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.

 

 

 

Summary Opinions for the Week Ending 8/21/15

We here at PT are huge fans of self-promotion, so I am thrilled to link Les’ recent article in The Tax Lawyer.   Les’ article, Academic Clinics: Benefitting Students, Taxpayers, and the Tax System, was published in the Tax Section’s 75th Anniversary Compendium – Role of Tax Section in Representing Underserved Taxpayers.  There are various other articles in the full publication that are worth reading (and hopefully will make you all feel guilty enough that you aren’t doing enough pro bono work to either cause you to assist some underserved folks or donate some money to those who are).

To the tax procedure:

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  • Hopping in the not-so-wayback-machine, in October of 2014, SumOp covered Albemarle Corp. v. US, where the Court of Federal Claims held that tax accruals related back to the original refund year under the “relation back doctrine” in a case dealing with the special statute of limitations for foreign tax credit cases.   As is often the case in SumOp, we did not delve too deeply into the issue, but I did link to a more robust write up.  It seems the taxpayers were not thrilled with the Court of Federal Claims and sought relief from the Federal Circuit.  Unfortunately for the taxpayer, the Fed Circuit sided with its robed brothers/sisters, and affirmed that the court lacked subject matter jurisdiction because the refund claim had not been made within the ten year limitations period under Section 6511(d)(3)(A).   This case deserves a few more lines.  The language in question states,  “the period shall be 10 years from the date prescribed  by law for filing the return for the year in which such taxes were actually paid or accrued.”   When the tax was paid or accrued is what generated the debate.

In the case, a Belgium subsidiary and its parent company, Albemarle entered into a transaction, which they erroneously thought was exempt from tax, so no Belgian tax was paid.  Years in question were ’97 through ‘01.  In 2002, Albemarle was assessed tax on aspects of the transaction in Belgium, and paid the tax that was due.   In 2009, Albemarle filed amended US returns seeking about $1.5MM in refunds due to the foreign tax credit for the Belgian tax.  Service granted for ’99 to ’01, but not ’97 or ’98 because those were outside the ten year statute for claims related to the foreign tax credit under Section 6511(d)(3)(A).  Albemarle claimed that the language “from the date…such taxes were actually…accrued” means the year in which the foreign tax liability was finalized, which would be 2002 instead of the year the tax originated.  Both the lower court and the Circuit Court found that the statute ran from the year of origin.  The Circuit Court came to this conclusion after a fairly lengthy discussion of what “accrue” and “actually” mean, plus a trip through the legislative history and various doctrines, including the “all events test”, the “contested tax doctrine”, and the “relation back” doctrine.  The Court found the “relation back” doctrine was key for this issue, which states the tax “is accruable for the taxable year to which it relates even though the taxpayer contests the liability therefor and such tax is not paid until a later year.” See Rev. Rul. 58-55.  This can result in a different accrual date for crediting the tax against US taxes under the “relation back” test and when the right to claim the credit arises, which is governed by the “contested tax” doctrine.

  • Prof. Andy Grewal, a past PT guest poster, has uploaded an article on SSRN entitled “King v. Burwell:  Where Were the Tax Professors?”  The post discusses possible reasons why tax professors largely did not enter the public debate on the merits of the legal arguments in King v. Burwell, and encourages them to be more active in future similar cases.
  • Another fairly technical issue was addressed in PMTA 2015-009, where the Service discussed interest netting when it is later determined that there was no original overpayment.  Under Section 6621(d), interest is wiped out if there equivalent overpayments to the taxpayer and underpayment to the Service.  The PMTA has a fair amount of analysis, but the issue and conclusion are a sufficient summary for our purposes.  Issues are:

(1) Whether an underpayment applied against an equivalent overlapping overpayment to obtain a net interest rate of zero pursuant to Section 6621(d) is available for netting against another equivalent overlapping overpayment if the Service determines the first overpayment was erroneous, (2) Whether the same is true for an overpayment netted against an erroneous underpayment, and (3) Whether the cause of the error affects these answers.

And concludes:

(1)  An underpayment that was previously netted against an equivalent overlapping overpayment is not available to net against another equivalent overpayment if the taxpayer has retained the benefit of the original interest netting (the interest differential amount paid or credited to the taxpayer). If, however, the taxpayer did not retain the benefit of the original netting, then the underpayment is available for netting against another overpayment. (2) The same analysis applies to an overpayment netted against an erroneous underpayment. (3) We are unaware of any circumstance where the cause of the error would change our answers.

  • I haven’t highlighted Prof. Jim Maule’s blog, MauledAgain, in a while, which is a failing on my part.    Here you will find Prof. Maule’s post on tax fraud in the People’s Court and if you scroll down on this page you will find an update to the case.  Two schmohawks agreed to commit tax fraud by transferring the value of a child tax credit.  The plan fell apart, and one sued the other in People’s Court to enforce the “contract” between the co-conspirators.  The Judge dismissed the case because fraudulent contracts are not enforced.  Prof. Maule quotes from the show, where the plaintiff said, “What about pain and suffering?”  Stole my line.
  • TIGTA has released a report about Appeals penalty abatement decisions, and it isn’t great.  First, it isn’t great because, as the report concludes, Appeals is not adequately explaining its abatement decisions.  I agree Appeals should indicate why it is abating penalties, but I do not agree with the second conclusion, which is that Appeals is leaving money on the table.  Meaning, it should not be waiving those penalties.  TIGTA reports that an additional $34MM could have been collected on the abated penalties.  It also reported that many cases were inappropriately considered by Appeals because Compliance had not reviewed the abatement.  Given that penalties are essentially applied to every underpayment, with no consideration to whether the taxpayer reasonably attempted to comply, it seems inappropriate to assume those penalties are all collectible (or to encourage Appeals to abate less).
  • On Jack Townsend’s Federal Tax Procedure Blog is a discussion of the tax perjury case, US v. Boitano (What would Brian Boitano do?  Not perjure himself in a tax filing, that is for darn sure.  This is Steve Boitano- presumably not related to the super hero/figure skater).  Questions presented in the case were whether filing a document was required under Section 7206(1) for perjury, and what constituted filing.  In Boitano, the taxpayer provided returns to an agent who was not authorized to accept filed returns.  Agent realized the returns were questionable and never forwarded to appropriate Service employee for filing.  The 9th Circuit held filing was required (not stated in statute), and giving the return to the agent did not constitute filing.  Therefore, no crime under Section 7206(1).
  • Like Thor’s mighty hammer, the IRS has slammed down the tax law upon Marvel, and not even its super team of Avenger like lawyers could provide a  Shield (select from Captain America’s, or Agents of) from the consequences.  The Tax Court has decided the hulking consolidated group of the Marvel universe was required to offset its net operating loss by the cancellation of debt  income, and could be applied against the NOL of one member of the consolidated group.   I’ll touch on the holding below in broad strokes and I’ll stop trying to incorporate Marvel superheroes, but what I found most interesting about this case is that it arose out of the 1996 Chapter 11 Bankruptcy of Marvel, which seems to just print money with its movies now.  I had completely forgotten also that two real life titans (of industry) got in dustup in ’96 about that bankruptcy, Ronald Perelman and Carl Icahn.  You can read more about the amazing twenty year turn around here and here.   That story is more interesting than the law in this one.  Under Section 108(a), discharge of indebtedness income is not included as income if the discharge is pursuant to a Chapter 11 bankruptcy.  The excluded income reduces certain other tax attributes in certain circumstances, including a reduction of NOLs that carryover from prior years.  See 108(b)(1)(2).  Marvel’s subsidiary only reduced the carryover for the subsidiaries  in Chapter 11, and not the parent group that filed consolidated returns with the subs.  The Tax Court found that the aggregate approach was required, and the COD income had to reduce the NOLs of the consolidated full group.  I’ve glossed over the analysis, which is worthwhile if you have this specific type of issue.

 

 

 

Summary Opinions for August 1st to 14th And ABA Tax Section Fellowships

Before getting to the tax procedure, we wanted to let everyone know the application for the ABA Tax Section fellowships is now open.  Here is a link to the release regarding the applications and the Christine A. Brunswick Public Service Fellowships.   Here is another link regarding the process, which also highlights recent winners.   I’ve had the pleasure of meeting many of the recipients, and it is an esteemed group providing amazing services thanks to the ABA Tax Section.

A few quick follow ups to some items from last week.  We had a wonderful post from Robin Greenhouse on the BASR Partnership case dealing with the statute of limitations and fraud of the tax preparer, which can be found here.  Ms. Greenhouse and Les were both also quoted in a story on the topic for Law360, which can be found here (may be behind a subscription wall, sorry).  Keith posted on the Ryscamp case, which dealt with jurisdiction to review a determination that a taxpayer’s position is frivolous.  Keith was also quoted about the case in the Tax Notes article, which can be found here (also behind subscription wall, sorry again).

Here are some of the other tax procedure items we didn’t otherwise cover:

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  • We flagged earlier in the month that Congress has overturned Home Concrete with the new Highway Bill.  The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 has a few other changes to tax procedure laws.  Probably the biggest news is that partnerships and s-corps will need to file tax returns three months and fifteen days after the close of their tax years (for calendar filers, that will be March 15).  This is a change for partnerships, but not s-corps.  C-corporations, however, will not have to file until four months and fifteen days after the close of the tax year (April 15 for calendar year filers).  The goal of this is to get k-1s to individuals prior to the April 15 filing deadline.  I assume c-corps were pushed back a month on work flow concerns for preparers.  The act also revised the extended due dates for various types of returns.  In addition, next year, FBARs will be due April 15, and there will be a possible six month extension.
  • The District Court for the District of New Jersey decided a lien priority case where a bank recorded a mortgage regarding a home equity line of credit (HELOC), some portion of which may have been withdrawn after a federal tax lien was filed.  In US v. Balice, the bank argued that the withdrawal date of the funds on the HELOC was irrelevant and state law directed that the date related back to the original recording date (the Court declined to offer an opinion about whether or not this is the actual NJ law).  The government argued that federal law applied, which held first in time is first in right, but only to the extent the funds were already withdrawn.  The Court held that state law defined the property rights, but federal law governed the lien priority.  Under federal the federal statute, the security interest was only perfected when the funds were actually borrowed.  See Section 6323(a).
  • The IRS has issued two important Revenue Rulings in the international arena.  The first outlines the procedures for making competent authority requests.  The second is for taxpayers seeking advanced pricing agreements, and can be found here.
  • Jack Townsend on his Federal Tax Procedure blog has a discussion of Sissel v. US Dept. HHS, where the majority, concurring and dissenting opinions all review the Originations Clause of the Constitution and its application to Obamacare.
  • I unabashedly praised John Oliver’s sultry singing about the IRS with Michael Bolton previously in our pages.  In that ditty, Oliver pointed out we should be hating on Congress, not the IRS.  Peter Reilly over at Forbes makes a good point that in Oliver’s new IRS bit, he should probably be complaining about Congress again and not the IRS about the lack of church audits (check out Section 7611, which is Congress’ doing).
  • Service issued guidance to its new international practice unit on transactions that might generate foreign personal holding company income under subpart F.  Caplin & Drysdale have coverage here.
  • The Tax Court seems to have just thrown an assist to the Service in Summit Vineyard Holdings v. Comm’r, holding that an individual had apparent authority to execute an extension for the statute of limitations, even though the individual lacked actual authority.  The Court somewhat saved the Service, because it probably should have known that the TMP was a different entity in the year in question, as it had been informed of the switch.  The Court noted the auditing agent had very limited TEFRA knowledge (I’m not sure that excuses the IRS from properly following the rules).  The agent had the manager of the then current TMP sign, instead of the TMP for the year in question.  There appears to be somewhat of a split on this, but the Court determined that the Ninth Circuit (where the appeal would lie) would apply state law and find apparent authority based on the evidence and actions taken by the individual.  Saved by the Court!  Based on the facts, it does not seem that unfair though, as the individual was the manager of both TMPs, and it seems like he also thought he was properly executing the paperwork and extending the SOL.
  • In Chief Counsel Advice, the Service has concluded it can only apply the Section 6701 aiding and abetting penalty one time against a person who submitted false retirement plan application documents.  This is the case even though multiple documents could be submitted with fraudulent information, and even though it could result in an understatement for the plan and each participant.
  • The Service has also released PMTA 2015-11, which outlines the application of the penalty under Section 6662A(c) for taxpayers who failed to disclose participation in listed transactions involving cash value life insurance to provide welfare benefits.  This is a very specific issue, so I won’t go into much detail, but the guidance is fairly thorough and provides good insight into the Service’s thoughts on the matter.
  • And another Section 7434 case.  I wrote about the Angelopolous case earlier in the week, which dealt with who was the “filer” of the information return.  In US v. Bigley, the District Court for the District of Arizona reviewed whether an employee’s claim against his employer for false returns was time-barred.  The suit was well past the six year statute, and the employee clearly had knowledge over the last year.  Section 7343(c) outlines the statute of limitations, and states the statute is the later of six years or one year after the return is discovered by exercise of reasonable care.    The Court found that the employee received the information returns upon filing, so the six year statute clearly applied, and it would be impossible to have the one year statute in that situation.  The actual language is “1 year after the date such fraudulent information return would have been discovered by exercise of reasonable care.”  I wonder if it would be possible to create a larger fraudulent scheme, whereby the recipient would receive the information return but not realize it was fraudulent until a later date.  Would the one year statute then apply?
  • My brother-in-law just got a Ph.D. (congrats Alex! I doubt he will ever read this).  In honor of that esteemed accomplishment, here is an infographic highlighting all kinds of negative financial and other statics related to Ph.Ds.  I make no assurances to the veracity of the graphic’s claims, and I am generally in favor of graduate degrees, but I found the stats interesting.

 

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:

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  • 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 12/19/14 to 1/05/15

Back in the saddle after quite a few weeks off.  Holidays, home renovations, and the passing of my maternal grandfather (phenomenal guy, who will be incredibly missed by everyone who knew him) took priority over blogging.  SumOp isn’t usually that time sensitive though, so we can pack three weeks into one post.

Here are the items we found interesting that we didn’t otherwise cover over:

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  • Let’s start off with Jack Townsend’s Federal Tax Crimes blog, and his post on Muncy v. Comm’r, which can be found here.  This Muncy is a gentleman who was not fond of following tax laws, and not the quaint town in north central Pennsylvania where I lived as a teenager.  Leroy Muncy created some type of fake employment agency and amazingly convinced his employer to pay his wages to this fake company in an effort to stop paying employment taxes.  I would guess he ran inflated expenses through the company to decrease his income taxes also, but that is just speculation.  When his fake employment company concept failed, he claimed he was a “sovereign living soul”, not subject to the rules of his home state of Arkansas or the United States of America. The civil court found he had failed his sovereign citizenship test (because it is made up and never recognized as a valid argument). Fast forward a few years, and there was criminal tax restitution and a potentially larger civil liability outstanding.  The Tax Court discussed the new legislation allowing immediate tax restitution on the criminal amount, and the issues that could cause in requiring a notice of deficiency for the full civil amount (which includes the criminal restitution amount).  Jack discusses the issue and provides his thoughts in the post.
  • Chief Counsel determined that employment tax liabilities and worker classifications were not partnership items under TEFRA, as they were items imposed and determined under Subtitle C, whereas TEFRA partnership items are those found under Subtitle A.  See LAFA 20145001F.  This general position has been stated before.  For an interesting discussion regarding this topic, and when related items of income may require TEFRA proceedings see CC Memo 200215053.
  • The Service shared its international tax training materials, which are found here.  There is a lot of material, and I have not gotten through it all yet.  The Service did caution that such training does not constitute pronouncements of law, and cannot be relied upon…but it will show how your agent will be approaching your audit.  Some of the units provide good overviews, while others dig down into specifics, like “Disposition of a Portion of an Integrated Hedge.”  My wife literally fell asleep when I was explaining that unit to her (or pretended to be asleep so I would stop talking).
  • The Fourth Circuit, in Wolff v. US,  in early December had a bankruptcy holding that I doubt is breaking new ground regarding preferential transfers (see Begier v. IRS. 496 US 53, cited by the 4th Cir.), but I hadn’t reviewed a case on the specific matter before.  The issue and holding, as outlined by the Court were:

whether the trustee in bankruptcy may reclaim as property of the debtor the approximately $28 million transferred by the debtor to the IRS during the 90 days preceding the filing of the bankruptcy petition. We agree with the bankruptcy court and the district court that, as a matter of law, the debtor lacked an equitable interest in the funds paid over to the IRS, and therefore we affirm the judgment.

The Fourth Circuit found that the property lacked the prerequisite of being the debtor’s property, because under applicable state law it held the funds in express trust and had no interest in the assets or discretion to use those funds for anything other than paying the government.

  • In US v. Titan International, the Service sought to obtain enforcement of its summons looking for the company’s 2009 airplane flight logs and general ledger in connection with its 2010 audit.  The taxpayer objected, as the Service has previously audited its 2009 return, and reviewed the requested documents. The taxpayer attempted to rely upon Section 7605(b), which generally states taxpayers do not have to hand over their books and records multiple times for the same year.  In Titan, the IRS argued it needed the documents to verify a 2010 deduction, and did not intend to review 2009 again.  The Court found the testimony and reasoning of the Service valid, and enforced the summons. This drives me crazy also (especially when they ask for the return), though the law (as Titan explains) gives the Service quite a bit of leeway to examine records from a previously examined year if the records relate to another possible year’s liability.
  • “Double-D Ranch” seems like a place in Nevada my wife would be very upset to find credit card receipts from, but it was apparently a far less seedy tax shelter for the one-time American Home Products (Wyeth) owner, Albert Diebold.  The Ninth Circuit found that shareholders, here the Salus Mundi Foundation, were responsible for a corporation’s taxes based on the state fraudulent conveyance statute and the transferee liability rules. See Salus Mundi Foundation v. Comm’r.   Peter Reilly has coverage at Forbes, where he loops in Frodo Baggins, all the tax shelter goodness, and the Diebold family history, found here.  If this all sounds familiar, it’s because the Second Circuit reviewed the exact same facts in Diebold Foundation v. Comm’r from 2013, which the Ninth Circuit looked to in its holding.
  • Southern District of Mississippi denied the Government’s motion to dismiss a taxpayer’s son’s action for quiet title on property the IRS was trying to foreclose its liens upon for the father’s taxes based on nominee theory; the Government argued that Sections 6325(b)(4) and Section 7426(b)(4) relating to some expedited lien remedies were the only remedies available to the taxpayer.  The Court in US v. McFarland disagreed, holding those were available remedies, but did not foreclose a quiet title action under 28 USC 2410.
  • In Larry J. Austin v. Comm’r (there was a Larry P. Austin case decided a few days later by the Tax Court – little confusing), the IRS prevailed in showing it was substantially justified in its position regarding foreign interest on accounts held in the name of the taxpayer, even though the interest was not actually taxable to the taxpayer.  Although the taxpayer prevailed on the item and amount in controversy, and met the financial thresholds for fees, the Service position was reasonable enough to prevent the imposition of costs.  A qualified offer was presumably not provided in this matter; although, there was a stipulated settlement, so the Service could have argued the concession was not the taxpayer prevailing, perhaps making such an offer useless.  We’ve discussed that before here and here (and I don’t like the court holdings very much).
  • John Doe is apparently involved in shipping, not just banking.  The DOJ has issued summonses to FedEx, DHL, and UPS to obtain information about clients who may be facilitating illegal activity resulting in tax fraud.  Robert Woods at Forbes has coverage here.

A Terrible (But Apparently Effective) Way to Thwart the IRS’ Civil Fraud Penalty

This post originally appeared on Forbes on December 17, 2014, and can be found here.

Frivolous arguments are not ‘How to STOP the IRS,’ but saying them loudly enough and often enough might prevent the fraud penalty.  The Tax Court in Kernan v. Commissioner recently had the opportunity to review the case of Eugene Kernan.  Mr. Kernan seems to have a lot of interesting ideas, which you can find at this webpage, www.theamericanrepublic.com (absolutely not an endorsement).   Some of Mr. Kernan’s ideas pertain to his not having to file tax returns or pay taxes.  You too can learn how to stop paying taxes for the low price of $1,295.00 by purchasing “How to STOP the IRS” on CD-Rom…

I know that seems like an exciting offer, but, as most readers have probably surmised, Mr. Kernan eventually drew the IRS’ ire, and was assessed taxes, penalties and interest for many of the past years where he was implementing his “How to STOP the IRS” strategies.  Many of the readers–and the author of this post—are probably happy to see Mr. Kernan forced to fulfil one of his civic duties, and there is some entertainment value in person who is smug but incorrect being publicly reprimanded, but we focus on tax procedure and not humiliation.  Thankfully, this backdrop provides an interesting tax procedure issue—whether or not Mr. Kernan’s proselytizing about his improper tax scheme to everyone who would listen, including on TV and to the IRS, was sufficient to insulate him from the civil fraud penalty.

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The Facts

Around 1993, Mr. Kernan ceased filing returns, and years 2001 through 2006 were at issue in the Tax Court case.  Mr. Kernan’s interpretation of the Code was that Section 6001 required the Commissioner of the IRS to personally invite him to file a return before he was required to file or pay any tax.  Contrary to Mr. Kernan’s tax philosophy, the Service issued notices of deficiency for each year for the tax due.  The noticed included the failure to pay estimated taxes penalty, the failure to file penalty, the failure to pay penalty, and the applicable interest.  The Service also imposed the fraudulent failure to file penalty under Section 6651(f).

Before issuing the notice, the IRS had recreated Mr. Kernan’s income by reviewing deposits made into his bank account.  Kernan refused to provide records (apparently, that request too should have come from the Commish), so the IRS summonsed the information from his banks.   The IRS found he had two sources of income, from which he seemed to earn a fairly nice living.  First, he sold various tax avoidance products (a fool and his money are soon parted).  Second, he acted as a paralegal, advising folks in IRS matters, and apparently setting up companies, trusts, doing estate planning, and other legal work.

As stated above, Mr. Kernan did not report any of this income, did not file returns, and did not pay tax.  Mr. Kernan did however share this thought on Section 6001 with the Social Security Administration and the IRS by letter – perhaps multiple times.  He also went on TV and discussed his strategy, and plastered his scheme all over his web page.

Before the Court, Mr. Kernan advanced his argument that he was not required to file a return until the Commissioner personally notified him that the IRS would like to review his tax information.  The Tax Court tossed Mr. Kernan’s briefs and refused to review them; generally, not a strong start to a case.  As a side note, the holding has an interesting discussion about the Court’s ability to do this when a party ignores the specific filing requirements.  Here, the Court noted Kernan greatly exceeded the “generous page limits” for briefs that the Court had allowed in this case.  The Court also stated that striking the brief didn’t matter much, because all 88 pages of initial brief and 88 pages of reply brief were garbage.

The tax, interest, and all penalties, except for the fraud penalty, were upheld.  Although Mr. Kernan’s briefs were tossed, the Court did still address whether or not tax and each of the penalties should have been imposed.

The Law

As stated above, the fraud penalty was imposed but not upheld by the Court.  The penalty under Section 6651(f) increases the failure to file penalty from 25% to 75% of the unpaid tax when the failure is fraudulent.  The government must show by clear and convincing evidence that the “taxpayer deliberately failed to file, and…that…the taxpayer intended to evade tax that he knew was owed.”

The Court first reviewed Mr. Kernan’s disclosure as a potential mitigating factor for fraud.  The Third Circuit, which is where I am located but not where Kernan’s case would be appealed, has held that disclosure can be a mitigating factor for fraud in tax protestor failure to file cases.  See Raley v. Comm’r, 676 F2d 980 (3d Cir. 1982).  In the Third Circuit case, the taxpayer sent multiple letters to the IRS, to the Secretary of Treasury, and various other federal officials, in which he claimed taxes were unconstitutional.  The taxpayer later filed returns, but failed to sign the returns and did not include any income.  After the taxpayer pled (or pleaded) guilty to criminal failure to file, he challenged the imposition of the civil fraud penalty.  The Third Circuit held:

[he] went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes.  The letters do not support a claim of fraud; to the contrary, they make it clear that [the (non)-taxpayer] intended to call attention to his failure to pay taxes.  It would be anomalous to suggest that [his] numerous attempts to notify the Government are supportive, let alone suggestive, of an intent to defraud.

Although not discussed in detail in the Kernan case, other courts have come to this same conclusion regarding protestors failing to file, requiring an affirmative act of misrepresentation.  See Zell v. Comm’r, 763 F2d 1139 (10th 1985).

Other courts, including the Ninth Circuit, the Seventh Circuit, and the Tax Court when not appealable to the Third or Tenth, have found that disclosure was not sufficient in these cases to prevent the imposition of the fraud penalty.  The Ninth Circuit stated, “disclosed defiance, standing alone, would not bar a finding of fraud.”  Further, fraudulent intent “does not require the taxpayer hide his defiance from the IRS.”  Edelson v. Comm’r, 829 F2d 828 (9th Cir. 1987).

It does not appear that the Ninth, Seventh or Tax Court holdings create a bright line that disclosure will never prohibit the imposition of the fraud penalty.  Likewise,  I would not be confident that the Third Circuit or Tenth Circuit opinions require the penalty to be waived in all protestor disclosures.  For instance, the Third Circuit relied heavily upon the non-taxpayer’s various (and entertaining) letters, indicating those were sufficient to “dilute” the government’s case to the point where it had not proven fraud by clear and convincing evidence.  Where there was less disclosure, the disclosure was less clear, there was stronger evidence of fraudulent intent, or the disclosure was simply an effort to reduce penalties, I would not be surprised if the Third and Tenth held the opposite.

It should also be noted that disclosure does not fix all fraud.  For instance, if a fraudulent return is filed, and then the taxpayer attempts to disclose and fix the fraud, the Service may still be able to impose the fraud penalty, and the statute of limitations will almost certainly still be extended because of the initial fraud.  This holding, and the cases discussed above, pertain to a more narrow fact pattern.

The Court in Kenan held the disclosure did not automatically mitigate the fraud, and went on to determine if the taxpayer had the customary badges of fraud required for the imposition of the penalty.  The Court determined, probably correctly, that Mr. Kenan in good faith believed his interpretation was correct, which was sufficient to erode the government’s attempt to show the intent to defraud by clear and convincing evidence.

A few parting thoughts.  Depending on where you reside, if you espouse your cockamamie tax ideas loud enough and often enough (and actually believe them), the fraud penalty may not be upheld; however, that is not a sure thing in any jurisdiction in my mind.  In addition, unless you have a new tax protestor idea, the Service can use your statements against you, as the rehashed failed protestor arguments can be an evidence of an intent to defraud on the part of the taxpayer – this does still generally require an affirmative action indicting something false to the IRS though.

Congress has also enacted a specific Code Section for protestors.  Section 6702 allows for an additional $5,000 penalty for frivolous returns or other submissions if they are based on positions identified as being frivolous in a published list, or reflect a desire to delay or impede tax administration.  Again, being creative and original in your balderdash should help.

Interestingly, had Mr. Kernan argued he was doing this as a “test case” for his position, which was also his livelihood, the Tax Court may have also considered that as a mitigating factor for fraud.  This would have shown a different intent.  The Tax Court has stated that full truthful disclosure of an intention to present a test case could be a mitigating factor in a fraud penalty case.  See Habersham-Bey v. Comm’r, 78 TC 304 (1982).  I’m not aware of any actual holdings in favor of taxpayers on that argument, but it is possible.

And to conclude, the IRS and the Tax Court do not believe “How to STOP the IRS” is an accurate title, but Mr. Kernan was successful in thwarting the fraud penalty—there was, however, a substantial cost in other penalties, interest, time and perhaps some embarrassment in obtaining that Pyrrhic victory.