Summary Opinions for June

Before covering the June tax procedure items we didn’t otherwise write on, I wanted to highlight that Keith was quoted in a Seattle Times’ article about the IRS/Microsoft litigation, where MS is questioning the length of its audit and the Service’s hiring of Quinn Emanuel to investigate its tax obligations.  Other tax procedure luminaries Stuart Bassin (who is working with Les on rewriting part of SaltzBook addressing disclosure litigation) and Professor Andy Grewal (a PT guest poster) were also quoted.   Keith’s last post on the topic can be found here, where he discusses Senator Hatch’s letter to the Commissioner questioning the use of an outside law firm on audits.

read more...
  • The 2015 IRS annual Whistleblower Report to Congress was released in June and can be found here.  In 2014, the Service paid out around $52MM in awards, representing about 17% of the tax it claims was collected due to WB’s information.  Submissions to the WB group were up in 2014, with over 14,000 claims being filed.  Of those, about 8,600 were opened.  The report paints a slightly rosier picture of the program than what may be practitioners’ perceptions of the program.  It does note issues with taxpayer confidentiality, and whistleblower protection. The report also provides a spreadsheet of the reasons for closing cases and the time most cases have been in the program (which tends to be fairly long).
  •  This Tax Court case has a fair amount of tax procedure packed into it.  In Webber v. Comm’r, the Court found a taxpayer had retained control and incidents of ownership over life insurance held in a trust, which caused some negative tax  consequences.  In coming to this determination, the Court found that the IRS Revenue Rulings dealing with the “investor control” doctrine were entitled to Skidmore deference under the “power to persuade” standard.  The Court also found reasonable cause due to the taxpayer’s reliance on his advisor.  In the case, the advisor was an expert and was paid hourly to review the transaction, and had the pertinent information.  We just wrote this case up for SaltzBook, so I won’t go into too much detail (don’t want to give all the milk away, as we definitely want to keep selling cows).
  • Agostino & Associates has published its July Monthly Journal of Tax Controversy.  Frank and his associate Brian Burton have a nice piece on the public policy of OICs.  As always, it is interesting and essentially a mini law review article.
  • BMC Software v. Comm’r is a Fifth Circuit case we (I) missed in March that was potentially significant in how closing agreements are interpreted.  Miller & Chevalier’s Tax Appellate Blog has coverage here.  The facts are fairly specific, and the applicable Code sections do not pertain to many taxpayers.  What is important is that the Fifth Circuit reversed the district court, and held that the boilerplate in the opening paragraph stating, “for income tax purposes” did not cause the agreed treatment of a tax item for one purpose as applying for all purposes under the Code.  The Court would not read that into the agreement of the two parties, who had meticulously spelled out the specific tax treatments for one purpose.
  • Another case with multiple interesting tax procedure items.  In Riggs v. Comm’r, the Tax Court ruled on 1) whether a bankruptcy stay for the taxpayer’s successor-in-interest applied to the taxpayer, and  2) whether the IRS had to follow the taxpayer’s instructions about which debts its payment should be applied to when the Bankruptcy Court directed the payment generally.  As to the first point, the court found there was not sufficient “identity between the debtor and the [taxpayer] that the debtor may be said to be the real party defendant”, so the stay did not apply.  As to the second point, the Court found the payments were not voluntary, and therefore it did not have to follow the taxpayer’s instructions under Rev. Proc. 2002-26.  I would assume the Court would have specifically directed the payment application in the order had it been requested.
  • Hard to talk to an accountant these days and not discuss the tangible personal property change of accounting method.  The Service has provided additional time to file Form 3115 and modified some procedures.  See Rev. Proc. 2015-33.
  • For those of you who do work with Section 6672 penalties, you know the definition of willfulness and actually running a business can be in conflict.  Often, a business that is light on cash has to make a decision about which bills to pay, and sometimes the business thinks that suppliers need payment to keep product flowing.  If a responsible person makes such a decision and knows the withholding taxes are delinquent, Section 6672 penalties will almost certainly apply.  See Phillips v. US, 73 F3d 939 (9th Cir. 1996).  The Court of Federal Claims had occasion to review one such case in Gann v. US, and dismissed the government’s motion for summary judgement.  It held that determining when and whether the responsible person had knowledge of the company’s failure to pay taxes was a disputed issue of fact.  The Court found that simply showing that cash inflows and outflows indicating someone wasn’t going to get paid weren’t enough for summary judgement, and some level of actual knowledge was needed by the responsible person.  There was also some question as to whether the person was a “responsible person”, which was covered by Professor Timothy Todd on Forbes and can be found here.
  • Another attorneys’ fees case that probably would have ended differently had the client made a qualified offer.  In Mylander v. Comm’r, the Tax Court found that the taxpayer prevailed in the amount in controversy and the most significant issue, but the Service’s position was substantially justified.  The reasoning for this was because the case was complex and the taxpayer didn’t share all relevant facts or the case law for their claims.  I’m not sure how I feel about the complexity aspect or the onus being on the taxpayer to provide the applicable law  to the Service.  If the taxpayer’s position was clear, and reasonable research could have turned up the correct law, it seems unfair to make the taxpayer outline all relevant cases.  I hope those were only considered in conjunction with the missing facts, and wouldn’t have been sufficient on their own.  The Court did also mention that the current case was arguably distinguishable from the applicable prior holdings, so the Service’s position could have been somewhat reasonable no matter what.  All of this probably wouldn’t have mattered if the taxpayer had taken advantage of the qualified offer provisions (although if you make an offer, and fail to provide the IRS with the facts and the law, can you still prevail?).
  • SCOTUS has denied cert for Ford in its interest payment case involving the treatment of an advanced remittance.  Les has blogged this case twice before, most recently here.  In addition to the interest question, there was also a jurisdictional issue about whether the district courts could hear an interest disagreement or if it had to be determined by the Court of Federal Claims.  Les’ post outlines the issue and eventual court holding.
  • In Slone v. Comm’r, The 9th Circuit has decided another case on the two prong test necessary to establish a transferee is liable for the predecessor’s tax liability.  The court remanded for the tax court to review the transaction as to the first prong on federal law, but also held that the Service had to show it was a fraudulent transaction under the federal law and also had to independently show that the transferee was liable under the applicable state law.  This holding is in line with the various other recent cases, including Stern, Salus Mundi, and Diablod, which we most recently covered here.
  • Would you like to know how to file delinquent FBARs and not pay a penalty (i.e. are you mega rich and hiding money in some country with shady banking laws)?  Well, this probably doesn’t apply to you because you likely did not pay the tax due on those assets.  For those folks who paid the tax, but inadvertently failed to file the FBAR the IRS has issued updated guidance on filing late without penalties.
  • A res judicata case, which should have a familiar name for tax procedure junkies.  In Batchelor-Robjohns v. US, the 11th Circuit held the feds were barred by res judicata from raising the dead taxpayer’s income tax issues in an income tax audit when the same issue was previously litigated in an estate tax refund relating to same issue.
  • Just about a year ago, we covered Heckman v. Comm’r, where the Tax Court found the six year statute of limitations under Section 6501(e)(1)(A) applied to ESOP distributions that were not properly disclosed.  The Eighth Circuit has affirmed that ruling.  This is the link to the prior SumOp where we discussed the case.  In Heckman, the courts (Tax Court & 8Th Cir.) declined to incorporate other related entity returns to show disclosure for the individual’s return of the ESOP distribution.  It is interesting to compare that language to CNT Investors, another recent Tax Court statute of limitations case, which seemed to indicate the tax court would consider all the filings of the taxpayer and his related entities.  Although the tones are different, I do not think the holdings are necessarily in conflict.  In Heckman, there was not much disclosed that would adequately apprise the Service of the connection.  In CNT, a few key items were left off, but overall the filings painted a fairly full picture.

Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice

In Mason v. Commissioner the Tax Court issued a regular opinion as it decided for the first time the impact of taxpayer’s failure to receive her notice of the trust fund recovery penalty (TFRP) assessment.  The case provides a logical extension to the provisions allowing taxpayers to litigate the merits of an income tax liability following a failure to receive the notice of deficiency.  In addition to the extension of protection to TFRP assessment situations in which the taxpayer did not have a pre-CDP opportunity to contest the correctness of the TFRP assessment, this case merits discussion because it also raises the issue of the ability of the Tax Court to hear a TFRP case based on the date of the assessment and the treatment of the IRC 6320 notice as the notice required by IRC 6672.

read more...

The Court spends a good deal of time with the procedural issues in this case, which makes sense because on the merits the taxpayer had little to offer.  She founded the business and ran the day to day operations.  After spending several pages getting to the merits of the case, the Court very quickly dispensed with her claim that the 6672 liability did not apply to her.  I will spend no time discussing her merits issue and will focus on her right to raise it even if she had a very weak case.

The issue causing the Tax Court to report this case as a regular opinion arises from the failure of Ms. Mason to receive Letter 1153 giving her a chance to go to Appeals to discuss the imposition of the 6672 liability. The IRS mailed the letter to her address of record on September 2, 2005.

Although a certified mail label and return receipt were affixed to the envelope, postage was placed thereon with a private postage meter and the letter was posted without being presented to a U.S. Postal Service (USPS) employee. As a result, no USPS postmark was date-stamped on the envelope, nor was the item number on the certified label entered in to USPS certified mail tracking system. . . .  The unopened envelope, return receipt still attached, was received by the IRS on September 29, 2005, Petitioner did not receive the Letter 1153 or notification of its attempted delivery.

These facts give Ms. Mason just about the best position possible to argue that in a CDP hearing she did not have the chance to previously contest the liability, except that Congress did not explicitly contemplate this situation as it wrote the statute. Section 6330(c)(2)(B) provides that “[t]he person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”  While Congress clearly signals that someone who fails to receive a notice of deficiency may raise the merits of the underlying liability in a CDP case, it did not talk specifically about liability situations outside deficiency proceedings.  It spoke vaguely about otherwise having an opportunity to dispute the liability.  What does that mean?

The 6672 liability does not use deficiency procedures as a predicate to assessment.  Since 1996, however, it does have very specific procedures the IRS must follow concerning notice provided in section 6672(b)(1) which states, “No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.”  While this provision closely mirrors the notice of deficiency language, it clearly differs from the notice of deficiency procedures.

Assuming the mailing was proper and given the fact that she did not receive the notice giving her a right to contest the assessment in Appeals, should she have the right to contest the assessment during a CDP hearing? The settlement officer (SO) working her CDP case told her she could not raise the merits of the TFRP assessment.  In the determination letter sustaining the IRS proposed levy, the SO reiterated the position that she could not raise the merits of the underlying TFRP assessment, citing to the attempted delivery of the Letter 1153 and Appeals consideration of her appeal of an offer in compromise.

The Tax Court showed great sympathy for her plight in trying to address the unpaid TFRP liability. I did not detail all of her efforts, which you can read in the opinion, but the Court characterized the process as follows:

One major reason for petitioner’s difficulty was that she had to deal with a different person for each type of procedure concerning the employment tax liability. At one point in the process she was dealing with as many as five of respondent’s representatives regarding different aspects of the same underlying tax liability: i.e., offers, installment payments, claim for refund, etc.  Respondent’s balkanized approach to collection procedures was also detrimental to respondent, because important dates and events were not being internally coordinated.  For petitioner, it presented Kafkaesque circumstances and confusion.

Not having read the brief filed by Chief Counsel, I cannot say if he argues that the TFRP situation bears fundamental differences from deficiency cases; he thinks that she deliberated failed to pick up the mail, triggering a different set of precedent discussed in the blog recently; he argues that the simultaneous CDP and refund hearing satisfied the prior hearing requirement or some other argument.  I would expect Chief Counsel’s office to agree with this opinion but it bears watching if he accepts this decision.

The Court did not buy whichever argument Chief Counsel sought to sell. Instead, it applied the same standard to this situation that applies when a taxpayer does not receive a properly addressed notice of deficiency.  In that situation the assessment, although valid, leaves the taxpayer with the opportunity to challenge because of the lack of receipt.

The Court noted that nothing in this record indicated that Ms. Mason chose not to pick up this mailing and, in fact, everything in the record supported the conclusion that she diligently pursued every opportunity given to her. The Court’s decision that she had the right to contest the merits of the TFRP liability in this CDP proceeding seems logical under both the language and the intent of the statute.  The IRS may not have contested this legal conclusion but only its application on these facts where it felt Ms. Mason had the opportunity to contest the liability previously.

In addition to the major holding of the case it contains two other holdings worth mentioning. The first concerns a minor matter of the Tax Court’s jurisdiction to hear a TFRP case and other non-deficiency procedure cases in the CDP context.  When Congress created CDP in 1998 it contemplated that CDP hearings would occur in the Tax Court for taxes assessed through the deficiency procedures and in District Court for taxes assessed though non-deficiency procedures such as employment taxes.  That bifurcation created unnecessary confusion and Congress amended the CDP provisions in 2006 to place all CDP cases under the jurisdiction of the Tax Court.  In making the change, it gave the Tax Court jurisdiction for determinations made after October 16, 2006.  Here the determination occurred on February 2, 2007 a few months after the effective date of the change in the law.  The change took place sufficiently long ago that few cases continue to require close scrutiny of the effective date but this one did.

The second issue worth noting concerns the phrase “otherwise have an opportunity to dispute” a tax liability. The phrase comes from IRC 6330(c)(2)(B), but the Code does not define the phrase.  The regulations define it by stating that it “includes a prior opportunity for a conference with Appeals.”  The definition in the regulations leaves open whether something else might also constitute an opportunity to dispute the tax liability.  In Lewis v. Commissioner, the Tax Court agreed with the regulation that the phrase included a prior opportunity to raise the issue at Appeals.  In Ms. Mason’s case she met with the SO on the CDP hearing and the appeal of a claim for refund at the same time.  For a more detailed discussion of the Lewis case and its interpretation of a “prior opportunity” to dispute the result of a previous administrative hearing, see When Can Taxpayers Challenge the Merits of the Underlying Liability in CDP Appeals: Why the Tax Court Was Wrong in Lewis v. Commissioner and its Progeny (Feb. 26, 2014).

The IRS argued at times that the simultaneous hearing gave her a prior opportunity cutting off her ability to petition the Tax Court on the merits of her liability.  The Court said that IRC 6330(c)(2)(B) contemplated a prior Appeals hearing and not a simultaneous one.  Therefore, the fact that Appeals considered the merits of the TFRP in the appeal of her claim for refund at the same time it considered her CDP request did not preclude her from raising the merits of the underlying assessment in the appeal to the Tax Court of the CDP determination.  While simultaneous hearings do not commonly occur, they do occur occasionally.  This decision will help those taxpayer should the IRS argue again that a simultaneous hearing on the merits cuts off rights in an appeal of the CDP determination.

 

 

Summary Opinions for 10/10/14

Summary Opinions only touches on a few items this week, but they are all interesting and somewhat important.  More jurisdiction questions, both in the whistleblower context and on failure to exhaust administrative remedies.  Plus interest abatement, penalty abatement, and more on the Elkins case and the Yari case.

read more...
  • Whistleblower cases are sort of like the IRS’s version of the Beatles’ Ringo songs.  Sort of quirky and entertaining, but not their best work.  If you have frequently read the Whistleblower opinions over the last few years, I think it would be understandable if you thought the Service was intentionally trying to thwart the program (were the Beatles trying to stop Ringo’s continued singing by giving him garbage?), or perhaps just incompetent (see Ringo’s singing), or nowhere near sufficient assets are allocated to the program (seems like the Beatles mailed a few of those Ringo songs in).  A recent Tax Court jurisdiction case, Ringo v. Comm’r, can be added to those prior cases.  In Ringo, the Service’s Whistleblower Office sent the petitioner a letter stating he was ineligible for an award under Section 7623, and not much else.  Petitioner disagreed, and appealed the determination to the Tax Court.  A few months later, the IRS sent a second letter saying, “just kidding, we are considering your claim”.  The Service then responded to the petition by filing a motion to dismiss for lack of jurisdiction, which Ringo did not oppose.  The Court, however, relying on law related to stat notices found that its jurisdiction is based on the facts at the time of the petition, and jurisdiction continues “unimpaired” until a decision is entered. (contrast this with CDP cases, which as Keith discussed here the parties can dismiss without the need for a decision) The Court found that the letter constituted a determination under Section 7623(b)(4), providing it with jurisdiction.

I think this is the correct result, and a good policy.  There could be negative implications in the Whistleblower context, and perhaps others, if the Court held the Service could divest the Court of jurisdiction simply by stating it was actually still reviewing the matter.  First, the Service could use this to prolong matters.  Second, and more troubling, the Service could start issuing such letters in all close situations, or even more broadly, so it wouldn’t have to deal with the matter until the taxpayer proved it was willing to go to court, or to attempt to thwart valid claims, only to retract the letter once the matter goes to court. In Ringo, none of this seems to have mattered much, because the petitioner appears to not have objected to the dismissal of the case, but other’s may want to force the issue, and it is better to not have a holding stating the Tax Court lacks jurisdiction.  For a far more succinct recitation of the facts and holding, check out Prof. Tim Todd’s write up on the Tax Litigation Survey blog.  Lew Taishoff also has a good post on the case found here.

  • The Tax Court had an interesting interest abatement holding in Larkin v. Comm’r.  I found two aspects interesting, and the case a little challenging to work through.  The quick facts; an incorrect overpayment in a later year was due to an incorrectly carried forward NOL, which should have been carried back.  The taxpayer amended the returns, resulting in a liability in the later year, and a larger overpayment in the prior carryback NOL year. Initially, my mind jumped to interest netting, which gets to the first interesting aspect of the case.  One argument the taxpayer made was that the Service failed to credit the prior year overpayment against the later year liability, as requested, and instead issued a refund, which it thought would have negated interest on the later year’s underpayment.  The Court found this argument moot, although the Service did not.  The Court stated, “[i]t appears that both parties may have assumed that a credit…would, no matter when it was administratively credited against the [later] liability, have been treated as if it had been paid at least as early as the due date of the [later return] and would therefore have precluded the accrual of any interest…But that is not the case.”  The Court looked to Section 6601(f) relating to the satisfaction of tax by credit, which it found precluded the erroneous assumption.  I have not had time to review this, so I am not saying the Court was correct on this point.  The main text of the holding does not fully flesh the point out, but I think Footnote 8 helps to explain the Section 6601(f) issue, stating:

Under section 6611(f)(1), for interest purposes the overpayment of 2003 tax was “deemed not to have been made prior to the filing date for” the loss year (2005), i.e., not before April 2006; and under subsection (f)(4)(B)(i)(I), the 2003 overpayment was “treated as an overpayment for the loss year”, i.e., for 2005. However, under subsection (f)(4)(B)(i)(II), the return for the loss year (2005) was treated as if “not filed before claim for such overpayment is filed”, i.e., in May 2008. That is, the 2003 overpayment was deemed to arise in April 2006, when the 2005 return was due; but the 2005 return (due in April 2006) was treated as not filed before May 2008 (and therefore as late), and the refund was made less than 45 days thereafter on July 9, 2008.

 The second major point I found interesting was the Court’s review of ministerial acts for abatement under Section 6404.  The taxpayers claimed that the IRS gave them erroneous advice regarding amending a different year, which was incorrect and the return was not processed.  The taxpayers claimed this caused delay in proper filing, resulting in interest.  The Court noted some evidentiary issues that made the taxpayers’ claim fail, but also stated that direction regarding amending prior returns, at least in this case, were “providing an interpretation of Federal tax law” which was not a ministerial or managerial act subject to Section 6404 abatement.

  • I’m not certain who is the “Chief Idea Guy” at Procedurally Taxing; probably Keith, maybe Les, definitely not me.  If we had such a position, our ideas would generally be tax related – at least the good ones.  In Suder v. Comm’r, that was not the case for Mr. Eric Suder who was CEO and CIG of his company Estech Systems.  His good ideas had something to do with telephones.  Not tax planning. Estech did some incorrect research credit tax planning, which resulted in an underpayment, which the Service assessed accuracy related penalties on.  The taxpayer argued reliance on a professional, and honest misunderstanding of law.  The reliance holding was fairly straightforward.  It is, however, less frequent that you see a misunderstanding of the law argument successfully made.  The Court held that the taxpayer had an honest misunderstanding of the tax law related to reasonable compensation under Section 174(e), which was reasonable under the facts and circumstances, and that this area was very complex.  It did seem like some of the pertinent facts and circumstances were that they relied on their longtime accountant to provide them with their misunderstanding, which makes it overlap with professional reliance.
  • In US v. Appelbaum the District Court for the Western District of North Carolina had the opportunity to review various procedural issues in a case involving Section 7433 damages claim following the Service attempting to claim Section 6672 penalties for not paying over a bankrupt company’s taxes.  Mr. Appelbaum, like almost all applicants for damages under this Section, failed to exhaust the administrative remedies under Section 7433, which allowed the District Court to provide its opinion on whether or not that requirement was jurisdictional.  Following Galvez and Hoogerheide, the Court found it was not a jurisdictional requirement, but failing to comply with the statute resulted in the taxpayer failing to state a claim upon which relief could be granted.  Regarding the counterclaim, it appears the taxpayer alleged latches, but not as some sort of equitable argument regarding the Section 7433.   I was initially excited to see “equitable” language following a determination that failure to exhaust administrative remedies was not jurisdictional (Courts don’t usually get to whether an equitable argument could prevail).  Unfortunately, it was a separate claim, which makes sense, since latches would not be the first equitable argument you would think should apply in that context.
  • Jack Townsend’s thoughts on the Elkins’ art valuation case can be found here.  We touched on that in the last SumOp, and this case is popping up everywhere.  Jack has a great discussion regarding burden of proof, which should be reviewed.  I’m thrilled that my family has a way to discount the value of our Star Trek commemorative plates.  The estate tax on those was going to be a bear when my folks died.
  • More on the Yari case, which considers the 6707A penalty in the context of an amended return; Les previously blogged on the case here.  This content is from David Neufeld, and was reproduced from the Leimberg Information Services, Inc. tax newsletter. In the post, Neufeld takes aim at the Tax Court holding in the case, and makes a spirited argument in favor of the taxpayer’s view that the penalty should be pegged to the amended return, and not the original filed return.

Postponing Assessment and Collection of the IRC 6672 Liability

IRC 6672 imposes a personal liability on those responsible for collecting and paying over to the IRS taxes held in trust. This liability goes by several names including “Trust Fund Recovery Penalty” (TFRP); 100% Penalty; and Responsible Officer Penalty. 

The code section sits in the assessable penalty chapter of the Internal Revenue Code but the Supreme Court has determined that this liability does not have the characteristics of a penalty for bankruptcy purposes. The Third Circuit has held that this liability does not have the same unlimited assessment period as other assessable penalties. (If you click on the link to the case, it will quickly become clear why the taxpayer won when you notice who was representing the taxpayer in that case.) The IRS has said that this liability does not have the same collection rules as other penalty assessments and that it will only collect the liability once even though assessments exists against multiple persons. 

read more...
 

The policy statement creates an interesting situation when the IRS “over collects” this liability by obtaining payments from more than one responsible person in a total amount that exceeds the liability. For example, assume that ABC Inc. fails to pay $100 of collected taxes. The IRS assesses three responsible persons, Mr. A; Mr. B; and Mr. C, $100 each for this failure. On September 1, three different revenue officers each succeed in collecting $100 from the responsible officers. One collects from Mr. A at 10:00 AM; one from Mr. B at 11:00 AM and the third from Mr. C at 1:00 PM. 

What will the IRS do with the “extra” $200 it has collected? It will return the money to Mr. B and Mr. C and keep the full amount paid by Mr. A. While this practice seems shortshigted because it encourages responsible persons not to pay, it creates opportunities for the responsible officer who understands this practice to seek to insure that one of the other responsible officers pays first. 

How does a responsible officer seek to insure the other responsible officers pay first – by slowing down the assessment and collection process against himself and by aiding the IRS in collection from the others. In seeking to slow down the assessment and collection process, a representative must take care to avoid restrictions in Circular 230 on inappropriate delay. 

Assessment 

It deserves note that the IRS does an excellent job of slowing down assessment without any assistance. On average, it takes the IRS about 21/2 years after the corporation’s failure to pay the trust fund taxes before the IRS makes assessments against responsible individuals. Of course, any given responsible officer wants his assessment to occur later than the assessments against other individuals also responsible for the same tax no matter how long the IRS takes on average. 

It also deserves noting that delaying the assessment benefits a responsible officer even if the IRS ultimately collects from him because interest on the liability does not start until the assessment occurs. (The link takes you to a law review article I wrote several years ago explaining the inappropriateness of the beginning point for the running of interest.) Delaying assessment postpones the day on which interest begins as well as the day on which the failure to pay penalty begins. So, the strategy of delaying assessment reaps multiple benefits under the current, seemingly misguided, system. 

Aside from avoiding or stalling the revenue officer during the investigative stage, a tactic not condoned by Circular 230 and not recommended here, availing yourself of all opportunities to appeal the proposed assessment presents itself as the simplest way to delay assessment. 

Another change in 1996 was the establishment of a process granting an automatic right to go to the Appeals Division to contest a proposed TFRP assessment. The proposed responsible officer who avails himself of this opportunity rather than consenting to assessment or failing to appeal, will delay the assessment, assuming the person cannot persuade the IRS not to make the assessment, for the length of time the case sits in Appeals. The period of time a case sits in Appeals could be fairly long – certainly a time measured in months if not years. Meanwhile, maybe the IRS will have already collected the liability from another responsible person. 

Collection 

Once the IRS assesses the liability, it will send Notice and Demand followed by other letters leading up to the Notice of Intent to Levy and the offer of Collection Due Process (CDP) rights. A responsible officer trying not to be the first to pay will not voluntarily pay in response to the IRS correspondence and will request a CDP hearing. Here is another chance to sit in Appeals inventory, assuming your client qualifies for a CDP hearing and is not precluded by IRC 6330(f)(3). for several months while the IRS maybe collects from the other responsible officers. 

CDP also creates the opportunity to go to Tax Court if a satisfactory collection alternative is not reached with the Settlement Officer. The time spent in Tax Court trying to reach an appropriate collection resolution gives more opportunity for the IRS to collect the liability from the other responsible officers. 

Aiding the IRS 

The IRS policy of keeping the first money it receives creates its own mini-whistleblower statute for responsible officers. These individuals frequently know each other’s finances very well. If they provide information to the revenue officer allowing easier collection of the liability form another of the responsible officers that can enhance the likelihood that the first one to pay will be the other person. The situation might be likenedto the children’s story of the three billy goats crossing the bridge each one telling the troll to wait for the next because the next one is better. 

Conclusion 

I think the IRS collection policies in this area create improper incentives as I have discussed in the articles linked above. It does not make sense to me from a tax administration standpoint to incentivize taxpayers to not pay or delay paying their taxes. The statute should charge interest from the moment the underlying liability arises and should give benefits to persons paying first rather than last. Nonetheless, since Congress and the IRS have created a system where a taxpayer can win by delaying, it is important to understand the incentives the system uses and work with them to the benefit of your client within the structures of the ethical rules. Paying last can subject the responsible officer to a suit from the person who does pay the trust fund taxes and another post will talk about that potential liability and the unanswered questions there. 

 

Summary Opinions for 6/13/14

Week late, and more than a buck short, here is last week’s Summary Opinions.  This week had a lot of really interesting procedure items, including the Clarke summons case being decided by SCOTUS, which Les covered here, and the final Circ. 230 regulations, which Michael Desmond covered for us here.  I still have my disclaimer in my email auto-signature.  Have to get around to that someday.

We also had the pleasure of welcoming Professor Andy Grewal (great professor, excellent scholar, but, most importantly, he named “Summary Opinions”) as a guest poster, where he discussed TEFRA jurisdiction and sham partnerships.   Thanks to both our guest posters.  As always, I will blame that wonderful content for bumping Summary Opinions all the way to the end of the week (but in reality, my day job got in the way).

So what happened last week that wasn’t covered?  A lot of really interesting stuff.  Here you go:

read more...
  • Jack Townsend’s Federal Tax Procedure Blog and Federal Tax Crimes Blog had a nice write up of US v. Carlson, which reviewed the plaintiff’s liability for the Section 6701 aiding and abetting understatement penalty.  Jack’s post focuses on the government’s standard of proof, which the 11th Cir. said was clear and convincing.  Jack follows that up with a good discussion on extending this rationale to FBAR willfulness.

 

  • Hom getting tired of coming up with bad puns for Mr. Hom (not really, I love them).  So, our favorite online gambler/tax procedure renegade, John Hom, lost yet another tax procedure case in district court.  Mr. Hom had accounts with various online poker companies outside of the US, which Mr. Hom failed to disclose on timely filed FBARs.  Mr. Hom contested the filing requirements and penalties by arguing the accounts weren’t bank accounts or other financial accounts.  The court quickly dispatched these claims by indicating the accounts fall within the definitions.  Best/worst line from case,  “The Court has tried to appoint a free lawyer for defendant—but no one would take the case.”  This was done probably because the issue was novel, and potentially far reaching.  Jack Townsend has a strong write up of the case here.  If the online poker account is the equivalent of a bank account, how far does the statute reach?

 

  • Our hammer lobbing (if you actually read all of our comments, that may make sense, otherwise it’s an inside joke, which I’ll try not to do often) frequent reader/commenter, Bob Kamman, tipped us to YRC Regional Trans v. Comm’r, which is a refund jurisdiction case, where the Tax Court told the Service to scram – because procedure says so.  The facts are somewhat complicated, as this is an NOL refund involving an acquisition where the target company’s subsequent NOL was carried back to the purchaser’s prior tax years.  But, boiled down, YRC had an NOL for 2008.  That was carried back for a tentative refund for 1999 on the purchaser’s books.  IRS issued a refund check on Sept. 30, 2009 for $351k and change.  Both parties agreed that was a rebate refund under Section 6211(b)(2).  On April 2, 2010, the Service issued another check in a similar amount of $357k and change. Taxpayer said thank you very much and deposited the second check.

 

Simple so far, but this will require a second paragraph.  Sometime later, the Service decreased the 2008 NOL, resulting in the 1999 carryback refund decreasing by around $64k.  The Service then increased that deficiency by the second erroneous refund amount.  What is really at question is whether or not the second refund was a rebate refund or a nonrebate refund, and how the Service can go about recovering each.  The Court has a good discussion on this point.  Essentially, an IRS error in issuing two refunds, regardless of the underlying reason, is a nonrebate refund.  Nonrebate refunds can only be obtained under Section 7405 procedures, which the Tax Court has held it does not have jurisdiction over.  Assuming the Service is not time barred, they could bring this in other federal courts.  In addition to bringing this suit in the appropriate courts, the Service also takes the position that it can offset this type of nonrebate erroneous refund against future refunds (based on common law principals, not the Code). See CCA 200137051.  I have never looked into that issue, and would not agree to that position until I had researched it further.  I believe Keith is going to write some additional commentary on this, and another erroneous refund case from last week that was brought to our attention by a good friend to the blog.

 

  • In Ruscitto v. U.S., an MJ recommended summary judgment in favor of the feds in a case where the income tax refund of a husband and wife was applied against hubby’s TFRP.  Wife argued that a portion of the refund was due to her, as her income from her Form 1099-C (cancellation of debt) gave rise to a portion of the income.  The Court found the claim was untimely, and could not review the claim.

 

  • SCOTUS has held that inherited IRAs are not retirement funds under 11 USC 522(b)(3)(C), meaning they are not exempt from the bankruptcy estate.  See Clark v. Rameker. Keith hopes to provide insight on this in the coming days or weeks.

 

  • In honor of Fathers’ Day, Going Concern has a post about paternity leave.  My wife has always given me a hard time about how long I took off after each of our daughters was born.  She claims cumulative total, I took off one day.  Two months ago she found out my firm has a paid paternity leave of six weeks…she was not thrilled.

 

  • I should have asked Keith about this case before writing it up, as his knowledge of taxes and bankruptcy is far superior to mine, but In Re: Pugh struck me as interesting.  In the case before the Eastern District of Wisconsin Bankruptcy Court, the debtor entered into Chap 13 bankruptcy (keep your assets, but have to pay your debts over 5 years), and entered into a repayment plan on July 30, 2013.  The Chap 13 plan provided that the debtor “would retain any net federal and state refunds”.  Following the plan, the Service audited the debtor’s 2011 return, resulting in a deficiency which was provided to the court.  The debtor then filed a 2013 return, requesting a refund, which the Service used to offset against the 2011 deficiency.  The taxpayer took exception, since the plan said she was to receive refunds and the 2013 tax year occurred after the filing of the bankruptcy petition.    The Court noted that when the debt and refund are both prepetition, the Service does not need to seek relief from the automatic stay; however, here the refund was post-petition.  The Court highlighted the split on this issue, with some courts holding the Service has the right to offset under Section 6402(a), leaving the “net refund” to be calculated after the setoff.  Others have held Section 6402 does not lift the stay, and the assets must pass to debtor or, at the least, the Service must ask permission before making an offset such as this.  The court in Pugh sided with the first set of cases, holding the power under the Code trumped the bankruptcy stay.  These cases seem to arise somewhat frequently.  I suspect we will see some additional Circuit Court guidance in the near future.

 

Summary Opinions for 6/7/14

Interesting posts on PT last week. We had two posts each by Keith and Les; in a two-part series Keith wrote about the consequences of IRS failing to issue a notice and demand, and Les wrote about penalties and reasonable cause and whether the IRS can collect penalties after a taxpayer dies. On to other procedure items that caught our attention:

read more...
  • Most folks don’t like paying much in taxes and often complain, but I think Louis Balestra has a substantially stronger case for b!*#ing than most. The first paragraph of the Court of Federal Claims opinion summarizes the issue well, “[t]his is a suit for a refund of…FICA taxes…At bottom, this case concerns a simple issue: whether the Balestras should have to pay FICA taxes on deferred compensation to which Mr. Balestra had a vested right but, due to the bankruptcy of his employer, he will never receive. So, does Mr. Balestra owe tax on the compensation he did not and will not receive? Yep. Under the Code, nonqualified deferred comp plans must be taken into account as wages for FICA the later of when the services are performed or when there is no substantial risk of forfeiture. See Section 3121(v)(2). “Substantial risk of forfeiture” is based on the taxpayer’s requirements, not the potential for his company to go belly up. I have not researched this issue, but the result does not surprise me based on what I know of this area.
  • Whistleblower 11332-13W is on a roll, which I guess is cool considering the death threats he/she received. The Tax Court has held it has jurisdiction to review the award determination the Whistleblower received, which the Government had contested arguing that the information provided by the Whistleblower was provided prior to the enactment of Section 7623(b). Section 7623(b)(4) states the Tax Court has jurisdiction to review determinations. The Court’s official holding was that it had jurisdiction to review the award determination where whistleblower alleged that he/she provided information to the Government before and after the effective date of the statute.
  • From Jack Townsend’s Federal Tax Procedure Blog, Jack discusses the 2013 Lockheed case and the government’s “second defense” arguing for a theoretical setoff. The lack of actual items for the setoff is troublesome, as Jack highlights, because it could result in a fishing expedition to find setoffs. The post goes on to discuss the needs for factual assertions in this type of matter and the split in circuits, and provides the revised version of Jack’s text on this matter.
  • On May 23, 2014, TIGTA issued a report that should be of great concern to corporate officers or employees responsible for paying over withheld employment taxes, especially if those companies are behind. TIGTA reported that it found trust fund recovery penalties were not always timely or adequate, and the investigations were incomplete. In well more than a third of cases, the actions were untimely or inadequate, and most took over 500 days to review and process. TIGTA and the Service have agreed that this needs to be rectified, TFRP cases need to be processed better and more efficiently. The Service plans to make additional changes to the program shortly.
  • CPA Amit Chandel posted a link to Parkertaxpublishing.com, which discussed the case Bruce v. Comm’r. In Bruce, married taxpayers were in the process of getting divorced. H filed a tax return as married filing jointly for 2010 in January of 2011, and informed his ex-to-be that they were getting a refund. She provided bank information for her share of the refund. Unbeknownst to H, W filed a 2010 tax return in March of 2011 filing as head of household, and taking the children as dependents. The Service then modified H’s return to married filing separately, and assessed additional tax. The Tax Court upheld the adjustment because W filed her return prior to April 15th, which she was allowed to do under Section 6702(a) and Treas. Reg. 1.6013-1(a)(1). I’ll be discussing this with our family law folks later today – what a great way to piss off your ex.
  • Jack Townsend has a post on his Federal Tax Crimes Blog on the potential changes to OVDP for non-willful violators, including substantial quotes from Comm’r Koskinen’s speech about the topic.
  • From Bloomberg BNA, for this filing season, virtual currencies do not have to be reported on FBARs, but that could change in the future.
  • Mary McNulty and Emily Parker of Thompson & Knight recently presented for the Tax Executives Institute on preparing clients for the new IDR process. The slides from the presentation are available here.