Restitution Based Assessment and Tax Return Preparers: An Uneasy Mix

At last week’s ABA Tax Section meeting in Chicago one of the panels I enjoyed most was the Civil and Criminal Tax Penalties discussion on tax preparer fraud moderated by Sara Neil of Capes Sokol (whose colleague Justin Gelfand has written on identity theft for us as a guest), with Scott Clarke from DOJ, Matt Mueller from Wiand Guerra King in Tampa and Paula Junghans from Zuckerman Spaeder in DC.

The panel’s materials included a 2015 case, United States v Horn, from the district court in Maryland. Horn involved a hearing regarding whether a return preparer who had pleaded guilty to one count of preparing and filing false returns in violation of 26 USC 7206(2) should be required to pay restitution. The opinion is by Judge Marvin Garbis, a former tax practitioner and author of books and articles on tax procedure. I do not know Judge Garbis personally but I recall one of my mentors Michael Saltzman admiring him for his tax procedure chops (no small feat as Michael’s talent was matched by a healthy and justified sense of tax procedure ego).

The opinion concludes for very practical reasons that the IRS should not be able to make a restitution based assessment (RBA) against Horn, and how it gets there rings some interesting tax procedure bells that I found worthy of a post.


Facts and Legal Background

The parties stipulated that the preparer Judianne Horn provided 16 clients with tax returns that listed false deductions on Schedule A or false business losses on Schedule C. The stipulation laid out over a four-year period the understatements of tax liabilities on a year-by-year basis for Horn’s clients. The total understatement of tax liabilities for the 42 federal tax returns (not every client had a return filed in every year) was $281,764.

We have recently discussed in the revision to Saltzman and Book the 2010 legislative change codified in Section 6201(a)(4)(A) that allows the IRS to assess and collect restitution under an order in Title 18 section 3556 “in the same manner as if such amount were such tax.” We discussed restitution based assessments in SaltzBook Chapter 10 (dealing with assessments) and in Jack Townsend’s redo of Chapter 12 (dealing with tax crimes); Keith also discussed it in PT in a post last year.

There are lots of interesting issues that spin off this important administrative power, and Horn raises one, namely whether the IRS has the ability to use RBA powers when the offense at issue relates to a preparer’s misconduct that implicates multiple taxpayers with multiple tax liabilities.

As the opinion describes, Section 6201(a)(4)(A) results generally in the IRS substituting itself for district courts when it comes to the payment of a restitution obligation. As an example of this, the opinion notes that an RBA “effectively eliminates the power of the district court to provide for periodic payments of restitution in amounts determined by the court subject to revision should the defendant’s financial circumstances change.”

The Tension Arising from Restitution Based on Third Party Liability

The rub as Judge Garbis describes was that when restitution is based on tax liabilities of others (such as but not exclusively when the defendant is a return preparer) it creates problems for both the courts and IRS in setting the proper amount but even more so perhaps in monitoring the payments going forward:

This creates a substantial level of complexity for determining the amount of restitution to be imposed and imposes a substantial management burden on the IRS and the court to monitor, not only in the application of restitution payments made by the defendant but also collections made by the IRS from taxpayers whose liabilities are the subject of the restitution order.

To fully appreciate this statement it is necessary to contrast loss for sentencing guideline purposes and restitution. The $281,764 understatement I referred to above determines loss for sentencing guidelines purposes. The loss for guidelines purposes exists irrespective of any post-offense circumstances, whereas the nature of restitution in the tax context makes those very post-offense circumstances quite relevant:

The function of restitution is to require a defendant to restore to the victim of a crime the loss caused by the defendant’s criminal conduct. A restitution award is not to be issued for punitive purposes or to provide the victim with a profit. Thus, the amount of restitution should not exceed the loss to the victim actually cased by the defendant.

The Horn opinion brings this back to the IRS:

In the context of a false federal income tax return, the actual loss to the IRS for which restitution should be paid is the deficit in tax collected with regard to the return in question-i.e., the amount of tax that would have been reported due on an accurate, correct tax return and paid, reduced by the amount collected by the IRS with regard to that return. (emphasis added).

Moreover, as the opinion notes, the actual loss to the IRS for restitution would have to take into account the tax liability reported as if the returns were properly filed, including deductions or credits that the taxpayers failed to originally claim. The proper amount of tax liability would also be reduced by the amount reported to the IRS on the false returns as well as “reductions in the restitution balance due as the IRS received payments and applied them to the tax liability understatement for the return in question.”

Given that the liability at issue here turns on third parties (the taxpayers whose returns Horn prepared) the opinion notes that the task would be dependent upon both “the number and complexity of the substantive issues presented in a particular case.” The process for defense counsel was as Judge Garbis describes one that would essentially require counsel to inquire into all 42 returns:

Defense counsel could be accused of a failure to provide effective assistance unless he/she reviewed the IRS’s proposed adjustments to each of these 42 returns, presumably with the assistance of a qualified tax professional.

Judge Garbis notes that the review should lead to some process (at cost that may be borne by the State if the defendant is represented by appointed counsel) whereby the defendant could access records and even potentially interview witnesses in a search for offsetting adjustments.

Contrasting Restitution Based Assessment with Restitution That is Not Assessed

The opinion notes in footnote 8 that “there may be reasonably debatable issues” as to whether the IRS can make a restitution based assessment in this case though the court for purposes of the order assumed that it could. I will take a quick stroll through that issue. Recall that Section 6201(a)(4)(A) provides that the Service may only assess an amount of restitution ordered “for failure to pay any tax imposed under [Title 26].” As the Service itself explained in a notice issued in 2011 “not every conviction in a Title 26 criminal case will result in an order of restitution that will be assessable.” Whether the IRS can use its RBA powers as the IRS in the notice from 2011 explained is based on whether the “restitution ordered is traceable to a tax imposed by Title 26 (e.g., cases stemming from an underreporting of income, an inflated credit or expense, or an alleged overpayment of tax that results in a false refund)….”

Not every restitution order connected to a Title 26 offense is within the reach of 6201(a)(4)(A):

On the other hand, criminal cases in which the restitution ordered is not traceable to a tax – such as when a taxpayer submits false documents or tells lies during an examination – may not result in assessable restitution.

Whether aiding and assisting in preparing and filing someone else’s tax return constitutes an amount of restitution ordered “for failure to pay any tax” is a question that the Horn opinion sidesteps and that I suspect other opinions may tackle, though IRS lists in its 2011 notice the 7206(2) offense Hom pleaded guilty to as an offense that “may” meet the requirements for assessment.

Back to the Horn opinion and what it does address. In discussing RBA, the opinion notes that once restitution is assessed, the IRS can use its full collection powers, with the assessment also subject to interest and late payment penalties.

In contrast, when there is restitution that does not result in an RBA, the opinion emphasizes the broad discretion that solely resides in a sentencing court:

However, when issuing a restitution order that does not result in an RBA, a sentencing court can exercise its discretion and decide whether to set a fixed date for payment in full or a schedule for partial payments consistent with the court’s finding regarding the defendant’s financial circumstances.The opinion illustrates the discretion with examples as to what the court (unlike the IRS) might do: Often, when a defendant does not have the ability to make full payment immediately, a sentencing court will defer all, or part, of the payment obligation during the time a defendant is incarcerated and will set a periodic payment schedule with the first payment due when the defendant is released from prison. The restitution order can provide that the amount of each periodic payment is subject to change depending upon changes in a defendant’s financial circumstances. The sentencing court can require, or waive, the accrual of interest on the unpaid balance. There will be no automatic “late payment penalty” applied to any unpaid balance of the full amount of restitution. Rather, the district court would consider imposing a sanction for a failure to make a restitution payment, taking into account the court’s determination of the defendant’s financial ability to meet the obligation.

Managing Restitution 

The opinion notes the important distinctions between the way the IRS and sentencing courts manage or monitor the receipt of restitution payments.  First, the opinion describes how courts manage the process:

In the absence of an RBA, a defendant’s restitution obligation is reduced, dollar for dollar, as the defendant makes payments pursuant to the restitution order.

IRS on the other hand treats payments made pursuant to an RBA as involuntary, with IRS having discretion to allocate the payments as it chooses among tax, interest and penalties. IRS may even, as the opinion notes, allocate payments to any other of the defendant’s own assessed liabilities that are wholly unrelated to the offense giving rise to the RBA.

The IRS’s discretion is amplified when the restitution relates to an order stemming from a return preparer’s criminal offense, with the IRS having the ability to allocate payments “among the taxpayers and income tax returns for which restitution would be due.”

Judge Garbis thus sets the stage for an administrative mess that led in part to his concluding that he would not order restitution in the case. Recall that when imposing restitution the IRS is not to collect more than the correct amount of tax at issue. When there are multiple taxpayers and multiple potential assessments and collections from those third parties, unless there is a process to track those payments and allocate the payments to the individual liabilities it would be very difficult for the IRS to represent to the court that it would limit its collection on the preparer’s assessed restitution to reflect its collection from those third parties whose returns the IRS would presumably examine.

Somewhat surprisingly, the IRS attempted to minimize the administrative burdens with a representation that it would not seek to enforce the laws with respect to the 16 taxpayers who benefitted from Horn’s illegal actions:

[T]he Government has taken the position that it will not seek to collect income tax underpaid by – or, better put, unwarranted refund payments made to – the taxpayers who filed the false returns.

Perhaps IRS did so because it wanted precedent on the books that it could get restitution in a case such as this, or perhaps it did so because it knew that resource constraints limited it from examining those 16 taxpayers and the 42 returns at issue (I won’t even go the SOL issues stemming from third party fraud, an issue we have spoken about in the BASR v US case in a guest post by Robin Greenhouse).

In any event, in a part of the opinion that appeals to my Introduction to Federal Income Tax professor hat, Judge Garbis pointed to the potential tax issues created when a preparer would make restitution payments that would benefit her clients by offsetting their tax obligations:

Nevertheless, unless the I.R.S. can make a decision to grant these taxpayers a gift from the Department of the Treasury, it should seek to have these taxpayers comply with their future tax obligations. Hence, if the Defendant were now to make a restitution payment that is applied to a tax liability of W.W., a taxpayer who obtained more than $17,000 of unwarranted refunds, it would appear that W.W. would have taxable income in the year of the Defendant’s payments.

This conclusion relates to the notion illustrated in cases such as Old Colony that a person has gross income when someone else pays that person’s tax on his or her behalf. The Horn opinion thus states that even if the IRS were not going to examine the prior returns to reflect ensuring past compliance, “the I.R.S. should monitor continually its application of restitution payments and ensure future tax compliance by the taxpayers to whose tax liabilities the payments are allocated.” While I have not fully thought through the Old Colony issue that Judge Garbis raises (for example, is the possible inclusion of income dependent upon there being an assessed liability agains the taxpayer?), the discussion at least implicates issues of coordination and the mechanism that the IRS would or should use to credit any restitution payments against individual taxpayer liabilities.

The Court Concludes that Restitution is Not Appropriate

Having I think established that the IRS desire to seek an RBA in this case created a number of vexing issues, the opinion expressed doubt as to whether the IRS was up for the task of managing and monitoring on a going-forward basis:

Indeed, it appears doubtful that the I.R.S. can, realistically, keep the Defendant and the Court (Probation Officer) informed of its application of Defendant’s payments. Moreover, the Government has described no coherent existing, or proposed, practicable process for keeping track of, and advising the Court (Probation Officer) and Defendant of, the status of payments made by, or collected from, taxpayers with respect to tax liabilities included in the restitution amount.

The “bottom line” is that if a tax return preparer defendant is unable to make more than modest partial payment of the restitution obligation, then a restitution order resulting in an RBA would impose a monitoring obligation on the I.R.S. and the Court (i.e., the Probation Officer) that, if at all possible to meet, would cause disproportionate managerial problems for the I.R.S. and the Court. (footnotes omitted).

The complexity and “disproportionate management burden” on the IRS and the court thus led to the conclusion that it was inappropriate to issue a restitution order. That burden was exacerbated by the financial circumstances of the defendant, as the court noted that a restitution order causing an RBA might be appropriate perhaps when “prompt, full payment can be required.” The opinion concludes by noting that it could have required restitution that would not have led to an RBA but that it chose not to in this case.

Parting Thoughts

Jack Townsend has noted that the relatively new RBA powers create some administrative challenges even when the restitution relates to an offense stemming from the defendant’s own tax liability (see his 2014 discussion of Murphy v Commissioner and procedures associated with RBA over at his Federal Tax Crimes blog here, with its sensible recommendation that IRS issue regs under the RBA statute).

The Horn opinion touches on some practical and legal challenges associated with an RBA that implicates third parties and their respective tax liabilities. In an email exchange over this case Jack offers the observation that “some of the real or imagined administrative problems that Horn raises could be solved by simply wiping off restitution on the criminal side once it has been assessed.”  As Jack notes, that “would let the IRS’s collection tools work the way they always work. It would also take legislation.” While at it, Jack suggests that with the “IRS’s robust tax collection mechanisms delegating tax restitution collection to the IRS and getting the courts / probation office / U.S. Attorney out would be a good use of limited resources.”  Jack also suggests that it would make sense for any delegation to the IRS include the IRS having the power to compromise the assessed restitution. 

IRS and DOJ have many tools at their disposal to go after crooked preparers, but Horn serves notice that at least among judges willing to inquire how the IRS will go about its business, the IRS may not be able to use an RBA when it comes to convicted preparers.



Impact of Bankruptcy Determination of Tax Liability on Tax Court Case and on Assessment Timing

When a taxpayer goes into bankruptcy, a new forum for tax litigation opens up, or potentially opens up, based on section 505 of the Bankruptcy Code. This section provides in pertinent part that “the [bankruptcy] court may determine the amount or legality of any tax, any fine or any penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, ….“  The recent case of Snyder v. Commissioner provides insight into the impact of a bankruptcy decision on the merits of a tax liability on a Tax Court case.  It also demonstrates the res judicata effect of the Bankruptcy Court’s decision on the tax matters decided in the case.

The Snyders appear comfortable in bringing court actions. Here, we see the result that court proceedings can have on the statute of limitations.  The recently decided Tax Court case in a collection due process (CDP) case concerns the tax years 1988 and 1989.  Because of years of litigation and a late start to the assessment of the liabilities for those years, the statute of limitations on collection remains open and still has years to run.


While it is not clear from the recent Tax Court opinion what caused the mailing of the notice of deficiency for 1988 and 1989 on September 25, 1997, the mailing of that notice appears timely based on the absence of a challenge. The Snyders timely filed a Tax Court petition based on the notice of deficiency and proceeded toward trial in Washington DC on a trial calendar scheduled to start on March 15 (the Ides of March), 1999.  On that fateful day the Snyders filed a chapter 13 petition in the bankruptcy court for the District of Maryland.  Filing the bankruptcy petition invoked Bankruptcy Code section 368(a)(8) of the automatic stay and stopped the Tax Court case in its tracks.  Although the opinion does not state why the Snyders chose this day to file their bankruptcy petition, I suspect it had much to do with pending Tax Court trial and little to do with the anniversary of the death of Julius Ceasar.

Having filed the bankruptcy proceeding, the Snyders decided to avail themselves of the new forum in which to litigate their tax matter; however, it took over four years, until April 18, 2003, before the bankruptcy court issued an order concerning their liability.  The Snyders appealed the order of the bankruptcy court, the District Court remanded the case for further consideration and over three years later on October 30, 2006, the bankruptcy court issued an order on remand determining that the notice of deficiency was proper and the Snyders owed about $150,000 for the two years combined.  They appealed again and this time went even to the Fourth Circuit which upheld the bankruptcy court’s determination on May 11, 2007.

All this time the Tax Court case remained open and suspended. While the bankruptcy court took over the litigation of the merits of the Snyders’ liabilities for 1988 and 1989 and while the automatic stay suspended the Tax Court proceeding, the end of the merits litigation on the bankruptcy side of the case did not terminate the Tax Court case.  In these circumstances, the Tax Court enters a decision once the stay lifts.  The decision document entered in the Tax Court case mirrors the decision of the bankruptcy court and serves as the action that allows the Tax Court to close its case.  Usually, the Tax Court orders the parties to provide status reports on the progress of the bankruptcy case during the period of the automatic stay.  Without looking at the docket sheet in the case, I imagine that the attorney for the IRS in this case filed numerous status reports over the eight year period the case worked its way to resolution in the bankruptcy court process.

So, the IRS finally won a victory allowing it to assess a tax liability for tax years that ended approximately 20 years earlier. In the recently decided CDP case the Snyders argued that the IRS jumped the gun in making this assessment.  It is this argument and its resolution that provides the most interesting aspect of the case for me because very few cases illustrate the interplay of the bankruptcy and Tax Court decisions as they impact the timing of the assessment.  Before we get to the discussion of the resolution of the timing of the assessment, it is necessary to set the scene by talking about the collection due process case.

On May 11, 2007, the Tax Court entered its order determining the amount of the deficiencies for 1988 and 1989 in the Tax Court case filed almost ten years earlier in December 1997. I can only imagine that someone in the Tax Court clerk’s office was glad to get that case off of their desk.  The IRS assessed the taxes for those years on July 23, 1997 – 73 days later.  Upon making this assessment the IRS should have sent notice and demand letters to the taxpayers within 60 days.  Because the Snyders put this at issue in the CDP hearing the Tax Court determined, based on certified transcripts provided by the IRS, that notice and demand went to the Snyders on July 23 and August 27, 2007.  The timing of the notices falls well within the 60 day period required by IRC 6303.

Having sent notice and demand, one can only imagine without seeing the entire file of the IRS that the IRS sent other notices to the Snyders and they did not pay. Because this case bears the Docket Number 8740-13L, I conclude that the IRS eventually sent the taxpayers a notice of intent to levy or filed a notice of federal tax lien, or both, and that the collection action caused the Snyders to timely request a CDP hearing.  The Tax Court case does not mention when the CDP notice issued so determining how long the case sat in Appeals is not possible based on the opinion.  Unless it sat in Appeals a long time, it took the IRS several years after making the assessment to get to the point of issuing the CDP notice that gave rise to the most recent Tax Court case.  Given the amount of the liability, I would have expected the IRS to quickly file the notice of federal tax lien which would have triggered an opportunity for a CDP hearing; however, this timing issue does not come out in the opinion just as the length of time the case spent in Appeals does not come out.  No matter the timing of the collection actions or the Appeals consideration of those actions, Appeals eventually issued a determination letter upholding the collection action and taxpayers petitioned the Tax Court on April 22, 2013.

The four page electronic Tax Court docket sheet on the CDP case shows that the Snyders take litigation seriously. They filed a series of motions and discovery requests from the outset of the case.  The IRS filed a motion for summary judgment on November 7, 2014, over 18 months after the filing of the petition.  The Tax Court decision accepts the IRS motion for summary judgment and does so because almost all of the issues raised by the Snyders in the proceeding such as the validity of the original notice of deficiency, the amount of their deficiency and the innocent spouse status of Marion Snyder were previously decided by the bankruptcy court and cannot be relitigated in CDP proceeding based on the principle of res judicata.  This portion of the opinion provides a routine application of res judicata in the various issues raised again by the Snyders.

As mentioned above the interesting aspect of the case comes in the discussion of their attack on the timing of the assessment. The assessment occurred 73 days after the entry of the Tax Court’s decision.  The Snyders argued that IRC 6213(a) prohibited the IRS from assessing the tax until 90 days after the entry of the Tax Court decision due to section 7481(a)(1).  Because of the prior determination of the bankruptcy court, section 6213 does not control the assessment date in this case as it does with most Tax Court litigation.  Instead, section 6871(a) controls.  Rather than creating a 90 day waiting period, section 6871(a) “provides, in part that any deficiency with respect to income tax determined by the Secretary may be assessed immediately, despite the restrictions imposed by section 6213(a) on assessments, if the liability for the tax has become res judicata pursuant to a determination in a bankruptcy case under title 11 of the United States Code.  See Freytag v. Commissioner .  Thus, when a tax liability is determined by the bankruptcy court, the restrictions imposed on assessment by section 6213(a) do not apply, including the restriction that the Commissioner wait until the 90-day period expires before making an assessment.”

Because the bankruptcy court had previously determined that taxpayers owed a deficiency for the taxes, the decision of that court on the liability was res judicata at the time of the entry of the Tax Court decision even through an appeal of the bankruptcy court’s finding were on appeal to the Fourth Circuit. The Tax Court also rejected the arguments of petitioners that the IRS did not follow its own manual procedures regarding the assessments saying that the manual does not control the legality of the assessments and that the assessment was legal pursuant to section 6871(b).  While this outcome does not set precedent, it provides insight into the processing of a case where the taxpayer invokes the right to litigate in bankruptcy after initially petitioning the Tax Court to decide the proposed deficiency.



Summary Opinions for 02/06/15

As always, a special thanks to Carlton Smith for his post on the Eighth Circuit oral argument on “separate returns” under Section 6013(b)(1) in Ibrahim.  The comment to the post raises a related issue, which Carl responded to and is worth practitioner review. More in the way of comments: Les’ post on proposed legislation kicking around that would address appellate venue in CDP cases drew some worthwhile comments from Carl and frequent commentator JT discussing the implications (and shortfalls) of the proposal.

And, even though it is immediately below this post, I do want to draw attention to Les’ post on the Villanova Graduate Tax Faculty position. I cannot speak from a faculty perspective, but as Les indicated I did receive my LLM in taxation from the traditional program.  The program offers a great mix of academic and practitioner resources to the students, and I feel that translates to the program itself.  I found the student population to be driven and smart. It seems as though everyone at the school is very excited about the expansion of the program and the role the new faculty would be taking on.

To the procedure:

  • Finally, the IRS has told me how to keep the books for my illegal drug business.  See Chief Counsel Memo 201504011.  Chief Counsel has explained how those of us trafficking in Schedule I and Schedule II controlled substances should capitalize our inventoriable costs.  I’m sure the accountants for the drug dealers will adjust accordingly.  You think I would have picked up something regarding tax from this, but really I was just surprised that marijuana is a Schedule I “hallucinogenic substance”.  I guess you are not really tired and hungry, you are just hallucinating that.
  • From The Taishoff Law Firm, a post on the American Airlines v. Comm’r Tax Court case, where the Service argued the court did not have jurisdiction to review the Airline’s challenge of employment taxes on certain flight attendants because of a prior “RA ’78 Sec. 530 determination.”  From the blog:

Notwithstanding anything to the contrary hereinabove stated, as my two-Martini-lunch colleagues say, and an earlier IRS audit that accorded the cabineers RA ’78 Sec. 530 relief (once a non-employee, always a non-employee), IRS comes back trying to hit AA with FICA, FUTA and all that jazz.

Now there is a material fact (did AA change how they treated the cabineers since the audit years they got off on?), so all we have is partial summary J: does Tax Court have jurisdiction?…

IRS hangs its fifty-mission-crush on Section 7436(a), but wants to ignore Section 7436(a)(2), which specifically mentions RA ’78 Sec. 530 determination. IRS claims neither Section 7436(a)(1) nor Section 7436(a)(2) gives Tax Court jurisdiction.

You’ll have to check out Mr. Taishoff’s blog for the rest.

  • Its tax time, meaning it is time to collect up your W-2s and 1099s, try to find receipts for all those deductions, wish the government would get out of your pocket, and…head butt the heck out of some tax preparers.  The craziest aspect of this story is the head-butting woman didn’t make it on to that People of Walmart webpage (which I’m not going to link to—SumOp is classier than that, even if we do know that webpage exists).  This seems to happen every year now.  Perhaps tax preparation training should include some aspect of self-defense.
  • USVI and its crazy tax credits have appeared quite a bit in SumOp over the last year.  The Service lost another case in Estate of Sanders v. Comm’r.   The Tax Court looked at the recent Vento and Appleton cases out of the Third Circuit and found that the decedent qualified as a USVI resident.  The law firm of Solomon Blum (who I know nothing about) has a nice summary found here.
  • The Third Circuit confirmed the holding of the district court in Patterson v. USVI, where the court found that the Virgin Island Bureau of Internal Revenue (VIBIR) did not have any overpayment from which a refund could be given to the taxpayer.   In the case, the government (here USVI) failed to file any response after getting a handful of extensions.  After chastising government attorney, the Court held that it still had to review the matter.  The salient facts are that Patterson alleged he was a USVI resident.  He paid about $813k to the IRS in the year in question to be applied to his USVI tax debt.  Later, he filed a tax return with VIBIR showing an overpayment of $179,000, requesting a refund of the same, which he never received.  After receiving the payment, the IRS opened an audit to determine if Patterson was really a resident (which it determined was not the case), and contemporaneously VIBIR sought to have the funds transferred to it from the IRS.  The funds were never transferred.  The Code provides that the IRS is supposed to transfer USVI residents’ payments over to USVI, and the taxpayer can take those into account regardless if the transfer actually occurs in determining their tax due to USVI.  The taxpayer argued the “regardless of transfer” aspect should allow him to obtain a refund.  The Court, however, held that the regulation did not direct how a refund was to be obtained, and, for a variety of reasons including the IRS position on his residency, it was not clear he had a valid claim.
  • A lot going on in those tiny islands.  In US v. Bailey, the Third Circuit confirmed the convictions of two individuals for conspiring to defraud the US and evade USVI taxes.  Jack Townsend has extensive coverage on his Federal Tax Crimes blog, found here.  Jack’s summary of the case is:

As described in the opinion, the principal scheme appears to be just garden variety enabler tax fraud.  The defendants were principals in a Virgin Islands company that billed U.S. taxpayers for “services” never rendered and then, after the customers paid, returned most of the amounts to the taxpayers.  The U.S. taxpayers deducted the payments for “services” and treated the amounts returned as “gifts.”  The defraud conspiracy charged related to this conduct. The VI company also claimed certain tax credits against it VI tax liability that it was not entitled to.  The offense conspiracy charge related to this conduct.

 Mr. Townsend then goes on to outline eight findings and holdings, highlighting what he views as important.

  • The Tax Court tossed an IRS determination to reject an OIC and move forward with a levy as an abuse of discretion in Estate of Sanfilippo v. Comm’r.  In Sanfilippo, the original settlement officer and the estate were in serious negotiations over a long period of time regarding the value of assets in an estate and the appropriate amount of tax due (pretty big estate, worth around $63MM at one point).  A second settlement officer took over the case, quickly came to a determination and rejected the OIC.  The Court found the settlement officer failed to properly analyze the situation.  Somewhat surprising that the settlement officer would move so quickly on such a big estate.
  • The 11th Circuit precluded the review of a guaranteed payment issue based on collateral estoppel in Wallis v. Comm’r.  Mr. Wallis was a tax partner at Holland and Knight who left the firm in 2002.  He was entitled to around $338k based on his capital account and interest in the firm (hmm, I need a better capital account), which was paid out over a couple years.  He was audited in one year, and argued that a portion was not taxable –lost- and that a portion was capital gain and not ordinary income—lost.  He later tried to make the same arguments before the courts for different tax years, which the Tax Court and 11th Circuit both indicated were barred by collateral estoppel.  The Courts found that the identical issues were brought and decided before, that Wallis was a participant in the prior hearing, and the issues was fully litigated in the prior preceding.


Summary Opinions for 1/6/15-1/23/15

Les and Keith ditched me for the end of last week, while they both attended the ABA Tax Section Meeting (much more on that to come).  Thankfully, Carlton Smith provided two guest posts.  One was on unpublished CDP orders and how those can implicate substantive and other important procedural matters, and a second on his victory in the Volpicelli equitable tolling case out of the Ninth Circuit.  Thanks again to Carl for both of those and a big congratulations on the important victory.

To the other procedure:

  • A couple cases on administrative costs are first up.  First Milligan v. Comm’r, where the IRS clearly did a poor job handling the taxpayer’s appeal, filing it incorrectly, not acting promptly (probably being difficult to contact), and requiring the Taxpayer Advocate to intervene.  Based on Section 7430(f)(2), the Tax Court correctly held that the IRS CP 2000 notice and Letter 105C denying the refund were not the “position of the United States” as required under the statute.  For the statute, the “position” only arises under a notice of decision by Appeals or the notice of deficiency.  Prior to that date, the IRS’s position and actions don’t count for fee shifting, and fees are not available.
  • Switching to a taxpayer win, the District Court for New Hampshire in United States v. Baker held that the Service was not substantially justified in its position that an ex-wife’s real estate was subject to a lien from her ex-husband’s tax liability because the divorce decree (and/or deed) was not recorded transferring the property to the wife pursuant to the divorce (which occurred before the lien arose).  We covered the underlying case in SumOp last year here.  The District Court found the position was contrary to the First Circuit’s law on the topic and awarded costs to the real estate owner.
  • Moving to a different topic, Steven Mopsick published “IRS to Issue More Tickets to the Tax Court in 2015” on LinkedIn and his blog last week, which discusses changes to Letter 5262.  Mr. Mopsick indicates that the changes to the document make it clear that if a taxpayer isn’t prompt in following requests for information (Form 4564), the taxpayer will no longer be able to remove the issue to Appeals in nondocketed cases, and will instead get a 90 day letter directing him to the Tax Court (where he could go to Appeals, but as a docketed case).  I have not looked into this further than Mr. Mopsick’s post.  In the post, it seems to indicate this is being done to reduce the Appeals backlog.  If this is correct, it will be interesting to see if there is an increase in small tax court cases over the next year or two, and a corresponding decrease in Appeals cases.  If, however, Appeals cases decrease, while Tax Court filings remain the same, it may indicate many taxpayers are not receiving review that they otherwise may have obtained.  Given the frequency with which the IRS is incorrect and Appeals high success rate in settling matters (when someone can actually review the matter), this would be unfortunate.  It would be interesting to see how often Form 4564 is issued, in what types of matters, and for what income groups.  Similarly, it would be interesting to see who is not responding.
  • The District Court for the Western District of Wisconsin has tossed a complaint by the Freedom from Religion Foundation (I wonder what percentage of its constituents are ten year old kids who don’t want to go to church every Sunday), which sought to block the IRS from granting churches and religious organizations exemptions from reporting requirements under Section 6033.  FFRF claimed that the Code section violated the establishment clause and the equal protection clause.  FFRF lost a similar case in November of 2014 regarding parsonage allowances.  The District Court, largely following the 7th Circuit, found that FFRF did not have standing, as it had never sought the exemption.
  • The Tax Court, in Lee v. Comm’r, denied the government’s motion for summary judgment on a taxpayer’s challenge to its lien imposition for failure to serve letter 1153.  The Court stated that whether the letter was served was a subject to a genuine dispute as to a material fact, and, further, whether the letter was properly issued was  a requirement of the statute that the Court would review regardless of whether the taxpayer raised the issue in his CDP hearing.
  • Last year, SumOp covered the Julia R. Swords Trust v. Comm’r, a Tax Court case discussing transferee liability and declining to apply the federal substance over form doctrine to recast a transaction being reviewed under Section 6901.  The case, and various related cases, have been appealed by the Service to the Sixth Circuit.  In December, the trustees were successful in moving venue to the Fourth Circuit.  The Sixth Circuit found both circuits could be the appropriate venue.  The Court noted the Service sought review in the Sixth Circuit because it had not held on the underlying question (at least not against the Service).  Most of the action in the case had occurred in Virginia (not in the Sixth Circuit). The deficiency notice was issued in Virginia and the tax court petition was filed in Virginia, where the case was decided.  The Court noted that the Service conceded venue was appropriate in the Fourth previously, but that did not preclude venue in other locations; however, the trustees had relied upon the venue statement in filing their petitions to the Tax Court.  As such, it found the Fourth circuit more appropriate.  This could be a slight blow to forum shopping for the Service, and perhaps taxpayers.  I couldn’t find the case for free on line. Sorry.
  • The University of South Dakota has a football program!!!!!  I had no idea – It is DI also. The program seems pretty terrible at football, but apparently some of its former players are really good at committing tax fraud.
  • Jack Townsend’s Federal Tax Crimes Blog has the creepiest headline of the year, Foot Kissing Chiropractor Sentenced for Bribing IRS Agent.  I have two takeaways from the post. First, don’t try to bribe the IRS, you will probably go to jail.  Second, don’t try to bribe the IRS after admitting to being a weirdo, you will go to jail, and all kinds of news outlets and bloggers will circulate posts about you for the world to see.
  • In what appears to be a really terrible case, the district court for the Southern District of Ohio has upheld delinquency penalties against an estate for failure to timely file and pay estate taxes in Specht v. United States.  The executor of the estate was a high school educated homemaker who was around the age of 73.  She did not own any stock, and had never been to a lawyer.  When her cousin died, she retained her cousin’s lawyer, Mary Backsman, who had been an estates lawyer for decades and was well respected.  Ms. Backsman was also suffering from brain cancer at the time, and did not disclose this to the executor or various other clients.  The attorney claimed to be doing various tasks, including obtaining extension of time to file and pay tax.  She also claimed to be contacting UPS for assistance in selling a large amount of UPS stock, and handle various other requirements.  None of these tasks were actually done.  Eventually, the executor realized, and fired the attorney and sued her for malpractice.  Unfortunately, the attorney had similar issues with various other clients.

The executor hired a new attorney, filed the estate tax return, and paid all tax due.  The IRS imposed a huge amount of penalties and interest. Due to the above facts, the executor argued the failure to file was due to reasonable cause and not willful neglect.  Unfortunately, based on Treasury Regulation 301.6651-1(c)(1) and Boyle, the executor had not exercised ordinary business care, as reliance on an attorney to file does not remove the executor’s obligation to ensure the return is timely filed and the tax paid.  The Court stated the executor did not need to be an expert to determine the due date.  I’ve shared my frustration with this line of cases repeatedly in the past, but I do somewhat understand why the rule is crafted in this matter.  I would be interested to know how the malpractice case panned out.  The coverage may have a maximum payout amount, and if there were a bunch of these cases, the various clients could be dividing up a limited pie.  In theory, the executor could be held liable to the beneficiaries for anything not recouped.  Any result where the executor ends up responsible seem completely inequitable to me.

  • I’m not a fan of Hartland Management Services Inc. v. Comm’r either, which is a recent Tax Court case reforming a Form 872 that the IRS screwed up.  Just when you think you get lucky, with the IRS completely blowing something, the Tax Court comes in and bails them out.  Without getting too far into the facts, the taxpayer and various entities were being audited for multiple years.  During the audit, the Service needed to extend the statute for assessment to continue discussing the matters.  On the Form 872, the Service included the extended date as the date of the return being extended (so the form effectively extended the statute for assessment on a return that wouldn’t have been filed yet or would never be filed).  The Service and the taxpayer continued to discuss the matter, and eventually the Service assessed tax.  The taxpayer contested the validity of the assessment, because the Form 872 did not state the year of assessment.  The Court found a mutual mistake of fact, which was evidenced by the taxpayers’ actions before and after the signing of the Form 872.  Because of the mistake, the Court reformed the document to extend the appropriate year.  I wonder if the taxpayers had contemporaneous notes indicating they were happy to sign because of the IRS error, and then immediately ceased negotiations if the Court would have held differently.  Then it would have arguably just been an IRS error.  Although I’m not sure I can create a winning legal argument against this holding, it does seem there are a lot of situations where a taxpayer could make a similar error, which was accepted by the IRS, that would never be reformed to save the taxpayer.  For those interested in learning more about this topic, Saltzman and Book touches on contract principles applicable to Form 872 in the newly rewritten Chapter 8.08[4][b].

Summary Opinions for 11/21/14 to 12/5/14

Once again, trying to catch up and cover a few weeks in one SumOp post.  Before getting to the new items from the last three weeks, I wanted to give a short update on Hawkins v. Franchise Tax Board.  In September, A. Lavar Taylor wrote a two part guest post on the 9th Circuit’s holding, which can be found here and here.  The case deals with, as the guest post title indicates, “What Constitutes An Attempt to Evade or Defeat Taxes for Purposes of Section 523(a)(1)(C) of the Bankruptcy Code,” and a split found between the recent holding and other Circuits.  Carlton Smith shared with us last week that the Government sought en banc review, the debtor has responded, and the petition is now before the entire 9th Circuit to decide whether the review is appropriate or not.  Either way, some court may be reviewing soon, and we will let you know if we hear more.


I also want to highlight some really strong guest posts over the last three weeks, and thank all of our guest posters again!  The aforementioned Carlton Smith wrote on the Lippolis Tax Court jurisdiction case relating to the $2MM Whistleblower amount limitation.  Professor Andy Grewal covered the recent Petaluma FX Partners oral argument in the DC Circuit, regarding the scope of TEFRA jurisdiction when the underlying partnership is a sham.

A few first time guest posters also contributed over the last few weeks.  Rachel Partain, an attorney at Caplin & Drysdale, wrote on the LB&I policy restricting informal refund claims for taxpayers in exam.  And, finally, Jeffrey Sklarz, of Green and Sklarz, touched on the interaction between Section 6020(b) and Deficiency Assessments in the recent Radar case.

To the other procedure.

  • PWC provided a fairly comprehensive overview regarding the new information document request process.  The document outlines the history behind the changes, how the process works, and what occurs if the IDR is not responded to in a manner the IRS finds acceptable.
  • As I mentioned above, Carlton Smith had a write up on PT regarding the Lippolis case.  Tax Litigation Survey has added its thoughts here.
  • Two weeks ago, Jack Townsend on his Federal Tax Crimes Blog posted about a FOIA information dump regarding FBAR audits found on Dennis Brager’s web page.  You can find Jack’s post about it here.  The FOIA request resulted in over 6,500 pages of info.  Jack’s page has some good comments and responses.
  • Chief Counsel has taken the position that a company which acquired, pursuant to Section 381, another company that had taken TARP funds was subject to the same restrictions as the TARP company regarding NOL carrybacks.
  • Tax Girl has a well written story on Forbes about the Whistleblower case brought against Vanguard.  Vanguard is a huge financial company located in Chester County (same as me), which is known for its low cost investing options.  A prior in house tax attorney, David Danon, has brought an action under the New York False Claims Act regarding its internal transfer pricing for investment services, which he claims caused Vanguard to underpay its taxes substantially.  The New York statute was expanded in 2010 to include tax claims.  Last year, this expanded statute was discussed on the whistleblower panel at the VLS Shachoy symposium, although this case was under seal at that time (if it had been filed), and was not discussed.  There is probably a IRS and SEC action moving forward, although those were not highlighted in the story.
  • This story deals with a few Golden Corral restaurants.  Apparently the slogan there is “Help Yourself to Happiness,” which is a reference to its all you can eat buffet.  The one time I went to the Corral, that didn’t summarize my experience, but it seems like a popular chain, so others would probably disagree with me.  Also interesting, there is a lot of internet debate out there about the fact that Golden Corral no longer allows people to bring guns into its establishments.  This really pisses people off.

In Erwin v. United States, 114 AFTR2d 2014-6630 (MD NC), a general manager (a gent named Pintner) of a company that owned five GC restaurants (these are franchises) was found to be a responsible person for the TFRP.  He clearly handled day to day operations, oversaw payroll, could hire and fire, and could write checks.  The fact that the owners and officers indicated they would take care of the issue did not mitigate the responsibility.  There was an argument about whether he knew of the debt in June or October of the year in question, but the Court directed that did not matter, which is somewhat interesting because he left the company two months after finding out about the issue.  Tough holding for the manager, as the amount was substantial, and his knowledge may have been less than 60 days.  Should have left the Corral sooner.  Keith had a good post a few months ago about postponing the assessment of the TFRP when others might be liable (and hopefully pay), which can be found here.  I bet most folks in the manager’s position would be surprised to know this is how the law works.

  • Foundation was granted reasonable cause relief to abate first-tier excise taxes under Section 4943 by the Service.  The TAM found that the foundation had reasonably relied on a memorandum that incorrectly determined the attribution rules regarding excess business holdings, and how the percentage applied.  The memorandum was made by a qualified tax preparer.  The foundation realized the error and fixed the issue.  The Service determined there was not willful neglect, and the error was due to reasonable cause.
  • The Service issued Announcement 2014-34 discussing the realignment of technical work between TE/GE and Chief Counsel to shift authority for preparing revenue rulings, revenue procedures, announcements, notices, technical advice, and certain letter rulings relating to exempt orgs and certain qualified plans.
  • Occasionally, a nice woman from sends me a link to infographics they have created, which are usually interesting.  This one is a fairly simple chart regarding entity choice, including the tax impacts.  Unlike most similar lists, this one covers cooperatives…which are useful if you want to be a snooty building or start an organic farm in a vacant lot.

Summary Opinions for 10/17/14

141022cHot tubs, fraudulent credits, the Tax Court saving a marriage, and, of course, some tax procedure.



  • This is an old version of Frank Agostino’s newsletter, which was published about a year ago.  I had not read it before, and he just posted it to LinkedIn.  As always, the quality is great.  I particularly enjoyed the hot-tubbing with the IRS article, and will know not to get flattered if Mr. Agostino ever asks me to hot-tub in the future.  Great article for tax professionals, but also non-tax folks who deal with valuation disagreements.
  • United States v. Bostick is an interesting case from the District Court for the Northern District of Texas relating to the IRS seeking permanent injunctions against preparers engaging in a fraudulent credit scheme. The Court did not grant the government’s injunction to the extent requested by the Service, largely because it did not believe the practitioners would engage in this type of action again. There is also a discussion as to what standard preparers are held to under Section 6694(a) and (b), and the reasonable cause exception to that statute.  In discussing these aspects of the case, the Court, interestingly, noted that the government had “not presented any evidence…that persuades the court that tax preparers are held to the same standard as attorneys or are required in every instance to seek the advice of a tax attorney.”  I wonder what the standard is for CPAs?  Peter Reilly at Forbes has some coverage found here.
  • The Service issued Notice 2014-58, which provides additional guidance regarding the codification of economic substance doctrine under Section 7701(o).  The Notice provides a definition of “transaction”, and also provides additional guidance for the related penalty under Section 6662.  There has been strong coverage of the Notice, especially helpful are write ups by PWC and KPMG.
  • In Wang v. Comm’r, a taxpayer claiming innocent spouse failed the “knowledge/reason to know” requirement under Section 6501(b)(1)(C), although she argued that her husband hid information from her. Taxpayer and her husband had conflicting testimony on various aspects of the case, and the Court found that taxpayer was involved in her husband’s business in a meaningful way, was very well educated, and did speak with him regarding his legal troubles.  The Court concluded she should have known or inquired more about the tax issues.  Worth noting that husband was disbarred a few years before for misappropriating client funds – he attributed this to bookkeeping errors (hmm, seems suspect, I’m sure Mr. Agostino was all over that).  Also somewhat interesting, the taxpayer said she was only with her husband for the children, and she would divorce him if successful in the innocent spouse claim…Perhaps the Court did not want to be responsible for the failed marriage.
  • I’m working on Saltzman and Book chapter 5 right now, which deals with statutes of limitations, and I’m pretty sure Reinhart v. Comm’r is going to make it into the text in one or two places.  Service filed a lien after ten years following the assessment.  The primary issue was whether or not the Service could collect trust fund recovery penalties that accrued prior to my little brother being born and around the time President Bush I puked on the Japanese prime minister.  The Case has a good burden discussion, a good discussion of when a limitations argument can be made before the court when coming out of Appeals, the proper scope of review, and when the statute is tolled for a taxpayer out of the country.  We will have more on this case this week and next, so I’ll just highlight the issues for now.
  • More statutes of limitations, this time regarding the refund period for claims based on foreign tax credit carrybacks.  In Albemarle Corp. v. United States, the Court of Federal Claims held that although the taxpayer met the “all events” test under Section 461, and the dispute was settled and taxes paid within the 10 year period, under the “relation back doctrine” accruals related to the original refund year, which was outside of the ten year period.  McDermott Will & Emery has a write up here, which discusses the issues in greater detail.
  • In Hauptman v. Comm’r, the Tax Court confirmed the IRS’s rejection of an OIC predominately because the taxpayer had provided drastically different values for his assets to the Service and to other third parties; further, he failed to comply with the tax laws, and was not completely helpful in providing information and explanations.  He was also not the most endearing taxpayer.  First, Mr. Hauptman owed a boatload of money; some amount of millions.  He also just didn’t file tax returns or pay tax, largely because he didn’t feel like it.  Eventually, his business tanked, and he wasn’t as rich anymore, and then the Service started levying.  Probably the biggest take away from the case is that you shouldn’t expect the Service to rely on your numbers when you owe millions.  The IRS followed up with banks, lenders and business associates, who provided much higher values for the taxpayer’s companies and assets.  He said those were “puffed up”, but the Service should definitely trust the numbers he gave to them.

Summary Opinions for 9/12/14

Sum Op for the week of the 12th is running a bit behind schedule because of a really wonderful two part guest post by A. Lavar Taylor on what constitutes an attempt to evade or defeat taxes for Section 523(a)(1)(c) of the Bankruptcy Code, which can be found here and here.  The post generated quite a few strong comments and responses, so I would encourage everyone interested in the topic to review those also.  Here are the other items we didn’t cover two weeks ago:

  • The Tax Court in Duarte v. Comm’r has remanded an Appeals decision to reject an OIC and proceed with collection action against an immigrant who ran a roofing business.  The Court found it was unclear if the settlement officer abused his discretion in rejecting the OIC when a prior settlement officer had already approved the OIC, but then the Service failed to process the  offer for unexplained reasons for quite a while.  The opinion framed Mr. Duarte as working very hard to solve his tax issues, including making the payment associated with the agreed upon OIC.  The second settlement officer determined there was significantly more collection potential, but the record did not indicate as why various decisions were made, actions were taken or actions were not taken.  It did seem clear, however, that the Tax Court did not like the result, and wanted the Service to, at a minimum, fulfill its obligations fully before implementing such a result.
  •  As Big Dan Teague said, “Yes, the word of God…there’s damn good money during these times of woe and want,” even when you take a vow of poverty.  That can cause an issue when you want to keep that money, so sometimes you need to divert those dollars to a shell entity in order to keep your vow of poverty and minimize taxes…Wait, that seems really shady, which is what the Service thought about the scheme.  On the slightly positive side, the whole thing may have been a tax play, which seems less insulting to the congregation members.  In Cortes v. Comm’r, for 2007 to 2009, the taxpayer, Mr. Cortes, a pastor, signed a “vow of poverty”, and created “A Corporation Sole” that received bi-weekly checks from the church.  Mr. and Mrs. Cortes had unfettered access to the account held by the corporation.  Mr. Cortes argued that his vow of poverty was evidence that he did not have income in the years in question.  The Court found that the signed paper did not change the fact that Mr. Cortes was effectively paid a salary that Mr. Cortes had full control over and used for personal expenses.  Mr. Cortes did highlight a line of cases where someone took a vow of poverty, was paid an income stream, but assigned that stream to a tax exempt organization.  The Court found the cases inapplicable because…Mr. Cortes was just cheating on his taxes (Mr. Cortes alleges that any such failure to pay was inadvertent).   Tony Nitti over at Forbes has more coverage.  The Service, in 2012, flagged the Corporation Sole set up as questionable.
  • It seems so much less offensive when the fraud doesn’t involve a church.  Like in US v. Bennett, where employees of a logistics company fraudulently directed around $600,000 to shell companies for fake expenses to the detriment of their employer and the IRS.  The Service charged the co-conspirators and one of their wives with tax evasion, and all three were convicted.  One of the two employees, Mr. Hogeland, spent months faking an illness to get out of his criminal proceeding by injecting himself with potassium chloride causing his blood to have elevated potassium levels.  Mr. Hogeland’s lawyer claimed Mr. Hogeland’s wife may have been behind the elevated potassium levels to set Mr. Hogeland up because of some tension relating to her having an affair.  Hogeland did end up dying – so perhaps he was actually ill— and at the time both Hogeland and his co-defendant Bennett were both appealing the conviction.  Bennett modified his appeal to take into account Hogeland’s death, arguing that Hogeland’s death abated the entire criminal proceeding ab initio (this was true of Hogeland’s conviction).  The Court was not impressed, holding on the first point that the reasoning for Hogeland’s reversal was that a defendant should not be denied the right to appeal, even by death.  Further, the punitive purpose cannot be served by a dead guy.  Neither applies to Bennett, who was still free to appeal and go to jail.  Bennett did argue other reasons the death should spring him from the slammer, but the court was likewise unimpressed and held Hogeland’s misfortune would not benefit Bennett.
  • The Service has issued Chief Counsel Advice , which is not really procedure related but I found interesting, stating that a controlled foreign corporation that “holds” a debt obligation of its United States sole shareholder  gives rise to taxable interest on the accrued but unpaid interest amount, which is treated as US property under Section 956(c).  This in turn will likely increase the US shareholder’s taxable income under Section 956 relating to US property.  The regulations provide the CFC will “hold” a debt where the CFC is treated as the pledgor or guarantor on the shareholder’s loan from a third party, and the “obligation” amount in question becomes the unpaid principal and accrued but unpaid interest.  Following the mental leap, the interest is payable to the CFC holder of the debt, which then flows through to the US shareholder who owes the interest to a third party.  So, to simplify, I think the CCA states that if a US parent company borrows funds from an unrelated third party and the CFC is guarantor, the accrued but unpaid interest is taxable income to the CFC, which passes back through to the US parent.  I do not profess to be an expert in this area and read the CCA quickly, so I could be wrong, but this seems to be a bad result.
  • The DC Circuit has agreed to an en banc review of Halbig v. Burwell.  We had some prior coverage on the matter here.   As you can imagine, the decision has caused quite a bit of partisan debate.
  • So, SOCTUS is getting an education in hip hop.  This is not tax procedure related, but I thought it was interesting.  The article indicates that while SCOTUS will occasionally reference song lyrics, it has apparently never quoted rap lyrics.  It also implies the Justices don’t know anything about hip hop (and perhaps question the artistic value of rap lyrics).  Although it would have been fun to assist in the drafting of the amicus brief, it might be more efficient and entertaining to just enlist the Roots, Jimmy Fallon and JT  to show up and perform the various songs (there are two others if you are interested and somehow missed this—you should have no trouble finding them on the internet).  A sort of  pop-star chamber, except without the abuse of power.   If you’re looking for rap music about taxes, and who isn’t, check out Slim Thug’s “Still a Boss”, with a solid nod to claiming fake dependents.

Summary Opinions for 08/29/14

photoAfter a great summer, I’m feeling a little old, with my youngest daughter starting kindergarten this week!  I don’t have a Facebook account, so I will subject the PT readers to my sentimentality and photo sharing.  This melancholy did not prevent me from pulling together a bunch of interesting tax procedure material from last week that we did not otherwise cover.  SumOp this week touches are some really interesting bankruptcy matters, and some PT favorites, such as extended statutes of limitations for understating income and for preparer fraud, preparer reliance for penalties, and obtaining fees and costs from the Service.

Before getting to those materials though, I would encourage you all to check out Wednesday’s lead Tax Notes article regarding the Tax Court’s electronic access to documents, in which Keith Fogg is quoted extensively.  You can find the article here (sorry, TNT subscription required).

And now to the tax procedure:

  • The Tax Court, in Barkett v. Comm’r, held that the reported taxable gain by the taxpayer and not the gross amount realized by the taxpayer was the applicable amount for determining if the reported amount understated the gross income by more than 25% for purposes of the extended six year statute of limitations under Section 6501(e)(1)(A).  The taxpayer argued that the gross amount of sale value reflected on its original return should have been the number considered when comparing the reported amount against the actual gross income, and the instructions to the regulations stating otherwise were thrown out under Home Concrete.  The Court found that was not the case, and even if it were, that would not necessarily overturn various prior Tax Court rulings on the subject matter.
  • We’ve previously touched on whether a return preparer’s fraud, or an agent’s fraud, extend the statute of limitations with coverage on BASR, Citywide, and Allen.  Les had an excellent post on this topic last October.  BASR is currently up on appeal in the Federal Circuit.  Briefing has occurred, and Jack Townsend has summarized the positions here.
  • Last week, the Service released CCA 201434021, which provided guidance on when a withholding agent may obtain late documentation to indicate a foreign person was entitled to the portfolio interest exemption for withholding.  E&Y has an extensive background write up found here.  Sections 1441 and 1442 require withholding agents to withhold 30% of interest, dividends, rents, or other fixed periodic payments made to foreign persons from US sources.  There are various exceptions, including interest on portfolio debt obligations.  The regulations under Section 871 allow for evidence of qualifying for the portfolio interest exception to be offered during any period where the refund statute is open (three years from date return is filed, or two years from date tax is paid).  In one of the scenarios, one of the foreign persons had not paid over any tax, nor filed a tax return, so the time frame for providing the documentation had not run, thus allowing the withholding agent to avoid liability if the documentation is provided at any point. This is a taxpayer and withholding agent friendly position.
  • In Wright v. Comm’r, the Tax Court held that  taxpayers did not show reasonable cause in relying on an opinion letter from an attorney who the Court determined not have experience in the area the opinion letter covered, and found it important that the letter was contingent on the taxpayers signing the “Investor Representations,” which was never done.  The taxpayers’ estate planning attorney also reviewed the materials, and indicated it seemed reasonable.  It was not clear if their accountant also reviewed the transaction, but the Court did indicate that the taxpayers failed to show reliance on the estate planning lawyer or the accountant.  The failure to sign the investor representations is highlighted as a major issue, but I would think it wouldn’t matter much if the practitioner clearly had expertise and the position was defensible.  I would also note, the Court did not provide much guidance on how the taxpayer should or should not have known the attorney would not be competent.  It simply indicated he lacked experience in the particular area of tax.  Prior experience is not the only way to gain competency in many matters.  I do not doubt the Court was correct, and this may have been a clear case of rubber stamping a BS tax shelter for all I know, but his having no prior experience shouldn’t automatically disqualify a practitioner.
  • In Swiggart v. Comm’r, the Tax Court found the taxpayer was the “prevailing party” under Section 7430 and allowed to recover litigation and administrative costs.  Underlying matter was whether or not the taxpayer was entitled to file as head of household, which the Service initially disagreed with because the taxpayer did not indicate who the individual was that allowed him to file as HoH.  The taxpayer had an agreement with the child’s mother, whereby he waived any claim for the year for the dependency deduction, so he had not listed the child, but that did not disallow the HoH status.  After an administrative appeal, the taxpayer went to the Tax Court, where he and the Service entered into a stipulated settlement agreement whereby the taxpayer prevailed.  The Court found the taxpayer was clearly the prevailing party, and, importantly, the Service was not substantially justified in its position (clearly contrary to the statute).  Although not directly on point, this initially brought my mind to the situation where the Service concedes litigation when a qualified offer has been made, which we have discussed here.  There the Service took the position that did not make the taxpayer the prevailing party, and therefore not entitled to costs.
  • The Second Circuit had an interesting bankruptcy holding in United States v. Bond.  The holding related to the jurisdiction of the bankruptcy court to review a liquidating trustee’s refund claim, reversing the bankruptcy court and the district court which held the claim could be reviewed.  The Second Circuit stated that Section 505 of the Bankruptcy Code allowed refund suits in bankruptcy court after a refund claim was filed with the IRS by the bankruptcy trustee.  The Second Circuit found the liquidating trustee who was a representative of the bankruptcy estate appointed under the reorganization plan was distinct from the bankruptcy trustee, and therefore not entitled to bring the claim.  The Second Circuit did note the assignment of the claim and the appointment of the liquidating trustee were both appropriate, but that did not change the fact that the bankruptcy trustee had to bring the claim with the Service.  Had that occurred, the liquidating trustee could have brought the suit through the bankruptcy court.
  • Sticking with bankruptcy, the Tenth Circuit has affirmed the district court and bankruptcy court holding that a taxpayer who entered into some bu!!$h*! tax shelter willfully attempted to evade taxes and therefore could not discharge the liability under Chapter 11 pursuant to Section 523(a)(1)(C) of the Bankruptcy Code.  Jack Townsend  has a post on the case on his federal tax crimes blog, and Keith will hopefully be posting something on this soon (which will show that this blurb is slightly misleading…and that this case also involves ex-spouses benefiting over the Service…which leads us to the next case).
  • Would you propose a divorce to get around tax or an IRS lien (you might have to be clairvoyant, and move quickly before tax was assessed)?  How far would you go to prove it wasn’t a sham?  Dating other people?  I’m pretty confident my wife is not down with that plan.  Folks have divorced to reduce their taxes in the past, but I have not seen it suggested that a divorce could have been a sham simply to get around an IRS lien, until US v. Baker.  Neither the Court nor the IRS actually indicated the Bakers’ divorce was a fraudulent sham to get around the liens, but the Court did indicate that a sham divorce, pursuant to which property was transferred, would not be respected.  In Baker, the Service did argue that the failure to record the divorce decree resulted in transferred real estate owned by the ex-wife was subject to the ex-husband’s IRS lien.  The Court disagreed based on an interpretation of New Hampshire law which allows the divorce decree itself, without further recording, to serve as a transfer of the property.  Because the divorce decree was entered prior to the assessment date, no property of the taxpayer existed at the time of the creation of the federal tax lien, following assessment, notice and demand and failure to pay, to which the federal tax lien could attach.
  • The law firm Paul Hastings has a nice write up of the Sixth Circuit decision in FDIC v. AmFin Financial Corporation, which is based on a dispute over the ownership of a $170MM tax refund that the Service issued to the parent company of a consolidated group, and not to the subsidiary that generated the refund.  The parent and its subsidiaries had entered into a tax-sharing agreement, which allocated liability.  Later the parent entered into bankruptcy, resulting in the subsidiary going into FDIC receivership.  FDIC demanded the portion of the refund generated from the subsidiaries operating, but the bankruptcy estate for the parent did the same.  The district court held that the agreement clearly allocated it to the parent’s bankruptcy estate.  The Sixth Circuit reversed and remanded, instructing the district court to consider the evidence concerning the parties’ intent in accordance with Ohio trust and agency law.  PH points out this case is instructive in drafting TSAs, and notes that the FDIC is requiring its insured to amend agreements to allocate refunds to the subsidiaries generating the refund.