Summary Opinions for May, part 1

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May got away from me, and so has much of June.  I’ll post the Summary Opinions for May in two parts, and handle June in the same manner.  Below are some of the tax procedure items in May that we didn’t otherwise cover:

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  • The Middle District of Louisiana, after the Fifth Circuit vacated and remanded the case, reversed its prior decision and, under Woods, held that the Section 6662(e) valuation misstatement penalty could be imposed when the underlying transaction had been determined to lack economic substance. Chemtech Royalty Associates, LP v. US.   This case was the result of some crazy tax planning by Dow Chemicals to goose its basis in a chemical plant.  Here is Jack Townsend’s prior coverage of the case.
  • Sticking with substantial valuation misstatement penalty, the Tax Court in Hughes v. Comm’r upheld the penalty against a KPMG partner who claimed a step up in basis in stock when he transferred the shares to his non-resident spouse.  This was based on some informal tax research, and conversations with some co-workers that were also informal.  The Court essentially felt Mr. Hughes should have known better, and tagged him with a big penalty (probably didn’t help he was transferring the shares to try and ensure his ex-wife couldn’t make a claim for the increase in value).
  • IRS has released Chief Counsel Advice regarding abatement of paid tax liabilities.  In taxpayer friendly advice, CCA 201520010 states the language of Section 6404(a) is “permissive” and does not require the liability to be outstanding.  That Section states the “IRS is authorized to abate the unpaid portions of the assessment of any tax or any liability in respect thereor…”  The reference to “unpaid”, according to the CCA, is not binding on the Service.
  • The Service has released CCA 201519029, which provides advice on when preparer penalties can apply in situations where the prepared didn’t sign the return or didn’t file the return, and when a refund claim was made after the statute had expired.  For the third situation, the Service stated that “understatement of liability” does not include claims barred by the statute.  The full conclusions in the CCA are:

Issue 1: Yes. If the return is not filed, a penalty under I.R.C. § 6694(b) may be assessed if the return preparer signed the return and the return preparer’s conduct was willful or reckless.

Issue 2: Yes. Under the language of I.R.C. § 6694(b)(1), the return preparer penalty may be assessed if the tax return preparer prepares any return or claim for refund with respect to which any part of an understatement of liability is due to willful or reckless conduct. There is no requirement that the Service allow the amounts claimed on an amended return before the I.R.C. § 6695(b) penalty may be assessed.

Issue 3. The penalties under I.R.C. §§ 6694(a), 6694(b) or 6701 should not be assessed merely because the return preparer made and filed a claim for refund after the period of limitations for refunds had expired, because an “understatement of liability” does not include claims that are barred by the period of limitations. In addition, there may be extenuating circumstances that weigh against asserting the penalty. The amended return, for example, may be perfecting an earlier timely informal claim for refund.

  • The Service has announced it will be refunding the registered tax return preparer test fees.  There will be a second refund procedure where you can request your time back…but it will be ignored.
  • Professor Andy Grewal in early May had an excellent blog post on Yale’s administrative law blog, Notice and Comment, which highlights more potential penalties on employers attempting to follow the ACA requirements.
  • Another CCA (CCA 201520005) , where the IRS has held that the deficiency procedures apply to the assessment of the penalty under Section 6676 to erroneous refund claims based on Section 25A(i) American Opportunity Credit, since the penalty can only apply to a refund claim based on the credit if that claimed credit is part of a deficiency.  Carlton Smith previously had a blog post touching on this issue, found here, where he persuasively criticized  this position.  You should check out the entire post, but I’ve recreated a portion below:

A third issue discussed by the PMTA is how the section 6676 penalty is to be assessed.  Frankly, I read the Code as providing that the assessment is done like a section 6672 responsible person trust fund penalty — straight to assessment, without the deficiency procedures applying.  That seems to be what section 6671 provides.  But, the PMTA takes the position that only for underlying issues on which the section 6676 penalty applies where there is no jurisdiction in the Tax Court under the deficiency procedures, such as for excessive refund claims regarding employment taxes or the section 6707A reportable transaction penalty, the section 6676 penalty is done by straight assessment, without prior notice to taxpayers.  However, for section 6676 penalties on what would constitute a “deficiency” — and excessive refundable credit claims are clearly part of a deficiency under section 6211(b)(4)‘s special rules — the PMTA concludes that the section 6676 penalty should be asserted in a notice of deficiency.  The PMTA reasons that Tax Court cases have in the past held that a penalty which is computed as a function of a deficiency (which I would point out includes extra late-filing and late-payment penalties on the tax deficiency) are also treated under the deficiency procedures.  This reasoning is all mixed up.  The Tax Court applies the deficiency procedures to penalties like the late-filing and late-payment penalties of section 6651(a) that are imposed on the tax deficiency only because of special language in section 6665(b) that directs the Tax Court to do so.  There is no similar language in section 6671 directing deficiency procedures to apply to any penalties imposed in the following sections.

  • And another CCA (201517005), this one dealing with the statute of limitations for refunds based on foreign taxes deducted.  Specifically, whether a refund claim more than ten years (yr 13) after the tax year in question (yr 2) was timely when it resulted from an NOL (yr 4) where the taxpayer elected to deduct foreign taxes paid instead of taking foreign tax credit.  The IRS concluded that no, Section 6511(d)(2) applied to the NOL and required the claim to be made three years after the NOL year.  Section 6511(d)(3), which allows for a ten year statute for refunds pertaining to foreign tax credits, was not applicable.
  • Apparently, some states are starting to scale back the amount of tax credits available for movie productions.  Two years ago, The Suspect was filed in my building, staring Mekhi Phifer and no one else you have ever heard of.  I think it was “catered” by a fast food joint, and they may have been using our coffee pots to make coffee.  I can’t imagine Pennsylvania dropped the big bucks to land that film.
  • Emancipation day is throwing off filings again next year.  I always assumed that had something to do with the date of the Emancipation Proclamation, but I was wrong. The Emancipation Proclamation went into effect January 1st, 1863.  On April 16th, 1862, President Lincoln signed the Compensated Emancipation Act, freeing the enslaved living in the District of Columbia.  The linked Rev. Ruling explains what those in Massachusetts who are celebrating Boston Marathon Day (Patriots Day-celebrating the shot heard round the world) should do also.
  • Initially when writing this, I was watching the US women’s national team take it to Colombia, and recalling what a jackass Sepp Blatter has been.  Hoping this article is in reference to the shoe dropping on him next.  Even if he didn’t evade taxes, he should have to pay someone money for suggesting he would boost viewership of the women’s game with hot pants.  Or for not knowing who Alex Morgan is…or for making the women play on turf.
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. Bryan Camp says:

    Hi all, Please remember that the Service does not, and cannot, abate a “liability” under 6404(a). It does, and can only, abate “assessments.” See e.g. U.S. v. Buckner, 64 B.R. 908 (ND Ind.) (2001)

    • Jason T. says:

      I’ll stake out a middle ground between Stephen’s liability abatement and Bryan’s assessment abatement:

      Under § 6404(a), can the Service abate accruals?

      Interest and penalties usually accrue for some time before the Service assesses them (if if it ever assesses them). Would an excess accrual forever remain in the Service’s computers?

      Also, I’d like to know where Stephen obtained his quote that reads, “That Section states the ‘IRS is authorized to abate the unpaid portions of the assessment of any tax or any liability in respect there[f]or….'” It is not in the CCA to which he refers. Perhaps someone knows something about abatements that we don’t know?

      • Jason, the quoted language is the first line of Section 6404(a).

        • Jason T. says:

          Thank you, Stephen. I must have already been in holiday weekend mode when I made my request of you.

          I had presumed your quote was not from § 6404(a) because it begins with “IRS is authorized.” As a rule, tax laws refer to only “the Secretary”; § 6404(a) does.

          I should have reread that law before my prior comment. I have read it again and I believe it answers my previous question about accruals.

          I’m unsure, then, how Professor Camp can insist that the law authorizes only assessment abatement. How does he explain its “or any liability in respect thereof” clause? He cites U.S. v. Buckner, [2]64 B.R. 908 (ND Ind.) (2001), but that case is inapposite. It involved a question resolved under § 6404(c), not § 6404(a). Indeed, Buckner noted “[t]his might be a different case if Buckner’s taxes had been abated under 26 U.S.C. § 6404(a).” Buckner at 916 n. 7.

          Unlike a § 6404(a) abatement, a § 6404(c) abatement “is not designed to reflect a taxpayers true liability.” Buckner at 914. And, of course, “while an assessment might reflect a tax liability, taxpayers are liable for taxes regardless of whether they have been assessed.” Buckner at 913.

          It seems to me, then, that § 6404(a) does allow for tax liability (including accrual) abatements, not only for tax assessment abatements.

          The language in § 6404(a)(1), as compared to § 6404(a)(2), (3), cinches the matter: § 6404(a)(2) and (3) refer to assessments, but § 6404(a)(1) does not.
          I don’t think one can seriously dispute that a tax liability, as well as a tax assessment, can be “excessive in amount.” § 6404(a)(1). When an unassessed tax liability is excessive in amount, then, the IRS is authorized to abate it.

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