Procedure Round Up(date):   Regulations, Mount Up! & State Law SOL Issue When Suing Promoters.

This will be a short post that touches on some temporary and final regulations that were issued in the last quarter of last year that impact tax procedure, specifically information reporting and the preparer due diligence rules, which we have previously covered.  The second portion of the post will deal with a state law statute of limitations issue from a tax shelter participant suing the promoter.


Regulation Update

What is Keno?

Back in March of 2015, I wrote about the temporary regulations dealing with reporting of winnings from bingo, keno, and slot machines.  The Service has finalized those regulations, which can be found here.  I believe the final regulations are similar to the temporary regulations (although aspects regarding electronic slot machines were not included in the final regs). These rules peg the required reported winnings at $1,200 for bingo and slot machines (but $1,500 for keno).  Anyone have any idea why those amounts are different (or what keno is, I don’t go to casinos much)?  The information on the information reporting must include the name, address, and EIN of the payee, along with a description of the two types of ID used to verify the payee’s address.

Discharge Reporting- Buy Now, Three Years, No Payments!

I thought I had written up the proposed regulations from 2014 relating to the rules on discharge of indebtedness reporting when a borrower had not paid for more than three years, but I cannot find the post (very possible I just read about it and found it interesting).  Under Section 6050P, prior regulations treated nonpayment of debt for 36 months as an “identifiable event”, which indicated formal discharge of indebtedness and required the issuance of a Form 1099-C.  This caused many borrowers to believe the debt had been discharged, but it was simply an IRS reporting requirement.  Tax professionals, lenders and borrowers did not like the rule.  The final regulations can be found here.  The regulations eliminate the passage of that time frame as a reportable event, which is a good result.  This change may have come from discussions started in the ABA Tax Section, Low Income Taxpayer Committee.

Preparer Due Diligence Regs Updated.

The Government has issued temporary/proposed regulations regarding the preparer due diligence rules, which can be found here.  We’ve talked about preparer due diligence repeatedly on the blog, including one of our first posts (and most popular), where Les extensively discussed peeing in pools.  That was re-posted earlier this year, and can be found here.  In both 2014 and 2015, Section 6695 dealing with preparer due diligence was amended.  The penalty was indexed for inflation, and the due diligence requirements were expanded to include the Child Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit.  The proposed regulations update the provisions to take into account these changes.

Information(less) Returns

In late December 2016, the Service issued guidance (Notice 2017-9) regarding the new de minimis safe harbor provisions enacted under the PATH act.  In general, failure to include all required information on an information return or payee statement will result in a penalty being imposed on the issuer.  The penalty is dependent on various factors, including the amount incorrectly reported, when it was not reported, how quickly it is rectified, and potentially other factors.

The penalty under Section 6721 can be reduced or eliminated in certain circumstances.  There is a de minimis exception to Section 6721, which allows the penalties to be waived if the error is corrected on or before August 1st in the year it is filed.  This is limited to the greater of ten returns or .5 percent of the information returns filed.  For returns required to be filed after December 31, 2016, there is a safe harbor that applies, where, if the information return has an error of $100 or less, or involves less than $25 of withholding, then the safe harbor applies, and no corrected return is required.  The notice is clear that this does not apply for intentional acts or intentional disregard.  It also indicates that regulations will be forthcoming regarding the safe harbor.

The de minimis safe harbor will not apply, however, if the payee elects out of the safe harbor.  Under Section 6721(c)(3)(B) and Section 6722(c)(3)(B), the payee can make an election and the payor has thirty days to furnish a corrected payee statement to the payee and the IRS.  If it is not done within thirty days the penalties will apply (it is possible for additional time in limited circumstances).

The payor must provide the manner for making such an election, which can be any reasonable manner including by writing, electronically or by telephone.  The payee must be told in writing the fashion in which the election can be made.  The notice goes on to indicate the timing of when the election must be made, and indicates the election must: 1) clearly state the election is being made; 2) the payee’s name, address, and TIN; 3) the type of statements and account numbers; and 4) the years in which the election should apply.

So, if you are super angry that Gigantor Bank and Lack of Trust Company misstated your 1099 by $4.37, you now have your avenue for redress.

Shelter Participant SOL Against Promotor Runs From Final Tax Court Ruling, Not Notice of Tax Deficiency

I initially saw this suit, and thought some aspect pertained to federal law claims against the tax shelter promoter, but the claims were state law based.  It is, however, still an interesting statute of limitations issue, that could impact future rulings based on state law.

In Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, the Eleventh Circuit, following direction from the Florida Supreme Court, has reversed the district court in holding the statute of limitation on state based claims against a tax shelter promoter by a participant were not time barred.

The particular holding is for a relatively straightforward issue.  After the defendant admitted fault, the IRS issued a notice of deficiency to the plaintiff for his involvement in the shelter.  This occurred in October of 2007.  On November 1, 2012, there was a final tax court order disposing of the case (90 days thereafter appeal rights expired).  On November 4, 2013, plaintiff filed suit against the defendant alleging various state law claims including fraud from the promoting and selling of the transaction.

The defendants moved to have the case thrown out as being outside of Florida’s four and five year statute of limitations for the claims made.  The issue was appealed to the Eleventh Circuit, which sought guidance from the Florida Supreme Court on the issue, specifically:

Under Florida law and the facts in this case, do the claims of the plaintiff taxpayers relating to the CARDS tax shelter accrue at the time the IRS issues a notice of deficiency or when the taxpayer’s underlying dispute with the IRS is concluded or final.

The Florida Supreme Court, which the Eleventh Circuit followed, determined that the claims accrued at the time the tax court order became final, which was ninety days after the order was issued when the appeals period had passed. See Kipnis v. Bayerische Hypo-Und Vereinsbank, AG 202 So. 3d 859 (Fla. 2016).  I think this is inline generally with what the federal law would be in most analogous situations, but would invite others to comment on this aspect if they have thoughts.

Faulty Information Returns: A New Frontier

We welcome back my colleague, Caleb Smith, in the Harvard Tax Clinic at the Legal Services Center.  Caleb has the misfortune to sit next to me and have me come over and regularly pose to him guest blog posts he might write.  In today’s post he linked up with Toby Merrill and our amazing colleagues at the Legal Services Center in the Predatory Lending Clinic who have a nationwide project going to assist individuals who fell prey to unscrupulous for profit colleges.  We hope that the Revenue Procedure issued by the IRS that Caleb discusses here might become a model for future rulings in similar circumstances.  Kudos to the IRS and Treasury for identifying and implementing a solution to a problem that could have created a lot of headaches for individuals who were already suffering from their student loan problems.  Keith

A lot has recently been said about the problems that arise when 1099s and other information returns are issued when they shouldn’t be. These earlier posts seemingly run the gamut of 1099 issues: from how to strategically defend against “phantom income” here to insight on how difficult it is to bring action against potentially malicious 1099 issuers (bottom of the post, here). The prior posts focus mostly on what to do when a 1099 was issued that shouldn’t have been. This post focuses on preventing the issuance of the 1099 in the first place.


As a tax practitioner, it can be easy to lose sight of the forest for the trees. Generally, you work with an individual client to solve their individual tax problem. Sometimes, however, you can’t help but take note that your client’s problem is identical to a pool of other individuals: think, for example, of the Bank of America underreporting of mortgage interest covered here, here and here. The recently issued IRS Rev. Proc. 2017-24 is perhaps an even better example of a systemic fix for a problem that will affect thousands of individual clients. Among other things, it demonstrates the potential of collaboration between tax and disparate fields of law to reach an optimal outcome. For your reading pleasure, it also provides an opportunity to learn a bit more about the sometimes-sordid world of for-profit colleges.

Background of Rev. Proc. 2017-24

In early 2013, a for-profit vocational school called the American Career Institute (ACI) closed suddenly, shutting out thousands of students in Massachusetts and Maryland. Shortly thereafter, the company went into receivership, and the Massachusetts Attorney General sued the company and its principals. After more than two years of contentious litigation, the Attorney General reached a consent judgment with the school in which the corporate defendants admitted significant wrongdoing and violations of state law.

At the same time that the Commonwealth was litigating the case, the U.S. Department of Education was dealing with an influx of applications for loan discharges from borrowers who were cheated by for-profit schools, especially the defunct Corinthian Colleges. Under federal law and the terms of all federal student loan master promissory notes, federal student loan borrowers are entitled to assert such “defenses to repayment” of their federal student loans when their schools violate their rights under state law.

The Department of Education eventually made a finding that certain subsets of former Corinthian Colleges students are presumptively entitled to have their loans discharged under this provision, and invited those borrowers to submit applications for discharge. Before the first discharges were granted or announced, advocates raised the issue with the Departments of Education and Treasury.

This advocacy helped result in the IRS issuing Rev. Proc. 2015-57, in which the IRS held that borrowers with federal loans taken out to attend ACI or Corinthian would not have income upon those loans cancellation. Rev. Proc. 2015-57 was a big win for taxpayers, but didn’t go quite as far as Rev. Proc. 2017-24…

What Rev. Proc. 2017-24 Does

Rev. Proc. 2017-24 essentially says three things: (1) “ACI/Corinthian students, completely disregard your cancelled student loans, (2) also, we want to avoid a bunch of other problems so don’t worry about things like potential ‘tax benefit rule’ issues on having taken education credits in the past, and most importantly (3) Creditor, you don’t have to report the cancelled debt under 6050P -so don’t bother issuing a 1099-C.”  The first two directives are pretty much already handled in Rev. Proc. 2015-57. It is the final point that addresses the most obvious problem that the IRS (and practitioners) could see looming on the horizon.

Without Rev. Proc. 2017-24 there is the serious risk that creditors would issue 1099-Cs to former students of Corinthian or ACI even though most of those students wouldn’t have discharge of indebtedness income under the disputed debt doctrine. The creditor would have impetus to avoid potential IRC § 6050P compliance problems by erring on the side of issuing 1099-Cs. This in turn would create an information reporting nightmare. To the IRS computers, it would look as if former students simply forgot to report the 1099-C on their returns. In fact, under the disputed debt doctrine there is no streamlined “form” for the former student to file “showing their work” as to why they did not include the 1099-C on their return (as they could on Form 982 for the insolvency exclusion). At best the taxpayer could attach a Form 8275 disclosure statement to their return explaining their disputed debt doctrine position. I have my doubts that this would ever be done. (As a side-note, low-income taxpayers seeking free tax assistance through VITA cannot file Form 982 for insolvency and very likely cannot file Form 8275, as it is “out-of-scope” of the VITA guidelines.)

But there is another issue that the IRS seems to acknowledge, albeit indirectly. After detailing the defense to repayment argument as a reason much of the debt wouldn’t be taxable, the IRS casually drops one more reason why much of the cancelled debt shouldn’t be included in income: the insolvency exclusion (see Section 2.03 of Rev. Proc. 2017-24). The IRS doesn’t say why it has reason to believe many of these individuals are insolvent (I don’t doubt that many are). It is just one more potential reason listed as to why we should treat ALL of the affected individuals as not having cancellation of debt income. Since the insolvency exclusion requires a reduction of tax attributes (and therefore properly requires a step beyond just “not reporting” the cancelled debt as income, see IRC § 108(b)), I think the IRS is actually mentioning insolvency for a different reason. Namely, that the IRS recognizes that many of these individuals would be very hard to collect from in the first place. And although it might seem unfair to administer assessment of tax based on collection criteria, to an extent this already happens all the time. Collectability is already cited as a factor in determining whether to pursue an examination of a taxpayer (see IRM Treating collectability as a factor in the exam stage (which can be thought of, in a sense, as the assessment phase) is even cited with approval by TIGTA, as covered by Procedurally Taxing here.

The New Normal: Why Collectability and Efficiency Matters

The quote “an ounce of prevention is worth a pound of cure” is attributed to the great American statesman Ben Franklin. Given current budget issues, it could serve just as well as the IRS guiding principle.  Think of the downstream costs without Rev. Proc. 2017-24. Thousands of taxpayers, generally low-income and with the least access to competent tax advisors, would receive 1099s. My bet is that many would ignore them when they filed their returns. This, in turn, would lead to a flurry of activity from the Automated Under-Reporter function of the IRS, leading to the usual split of taxpayers that respond to the notices and those that do nothing until their paychecks are on the verge of getting levied. Those that wait to respond would, most likely, have an excellent argument on the merits that they shouldn’t have cancelled debt income… but good luck finding a venue to make that argument in the collection stage. Instead, out of expediency, many of these individuals would likely look to (and be eligible for) collection alternatives. The outcome? Skewed tax rolls, about an extra billion trees chopped down for IRS notices, and little to no more money taken in by the Treasury.

Of course, the IRS shouldn’t make decisions purely out of administrative efficiency concerns: the proper application of the tax law should govern. But where both equity and the law bend strongly towards broad strokes (that just so happen to carry significant efficiency gains as well), I for one find it hard to work up too much moral outrage. (A similar example can be found in the IRS administration of the PATH Act ITIN expiration statutes. The law plainly says all pre-2008 ITINs expire January 1, 2017 (See IRC 6109(i)(3)(c). The IRS plainly says (at page 5) all ITINs with 78 or 79 as the middle digit expire January 1, 2017… but that’s it. Don’t worry if your ITIN was actually issued before 2008, as it would be a nightmare to track those all down.)

And this leads to the final point: that the “new normal” of an under-funded IRS may provide greater opportunity for systemic advocacy and innovative alternatives to the usual procedures. As a recently publicized example, one may consider the educational letters sent out by TAS to EITC recipients that likely over-claimed their credit but weren’t audited. The IRS may have a greater appetite for a Rev. Proc. 2017-24 type solution when the argument is advanced that, on the whole, tax administration is better served by painting with a broad brush. Cancelled debts stemming from lawsuits are not the only area where this approach is being taken. But seeing where these opportunities are, and effectively advocating for them, requires collaboration and an eye to the non-tax world.

If nothing else, the value of Rev. Proc. 2017-24 may be as a reminder to tax practitioners on the value of stepping outside of the tax bubble (or even just noticing that you may be in one).

Proving a Negative – The Use of IRC 6201(d)

It has only been a short period of time since I wrote about IRC 6201(d) in a post about cash for keys but I return to it as we enter the filing season for a couple of reasons.  First, I have observed the importance of 6201(d) on a high percentage of the pro se cases heading to litigation in the Tax Court and second, a relatively easy fix at a lower level seems possible.


On the Tuesday after Christmas I drove one of my sons back to DC from Richmond.  He works only a few blocks from the Tax Court.  After dropping him off, I spent the day in the Tax Court clerk’s office looking up the cases on two Tax Court calendars scheduled for Boston this spring so that I could identify cases I thought would benefit from the services of a clinic and personally reach out to those individuals.  Both the Tax Court and the Boston Chief Counsel’s office send notices to pro se taxpayers informing them of the existence of the potential for free legal services for pro se petitioners seeking to have their case heard in Boston; however, I find that the number of petitioners who respond to these notices is quite low.  I wanted to obtain data about their cases that would allow me to send them a personal letter from the clinic that addressed their specific tax problem to ascertain if that approach would increase the number of individuals who sought the services of our clinic.  Because the information about a Tax Court case is public, including the petition and the notice of deficiency which provide the taxpayer’s address, phone number and the issues in the case, obtaining the data in order to pursue the study proved no problem as long as I was willing to travel to DC to the Tax Court clerk’s office and look at the information there.

I provide this background because spending the day looking at all of the cases on a Tax Court calendar allows you to see how the IRS spends its resources.  Tax Court cases directly correlate to audit activity.  Some years ago when I fought a losing battle with the examination division in Richmond over the need to provide better descriptions in notices of deficiency, the data showed that only 3% of notices resulted in a Tax Court petition.  I doubt the percentage has changed much over the years.  That low percentage fostered the belief of the examination manager that spending extra time to provide a better description of the issue did not make sense.  Time has proven him correct and cases like QinetiQ support the decision of the IRS not to devote excessive energy to making the notice something which carefully details the issues; however, I began my time representing the IRS when review staffs reviewed every notice of deficiency and insured that they met certain standards.  Losing the high standards of hand-crafted notices provides an example of the same type of progress that exists in many other fields of endeavor where mass production overtook the more expensive means of producing a product.  Still, the loss of the hand-crafted notice still hurts if you had grown accustomed to a better product.

In my review of pro se cases on both a small and regular calendar, I expected a relatively heavy dose of earned income tax credit (EITC) cases since the IRS audit numbers for that type of case has held steady at relatively high numbers for many years.  To my surprise, I found far fewer EITC cases than anticipated.  Instead, I found far more cases involving taxpayers petitioning because they did not agree that the Form 1099 issued to them correctly reported their income.  Finding Form 1099 cases did not surprise me but the percentage did.  The percentage suggested to me that cases coming out of the automated underreporter unit (AUR) of the IRS where the IRS computer matches the data on the return with the date coming in from third parties has become perhaps the most common type of “examination” that the IRS performs and results in the most common type of Tax Court case for pro se individuals.

The current IRS strategy when the information on a return does not match the third party reporting information on a Form 1099 is to have the AUR unit send the taxpayer a letter informing the taxpayer of the mismatch and instructing the taxpayer to sign the consent form agreeing to an additional assessment based on the third party data or to provide the IRS with proof of the incorrectness of the data.  For the majority of taxpayers receiving this notice, the third party data probably correctly states the tax character of a source of income that the taxpayer either left off the return or reported in a manner that masked the income from the view of the computer.  In these cases, resolving the discrepancy proves relatively simple.

For a smaller percentage but still a high raw number, the taxpayer truly disagrees with the information on the Form 1099.  The disagreement could take several forms.  In the Bobo case blogged recently, the disagreement centered on the characterization of the income and not the amount.  Sometimes, the disagreement focuses on the amount reported and sometimes on the very existence of the transaction as it relates to the taxpayer.  In the clinic we regularly have clients who dispute correctness of the existence of the Form 1099 usually because the client became the victim of identity theft.  For these individuals, the position in the IRS letter essentially requests that they prove a negative.  We also have clients in the clinic who deny the correctness of a Form 1099 only to have an “ah ha” moment when additional data supports its correctness.  I do not mean to suggest that taxpayers always know the correct answer regarding Form 1099 or that the IRS should stop questioning them; however, a better way of resolving these cases may exist.  The current system seems to push too many down the road where higher resolution costs exist.

In response to the recent post, frequent commenter Bob Kamman suggested the following:

A successful strategy at the return-filing stage would involve IRS providing a disclosure form for taxpayers to dispute a 1099. IRS would then be required to include with Notices CP-2000 an admission that the dispute had been reviewed and either is rejected, or requires further information. This, of course, requires more resources at the first contact level, where it is so much easier to kick the problem up to a higher pay grade.

This suggestion provides a good option for resolving the issue at the lowest level and for providing the person preparing the return with an easy way to flag the problem with the Form 1099.  It would keep return preparers from forcing the data onto the return in an effort to save the taxpayer the grief of AUR correspondence and clearly alert the IRS to the problem with the Form 1099.  Taxpayers often have little or no leverage over the issuer of the Form 1099 and cannot get the person issuing the form to fix it or, in some cases, to even provide an explanation of the basis for issuing it.  Of course, in those instances in which a third party victimizes both the taxpayer and the issuer through identity theft, neither the taxpayer nor the issuer may have the facts necessary to understand what has happened.  The IRS has a better chance of getting information from the issuer of a Form 1099 than the taxpayer and could write regulations requiring the issuer to provide the backup data to the IRS upon request.

Assuming that the IRS does not leap to accept Bob’s suggestion and adopt a process that would seek to resolve the disputed Forms 1099 at the earliest stage, what should you do when trying to prove the negative?  This is where IRC 6201(d) comes into play and where a qualified offer can provide a benefit.  Section 6201(d) provides:

(d)Required reasonable verification of information returns

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

One of the problems with 6201(d) concerns its focus on court proceedings, but knowing that the burden of production will shift at the court level should provide the IRS with adequate incentive to appropriate the burden of production into its administrative process.  When contesting the Form 1099 which the taxpayer states is wrong, the taxpayer must bring this to the attention of the IRS during the audit phase of the case.  If the taxpayer knows nothing about the Form 1099, as will frequently occur in an identity theft context, the taxpayer will have nothing to give to the IRS about the circumstance except the statement that they know nothing.  That statement should spur the IRS to seek data from the issuer.

If the case passes the stage of the 30-day letter and if the taxpayer expresses confidence in the incorrectness of the Form 1099, the case becomes a good one for the issuance of a qualified offer.  The qualified offer will give the IRS a relatively short period of time to gather data from the third party and make a decision whether to continue forward with the matter in a situation in which it will face potential attorney’s fees if it cannot meet its burden of production.  The failure to resolve Form 1099 disputes at the initial stages of return processing can put an expensive burden on taxpayers who become caught up in the controversy system.  If the IRS does not decide to create a verification system to help avoid legitimate contests regarding the correctness of Form 1099, taxpayers should utilize IRC 6201(d) to set the case up for a shift in the burden of production at the court stage and utilize the qualified offer process to provide incentives for the IRS to get the data from the third party as quickly as possible.





A Return Look at a Disabled Veteran Who Took Action in Light of a Bank’s Issuing an Incorrect Information Return

Following the December receipt of holiday cards comes the January ritual of receiving information returns.  We have often discussed in PT the impact of information returns. Just last week Keith discussed taxpayers who challenged the characterization of payments that a bank made in Cash for Keys and the Effect of the Form 1099. Guest poster David Vendler has kept us informed about  the lawsuits and issues spinning from banks failing to report interest attributable to modified mortgages.

 One of our all-time most viewed posts is Bank of America on Hot Seat For Issuing Allegedly Incorrect 1099C to Disabled Veteran and we run it again today. The post originally aired in January, 2015. In that post, we discussed how disabled veteran Freddie Raley took action after receiving incorrect 1099-C reflecting cancellation of indebtedness income on credit card accounts that were not his. Raley and his attorney Carl Chamblee of Birmingham, Alabama sued the bank. I found the case  interesting when I read it a couple of years ago as it suggested a way for taxpayers to bring state law causes of action against issuers of incorrect information returns if Section 7434 did not provide a remedy. I contacted Mr. Chamblee last week to get an update on the case. He informs me that Bank of America has settled the case “for an undisclosed sum.” Les

 In today’s post I discuss a lawsuit involving the bank’s allegedly incorrect issuance of information returns showing cancellation of debt income.

Raley v Bank of America involves a disabled 83-year old veteran who was fed up with the bank’s contacting him back in 2010 over credit card accounts he claimed were not his; his anger boiled over to a lawsuit when last January the bank issued a 1099C showing about $7500 in cancellation of debt income. The Raley opinion from the federal district court in the Northern District of Alabama late last year caught my attention both for its procedural implications as well as its use of state law remedies to address a bank’s potentially improper issuance of an information return.


The case has a somewhat complex procedural pedigree, having been originally filed in state court, then removed to federal court, and then in the opinion from last month remanded back to state court to consider state causes of action after the federal law causes of action were dismissed or dropped.

Here are the simplified facts. In January of 2014, disabled 83-year old veteran Freddie Raley received a 1099C from Bank of America listing about $7500 of credit card debt forgiveness. According to Raley, the debt related to accounts he never opened, and starting in 2010 he had contacted Bank of America to let it know that the accounts were not his. Moreover, he told the bank that it should direct any future communications on the matter to his attorney. Despite the letter, the bank continued to contact Raley about the debt, and it eventually issued the 1099C to both Raley and the IRS.

The improper issuance of the 1099C led to a lawsuit in state court alleging a federal Fair Debt Collection Practices Act (FDCPA) claim and state law causes of action. Due to the presence of the FDCPA cause of action (a federal law issue), the bank moved to transfer the case to federal court. Raley then filed a complaint in federal court essentially repeating the causes of action it brought in state court. Raley then amended his complaint, dropped the FDCPA claim and added a cause of action relating to a violation of IRC Section 7434. As I discussed yesterday IRC Section 7434 involves a fraudulent issuance of certain information returns. The case was teed up on the bank’s motion to dismiss the complaint and a motion to dismiss the case on the pleadings.

My Forbes colleague Peter Reilly ran a nice piece on the case called Disabled Veteran Sues Bank of America Over Erroneous Form 1099-C last month. For Raley’s willingness to fight back against the bank (and in some part due to his status as a disabled veteran), Peter refers to Raley as his hero.

I understand Peter’s praise of Raley. Anyone who has been in the bowels of trying to unwind an identity theft knows how frustrating that process is (it has happened to me). The last thing you want on top of the hassle of unwinding the theft is a potential tax bill wrongfully triggered by a bank. Identity theft is major problem worldwide, with credit card fraud itself a major problem within that broader category. A February 2014 article in the Economist noted that fraud related to credit cards cost retailers over $11 billion worldwide in 2012, with the US suffering a whopping 47% of the total 2012 losses.

Fraud against seniors is itself a special category with its own characteristics and often differing perpetrators preying on those who may be most vulnerable (here is a useful link to resources for those who might be looking for help to prevent and address elder fraud issues).

What does this have to do with tax procedure and tax administration? One consequence of improper credit card usage is a possible unexpected tax bill for the person suffering from the improper or unauthorized usage of a credit card. To be sure, there should not be an income tax consequence from someone using your card improperly. That is so because if you notify a credit card issuer that there is an unauthorized use of your credit card, or someone has without authorization established a card in your name, you have no or very little liability to make payments relating to the unauthorized use (see more from the Consumer Financial Protection Bureau). That should be the end of the story when it comes to the IRS. Unlike when a credit card company cancels a debt say because a cardholder is unable to make payments due to an inability to pay, no tax consequences relating to the relief from the fraudulent charges should flow from that in part because there is no enforceable obligation that could give rise to cancellation of indebtedness income.

When there is a discharge of a legitimate credit card debt, card issuers will a 1099C. Unfortunately, sometimes banks make mistakes and issue 1099C’s relating to the supposed cancellation of debt even from an unauthorized card usage. When they do so, it can generate bad feelings and almost certain correspondence from the IRS to the taxpayer who got the 1099C relating to the income underreporting if the taxpayer (properly) does not report the cancelled credit card debt on his return. This can lead to needless correspondence with the IRS and the possible filing of a petition in Tax Court to protect against an erroneous deficiency assessment.

The Legal Issues

Unlike the Smith case discussed yesterday [the BOA loan modification case referred to in the intro], Raley sought damages under Section 7434 for the fraudulent issuance of an information return (he had previously abandoned his FDCPA claim). Unfortunately for Raley, however, Section 7434 does include Form 1099C as one of the information returns that impose liability for fraudulent issuance. As I mentioned above, perhaps Congress needs to revisit the statute to bring 1009C’s into the statute’s coverage, and perhaps address whether fraudulent conduct is a necessary trigger for liability.

Similar to the Smith case, Raley also brought state law causes of action, including negligence, wantonness, defamation. In Raley, the federal court remanded the case to Alabama state court to consider some of the state claims. In so doing, it took the opportunity to discuss the merits of the state law causes of action based on facts most favorable to Raley (it did so because in federal motions to dismiss courts essentially accept the plaintiffs allegations as true but also consider whether even looking at those facts in the most favorable light whether the claim states a plausible basis for relief).

If I were the bank (or other financial institutions that may have issued improper 1099Cs) I would be worried about the federal judge’s discussion of the state law causes of action, especially its discussion of the wantonness claim.

Wantonness, according to the court, is “defined as “[c]onduct which is carried on with a reckless or conscious disregard of the rights or safety of others.” Ala. Code § 6-11-20 (1975). A wantonness cause of action imposes similar requirements to a negligence claim, but with the enhanced culpability requirement that the conduct be done recklessly or in conscious disregard of others’ rights.”

Here is language from the opinion that raised my (and I suspect some bankers’) eyebrows:

Raley alleges that the Bank repeatedly contacted him and threatened collection actions against him even though he claimed to have never opened the accounts and instructed that all contact be made through his attorney. The Bank then, apparently without ever referring the matter to its Fraud Department, submitted a Form 1099-C, stating that it had forgiven the debt. While these are unproven allegations, they are sufficient at this stage to plausibly allege that the Bank acted with a reckless or conscious disregard of Raley’s rights, especially considering the repeated denials of liability and lack of a sufficient investigation into the validity of the debt.

I am intrigued by the wantonness claim and its standard for liability. Perhaps Congress should take note of that standard and modify Section 7434 to allow private parties to bring claims with respect to broader class of returns and at a lesser standard of liability than under current law?

In any event, we will watch this case as it makes its way back to state court though I would not be surprised to see BOA settle this matter to avoid a possible adverse state law precedent on its 1009C issuance practice.


Cash for Keys and the Effect of the Form 1099

On November 8, 2016, Judge Panuthos issued a Summary Opinion in the case of Bobo v. Commissioner involving the proper tax treatment of a cash for keys payment received by taxpayers in conjunction with a deed in lieu of foreclosure.  Although the opinion does not technically address a tax procedure issue, the proper treatment of the cash proceeds received and the reporting of those proceeds on a Form 1099-Misc comes close enough to draw a post.  We have posted before on Form 1099 creating problems including several posts on the wrong form issued by Bank of American in the refinancing context and on the form issued to disabled veterans.

Taxpayers have no control over Forms 1099.  When a third party issues a Form 1099 attributing income to the taxpayer with which the taxpayer does not agree, the taxpayer goes into damage control mode.  There are many strategies for dealing with a Form 1099 with which a taxpayer disagrees and we welcome comments on successful strategies at the return filing stage.  Obviously, every taxpayer’s goal seeks the acceptance of the return as filed with no further interaction between the taxpayer and the IRS except the receipt of the refund check.  When a taxpayer receives a Form 1099 that does not characterize a payment in the same manner the taxpayer characterizes it, reports someone else’s income due to identity theft, or seeks to penalize the taxpayer through the IRS, the taxpayer knows that the IRS computer will, in a high percentage of cases, spit out a notice in which the IRS takes a position consistent with the Form 1099 and that the employees in correspondence audit will believe the Form 1099 before believing the taxpayer.  The Bobo case and another recent case I have linked below involving remedies a taxpayer can seek for the purposefully wrong Form 1099 provide some comfort for taxpayers, although the comfort comes in the form of expensive court decisions.


In Bobo, the taxpayers have a story of financial woe repeated thousands of times over as a result of the great recession.  Their story falls at the higher end of the income scale than many that have come through my clinic but still follows a familiar pattern.  They bought a house in 2008 and ultimately could not make the mortgage payments on that house.  Because they were able to make the mortgage payments for several years before they fell behind, their foreclosure came at a time when banks had become a bit friendlier about dealing with foreclosure than in the initial years of the great recession.  As an alternative to a foreclosure proceeding, their bank offered cash if they would vacate the premises without a fight and leave the house in broom clean condition.  The Bobos accepted the bank’s offer to walk away from their house in return for cash.  The bank issued a Form 1099-Misc with respect to the cash payment.  The Bobos effectively treated the cash for keys payment as part of the amount they realized on the foreclosure, which still left them with a loss for tax purposes, and argued that the Form 1099 mischaracterized the nature of the payment and the IRS, in its Pavlovian way, argued that the Form 1099 represented the correct characterization of the transaction and in effect treated the cash for keys payment as income for the services the Bobos performed in leaving the house in pristine condition without the need to resort to a foreclosure proceeding.

Judge Panuthos found that the cash for keys paid by the bank in this case did not represent a stand-alone payment to the petitioners resulting in ordinary income but rather represented a part of the amount realized in the exchange of the property from the taxpayers to the lender.  He stated that “Green Tree [the lender] paid petitioners $20,500 to avoid the lengthy and expensive legal process of foreclosure as part of the deed in lieu of foreclosure process.  The two agreements are inextricably linked, and there is no basis for treating them separately.”  Since the Bobos’ basis in the house was greater than the amount realized, even when taking into account the cash for keys payment, instead of a $7,000 deficiency, the taxpayers had a loss, albeit a nondeductible personal loss. The opinion produced a nice result for the taxpayers on an issue of law that is not well settled.  Even though this is just a summary opinion which is not precedential, it is definitely worth reading if you represent clients with this type of payment in a foreclosure.

In the Bobos’ case, the legal consequence of the Form 1099 was at issue, but the taxpayer did not dispute the receipt of the funds and only their characterization. Les wrote recently about secret subpoenas in the Tax Court.  While secrecy generally did not play a role in the Bobos’ case, the subpoena process matters a great deal in resolving Form 1099 cases that land in Tax Court, and the current Tax Court practice does not provide the ideal model for quick resolution of these cases.  When a taxpayer receives a Form 1099 with which the taxpayer disagrees, the helpful correspondence from the AUR unit directs the taxpayer with the disagreement to go to the issuer and resolve the problem.  The writers of this correspondence choose willful blindness about IRC 6201(d) and the responsibility the IRS has to check the correctness of the Form 1099 when a taxpayer questions its correctness.  Taxpayers regularly face difficult challenges in getting the issuer of a Form 1099 to acknowledge a mistake or to correct it even if acknowledged.

This difficulty leads to an impasse at the audit stage and either moves the taxpayer down the tax procedure conveyer belt into Tax Court or simply to the assessment of the tax related to the allegedly wrongful Form 1099.  If the taxpayer lands in Tax Court, either the taxpayer or the IRS can subpoena the uncooperative issuer to provide the backup information for the Form 1099 which could lead to resolution; however, pursuant to Tax Court Rule 147, the subpoena must wait until the issuance of the calendar on which the case will appear with a return date of the calendar call itself.  If the taxpayer issues the subpoena, the taxpayer must also tender the fees associated with the appearance and the documents.  This provides a significant barrier to low income taxpayers.

In many cases, the Chief Counsel attorney will take on the task of issuing the subpoena which provides much needed assistance to the taxpayer and fulfills the goal of IRC 6201(d).  In either case, the hope in issuing the subpoena is that the party receiving it will find it easier to send the material long before the trial in order to avoid the hassle of appearing in court; however, nothing in the Court rules allows either the taxpayer or the IRS to compel that result.  When I worked for Chief Counsel and issued these types of subpoenas, I always made it clear to the party to whom it was issued that I wanted to make things easy for them and if they could get me the documents well in advance of trial, I thought I might be able to settle the case.  Usually, this worked to get the material in advance but this action usually takes place several months after the filing of the petition and sometimes quite close to the actual trial date.

As mentioned above, sometimes the issuer of the Form 1099 has motives other than compliance with the tax laws and may affirmatively seek to put the taxpayer in a bad place by issuing the Form 1099.  IRC 7434 gives the taxpayer some ability to recover monetary damages from a person issuing a bad Form 1099.  These cases are not easy to pursue.  A recent decision bears some attention if you feel the need to go this route for your client.

The Nonreportng of Modern Fringe Benefits

Today we welcome first-time guest bloggers Jay A. Soled and Kathleen DeLaney Thomas. Jay is a tax professor at Rutgers University, and Kathleen is a tax professor at the University of North Carolina School of Law. While in Procedurally Taxing we have discussed isolated issues relating to information reporting, in this post Jay and Kathleen discuss the pervasive failure of employers to report many types of fringe benefits. The authors have written a more expansive piece on the same issue entitled, Revisiting the Taxation of Fringe Benefits, that will appear shortly in a forthcoming issue of the Washington University Law Review. Les

Due to advances in technology and globalization of the work force, there is a whole new breed of fringe benefits that have emerged in the twenty-first century. While these fringe benefits come in many varieties, they generally can be grouped into three baskets: (i) customer loyalty award programs like frequent flyer miles and hotel points; (ii) the use of high tech gadgets and services such as cellphones and high-speed internet access; and (iii) on-the-job perks like lavish meals, dance lessons, and massages. While today’s office perks may bear little resemblance to the fringes of years past (think coffee in the break room and an annual holiday party), the tax treatment should be the same: that is, those fringe benefits not specifically exempted from taxation by Code section 132 are reportable and subject to payroll and income taxes. But there is a strange phenomenon transpiring with respect to this new breed of fringe benefits. While they generally do not fall within the delineated scope of Code section 132’s enumerated exemptions, they are nevertheless not being reported as income by employers (nor by the employees, who follow suit).

In the employer-employee context, the failure to report taxable income is particularly unusual. This is because an employer who fails to report employee remuneration (including taxable fringe benefits) faces stiff penalties. More specifically, under Code section 6721, the penalty for the failure to issue correct information returns can readily exceed $1 million, particularly for large companies with a lot of employees. Thus, when it comes to employee compensation, most employers err on the side of reporting lest they endure the risk of being severely penalized.


Despite this third-party reporting safeguard, the problem of fringe benefit nonreporting persists, plaguing the nation and potentially costing the fisc billions of dollars annually (albeit, hard-and-fast dollar revenue loss estimates are nettlesome to make). The most obvious question is why a problem that is so prevalent, of this magnitude, and in the public domain nevertheless persists. There are at least three probable reasons. First, compensating employees with untaxed fringe benefits in lieu of salary allows employers to circumvent their payroll tax obligations and thereby minimize their own tax burden. Second, since the advent of these newly-minted fringe benefits, employers have not reported their value as income and such nonfeasance has been met with impunity. Indeed, Congress has essentially ignored the issue while the IRS has signaled that it will not challenge employers’ nonreporting (see Announcement 2002-18 regarding frequent flyer miles and Notice 2011-72, regarding cell phones), giving employers every reason to continue their current practices. Third, employers might fear public outcry and media scrutiny if they were to shift gears and begin reporting such benefits absent some pronouncement from Congress, Treasury, or the IRS. This concern might not be unfounded, given the political firestorm that erupted when Citibank issued 1099s to customers who received free frequent flyer miles for opening new accounts. See, e.g., Alistair M. Nevius, Are Frequent Flyer Miles Taxable?, J. Acct. (Aug. 1, 2012). In light of these reasons, the fringe benefit nonreporting bonanza has and will continue for the foreseeable future.

Yet, having a tax system in which nonreporting is tacitly approved is inherently problematic. Indeed, some taxpayers may take the current state of affairs as a cue to further push the limits of what constitutes “nonreportable fringe benefits” or, alternatively, test the water and engage in other forms of nonreporting. Whatever the case, either taxpayer stance does not bode well for tax compliance and may result in enlarging the tax gap – the difference between what taxpayers owe in tax and what they pay.

To address this problem, action must be taken by Congress, not the IRS. Over the past several years, Congress has delivered mixed messages regarding the taxation of these twenty-first century fringe benefits. These mixed messages have put the IRS in an untenable position: if the agency takes enforcement action, it will be deemed to be too aggressive, and conversely, if it fails to take enforcement action, it will be perceived to be inept.

There are several approaches Congress could take to address the receipt of modern fringe benefits. First, it could decide that some or all of such benefits should be exempt from income and accordingly expand the scope of Code section 132. At the very least, this would mean Congress was no longer offering tacit approval of noncompliance; it would also delineate lines between taxable and nontaxable fringes in the modern era.

Second, Congress could specify that such benefits are includable in employees’ income at their fair market value. Under such an approach, Congress would be well-advised to adopt fixed valuation proxies for purposes of administrative ease. For example, the fair market value of all frequent flyer awards could be deemed to be equal to one cent per mile, and a fixed percentage of employer-provided cellphone use could be deemed personal in nature (say, 40%). Concerns about over-taxing employees could be mitigated by choosing proxy values that are on the low end of fair market value estimates, and by allowing taxpayers to “opt out” of taxation on mixed-use assets like cellphones by agreeing to utilize them for business purposes only.

Finally, Congress could deny employer deductions for all or a portion of the cost of these fringe benefits. For example, an employer who spends $100 on a masseuse that will provide an onsite massage to a stressed employee would only be able to deduct a portion of the cost (say, $50). This approach would be akin to the one taken by Code section 274(n), which limits the deductibility of business meals to 50 percent of the employer’s cost, thereby serving as a proxy tax on the benefit to the employee.

The new breed of twenty-first century fringe benefits requires an updating of the current tax regime. Congress should act and has several viable options to consider. What it should not do, however, is sit on its hands and permit taxpayers’ nonreporting practices to continue unchallenged.

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:


  • 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 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:


  • 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.