Summary Opinions for 02/14/2014

In honor of Presidents’ Day (yesterday), here is a copy of the NYT’s front page the day Vice President Agnew admitted to tax fraud.  Also, a special thanks to Jamie Andree for her Valentine’s Day Innocent Spouse post.  Good stuff this week.  Updates on the IDR process, Ty Warner, and the King of Pop.  Also some new summons cases,  NPR commentary, and the depressing Treasury budget.

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  • Oh, and Keith is featured in the newest edition of the Tax Lawyer, with his article, Taxation with Representation: The Creation and Development of Low-Income Taxpayer Clinics.  TaxProfBlog has coverage.
  • The new IDR process for large cases, which Keith has discussed before here, has been delayed.  Initially, the procedures were to be effective January 2, 2014, but have now been pushed out until March 3, 2014 to allow LB&I to clarify how they work.  The news release can be found here.
  • The DOJ has filed a protective appeal in the Ty Warner case relating to the sentencing of the Beanie Baby mogul. Jack Townsend’s Federal Tax Crimes Blog has a post with more details and some quotes found here.  Readers will probably recall that Mr. Warner only received probation for his substantial tax evasion.  The protective appeal does not mean the DOJ will proceed with the appeal, but is simply a notice protecting its rights while it makes a decision.  Mr. Townsend indicates in his post that although the sentence seemed light, the DOJ would likely have an uphill battle to overturn the Judge.
  • The Tax Times has a post regarding the new federal budget, and the 4.4% cut in the IRS budget for the year.  It will be interesting to see what the IRS automates this year (link is to my post last week on the increased use of automated services, and the reduced ability to get advice from a person at the Service).   USA Today had a related article about the poor customer service by the Service.
  • From the MauledAgain blog on February 14, James Maule wrote about income inequality in light of the debate about how terrible things are for the much maligned ultra-rich (except Ty Warner, who should be ecstatic about probation).   Related, here is an article about Larry Summers and the Downton Abbey economy.
  • NPR Investments, LLC –which I’m fairly certain is how Nova, The Street, and Downton Abbey get all their scratch — lost again against the Service, with the Fifth Circuit upholding the District Court’s imposition of penalties, and which found the Service acted properly in issuing a second FPAA a few months after issuing a no-change letter for the same tax year. The Miller and Chevalier blog has coverage, and a copy of the opinion here. The M&C blog did not find the FPAA item as interesting as I did, but I will still cover it in a bit of detail.  In general, Section 6223(f) provides that only one FPAA should be issued for any given year.  Taxpayer success!?!?  But, there is a provision that allows the Service to issue a second when the taxpayer is a real jerk (“absence a showing of fraud, malfeasance, or misrepresentation of a material fact”).  The Fifth Circuit found that checking the box indicating the entity was not a TEFRA partnership on its return was sufficient to meet that jerk standard.  I believe this is the only Circuit Court to have reviewed this matter.  Interestingly, reliance by the Service and the intent of the taxpayer were not particularly important in the analysis.
  • Some of this has to be sensationalized, right?  The Journal of All that is Correct and Respectable, TMZ,  is covering the tax troubles of Michael Jackson’s Estate, which apparently took the position that MJ’s net worth at death was around $7MM.  The Service, however, thought that amount was slightly closer to $1.125BB.  What a Thriller.  Dollar here, dollar there, and it starts to add up.  The Service told the estate to Beat It and doubled the penalty due to the Bad numbers under Section 6662(h)(1).  Apparently, the Service is seeking $702MM, which is enough to make you Scream.  These matters are never Black or White, and the amount will probably end up in the middle, but the estate’s position seems Dangerous and borderline (Smooth) Criminal. It is Human Nature to want to reduce your tax bill…I should stop, this is getting pretty silly.
  • A few summons orders were issued.  First, an order quashing an attempt to block the IRS from seeking information from banks in the United States that was done by the Service to assist the Competent Authority for India in investigating the taxpayer in India.  The taxpayer argued an improper purpose, but the Court found the Service statements that the competent authority request was valid was sufficient to carry the Service’s slight burden.  SCOTUS will be hearing an improper purpose case in Clarke shortly (covered in SumOp before), where it will determine if a taxpayer is entitled to a hearing after alleging improper purpose.  We will be following Clarke closely.
  • The second summons case involved a tax attorney trying to quash a summons based on confidentiality, but the case was dismissed because of procedural defects.  In Patel v. United States, decided in March of 2013, the Southern District of Florida dismissed the motion to quash because the filing party (a third party) was not entitled to file a motion to quash, which is reserved for only the taxpayer under Section 7609.

Summary Opinions for 01/17/2014

Summary Opinions is very late this week due to my various day jobs and the shoveling of snow.  We covered a few big items last week, and here are a few others that we thought deserved a few words.

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  • First, United States v. Clarke was granted cert by SCOTUS to  determine if taxpayers have a right to a hearing when a taxpayer alleges a summons was issued for an improper purpose.  We’ve mentioned this case a few times, and are glad this will be reviewed.  The incomparable Jack Townsend covered this issue very well on his Federal Tax Procedure Blog back in December.
  • Jack Townsend also covered another Clark case this week, where the Court of Federal Claims held the taxpayer failed to show full payment under Flora, so it lacked jurisdiction.  What makes it interesting is that the Court transferred the case to the Tax Court for prepayment review, because the taxpayer had filed within the ninety days allowing for Tax Court review.  Not something you see every day.
  • The Tax Court had a holding regarding captive insurance companies – something that is actively discussed a lot lately by planners and I had heard was under heavier audit review lately.  In Rent A Center, Inc. v. Comm’r, the Tax Court held that the wholly owned captive life insurance company of the parent, Rent A Center, was not a sham and was created for non-tax reasons.  There are lengthy discussions regarding the funding levels and the insurable risks in the case.
  • I found this link through Joe Kristan’s Roth & Co. blog, which is the Tax Foundations advice to same sex couples this tax filing season.  The post includes a link to how each state is handling the issue.
  • Mr. Beanie Baby gets probation.  Damn.   Money can’t buy you happiness…but he is probably happy all that money bought his way out of jail time for that $100 million plus hidden offshore account.  Last fall, Villanova hosted the 2013 Norman J. Shachovy Symposium, reviewing pressing issues in US Tax Administration.  The third panel that day discussed criminal sentencing guidelines, specifically the fairness of them and the deterrent value.  You can hear the panel discussion at the above link, where the panel does somewhat discuss how wealth can impact sentencing.  I suspect a future panel on this topic would include this case.
  • Here is a brief article from Bryan Cave, LLP about the United States v. Doe holding from the Fifth Amendment that we touched on before in SumOp.  Doe dealt with a taxpayer claiming Fifth Amendment privilege on a subpoena for foreign bank records, with the Court holding the required records doctrine trumped the privilege.
  • Here is a post from IRS Medic discussing the IRS Offer in Compromise Pre-Qualifier calculator. As Anthony Parent points out, the calculator can have interesting (taxpayer friendly) results, but that is not binding on the Service.  Mr. Parent doesn’t seem to like the calculator much (“the IRS Offer in Compromise Pre-Qualifier is a dumb calculator”).  I like the idea behind the calculator, but haven’t used it yet, so cannot offer my own thoughts.
  • Here is a post about whether or not you have to pay your employees on snow days.  Not exactly tax procedure related (there would be withholdings), but the snow is horizontal out my window, and I think the post was written by another Villanova alum.  Villanova needs some good press after the blowout loss to Creighton last night.  Thankfully, Procedurally Taxing covers tax procedure significantly better than Villanova’s basketball team covers the three.

Summary Opinions for 01/10/2014

Here is the Summary Opinion for last week.  Sorry it is so late, and sorry that many of the cases below do not have links.  I had a lot of trouble finding them on free webpages.  I’m happy to track down hard copies if you would like to see them.  Just let me know.

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  • From the Mount Rushmore State (not a great nickname), we have a jeopardy levy case where the IRS essentially didn’t give the taxpayer reasons for its jeopardy assessment and levy, but the Court still upheld the levy because apparently the taxpayer was blatantly ignoring various laws he fully understood, and he already knew why the Service was coming after him.  In Picardi v. US, the District Court for South Dakota held that although the Service provided insufficient notice regarding the reason for the levy, the taxpayer was repeatedly uncooperative, filed false returns, and shifted assets overseas to evade tax. The Court also found he was aware of why the Service was trying to nail him, so therefore he was not prejudiced by the notice insufficiencies.  Here is the Rightsided news blog covering the related criminal case and posting a video from Mr. Picardi arguing his position.  I didn’t listen to the whole interview.
  • A bunch of interesting enforcement news over the last week.  Audits are apparently way down, with less than 1% of taxpayers being audited.  Around 10% for those making over $1MM.  But, identity theft investigations are way up, which is good news.  Accounting Today has a nice interview with Commissioner Koskinen, which outlines the challenges and goals he will be facing (we have a suggestion a few paragraphs down to assist with overcoming these challenges).  In the interview, the Commish indicates he would advocate for a voluntary tax preparer certification if the IRS fails to win its appeal over the return preparer regulations.  Not exactly a line in the sand on preparer regulation.
  • Professor Michael B. Lang of Chapman University School of Law has published an article about the Service’s ability to adequately regulate tax preparation and tax advice.  Abstract is as follows:
    • This article asks whether tax planning advice can ever be effectively regulated by the IRS. The article first explores whether tax advice differs in kind from other forms of legal advice. Secondly, it looks at the clear regulatory distinction between the treatment of return preparation advice and the treatment of tax planning advice, taking into account historical anomalies and asking if the difference in treatment is justified or misguided. The article then reviews and evaluates efforts to regulate planning advice directly, including earlier attempts to address tax shelter opinions in Circular 230, the current covered opinion rules and written advice rules, and the proposed changes in these sections of Circular 230, Less direct approaches such as flagging certain transactions (reportable transactions) with tax shelter potential for particular focus are noted along with their limitations as is the role of oral tax planning advice. Finally, the article discusses how combining more than one approach (such as retaining the accuracy standard of the covered opinion rules, UTP filing requirements, and competency testing) might be useful in regulating the quality of tax planning advice, but concludes that a magic IRS bullet for monitoring and regulating the quality of tax planning advice has yet to be invented. However, the article notes that reducing the ability of taxpayers to rely on the advice of tax advisors to avoid penalties might force taxpayers to hold their advisors to account through malpractice litigation to a degree that the Service will never be able to do.
  • Peter Reilly, who writes for Forbes (and I think is insightful and funny),  has a post on the creating reality TV based on the IRS –my wife’s eyes are already rolling.  Mr. Reilly’s idea was based on an internal IRS email that was released, where Counsel was opining on a taxpayer’s ability to videotape an IRS seizure.  Keith Fogg loved the idea and thought nothing would add credibility to our tax system like reality TV, but said the IRS only seizes sufficient (interesting) property per year to create two episodes.  On a directly related note, The Running Man took place in between 2017 and 2019 –not far off in the future– and I quote from that cinematic gem, “if you want to avoid tax revolts…you sure as hell are not going to do that with reruns of Gilligan’s Island.”  That type of game show could save the Service.
  • From Going Concern (so, some NSFW language and immature humor) some bad accounting pickup lines found on the world’s largest time-suck vortex, Reddit.
  • Sticking with the CPAs, Journal of Accountancy has an article regarding courts providing more protection for accountant-client communications.  The article provides some history of this privilege, and touches on the 2013 Wells Fargo case that we have discussed before, and held that some accountant created workpapers were protected in creating UTPs.
  • Les posted this week on the TAS annual report, and the SOI Bulletin for the fall was also published.  I really like statistics.
  • From the District Court for the Central District of California comes a case that I do not like very much, Aljundi v. United States, where the Court granted the government’s motion to dismiss for lack of jurisdiction.  The Court found it lacked jurisdiction because the taxpayers filed a refund claim after two years under Section 6532, which has a two year statute.  The decision was based on cases extending Brockamp to Section 6532, which the Court believed made the time limit  jurisdictional.  I respectfully disagree that Brockamp requires this to be jurisdictional (it may be a failure to state a claim, or the claim may have been garbage).  We have touched on this jurisdictional/look back point a lot, and we have some additional posts on it coming up soon.  I hope this gets appealed, as the appeal would go up to the 9th Circuit, which had held in Brockamp that equitable tolling did apply.  It would be interesting if the 9th Circuit found that Section 6532 has the same specificity and technical detail as Section 6511 that caused SCOTUS to feel there was no equitable tolling, of it if would read in an implied equitable tolling.   Also interesting to note that Section 6532 doesn’t have a financial disability provision, like Section 6511.
  • Two cases where taxpayers received attorney’s fees and costs!  In both Purciello v. United States, out of the District Court for New Jersey, and Dodson v. United States, out of the District Court for the Central District of Florida, the Courts found that the Service’s position was not substantially justified.  Dodson is interesting, in that the Magistrate goes into a fair amount of detail about each phase of the case, and whether or not costs are appropriate.  For a portion, the Magistrate recommended not providing costs and fees because the taxpayer failed to file the “fees application” under Section 7430(b)(4).  I won’t say much about Purciello now, as it may be the basis for a large post this week.

Review in Veolia Showcases Various Privileges

In US v. Veolia Environmental North American Operations, the District Court for Delaware had an interesting holding at the end of last month regarding document privilege in a minor $4.5 billion worthless stock deduction case.  I do not believe any new law was forged, but the holding had a good discussion of work product, attorney client privilege, attorney expert privilege, and waiver.  The case highlights the importance of the various privileges and ensuring actions fall within the privilege if you hope to not share something in discovery.

A quick review of the underlying law.  Pursuant to FRCP 26(b)(3)(A), a party may not discover documents “that are prepared in anticipation of litigation or for trial by or for another party or its representative.”  This is the work product doctrine and allows parties to prepare for litigation without being worried that it will be used against them.  The party’s state of mind is key in determining whether the document was prepared in anticipation of litigation or in the normal course of business.  FRCP 26(a)(2)(B)(ii) provides a testifying expert witness must disclose  all facts, data, and assumptions considered in forming opinions to be testified on.  Communications between experts and the party’s attorney are protected under FRCP26(b)(4)(C), but the expert still must disclose 1) the experts compensation, 2) identifying facts or data the attorney provided and the expert considered in forming the opinions, and 3) assumptions provided by the attorney that the expert relied upon in forming opinions.

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On to the facts, where in April of 1999, Veolia purchased Water Application & Solutions Corporation (“WASCO”) for $8.2 billion, which turned out to be a crap investment.  In ’06, Veolia retained attorneys and experts to find a way to write off and deduct the WASCO stock as worthless.  During ’06, a plan was outlined to convert WASCO into an LLC as a triggering event to deduct the value.  The taxpayer obtained additional counsel, sought a PLR, and hired two valuation firms to produce reports on WASCO’s insolvency.  The plan was implemented, and,  in 2007, Veolia entered into the pre-filing agreement program to attempt to determine the deductibility prior to filing its return.  A third valuation firm was hired, and the report provided to the Service.  The Service then requested a few (hundred thousand) documents. Veolia complied with most of the documents, but withheld all or portions of slightly under 361 documents.  The IRS knew that those were probably the ones they wanted, and issued a summons.  Keith had recent post on the new IDR rules in large cases, which can be found here, which may result in more summons cases.

Veolia refused to hand over the documents, stating various privileges, including work product and attorney- expert.  The Court first addressed Veolia’s work product argument.  Veolia had provided evidence to the Service and the Court that it had anticipated IRS scrutiny, disagreement and possible litigation as early as 2006 when it started considering the deduction and how to obtain it under the Code.  The Service argued that part of Veolia’s business model was purchasing companies in distress, and dismantling them for tax benefits.  As such, the research and opinion was simply normal business practices and not generated in anticipation of litigation.  The Court found that the Service position was correct in that Veolia’s actions were part of its ordinary business practices, but held that did not preclude those actions from also being taken in anticipation of litigation.  The hiring of valuation experts and counsel, and the reports regarding IRS scrutiny and the chances of success all indicated that Veolia was taking steps to properly handle the transaction, but also to properly position itself for a contentious debate with the Service.  The Court further held that it was objectively reasonable for Veolia in 2006 to think litigation was possible, as the size of the deduction–$4.5 billion– would cause IRS review and Veolia was already under audit for various other years.

Another aspect of the holding that I found interesting was the portion pertaining to the information relied upon by the expert.  The Service and the taxpayer disagreed as to the extent of the documents and information that had to be supplied to the Service that the experts reviewed.  Veolia felt it met its obligation by disclosing all the information and documents it provided to the expert, whereas the Service wanted the information and facts that anyone had provided to the expert.  The Court held that Rule 26(b)(4)(C) only protects communications between the party’s attorney and the party’s testifying expert, and communications by anyone other than the party’s attorney are not protected and must be disclosed.  The Court extended this to communications by one expert to the other expert.  The Court also noted that the attorney-expert privilege is also limited, in that the expert must disclose all facts, data and assumptions it relied on that were provided by the attorney, and it would not make sense to protect that information if supplied by the other expert. See  Fialkowski v. Perry, 2012 WL 2527020, at *4 (E.D. Pa. June 29, 2012) (stating that disclosure requirements for testifying experts “were meant to trump all claims of privilege, mandating production of all information furnished to the testifying expert for consideration in the formulation of [the expert’s] opinions, regardless of privilege”).

The Court did leave open the possibility that Veolia could assert some other privilege for these documents, but was not specifically ruling on any documents at that time. The question this raised in my mind was the extent to which the lawyers provided the first set of experts with the documents and information that were subsequently provided to the second expert. Did this expert to expert communication taint otherwise protected attorney work product or attorney expert privilege, or was it all discoverable as facts, data and assumptions?  Perhaps the Court’s statements indicating other privileges could still be raised was a guide to Veolia that it would treat the expert as an agent of the attorney for otherwise protected materials if those materials were outside of the discoverable facts, data and assumptions.  As stated above, the Court was providing general holdings, and it hoped the parties could then come to an agreement as to what had to be disclosed.  The Court was not holding on any particular document, so the holding did not show how exactly this would be applied.

One last point worth noting was the Court’s statement on the waiver doctrine.  A waiver of otherwise privileged documents can occur if the taxpayer shares those documents with third parties.  The Service argued that communications between Veolia’s employees and employees of other related entities resulted in a waiver.  The Court held that Veolia had similar interests as its parent company and other related entities, and the participation of various entities was required for obtaining and enacting legal or tax advice, so waiver was inapplicable.