District Court Holds Tax Court Exempt From FOIA as a “Court of the United States”

We welcome back frequent guest blogger Carl Smith.  Today Carl writes about a recent case looking at whether FOIA applies to the Tax Court.  Les

In June 2015, I did a post warning readers that the litigious Mr. Ronald Byers was about to bring a FOIA suit against the Tax Court. Previously, Mr. Byers had gotten a ruling from the D.C. Circuit in a Collection Due Process (CDP) levy case allowing all CDP cases not involving challenges to underlying tax liability to be appealed from the Tax Court to the D.C. Circuit. See Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014) (venue ruling legislatively overruled going forward in December 2015). Mr. Byers is currently in the midst of a CDP lien case in the Tax Court. In 2015, he made a FOIA request to the Tax Court for various unpublished documents. The Tax Court refused the request, saying that it was exempt from FOIA because it was one of the “courts of the United States”, within the meaning of 5 U.S.C. § 551(1)(B).

Mr. Byers had a hard time intellectually reconciling (1) the holding in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), that the Tax Court, for constitutional purposes, is located in the Executive Branch with (2) the idea that the Tax Court is one of the “courts of the United States” for purposes of the FOIA exemption. So, he brought suit against the Tax Court in the district court for the District of Columbia, arguing that the Tax Court is an Executive agency or other entity covered by FOIA and is not described in the exemption to FOIA for “courts of the United States”. In an opinion from the district court issued on September 30, the court agrees with the Tax Court that FOIA doesn’t apply to the Tax Court. Byers v. United States Tax Court.

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5 U.S.C. sec. 552(a) requires that “[e]ach agency shall make available to the public information . . . .”   An “agency,” for purposes of FOIA, “as defined in section 551(1) of this title includes any executive department, military department, Government corporation, Government controlled corporation, or other establishment in the executive branch of the Government (including the Executive Office of the President), or any independent regulatory agency.”  5 U.S.C. sec. 552(f)(1).  5 U.S.C. sec. 551(1), in relevant part, states that “‘agency’ means each authority of the Government of the United States, whether or not it is within or subject to review by another agency, but does not include– . . . (B)  the courts of the United States”.  IRC sec. 7441 establishes the Tax Court as a “court of record” under Article I.

Byers argued that the Tax Court – per Kuretski – was either an agency or “other establishment in the executive branch of the Government”. Essentially, the district court agreed with Byers on this point, but it noted that the D.C. Circuit in Kuretski speculated that the Tax Court might be one thing for constitutional purposes, yet another thing for statutory purposes, and left open that question.  This district court opinion decided the question left open in Kuretski.

However, the district court held that the Tax Court was exempt from FOIA, holding that it is one of the “courts of the United States”. Byers argued that the phrase “courts of the United States” was a term of art in several places of the United States Code that limited the phrase to Article III courts.

The opinion correctly notes that two courts in other Circuits have previously decided that the Tax Court is exempt from FOIA as one of the “courts of the United States”.   Megibow v. Clerk of the United States Tax Court, 432 F.3d 387 (2d Cir. 2005), aff’g 94 AFTR 2d 5804 (S.D.N.Y. 2004 (holding that the Tax Court is not an “agency” for purposes of FOIA); Ostheimer v. Chumbley, 498 F.Supp. 890,892 (D. Mont. 1980) (same), aff’d, 746 F.2d 1487 (9th Cir. 1984). Thus, the D.C. district court Byers opinion does not break new ground in its holding. No court has held otherwise. At least one of those courts relied, in part, for its holding that the Tax Court was a “court”, on the functional analysis that the Supreme Court did of the Tax Court for constitutional purposes in Freytag v. Commissioner, 501 U.S. 868 (1991). In Freytag, the Supreme Court held that the Tax Court, despite not being an Article III court, held a portion of the judicial power of the United States. The district court in Byers supported its holding, as well, in part by the Freytag functional analysis of the Tax Court.

However, unlike the prior court opinions on this FOIA issue, the D.C. district court in Byers had to deal with the December 2015 amendment to IRC § 7441 that added the following sentence to respond to the Kuretski opinion:  “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.”  Of course, the D.C. Circuit in Kuretski held that the Tax Court was part of the Executive Branch for constitutional purposes.  The Byers district court agreed with the Tax Court’s argument that this added sentence did nothing to change existing law or overrule Kuretski.  Interesting for the Tax Court to make that argument, since it must have been the Tax Court that asked Congress to amend § 7441.  Why make a pointless amendment?  I think the answer may be for public perception – i.e., individuals reading the Code should learn of the Tax Court’s independence from the Executive Branch (i.e., independence from the IRS) not by having to read and parse Freytag and Kuretski (which only lawyers would do).

The Byers district court also rejected applying to FOIA the definition of “the courts of the United States” in 28 U.S.C. § 451 – one that limits that phrase only to Article III courts. The district court noted that the § 451 definition is explicitly limited in effect to Title 28, so does not apply to Title 5, where FOIA is located.

The Byers district court still had to deal with two provisions of the IRC that also seem to use the phrase “courts of the United States” to refer only to Article III courts:

In footnote 6, the district court wrote:

Section 7457 provides for witness fees and mileage in the Tax Court that are the same as those provided for “witnesses in courts of the United States.” 26 U.S.C. § 7457(a). Mr. Byers argues that this statute shows that the Tax Court is not one of the “courts of the United States.” See Compl. Ex. C at 27. But the Court is persuaded by the Tax Court’s argument that this provision was enacted when the precursor to the Tax Court was still an “independent agency,” thus requiring the comparison to existing courts. See Def.’s Mem. At 16–17; see also Internal Revenue Code of 1954, Pub. L. No. 83-591, § 7457, 68A Stat. 730, 886 (1954); supra Part II.B (explaining that the Tax Court was not “established” as an Article I court until 1969).

Of course, the response to the district court’s statement is that Congress continued the language in § 7457 after it adopted the 1969 amendments, thus suggesting that, after 1969, Congress still did not feel that the Tax Court was one of the “courts of the United States” for Title 5 FOIA exemption purposes.

On page 17, the Byers court noted “possible contradictions in the recent legislation”, since in December, Congress newly adopted § 7470, which provides:

Notwithstanding any other provision of law, the Tax Court may exercise, for purposes of management, administration, and expenditure of funds of the Court, the authorities provided for such purposes by any provision of law (including any limitation with respect to such provision of law) applicable to a court of the United States (as that term is defined in section 451 of title 28, United States Code), except to the extent that such provision of law is inconsistent with a provision of this subchapter.

The court thinks the amendment of § 7441 essentially trumps the implication of § 7470 that the Tax Court is an agency of the United States that did not already have the powers of management give in § 7470 because the Tax Court isn’t a court of the United States.

Mr. Byers tells me that he plans to appeal the district court’s ruling to the D.C. Circuit, perhaps after filing a motion for reconsideration.

 

 

The Interplay between the Freedom of Information Act and IRC 6103

In Goldstein v. IRS the District Court for the District of Columbia found that the IRS misconstrued the relationship between the Freedom of Information Act (FOIA) and Section 6103.  It remanded large parts of the case to the IRS for further action because the Court finds that the IRS did not properly follow its own regulations and did not properly interpret the relationship between FOIA and Section 6103.  Because this decision comes from the District of Columbia, it carries significant weight.  The case involves an heir seeking information about his father’s estate and income taxes.  The case provides a guide to obtaining information as an heir as well as a glimpse at the IRS processing of such requests.  It shows that the privacy wall around tax information which protects taxpayers from having their tax information seen by others may not rise as high in the context of an heir.  The case offers hope to those who need information about an estate to protest their interest but who do not control the estate or a trust.  The case also views the return of information provided by a whistleblower differently than the IRS.  We do not post in this area often.  Les ventured into disclosure last year in a post involving another case that deserves attention if you did not receive an adequate explanation from the IRS for denying your request for information.

As a Chief Counsel attorney I always felt that demonstrating knowledge of disclosure law operated as a close second to demonstrating knowledge of TEFRA.  Such knowledge created a path to case assignments in which I had no interest.  Yet, I always had a fascination with knowledge of the disclosure laws because these laws provided a path to important information.  Representing clinic clients, I do not use FOIA as much as I should.  Perhaps, my failure stems from my old fears of demonstrating knowledge of matters regarding disclosure but more likely it stems from a failure to know how to use the disclosure laws to the best advantage of my clients.  The Goldstein case shows FOIA opening the door to information that will assist the plaintiff in evaluating his interest in the assets of a complicated estate and whether the actions of the executor have best preserved his interest.  A guest post on FOIA may provide a guide if you seek to use FOIA to gain information.

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The plaintiff made a FOIA request for 10 discreet items from the IRS.  In the context of a summary judgment motion, the Court goes through each of the ten items, grouping a few together, and discusses how the IRS treatment of the request did, or did not, comply with the law.  Prior to the litigation, the IRS had determined that either FOIA or 6103 allowed plaintiff to receive the documents; however, it denied the release of many other documents on the grounds that the IRS did not have authority to release them.  The Court started its legal discussion pointing out the flaw in the IRS treatment of information requests that created a distinction between FOIA and 6103.  Citing to a 1986 D.C. Circuit court case of Church of Scientology of California v. IRS the Court quoted “FOIA is a structural statute, designed to apply across-the-board to many substantive programs; it explicitly accommodates other laws [under FOIA Exemption 3] by excluding from its disclosure requirement documents ‘specifically exempted from disclosure’ by other statutes.”

Section 6103 is one of the “other statutes” referred to in FOIA similar to other provisions elsewhere in the United States Code that prohibit the disclosure of certain information.  So, 6103 and FOIA work in harmony rather than as separate stovepipes as the IRS treated them.  Because a request for information, even one that implicates 6103 still comes under the FOIA umbrella, plaintiff here appropriately made the request for the information under FOIA and the IRS must follow FOIA (and 6103) in making its determination whether to provide the information requested.  The separate non-FOIA process that the IRS developed for information covered by 6103 does not work as a process to prevent a plaintiff from moving forward for resolution under a FOIA action.  Section 6103 still plays a role in whether the information will be turned over but the IRS cannot hold up 6103 as a shield to prevent a party from seeking information by bringing a FOIA suit.  Having decided that the FOIA litigation itself provided the appropriate vehicle for examining the requests for information, the Court then went through each separate request.

Item 1 of Plaintiff’s request sought the entire examination file with respect to the audit of the estate of Plaintiff’s father.  The relevant statute governing this request, IRC 6103(e)(1)(E) has two requirements.  A relationship requirement and a material interest requirement.  Plaintiff met the relationship requirement as an heir of the estate.  The IRS found that he did not meet the material interest requirement which requires that the person “will be affected by the information contained therein.”  The IRS found Plaintiff had a material interest in only part of the examination records.  Plaintiff sent two more letters seeking to show the material interest but the IRS remained unconvinced and it sought summary judgment that its determination regarding material interest correctly followed the statutory standard.  The Court, however, determined that the IRS failed to follow another part of the same regulations it sought to use to deny the request because the IRS did not advise the Plaintiff in writing “in what respect” his request failed 26 C.F.R. 601.702(c)(1)(i)  and (c)(4)(i).  So, it remanded the case to allow the IRS to provide the Plaintiff with specific guidance and to evaluate his response.

Item 2 of the FOIA request sought the estate tax return and return information.  The IRS provided some of the estate tax return but Plaintiff complained that the response failed to provide “the full and complete return [including all schedules] nor the amendments to the return, as agreed upon, in an estate tax audit.”  The Court remanded again saying the that IRS failed to appreciate the breadth of the request and that it failed to advise the Plaintiff in writing of the specific reason for its denial so that he could respond to the stated concern.

Items 3 and 4 sought fiduciary income tax returns of the estate and of a living trust.  Because the IRS treated the request for income tax returns as falling within its 6103 procedures and outside of the FOIA procedures, the affidavits it provided to the Court concerning its response to this request failed to address the information the Court needed in order to properly evaluate the FOIA request and it remanded this aspect of the case for further information gathering on the basis for the IRS denial of the request pointing again to the IRS failure to follow its own regulations by providing Plaintiff a detailed statement regarding the deficiencies in the information request.

Items 5 and 7 concerned information about a partnership in which the decedent had invested.  The IRS refused to provide this information because Plaintiff was not a “general partner, limited partner or special limited partner.”  The court found clear error in the IRS determination that Plaintiff was not a beneficiary of the living trust established by the decedent and remanded this part of the case to the IRS to “re-evaluate its determination.”  The court went further on the legal issue applicable here to direct the IRS to consider whether the definition of partner advanced by Plaintiff was correct essentially ordering the IRS to reconsider who may receive partnership information.

Item 8 seeks information submitted to the IRS by attorney David Capes who submitted the information to the IRS at the request of Plaintiff.  The information submitted by Mr. Capes alleged civil and criminal fraud by the estate.  The IRS denied the request and argued in the proceeding that this information, if it exists, was return information of a third party protected under 6103 for which Plaintiff did not have a release.  The Court looked at the IRM which states that “information furnished to the IRS by third parties (e.g. informants) may be returned to the third party upon request in most instances provided the material has remained in its original state.”  The Court said that the IRS appeared not to have considered the rules that should apply when a whistleblower requests the return of documents.

The case offers many possible bases for challenging IRS denials for request of information.  The primary focus of the opinion concerns those whose interest arises through a will but the last item discussed also challenges IRS assumptions regarding return of information provided by informants.  The tone of the opinion challenges another vestige of tax exceptionalism.  The IRS bifurcated 6103 responses from FOIA responses but the Court found the two bound together in a statutory scheme that recognizes the importance of the disclosure provisions under 6103 but does not place them outside the scope of the broader FOIA framework for requesting information from the government.

 

 

Summary Opinions for 9/21/15 to 10/2/15

Running a little behind on the Summary Opinions.  Should hopefully be caught up through most of October by the end of this week.  Some very good FOIA, whistleblower, and private collections content in this post.  Plus fantasy football tax cheats, business on boats, and lots of banks getting sued.  Here are the items from the end of September that we didn’t otherwise write about:

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  • Let’s start with some FOIA litigation. The District Court for the District of Columbia issued two opinions relating to Cause of Action, which holds itself out as an advocate for government accountability.  On August 28th, the Court ruled regarding a FOIA request by Cause for various documents relating to Section 6103(g) requests, which would include all request by the executive office of the Prez for return information, plus all such requests by that office that were not related to Section 6103(g), and all requests for disclosure by an agency of return information pursuant to Sections 6103(i)(1), (2), & (3)(A).   The IRS failed to release any information pursuant to the last two requests, taking the position that records discussing return information would be “return information” themselves, and therefore should be withheld under FOIA exemption 3.  There are various holdings in this case, but the one I found most interesting was the determination that the request by the Executive Branch and the IRS responses may not be “return information” per se, which would require a review by the IRS of the applicable documents.  Although the petition was drafted in broad terms, this Washington Times article indicates the plaintiff was seeking records regarding the Executive Branch looking into them specifically, presumably as some type of retaliation.

In a second opinion issued on September 16th, in Cause of Action v. TIGTA, Judge Jackson granted TIGTA’s motion for summary judgement because after litigation and in camera review, the Court determined none of the found documents were responsive.  This holding was related to the same case as above, but the IRS had shifted a portion of the FOIA request to TIGTA.  Initially, TIGTA issued a Glomar response, indicating it could not confirm or deny the existence (I assume for privacy reasons, not national defense).  The Court found that was inapplicable, and TIGTA was forced to do a review and found 2,500 records, which it still withheld.  Cause of Action tried to force disclosure, but the Court did an in camera review and found the responsive records were not actually applicable.

  • That was complicated.  Now for something completely different.  This HR Block infographic is trying to get you all investigated for tax fraud.  In summary, 75 million of the 319 million people in America play fantasy football, and roughly none are paying taxes on their winnings.  If you click on the infographic, we know you are guilty.  Thankfully, my teams this year are abysmal, so I won’t be committing tax fraud…my wife on the other hand has a juggernaut in our shared league…To all of our IRS readers, please ignore this post.
  • Now a couple whistleblower cases.  In Whistleblower One 10683W v. Comm’r, the Tax Court held that the whistleblower was entitled to review relevant information relating to the denial of the award based on information provided by the whistleblower.  The whistleblower had requested information relating to the investigation of the target, the disclosed sham transaction, and the amounts collected, but the IRS took the position that certain items requested were not in the Whistleblower Office’s file, and were, therefore, beyond the scope of discovery (denied, but we don’t have to explain ourselves).  The Court disagreed and found the information was relevant and subject to review by the whistleblower.  Further, the IRS was not unilaterally allowed to decide what was part of the administrative record.  Another case that perhaps casts a negative light on how the IRS is handling the whistleblower program.
  • On September 21st, the District Court for the Middle District of Florida declined a pro se’s request for reconsideration of a petition for injunctive relief against the IRS to force it to investigate his whistleblower claim in Meidinger v. Comm’r (sorry couldn’t find a free link to this order).  Mr. Meidinger likely knew the court lacked jurisdiction, and this was the purview of the tax court —  Here is a write up by fellow blogger, Lew Taishoff, on Mr. Meidinger’s failed tax court case.  Lew’s point back in 2013 on the case still rings true:  “But the administrative agency here has its own check and balances, provided by the Legislative branch.  There’s TIGTA, whose mission is ‘(T)o provide integrated audit, investigative, and inspection and evaluation services that promote economy, efficiency, and integrity in the administration of the internal revenue laws.’ Might could be y’all should take a look at how the Whistleblower Office is doing.”  The tax court really can’t force an investigation, but TIGTA could put some pressure on the WO to do so.  After taking a shot at the IRS, I should note I know nothing of the facts in this case, and Mr. Meidinger may have no right to an award, and TIGTA has flagged various issues in the program.  It just doesn’t feel like significant progress is being made.
  • I found Strugala v. Flagstar Bank  pretty interesting, which dealt with a taxpayer trying to bring a private action under Section 6050H.  Plaintiff Lisa Strugala filed a class action suit against Flagstar Bank for its practice of reporting, and then in future years ceasing to report, capitalized interest on the borrower’s Form 1098s.  Flagstar Bank apparently had a loan that allowed borrowers to pay less than all the interest due each month, resulting in interest being added to the principal amount due.  At year end, the bank would issue a 1098 showing the interest paid and the interest deferred.  In 2011, the bank ceased putting the deferred interest on the form.  Plaintiff claims that the bank’s practice violated Section 6050H, which only requires interest paid to be included.  The over-reporting of interest, she claims, causes tens of thousands of tax returns to be filed incorrectly.  Further, upon the sale of her home, Strugala believed that the bank received accrued interest income that it didn’t report to her.  A portion of the case was dismissed, but the remainder was transferred to the IRS under the primary jurisdiction doctrine.  The Court found the IRS had not stated how the borrower should report interest in this particular situation, and that it should determine whether or not this was a violation.  In addition, Section 6050H didn’t have a private right under the statute.  I was surprised that this was not a case of first impression.  The Court references another action from a few years ago with identical facts.  However, perhaps I shouldn’t not have been, as this is somewhat similar to the BoA case Les wrote about last year, where taxpayers sued Bank of America alleging fraudulent 1098s had been issued relating to restructuring of mortgage loans.
  • The Tax Court has held in Estate of John DiMarco v. Comm’r, that an estate was not entitled to a charitable deduction where individual beneficiaries were challenging the disposition of assets.  Under the statute, the funds have to be set aside solely for charity, and the chance of it benefiting an individual have to be  “so remote as to be negligible.”  Here, the litigation made it impossible to make that claim.
  • My firm has a fairly large maritime practice, which makes sense given our sizable port in West Chester, PA (there is not actually a port, but we do a ton of maritime work).  That made me excited about this crossover tax procedure and maritime  Chief Counsel Advice dealing with Section 1359(a).  Most of our readers probably do not run across Section 1359 too frequently.  Section 1359 provides non-recognition treatment for the sale of a qualifying vessel, similar to what Section 1031 does for like kind real estate transactions.  This applies for entities that have elected the tonnage tax regime under Section 1352, as opposed to the normal income tax regime.  In general, the replacement vessel can be purchased one year before the disposition or three years afterwards.  But, (b)(2) states, “or subject to such terms and conditions as may be specified by the Secretary, on such later date as the Secretary may designate on application by the taxpayer.  Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.”  Those regulations do not exist.  The CCA determined that even though the regulations do not exist, the IRS must consider a request for an extension of time to purchase a replacement vessel, as the Regs are clearly supposed to deal with extensions by request.
  • From The Hill, another article against the IRS use of private collection agencies.

 

 

 

The Right to Be Informed: Using the Freedom of Information Act and Internal Revenue Manual to Secure Taxpayer Records

Today we welcome first time guest blogger, Nicholas Xanthopoulos, who directs the low income taxpayer clinic at Nevada Legal Services.  Nick posted on the low income taxpayer listserv an experience he had when seeking records through FOIA in which an IRS FOIA Public Liaison suggested that he should request the information from the front line IRS employee.  You can read below how that worked. 

Sometimes IRS employees use FOIA as a way to shield themselves from possible disclosure violations, the charitable view, or just doing the work to copy appropriate documents from a taxpayer’s file, the less charitable view.  In my clinic this comes up most often in Tax Court cases where we first get involved after the case has gone to Appeals.  More often than not, the Appeals employee declines to provide information in the file referring us to the FOIA process if we want the information.  This is a shortsighted and incorrect response.  The Appeals employee has the ability to provide the information in the file almost all of which the taxpayer or the representative has the right to see.  Suggesting FOIA creates more work for everyone including the Appeals employee and greatly slows the process of information flow.  With cases in Tax Court in which Appeals declines to provide the requested information, my clinic simply makes a Branerton request to the Chief Counsel attorney which usually results in a call from the Attorney to the Appeals employee directing the Appeals employee to provide the information.  This tactic does not work, however, when no Tax Court case exists. 

TIGTA recently looked at the IRS performance in FOIA requests.  It found that the IRS was getting slower in responding but also that it failed to send response documents in certain cases.  That it takes longer should surprise no one given the staffing problems caused by the budget cuts.  TIGTA recommended providing more information to the parties requesting information during the search and response process.  This good idea does, however, take time away from actually responding.  Making a FOIA request can be a slow, painful process but can also produce important information necessary to proper representation of a client.  Nick provides some good insights and citations regarding the process.  Keith

The Freedom of Information Act (“FOIA”) requires the Internal Revenue Service to “promptly” provide records when a person requests them.  5 U.S.C. § 552(a)(3)(A).  A request qualifies for FOIA treatment if it “reasonably describes” the records and follows agency policy.  Id.   The request must “fully comply” with various form requirements, such as stating whether the requestor wants to view the records before receiving copies of them.  26 C.F.R. § 601.702(c)(4).

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Usually, a FOIA request “reasonably describes” the records if it provides “the name, taxpayer identification number (e.g. social security number…), subject matter, location, and years at issue of the requested records.  § 601.702(c)(5)(i).  In making a request, a practitioner must provide a completed “power of attorney, Privacy Act consent, or tax information authorization.”  § 601.702(c)(5)(iii)(C).  Sample FOIA requests are available from various sources, including the IRS.  The Treasury processes record requests under both FOIA and the Privacy Act of 1974, as amended, a topic outside the scope of this post.

FOIA deadlines for the IRS to provide requested records is slightly more complicated.  Within 20 days[1] of receiving the request, the IRS must decide whether to comply with it and notify the requestor about the decision.  5 U.S.C. § 552(a)(6)(a)(i); 26 C.F.R. § 601.702(c)(9)(B)(ii).  The IRS can extend the deadline by up to 10 business days if it has “to search for and collect” the records from other locations.  5 U.S.C. § 552(a)(6)(B)(i), 552(a)(6)(B)(iii).  In one of my cases, the IRS invoked this “unusual circumstances” extension; I imagine such extensions are relatively common when requesting records from an examination administrative file.

If the IRS chooses to provide the records, it generally must mail them to the requestor at the time of the determination or “shortly thereafter.”  26 C.F.R. § 601.702(c)(9)(B)(iii).  (Section 601.702 does not define “shortly.”)  If the IRS does not notify the requestor of its determination within 20 days of receiving the request, then administrative remedies are considered exhausted.  5 U.S.C. § 552(a)(6)(C)(i); 26 C.F.R. § 601.702(c)(12).  The requestor may then seek from the U.S. District Court an order for the IRS to produce the requested records.  5 U.S.C. § 552(a)(6)(B).  The Court may also order the IRS to pay reasonable attorney fees and costs if the requestor “substantially prevails” in the action.  5 U.S.C. § 552(a)(6)(E).

I have a case where the IRS did not, within 20 days of receiving my FOIA request, notify me of its determination or invoke the unusual circumstances extension.  As a result, I called a FOIA Public Liaison to ask about the status of my request.  (A list of Liaisons’ names and phone numbers is available at http://www.irs.gov/uac/IRS-Disclosure-Offices.)  The Liaison told me that it may be more effective to request records directly from a representative in the relevant IRS division.  I was also told that, if the IRS representative wouldn’t release the records, I should cite the Internal Revenue Manual (“IRM”): section 5.1.22.6 for a “copy of the [collection] case file” and section 4.2.5.7 for “a copy of the examiner’s files or workpapers.”  Finally, a Liaison told me that the records provided might be broader than those disclosed in response to a FOIA request.

Both IRM sections refer to Internal Revenue Code section 6103(e) as authority for releasing taxpayer records.  For collection files, the IRM says that “[a] taxpayer or taxpayer representative has a right to information used to collect his/her tax liability, which includes a copy of the case file.”    IRM 5.1.22.6.  However, IRM 5.1.22 does not describe what a “case file” contains, and I have been unable to find a definition of the term elsewhere in the IRM.  When I requested a copy of a taxpayer’s case file, the representative agreed to fax it to me.  Due to technical difficulties, I only received the cover pages to the fax attempts.  When I spoke with a different collection representative, he told me that the “case file” I was faxed consisted only of an account transcript; he also told me that he didn’t know what documents a “case file” includes.

For exam cases, the IRM disclosure provisions read less strongly.  To be exact, “the examiner may be asked…for a copy of the examiner’s files or workpapers.” IRM 4.2.5.7.  The section adds that IRC section 6103(e) “advises that the Service shall [generally] give taxpayers access to their returns or return information.”  Id.  When I asked a representative for a copy of workpapers and cited to the IRM, she told me that the disclosure is not allowed.  I accepted her offer for a call back from a supervisor about my request, but I never received one.

The IRM disclosure provisions each offer a remedy to aggrieved requestors.  If a collections representative refuses to release a copy of a case file and a taxpayer can’t resolve the issue with managerial involvement, then a “[FOIA] or Privacy Act request process is available.”  IRM 5.1.22.6 at ¶ 7.  Likewise, a FOIA request is sometimes “necessary” for representatives to provide taxpayers with copies of examination files or workpapers.  IRM 4.2.5.7 at ¶ 6.

So far, my experiences with the IRM sections on disclosure and requesting hardship CNC when a taxpayer isn’t in filing compliance are similar: explain what they say, provide the citation, and hope the IRS representative is willing to listen.  If the representative is not responsiveand litigation isn’t pending, then FOIA and the Privacy Act are the only disclosure paths I’m aware of that offer a judicial remedy.

 

 

 

Is The Tax Court an Agency or a Court for FOIA Purposes?

We welcome back frequent guest blogger Carl Smith discussing a different wrinkle in the Kuretski case – getting information from the Tax Court if it is an agency.  Keith  

For purposes of the constitutionality of the President’s removal power over Tax Court judge at section 7443(f), whether the Tax Court is a court, or an Executive agency, or exercises the judicial power of the United States are issues that were litigated in Kuretski v. Commissioner, 755 F.3d 529 (D.C. Cir. 2014), and that continue to be litigated in other cases before the Tax Court.  In Kuretski, the D.C. Circuit held that the Tax Court was part of the Executive Branch, so section 7443(f) presented no constitutionally-impermissible inter-branch removal power.  Whether the Tax Court is a court or agency for statutory — i.e., non-constitutional — purposes has also been the subject of litigation in the past, and it will apparently soon again be litigated in the context of the Freedom of Information Act (FOIA).

This post is to alert readers to an impending litigation in the D.C. district court that will force that court to confront the issue of the Tax Court’s status, since the Tax Court recently denied a FOIA request because, according to the Tax Court, it is a “court” for purposes of the exception to the application of FOIA.  As will be discussed below, the FOIA suit will shortly be brought by the intrepid pro se taxpayer Ronald Byers, who recently won a venue dispute but lost the underlying other issues in a CDP levy case named Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014).  Disclaimer:  I have had no hand in encouraging Mr. Byers to bring this FOIA suit.

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Earlier this year, Mr. Byers made a FOIA request to the Clerk of the Tax Court for copies of certain of the Tax Court’s internal procedures.

5 U.S.C. sec. 552(a) requires that “[e]ach agency shall make available to the public information . . . .”   An “agency,” for purposes of FOIA, “as defined in section 551(1) of this title includes any executive department, military department, Government corporation, Government controlled corporation, or other establishment in the executive branch of the Government (including the Executive Office of the President), or any independent regulatory agency.”  5 U.S.C. sec. 552(f)(1).  5 U.S.C. sec. 551(1), in relevant part, states that “‘agency’ means each authority of the Government of the United States, whether or not it is within or subject to review by another agency, but does not include– . . . (B)  the courts of the United States”.  IRC sec. 7441 establishes the Tax Court as a “court of record” under Article I.

On April 28, 2015, the Tax Court Clerk wrote a letter to Mr. Byers (copying the Chief Judge), stating in full:

This letter is in response to your Freedom of Information Act (FOIA) request, received by the Court on March 18, 2015.

 

The United States Tax Court is a court of law.  26 U.S.C. sec. 7441; Freytag v. Commissioner, 501 U.S. 868, 891 (1991) (“The Tax Court exercises judicial power to the exclusion of any other functions”).  Consequently, the Tax Court is not an “agency” subject to FOIA.  See 5 U.S.C. sec. 552(f)(1) (incorporating definition of “agency” as set forth in 5 U.S.C. sec. 551(1)).  Section 551(1)(B) of Title 5 provides that an “agency” does not include the courts of the United States. Megibow v. Clerk of the United States Tax Court, 432 F.3d 387 (2d Cir. 2005), aff’g 94 AFTR 2d 5804 (S.D.N.Y. 2004 (holding that the Tax Court is not an “agency” for purposes of FOIA); Ostheimer v. Chumbley, 498 F.Supp. 890,892 (D. Mont. 1980) (same), aff’d, 746 F.2d 1487 (9th Cir. 1984).  Contrary to the assertion in your submission, Kuretski v. Commissioner, 755 F.3d 929, 932 (D.C. Cir. 2014), did not hold that the Tax Court is an “agency” for purposes of FOIA and did not otherwise disturb the well-established law in this regard.  See id. at 944 (stating that Congress established the Tax Court “as a ‘court’ rather than an ‘agency'”).

 

I have read the two district court opinions cited, and both do not merely rely on the fact that section 7441 calls the Tax Court a “court”, but also on the fact that the Tax Court functionally has the powers of and acts like an Article III court (the Megibow case even citing to and quoting Freytag‘s majority’s reasoning).  If the D.C. Circuit in Mr. Byers’ FOIA case rules that the Tax Court is a “court” for purposes of FOIA, though is part of the Executive Branch for purposes of separation of powers, the D.C. Circuit may not be able to rely on the reasoning of the district courts to the extent that they rely on a functional justification for calling the Tax Court a “court” for purposes of FOIA.  The Courts of Appeals in Megibow and Ostheimer just summarily affirmed the district courts without stating any reasoning (Megibow merely calling the district court’s opinion thorough and well-reasoned).  It appears that no district court or Court of Appeals beyond these two cases has ever ruled on the issue of FOIA’s applicability to the Tax Court.

Interestingly, the D.C. Circuit in Kuretski realized there might be some tension between its holding and Megibow.  Here is what the D.C. Circuit said in Kuretski about Megibow:

And while we have no need to reach the issue here, Congress, in establishing those entities [ — i.e., the Article I Tax Court and the Article I Court of Appeals for the Armed Forces — ] as a “court” rather than an “agency,” perhaps also exempted them from statutes that apply solely to executive “agencies.” Cf. Megibow v. Clerk of the U.S. Tax Court, No. 04-3321, 2004 U.S. Dist. LEXIS 17698, at *13-22 (S.D.N.Y. Aug. 31, 2004) (Tax Court is a “court of the United States” and not an “agency” under the Administrative Procedure Act, 5 U.S.C. § 551(1)), aff’d, 432 F.3d 387 (2d Cir. 2005) (per curiam).

Kuretski, 755 F.3d at 744.

The goal of Mr. Byers’ suit apparently is to force the D.C. Circuit to reach the issue that it only speculated about in Kuretski.  Currently pending before the Senate is a bill, S. 903, that might affect this FOIA litigation, as it would add a new sentence to section 7441 reading:  “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.”We’ll see what happens.

 

 

IRS Makes Novel Use Of Outside Contractors—To Audit Microsoft

 

Earlier this year I wrote about the effort by some Senators to revive the private debt collector provisions that expired several years ago.  For the moment the revival of that bad idea seems to have lost steam.  A new and creative way to use private parties for what seems like a governmental function – the examination of a tax return – has surfaced and deserves watching.

The IRS has changed the regulation concerning who can participate in an examination to include private contractors.  It has hired a private law firm as an expert.  Microsoft appears to be the first examination using private contractors to become public.  The issue deserves attention in order to determine if this represents a new and better way to examine complex returns or a capitulation of what was previously considered a governmental function.

Today, Microsoft filed a FOIA suit against the IRS seeking to learn more about the terms of the contract between the IRS and Quinn Emanuel, a commercial litigation law firm (the complaint can be found here, along with the required declaration, and Exhibit I.aExhibit I.bExhibit I.c,  Exhibit I.dExhibit IIExhibit III, and Exhibit IV).  It appears that the IRS examination team wants to use the law firm to assist it in conducting the examination and has hired the firm as experts.  If successful, the FOIA litigation will make clear the precise intentions of the IRS as it moves to a new method of examining tax returns.  Those intentions, if they become public, will allow a better understanding of what appears to be a new avenue of removing the wall between government and private contractor in the area of taxation.

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Hiring private experts in tax cases does not present new or novel issues.  The IRS regularly hires experts to assist it in valuing property or other discreet functions where expert testimony or expertise in a particular subject not within the realm of the IRS is needed.  To my knowledge the IRS has not previously hired an expert to participate in the examination of a return but rather has hired experts to assist with discreet issues which turned up during the audit.  The hiring of Quinn Emanuel in conjunction with the promulgation of the new temporary regulation allowing private contractors to participate in questioning a taxpayer during the examination process suggests that the IRS seeks to try a new technique in the examination of large corporations presenting sophisticated issues that may test the capabilities of the IRS examiners and the Chief Counsel attorneys who assist them.

Some of the concerns raised about the use of private collectors appear relevant in deciding if this new direction brings a good or bad direction for the IRS.  Like collection, the examination of a tax return seems to represent a core government function.  If a private contractor can conduct a little bit of the examination of a return, at what point does the use of the contractor stop or could the entire examination process get turned over to third parties?  If using a private contractor to assist in the examination of a large and sophisticated corporate tax return becomes accepted, could private contractors also examine the returns of smaller corporations or individuals?  Where should the line between core government function and private action exist on the exam side of the equation and does it present different issues about government function than the collection side of this issue?  Does this need to stop at the examination level or should the IRS consider hiring private lawyers who might possess greater expertise than Chief Counsel lawyers to provide advice on the case or to try the case?

Bringing greater expertise to the examination of a large corporation makes sense if the IRS lacks the expertise currently but should such expertise come in the form of a private contractor or new government employees.  This case appears to start the IRS down a new path which, unlike the decision on the use of private debt collectors has not played out in the public. The temporary regulation is titled “Participation of a Person Described in Section 6103(n) in a Summons Interview Under Section 7602(a)(2) of the Internal Revenue Code.”  The description of the change suggests that the change clarifies “that persons with whom the IRS of the Office of Chief Counsel contracts for services described in section 6103(n) and its implementing regulations may be included as person designated to receive summonsed books, papers, records, or other data and to take summoned testimony under oath.” (emphasis added)

Section 7602 is the general summons provision of the Code.  The issue of the IRS using summonses in large case examinations has been much debated over the past year as the IRS has initiated a new strategy and received some tongue in cheek commentary from me in a prior blog post.  Historically, the IRS has used summonses very sparingly as a part of its examination of large corporations (and of small corporations and of individuals).  Summonsing information generally comes as a last resort when a taxpayer refuses to cooperate.  The examiners dislike the summons process because it significantly slows down an examination and fosters an adversarial atmosphere.  I do not know if summonsing has become routine over the past year following the issuance of the new audit guidelines by the IRS.

The temporary regulation says that the contractor can fully participate in a summons interview and describes full participation to include “receipt, review, and use of summonsed books, papers, records, or other data, being present during summons interviews, questioning the person providing testimony under oath, and asking a summonsed person’s representative to clarify an objection or an assertion of privilege.”  The temporary regulation cites to transfer pricing as a circumstance in which outside contractors often assist the IRS by providing specialized knowledge.

The temporary regulation acknowledges the potential concerns of having an outside contractor perform an inherently governmental function and states that the IRS will ensure that the core functions surrounding the summons will remain in the control of the IRS – “deciding whether to issue a summons, deciding whom to summon, what information must be produced or who will be required to testify.”  The explanation with the temporary regulation states that the IRS employee will issue the summons and says that it will safe guard the inherent governmental function by making sure that an IRS employee is always present when the private contractor ask questions of a summonsed witness testifying under oath.

The issuance of the temporary regulation giving private contractors the right to examine taxpayers during a summons drew one public comment from the Texas bar.  The comment made by the Texas Bar to the temporary regulation acknowledged that giving a private contractor information obtained during a summons enforcement was appropriate and that having an IRS employee consult with an expert during the interview was an appropriate use of the expert but expressed concern with the expert actually questioning the summonsed party.  The commenter expressed concern relating to the issue of multiple counsel examining a witness during trial.  Courts do not permit more than one counsel to examine a witness and for many of the reasons it is not allowed in court, the Texas Bar commentators felt it would present problems in examining a witness during a summons enforcement proceeding.  They also expressed concern about loss of control over the contractor by the government agents and attorneys coupled with the legal uncertainty of the authority of a private contractor to examine a witness.  They questioned whether the statute provided authority for the regulation citing the language of the statute which authorizes “only an officer, employee or agency of the Treasury Department to take testimony of witnesses.”

This should be an interesting issue to follow.  Whether it will receive attention from Congress or the IRS employee union could add to that interest but it will almost certainly come to the attention of the court system when the IRS seeks the examination under oath by a contractor.

Summary Opinions for 11/07/14 & 11/14/14

Trying to get somewhat back on schedule with the SumOp’s, so we are covering two weeks of material in this post.

First, I want to note that Keith has a really interesting post up on Forbes regarding Microsoft filing a FOIA suit yesterday against the IRS to determine the extent to which the IRS is using an independent contract (here the law firm Quinn Emanuel) in its examination.  This is going to be a very hot  topic moving forward.  That post will find its way to PT later today, but probably not until late in the afternoon.

Before getting to the items we missed over the last few weeks, we had a very strong guest post by Christopher Rizek on the Sexton v. Hawkins case, which was very well received two weeks ago. You should check it out if you didn’t read it when we originally posted.  In October, we had a somewhat related post from Michael Desmond on the future role of Circular 230 in tax compliance, which can be found here.  The comments to that post, which are found here, have recently expanded significantly, as various Villanova LLM students were asked to respond as part of their professional responsibility class.  The students provide some quality feedback, astute observations, and ask some good follow up questions.

To the other procedure.

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  • Veolia Environment is still fighting with the IRS over document discovery.  We touched on this last year around this time.  The case again discusses privilege regarding various draft reports by experts, and other lawyer communications.  For one draft valuation, which was then shared with the company’s accountants at PWC, the Court found privilege had not been waived, stating, “PWC is not an adversary nor a conduit to an adversary.”  That seems like a favorable view on what is required to blow privilege.  The case goes through many other specifics as to the types of documents that remained privileged.
  • Jumping to a case from early October that we (I) missed in Comparini v. Comm’r, where the Tax Court determined it had jurisdiction to review an IRS determination to deny the taxpayers’ whistleblower claim.  The letter was not formatted as a determination, and prior letters had been sent to taxpayers; however, letter was the first one to use term “determination”, stated the matter was closed, and did not indicate any further administrative procedures were available.  The Court found that prior letter could have been a determination, but this later letter was also a determination (there is an interesting back and forth in the concurring and majority opinion about the basis for jurisdiction).  The concurring opinion, and Judge Holmes in comments to the CA Bar Association, both noted that the Court is having to spend a lot of time on procedural matters and jurisdictional questions due to the Whistleblower Offices’ habit of issuing various statements that seem to be determinations, and not having set forms for indicating when a determination had been made.  Tax Litigation Survey has coverage here.
  • Another older item that I didn’t catch.  The Service issued an Action on Decision  with regard to the Dixon case from last September, which we wrote about here.  The case had to do with an employer’s ability to designate employment tax payments that were not withheld at the source.  The Service believes the Tax Court was wrong in Dixon in deciding such payments can be designated against a taxpayer’s specific liability.
  • From Jack Townsend’s Federal Tax Crimes Blog, a discussion of the jury instructions in the Weil case as regard the good faith defense.  Not a long post, but interesting summary of this attack on the government’s case, and how the instructions could have influenced the jury.
  • Earlier this year, Google killed off one of its coupon saving sites, Zavers (reminds me of Zima’s “zomething different” slogan—don’t use Z’s where they are not needed—your company will fail), but the remains of the aggressive tax planning of Zavers’ chief technology officer have been resurrected by the Tax Court in Brinkley v. Comm’r.  As a side note, it is nice to be Google, who bought Zavers for close to $100MM in 2011, probably spent a bundle more on it, and are now walking away, as it was not growing fast enough (so says the article linked above).  The underlying matter has to do with Mr. Brinkley’s characterization of his income as capital gains, whereas the Service and Tax Court thought a portion should be ordinary income.  He had apparently been very clear that his ownership should never dip below 3% of the stock, which Zavers agreed to; however, at the time of the Google purchase, he owned around 1%.  In the end, he was paid as though he still held 3%.  The two tax procedure items involved the shifting of the burden, and reliance on a practitioner as reasonable cause.  Neither treads new ground.

On the shifting of the burden, the taxpayer argued that he offered reasonable evidence that an item of income reported on an information return was incorrect, shifting the burden under Section 6201.  The Court, however, was relying on other evidence submitted by the IRS, and not the information return, so the burden did not shift.  Mr. Brinkley also argued that he complied with Section 7491, and produced “credible evidence to support his position as to a factual issue, complie[d] with substantiation requirements, and cooperate[d] with the Secretary with regard to all reasonable requests for information,” but the Court found that Mr. Brinkley failed to offer any credible evidence of his position.

As to the reliance, the Court found that Mr. Brinkley failed to disclose his percentage of the stock to his advisers, how much that was valued at, and  did not provide them with all the documents from the deal.  It is clear law that where the adviser is not informed of all pertinent information, the taxpayer cannot rely on the adviser’s advice or work to get out of a penalty.

  • Susquehanna Bank, which was purchased last week by a North Carolina bank, recently won a lien priority case in the Fourth Circuit.  The Court held the district court incorrectly determined a trust deed, which the bank received prior to the IRS lien, but failed to record, was entitled to priority under Section 6323(h) based on Maryland law relating the recording of the trust deed back to the execution date.  However, the holding was affirmed because the bank was protected by Maryland’s equitable conversion law, which directs that when a taxpayer executes a deed in exchange for a loan prior to a lien filing, the deed took priority.
  • Kurko v. Comm’r is packed with tax procedure.  Lew Taishoff’s blog has some coverage here.   The cases discusses credit elect overpayment jurisdiction before the tax court, tolling for financial disability under Section 6511(h), how those interact, and the Court’s “next friend” rules under Tax Court Rule 60(d).  The Court encouraged Ms. Kurko, who suffered from substantial mental health issues, to have someone file a Motion to Be Recognized as Next Friend.  The Court said such motion should recite that:

o   The person filing would like to be recognized as Ms. Kurko’s next friend and would represent her best interests;

o   That Ms. Kurko cannot prosecute the case without help;

o   The person has a significant relationship with Ms. Kurko; and

o   There is no other person better suited to serve as next friend.

  • The Tax Court had occasion to review the 2006 changes to Section 6664, and the removal of the reasonable cause defense to the gross valuation misstatement penalty in Reisner v. Comm’r.  Prior to 2006, old Section 6664(c)(2) allowed the reasonable cause defense to the penalty when value was provided by a qualified appraiser and the taxpayer made a good faith attempt to determine the value.  That was tossed in the 2006 amendment for gross valuation misstatements (those with only substantial valuation misstatements can still show reasonable cause).  In Reisner, the taxpayer received a charitable deduction for a façade easement.  A portion carried forward to 2005 and 2006.  The Service determined the donation was valueless, and no deductions were allowed.  The gross valuation misstatement penalty was not imposed in 2004 or 2005 because the taxpayer was able to show reasonable cause.  For 2006, the return was filed after the changes to the statute, and the Service imposed the penalty on the carryover charitable deduction.  The Court held the penalty was correctly imposed, stating:

Because their 2006 return was filed after the effective date of 2006 amendments to I.R.C. sec. 6664(c)(3), Ps are precluded under that section from raising a reasonable cause defense to imposition of the gross valuation misstatement penalty for the underpayment on their 2006 return attributable to the carryover of their charitable contribution deduction.

An interesting result, where the action was protected in the initial year, but the statutory change resulted on penalties in future years based on the same transaction.

  • The Ninth Circuit reversed the Tax Court in JT USA, LP v. Comm’r, holding Section 6223(e)(3)(B) was clear and unambiguous and did not allow a partner in a partnership to elect out of the TEFRA proceedings unless the partner elects to have all his or her partnership items treated as non-partnership items.  For the majority, that was all partnership items, regardless if those were owned through other entities.  From the case:

 

26 U.S.C. § 6223(e)(3)(B), entitled “Notice to Partners of Proceedings,” reads in pertinent part, “In any case to which this subsection applies, if paragraph (2) does not apply, the partner shall be a party to the proceedings unless such partner elects – . . . (B) to have the partnership items of the partner for the partnership taxable year to which the proceeding relates treated as nonpartnership items.

In the prior proceeding, the tax Court held that that “§ 6223(e)(3)(B) permits taxpayers to opt out of the partnership proceeding with respect to their indirect interests but to leave in that proceeding their alleged remaining direct partnership interests.”  The Ninth Circuit disagreed, and said that the plain language states it is all or nothing when it comes to opt out.  The opinion was split, and the dissent stated the taxpayer should have the ability to completely elect out with regard to their direct interests in the partnership, but not do so with the indirect interest in the partners (and/or the other way).  I found this surprising, and my initial (somewhat uninformed) thought is that the tax court had this right.

 

Summary Opinions for the weeks of July 4th and July 11th

Special double feature this week.  Summary Opinions will cover items we did not otherwise cover in the previous two weeks.

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  • IRS has announced that ITINs will now only expire if not used on tax returns for five consecutive years.  They used to expire after five years.
  • From Accounting Today, a story on the TIGTA Report regarding the Service’s poor handling of amended tax returns.   TIGTA found about 20% of the amended returns had erroneous refunds issued.  On the bright side, four out of five didn’t .  That would have landed you a solid B- in college; enough to return the following semester and continue drinking.
  • From Jack Townsend’s Federal Tax Crimes Blog, a write up of US v. McBride, where a lawyer was indicted for tax obstruction, and the prosecution requested the indictment be sealed.  Jack uses the word skullduggery, which is pretty awesome, but the post generally covers when indictments should be sealed and the reasons that, in general, they should not.
  • In Public.Resource.org v. US, the Northern District of California has dismissed the Government’s motion to dismiss the FOIA request of Public.Resource.org for all types of nonprofits’ Form 990s in machine readable format.  The Feds claimed that FOIA is trumped by the Code sections dealing with the release of Forms 990.  The Yes We Scan organization is able to fight another day as the Court found that there was no basis for the Service’s position, and the position would undermine FOIA.
  • The Frank Sawyer Trust of May 1992, which we very briefly mentioned in SumOp before, requested the Tax Court reconsider its prior holding that it was liable as a transferee for tax debts of entities it had held.  The two items in dispute were whether the IRS should apply equitable recoupment for estate tax overpayments in the settlor’s wife’s estate, and if the trust should be responsible for the penalties imposed on the entities.  Terribly oversimplified, the same income tax issue giving rise to the tax debt also caused the trust to be able to sell the entities at higher prices.  Those entities were in the spouse’s estate, and the resulting tax inflated the entities value and arguably a refund of estate tax due on that amount.  The Court stated the test for recoupment as:

 

[t]o apply equitable recoupment, the taxpayer must prove the following elements: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.

 

Only points two and three were in dispute.  The Court found that income and estate tax can be imposed on the same item and that the Service was inconsistently treating the two taxes arising from that same item.  As to the penalties, the actions giving rise to the penalties occurred months after the sale by the trust.  The Court found the Service failed to evidence the connection between the trust and the inappropriate acts, and declined to impose the penalties on the taxpayer.  An interesting case, and one that I suspect will be appealed – again (it has already gone up to the First Circuit at least once).

  • In Heckman v. Comm’r, the Tax Court has held that the extended six year statute of limitations applies for assessment on a taxpayer when the taxpayer receives a distribution from a disqualified ESOP in an amount exceeding 25% of his gross income for the year.  Section 6501(a) imposes the general three year statute, but that can be extended under Section 6501(e)(1)(A) to six years when a taxpayer makes an omission on his return in an amount that is greater than 25% of the amount of gross income stated on the filed return (As I’m sure you will all remember, this provision has received a lot attention over the last few years regarding inflated basis transactions).  If you adequately disclose the transaction or item, the normal three year statute still applies.  The disclosure must be legit though, and can just be you yelling it at an IRS building as you drive by.  The Court found the possible verbal disclosure some years later, and the return of a related entity that had some clues as to the ESOP termination were insufficient disclosure, and allowed the six year statute.  This situation was fairly egregious, and the same individual controlled all aspects of the entities, ESOP and his personal returns.  But what about the situation where the individual did not know his ESOP distribution was not properly tax deferred, or perhaps were an IRA rollover is not valid for reasons outside the taxpayer’s control?  Probably the same result, as the statute speaks only to “omits from gross income”, and has no language regarding knowledge or intent.  See Benson v. Commissioner.  I would still research the issue, and try to come up with a good argument, especially if there was no reason your client should have known about the omission.
  • Big Mo Vaughn has struck out with the Tax Court (much like all his plate appearances with the Mets at the end of his career – horrible acquisition by then GM Steve Phillips, almost as bad as Mr. Phillips decision to have an affair with a twenty-something-year-old intern at ESPN). The Court found he did not show reasonable cause for failure to file his tax return and failure to pay his taxes where there was not evidence if he even asked his accountant or financial advisor if it had been done.  Unfortunately, Mo’s financial advisor apparently stole close to $3MM from him during this same time period.  In a clever argument, Mo argued this caused him to be “disabled”, which was in line with a bankruptcy case, Am. Biomaterials Corp, 954 F2d 919, out of the Third Circuit.  Unfortunately, the Tax Court sided with Valen Mfg. Co. v. US, 90 F3d 1190, out of the Sixth Circuit, which held  in Am. Bio the CEO and CFO were the bad actors, making it impossible for the corporation to comply.  Whereas in Valen, the bookkeeper failed to file, but the executives remained able to review the bookkeepers actions.  The Tax Court said Mo was more like the executives in Valen, who could have questioned his crook of a financial planner.