to be.

Overall the Tax Section comment does a great job of striking a balance between the needs of volunteer attorneys ethical compliance and workload considerations with their desire to help pro-se petitioners. The inclusion of clear sample forms gives the Court and pro-bono volunteers a better idea of how this rule could be implemented and what pro-se litigants might expect should this proposal be adopted. In my opinion the Tax Court should implement a limited scope rule that is substantially similar to what the ABA Tax Section proposes.

Designated Orders 9/24/2018 – 9/28/2018: Understand the Remand; No Proof, No Relief

This week’s designated orders are brought to us by Samantha Galvin of the University of Denver. The last case Samantha mentions involves an unsuccessful motion for reconsideration under Tax Court rule 161. Keith previously covered motions for reconsideration on PT here. Christine

During the week of September 24, 2018, the Court designated four orders: two for cases previously covered in Caleb Smith’s October 3rd post, and two for cases where petitioners offered no evidence to support their positions. First, as a very quick follow up – the Court denied the remaining portion of Tribune Media Company’s motion to compel the production documents (order here). If you are interested, see Caleb’s post (here) for the background and more information on this order and the first order discussed below.

Understand the Remand

Docket No. 22224-17, Johnson and Roberson v. C.I.R. (designated order of 9/29/18 here; most recent order here)

When we last saw this case, Caleb explained that notes in the administrative file suggested that petitioners had not received a SNOD, and as a result, a remand to Appeals seemed imminent. The IRS does not object to a remand, but petitioners do object, so the case is set for trial during the week of October 15th. In its designated order of September 29, the Court takes steps to ensure that petitioners understand the consequences of objecting to a remand. The Court explains that many petitioners benefit from remands, and that any supplemental determination is eligible for judicial review. In the alternate scenario, if there is no remand and the Court decides that Appeals’ determination cannot be sustained- that finding of abuse of discretion alone does not bar the IRS from future collection activity.

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There is a misconception among some taxpayers who believe if they can prove that IRS made a mistake, they’ll be absolved of their tax liability – we all know this is not the case. Although not receiving the SNOD allows petitioners to raise issues related to the underlying liability, a reduction or elimination of that liability is not guaranteed. In the present case, petitioners will have the burden of proving their charitable contributions, medical expenses, and business expenses claimed as miscellaneous deductions.

The next two orders share a common designated orders’ theme, which is “petitioners who do not provide evidence to support their claims.”

No Proof, No Levy Release

Docket No. 25627-17SL, Hommertzheim Enterprises, Inc. v. C.I.R (Order and Decision here)

This first instance of a petitioner without proof is in Court after a CDP hearing for unpaid employment taxes. This case also has another common designated orders’ theme, which is “neither the IRS, nor the Court, can help the taxpayer who fails to do what they’re asked to do.” I assume here (and have assumed in previous posts) that these types of orders are frequently designated to provide guidance to taxpayers about their responsibilities in a CDP hearing and the Court’s jurisdiction over CDP hearings, which makes me think CDP hearings would run more smoothly if the IRS would instruct taxpayers to read Procedurally Taxing as a part of the process (ha ha).

In this case the IRS requests a collection information statement, unfiled returns, and proof of quarterly tax deposits. Petitioner provided one of the three unfiled returns, copies of two previously filed (but not requested) returns, and nothing more. The new return showed a balance which the settlement officer said would need to be paid before an installment agreement could be considered; although, I don’t understand why this balance couldn’t be included in any proposed agreement.

The levy is sustained, and petitioner explains in its petition (in all capital letters, presumably to convey anger and frustration) that all documents were faxed, they were never told how to make a payment arrangement, and thus were unable to make it.

Despite the explanation, petitioner does not offer any evidence to prove that it faxed all of the documents and the administrative record supports the IRS’s position that only one of the requested documents was received. As a result, the Court finds there is no abuse of discretion, grants the IRS’s motion for summary judgment and sustains the levy determination.

No Proof, No Reconsideration

Docket No. 25105-12L, Robinson and Jung-Robinson v. C.IR. (order here)

This order involves petitioners’ motion for reconsideration. The crux of petitioners’ argument is that the Court lacks jurisdiction because the ASED had already expired when the parties executed an agreement to extend it, but again, petitioners did not offer any evidence to support this. Whereas the IRS refers to exhibits that show the ASED had been extended until ten months after the notice of deficiency was issued.

As a reminder, or for those of you who don’t know, a motion for reconsideration is generally only granted when there is a substantial error or unusual circumstances, so without evidence from petitioners it’s no surprise the Court denies their motion.

Altera Oral Argument Live Stream Available Now

We have covered the Altera opinion extensively. The oral argument in the Ninth Circuit is being live streamed here

The argument started today at 5PM EDT. On my stream it can be found at about 7 minutes and 52 seconds in.

UPDATE: The above video link is no longer active; a link to a recording of the video is here and the audio alone is here

Professor Kwoka Sues IRS and Explains the Path of FOIA in Two Recent Important Law Review Articles

Kwoka v IRS is a FOIA case from a federal district court in the District of Columbia. The case involves Professor Margaret Kwoka, one of the leading scholars of government secrecy in general and FOIA in particular. In the lawsuit, Professor Kowka is seeking records that categorize FOIA requests IRS received in 2015, including the names and organizational affiliations of third-party requesters and the organizational affiliation of first-party requesters. The IRS provided some of the information she sought, but not all of it.

In this post I will briefly describe Professor Kwoka’s research project and turn to the particular suit that generated last month’s opinion.

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Professor Kwoka teaches at the University of Denver Strum School of Law. Her recent research focuses on FOIA and how it has strayed from its main purpose of allowing third party requesters (like the press and non profits) holding government accountable.  A 2016 article in the Duke Law Journal, FOIA, Inc.  chronicles the growth at some agencies of commercial FOIA requests, that is requests that are primarily motivated by commercial interests of the requesters. A 2018 article in the Yale Law Journal, First-Person FOIA, highlights the rapid growth in FOIA cases from people or their lawyers or other representatives seeking information about their particular case, often to use in other litigation or administrative actions. It is these FOIA cases that are made by so called first person requesters.

The First-Person FOIA article has particular resonance for people interested in tax administration, as practitioners and taxpayers frequently turn to FOIA to learn more about their case as they challenge an IRS determination. The article looks at agencies like the Department of Veterans Affairs and Social Security Administration and Professor Kwoka demonstrates that a “significant amount of first-person FOIA requesting serves as a means for private individuals to arm themselves when they are subject to governmental enforcement actions or seek to make their best case for a government benefit.”

First-Person FOIA makes the case that while FOIA provides a vehicle for people to get needed information about their cases it has significant shortcomings when used for that purpose. The article does not minimize the need for access to information; she suggests solutions for individual access outside of FOIA, including expanding individuals’ online access to information and limited administrative discovery. Yet Kwoka argues that while “these requests represent legitimate efforts by private individuals to obtain information about themselves, they serve largely private, not public interests.” That, as Kwoka notes, has led some observers to question FOIA’s value and perhaps will have the unintended effect of reducing its role as helping the public keep government accountable, a goal that seems as important today as it did in the post-Watergate era when sunshine laws like FOIA took root as one way to keep government accountable.

That takes us to the lawsuit that Professor Kwoka filed to get more information so she could properly catalogue the FOIA requests IRS received in FY 2015. In her study Kwoka sought information about requesters from 22 different agencies; only six gave her the information she needed; three provided the information in publicly available form on their websites. IRS was one of seven agencies that provided some information but due to withholdings or redactions Professor Kwoka could not use it in her study. That is what led to her suing the IRS to get more specific information about the FOIA requesters and their affiliations. In particular in her FOIA request, she sought “[t]he name of the requester for any third-party request (for first-party requests I accept this will be redacted)” and “[t]he organizational affiliation of the requester, if there is one.”

In the suit IRS relied on Exemptions 3 and 6 to withhold the names of the third party requesters and the organizational affiliations of the first and third party requesters. Exemption 3 essentially requires IRS to withhold information that is exempted from disclosure under another statute—the biggie in tax cases is the general restriction on release of taxpayer information in Section 6103. Exemption 6 allows an agency to withhold “personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.”

With respect to its Exemption 3 defense, IRS argued that need not reveal the names or organizational affiliations of FOIA requesters because doing so could “reveal protected tax information including, but not limited to[,] the identity of a taxpayer.”   As part of its defense IRS pointed to the online log of FOIA requests that it maintains (see for example its FY 2015 log).  The IRS argued that if Kwoka obtained the names and organizational affiliation of third-party requesters, she could cross-reference that information with the online log and deduce the identities of the taxpayers.

The opinion pushed back on this, noting firstly that the topics the log lists are vague and more importantly  the “IRS’s conclusion does not follow from its premises.”

Even armed with the information she requests and the publicly accessible FOIA log, in most cases Kwoka could not know with any certainty the identity of particular taxpayers. Neither the log nor the information Kwoka requests generally reveals the target of a FOIA request—i.e., the person whose tax records the requester is seeking. Thus, for third-party requests in which a requester submits a request for someone else’s information, knowing the name and organizational affiliation of the requester (from her own FOIA request) in conjunction with the topic of the request (from the publicly accessible log) would not reveal the identity of the target of the request.

The requests for the organizational affiliations of the first-party requesters was a somewhat more nuanced issue, but there too the court sided with Kowka over the IRS argument that exemption 3 allowed a blanket excuse to withhold on all of the requested information:

In most cases, the same is true for first-party requesters who request their own tax return information. Kwoka concedes that the IRS can redact the names of first-party requesters, see FOIA Request; she asks only for their organizational affiliations. But because most organizations have many affiliated individuals, knowing a requester’s organizational affiliation—even in conjunction with the topic of the request—would not ordinarily reveal the identity of the requester (and thus the identity of the taxpayer). There may be a few exceptions where, for example, a particular organization has only one affiliate, or where a topic listed in the publicly accessible FOIA log is so specific (in contrast to the majority of the entries) that it would, in conjunction with the requester’s organizational affiliation, effectively reveal the first-party requester’s identity. See Def.’s Reply at 8 (arguing that “a FOIA request made by the owner of an individually held or closely held company, in concert with the subject of the request, would be enough to reveal the identity of the individual making the request”). Kwoka also concedes that “[w]here an individual requests tax records about the organization that is identical to the individual’s organizational affiliation as recorded in the IRS’s records, … the organizational affiliation would be subject to redaction.”

The opinion moved on to Exemption 6, which employs a balancing test and allows agencies to withhold certain information when disclosing it would result in a “clearly unwarranted invasion of personal privacy.”  IRS argued that it could rely on Exemption 6 for a blanket witthhoding of the requested information For reasons similar to its rejection of Exemption 3, the court disagreed with the IRS:

For many of the same reasons the IRS is not entitled to a blanket invocation of exemption 3, it is not entitled to one under exemption 6. The IRS argues that “third-party FOIA requesters in this case [would] be subject to harassment, stigma, retaliation, or embarrassment if their identities were revealed” and that “[t]he average citizen has ample reason not to want the world to know that someone else has used the FOIA to obtain information regarding his federal tax liabilities, or his tax examination status.” But, as explained above, in most cases, revealing the organizational affiliations of first-party requesters and the names and organizational affiliations of third-party requesters would not reveal the targetof the request. Moreover, FOIA requesters “freely and voluntarily address[] their inquiries to the IRS, without a hint of expectation that the nature and origin of their correspondence w[ill] be kept confidential.” Stauss v. IRS, 516 F. Supp. 1218, 1223 [48 AFTR 2d 81-5617] (D.D.C. 1981)…

Conclusion

The case continues, as the court concluded that the IRS could not rely on Exemptions 3 and 6 to provide a categorical denial of Professor Kwoka’s request though it may in specific instances rely on those exemptions as a basis for redacting or withholding information.

Kudos to Professor Kwoka for her important research and her efforts to uncover more information about the nature of FOIA requests across the government.