Increased Transparency in the U.S. Tax Court: Has the Moment Arrived?

Today’s guest post is by Leandra Lederman, the William W. Oliver Professor of Tax Law at Indiana University Maurer School of Law in Bloomington. Professor Lederman is a prolific tax scholar and has written some of the most cited and influential articles on tax procedure and tax compliance, among other topics. In today’s guest post, she discusses Tax Court transparency, a topic she has also written about for many years.

This post originally appeared here on the Surly Subgroup, a blog where she and a number of tax academics write on a variety of tax issues. We highly recommend you adding it to your regular blog reads. Les

Transparency is a widely accepted judicial norm. It increases courts’ accountability and thereby increases the confidence and trust litigants and the general public have in courts’ decisionmaking. The comparatively limited access afforded to Tax Court documents is a longstanding issue. The reason Tax Court transparency differs from that of other courts is partly structural, in that the Tax Court isn’t as neatly situated in the federal government’s org chart as Article III courts, administrative agencies, or even Article I courts such as the Court of Federal Claims. (In fact, even which branch of government the Tax Court is located in has presented a puzzle.) Accordingly, the Tax Court traditionally has created many of its own rules and procedures, such as ones governing access to its documents. This means that the question is also partly cultural. As discussed below, access to Tax Court documents has increased over time, and the appointment of several new Tax Court judges may mean that we see further changes in the future.

In the past, the Tax Court’s more limited transparency has sometimes violated judicial norms and has sometimes created access inequities. For example, although the Tax Court is required by statute to make its reports and evidence “public records open to the inspection of the public,” for years the Tax Court kept its Summary Opinions confidential, which I protested in 1998 in a short Tax Notes article called “Tax Court S Cases: Does the ‘S’ Stand For Secret?”.  Although Summary Opinions lack precedential value, they are Tax Court opinions, revealing how the judge deciding the case (typically a Special Trial Judge) thinks about the issues. The Tax Court’s practice of sharing those opinions only with the parties to the case meant that the IRS had a copy of every Summary Opinion but taxpayers typically could not access the opinions in other Small Tax Cases (S cases). This created an uneven playing field. Secrecy can also lead to suspicion of favoritism or other inequities, concerns that existed in an analogous situation, in the era when the IRS did not make Private Letter Rulings (PLRs) public but large firms collected them. Litigation challenging this lack of transparency resulted in legislation, requiring PLRs to be disclosed (with taxpayer information redacted).

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In the Tax Court context, at the time I wrote my 1998 article, legislation already required public access to all Tax Court opinions and case files that weren’t under seal. The Tax Court reportedly began making Summary Opinions and the underlying files publicly accessible shortly after that article was published. That change ensures that interested parties can see both if similarly situated taxpayers are being treated similarly, and if S case outcomes differ from those of regular cases (the issue I had wanted to study when I tried to obtain access to S cases before 1998; I ended up having to focus that study only on regular cases).

A more recent example of a Tax Court violation of judicial norms was revealed by Ballard v. Commissioner, which went to the U.S. Supreme Court. (Disclosure: I filed an amicus brief in that case in support of the taxpayers.) In the Ballard litigation, taxpayers’ counsel was attempting to obtain the factfinding report of the judge who had presided over the trial in a consolidated multimillion dollar fraud case. Although the decision the Tax Court had issued after trial said that it “agrees with and adopts” the Special Trial Judge’s report, taxpayers’ counsel had reason to believe that the result in the opinion (that the IRS had proven fraud by clear and convincing evidence) was not what the report had actually found. Such reports were kept confidential following an internal rule change by the Tax Court in 1983. That rule change also resulted in the report being excluded from the record on appeal, as I explained in a 2004 Tax Notes article. So, no one outside the Tax Court could access the trial judge’s report in these (large) Rule 183 cases. In Ballard, the U.S. Supreme Court agreed with the taxpayer that the STJ’s factfinding could not be secret. On remand, the Court of Appeals for the Eleventh Circuit ordered the Tax Court to disclose the original report. That report had in fact found in favor of the taxpayer.

The Tax Court has made tremendous strides in the decades since I first argued for increased transparency. The Tax Court currently provides on its website a searchable database to locate opinions in its cases, and Summary Opinions are available for decisions on or after January 10, 2001. The Tax Court’s TC and memorandum opinions are available there, too, and go back farther—to September 25, 1995. More recently, the Tax Court made available a searchable database containing “all orders issued after June 17, 2011” except for “computer-generated mailings of form orders.” And the Tax Court does not charge for access to its online documents.

The Tax Court’s online Docket Inquiry System was another terrific addition. It allows searches by docket number, individual party name, and corporate name keyword, and it goes back to the 1980s: the website states that “Docket records are available for cases filed on or after May 1, 1986.” It is also very helpful that the Docket Inquiry System now includes a link to the stipulated decision in a settled case, which, when I conducted empirical studies of Tax Court cases, had to be accessed in hard copy from the Tax Court’s public files office in Washington, D.C. The Tax Court states that the Docket Inquiry System provides access to decisions and orders issued after March 1, 2008. (For an example, see the stipulated decision in docket number 4358-10, or the docket entries for that case.)

Unfortunately, however, the Docket Inquiry System has some major limitations. First, for those not logged into the system as a representative, it currently allows access to only two cases in short succession. On searching for the third in a row, it says “Access frequency exceeded. Please try again later.” This restriction presents obvious difficulties for researchers and journalists, among others. While an access frequency limit may be intended to prevent denial-of-service and other cyber-attacks, the limit of two docket numbers seems unnecessarily low. Even password-protected websites following best practices give more than two tries (e.g., ten) before locking out a user.

Second, the Tax Court’s Docket Inquiry System does not provide electronic access to many types of documents. It does currently link both the decision and orders in the case, which is a very helpful feature. However, non-party access to materials from the Tax Court public files, such as other documents listed there, calls for accessing them from the Office of the Clerk of the Court in Washington, D.C. during business hours. This not only limits the access researchers, journalists, and the general public, it restricts the access of attorneys who have not yet entered an appearance. It is not unusual for a taxpayer to petition the Tax Court pro se and seek counsel later, as Keith Fogg has pointed out. This is likely because the time within which to file a petition is short; the “Last date to petition Tax Court” is required by an off-Code provision to be stated on the notice of deficiency; the notice of deficiency does not say that there is also a refund option available (as noted here on pp.902-903); and the Tax Court helps facilitate filing with a simplified petition form that is available online.

It is possible to physically go to the Clerk’s Office to view Tax Court case documents, but, as Keith Fogg has pointed out, that is expensive if you don’t live in the Washington, D.C. area or have a friend there who is willing to do this kind of task for you. Copies obtained from the Tax Court cost 50 cents per page, which is another economic barrier to access. Keith blogged about going to the court and taking photos with his phone of relevant documents in case files. However, he points out in a comment that he later learned that the Tax Court does not permit that.

This limited electronic access to Tax Court filings is in stark contrast with PACER (Public Access to Court Electronic Records), which is managed by the Administrative Office of US Courts. In the words of the PACER website, “PACER hosts millions of case file documents and docket information for all district, bankruptcy, and appellate courts. These are available immediately after they have been electronically filed.” PACER thus facilitates quick electronic access to numerous documents in a case file. PACER also has a fee schedule that is significantly below 50 cents per page:

Access to case information costs $0.10 per page. The cost to access a single document is capped at $3.00, the equivalent of 30 pages. The cap does not apply to name searches, reports that are not case-specific, and transcripts of federal court proceedings.

By Judicial Conference policy, if your usage does not exceed $15 in a quarter, fees are waived.

Of course, this means that PACER starts charging a user to access electronic documents after $15 worth in a 3-month period (equivalent to 150 pages, assuming that no individual document reaches the $3 capped per-document fee). The Tax Court does not charge at all for electronic access, as noted above. However, as Peter Reilly pointed out last year, “In PACER, almost all the docket entries will have a link like that [to documents in the case]. In the Tax Court most of them do not.” It is worth remembering, however, that the Tax Court provides a free, searchable database of its orders, as noted above.

Complaints about the Tax Court’s comparative lack of online access is a longstanding issue, as this 2012 Reuters article by Kim Dixon explains. As I explained in a 2008 article in Wash. U. Law Review titled “Tax Appeal: A Proposal to Make the United States Tax Court More Judicial,” The Tax Court has never been included in PACER or the oversight of the Administrative Office of U.S. Courts (AOUSC). By contrast, the Court of Federal Claims, which is also an Article I court that hears tax cases, is on PACER. In my 2008 article, I proposed to align treatment of the Tax Court with that of the Court of Federal Claims.

The Tax Court has raised the privacy and security of taxpayer information as a concern that raises a potential barrier, and that is an important issue worth serious consideration. Of course, what’s currently at stake isn’t whether public Tax Court documents are available at all, it’s whether they’re available electronically. But providing online access certainly increases the potential exposure for a document.  The Tax Court has an undated notice on its website that, in part, “encourage[s parties] to refrain from including or to take appropriate steps to redact” private information, such as Social Security numbers. PACER has had to address this issue, too, of course. Its website states “Certain personal identifiers are removed or redacted before the record becomes public, including Social Security number, financial account numbers, the name of a minor, date of birth, and home addresses in a criminal case.”

The Tax Court also currently does not publish case statistics on its website, although such aggregate statistics do not raise concerns about personal information such as Social Security or bank account numbers. The Tax Court’s opacity in this regards contrasts with the AOUSC and the Court of Federal Claims, both of which make statistical documents available on their websites from drop down menus. Tax Court statistics can be valuable both to litigants and researchers interested in trends over time and differences in results in pro se and other cases, as well as in regular and S cases. I have heard the Chief Judge of the Tax Court provide a Tax Court update at the Court Procedure and Practice Committee session at ABA Tax Section meetings, but these are general statistics and do not seem to be accompanied by documents available in the meeting materials. The Tax Court has produced more detailed statistical documents at times, but there does not seem to be a regularized system for doing so, or for accessing them (as discussed on pages 1213-14 of my 2008 article). Nor can the Freedom of Information Act readily be used to obtain these or other documents from the Tax Court; the Tax Court isn’t subject to statutes governing administrative agencies because it is not an executive agency.

What’s past is prologue, however. The Tax Court’s broad self-governance also means that it has the power to greatly increase its transparency. Les Book has blogged that, at the Tax Court Judicial Conference in March of this year, some of the judges expressed interest in increased electronic access. And the addition of new Tax Court judges could give rise to further cultural changes. Two new judges have been sworn in in the past month or so: Judge Patrick Urda on September 27 and Judge Elizabeth Copeland on October 12. That still leaves the 19-member court with 4 vacancies, but President Trump has announced 4 nominees. With so much new blood, the Tax Court’s self-governance could move in new directions. Perhaps we will see increased Tax Court transparency in the near future. That would be a very welcome development!

Designated Orders: Penalties Imposed and Analysis of an Investment Firm (10/1/18 to 10/5/18)

Designated Order blogger William Schmidt from the Legal Aid Society of Kansas brings us this week’s orders. Keith

This week provides 4 designated orders. The batch includes two related orders regarding penalties for the same petitioner, analysis of an investment firm and an order concerning specific memos required before trial (Order Here). That order is a good example of what is needed in a pretrial memo in a case under regular tax case procedures: issues of fact and law, each party’s position and theories, expert witness testimony anticipated, and status of stipulations of facts.

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Tax Court Penalties Imposed

Docket # 16108-14 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

Docket # 9435-15 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

While there have been previous designated orders for Mr. Walker, his cases were not discussed here before. Each of the two cases are collection due process cases. One case concerns collection by levy for Mr. Walker’s unpaid 2007 and 2009 income taxes (16108-14) while the other case concerns collection by lien of his unpaid 2001 through 2007 income taxes. Otherwise, the orders are virtually identical yet ordered on two separate days.

Originally, Mr. Walker’s cases were remanded to IRS Appeals for a supplemental hearing on the issues listed above. The settlement officer provided him an explanation of how his 2007 and 2009 taxes were calculated and afforded him the opportunity to file returns claiming lesser taxes but he did not file those returns. Mr. Walker instead used the hearing to raise an issue previously ruled on by the Court.

The Court believed Mr. Walker used the period of remand primarily for delay and issued an order on August 27 to show cause that it was not a frivolous argument and why no penalty should be imposed. In fact, the penalty in question is from Internal Revenue Code (IRC) section 6673(a)(1). The section authorizes a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or if the taxpayer’s position is frivolous or groundless.

Mr. Walker did not respond to the August 27 order to show cause. The Court then imposes a section 6673(a)(1) penalty of $5,000 (it is my understanding that even though these are separate orders there would only be one penalty imposed). The Court orders that the IRS may proceed with the collection actions for the years in question.

Takeaway: The Tax Court is showing its teeth with regard to frivolous or groundless filings. While it is doubtful a petitioner that would file such a case is a reader of this blog site, it is worthwhile to note that the Tax Court is not afraid to impose penalties on petitioners trying to use the Tax Court just as a means of delaying IRS taking collection actions. While other cases have brought up the penalty without imposing it (giving little more than a slap on the wrist), this is a time where the Court made use of this power and imposed a decent penalty.

Was it a “Trade or Business”?

Docket # 8486-17, 8489-17, 8494-17, 8497-17, Richard M. Hellmann & Dianna G. Hellmann, et al., v. C.I.R. (Order Here).

GF Family Management, LLC (GFM) is an investment management firm owned and operated by members of the same family (the petitioners) and it is a family office as defined by federal securities law. The petitioners each hold a 25% profits interest in GFM and the assets managed by GFM were held by six investment partnerships. GFM held a 1% interest in each partnership, and trusts where the petitioners are the beneficiaries held (individually or collectively) the remaining 99% of each partnership.

GFM claimed expense deductions as a “trade or business” under IRC section 162. That would allow for GFM to claim ordinary business expense deductions for operating costs such as salaries, rent or investment expenses. The IRS contends GFM was actually engaged in activity “for the production or collection of income” or “for the management, conservation, or maintenance of property held for the production of income” under IRC section 212. That treatment would mean GFM’s expenses would be treated as miscellaneous itemized deductions subject to the 2% floor imposed by IRC section 67(a). The treatment will also be limited by application of the alternative minimum tax. Carryover of net operating losses are only permitted for a trade or business so that would also be limited for GFM.

Within this order, there is comparison to the fact situation in Lender Management, LLC v. C.I.R. Within that case, the Court emphasized the need to examine each case individually. In that case, the Court determined that it was in fact a trade or business.

Overall, the question is whether the owners of the family office are “actively engaged in providing services to others” (citing Lender Management) or are simply providing services to themselves. The Court provides factors for its analysis and proceeds to list factual issues it would like answered.

The parties are ordered to provide a joint status report by November 5. Within the report they are to express whether the facts will need to be developed at trial or to supplement the factual record through a stipulation of facts. Also, the parties will need to state whether the stipulation of facts could be submitted for decision without trial under Rule 122.

Takeaway: The IRS examination of this investment firm seems logical as the structure provides benefits to its family members. Is the firm actually a “trade or business” or is functioning in more of a self-serving capacity? The Court’s stance also sounds logical as the facts do not necessarily parallel the Lender Management facts so it is necessary to do further factual investigation to determine what kind of role the firm functions under. It is worth noting the major tax implications such a decision will result in for GFM, as listed above.

 

 

4th International Conference on Taxpayer Rights “Taxpayer Rights in the Digital Age: Implications for Transparency, Certainty, and Privacy”

The National Taxpayer Advocate asked us to announce the upcoming 4th International Conference on Taxpayer Rights and to alert readers not only to the conference, which has become an annual event, but to the opportunity to participate as a speaker at the conference and present a paper. Les and I both had the opportunity to participate as speakers in the first conference. He also participated in the second conference and I attended the third. The conference is an excellent chance to hear about the efforts to protect and improve taxpayer rights around the world. If you have thoughts and ideas about how taxpayer rights should be protected and improved, consider writing a paper and speaking at the conference. If you just want to listen to some interesting discussions on the topic, mark the date and note that the conference has been filling up and turning away interested attendees who signed up late. The balance of this post is taken from the official announcement of the conference and its call for papers. Keith

Taxpayer rights serve as the foundation for effective tax administration. Whether expressed through a taxpayer bill or charter of rights, or a declaration of human rights, governments have long recognized that providing taxpayers with assurances of fair treatment and respect, and protections against government overreaching, further voluntary compliance. Current research is exploring the extent to which procedural justice encourages taxpayers’ willingness to comply with tax laws and obligations.

Since November 2015, the National Taxpayer Advocate of the US Internal Revenue Service has convened 3 international conferences to bring together scholars, taxpayer representatives, tax administration officials, and taxpayer ombuds/advocates, and provide a forum for a multi-disciplinary discussion of the operation of taxpayer rights in theory and practice. Videos and abstracts or papers from past conferences are available at taxpayerrightsconference.com. The 3rd International Conference on Taxpayer Rights, held in Amsterdam, The Netherlands, hosted by the International Bureau of Fiscal Documentation (IBFD) and sponsored by Tax Analysts, was fully subscribed by 160 attendees from 42 countries.

The National Taxpayer Advocate will convene the 4th International Conference on Taxpayer Rights on May 23 and 24, 2019, in Minneapolis, Minnesota. The conference is hosted by the University of Minnesota School of Law and sponsored by Tax Analysts, with technical assistance from IBFD. The 2019 conference will explore the role of taxpayer rights in the digital age, and the implications of the expanding digital environment for transparency, certainty, and privacy in tax administration.

We are currently seeking presentation and paper proposals on a range of topics. In developing proposals, the conference encourages proposals from multiple disciplines (e.g., from the fields of law, economics, psychology, anthropology,

sociology, computer science as well as from government officials and ombuds and taxpayer advocates) that address the following topics:

  • The existence and comparative analysis of taxpayer charters and taxpayer bills of rights around the world, and the foundation of taxpayer rights in human rights.
  • A comparative law analysis of the treatment of taxpayer rights, including under common law and civil law, with recommendations to establish some global common standards.
  • The impact of “big data” on the right to privacy in the context of tax administration, including a comparative global analysis of the judicial treatment of evidence obtained from leaked tax and financial documents.
  • The availability of administrative guidance (including the limits of legislative interpretation and interpretive guidance), its role in fostering compliance, and administrative or statutory vehicles for obtaining access to that guidance, as well as the methods to bring stakeholders into a constructive discussion with authorities and legislative bodies.
  • The ability of taxpayers to legitimately rely on published administrative guidance in its various forms, how such reliance is treated by tax authorities, the judiciary, and legislative bodies, and remedies for taxpayers when they relied on such guidance, to their detriment.
  • The role of “whistleblowers” in tax administration, including access to tax information, and protections for both the whistleblower and the subject taxpayer, with a comparative analysis of the approaches of different countries and other fields of law.
  • The impact of increasingly digital delivery of taxpayer assistance on vulnerable taxpayer groups, including the efficacy of different modes of communicating with taxpayers in order to promote compliance.
  • The ability of taxpayers to bring cases to court, especially in countries where taxpayers are either afraid of seeking assistance or relief, or are reluctant to bring a case against tax authorities because of cultural reasons.

PAPER SUBMISSION PROCEDURE:

To submit a paper proposal, please send the following information by December 1, 2018 to tprightsconference@irs.gov:

  • Author(s) name, contact information, and professional affiliation
  • Author(s) CV
  • Title of proposed paper
  • A 3 to 5 page abstract of the paper, in Times New Roman, 11 point, double spaced, left alignment.

Participants will be notified of their selection by January 1, 2019. Conference fees for presenters will be waived. Travel and accommodation assistance also may be available for academic presenters, courtesy of co-sponsors.

Post-conference opportunities for publication of original papers will be available, including in The Tax Lawyer and in Tax Analysts publications.

Important dates and deadlines:

Deadline for submission of abstracts: 01 December 2018

Notification of paper/presentation acceptance: 01 January 2019

Deadline for submission of slide presentations and updated abstracts: 15 April 2019

Deadline for submission of papers for publication in Tax Lawyer or by Tax Analysts 31 July 2019

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.

 

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.

 

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.

Designated Orders: One-Two Punch for Respondent in CDP Disputes before Judge Gustafson

This week Patrick Thomas who teaches and runs the low income taxpayer clinic at Notre Dame Law School brings us the designated orders. I have written before about the lessons in making motions for summary judgment that Judge Gustafson provides to Chief Counsel attorneys. Like the wonderful blog series written by Bryan Camp entitled Lessons from the Tax Court (samples here and here), Judge Gustafson provides his own lessons from the Tax Court to the attorneys in Chief Counsel’s Office who file summary judgment motions with him without carefully preparing their motions. At some point we hope the Chief Counsel attorneys will read our blog posts (not to mention his prior orders) and realize that they need to spend some time with these motions and especially when they know the motion will go to Judge Gustafson’s chambers. Professor Thomas writes about the Judge’s most recent lessons below. Keith 

Designated Orders: 9/17 – 9/21/2018

There were only three orders this week, two of which will be discussed here. Not discussed is a routine scheduling order from Judge Jacobs. The two others are both from Judge Gustafson and involve an IRS motion for summary judgment in collection due process cases. Judge Gustafson denies both motions—the first because material facts remained in dispute, and the second because the motion mischaracterized facts elsewhere in the record (and omitted other facts that might have saved the motion). More below.

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Docket No. 26438-17L, Schumacher v. C.I.R. (Order Here)

This CDP case stems from a Notice of Federal Tax Lien filed against Mr. Schumacher for multiple tax years. After Petitioner timely requesting a hearing, the Settlement Officer (SO) sent an initial contact letter to Petitioner and his authorized representative—at least, to what the IRS computers thought was his authorized representative. On the hearing date, the SO called petitioner; the order states “[Petitioner] was not available and his telephone message stated that he did not accept blocked calls.” I’m assuming that the SO was therefore unable to leave a message on Petitioner’s voicemail.

Undeterred, the SO attempted to call the authorized representative on file with the IRS CAF Unit. The representative’s office informed the SO that they no longer represented Petitioner. The SO called the next listed authorized representative and left a message, but didn’t receive a response.

So, on that day, the SO sent a letter to Petitioner, noting these attempts. It further stated that if Petitioner didn’t contact the SO within 14 days, she would issue a Notice of Determination sustaining the lien. 14 days came and went, and the SO did just that.

In the motion, Respondent argues that the SO was justified in issuing the NOD, because neither Petitioner nor his authorized representative responded during the CDP hearing. In opposition, the Petitioner notes that (1) he didn’t receive any phone calls from the IRS and (2) he didn’t have any authorized IRS representative at that time. Judge Gustafson finds the latter plausible, given there’s no indication on the Form 12153 that Petitioner had representation. Good for Petitioner, as the Tax Court will ordinarily sustain a NOD if a truly authorized representative fails to respond.

Judge Gustafson denies the motion because, in his view, there appears to be a dispute as to whether Petitioner had a reasonable opportunity to challenge the NFTL. Specifically, Judge Gustafson finds troubling that there were no attempts to phone Petitioner a second time and no attempt to “unblock” the SO’s phone, such that Petitioner could receive its calls or a message. Further, he takes issue with the language in the 14-day letter sent to Petitioner; it included language noting that “your account has been closed” and might reasonably suggest to a taxpayer without CDP experience that the SO had already made her decision. Accordingly, Judge Gustafson denies the motion and sets the case for trial in Baltimore on November 5.

Takeaways: First, at the end of representation, practitioners should remember to withdraw their Forms 2848. Some portion of the confusion could have been avoided here.

Second, I didn’t know there was a mechanism that could block voicemails or calls from blocked numbers. To the extent our clients have such a mechanism, I might advise them to disable this feature until their tax controversy is resolved. As an aside, to the extent this seeks to reduce spam calls, it appears ill suited to the task. From my own experience, I don’t think I’ve ever received a spam call from a blocked number; rather, it’s usually an IRS employee calling. The spam calls tend instead to come from unblocked numbers.

Docket No. 1117-18L, Northside Carting, Inc. v. C.I.R. (Order Here)

This combined NFTL and levy case involves Petitioner’s unpaid employment taxes. Here, Petitioner does itself no favors in not responding to the motion for summary judgment. Nonetheless, Judge Gustafson finds that Respondent fails to carry own their burden on the motion because of other record evidence.

Respondent argues that Petitioner asked for an OIC or installment agreement in the CDP request, failed to provide the information and documentation necessary to consider an installment agreement. Specifically, Respondent notes that when Petitioner’s authorized representative informed the SO on July 13, 2017 of their desire to renegotiate a collection alternative, the SO asked for additional documentation. That documentation not being forthcoming, the motion states, the SO justifiably upheld the levy and NFTL filing.

Not so fast, says Judge Gustafson. The administrative record shows that the representative submitted some portion of the requested information on two occasions after July 13. Ultimately, the SO still wanted more; after a final deadline of November 16, the SO issued the Notice of Determination.

Judge Gustafson finds the motion’s failure to recite this information problematic. It doesn’t say what was requested or given—only that the SO requested something, part of which was provided and part of which was not. This is a material difference; if the SO receives no information at all, and issues a NOD on that basis, that’s understandable. But here the Court must at least understand the information that was provided; perhaps the SO required a piece of meaningless or trivial information, and on that basis upheld the NFTL and levy. Probably not, but without the specific information, the Court is left without any idea.

The motion could probably have been saved for another reason: when the NOD was issued, Petitioner wasn’t in filing compliance, a necessary requirement for any collection alternative. While the declaration underlying the motion mentions this, the motion itself fails to do so. Judge Gustafson seems unwilling to entertain an argument not presented to the Court, and so ultimately denies the motion, setting the case for trial in Boston on October 15. He suggests that an ultimate outcome may be remand to Appeals for further development of the record, or simply that the NFTL cannot be sustained.

So, good news for Petitioner. Hopefully Petitioner realizes its good fortune, and begins to participate in this case.