And Now a Quick Break from Procedure to Recognize Dorothy Steel

Guest blogger Bob Kamman picked up this story last week and the judicial conference slowed down our production line. This is a great story about a former revenue officer who has gone on to bigger (and better?) things with her career. It’s nice to see someone working in tax procedure collecting taxes having a good post-IRS career. Keith

Is there life after IRS? That’s a question that many writers and readers of this blog have likely asked ourselves. No one has a better answer than a 91-year-old former IRS revenue officer from College Park, Georgia.

“Hopefully, somebody who at 55 or 60 has decided, ‘This is all I can do,’ they will realize they have 35 more years to get things together,” Steel said. “Start now. It’s never too late. … Keep your mind open and keep faith in yourself that you can do this thing. All you have to do is step out there.”

That is a quote from her in this article in the Washington Post

“Dorothy Steel was born and raised in Detroit and eventually worked for the federal government as a senior revenue officer for the Internal Revenue Service for decades before retiring on Dec. 7, 1984 — a date she rattles off with impeccable memory,” the Post reports. The article adds, “she bounced around the world as part of her job.” So what has she done lately?

Proved, beyond a doubt, that if you can collect federal taxes you can do anything, even if you are an African-American woman north of 90 years old.

She is a scene-stealing actress in the current box-office blockbuster, “Black Panther.” It’s the 14th-highest grossing movie of all time, and moving up the list. She plays the role of a merchant elder. Acting experience? She started in community theatre for seniors when she was 88. At 89, she got an agent and began getting parts in television shows and commercials.

Steel turned down the chance to audition for “Black Panther” the first time she was asked, because she was not interested in some “comic-strip movie” and she didn’t think she could do an African accent. Her grandson, 26, explained to her that this was not just any comic strip. And she listened to hours of Nelson Mandela speeches on YouTube, to develop the accent. She agreed to the audition, and was asked to join the cast.

Yes, there is life after IRS. Some of us may even be fortunate enough, to have an income at age 91 that is as much as what Dorothy Steel will pay in taxes this year.

ARE ALLEGED ALTER EGOS, SUCCESSORS IN INTEREST AND/OR TRANSFEREES ENTITLED TO THEIR OWN COLLECTION DUE PROCESS RIGHTS UNDER SECTIONS 6320 AND 6330? PART 2

Today, guest blogger Lavar Taylor continues his discussion of the interplay of the laws regarding third parties liable for a tax debt and the ability of those third parties to obtain CDP rights. If you have not had the chance to read his initial post on this topic, you might want to take time to read that one before digging into this one. These posts not only explore the ability of these third parties to obtain CDP rights but help anyone not familiar with the various ways that the IRS can seek payment of a taxpayer’s liability to gain a better understanding of the collection process. Keith

In Part 1 of this series of blog posts, I explained how the relevant statutes and regulations, together with the rationale of the Court deciding Pitts v. United States in favor of the IRS, support the conclusion that persons/entities who are alleged by the IRS to be the alter ego, successor in interest, and/or transferee of the party who incurred the tax liability (“original taxpayer”) are entitled to their own independent Collection Due Process (“CDP”) rights under §§ 6320 and 6330 of the Code. In the present blog post, I explain why I believe that the IRS is speaking out of both sides of its mouth when it denies alleged alter egos, successors in interest, and transferees their own independent CDP rights under §§ 6320 and 6330.

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The IRS, in the current version of the Internal Revenue Manual (“IRM”), instructs revenue officers to treat partners in a general partnership which incurred unpaid federal taxes as “persons liable for the tax” for purposes of administratively enforcing the partnership’s unpaid tax liability. Per the IRM, these general partners are to be given CDP Lien and Levy notices under sections 6320 and 6330, in addition to the CDP Lien and Levy notices provided to the taxpayer partnership. Thus, IRM section 5.19.8.4.2(5)(08-05-2016), titled CDP Hearing Requests, provides in section (5) as follows:

If the tax liability involves a partnership, a request for a CDP hearing under IRC 6330 would cover all partners in the partnership. Under IRC 6320, the partnership and partners listed on the NFTL receive the CDP hearing notice. A partner with authority to represent the partnership could request a hearing for the partnership or a partner listed on the NFTL could request a CDP hearing as an individual partner.

Similarly, IRM 8.22.5.3.1.4(4) (03-29-2012), titled Determining Timeliness-Levy, provides that “[f]or partnerships, Collection may issue separate notices to individual partners as well as the partnership entity.” IRM Section 8.22.6.5 (03-29-2012), titled Partnership Liability, states as follows:

1. Under state law, general partners in partnerships are liable for taxes assessed against the partnership. In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court held the Service’s assessment against a partnership serves to make the general partner liable for the tax. While the Supreme Court did not address administrative collection, Galletti is consistent with the Service’s long-standing legal position that it can enforce a tax lien and take administrative levy action against a general partner based on the assessment and notice and demand directed to the partnership. See Chief Counsel Notice 2005-003 at http://www.irs.gov/pub/irs-ccdm/cc-2005-003.pdf .

2. A partner’s individual CDP hearing request:

— DOES NOT affect Collection’s ability to collect from the partnership or other individual partners’ assets

— DOES affect Collection’s ability to collect from that partner’s individual assets.

Chief Counsel Notice 2005-003 explains in detail the rationale for the IRS’s position that the IRS may pursue administrative collection action against general partners personally for taxes incurred by and assessed against the partnership itself. Essentially, the IRS takes the position that it may take advantage of state law to pursue collection of a tax liability against someone other the person who incurred the tax liability. That concept is not a new one – it is the bedrock of the Supreme Court’s decision in Commissioner v. Stern, 357 U.S. 39 (1958), which deals with the assertion of transferee liability under what is now section 6901 of the Code. In the case of a general partner of a general partnership, the IRS is using the relevant state’s version of the Uniform Partnership Act, which provides that general partners are personally liable for partnership debts.

Why is the IRS speaking out of both sides of its mouth when it grants partners in general partnerships their own CDP rights under §§ 6320 and 6330 with respect to taxes incurred by the partnership but denies those same CDP rights to alleged alter egos, successors in interest and transferees of the original taxpayer? Simply put, the IRS, in seeking to hold third parties liable as the alleged alter ego, successor in interest, and/or transferee of the original taxpayer, is invoking state law to hold a third party liable for the taxes of the original taxpayer.

Conceptually, there is no difference between the IRS invoking state law to hold a general partner of a general partnership liable for the partnership’s tax liability and the IRS invoking state law in an effort to hold someone other than the original taxpayer liable for that tax liability as an alleged alter ego, successor in interest, and/or transferee of the original taxpayer. While determining whether a person or entity is a partner of a general partnership is normally a simpler task than determining whether a person or entity is an alter ego, successor in interest, or transferee of the original taxpayer, both types of determinations involve the application of state law to a given set of facts to determine whether a third party can be held liable for taxes owed by the original taxpayer.

It is clear that state law governs the question of whether a third party can be held liable as an alter ego, successor in interest, and/or transferee of the original taxpayer for taxes assessed against the original taxpayer. See, e.g., Commissioner v. Stern, 357 U.S. 39 (1958) (transferee), Wolfe v. United States, 798 F.2d 1241, (9th Cir. 1986) (alter ego), TFT Galveston Portfolio, Ltd. v. Comm’r, 144 T.C. 96 (2015) (successor in interest), see also Fourth Inv. LP v. United States, 720 F.3d 1058 (9th Cir. 2013) (nominee). It seems to me that, if the IRS’s assertion of liability under state law to enforce a general partnership’s tax liability against a general partner of that partnership is sufficient to trigger CDP rights for the general partner, the IRS’s assertion of liability under state law to enforce a taxpayer’s tax liability against a third party as an alleged alter ego, successor in interest, or transferee should also be sufficient to trigger CDP rights for the alleged alter ego, successor in interest, or transferee.

In the Tax Court cases which we recently settled, the IRS argued that it was not being inconsistent in denying our client (which was an alleged alter ego/successor in interest of the original taxpayer) its own independent CDP rights while allowing those same rights to partners of general partnerships that incur tax liabilities. The IRS argued as follows:

The alter ego doctrine is used in federal tax cases to collect the liability of a taxpayer from a separate corporate entity that is operating to impair the government’s ability to satisfy the taxpayer’s legitimate tax liability. See Oxford Capital Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000); Valley Fin. V. United States, 629 F.2d 162, 172 (D.C. Cir. 1980). Once respondent has determined that an entity is an alter ego, that entity’s assets may be levied upon for the debtor of the taxpayer because the law does not recognize the taxpayer and the alter ego entity as each having independent existence for purposes of debt collection. See Oxford Capital Corp., 211 F.3d at 284; see also United States v. Scherping, 187 F.3d 796, 801-02 (8th Cir, 1999).

There are two significant problems with the IRS’s argument (aside from the fact that the IRS’s argument fails to address successor in interest liability). First, there is both federal and California case law which makes clear that an entity is considered a valid, separate entity even when that entity is liable for a third party’s debt under the alter ego doctrine. In Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), the Ninth Circuit upheld the application of the alter ego doctrine under Montana law against the shareholder of a corporate taxpayer. In doing so, the Ninth Circuit stated as follows:

Indeed, despite Wolfe’s contentions, it is not necessarily inconsistent to view a corporation as viable for the purpose of assessing a corporation tax, while disregarding it for the purpose of satisfying that assessment. Only those corporations that were established with no valid purpose are considered sham corporations, and thus not entitled to separate taxable status. See Moline Properties v. Commissioner, 319 U.S. 436, 439, 87 L. Ed. 1499, 63 S. Ct. 1132 (1943). A corporation could have a valid business purpose (giving it separate tax status), and at the same time be so dominated by its owner that it could be disregarded under the alter ego doctrine. Cf. National Carbide Corp. v. Commissioner, 336 U.S. 422, 431-434 & n. 13, 93 L. Ed. 779, 69 S. Ct. 726 (1949) (finding insignificant, for the purpose of determining whether a subsidiary corporation is entitled to separate taxable status, the fact that the owner retains direction of the subsidiary’s affairs, provides all of its assets, taxes all its profits, and exercises complete domination and control over its business). This view has been adopted by the Fifth Circuit. See Harris v. United States, 764 F.2d 1126, 1128 (5th Cir. 1985) whether or not [the corporation] was a separate taxable entity is not the same question as whether it was an alter ego for the purpose of piercing the corporate veil”).

Thus, Wolfe, and the cases cited in the Wolfe opinion, make clear that a corporation can be a valid, separate entity from the original taxpayer for purposes of the CDP procedures, even if the IRS is seeking to hold a corporation liable under the alter ego doctrine for the taxes owed by the original taxpayer.

Similarly, California law, upon which the IRS was relying in the now-settled cases we were handling in Tax Court, makes clear that a third party entity which is held liable as the “alter ego” of the original obligor remains a valid, independent entity for purposes of California law. In Mesler v. Bragg Management Co., 39 Cal. 3d 290 (1985), the California Supreme Court made this point very clear while holding that a parent corporation could be sued as the alleged alter ego of its subsidiary, even though the plaintiff had previously reached a settlement agreement with the subsidiary. The Court stated in relevant part as follows:

[W]hen a court disregards the corporate entity, it does not dissolve the corporation. “It is often said that the court will disregard the ‘fiction’ of the corporate entity, or will ‘pierce the corporate veil.’ Some writers have criticized this statement, contending that the corporate entity is not a fiction, and that the doctrine merely limits the exercise of the corporate privilege to prevent its abuse.” (6 Witkin, op. cit. supra, §5, at p. 4317; see, e.g., Comment, supra, 13 Cal. L.Rev. at p. 237.)

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The essence of the alter ego doctrine is that justice be done. “What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result.” (Latty, Subsidiaries and Affiliated Corporations (1936) p. 191.) Thus the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require.

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It is not that a corporation will be held liable for the acts of another corporation because there is really only one corporation. Rather, it is that under certain circumstances a hole will be drilled in the wall of limited liability erected by the corporate form; for all purposes other than that for which the hole was drilled, the wall still stands. 39 Cal. 3d at 300-301.

To the extent that state law is relevant in this context, California law supports the conclusion that an alleged alter ego is a separate entity which is entitled to its own independent CPD rights. (For taxpayers located outside of California, and outside of the Ninth Circuit, the relevant case law will obviously be different.)

The second problem with the IRS’s argument is that the two cases which it cited both pre-date the CDP procedures, which took effect in January of 1999, following the enactment of RRA 1998 in July, 1998. The resolution of the question of whether an alleged alter ego, successor in interest, or transferee of the original taxpayer is entitled their own independent CDP rights will likely depend on the statutory interpretation of the CDP provisions, §§ 6320 and 6330. There are no cases which address this issue. And as is explained in Part 1 of this series of blog posts, the question of how to interpret §§ 6320 and 6330 is likely to be influenced by looking to §§ 6321 and 6331.

Notably, § 6331 refers to the need to provide a “notice and demand” before levy action may be pursued. This is a reference to “notice and demand” as set forth in IRC § 6303(a), which requires the IRS to provide “notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.” This notice must be sent to the person’s “last known address” within 60 days of the date on which the tax is assessed. Id. Failure to give a valid notice and demand renders void any levy action by the IRS and requires the IRS to refund all monies collected by levy. See Martinez v. United States, 669 F.2d 568 (9th Cir. 1981) (IRS was required to return all funds received by levy where IRS failed to give taxpayer a valid notice and demand under § 6303(a) prior to issuing levies). Failure to give a proper notice and demand also prevents the IRS from taking future administrative enforcement actions such as filing lien notices and issuing levies. See United States v. Coson, 286 F.2d 453 (9th Cir. 1963) (failure to send proper notice and demand to putative partner of a general partnership rendered tax lien void), United States v. Chila, 871 F.2d 1015 (11th Cir. 1989), cert. denied, 493 U.S. 975 (1989) (failure of the IRS to send a valid notice and demand to the taxpayer precludes the IRS from taking administrative collection action with respect to the unpaid taxes but does not prevent a suit to reduce the assessment to judgment), Blackston v. United States, 778 F.Supp. 244 (D. Md. 1991) (Marvin Garbis, J.).

There is a further requirement that the IRS send a notice of intent to levy under IRC § 6331(d) at least 30 days before the IRS levies “upon the salary or wages or property of any person with respect to any unpaid tax.” This requirement, largely forgotten since the enactment of section 6330, has never been repealed. Its primary significance now is that the sending of this notice triggers an increase in the accrual rate of the failure to pay penalty under IRC §§ 6651(a)(2) and (a) (3). See IRC § 6651(d)(1).

The language of §§ 6303(a) and 6331(d) is similar to the language used in §§ 6320 and 6330. Yet we know that the IRS does not send a “notice and demand” for payment under § 6303(a) within 60 days of the date of assessment to alleged alter egos, successors in interest, or transferees who have not been separately assessed that tax liability. Similarly, we know that the IRS does not send § 6331(d) notices to alleged alter egos, successors in interest, or transferees prior to issuing levies against the property of alleged alter egos, successors in interest, or transferees. How is it that the IRS is able to take administrative collection action against alleged alter egos, successors in interest, and/or transferees without complying with §§ 6303(a) and 6331(d)?

The answer to that apparent conundrum may surprise you. While it is possible to argue that the IRS may take administrative collection action against alleged alter egos, successors in interest, and/or transferees who have not been separately assessed a tax liability without complying with the requirements of §§ 6303(a) and 6331(d), it is far from clear that this argument carries the day. There are other arguments, some of which, in my view, have not been properly articulated in recent years. Perhaps Pitts was incorrectly decided, and the IRS is not entitled to take administrative collection action against alleged alter egos, successors in interest, or transferees at all. That topic will be explored in greater detail in Part 3 of this series.

 

 

 

Designated Orders Post: Week of 2/26 – 3/2 Estate of Michael Jackson, A New Graev Issue and More

Caleb Smith who teaches and directs the clinic at University of Minnesota bring us this weeks designated order post. He starts with the now obligatory designated order concerning yet another aspect of Graev and ends with orders from two frequently recurring judges in the designated order post, Judges Holmes and Gustafson. Judge Holmes puts up another other in the ever popular Estate of Michael Jackson case. It is a “Thriller.” Keith

There were quite a few designated orders last week, but most warrant only a passing mention. Those that will not be discussed include involve motions for summary judgment, granted in full here and here and in part here and here. Of course, we start our substantive discussion with an order continuing the clean-up of Graev III.

Giving the IRS a Chance: Hendrickson v. C.I.R., Dkt. No. 6863-14 (order here)

It seems fairly clear at this point when the IRS does and does not need supervisory approval for a penalty. I believe there may be a future, litigable question as to when the IRS can bypass the supervisory approval issue by relying on computers instead of humans for the determination, but when fraud is alleged (as it was in this case) it is pretty clear that approval will be needed.

Here, trial took place a week after Chai reversed Graev (but ONLY for the 2nd circuit, which this case would not be appealable to). Later, after the Tax Court reversed itself (Graev III) the court ordered the parties to address what effect that reversal had on their present case. The IRS, quite sensibly, took it to mean “Graev III means we need to introduce evidence of supervisory approval in a deficiency proceeding. So… we need to make a motion reopen the record and introduce that evidence.” The IRS then, quite sensibly, made that motion.

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Which brings us the present order…

To some (including a few of my students), insisting on compliance with IRC 6751(b) sometimes looks like a technicality that “bad-actor” taxpayers are trying to take advantage of. In some instances, that may well be so.

Here, with a civil fraud penalty at play, one gets a sense of the “technicality” argument in full force. Judge Buch has little trouble finding that it is within his discretion to open the record in this case (Judge Holmes dealt with a slightly less clear case weeks ago, here). The IRS was playing by the rules that bound the Tax Court at the time of the Hendrickson trial: that is to say, the rules of Graev I and II. Those rules did not require producing evidence of supervisory approval prior to assessment in any case other than those appealable to the 2nd Circuit. When it appears, as is suggested here, that the IRS actually had supervisory approval but failed to introduce it into evidence (in accordance with the Tax Court interpretation of the law, at the time), there isn’t much beyond a technical argument to be made as to why they shouldn’t be allowed to introduce that into evidence now. Kudos to the taxpayers (pro se) in their zealous self-representation… but I surmise they are just accumulating interest on their tax bill at this point.

Volume 36: Estate of Michael Jackson v. C.I.R., Dkt. No. 17152-13 (order here)

We return to another Designated Order favorite: the never-ending saga of Michael Jackson’s estate. Here, after years of motion practice, a trial that produced 36 volumes of transcript, and no less than three separate stipulations of fact, we arrive at the initial stages of post-trial briefing. When you have this voluminous of a record, with evidence so frequently objected to, it is obviously difficult to know what you can (and can’t) rely on as in the record for the brief you are working on. Judge Holmes kindly takes on the task of sorting out one evidentiary issue confronting the parties: resolving the hearsay objections reserved throughout the stipulations.

For practitioners that want an in-depth analysis of numerous hearsay exceptions, I strongly recommend a close reading of Judge Holmes’ order. For tax practitioners generally, I think another aspect is worth highlighting.

And that aspect is the nature of stipulations. This order highlights the proper method of objecting to stipulations on most evidentiary grounds: you note (thereby reserving) your objection, you don’t fail to stipulate. We have seen instances where the two parties fail to get along, and then fail to stipulate, with the Court generally taking a dim view of that approach. Tax Court Rule 91(a) specifically states that an objection may be noted (to relevance or materiality), but that such objection is not, in itself, is not a reason to fail to stipulate.

Stipulations of fact are extremely important in Tax Court cases, and should not be taken lightly in preparing for trial. You should obviously be sure that you’ve stipulated absolutely everything that you need to (if you are submitting fully stipulated), but you also should consider objections and, even then, what your objections have the effect of doing. In this order, with very sophisticated parties (including the newly nominated Commissioner’s firm) it is informative how the taxpayer phrased some of the objections: not that the exhibits were admissible, but only that they could not be cited to as evidence of “truth of the matter asserted.” That is a nuance that often goes missed (but was stressed by the federal district judge that taught my evidence class): the reason you introduce the evidence is critical to whether (and to what extent) it is admissible.

Going Through the Motions: Langdon & Fuller v. C.I.R. (Dkt. No. 22414-15) and York v. C.I.R. (Dkt. No. 2122-17)

Another set of nearly identical orders provide a quick lesson for tax practitioner. As a change to the usual guidance the Tax Court provides to pro se taxpayers, the orders actually give a lesson to IRS counsel. And that lesson is that when you want the court to “do something,” you generally ask through a motion.

Here, a joint status report was given to the court that likely reflected both parties’ near imminent settlement. All that is left is to draft and file a decision document, so the IRS asks for more time to do so in the joint status report. Pretty uncontroversial… but denied, because the request for additional time was not made in a motion.

I tell my students that there aren’t usually “magic words” you need to know when asking the Tax Court to do something: students pull templates off of the internet with archaic “Here comes taxpayer John Smith by his representative Caleb Smith” and worry that if they omit that line the court won’t have any clue what to do with their document. At the same time, though there aren’t magic words, I tell my students to look to the US Tax Court rules to see what, if anything, the Court would want covered in the motion. As an unfortunate example we’ve had to deal with, there are specific things the Court wants in a motion to withdraw (see Rule 24(c)). A quick search of orders citing to that rule shows order after order denying the motion for failure to address something mentioned in the rule. Where there is a specific rule on point, use it as your lodestar.

These orders, denying a request for more time because it was not made in the form of a motion, may seem formulaic (and thus give rise to a “magic word” worry), but Judge Gustafson does a good job of explaining why it isn’t just insistence on form. For one, it makes the job of the judge easier to ask via motion. By using a motion, you also indicate to the court whether the opposing side has an objection (or is aware of the request at all). But perhaps most importantly, by asking the court to do something via motion you ensure that your request is actually seen and heard… With roughly 22,000 cases pending at the end of October, 2017, one can only imagine the amount of paper that accumulates on any given judge’s desk. As Judge Gustafson seems to hint, judges are people too, and if you want to make sure a request isn’t overlooked, you have to give it the bold heading of a request: in other words, a motion.

 

 

Returned to Sender: Should the IRS Be Required to Search for A Taxpayer’s New Address Beyond its Own Databases When a Notice is Returned as Undeliverable?

We welcome guest blogger Lisa Perkins who is an Assistant Clinical Professor of Law and Director of the Tax Clinic at University of Connecticut School of Law. Professor Perkins worked for five years in the Criminal Division of Department of Justice Tax Section and over a decade as an AUSA in the Unites States Attorney’s office in Hartford. She joins Sonya Miller of UNLV and Christina Thompson of Michigan State as a writer of posts on tax articles featuring procedure issues. She writes to us today about an article that looks at ways to improve getting notice to taxpayers and a realistic opportunity to contest their tax issue in court. The 7th Edition of “Effectively Representing Your Client before the IRS” is coming out this month. It has an entire chapter on this topic if you are interested in more information on last known address issues. Keith

The IRS is required to send via certified mail to the “last known address” of a taxpayer several notices that contain substantive legal rights, including statutory notices of deficiency, final notices of intent to levy, and notices of filing of federal tax liens. The Code requires a taxpayer to exercise the right to appeal the actions proposed in these notices within very strict time limits. The time limit for claiming the substantive right provided in the notice (e.g., filing a Tax Court petition within 90 days), begins to run on the date of mailing, regardless of whether or when the taxpayer actually receives the notice. The IRS need only exercise reasonable diligence in ascertaining the “last known address” of the taxpayer for purposes of mailing the notice. The Code does not require “actual” receipt.

An expansion of the reasonable diligence standard applicable to determining the “last known address” was proposed by the National Taxpayer Advocate in her 2012 annual report and is the subject of The Last Known Address: A Joint Effort Between the IRS and the U.S. Postal Service, Larry Jones and Rachel Multer Michalewicz. Though the article was published in the April-May 2014 issue of the Journal of Tax Practice & Procedure, the question remains relevant today. Courts beyond the Fifth Circuit Court of Appeals have remained reluctant to require the government, upon return of a notice, to search for a new address for a taxpayer in databases outside of the IRS, such as motor vehicle and real property records, despite the government’s access to and routine use of these databases for other purposes (e.g., to locate assets upon which to levy).

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In The Last Known Address: A Joint Effort Between the IRS and the U.S. Postal Service, Jones and Michalewicz discuss what constitutes “clear and concise notification of a change of address” for purposes of the IRS’s burden to send certain notices, including statutory notices of deficiency (SNOD), to a taxpayer’s last known address. In particular, the authors look more closely at the change of address process to IRS records effected by a database maintained by the U.S. Postal Service and claim that errors in the process may prejudice a taxpayer.

As the authors explain, Treas. Reg. 301.6212-2(a) “defines ‘last known address’ as ‘the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address.’” The IRM applicable to Notices of Deficiency warns “[i]n no event should databases or information outside of the IRS be consulted for addresses. Alternative addresses, to the extent that they are used, must have been provided to the IRS by the taxpayer or his representative (or other agent).” IRM 4.8.9.8.2.5 (07-09-2013).

While the IRS generally will not accept change of address information from a third party, an exception is provided in the regulation for regular address updates obtained from the U.S Postal Service (USPS). See Treas. Reg. Sec. 301.6212-2(b)(1) & (2). The USPS maintains a National Change of Address (NCOA) database which is forwarded to the IRS weekly. See IRM 4.8.9.8.2.1 (08-11-2016) (SNOD Last Known Address guidance). The article explains how the IRS goes about updating an address from the NCOA database and notes the IRS allows the update to carry through despite the fact that the names may not match exactly.

For instance, as the authors explain, “if the NCOA database shows a Bob Smith who changed from one specific address to another, and the IRS records show a Robert Smith with that same prior address, the IRS can consider that a match and update the records.” The new address from NCOA will be considered the last known address until the taxpayer files a tax return with a different address or gives the IRS “clear and concise notification of a different address.” Contrast this with IRS rules that narrowly restrict attempted changes of address by a taxpayer himself.

For instance, per the Internal Revenue Manual relating to Notices of Deficiency, only the following notices from taxpayers are considered “clear and concise notification” of an address change:

  1. A statement signed by the taxpayer requesting the address change and containing full name, old address and SSN and/or EIN,

IRM 4.8.9.8.2.2 (07-09-2013)

On the other hand, standing alone, the following are not considered “clear and concise” notification of a new address:

  1. Letterhead of taxpayer correspondence;

Id. A phone call from the taxpayer requesting an address change is insufficient unless it is made in connection with a conversation about an open account or adjustment and authentication of the caller’s identity is verified using the criteria in IRM 21.1.3.2.3 and 21.1.3.2.4. IRM 4.8.9.8.2.4 (07-09-2013). See also Rev. Proc. 2010-16, 2010-19 IRB 664.

I can certainly see why many of these restrictions seem appropriate safeguards to preventing theft of taxpayer information. Yet, as the authors point out, allowing the USPS NCOA to effect an automatic update to a taxpayer address without an exact name match is prejudicial to taxpayers and seems inconsistent with these safeguards. Couldn’t a third party file a change of address form for a taxpayer with the local post office resulting in the same identity theft issue (though obviously the IRS would not be responsible)? In my former career as a federal prosecutor, I once handled an identity theft case involving a taxi driver who was doing just that: redirecting other people’s mail to post office boxes he set up for the purpose of collecting their financial information, including credit card cash advance offers that he then used to the detriment of these individuals.

As the authors explain, a taxpayer residing in the Fifth Circuit (Louisiana, Mississippi and Texas), may have the added benefit of the Fifth Circuit Court of Appeal’s more expansive requirement of reasonable diligence in determining the “last known address.” In Mulder v. Commissioner, 855 F.2d 208, 210 (5th Cir. 1988), the Fifth Circuit invalidated a notice of deficiency and held the IRS had a duty to further investigate when the postal service had returned letters to it prior to the mailing of the notice of deficiency. Likewise, in Terrell v. Commissioner, 625 F.3d 254, 257 (5th Cir. 2010), the court held the IRS has a duty to further investigate by, e.g., searching DMV or other records, where the “IRS knows or should know at the time of mailing that taxpayer’s address on file may no longer be valid [due to] previously returned letters, . . . .” Nonetheless, as Jones and Michalewicz explain, even in the Fifth Circuit, taxpayers benefit from this more generous standard only at the time of the original mailing of a notice, not if that notice is then returned to the IRS.

Ultimately, the authors conclude that it would not be unreasonable to require the IRS to investigate further to determine a correct address for a taxpayer upon receipt of an undelivered notice (or other credible information questioning the accuracy of the address information on the IRS’s original notice). As the article points out, the National Taxpayer Advocate has urged Congress to amend the Code to require that the IRS look beyond its own databases to locate potential new addresses for sending taxpayers important notices, such as notices of deficiency.

Conclusion

If the IRS were required to search beyond its own databases to locate a new address for a taxpayer, presumably to send a new notice, how far should it be required to go?  Which databases should the IRS consult?  To be clear, the examples the authors suggested (and the National Taxpayer Advocate has suggested) include motor vehicle records and real property records; they do not suggest the IRS could or should rely on a “Google” search for this information.  Motor vehicle records and real property records typically contain information from the individual to which they pertain.  In the context of low-income taxpayers, who tend to move frequently, and may not file or may not be required to file a tax return each and every year, this would seemingly improve the chances of actual receipt of a notice of deficiency.  But, as the authors note, broader search requirements will also raise more questions, such as whether a second notice to a newly located address re-starts the 90 day window for filing a Tax Court petition, and whether the courts should validate the IRS’s extra search effort, even when the IRS picks the wrong Bob Smith.

 

Designated Orders: 2/19/18 to 2/23/18

This week’s designated order post was prepared by William Schmidt of Kansas Legal Aid Services. Of course, one of the designated orders addresses an issue of interpretation of the Graev case. This week the Court struggles with the concession of the fraud penalty for lack of proper approval and the impact of that concession on the statute of limitations. If the IRS does not obtain the proper approval for imposition of the fraud penalty and if the statute of limitations expires but for the exception provided by proof of fraud, there can be situations in which the IRS must prove fraud for purposes of holding open the statute but not be allowed to impose the fraud penalty for lack of approval.

The second case discussed by William concerns a bankruptcy issue I have never seen litigated and one it appears the IRS did not appreciate the Court was asking about. The issue concerns the scope of the automatic stay. Section 362(a)(8) of the Bankruptcy Code imposes a stay “on the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor … who is an individual for a taxable period ending before the date of the order for relief under this title.” The IRS and the taxpayer negotiated a settlement with the debtor during a period in which the stay was in effect. They submitted a decision document to the Court which was signed by the Court and then set aside when the existence of the stay became known to the IRS and the Court. After the lifting of the stay, the IRS resubmitted the decision document. The Court questions the binding effect of a settlement negotiated during the stay and finds a work around. Keith

One pattern for Tax Court is that holiday weeks are light weeks for designated orders. There were 3 designated orders this particular week.

The first, Renee Vento, et al., v. Commissioner (3 consolidated cases), finds the petitioners trying to claim deductions for payments made to the Virgin Islands Bureau of Internal Revenue (VIBIR). They now concede they are cash method taxpayers so would not be eligible to claim deductions on 2001 U.S. tax liability for 2002 payments made to the VIBIR.

Followup on Mr. Kyei

The second order, Cecil K. Kyei v. Commissioner, updates a previous designated order report here. To summarize, Mr. Kyei has filed for bankruptcy previously and those time periods have overlapped with his Tax Court cases. Specifically, a previous settlement agreement with the IRS looks to be void because it was during the time period of an automatic stay based on a bankruptcy filing. The parties were to file their recommendations before February 16.

Mr. Kyei has been nonresponsive and the IRS is unable to contact him. The IRS filed their recommendation to proceed with the notices of deficiency for 2008 and 2010, but accept a lower amount for 2009.

The Court’s decision is that the June 2015 agreement is not enforceable because of the automatic stay. The Court denied the IRS motion for entry of decision based on the agreement. The Court is treating the IRS motion, while not styled as a motion for dismissal, as a motion to dismiss for lack of prosecution.

The IRS did not address the 2010 penalty of $2,614.80 so they are ordered to file a supplement to their motion addressing the burden of production for the 2010 penalty no later than March 9, 2018. Mr. Kyei shall file his response to the motion as supplemented no later than March 23, 2018.

Takeaway: Potentially Mr. Kyei had a good settlement agreement in place with the IRS in June 2015. The bankruptcy affecting that time period means that the automatic stay interfered with those settlement negotiations and they are no longer enforceable. Now that the IRS is unable to contact him, Mr. Kyei is likely going to owe once again the original notice of deficiency amounts (with a lower amount in 2009), making part of his actions in vain.

Further Graev Fallout

The third order, Johannes Lamprecht & Linda Lamprecht v. Commissioner, further deals with Graev penalties. On February 20, 2018, the IRS filed a status report conceding the requirements of 6751(b)(1) were not met regarding the 6663 fraud penalty for 2006 and 2007. They indicate they are prepared to introduce evidence on compliance with 6751(b)(1) in connection with the 6662 accuracy-related penalty but trial is no longer required as to the fraud penalty. The status report does not comment on the issue of fraud as it relates to the statute of limitations.

The Court’s order is to strike the case from the March 8, 2018, Washington, D.C. Special Session calendar. No later than March 9, 2018, the IRS shall file a status report regarding their position as to the statute of limitations and the arguments relied on to show the statute of limitations does not bar the assessment of the accuracy-related penalty still at issue. The report should explain whether intending to argue fraud for the purpose of 6501(c)(1). If the concession affects the relevance of the information sought in the motions to compel, then that date is a deadline for amended motions to bring the previous motions into conformity with their current position. It is further ordered that the parties shall file a status report no later than March 23, 2018, (or separate reports, if necessary) with their recommendations as to further case proceedings (including a deadline for petitioners’ response to the motions to compel).

Takeaway Summary: There looks to be some IRS give-and-take regarding the 6751(b)(1) penalty in this case regarding Graev fallout. While conceding the 6663 fraud penalty, the IRS has not given up on the 6662 accuracy-related penalty and the Court wants explanation of how the statute of limitations allows them to proceed on that accuracy-related penalty. It is curious how each case develops regarding 6751(b)(1) penalties.

 

Fractured Tax Court Opinions – Which Opinion Controls and Does the Supreme Court’s Marks Decision Apply?

We welcome first time guest blogger Joseph A. DiRuzzo, III. Joe’s practice is based in South Florida; however, he handles cases throughout the country and in the United States Virgin Islands. Joe regularly represents litigants pro bono before the Tax Court and before the Courts of Appeal. Joe tilts at some of the same jurisdictional windmills as the tax clinic at Harvard. Keith

Introduction

For the last decade I have been involved in the on-going donnybrook between United States Virgin Islands taxpayers who claimed a tax incentive credit under Code Section 934 and the IRS, who has contested those taxpayers’ residency in the Virgin Islands and their ability to claim the Section 934 tax credit. Disclaimer – I do not pretend to be impartial as I’ve been one of a handful of attorneys on the other side of the “v.” with the Commissioner. See, e.g. Huff v. Comm’r, 135 T.C. 222 (2010); Huff v. Comm’r, 135 T.C. 605 (2010); Huff v. Comm’r, 138 T.C. 258 (2012); Cooper v. Comm’r, T.C. Memo. 2015-72 (2015).

One of the main points of contention is whether the filing of an income tax return with the Virgin Islands tax authority starts the running of the statute of limitations for the IRS to assess (the details of that analysis are beyond this blog).

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With that in mind, I turn to the Tax Court’s January 29th fully reviewed decision in Coffey v. Comm’r, 150 T.C. No. 4 (Jan. 29, 2018). The Coffey opinion has an opinion by Judge Holmes, an opinion by Judge Thornton, and a dissenting opinion by Chief Judge Marvel.

Judge Holmes’ opinion was joined by Foley, Vasquez, Gustafson, and Buch, JJ.; Judge Thornton’s opinion was joined by Gale, Goeke, Paris, Kerrigan, Pugh, and Ashford, JJ., and with Judge Gustafson (with the exception as to the word “only” in the first line of the concurring opinion and the phrase “if not the reasoning” in the last sentence of the concurring opinion). Chief Judge Marvel’s dissenting opinion was joined by Morrison, Lauber, and Nega, JJ.

Questions in the wake of Coffey?

Frankly, I have no idea how to read the Coffey opinion, as the Tax Court has not indicated how to read fractured full division decisions, nor do the Tax Court’s rules shed any light on the matter. As I see it, the Tax Court entered a 5-7-4 decision, but leaves open the following questions:

  • Does Judge Holmes’ opinion carry the day when it had only 5 judges signing on to it?
  • Shouldn’t Judge Thornton’s opinion be the controlling since it had 7 judges signing on to it?
  • Judge Gustafson voted twice, i.e., he signed on to both the Holmes and the Thornton opinions. Is that possible? If so, does one vote weigh more heavily than the other?
  • Does Judge Thornton’s opinion (which is the most taxpayer friendly) control since it is well settled that courts interpret revenue laws in favor of the taxpayer—a principle known as the “strict construction doctrine.” Bowers v. N.Y. & Albany Lighterage Co., 273 U.S. 346, 350 (1927); see also Royal Caribbean Cruises, Inc. v. United States, 108 F.3d 290, 294 (11th Cir. 1997) (“This interpretation is consistent with the general rule of construction that ambiguous tax statutes are to be construed against the government and in favor of the taxpayer.”).
  • What impact, if any, does the Supreme Court’s opinion in Marks v. United States, 430 U.S. 188 (1977) have on this Court’s jurisprudence?

Marks expresses the Supreme Court’s view on how to determine which opinion is controlling when there is no majority opinion in its decisions. But, Marks is often difficult to apply, has been subject to much criticism, and has never explicitly been stated by the Tax Court as governing the interpretation of its own opinions (perhaps with good reason).

Marks v. United States

For those that are unfamiliar, the Marks decision set forth how one is to interpret a Supreme Court decision where there is no majority decision.  Grossly over-simplified, Marks stands for the proposition that the opinion that votes for the outcome of the case decided on the “narrowest grounds” is the controlling opinion. As one jurist has put it, the D.C. Circuit has

interpreted Marks to mean that, to be binding as representing the narrowest grounds for decision, an opinion must represent a common denominator of the Court’s reasoning it must embody a position implicitly approved by at least five Justices who support the judgment. (emphasis added). Under Marks’ “narrowest grounds” approach, for an opinion to be controlling it must contain a “controlling rationale.” “Marks is workable … only when one opinion is a logical subset of other, broader opinions.” Otherwise, the en banc court reasoned, “[i]f applied in situations where the various opinions supporting the judgment are mutually exclusive, Marks will turn a single opinion that lacks majority support into national law.” So, “[w]hen … one opinion supporting the judgment does not fit entirely within a broader circle drawn by the others, Marks is problematic.” According to the en banc court, Marks applies when “the concurrence posits a narrow test to which the plurality must necessarily agree as a logical consequence of its own, broader position.” (emphasis added).

United States v. Duvall, 740 F.3d 604–605 (D.C. Cir. 2013) (Rodgers, J. concurring in the denial or rehearing en banc) (internal citations omitted).

The problem with Marks is that “The Supreme Court has recognized that applying a rule of law from its fragmented decisions is often more easily said than done.” United States v. Bailey, 571 F.3d 791, 798 (8th Cir. 2009) (internal citations omitted); see also Nichols v. United States, 511 U.S. 738, 745 (1994) (the Marks rule has been “more easily stated than applied.”).

Does Marks Apply to the Tax Court’s own decision?

The Tax Court has never cited to, let alone analyzed, the Marks decision. Accordingly, I have recently filed a motion asking the Tax Court to inform the Tax bar how to interpret its fractured decision (this would apply to all fractured decisions, not just the Coffey decision). A copy of the motion is available here (ignore the title on the coversheet as there isn’t a “miscellaneous” option on the drop down lists when selecting the type of motion (much to my chagrin)).

In my motion, I make the following arguments why Marks does not apply to the Tax Court’s interpretation of its own decisions (in contrast to the Supreme Court’s decisions).

  1. The “narrowest grounds” approach is a means to interpret case law, not statutes. Thus, to the extent that there is a tension between “strict construction doctrine” and the “narrowest grounds” the Tax Court must employ the “strict construction doctrine” to determine which opinion is most taxpayer friendly.
  2. The Supreme Court did not hold in Marks that lower court fractured decisions (i.e., Court of Appeals or the Tax Court) are subject to Marks. Marks was limited to Supreme Court decisions and has not been expanded to trial courts.
  3. The animating reasoning behind Marks is vertical stare decisis and lower courts’ obligations to follow Supreme Court rulings. While the Tax Court has taken the position that its rulings published in T.C. volumes are precedents that must be followed by other Tax Court judges until reversed by the court sitting en banc; see Lawrence v. Comm’r, 27 T.C. 713, 718 (1957) (“The Tax Court has always believed that Congress intended it to decide all cases uniformly . . . “); there is nothing in the Tax Court’s authorizing statutes that suggests and/or requires that result. Other trial courts, such as district courts and the Court of Federal Claims, do not purport to issue precedential rulings, and their judges are free to disagree with each other — only being required to follow controlling Supreme Court or appellate court authority. If there is no Tax Court majority opinion in an en banc reviewed opinion, does it accord with Marks’ purposes that any judge is bound to follow any particular Tax Court plurality opinion? Further, because vertical stare decisis cannot work on the Tax Court’s own case law, Marks is inapplicable to the Tax Court.
  4. There are times when splintered decisions have no “narrowest” opinion that would identify how a majority of a court (e.g. the Supreme Court or the Tax Court) would resolve all future cases.
  5. The Golsen Rule would wreak havoc if the Tax Court were to adopt Marks. That is so, because the Courts of Appeals “cases interpreting Marks have not been a model of clarity,” United States v. Davis, 825 F.3d 1014, 1021 (9th Cir. 2016), and the Tax Court would have to interpret Marks via extant circuit case law to determine how the Tax Court is to read its own fractured precedent. Such would simply be unworkable. This is especially so given that there is a circuit-split regarding how to apply Marks as the D.C. Circuit and the Ninth Circuit have taken a “logical-subset” approach, while the others used a “results-oriented” test.
  6. The Marks decision has received substantial academic criticism. See Mark A. Thurmon, When the Court Divides: Reconsidering the Precedential Value of Supreme Court Plurality Decisions, Vol. 42 Duke Law Review 419 (Nov. 1992); Ryan C. Williams, Questioning Marks: Plurality Decisions and Precedential Constraint, 69 Stan. L. Rev. 795, 799 (2017) (“The conceptual confusion surrounding Marks presents an important practical challenge for lower courts.”).
  7. On December 8, 2017, the Supreme Court has granted cert. in Hughes v. United States, Case No. 17-155, presenting the following three questions:

1. Whether this Court’s decision in Marks means that the concurring opinion in a 4-1-4 decision represents the holding of the Court where neither the plurality’s reasoning nor the concurrence’s reasoning is a logical subset of the other.

2. Whether, under Marks, the lower courts are bound by the four-Justice plurality opinion in Freeman, or, instead, by Justice Sotomayor’s separate concurring opinion with which all eight other Justices disagreed.

3. Whether, as the four-Justice plurality in Freeman concluded, a defendant who enters into a Fed. R. Crim. P. 11(c)(1)(C) plea agreement is generally eligible for a sentence reduction if there is a later, retroactive amendment to the relevant Sentencing Guidelines range.

Thus, even the Supreme Court has recognized that the Marks decision needs some clarification.

  1. If the Tax Court desires to issue rulings which the American public can tell what the law is in respect to the omnipresent Internal Revenue Code, it must create a bright-line rule, which Marks does anything but.

Conclusion

In my humble opinion, the case law interpreting Marks is a mess, and the Tax Court should not import such a mess into its jurisprudence. So where does that leave us? Well, only time will tell how the Tax Court decides my motion. At a minimum, I hope that this blog will kick-start the discussion on this issue amongst the Tax bar (I anticipate this issue will arise again because it appears that fully reviewed opinions have become more common). If anyone wants to file an amicus in my case, please contact me so I can give you IRS counsel’s contact information.

 

Article Review: How Can Tax Collection Be Structured to Observe and Preserve Taxpayer Rights: A Discussion of Practices and Possibilities

We welcome back guest blogger Sonya Watson who teaches at UNLV law school where she is an assistant professor in residence and the director of the Rosenblum Family Foundation Tax Clinic. As mentioned before, she is one of the new clinic professors now writing a regular feature which describes law review articles on tax procedure issues. She has selected an article I wrote a couple of years ago on taxpayer rights. Assisting her in the preparation of this post is her student, Vincent Kwan. Keith

In this article by Keith Fogg and Sime Jozipovic, the authors address the U.S. tax system and explore the rights of taxpayers in different countries for comparison. The article generally focuses its discussion on taxpayer rights and collections, but specifically on the enforcement mechanisms used by various governments.

Generally, the government’s inability to collect and enforce collection can be seen as a failure of the system that makes those who comply with tax laws feel as if others have an unfair advantage. However, the government must balance forced compliance against those who do not pay voluntarily with caution so as not to “drive [noncompliant taxpayers] to an underground economy, to discontinue producing income or to economic positions that fall through the necessary social safety net.” To properly and effectively enforce the tax laws, the government must consider the rights of the taxpayer as well as what the government can do to ensure compliance.

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According to Fogg and Jozipovic, there are three taxpayer rights that must be preserved to main an effective tax system, which include the right to be informed, the right to challenge the underlying liability and proposed collection action, and the right to a fair and just tax system. To give a more well-rounded and holistic view of the way in which the government can preserve taxpayer rights, the authors discuss the tax collection systems of the United States, England, Germany, Switzerland, Croatia, and Australia. The article highlights the differences between tax systems and taxpayer’s rights in each country, judging the efficacy of each system in protecting the rights of its citizens. The article concludes with a proposal on how to best structure the tax system to maximize taxpayer rights with an optimal collection strategy.

The authors start with the United States tax system and describe the process in detail; however, for the sake of brevity, we will note only the highlights. The collection of taxes begins with a volunteer assessment except when taxpayers fail to file a return, in which case the government will ultimately prepare a return for the taxpayer. After voluntary assessment, or an assessment that is the result of an examination, IRC Section 6303 requires the IRS to send a “Notice and Demand” letter within 60 days of the assessment, alerting the taxpayer that the collection process has begun. If the taxpayer has taxes owed, the letter states the amount of tax owed and requests payment within 10 days.

IRS collection alternatives provide debt relief for those taxpayers who are unable to pay. Collection alternatives include Currently Not Collectible status, Offer in Compromise, and installment agreements. Additionally, taxpayers can seek relief from all debts through bankruptcy by obtaining a discharge of taxes which have grown old. There is also the option of postponing and restructuring the payment of the taxes in the Bankruptcy Code’s reorganization chapters.

The Taxpayer Bill of Rights plays a large role in ensuring that IRS collections is fair and just. It mandates that taxpayers have the right to be informed and the right to pay no more than correct amount of tax. The IRS often falls short of honoring these rights. A few ways the IRS falls short is by sending taxpayers notices that are difficult to understand, by providing account transcripts that are difficult for taxpayers to read, and by failing to have adequate staff available to answer taxpayer questions about tax debt collection. To address this, the authors propose having “the IRS send taxpayers an account transcript with the annual statement of outstanding liability” and also “having an adequate phone presence with properly trained assistors who can explain the account transactions, which would ensure that taxpayers will have the opportunity to learn the basis of their liability when questions arise.” Such measures would help to ensure that taxpayers who cannot afford representation have as good a chance of obtaining a good result as those taxpayers who can afford representation. Not all taxpayers receive the same treatment when they owe taxes. Sometimes, there is discrimination of taxpayers based on who they work for, such as “encouraging” government employees to pay their federal taxes. However, doing so removes fairness from the system.

Through the Taxpayer Bill of Rights, the U.S. has tried to systematize the procedural rights of taxpayers around the world. However, due to the many differences and complexities between countries, systemization is somewhat difficult as there is great divergence in the various tax systems. The authors compare the U.S. tax system to solutions in the field of tax debt enforcement in the UK, Australia, Germany, Croatia, and Switzerland, analyzing the tax mechanism in those countries and what the U.S. can learn from them.

 

Switzerland

Unlike the U.S., where taxation is generally centralized in the federal government, there is a high level of decentralization in the Swiss tax system in that the Swiss regional entities— cantons—can implement their own taxes and their own measures of tax collection.

By relying on preventive distraints, the Swiss tax law has a developed system to prevent tax collection default. Preventive distraints can be voluntary and involuntary. Voluntary distraints exist “with the consent of the taxpayer pursuant to a compromise agreement between the taxpayer and the tax authorities.” On the other hand, an involuntary preventive distraint can only occur under certain circumstances defined by law such as “where the taxpayer has no permanent residence or headquarters in Switzerland, and where the tax authorities have objective reasons to believe that it may not be possible to collect the tax.” The term “Sicherungsverfügung” describes the administrative act that contains the reasoning of the taxing authority and the measures to apply. If the taxpayer fails to pay on time, taxing authorities utilize a preventive distraint, which permits them to take possession of “property of the taxpayers valuable enough to satisfy the tax liability, including any interest and penalties, while title to the property remains with the taxpayer.”

As far as tax debt forgiveness, there is a unified system to regulate forgiveness of federal taxes. The procedure begins with the taxpayer’s request. “If the tax authorities agree to settle the debt, they can decrease, forgive or defer the debt and as mentioned above, if they deem necessary, include a voluntary preventive distraint as requirement.”

Regarding taxpayer rights, there are few guidelines published for taxpayers and they only briefly touch on taxpayer rights. Generally, most taxpayer rights such as the right to equal treatment, the right to be informed, and the right to challenge the underlying liability, have their basis in the Swiss Federal Constitution (“Bundesverfassung”). The general provision in “article 8 of the Federal Constitution guarantees equal treatment before the law, and article 127 (2) guarantees equal treatment of taxpayers and taxation based on the economic capacity of an individual.” Also, see Article 29 (1) for procedure before a public authority, Article 29 (2), for the right to be heard in any procedure before a public body, and Article 36 (3) for the rule of proportionality. 

Australia 

Similar to the U.S., Australia primarily uses a centralized taxing authority. Regarding tax collection enforcement, if a taxpayer does not satisfy a tax obligation, the taxing authorities file a claim of summons with the court to have the court recognize that the debt is duly owed. The taxing authorities then have several methods for enforcement to seize a taxpayer’s personal and real property to satisfy a liability. Also, taxing authorities can force both corporations as well as individual taxpayers into a bankruptcy proceeding. On the extreme end, if the company [d]oes not pay or enter a payment plan within 21 days, the tax authority can place it into a liquidating procedure, also known as a “wind-up.” If this occurs, a trustee will liquidate the company and assuming sufficient assets exist, the creditors will receive payment from the liquidated assets.”

Also similar to the U.S. tax system, there are many ways to discharge a tax liability in full, including deferral rules, agreements with taxpayers, and special hardship rules. Also, taxpayers can enter into an installment plan, but the decision rests within the discretion of the taxing authorities. If there is hardship, there is a limit on certain individual taxes and duties, requiring that relief “must have a positive effect on the economic situation of the taxpayer; accordingly, a taxpayer who would be insolvent regardless of the hardship release would not be granted tax forgiveness.”

Unlike the U.S. and other countries, Australia does not have a taxpayer bill of rights. Instead, Australia has a taxpayer charter—a sort of bill of rights that taxpayers can expect in their interactions with taxing authorities. However, it is not as comprehensive as that of the U.S. Therefore, Australian taxpayers have scant rights. Three rights of significance in the charter include the right to receive an explanation of decisions, the right to fair and reasonable treatment, and the right for an independent review.

As the authors note “The European Union serves as a supranational body limited to influencing just those areas of legislation of the member states within the competences explicitly transferred to the EU.” Many aspects of European law overlap with tax collection and enforcement. Such overlap results from the EU fundamental freedoms which include the free movement of capital, the free movement of goods, the free movement of persons, and the free movement of services. In this vain, the EU’s laws limit the types and amounts of relief that its member states may provide. Additionally, the EU’s Tax Claims Recovery Act, an enforcement network covering all of the EU, affects how tax compliance is enforced. However, member nations can use their own enforcement mechanisms to collect tax debt. However, because the EU strictly limits debt forgiveness, debt forgiveness is largely the result of state aid.

Germany

The German tax collection system, like the U.S. system, is built around the country’s federal structure. Tax collection is within the competences of the Länder, the German federal states, which agree on an interstate contract, defining the basic procedures of tax collection. Germany has been a stable country economically, requiring little restricting compared to other EU states.

Enforced tax collection in Germany is executed by either the authority that issued the primary tax assessment or by any other tax authority in the country as the result of cooperation rules. Enforcement methods include seizure of personal and real property, forced insolvency proceedings in the case of corporation, and forced property evaluations for individuals. Once an assessment is made, taxpayers have limited options to protect themselves from enforced collection.

However, debt forgiveness is available based on the German Duties Act (Abgabenordung, AO), which “contains the essential material rules of tax forgiveness.” There are two main rules regarding tax forgiveness: a substantive rule contained in section 227 for tax forgiveness in cases defining application of the merits of the imposition of tax, and a procedural rule contained in the interstate agreement called a deferral agreement “Stundungserlass” which addresses forgiveness from a collection perspective.” While tax debt forgiveness is possible for every taxpayer in Germany, and the German system exhibits a good measure equitable treatment for all taxpayers, the German system is very rigid in granting the tax relief. The German Fundamental Law, “Grundgesetz,” the de facto constitution, of Germany has rules that form basis for taxpayer rights, but does not contain rules that specifically apply in matters of tax law.

Croatia

While Croatia has membership in the EU, it is the least developed country analyzed in this article. Despite reforms in recent years, it still has not achieved the efficiency and sophistication of the systems of Western European countries. This likely stems from Croatia’s economic crisis, which results from “a nation-wide high unemployment rate and significant private debt have lead in recent years to a steep increase of tax collection problems. Currently in Croatia, about 8% of the adult citizens and more than 40,000 corporations have blocks on their bank accounts.”

Regarding enforced tax collection, like in the U.S., Croatian taxing authorities in have the right to seize tangible property, funds in bank accounts, and tax refunds. Croatian taxpayers do have to receive notice about their tax debt but not necessarily the right to be heard regarding the tax debt. Only when taxing authorities fail to at least attempt to provide appropriate notice to taxpayers prior to taking collection action do taxpayers possibly have the right to challenge the decision of the taxing authority. Also like in the U.S., Croatian taxing authorities may levy a taxpayer’s salary until a tax debt is satisfied.

Unlike in the U.S., Croatia does not provide for tax debt forgiveness through insolvency (bankruptcy). Therefore tax debts remain on the books until the expiration of the statute of limitations plus four years after the statute of limitations and tax collection is not possible, or until taxing authorities decide to remove the debt from the books. However, pre-insolvency “procedure allows the creditors and the taxpayer to reach an agreement on debt forgiveness, payment plans, potential debt-equity swaps or the transfer of certain property between the taxpayer and the creditors.”

In Croatia, the constitution provides the main source of general tax principles, and in comparison to the other analyzed systems, the Croatian tax system is simpler, aiming to have a system that the citizens can understand. The Croatian General Tax Code (Opći porezni zakon), regulates the fundamental procedural issues for all types of taxes, and contains its own bill of procedural taxpayer rights. Unfortunately, only corporations may receive tax debt forgiveness in Croatia, which leaves individuals, for whom only forbearance is available, vulnerable. This policy promotes noncompliance in individuals, making them likely to work “under the table” rather than voluntarily participate in the tax system.

United Kingdom

Like the U.S., the United Kingdom has a highly developed tax system, based on a federal agency that is responsible for the collection. Also like the U.S., it has a special department for enforcement procedures. Before the taxing authority may proceed with enforced collection, there must be a fixed and determined tax liability and a demand for payment which the taxpayer refuses. Enforcement methods include seizure of income and property as well as initiation of bankruptcy proceedings. While debt relief generally may occur only through a bankruptcy proceeding, other debt relief options include forbearance and installment agreements.

The constitution of the UK is composed of various sources, such as the Human Rights Act of 1998, and the European Convention on Human Rights, which have a very narrow impact in the area of tax law and tax procedure. Instead, the UK has a separate Charter of Taxpayers’ Rights. There are many rights, such as the right to be treated even-handedly, the right to appeal, the right to “be respected,” and the right to have the taxpayer’s personal circumstances considered. UK taxpayers also have “the right to help and support to get things right [which] includes a broad right to information about which taxes are owed and why.”

Conclusions

Not surprisingly, the basis and presentation of taxpayer rights vary among countries. The right to information and equal treatment are generally accepted principles in all jurisdictions. However, “access to information and the right to protest are, albeit present in all jurisdictions, to a certain extent handled differently.” As the authors illustrate, developing a strong tax system grounded in due process is paramount to taxpayer rights. It is vital that taxpayers receive due process prior to enforced collections.

Despite the relatively advanced nature of the U.S. tax system compared to that of other countries, the U.S. system still leaves much to be desired. Even though due process exists, for some taxpayers, particularly low-income taxpayers, it can be inaccessible because the process is so complex. Looking to the German model, the U.S. should consider the “presented civil law model, which grants the taxpayers in most civil law countries a direct remedy against statutes or actions by tax authorities.” Furthermore, while a direct discrimination of a taxpayer would under most civil law constitutions be considered unconstitutional, and therefore such an approach as illegal, the problem in the United States does not lie with the case-by-case discrimination of taxpayers. It rather lies in the inherent discrimination of low-income taxpayers who do not have the same access to information and legal advice, and who therefore depend much more on an efficient tax authority for direction.

The authors propose that “one solution could be a fast-track insolvency procedure which would allow taxpayers to start over after just a few years similar to the solution in the UK. The authors further propose that more collection would be better pursued through regular tax procedure rather than collection enforcement procedures. They also not that a more accurate withholding system could prevent enforcement from being necessary. Additionally, the U.S. should consider reforming the procedures that take place before enforcement, which would help clean up the “complex system of debt forgiveness, information distribution, enforcement and taxpayer protection,” even though these procedures in the U.S. are more developed than those in other countries.

 

 

 

 

 

 

The Perils of a Discredited Appraisal: Critical Insights on Kollsman v. Commissioner

We welcome guest blogger Cindy Charleston-Rosenberg, ISA CAPP. Cindy is a past President and Certified Member of the International Society of Appraisers (ISA), the largest professional organization of qualified appraisers in the United States and Canada.   She is an experienced expert witness and writes and presents widely on advanced appraisal methodology issues. Cindy is active in industry activities to raise awareness of the critical importance of meaningful appraiser qualification standards. She provides insight on things we should consider in hiring an expert witness in order to avoid problems of qualification or bias. Keith 

A US Tax Court ruling has brought the perils of a discredited art appraisal into sharp focus. In the Estate of Kollsman v. Commissioner, the court rejected a premiere auction house appraisal for bias and absence of objective support. Relying almost exclusively on the IRS expert, the court concluded a $2,400,000 value for the disputed artwork. (The estate had valued the artwork at $600,000, the IRS at $2,600,000). Kollsman illustrates that preeminence in the auction business, or in another art-related profession, is not adequate assurance of appraisal expertise or competency. As Keith Fogg thoughtfully covered in a previous Procedurally Taxing blog post, an expert who has or is seeking any involvement in the sale or purchase of the subject of an appraisal can signal an obvious and avoidable conflict of interest.

Beyond bias, this post explores exposure in failing to select a relevantly credentialed expert, who will submit fully supported, impartial testimony and reports, allowing their opinions to be confidently embraced by the IRS and the courts. Those who practice tax law where the value of art is at issue may be held liable for failing to secure a qualified expert who can competently support contested value. Therefore, lawyers offering estate planning services should be familiar with established, meaningful, credible and defined appraiser qualification criteria when vetting personal property appraisal experts.

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In contrast to the disregarded expert witness offered by the estate in Kollsman, the IRS expert whose opinion prevailed and was found qualified, was a properly credentialed appraiser. Credentialed appraisers are trained and tested in appraisal standards, ethics and methodology, have had sample reports vetted through peer review, and are more likely to submit a full and impartial expert analysis.

In rejecting the appraisal offered by the estate in Kollsman as “unreliable and unpersuasive”, the court found profound deficiencies in competency as well as independence:

  • Absence of comparable market data: The court found it “remarkable” that the opinion was not supported by the comparable sales price data consistently found to be significant in prior cases, or that “any objective support” was offered to support the valuation figures. “He effectively urges the Court to accept them on the basis of his experience and expertise. We have no basis for doing so”.
  • Exaggerated discount for condition. In rejecting the wholly unsupported opinion of diminution of value based on condition, the court believed any reasonable investigation of condition impacts on value would, at a minimum, include an opinion from a qualified conservator.
  • Direct conflict of interest: The expert provided his fair market value estimates simultaneously with a solicitation for exclusive rights to auction the paintings if they were to be sold. The court found this to be a “significant conflict of interest that could cause a reasonable person to question his objectivity”.
  • Direct financial incentive: The court believed the expert was acting with incentive to undervalue estate tax liability in exchange for an agreement to benefit from selling the property. Judge Gale’s language was strong on this point, finding: “a direct financial incentive to curry favor” by providing “lowball estimates that would lessen the Federal estate tax burden borne by the estate”.

The Appraisal Foundation’s 2018 Personal Property Appraiser Qualification Criteria

The appraisal of art is a recognized professional discipline, distinct from other types of art market expertise, with clearly defined credentialing standards. When engaging an art appraisal expert it’s critical to assert the same diligence employed in engaging any other expert witness, which includes understanding the professional criteria specific to the discipline of appraising.

In the United the States, The Appraisal Foundation (TAF) is the foremost authority on the valuation profession. Under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Congress authorized The Appraisal Foundation as the source of appraisal standards and qualifications.  TAF’s Appraiser Qualifications Board (AQB) is responsible for developing appraiser qualification standards for the real estate and personal property professions. TAF’s Appraisal Standards Board (ASB) issues and updates The Professional Standards of Professional Appraisal Practice (USPAP). Together these standards help ensure a trustworthy level of professional competency. After five years of research and analysis, including input from the credentialing sponsoring organizations, TAF issued an updated and more stringent Personal Property Appraiser Qualification Criteria, which is in effect as of January 1, 2018.

TAF sponsoring professional personal property organizations are required to adhere to these criteria when credentialing members. The International Society of Appraisers, The Appraisers Association of America, and The American Society of Appraisers maintain public online registries where the expert’s specialization, level of credentialing and current USPAP compliance may be accessed and confirmed.

Suggested Standards of Professional Responsibility in Vetting Appraisers and Expert Reports

  1. Require a current credential issued by one of the three TAF sponsoring personal property appraisal organizations. Members of the qualifying organizations earn their credentials through a rigorous admissions, training and testing process. They are required to comply with IRS and AQB guidelines, adhere to a code of ethics, are subject to oversight, and continuing education requirements. Before attaining Accredited or Certified status, members must submit appraisal reports to a stringent peer review process. These qualifications support competency, accountability and a commitment to professionalism. Consult the public registries of the qualifying organizations to ensure current credentialing. The International Society of Appraisers, the Appraisers Association of America, and The American Society of Appraisers.

 

  1. Appraisal reports should be well-supported. Every appraisal submitted to assist in determining tax liability has the potential to become the subject of litigation. The IRS Art Appraisal Services (AAS) is staffed by experienced appraisers, tasked with protecting the public from abuse in valuation resulting from inadequately supported appraisal reports. The IRS Art Appraisal Services is part of the IRS Office of Appeals. All AAS reviewers have been trained in appraisal methodology by one of the three TAF Sponsoring organizations and comply with USPAP continuing education requirements. The AAS is distinct from the IRS Art Advisory Panel. The members of the Art Advisory Panel are renown art experts, scholars and gallerists who serve without compensation.

Reports for objects of significant value should be supported by comparable sales data, relevant expert opinions, and a well-reasoned objective justification for each value conclusion. In response to IRS guidance, this is a required reporting component of all three TAF qualifying organizations for any object valued above $50,000. At a minimum, all appraisal reports should also disclose the approach to valuation and methodology employed, intended use, definition of value, markets explored, any conditions limiting assignment results, extraordinary assumptions, and scope of work.

  1. Appraisal reports should be comprehensive. IRS Publication 561, Determining the Value of Donated Property, outlines a Preferred Object Identification Format for Art Valued over $50,000. The suggested appraisal format includes a complete physical description of the object, including size, materials or medium, subject matter, name, nationality and life dates of the artist, signatures or other identifying inscriptions or markings, date of creation, provenance (history of ownership), condition, literature references and exhibition history. The IRS also recommends the appraiser exercise due diligence in confirming authenticity. The appraisal must include professional quality photographs of the subject properties. The IRS Preferred Object Identification Format for Art Valued over $50,00 defines “Art” as including paintings, sculptures, watercolors, prints, drawings, ceramics, antiques, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects. This format essentially applies to all personal property.
  1. Appraisals submitted to the IRS should address how the appraiser meets the IRS Appraiser Qualification Criteria, and acknowledge civil liabilities associated with a grossly inaccurate valuation. The Pension Protection Act of 2006 ((PPA), P.L. 109-280, at §170(f)(11)(E)), codified the definition of a qualified appraiser and qualified appraisal report. The PPA strengthened the professional requirements a qualified appraiser must meet, specifically identifying organizational credentials, experience, and professional-level coursework. All IRS appraisals are required to include a statement of how the appraiser meets the IRS qualification criteria.
  1. Appraisals should include a signed and dated certificate of compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). This certification must confirm that the assignment was not predicated on a pre-determined result. The certification should include a statement that the appraiser is compliant with the current version of USPAP (2018-19)
  1. The Uniform Standards of Professional Appraisal Practice (USPAP) is not a credential. USPAP sets critical ethics and reporting standards, but it is not a credential. An individual who promotes as “USPAP Certified” displays a superficial understanding of the standards of their own profession, because USPAP does not certify. The qualifying personal property organizations issue credentials. USPAP training and compliance is a 15-hour foundational course with a 7-hour bi-annual continuing education requirement. It is a required, but rudimentary component in achieving and maintaining an AQB compliant credential.
  1. Experts should be objective and disinterested. The PPA specifically disqualifies individuals who would have a conflict of interest in the outcome of the appraisal. An expert should do nothing that would cast doubt on the impartiality of their opinion.
  2. Contingent fees are prohibited by USPAP. The Ethics Rule of USPAP prohibits contingent fees without exception. An appraiser must not accept an assignment, or have a compensation arrangement for an assignment, that is contingent on a predetermined value result, based on a percentage of value, or attainment of any advantage (e.g., the appraiser will broker or sell the subject property).

In summary, preeminence in art sales or other art-related professions is not assurance of appraisal expertise or competency. In fact, an expert’s involvement in the sale and purchase of the subject artwork can undermine the perception of objectivity. Further, to manage the risk of a disqualified expert, appraisers should meet recognized professional standards for qualification and competency, including active credentialed membership in one of the three TAF qualifying organizations. In Kollsman, the appraisal credential of the IRS expert was referenced in the opinion.

Professional Qualification Criteria for Personal Property Appraisers are developed by The Appraiser Qualifications Board of The Appraisal Foundation. The standard is rigorous, meaningful, easily accessible to opposing parties, and is clearly defined. Qualification to AQB standards is the accepted minimum professional standard.

The three major appraisal organizations (TAF Sponsors) have united in a collaborative effort to inform the public of meaningful qualification standards. The Appraisal Foundation is in the process of developing a public campaign to promote these standards. Increasingly, it will be difficult for allied professionals to credibly overlook the qualifying standard of experts they customarily engage.

In the wake of Kollsman, it is critical for tax attorneys and tax and estate advisors who rely on expert appraisals to be familiar with appraiser qualification and reporting standards. Assertively vetting experts illustrates an advanced level of diligence, providing a critical, and often overlooked layer of protection for the clients we mutually serve.