Leslie Book

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Trump Budget: Perhaps Dead on Arrival But Key Themes Emerge for Tax Administration

The Trump Administration released its FY 18 budget, a budget that is generating a great deal of controversy due to unrealistic assumptions and for its slashing many entitlement programs. Since early days on the campaign the President has emphasized the need to control for errors and fraud in transfer programs. IRS has been a poster child for improper payments, and it is no surprise that this budget addresses that issue.

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The document entitled Analytical Perspectives to the budget seems to contain most of the context and description of the assumptions and additional detail. Starting at about page 99 is a discussion of the need to ensure greater integrity in federal spending programs. While I have not read line by line the budget materials there are two measures in the budget that stand out for possible impact on tax administration: oversight over tax return preparers and expanded IRS math error powers. The former in my view is a great idea and the latter not so much.

The  budget requests “authority to increase [IRS] oversight over paid preparers.” As the Administration states, “[i]ncreasing the quality of paid preparers lessens the need for after-the-fact enforcement of tax laws and increases the amount of revenue that the IRS can collect.” We have discussed this issue numerous times in PT. Increasing accountability and visibility of unenrolled preparers is on balance good for taxpayers and tax administration. The most recent IRS compliance study pegged unenrolled preparers as having the highest error rates on EITC returns, and while regulation is not a panacea, requiring minimum standards and directly bringing those preparers into the Circular 230 fold is a way to discourage preparers and taxpayers from acting as if the tax system is an unwatched cookie jar and to encourage preparers to act as gatekeepers.

The second proposal in the budget is a call to expand IRS power to essentially use math error summary assessment powers:

[W]ith this new authority, the IRS could deny a tax credit that a taxpayer had claimed on a tax return if the taxpayer did not include the required paperwork, or where government databases showed that the taxpayer-provided information was incorrect.

I understand the reasoning behind this proposal. EITC exams already hover at about 40% of all IRS exams and while IRS does these exams mostly on the cheap through correspondence, TIGTA has estimated that it still costs IRS on average about $400 for each correspondence exam. Yet the problem with the proposal is that the underlying information in many of the federal databases is not reliable enough to justify dispensing with the normal due process protections of pre-assessment notice and defined right to Tax Court review. For example, HHS maintains database on child custody but millions of lower income individuals do not have formal custody arrangements or even if they do the databases are not reliable enough to warrant automatic rejection. In addition, GAO and others have criticized past IRS administration of its math error powers, an issue that is particularly pressing if individuals rely on the claimed credit to meet basic needs.

While IRS is still an efficient administrator of refundable credits (even accounting for program error costs per $ of benefit are very low relative to other means-based benefit programs), Congress would be better served recognizing the limits of IRS ability to verify eligibility and provide additional resources to do its job properly rather than look for ways to do its job on the cheap and on the backs of the beneficiaries.

While many observers have labeled this budget dead on arrival, tax proposals and tax administration proposals often have nine lives. The theme of reducing errors and saving money through increased compliance will be recurring over the next few years, and that will likely lead to proposals like these that if enacted could mean significant tax administration changes.

Legal Practice and Mental Health

We try hard to stay in our lane on Procedurally Taxing. If you come to us for tax procedure and tax administration, and want to keep it that way, feel free to pass on today’s article.  Because we deal with proper representation and because good mental health of the representative is an important aspect of proper representation, you may find today’s short post of some benefit.

May is mental health month, according to Mental Health America, a leading nonprofit that spreads the word on mental health issues. As someone who has over the years benefitted from confronting mental health issues with the care of professionals, and who lost a dear friend to suicide, I believe that tax professionals and the organizations where they work should have at their disposal resources to help through inevitable tough times that are part of life.

There are many places that can provide help and information, and lawyers and tax professionals are generally pretty good about finding information (hey, you found us)! For many who might need help, however, a big issue still is the stigma associated with seeking help from a mental health professional.

Perhaps that is changing.

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An article last week in the WSJ Law Firms Finally Say it’s OK to See a Therapist [$]discussed how some law firms have begun to address more directly the challenges of life in big law, with proactive efforts to bring care to lawyers who may need some help.

My tax professor at Stanford, Joe Bankman, who is also a clinical psychologist in addition to being a rock star tax professor, along with Sarah Weinstein, have started the Wellness Project. As the home page of the project describes, “there has been an explosion of interest in wellness at law schools, and in the greater legal community. The purpose of this website is to make it easier for those working in this area to share ideas, teaching materials, articles and announcements.”

There are some terrific resources at the Wellness Project site. I listened to their most recent podcast, a conversation with Brooklyn Law School Professor Heidi Brown, who discussed her book The Introverted Lawyer. The discussion is terrific, and includes some heartfelt stories about anxiety and how students and lawyers can develop coping strategies to deal with anxiety. As a fellow introvert who finds joy and calm in reading, reflecting and writing, I identified with Professor Brown’s day-to-day approach in finding professional satisfaction despite anxieties.

Just knowing that there are others who sometimes struggle can make a difference. People do not need to suffer in silence, or feel that mental health issues make them weak or lesser professionals.

Back to tax procedure. I promise.

Who Needs Netflix? Tax Videos on Demand

Today is graduation at Villanova Law School. It is a beautiful day and it will be nice to see families and students beaming. One of the highlights for me last academic year was participating in the Second Annual International Taxpayer Rights Conference in Vienna. The conference had a diverse group of speakers, with tax administrators, practitioners and academics from all over the world.

The conference organizers have posted videos of all of the panels and I link them below. An agenda with a little more description and information about the panelists is here.

Links to Video of Panels

NTA Testimony Today on Tax Reform

For more viewing pleasure, the National Taxpayer Advocate will be testifying today about tax reform before the Oversight Subcommittee of the Ways and Means Committee. The hearing is scheduled for 9 AM and the committee live streams and archives the event, which can be found here. More information on the hearing is here

 

9th Circuit Reverses District Court in Case Involving Exceptions to SOL For Failing to Disclose a Listed Transaction

We have often discussed statutes of limitation. Yesterday’s post discussed the government’s unlimited time period to assess civil penalties that are not based on the filing of a tax return. Today’s post discusses the consequences of a taxpayer failing to file a form that it is supposed to file when it engages in a listed transaction. In an opinion that surprised me, in May v US, (an unpublished opinion) the 9th Circuit reversed and held that the taxpayer’s failure to file the form resulted in the application of an extended SOL on assessment even when the IRS admitted that it had knowledge of the information that the form itself would have contained.

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First some background: Section 6707A imposes a civil penalty for failing to include information pertaining to a listed transaction on a tax return. Under Section 6707A a listed transaction is “a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of [Section] 6011.”

Section 6501(c)(10) is an exception the general SOL rules and addresses a taxpayer who “fails to include on any return or statement (that Section 6011 requires to be included in the return or statement) for any taxable year any information with respect to a listed transaction.” If this information is omitted, the time for the assessment of any tax imposed by the Code arising out of the transaction, “shall not expire before the date which is [one] year after the earlier” of (A) the date the Service receives the information required to have been filed, or (B) the date that a material advisor complies with the Service’s request for the list the material advisor is required to maintain on the transaction in which the taxpayer has participated.

Treasury promulgated regs under Section 6011 that specify how a taxpayer is to disclose the transaction. Regulation § 1.6011-4 provides that “[a] taxpayer required to file a disclosure statement under this section must file a completed Form 8886, ‘Reportable Transaction Disclosure Statement’ … , in accordance with … the instructions to the form” and that “[t]he Form 8886 … is the disclosure statement required under this section.”

May involved a transaction that the taxpayer failed to disclose on his 2004 tax return, which he filed in 2005. The transaction at issue that he failed to include on his 2004 tax return was about $165,000 in pass through income. May eventually agreed that the transaction that gave rise to the omitted income was a listed transaction. At the district court, the Service argued that only the taxpayer’s filing of Form 8886 triggered the statute of limitations for purposes of Section 6501(c)(10)(A). The Service admitted that it had knowledge of the information that the taxpayer was supposed to report in the form but that May’s failure to file Form 8886 meant that the statute of limitation was still open (the trial court and appellate opinion do not specify how the IRS got the information but IRS conceded that it had it). May argued that the Service’s knowledge of the information in the form, rather than his filing the form, was the starting point for the one-year period.

 At the district court, May won, with that opinion stating that “common sense confirms that the statute of limitations does not open or close based on which piece of paper a taxpayer chooses to employ.”

Over a brief but spirited dissent, the 9th Circuit reversed. In finding for the government, the 9th Circuit tied the 6501(c)(10) exception to what it viewed as clear directive under the 6011 regulations to submit the 8886:

6501(c)(10)(A)’s reference to “the information so required” under § 6011 functions as an incorporation by reference of the disclosure requirements of Treasury Regulation § 1.6011-4(d), which requires that a taxpayer disclosing a listed transaction do so on Form 8886 and send a completed copy of that disclosure to the OTSA[Office of Tax Shelter Analysis]. It is undisputed that May neither filed a Form 8886 nor sent it to the OTSA. For that reason, May failed to do what was required to start the running of the § 6501(c)(10)(A) statute of limitations. Thus, the one-year limitations period of § 6501(c)(10)(A) did not commence, and the IRS’s assessment of the penalty was timely.

As support, the majority felt that looking to 6501(c)(10) in isolation was not coherent with the overall scheme, and it repeated the maxim from the 1984 Supreme Court case Badaracco v Comm’r that statutes of limitations “barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.”

The dissent viewed it quite differently, focusing on how Section 6501(c)(10) itself does not require the submission of any particular form and that the regulations under 6011 failed to clearly specify the SOL consequences of failing to submit information on any particular form:

It would have been simple to write a statute that stated that the limitations period starts to run on “the date when the taxpayer provides the information to the Secretary on the form specified by the Secretary,” but that’s not how Congress wrote the statute. Alternatively, it would have been simple for the Secretary to have promulgated a regulation that clearly informed all taxpayers that providing information to the IRS doesn’t count unless the information is provided on the specified form.

I must say I am surprised by the 9th Circuit opinion. As the dissent noted, it might have been appropriate to remand for the trial court to refine its standard to avoid a broad reading of the opinion that would invite questions and litigation in other circumstances as to whether IRS had sufficient knowledge:

I have no quarrel with the Government’s position that the taxpayer should be required to provide the relevant information in a coherent form to the appropriate tax agents. An interpretation that started the limitations period as soon as some IRS office, somewhere, had the information or as soon as IRS agents collectively had the information would be both illogical and open to abuse. I don’t disagree that it might be appropriate to remand this case to the district court to apply a more precise interpretation of the statute. But I am not persuaded by the Government’s interpretation, especially in the context of a civil penalty, and cannot join my colleagues in adopting it.

It seems to me if the IRS admits to knowledge of the information then in appropriate circumstances then to elevate the Form itself as the sole trigger elevates a literal form over substance.

Court Rules Abusive Tax Shelter Penalty Has No SOL; Laches Also Not A Defense

Groves v US involves a taxpayer who was assessed over $2M in penalties for failing to register transactions as tax shelters. The penalties stemmed from conduct in years 2002, 2004 and 2005, but the IRS did not assess the penalties until 2015. Groves argued that the IRS assessments, coming over a decade after the conduct that gave rise to the penalty, was too late. The federal district court for the Northern District of Illinois disagreed.

I will briefly explain the opinion below.

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Under statutory procedures that allow for a refund claim following partial payment of the tax shelter penalty, Groves paid 15%, and filed a refund claim alleging that the penalty was assessed outside the normal three-year statute of limitations under Section 6501(a) or a 5-year SOL under Title 28 that applies to civil penalties. He also alleged in the alternative that the doctrine of laches barred the government from assessing the penalty for conduct that stretched back the better part of a decade.

After IRS denied the claim, Groves filed suit in federal district court. The court agreed with the IRS, holding that the penalty under Section 6700 for failing to register a tax shelter was not subject to the normal statute of limitation scheme and that laches was of no help.

We are in the process of finishing the new chapter in Saltzman and Book on statutes of limitation (SOL); it should be out in the fall (with this chapter will mark the rewriting of all original 18 chapters in the book, with a new 19th chapter on CDP). In the SOL chapter we discuss the odd intersection of civil penalties and SOL issues. Many penalties are not subject to readily observable statutes of limitations. For civil penalties that are not “return-based” penalties, courts have increasingly found that those penalties are not subject to any statute of limitations.

What are non return-based penalties? The key feature is that the conduct that gives rise to the civil penalty is not tethered to the filing of a tax return; in other words, as in Groves, what triggered the liability was the conduct of promoting tax shelters and failing to inform the IRS of his promotion rather than the filing of a return.

Groves argued that because the Code states that the 6700 penalty is to be assessed and collected in the same manner as taxes it should thus be subject to the general SOL rules as per Section 6501(a). The opinion disagreed:

Section 6700 assessments do not depend on the filing of a tax return,” but rather “occur … after the IRS becomes aware that an individual’s activities are prohibited by Section 6700.” The mismatch between the triggering event under § 6501(a)—the taxpayer’s filing a return—and the basis for liability under § 6700—being involved in a tax shelter and making false statements about its benefits—makes the § 6501(a) limitations period an inappropriate fit for the assessment of § 6700 penalties.

Groves countered that there was a return at issue, that is, the individuals who took up his advice and filed returns taking positions consistent with his shelter advice. The court emphasized that the penalty under Section 6700 only looked to whether promoter makes “a statement that falsely touts the shelter’s tax benefits.”

The court also addressed 28 USC § 2462, a non-tax law based SOL that applies to civil penalties. That statute states that “[e]xcept as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued ….”

The opinion concluded (as have other courts) that the IRS assessment of a 6700 penalty does not arise from “an action, suit or proceeding” because the IRS assessment arises from in the court’s view an ex parte act rather than an adversarial adjudication. Adjudicative action is a prerequisite to the 28 USC § 2462 SOL applying. As support, the court emphasized that Groves had no right to any pre-assessment administrative adjudication of the penalty, and a number of courts have held that the assessment itself was agency conduct not in the nature of an action or suit for these purposes. Groves served up a number of other creative § 2462 arguments, but the court rejected them, largely on the grounds that the IRS imposition of the penalty was not in any way based on a hearing or other adversarial procedures.

Finally, the court considered whether laches applied. Laches is an equitable defense that gives the court the power to hold that a legal right or claim will not be enforced if a party unreasonably delays in bringing the claim and the delay prejudices the other party. There is uncertainty as to whether a laches claim can be made against the government in tax cases. A Fifth Circuit case, Sage v US, after concluding that no SOL applied to the 6700 penalty, stated in dicta that the doctrine was the only curb on IRS assessment power.

Groves is appealable to the 7th Circuit, and the district court noted that the circuit had not held whether laches is available as a defense to a government tax suit. (for an interesting discussion of laches, including its history, see Judge Posner’s discussion in the 7th Circuit Lantz case from 2010). Groves concluded that laches is probably not a defense in tax cases, and that even if laches were an available defense it only applied in narrow circumstances that were not present in the case. One of the circumstances is when there is an egregious delay. On that point  the court pointed to a 2005 Second Circuit case, Cayuga Indian Nation v Pataki. In Cayuga, the US intervened on behalf of the tribe in an ejectment action that stemmed from conduct over 200 years old and pertained to actions surrounding a treaty signed in 1795. Unlike Cayuga, “this case, by contrast, involves a delay of just over ten years. Although ten years is not an instant, the difference between a ten-year delay and a 200-year delay is one in kind, not of degree.” Another circumstance where laches may apply is when the government action pertains to an adjudication of private rights. As to that circumstance, the court noted that “few areas of government activity are more canonically sovereign than taxation.”

Parting Thoughts

It does to me seem odd that the government has no limits on when it can assess these (and some other) penalties. Over the last couple of decades there has been a vast increase in the number of civil penalties in the Code. When Congress gets around to revising the civil penalty regime, it would be well served to look at these non return based penalties and impose some outside limits on when the government can  assess these penalties.

 

Oral Argument This Week on State Qui Tam Action Involving Citigroup

Readers may recall from fall of 2015 a post by Professor Eric Rasmusen discussing a New York State False Claim complaint he filed in connection with allegations that the government’s purchase of Citigroup stock should have triggered Section 382 to apply to limit the bank’s net operating losses. The matter has been removed to New York State court and is scheduled for oral argument this Wednesday. Professor Rasmusen has posted lots of useful information (including briefs) about the case here.

The main issues before the court are the following:

1. Does Citigroup owe the taxes?
2. Should Citigroup know it owes the taxes? (scienter)
3. Is the qui tam suit based on information “publicly disclosed in the news media and government reports”?
We will keep you posted.

ABA Tax Section Preview: Panels of Interest, Appeals Comments and Olson Wins Distinguished Service Award

Keith and I are off to the ABA Tax Section meeting in DC this week. We will report back on some of the highlights; both Keith and I are speaking. Keith is on a panel today discussing issues small businesses confront when things do not go well, including trust fund recovery and bankruptcy issues.

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I am moderating a panel tomorrow that will feature two former PT guest posters, David Vendler and Caleb Smith. David and Caleb will be focusing on information reporting issues; David will be looking at interest reporting arising from transactions relating to homeownership (e.g., loan modifications, short sales). As David has discussed here before, the issue is timely: it is part of the recent IRS guidance priority and David is lead attorney in a class action suit that alleges banks are systematically underreporting interest to millions of consumers. Caleb will be looking at systemic approaches to information reporting, looking at student loan discharge as a case study, a topic he has also discussed in PT here.

On Saturday I will be on a panel moderated by former guest poster, current Tax Court clerk (and Villanova Law alum) Lany Villalobos with the National Taxpayer Advocate Nina Olson, EITC expert Steve Holt, and Congressional Research Service staffer Margot Crandall-Hollick; the panel will focus on tax benefits for working families, with an eye toward future reform proposals.  I will look at two recent cases as a platform to show how the current EITC often entraps individuals, contributing to the high improper payment rate. This is a topic of a brief essay I am finishing and hope to discuss in more detail in PT once it is done.

In addition to hosting meetings, the Tax Section submits many comments. Earlier this week, the Section submitted a set of comments looking at recent Appeals changes and suggesting improvements. Those comments are quite good and are linked here.

Finally, the ABA Tax Section is recognizing National Taxpayer Advocate Nina Olson this weekend with its Distinguished Service Award in honor of her service to the ABA Tax Section, the government and the tax system generally. Former ABA Tax Section Chair Michael Hirschfeld wrote a brief article discussing some of Nina’s career highlights. In it he shares a terrific story involving Keith and Nina meeting years ago to discuss Nina’s prescient idea to have tax clinics help the unrepresented in tax disputes.

District Court Grounds NetJets’ Refund Suit

NetJets Large Aircraft v US, a recent case out of the Southen District of Ohio, [free link not available], illustrates some of the nooks and crannies that taxpayers must navigate in refund suits. Being right on the merits is not enough. Filing a timely claim for refund is a jurisdictional requirement, even when the circumstances are clear that the government knows that a taxpayer wants its money back. Most of the times when there is a dispute about timeliness of a claim the issue revolves around a taxpayer filing a claim too late. Sometimes, as in this case, a claim for refund can also be too early.

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IRS assessed NetJets and related entities air transportation excise taxes on a variety of fees that the fractional jet company collected from its customers. For a court to have jurisdiction over a refund suit, taxpayers must under the Flora rule fully pay the tax, file a refund claim, and if the Service denies the claim, file a refund suit in federal court. As a divisible tax, under Flora, NetJets only needed pay the amount of excise tax due on an individual transaction for each tax quarter at issue to gain standing to challenge the entirety of the assessment.

NetJets payed a representative amount of tax, and then filed a claim for refund on the amounts it paid.(As to whether an amount is considered representative to meet the Flora divisible payment exception see an earlier two-part guest post by Rachael Rubenstien here ). After the Service denied the claim, it filed a suit seeking 1) a refund of the amounts it paid and 2) an abatement of the unpaid amounts the IRS had assessed for other transactions that IRS felt were subject to the excise tax.

Here is where it got tricky for NetJets.

During the pendency of the suit, IRS applied overpayments from other periods to the unpaid assessments that were at issue in the refund suit.  NetJets won on the merits in the refund suit and then filed a motion to make sure that the district court’s final judgment included an order that directed the Service to pay back the tax that were originally listed in the complaint as well as the overpayments that the IRS had applied during the pendency of the suit.

For support for its motion, NetJets relied in part on Fed R Civ Proc 54(c), which states that ‘[e]very . . . final judgment [other than a default judgment] should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.'”

The Service disagreed, and in opposing the motion argued that the US had not waived sovereign immunity with respect to the overpayments it had applied to the unpaid assessments during the pendency of the refund suit. In particular, the government leaned on the jurisdictional requirement in Section 7422 that a tax refund suit cannot be brought until a claim has been filed and the rule in Section 6511(b)(2) that “no credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in [Section 6511(a)] for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.”

While the government agreed that NetJets had filed a refund claim, it filed its claim before the Service had applied the later overpayments to the assessments that were at issue in the case. According to the government, its earlier claim was not a claim with respect to the later amounts. The evidence in the record did not indicate that NetJets filed a formal claim for those other applied amounts; nor did it amend its pleadings to specifically allege a return of those funds. While the government agreed to abate the unpaid assessments, it would not refund any of the amounts that were applied to the assessment after NetJets filed its original refund claim because there was no separate claim filed with respect to those latter amounts.

The district court agreed with the government, looking primarily to the statutory language in Section 6511(b)(2). To get around that statute’s rather clear language that tethers the government issuing a refund to a taxpayer filing a claim, NetJets argued that a plain language approach to the issue failed to effectuate legislative intent (preventing the litigation of stale claims) and produced an absurd result. The court disagreed, initially noting that Section 6511(b)(2) had no exception for divisible taxes and that the broad language of the statute suggested perhaps an intent that was not so clear to discern.

As to the absurdity of requiring a taxpayer to file a separate claim when litigation was already pending, the court disagreed with NetJets:

Plaintiffs point to the apparent absurdity of filing a new refund claim when the Court has already determined that the underlying tax assessment cannot be collected. The application of § 6511(b)(2) in this case is, admittedly, tedious. But it is hardly absurd. Where the IRS retains overpayments and applies them toward a divisible tax liability for which a claim has already been filed, the taxpayer, to comply with § 6511(b)(2), must take a simple action: file a new refund claim. And contrary to Plaintiffs assertion, a refund claim is not only a “challenge [to] the lawfulness of an underlying tax assessment.” More mundanely, and as relevant here, a refund claim is a formal request to the IRS for the return of a taxpayer’s money. See 26 C.F.R. 301.6402-2. Filing a refund claim does not become a superfluous task simply because the lawfulness of the underlying assessment has already been determined.

Conclusion

This is a harsh result for NetJets but the opinion suggests that all is not lost. While it is too late to file claim now, the opinion states that the government “hinted” that previously NetJets may indeed have filed another formal claim for some of the amounts. Moreover, the opinion discusses that NetJets may have submitted informal refund claims, though there was insufficient evidence in the record on that point, and a party who files an informal claim must also perfect that informal claim with a formal claim in order for a court to have jurisdiction.

While NetJets may be able to salvage some of its refund the lesson of this case is clear: if litigating a divisible tax refund suit taxpayers should be on the lookout for IRS applying any overpayments to the dispute that is at issue in the suit. Even if the taxpayer wins on the merits, absent a specific refund claim for those amounts, taxpayers are vulnerable to the government’s argument that it has not waived sovereign immunity.

NetJets Large Aircraft v US, 119 AFTR2d 2017-1246 (SD Ohio 2017)