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

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.

  • 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.


Reinhart Part II – Extending the Statute of Limitations on Collection by Virtue of Being Out of Country

In the first post on this case I discussed the CDP and lien issues presented.  Many of those issues seemed unusual or wrong in some way.  The meat of this case, however, lies in the application of the facts to the statutory suspension available where a taxpayer removes themselves from the country for six months.  This statute extension provision presents legal issues and Ms. Reinhart’s counsel challenged the regulation interpreting what it means to remove oneself from the country.  The case also presents factual issues.  In the end the Court decided the case on the facts without resorting to an analysis of the correctness of the regulation.  In this post I will examine the law, the facts, and the burden of proof.


The burden of proof issue adds a wrinkle to the case because of the procedural setting. The question raised by Reinhart concerns how, if at all, the burden of proof on a statute of limitations issue changes when a statute of limitations issue presents itself in the CDP context.  The IRS argued that the determination letter issued by Appeals in response to Reinhart’s CDP request was subject to an abuse of discretion review.  If correct, that would change the burden of production for the statute of limitations argument.  Reinhart argued that the burden of proof/burden of production issue, like an issue where petitioner contests the underlying tax, would have a de novo review.  The Tax Court agreed with Reinhart.

CCA 2014-002 states that “Counsel attorneys should argue in Tax Court CDP cases that a determination by Appeals about the validity of an assessment, the expiration of the assessment or collection statute of limitation, or other procedural requirements for administrative collection are determinations under sections 6320(c) and 6330(c)(1) reviewable for abuse of discretion.”  The notice acknowledges that some Tax Court opinions have decided that the phrase “existence or amount of the underlying tax liability” in the CDP provisions includes arguments regarding the statute of limitations and cites to five cases.  Then the Notice lists another five cases reaching the opposite conclusion.  Because Appeals must verify the statute of limitations has not yet expired as part of statutory charge, Counsel views the statute of limitations issue as one falling under the abuse of discretion standard.

In Reinhart, the IRS could hardly have chosen a worse case to test the position taken in the notice. The normal statute of limitation had long expired before the IRS decided to reopen this case.  The statute of limitations issue presented here is not only rare but particularly fact driven.  For the Tax Court to decide that the IRS could get past a difficult statute of limitation issue because the case came to it through the CDP door seems a stretch.  In some ways the IRS position here reminds me of the position it battled in bankruptcy court for two decades.  In bankruptcy cases, debtors argued that instead of the normal burden of proof in a tax case where the taxpayer has the burden that if a tax merits argument came up in a bankruptcy case the appropriate burden applicable was not the one used for tax merits litigation but rather the one used for objections to bankruptcy claims.  The Supreme Court rejected that argument in Raleigh v. Illinois Department of Revenue, 530 U.S. 15 (2000), holding that the nature of the issue before the court, rather than the particular forum, dictated the burden of proof.

Just as in Raleigh, the important issue in Reinhart is the nature of the issue before the court.  It should not matter that the statute of limitations issue has come to the court through the lense of a CDP case.  It should not matter that an IRS Appeals employee, in addition to the IRS employee in collection, decided that the statute of limitations on collection had not expired.  What matters is that the statute of limitations issue requires the party asserting an exception to the statute of limitations must prove the exception applies to the circumstances of the case.  Letting the IRS avoid the need to prove that simply because a second IRS employee, the Settlement Officer in Appeals, agreed with the first should not control this issue.

The Tax Court laid it out in simple, direct terms. The party raising the statute of limitations has an affirmative defense but must establish a prima facie case the collection period has expired.  Once the party, here the taxpayer, establishes a prima facie case, the burden of production then “shifts to the Commissioner to prove that an exception to the period of limitations applies.”  The IRS must prove that exception and not hide behind a determination of one of its employees.  The Tax Court held that a statute of limitations argument challenges the underlying liability and therefore give a de novo rather than abuse of discretion review to this issue.

After resolving the burden issue, the Court moved on to the real issue – did petitioner extend the statute of limitations by her actions? Section 6503(c) provides that “[t]he running of the period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period during which the taxpayer is outside the United States if such period of absence is for a continuous period of at least 6 months.”  Treasury regulation 301.6503(c)-1(b) explains what the statute means by providing, “The taxpayer will be deemed to be absent from the United States for purposes of this section if he is generally and substantially absent from the United States, even though he makes casual temporary visits during the period.”

“Generally and substantially absent” does not seem quite the same as continuously absent – at least not to Ms. Reinhart. She argued that the statute was not ambiguous and should be applied based on its plain meaning which is always out of the country for a period of six straight months.  The IRS argued that “continuous” does not necessarily mean “uninterrupted.”  Both positions leave open the question of when the suspension stops.  If Ms. Reinhart did spend six straight months out of the United States after the assessment and before the running of 10 years, when would the suspension stop?   How much U.S. presence would trigger an end to the suspension?  That would have been an interesting question on the facts of this case but the Court did not get there because it interpreted that she did not meet the initial test to create a suspension.

The opinion contains seven pages (at least in my printed version) displaying Ms. Reinhart’s arrival and departure records maintained by the Department of Homeland Security. That’s a lot of trips.  The records start on January 16, 2001.  From that point until they stop on July 10, 2010, she was constantly going in and out of the country.  The IRS could have collected the liability just from the cost of the airplane tickets.  The amount of travel displayed in the opinion is impressive.  So, the issue of continuously versus generally and substantially is clearly presented by the facts of this case.

Aside from the airplane records which create significant doubt about the continuous nature of her absence overseas, the IRS had two rather significant pieces of evidence in its favor. First, Ms. Reinhart’s 2001 through 2004 joint tax returns listed a Bahamian mailing address.  Second, on August 6, 2006, “petitioner signed a declaration submitted to the U.S. District Court for the Southern District of Florida stating that petitioner and her husband lived in Nassau, Bahamas, and that the Vero Beach, Florida, residence never was intended to be their residence.”  These two pieces of evidence impressed me but did not create the same impression on the Court.

Petitioner testified that she lived in Florida throughout, reciting a fairly long list of different addresses in Florida. She said that her husband rented a furnished one-bedroom apartment in Nassau, Bahamas from September 2002 until February 2012 but she always considered herself to reside in the U.S. (except perhaps when she signed the declaration).  She explained away the use of the Nassau address as resulting from a misunderstanding of the question and that she did live in Nassau when she was with her husband and she was not asked whether she lived continuously in the Bahamas or whether she had other residences.  The Court found her testimony credible even if I am having trouble with some of it.  It found that she lived in the U.S. and her husband lived in the Bahamas.

The burden of proof aspect of the case is legally the most significant; however, the lengthy litany of facts about her obvious constant movement back and forth between the Bahamas and the U.S. makes it a difficult case from a factual perspective. As a long time government lawyer, I am troubled when people explain away statements they make under penalties of perjury when the answer does not have significance.  I understand why the Court wanted to get to a factual rather than legal result here but I find her testimony too convenient for my liking.  Had the Court gotten to the merits of the statutory language, I think she was not continuously out of the United States.  By deciding the case on a factual basis, it gets to what seems to be the right result in a way that does not require it to strike down a regulation and cause an automatic appeal.

I take away from the case that a taxpayer traveling back and forth all the time as Ms. Reinhart did will have a decent case to keep the statute of limitations from getting suspended. Even if the Court had made its decision based on her residence moving to the Bahamas and applying the language of the regulation, it might still have found that she was not generally and substantially absent.  This is a hard case to know who to root for.  The IRS appears to have done nothing for a decade with respect to a taxpayer who it knew was not a good taxpayer.  Then it makes very technical argument based on a regulation that appears suspect.  On the other hand neither Ms. Reinhart’s tax activities nor her testimony left me with a favorable impression.  Losing this liability may mean nothing if it gets a subsequent liability against her and the new liability exceeds her ability to pay or the IRS’s ability to pursue collection.  If nothing else, the case highlights a little used provision of the code for extending the statute of limitations and tees up an attack on the regulation for the next taxpayer to come along.


Summary Opinions for 10/17/14

141022cHot tubs, fraudulent credits, the Tax Court saving a marriage, and, of course, some tax procedure.



  • This is an old version of Frank Agostino’s newsletter, which was published about a year ago.  I had not read it before, and he just posted it to LinkedIn.  As always, the quality is great.  I particularly enjoyed the hot-tubbing with the IRS article, and will know not to get flattered if Mr. Agostino ever asks me to hot-tub in the future.  Great article for tax professionals, but also non-tax folks who deal with valuation disagreements.
  • United States v. Bostick is an interesting case from the District Court for the Northern District of Texas relating to the IRS seeking permanent injunctions against preparers engaging in a fraudulent credit scheme. The Court did not grant the government’s injunction to the extent requested by the Service, largely because it did not believe the practitioners would engage in this type of action again. There is also a discussion as to what standard preparers are held to under Section 6694(a) and (b), and the reasonable cause exception to that statute.  In discussing these aspects of the case, the Court, interestingly, noted that the government had “not presented any evidence…that persuades the court that tax preparers are held to the same standard as attorneys or are required in every instance to seek the advice of a tax attorney.”  I wonder what the standard is for CPAs?  Peter Reilly at Forbes has some coverage found here.
  • The Service issued Notice 2014-58, which provides additional guidance regarding the codification of economic substance doctrine under Section 7701(o).  The Notice provides a definition of “transaction”, and also provides additional guidance for the related penalty under Section 6662.  There has been strong coverage of the Notice, especially helpful are write ups by PWC and KPMG.
  • In Wang v. Comm’r, a taxpayer claiming innocent spouse failed the “knowledge/reason to know” requirement under Section 6501(b)(1)(C), although she argued that her husband hid information from her. Taxpayer and her husband had conflicting testimony on various aspects of the case, and the Court found that taxpayer was involved in her husband’s business in a meaningful way, was very well educated, and did speak with him regarding his legal troubles.  The Court concluded she should have known or inquired more about the tax issues.  Worth noting that husband was disbarred a few years before for misappropriating client funds – he attributed this to bookkeeping errors (hmm, seems suspect, I’m sure Mr. Agostino was all over that).  Also somewhat interesting, the taxpayer said she was only with her husband for the children, and she would divorce him if successful in the innocent spouse claim…Perhaps the Court did not want to be responsible for the failed marriage.
  • I’m working on Saltzman and Book chapter 5 right now, which deals with statutes of limitations, and I’m pretty sure Reinhart v. Comm’r is going to make it into the text in one or two places.  Service filed a lien after ten years following the assessment.  The primary issue was whether or not the Service could collect trust fund recovery penalties that accrued prior to my little brother being born and around the time President Bush I puked on the Japanese prime minister.  The Case has a good burden discussion, a good discussion of when a limitations argument can be made before the court when coming out of Appeals, the proper scope of review, and when the statute is tolled for a taxpayer out of the country.  We will have more on this case this week and next, so I’ll just highlight the issues for now.
  • More statutes of limitations, this time regarding the refund period for claims based on foreign tax credit carrybacks.  In Albemarle Corp. v. United States, the Court of Federal Claims held that although the taxpayer met the “all events” test under Section 461, and the dispute was settled and taxes paid within the 10 year period, under the “relation back doctrine” accruals related to the original refund year, which was outside of the ten year period.  McDermott Will & Emery has a write up here, which discusses the issues in greater detail.
  • In Hauptman v. Comm’r, the Tax Court confirmed the IRS’s rejection of an OIC predominately because the taxpayer had provided drastically different values for his assets to the Service and to other third parties; further, he failed to comply with the tax laws, and was not completely helpful in providing information and explanations.  He was also not the most endearing taxpayer.  First, Mr. Hauptman owed a boatload of money; some amount of millions.  He also just didn’t file tax returns or pay tax, largely because he didn’t feel like it.  Eventually, his business tanked, and he wasn’t as rich anymore, and then the Service started levying.  Probably the biggest take away from the case is that you shouldn’t expect the Service to rely on your numbers when you owe millions.  The IRS followed up with banks, lenders and business associates, who provided much higher values for the taxpayer’s companies and assets.  He said those were “puffed up”, but the Service should definitely trust the numbers he gave to them.

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.

  • 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.

Summary Opinions for 10/03/14

Happy Columbus Day.  I am not sure if we are celebrating the beginning of his journey, the ending, his birthday, or something else, but I am certain I’m jealous that many of our government readers have off today.   Here are the procedure items from last week that we didn’t otherwise cover:

  • Buczek v. Comm’r , a decision from the Tax Court last week, is getting a lot of press.  Law professor Tim Todd has a great summary on his Tax Litigation Survey found here.  I’ve stolen Tim’s first few lines, which do a good job of outlining the buzz-worthy aspect of the case: “Judge Dawson held, in a division opinion, that the Tax Court has jurisdiction under IRC § 6330(d)(1) to review the IRS’s determination of whether a CDP request contains frivolous grounds and thus refused the IRS’s invitation to overturn Thornberry v. Commissioner, 136 T.C. 356 (2011).”  Prof. Todd asked for our thoughts on the matter via Twitter, in particular the Thornberry punt, and Les was kind enough to provide the following comment:

 The Buczek case involves a [tax] protestor submitting a [garbage Form] 12153. Thornberry gave the Tax Court jurisdiction when a taxpayer submitted some legitimate issues with the 12153, which also had protestor gibberish. In Buczek the request was all b#^& $#%/ and raised no legitimate CDP issues. The key point from the opinion is the first sentence below:

In Thornberry, the taxpayers’ hearing request, on its face, clearly raised proper issues set forth in section 6330(c)(2)(A) and (B), and the taxpayers raised those issues in the petition they filed in this Court appealing the disregard letter sent by the Appeals Office. By contrast, petitioner’s hearing request, which included Form 12153 and the pages attached thereto, does not challenge the appropriateness of the collection action, offer or request any collection alternatives, challenge the existence or amount of the underlying tax liability, or raise any spousal defenses….

Because petitioner [Buczek] did not raise in his hearing request any issues that may be considered in the administrative hearing, there are no issues that are deemed to be excluded from any portions of his request that the Appeals Office determined were frivolous. In accordance with section 6330(g), we make no review of the portions of a request for an administrative hearing that the Appeals Office has determined are frivolous. Moreover, because respondent’s determination that the IRS Collection Division could proceed with collecting petitioner’s unpaid tax liability for 2009 was not made in response to a proper request for a hearing, i.e., the entire request was properly treated as if it had never been submitted, this Court lacks jurisdiction to review respondent’s determination that collection may proceed, and therefore respondent’s motion to dismiss for lack of jurisdiction will be granted.

These are my parting thoughts.  In addition to Prof. Todd’s post, I would also suggest readers check out Lew Taishoff’s blog post on the subject found here.  Attorney Taishoff points out that Judges do not often overturn their own decisions (Judge Dawson wrote both opinions).  Moving forward, the Court will continue to review Appeals determinations that a position is frivolous (which the IRS is not fond of), and the IRS will probably continue to try to find another Judge to read Section 6330(g) more broadly to cover the determination.

  • In Law Office of John Eggersten v. Comm’r, the Tax Court vacated its prior holding (found here), which stated the IRS was time-barred from assessing ESOP excise tax by the statute of limitations under Section 4979A(e)(2)(D) even though the Form 5330, or something else constituting a return, had never been filed.  In the new opinion, the Tax Court held that the applicable statute was the general statute of limitations found under Section 6501, which was unlimited because no return was filed.  The IRS argued on reconsideration that Section 4979A(e)(2)(D) “supplements but does not replace” the general statute, which the Tax Court determined was a substantial error in the first holding, allowing the opinion to be vacated.
  • An interesting interest case from the Eastern District of NY in Maimonides Medical Ctr. v. United States (couldn’t find it free yet), where a 501(c)(3) entity sought a refund of FICA taxes paid, and argued it was not a corporation for purposes of the overpayment interest rate under Section 6621.  The 501(c)(3) argued that the Service IRM indicates that “corporations” are defined by the return they file, which does not include not-for-profits, and the Service has previously issued refunds using the non-corporate rate.  The Court stated the IRM cannot be used as precedent, or trump other regulations that would indicate the contrary.   The 501(c)(3) also argued that the check-the-box regulations were not clear on the classification of it as a corporation, so it should be afforded “special treatment”, which is allowed in limited circumstances. The Court did not find this persuasive, and held it was a business entity, the default treatment of which was a corporation.
  • More on Perez v. Mortgage Bankers Association from the Yale Journal on Regulation’s blog, Notice and Comment (our third reference to this new blog over the last two weeks).  We had an excellent guest post from Patrick Smith on the case this week, which can be found here.
  • From Jack Townsend’s Federal Tax Procedure Blog, a review of Cavallaro v. Comm’r, where the Tax Court found for the IRS in a valuation dispute on a transfer resulting in an imputed gift.  The Court held the taxpayer had the burden, even though the IRS had substantially reduced the value.  The Court found the taxpayer’s expert relied upon an incorrect assumption from the taxpayer regarding the ownership of certain technology.  This resulted in the Court disregarding the opinion completely, and the Service carrying the day.  Jack’s write up has some great commentary on the burden of proof matter.
  • Also from Jack Townsend, but this time from his Federal Tax Crimes Blog, you can find the IRS Information Letter regarding the tax regime for “green card” holders.  This ties into last week’s SumOp pretty well, where we discussed the Topsnik case, where a foreign individual tried to informally abandon his residency.
  • More statute of limitation issues, with the Service releasing CCA 201438021, which outlines the Service position on when third-party filed employment returns for common law employers will start the running of the statute of limitations.
  • The GAO has issued a report on recommendations to improve efficiency and effectiveness of large partnership audits, found here.  Thompson and Knight’s tax blog, TK Tax Knowledge has a short summery.
  • Bob McKenzie, writing at Forbes, has an article on the new OIC guidance issued by the Service, and the likely increase in acceptance rates resulting in the new rules, combined with the 2012 changes.
  • In US v. Wommer, the Ninth Circuit has affirmed an attorney/taxpayer’s conviction for subscribing false returns, currency offenses and evading tax, hold the taxpayer’s argument that interest and penalties were not “taxes” for purposes of tax evasion under Section 7201.  The taxpayer was able to advance case law regarding sentencing that advanced his position, but the facts were distinguishable and the Court held the statements were dicta.
  • From the US Bankruptcy Court in the Southern District of Texas comes In Re: Kemendo, where the taxpayer was able to discharge tax liabilities for years in which the Service prepared substitutes returns…which is generally not the rule under Bankruptcy Code Section 523(a)(1)(B).  In this case, Mr. Kemendo cooperated with the IRS in the preparation of those returns, taking them out of the exception for non-dischargeability.  Kieth noted that the Court placed the burden on the Service to prove the returns were not done with Mr. Kemendo’s cooperation, as he had alleged, which Keith found unusual.  Unfortunately for the Service, the returns had been prepared years before, and the Service did not have any records regarding that aspect of the case.



The Congressman James Traficant Memorial Code Section

Frequent guest blogger Carl Smith alerted us to the importance, from a tax procedure perspective, of the recent death of former Congressman James Traficant of Ohio. Congressman Traficant played an instrumental role in the passage of one of the mosre heavily discussed but little used provisions of RRA 98. Carl’s discussion below lays out the history and comes from a handout he gave to his tax procedure class. You will never think of this code provision the same after reading this post. Keith 

Section 7491 was added to the Code by the IRS Restructuring and Reform Act of 1998 to shift the burden of proof to the IRS in some civil tax cases. To understand why it was enacted and why it is deliberately so ineffective, one needs to know a little history – particularly that of former Congressman James Traficant of Ohio.


Traficant had been a college football star. Later, he worked as the head of a drug program in a county in Ohio for almost a decade. In 1980, he was elected sheriff of Mahoning County, Ohio. While running for sheriff, he took bribes from two different branches of organized crime to look the other way about their illegal activities should he be elected. Unfortunately for Traficant, the FBI caught him on tape taking some of the bribes. When the FBI played the tape to him, Traficant signed a confession. In 1983, the federal government charged him under RICO, for a pattern of bribe-taking, and, under Code section 7206(1), for filing a false 1980 income tax return. Despite the evidence against him, Traficant decided to fight the charges in court before a jury. He moved to suppress both the FBI tape and confession and lost both motions. United States v. Traficant, 558 F. Supp. 993 and 558 F. Supp. 996 (N.D. Ohio 1983). Though not a lawyer, he then decided to represent himself at trial. Shockingly, a jury of his constituents found him not guilty of all charges. The fame of his single-handedly beating a RICO charge endeared him to his constituents as a lovable rogue. So, in 1984, they elected him to Congress.

The federal government did not take its criminal litigating loss lying down. Instead, in 1984, it issued a notice of deficiency to Traficant determining additional income taxes for 1980 on $108,000 of unreported bribes and a civil fraud penalty. In Tax Court, Traficant admitted to taking a much smaller amount of bribes. He also was permitted to take the Fifth Amendment when asked certain questions by IRS counsel. The Tax Court held that under its Rule 142(a), Traficant had the burden of proving the exact amount of the bribes and that his failure to testify was not affirmative evidence meeting that burden. The Court upheld the deficiency. It also ruled that under Code section 7454(a) and Rule 142(b), the IRS had the burden of proving fraud by clear and convincing evidence, and that the IRS had met that burden. The Court rejected Traficant’s argument that his criminal acquittal barred the IRS from seeking the tax or penalty as a civil matter. Traficant v. Commissioner, 89 T.C. 501 (1987), affd. 884 F.2d 258 (6th Cir. 1989).

Traficant was furious about this loss, and decided to make it his personal crusade to shift the burden of proof to the IRS on all issues in civil tax cases. Thus, he wanted to make it the IRS’ burden in Tax Court to, say, disprove that you made the charitable contribution of $5,000 that you listed on Schedule A of your income tax return – even if you had thrown out all your records and cancelled checks and were uncooperative with the IRS in the audit. His bill, H.R. 367, introduced in the 105th Congress in 1997, proposed a new Code subsection, which would read simply: “Notwithstanding any other provision of this title, in the case of any court proceeding under this title, the burden of proof with respect to all issues shall be upon the Secretary.”

In Congress, Traficant was famous for his unorthodox behavior and speech, his bad and badly-fitting clothes, and, most of all, his terrible bouffant gray hair. Traficant also loved to go to the well of the House at night and make one-minute speeches to the empty chamber railing against government waste and, most especially, the IRS. He peppered his speeches with the famous phrase from “Star Trek”, “Beam me up!” The speeches were so unusual that they got quite a following on C-Span. It was like watching a terrible “American Idol” audition or a car wreck. You knew you shouldn’t, but it was hard to resist. But, the speeches had the effect Traficant desired. Eventually, over years, members of Congress from all over the country got more and more constituent mail demanding that the burden of proof be shifted to the IRS in civil tax cases. To give you an idea of Traficant speeches on this subject, below are two that had been delivered from the well of the House, quoted from his website (which has since been taken down):

September 23, 1997:

Mr. Speaker, according to news reports, the IRS has a quota system. IRS agents got bonuses for ripping off taxpayers. And many times, taxpayers settled their cases, even though they were innocent. What is so shocking about that? The American people have known this for years. And the American people have been telling us, ‘The IRS is incompetent. The IRS is arrogant. The IRS has abused their powers.’ It has gotten so bad, the IRS is even above the law. That is right: In America, the accuser has the burden of proof, but not in a civil tax case. The IRS accuses; the taxpayer must prove their case. Beam me up! Let me say this: There can be no true reform in American tax law without changing the burden of proof. It is time to handcuff them to a chain link fence and flog them with their own hefty Tax Code. I yield back their unauthorized seizures and excessive penalties.

See Congressional Record 105th Congress. For video footage, see “September 23, 1997 House Session,” C-SPAN, at 00:03:30.

October 6, 1997:

Madame Speaker, asking the Congress to stay out of it, the IRS is promising to reform themselves. Like a wounded TV evangelist, the IRS is begging the American people for forgiveness. They said, ‘This time we really mean it. Cross our hearts. Hope to die.’ Spare me, Mr. Speaker. Who is kidding whom? Allowing the IRS to reform themselves would be like allowing Jeffrey Dahmer to head up the Boy Scouts. The IRS is guilty, guilty, guilty! And every time they get caught with their finger in our 1040’s, they plead for forgiveness. Enough is enough! I say it is time to kick these computer cowboys right up their hard drives. Pass H.R. 367 and change the burden of proof in a civil tax case. That will get it done. With that, I yield back all those crocodile tears at the Internal Revenue Service.

See Congressional Record 105th Congress. For video footage, see “October 6, 1997 House Session,” C-SPAN, at 00:05:10.

Knowledgeable members of the private sector and the government resisted Traficant, knowing that if his proposal were adopted, the IRS would probably never win another case in the Tax Court. Not only revenue from tax deficiencies would disappear, but revenues from voluntary reporting of taxes would tumble. So, for a time in 1997, there was a stalemate. On September 11, 1997, Traficant lashed out at his critics with another speech from the well of the House:

Mr. Speaker, the American Bar Association does not want it. Former IRS Commissioners do not want it. The current IRS Commissioner does not want it. Tax attorneys do not want it. IRS collection agents do not want it. All of these bureaucrats and special interest people do not want Congress to change the burden of proof in a civil tax case. Some surprise, Mr. Speaker. All of these bureaucrats and special interest people have one major thing in common: They all make big bucks off the backs of the American people. Beam me up! I must admit: The only people in America that support changing the burden of proof in a civil tax case are the American people, in record numbers, and it is very simple: They are taxed off. They are fed up. And they want Congress to right this major wrong. Congress was not elected to represent special interest bureaucrats and the IRS.

See Congressional Record 105th Congress. For video footage, see “September 11, 1997 House Session,” C-SPAN, at 00:04:45.

Eventually, the drafters of the 1998 IRS Restructuring and Reform Act knew that they would have to include a provision which they could say to their constituents shifted the burden of proof to the IRS in civil tax cases, without its really doing so in the vast majority of cases. So, Congress enacted Code section 7491. The section is largely cosmetic. It is deliberately designed to fail nearly all the time because of the conditions attached therein before the burden is shifted. Essentially, section 7491 almost always requires a taxpayer to prove his or her case the same way as in the old days. Only then, after proving the case, the burden shifts to the IRS. But at that point, the IRS usually has nothing to introduce as contrary evidence, so the taxpayer wins, and the burden shift is irrelevant.

And what became of Congressman Traficant? First, he claimed victory in section 7491. Second, he continued his corrupt ways while in Congress: He demanded thousands of dollars in goods and services from businessmen in return for official favors, including contacting the Director of the FAA, the Secretary of State, and the King of Saudi Arabia. He paid inflated salaries to his staffers, who were required to kick back the difference to him. He even forced his Congressional staffers to bale hay, repair plumbing, and reinforce barns at his show-horse farm.

In May 2001, an Ohio federal grand jury indicted Traficant for bribery, obstruction of justice, conspiring to defraud the United States, filing false tax returns, and RICO. Once again, Traficant defended himself in court. This time, he wasn’t so lucky. He was convicted, expelled from Congress, and, in 2002, sent to jail. See United States v. Traficant, 368 F.3d 646 (6th Cir. 2004). The national news media had great fun covering his second trial, his expulsion from Congress, and even his release from jail on September 2, 2009. (When he was released, he immediately did all the Cable TV news shows.) But the media found that the biggest story of all was in publishing his prison mug shot. Only then was it revealed that the terrible hair on the top of his head was just a bad toupee. He had been bald all along.

nice hair


nice hair 2