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

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

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

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

To the other procedure.

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

 

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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Comments

  1. I learned something from the 9th Circuit TEFRA opinion (JT USA). I learned that at least two Circuit Court judges, their clerks and staff don’t know how to spell “sleight-of-hand.”

    Happy Thanksgiving to all. The horse knows the way to carry the sligh.

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