Fee Arrangements are a Matter between Taxpayers and their Advisors

We welcome back guest blogger G. Brint Ryan, Chairman and CEO of Ryan, LLC. Brint wrote a guest blog post for us at the end of 2014 about a case we described then as perhaps the most important procedural case of the year combined with the Loving case.  He has continued to litigate concerning the issue of fees for service and the ability of the government to control the fee arrangement between parties.  The most recent case involves litigation with the state rather than the IRS but has implications that go beyond just the laws in California.  Keith

In an important win for business against government encroachment, a California Superior Court recently invalidated a rule restricting taxpayers from paying performance-based fees for professional services.  In this case, Ryan, LLC (“Ryan”) filed suit challenging the legality of an emergency rule promulgated by the California Governor’s Office of Business and Economic Development (“GO-Biz”) in August 2014, which sought to restrict performance-based fee arrangements for companies applying for the California Competes Tax Credit.  California Superior Court Judge Timothy M. Frawley ruled in favor of Ryan, stating that the “cost of a consultant’s services is a matter between the taxpayer and the consultant.” He found that the state had failed to show any link between these costs and the economic development goals of the program.


This ruling is a win for businesses and the professionals who assist them in making their growth and investment decisions.

Federal, state, and local governments in the U.S. offer tens of billions of dollars annually in credits and incentives (like the California Competes Program) to businesses to promote job creation and economic development. However, due to the complexity of uncovering and applying for available credits and incentives, half of them go unclaimed each year. Firms like Ryan provide the advice needed to ensure that these incentives aren’t missed by growing businesses that are generating local jobs and economic opportunities.

Of the nearly six million employer firms in this country, companies with fewer than 500 workers accounted for 99.7% of those businesses. In other words, the businesses that make up the very backbone of the U.S. economy are the ones likely to engage a credits and incentives consultant. They are small to medium-sized and unlikely to have the experience, expertise, or bandwidth needed to properly research, identify, and negotiate business incentives. These smaller organizations are the most likely to need external counsel to assist them in unlocking incentives that will help expand their businesses by impacting their bottom line.

Adopting a performance-based fee structure, which pays a consultant only if that consultant successfully procures useful business incentives, is a “win-win” situation, especially for firms who can’t afford to pay these fees upfront. This is precisely why a ban on fee arrangements makes no sense. Restricting taxpayer contracts for professional services would only hamper the appetite and ability of businesses to apply for tax credits—producing a self-defeating result for any economic development program.

Judge Frawley agreed with this argument, writing that banning performance fee arrangements “does nothing to stimulate ‘new employment’ or ‘economic growth,’ and does nothing to encourage businesses to invest in California. The only thing the ban is likely to accomplish is [to] discourage businesses with contingent fee arrangements from participating in the California Competes tax credit program.”

Thus, ironically, losing this lawsuit is actual a “win” for the California economy. Removing this ban puts California back in line with the way other states operate. It opens the market back up for California as a business-friendly state and promotes the California economy.

In addition, the nature of the ban was inherently flawed and lacked a fundamental understanding of how performance-based fees work with regards to incentives. It restricted the fee structure for one particular tax credit. But companies that are considering expansions and relocations typically are not focused on a specific tax credit or incentive in a single state. For example, Ryan works on behalf of its clients to research and pursue any and all potentially available credits and incentives for each potential site so that the client can take all of them into account in determining the return on investment for a project. In general, because the services Ryan provides to its clients are interconnected, span multiple years and locations, and encompass a variety of different tax credits and incentives (national, state, regional, and municipal), the fees it charges cannot be isolated on a “per credit” basis.

Underscoring these arguments is the basic notion of fairness. It is unjust for government to intrude into a company’s business judgments to the point of dictating how a company pays its consultants. Ryan levied a similar blow to Internal Revenue Service (IRS) business regulatory overreach in 2014 in Ridgely v. Lew, which invalidated restrictions prohibiting attorneys, certified public accountants (CPAs), and other practitioners from entering into performance-based fee arrangements for services before the IRS (known as Circular 230 provisions).

This ruling on the California GO-Biz case is a win for businesses as well as economic development in the state of California. Ryan will continue to lead the charge against unfair and illegal government interference that infringes on the rights of taxpayers and inhibits economic growth.



Summary Opinions for 06/20/14

Last week was a fairly interesting week in the tax procedure world, with the Clarke decision and the Kuretski decision.  Both items we have followed closely.  We also finally saw the Circ. 230 regulations (I still have the disclaimer on my email), and we have to thank Michael Desmond again for his post, found here, on that topic.  In addition, there were a handful of interesting penalty cases, some new important FBAR information, and reactions to the various cases; all of which is discussed below.

  • The IRS has eased up on nonwillful failure to file FBARs.  Jack Townsend’s Federal Tax Crimes blog has initial reactions here, including various other links and the salient terms.  Jack also has a second post containing a summary of IRS statements on the new policies from the Service here.
  • The Fifth Circuit has again reviewed the Whitehouse Hotel LP v. Comm’r, this time vacating the Tax Court’s imposition of the gross valuation misstatement penalty under Section 6662.  The underlying question in the case was the valuation of a façade easement, which the taxpayer obtained an appraisal on and had the assistance of other tax professionals.  The Tax Court stated this was not sufficient because there was no evidence that the taxpayer made a separate independent investigation in good faith or asked its tax professionals to do the same.  The Fifth Circuit stated the standard was too high for reliance, and that the taxpayer had shown reliance on the advice of a competent professional under the statute.  I have a post this week coming on the Liftin case from the DC Circuit Court of Appeals, which I would argue takes a somewhat contrary position for reliance.
  • Estate of D. McNeely v. US is another interesting Section 6166 procedure case, where the estate initially paid estate tax for an amount greater than the tax due on the non-closely held company assets.  Section 6166 is discussed in my second Knappe post here, but in a nutshell the Section allows estates to defer certain estate tax obligations on some closely held entities and then pay the tax in installments.  The estate tax is due, however, on all non-closely held company interests.  The estate in McNeely realized it had paid estate tax in an amount greater than required for just the non-closely held business interests, and sued for a refund.  When the estate made the payment, it marked the payment as the “non-deferred” amount, but the Service stated that under Section 6403 it was allowed to apply an overpaid installment obligation against future installments.  The Court found the Service had the discretion to do this under either Section 6402 or Section 6403, but there did appear to be somewhat compelling arguments against this result and some arguably contrary holdings in other district court cases.
  • The IRS has issued temporary regulations  indicating the persons/entities that the Service can contract to receive summoned books, and records, and to take summoned testimony.   The regulations are not extensive, and do not provide that much guidance.
  • Another great tax procedure mind, Professor Steve Johnson, has comments on the Clarke case also on TaxProfBlog.
  • This is our 200th post!!!  Thanks to everyone for reading.  Not bad for less than a year.

Summary Opinions for 5/16/14

684px-1996_McLaren_F1I would like to claim that SumOp was delayed this week because of our wonderful guest posts by Larry Gibbs on the loving aftermath, and Mary Gorman on third party payor regulations, but, in reality, I was just slacking.  Below you can find your long awaited summary of tax procedure items from last week:

  • In Louisiana Rest. Ass. Self Insur. Trust v. United States, the District Court for the Eastern District of Louisiana held that the Service abused its discretion by not following a TAM it issued to the taxpayer (can’t find the case for free yet, sorry).  The Court, relying on Lansons, Inc. v. Comm’r, stated the Service can retroactively change its interpretation of a law, but when the taxpayer has relied in good faith upon the Service’s position, and the change would have an inordinate adverse effect, the Service must abide by its prior position.
  • Loans related to Yachts and failure to pay the gas guzzler excise tax on the 1998 McLaren F-1 he was importing—looks like the Court has been reading my journal (queue Doogie Howser music).  In Gonzales v. United States, the Court held that the taxpayer could not have relied on the car dealer or his accountant to show reasonable cause for penalty relief from the excise taxes relating to the purchase of the car (which, after finding out he was terminally ill, he transferred to his father to satisfy a debt relating to his Yacht).  First, it was not reasonable to view the car dealer as a tax expert, upon whom one could rely (the Court did not get into credentials, but presumably he was not a CPA or LLM).  The Court found the taxpayer also could not rely on his accountant because of his accountant’s damning testimony, stating “he had never prepared an excise tax return, he [was] not familiar with the law…, and he does not advise clients on excise tax liability.”  Further, the accountant never talked to the taxpayer regarding the tax.  The case has a lengthy discussion regarding whether or not the car was subject to the luxury tax (yes) and the gas guzzler tax (yes), both of which are interesting, but beyond the scope of SumOp.
  • The IRS has issued Chief Counsel Notice 2014-002, which directs the Service to take the position in CDP cases that the existence of the amount of underlying tax is not in question under certain circumstances, thereby requiring abuse of discretion review and not de novo review.  Issues involving the validity of the assessment, the expiration of the statute of limitation, or payments and overpayment credits and their application do not include a question as to the underlying tax, and therefore receive the more deferential review.  This position is contrary to some decided Tax Court cases.
  • Lose your books and records during a move?  Not sufficient by itself for penalty relief if the IRS assesses additional tax if you can’t substantiate the tax items.  The Tax Court in Chandler v. Comm’r stated that lost records due a move was not enough, and the taxpayers should have also attempted to show that the loss was due to circumstances beyond their control and that they attempted to reasonably reconstruct the same.  The Court relied on its prior holding Mears v. Comm’r.  I’ve had this issue come up with flooding a few times.  My experience with the Service has been positive.  We attempted to prove each requirement, and my clients presented well.  In the end, we did not have any issues.
  • Last week, Keith posted on the proposed legislation that would require the Service to use private debt collection services for certain collection matters.  One of our frequent commenters, Bob Kamman, thought we should have hammered the lobbying point, instead of arguing the merits of the suggestion.  I think both are important, and others have previously touched on the lobbying aspect.  Three of the four possible companies are headquartered in the districts of the two senators advancing the bill.  I’m sure our readers are shocked.  You can find two articles on this here and here.
  • In news that is sweeping the web, but really shouldn’t surprise anyone, TIGTA has issued a report indicating there is a significant overall difference in the amount of alimony deductions taken compared to the amount of alimony reported as income.  Many recently divorced folks have suffered a bit of a financial shock, and now have different and somewhat complicated tax rules to follow.  A bad combination for tax compliance.   This seems like it should not be terribly difficult for the Service to track, and to ensure the returns match up, but perhaps I am naïve.
  •  An interesting article from New Science, reported by Slate, regarding violent crimes spreading in a similar fashion to infectious disease, and how, like infectious disease, the spread can be interrupted and stopped.  I would not be surprised to see similar results with tax evasion, as the premise behind the spread is that if someone is in contact with violent crime, he or she is more likely to commit such a crime.  Seems like it could be equally applicable to tax.
  • IRS is doing limited audits on Section 409A plans, and Winston and Straw has some coverage here.  From the article, the IRS is not jumping into more complicated areas, but instead just doing someone basic reviews.
  • IRS has announced a one year pilot program to provide penalty relief for delinquent Form 5500 series retirement plans that are not covered under Title I of ERISA (not a lot – one participant plans and some foreign plans).  See Rev. Proc. 2014-32 if you desire more info.



Third Party Payor Regulations and Audit Guidance

Today’s guest blogger, Mary Gorman, worked with me in the Office of Chief Counsel, IRS for many years and became an expert on employment tax issues there.  Today she discusses a new and long needed regulation that will impact what I used to call employee leasing companies.  As the common law employer moved away from the direct role as employer and new companies entered the scene as intermediaries, the IRS encountered more and more problems over the past two decades when payroll taxes were not paid.  The regulations give the IRS another tool in its efforts to collect unpaid payroll taxes.  Keith

On April 14, 2014, the IRS finalized the third party payor regulations.  These regulations create a new type of entity for payroll compliance, the “Payor to Perform Acts of an Employer”, (Payor Employer).  This new entity will be jointly liable with the common law employer for any unpaid employment taxes.   The proposed regulations had used the term “Payor as Agent to Perform Acts of an Employer”.  In response to a comment on the proposed regulations, IRS removed the term Agent.  It is probable that these regulations will function as a “collection tool”.   They will be used when taxes are unpaid and the IRS needs to assert joint liability since the regulations do not impose any unique reporting requirements for an entity that meets the definition of Payor Employer.

This new type of payroll entity should encompass employee leasing companies.  A Professional Employer Organizations (PEO) is an entity that hires and leases employees to workplace employers.  PEOs hold themselves out as the employer.  They file the Forms 941 in their own name and Employer Identification Number (EIN).  If the PEO leases employees to multiple worksite employers, the PEO will file an aggregate return, treating all leased employees as the PEO’s employees and will make aggregate deposits for these liabilities.  When those taxes go unpaid, the IRS and the worksite employers have problems, not the least of which is determining which clients’ taxes have gone unpaid when there was aggregate reporting and aggregate deposits.


First issue has been whether the PEO is liable for the unpaid taxes.  The Internal Revenue Code attaches liability for employment taxes to the employer.  Sections 31.3102-1 (d), 31.3202-1 (e), 31.3301-1 and 31.3403-1 establish that the employer is the person liable for the withholding and payment of employment taxes, whether or not amounts are actually withheld.

Common Law Employer?

It is rare that a PEO would be the common law employer.  The PEO client, the worksite employer, is generally always the entity with the power to direct and control the workers.  The proposed regs provide:

Under the common law test, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. An employment relationship exists if an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so. See §§31.3121 (d)-1 (c), 31.3231 (b)-1 (a) (2), 31.3306 (i)-1 (b), and 31.3401 (c)-1 (b). This test is also applicable in determining which of two parties in a three-party arrangement is the employer. See for example, Professional and Executive Leasing, Inc. v. Commissioner, 89 T.C. 225 (1987), aff’d, 862 F.2d 751 (9th Cir. 1988)

Joint or Co-Employer?

Federal employment tax law does not recognize co-employment or joint employment.

There is no definition of “co-employment” or “co-employer” for federal employment tax purposes. Nor does the Code, regulations, other formal guidance, or any binding court precedent recognize “co-employment” or “co-employer” for federal employment tax purposes. PLR 201347020

There is a Revenue Ruling from 1966 that is discussed in footnote 19 of the PLR, where the IRS recognized concurrent employment by two common law employers where both satisfied the common law direction and control test such that each was a common law employer of the sales clerks. Revenue Ruling 66-162.Statutory Employer or “mere conduit”?

Is the PEO the §3401(d)(1) employer?  Section 3401 (d) (1) provides that for purposes of federal income tax withholding, the term employer means the person for whom an individual performs or performed any service, of whatever nature, as an employee of such person, except that, if the person for whom the individual performs or performed the services does not have control of the payment of wages for such services, the term employer means the person having control of the payment of such wages.

What does “in control of the payment of the wages” mean?  It means legal control.  If the PEO is paid the wages and the taxes by the client before the PEO pays the employees, IRS has said that the PEO is a mere conduit for the wages and is not in legal control of the wage payments. IRS appears to be moving to a position that if the PEO is reimbursed after the wages were paid, than the PEO is in control of the payment of the wages.

3504 Agent

To be a payroll agent under § 3504 of the Code, the entity must file a Form 2678 and be approved by the IRS as the agent for payroll. PEO’s do not file this form because they hold themselves out to be the employer. Payor to Perform Acts of an Employer

The new regulations create joint liability for any entity holding itself out as the employer if the entity is party to a service agreement that:

  1. asserts it [the payor entity] is the employer (or “co-employer”) of the individual(s) performing services for the client;
  2. pays wages or compensation to the individual(s) for services the individual(s) perform for the client; and
  3. assumes responsibility to collect, report, and pay, or assumes liability for, any taxes applicable under subtitle C of the Code with respect to the wages or compensation paid by the payor to the individual(s) performing services for the client.

If a payor is designated to perform the acts required of an employer under this section then the following rules apply:

  1. A payor must perform the acts required of an employer under each applicable chapter of the Code and the relevant regulations with respect to the wages or compensation paid by such payor.
  2. All provisions of law (including penalties) and the regulations applicable to the employer are applicable to the payor so designated with respect to the wages or compensation paid by the payor; and
  3. Each employer for whom the payor is designated remains subject to all provisions of law (including penalties) and of the regulations applicable to an employer.

A payor is not considered a payor employer that has been designated to perform the acts required of an employer under this section for any wages or compensation paid by the payor to the individual(s) performing services for a client if:

(1) the wages or compensation are reported on a return filed under the client’s employer identification number (as defined in section 6109 and the applicable regulations);

(2) the payor is a common paymaster under sections 3121 (s) or 3231 (i);

(3)the payor is the employer of the individual(s) (including an employer  within the meaning of section 3401 (d) (1)); or

(4) the payor is treated as an employer under section 3121 (a) (2) (A) [sick pay].

Treas. Reg. §31.3504(e) has 9 examples showing the application of these regulations.  Example 1 is as follows:

  1. Example 1. Corporation P enters into an agreement with Employer, effective January 1, 2015. Under the agreement, Corporation P hires the Employer’s employees as its own employees and provides them back to Employer to perform services for Employer. Corporation P also assumes responsibility to make payment of the individuals’ wages and for the collection, reporting, and payment of applicable taxes. For all pay periods in 2015, Employer provides Corporation P with an amount equal to the gross payroll (that is, wage and tax amounts) of the individuals, and Corporation P pays wages (less the applicable withholding) to the individuals performing services for Employer. Corporation P also reports the wage and tax amounts on Form 941, Employer’s QUARTERLY Federal Tax Return, filed for each quarter of 2015 under Corporation P’s employer identification number. Corporation P is not a common paymaster, the employer of the individuals (including an employer within the meaning of section 3401 (d) (1)),   [*15] or treated as the employer of the individual under section 3121 (a) (2) (A). Corporation P is designated to perform the acts of an employer with respect to all of the wages Corporation P paid to the individuals performing services for Employer for all quarters of 2015. Employer and Corporation P are each subject to all provisions of law (including penalties) applicable in respect of employers for all quarters of 2015 with respect to such wages.

IRS Audit Memo dated May 8, 2014.

On May 8, 2014, the IRS issued an Interim Guidance Memo (IGM) number SBSE-04-0514-0036. The purpose of the memo is to identify when employers use a third party to withhold, file, and pay their employees such as a Payroll Service Provider, Reporting Agent, a Section 31.3504-1 Agent with an approved Form 2678, or an employee leasing entity (a Professional  Employer Organization, PEO).

During the audit of an employer that uses the services of a third party, the examiner must inform the employer that it is not relieved of the responsibility to ensure that its tax returns are filed timely, and that taxes are deposited or paid correctly and timely.

Additionally, the examiner must instruct the employer to take actions to determine that its filing and payment responsibilities are met.

For employers that use Payroll Services Providers or Reporting agents where the Forms 941 are filed in the name and EIN of the employer, as part of the audit, the employer will be instructed to:

º Verify its employer address is the address on record with the IRS, not the address of the PSP or RA. Examiners must check IDRS and inform the employer which address we have on file. Further, the examiner should instruct the employer that it could verify the address of record by calling the IRS Business and Specialty Tax Line at (800) 829-4933. º Verify the PSP or RA uses the Electronic Federal Tax Payment System (EFTPS) when making employment tax deposits and payments. º The employer will be instructed to enroll in EFTPS so the employer can view EFTPS deposits and payments made on its behalf under its EIN. Information about enrolling on EFTPS is located at www.eftps.gov. Effective January 2014, EFTPS will be issuing Inquiry PINs to all employers who are registered on EFTPS by their TPPs. Inquiry PINs allow employers to view their deposit history without a separate EFTPS enrollment. Employers that use 31.3504-1 agents, who file the Forms 941 in their own name and EIN and not those of the employer, will be advised, as part of the audit, that:

  • the employer that it remains liable along with the agent.
  • the employer must use due diligence in requesting authorization from the IRS to appoint an agent on Form 2678, and continuing to use the agent after the authorization is approved.

Employers that use PEOs who also file the Forms 941 in their own name and EIN and not those of the employer, will be advised, as part of the audit, that:

  • the employer must use due diligence in selecting and continuing to use the services of any PEO.
  • Further, Examiners auditing an employer who is using a PEO must also contact Judith ‘Judy’ Davis of Specialty Programs, Employment Tax, via e-mail. Examiners must provide Judy with the following information: º Name and EIN of client º Tax Periods under examination º Name and EIN of PEO


While these regulations give the IRS a second collection source, the PEO, these employee leasing entities generally do not have significant assets.  The common law employer, who paid over his tax money to the PEO, will still be jointly liable for the unpaid taxes.  It also doesn’t solve the aggregate deposits and filing problems. When a PEO doesn’t pay or doesn’t full pay the employment taxes for its clients, there will still be the issue of which employer’s taxes have gone unpaid.  What would help the aggregation problem is if the IRS would require any entity that meets the definition of Payor Employer, to file the Schedule R with their Forms 941. The Schedule R would require the Payor Employer to show the wages, taxes and deposits separately for each client.  The deposits would be identified for each specific client, and the IRS and the common law employer could use this information to determine how much is owed by each client (although this still leaves the problem of credits and refunds that were sent back to the PEO, since those were also aggregate amounts. )

For anyone wanting more background on this, look the Proposed Regulations (REG. 102966-10).  The Preamble contains an extensive discussion of the IRS’ position regarding all variations of third party payroll entities and how IRS will analyze third party payroll situations.

Summary Opinions for 03/28/14

This week’s report contains lots of interesting statistics from the Service, including a look into the APA program, and filing and enforcement statistics.  There is also a recap of a recent tax court case looking at material participation by a trust in real estate activities, which is going to be a very big deal this year due to Obamacare. Plus an interesting Service loss in a bankruptcy case, where the Court found the Service incorrectly determined a taxpayer’s business when reallocating income under Section 482.  Also, more West Coast administrators failing to file estate tax returns.  To the roundup:

  • The Bankruptcy Court for the Middle District of North Carolina had an interesting ruling in In Re: Decoro USA, LTD  (couldn’t find for free yet).  The Court sustained the taxpayer’s objections that additional tax allocated to it in a Section 482 adjustment were inappropriate because the transfer pricing analysis by the Service was unreasonable.  Section 482 allows the Service to reallocate tax items between related entities doing business together.  Here, the Service took the position that the taxpayer acted as a distributor for its parent in selling leather furniture, and then increased the taxpayer’s income to be more in line with a distributor.  The taxpayer argued it was more of a “facilitator” to distributors, and its income was in line with similar businesses that did the same.  The Court looked a variety of factors and found that the taxpayer’s interpretation of its business was more accurate, resulting in the IRS allocation losing the presumption of correctness.
  • Announcement 2014-14 issued by the Service this week reports on the status of the advanced pricing agreement programs.  Highlights include increased efficiency and a greater use of the program.  Part 1 of the report has a comprehensive summary of the programs, part 2 has the 2013 statistics, and part 3 discusses the types of items resolved by APAs.  Interestingly, more than 50% of the APAs executed were with Japan.
  • More stats, the Service has also issued its 2013 IRS Data Book, which generated headlines about the rich not getting audited as much (apparently, the Service didn’t care for the GAO report last year arguing the Service should audit the wealthy more often).  Table 9b shows that less than 1% of individuals were audited.  Those making over $10MM a year get a hard look the most, followed by those making over $5M.  Individuals making over $1MM, but less than $5M are audited at a 9% rate.  The next highest group to be audited are those making no money, with 6% audited.
  • Estate administration lawyers in California apparently don’t understand the filing deadline for estate tax returns.  In American Contractors Indemnity Company v. United States, the District for Northern CA denied the Service’s motion for summary judgment in a case where an administrator of an estate was claiming reliance on an attorney as reasonable cause for penalties for failure to file and failure to pay estate tax.  The named party in this case is the surety company that ended up stepping into the shoes of the administrator.  The Court found there was a genuine dispute as to whether the administrator relied on the attorney to file or relied on erroneous advice on filing or when to file.  In coming to the conclusion and looking at the distinction, the Court reviewed Boyle, Baccei, and Knappe (the last two are also Cali or West Coast cases of executors failing to file), which we covered before in great detail here and here.
  • Joe Kristan on his Roth & Co. blog has a good write up of the Frank  Aragona Trust case decided by the Tax Court this week, which allowed a trustee to “materially participate” in rental activities.  This used to be only a huge deal for passive activity gains and losses, but the Obamacare 3.8% net investment income tax follows the same rules.  The trust “materially participating” allows the net income to be exempt from tax.  There is a lot of interest in this right now.  I have two clients going through this analysis for trusts, and a call with an accountant on a third this afternoon.  If you have clients with trusts that hold majority interests in closely held companies, this is probably worth a look.

Summary Opinions for 1/24/2014 (100th Post!!!)

100th Post!!  When we started discussing this blog, I assumed 100 posts would take us five years, and we would probably quit before then. A few short months later, and here we are.  Thanks to all the readers for your comments, feedback, encouragement, and guest posts.  The first 100 has been a lot of fun, largely due to you all.  On to the tax procedure:

  • Starting off the 100th post with a quick congratulations to Procedurally Taxing’s own Keith Fogg, who was elected to Council for the  ABA Section on Tax.  Many of our readers know Keith, and know he is more than deserving of this honor and that he will continue to serve the ABA with distinction in this new role.
  • For our first procedure matter we have Chief Counsel advice indicating that Exam can disclose its findings and decisions to OPR before the case is resolved in Appeals when OPR referred the practitioner to Exam. Chief Counsel concluded that disclosure is appropriate under Section 6103(h)(1).  Section 6103 generally requires Service employees to keep return information confidential.  Section (h)(1) allows disclosure to Dept. of Treasury employees whose official duties require such inspection or disclosure for tax administration.  The advice essentially says OPR employees are Treasury employees, and Circ 230 authorizes OPR to conduct investigations in the furtherance of tax administration.
  • From TaxProfBlog, I found this post on the NY Post about a business man who tripped during his audit at an IRS office, and obtained an $862,000 judgment against the Service for his pain and suffering.  The article does not indicate how the $60,000 tax debt was handled.  Hopefully, paid in full, as the Fisc won’t be taxing his judgment.
  • Another day, another summons case where the 5th Amendment is thwarted by the required records doctrine.  Link is to Jack Townsend’s Federal Tax Crimes blog.  Mr. Townsend’s blog also covers the Court’s discussion of the forgone conclusion doctrine, which isn’t as often discussed in these cases.  As always, Mr. Townsend gives readers an obscene amount of information and knowledge.
  • The Ninth Circuit has affirmed the Tax Court’s holding in Nakano v. Comm’r, which had held that a levy notice contained sufficient information to also serve as the required notice and demand under Section 6303 for the TFRP.  The Service had assessed tax on March 28, 2006, issued the notice of the levy on May 22, 2006, and issued notice of the tax due on June 6, 2006.  Section 6303 requires notice and demand within sixty days, and the June notice was outside of sixty days, but he levy notice was within the sixty day period.
  • Here is a nice article written by June K. Campbell, who is a lawyer at Lane Powell in Seattle, where she discusses her experience with volunteering to serve as a tax return preparer through the United Way.  She highlights some of the particularly tricky aspects of volunteering for this work, but also covers the great rewards.  Finally, she hammers home the point that the demand for this service is great.  I’ve volunteered before for the VITA tax program, and it can be very overwhelming at first, but you do get the hang of it quickly.  There is immediate gratification too, as people are thrilled to have the return done and done for free.
  • There are two phrases from 2013 that I am fairly sick of.  One of which is “thought leaders”.  It seems like I see someone self-apply that title twice a day now.  It is driving me crazy.  The other is “the internet of things”.  Although the use of the term is bothering me, I am intrigued and scared by the idea.  It seems like it may become a non-military skynet.  I don’t have a tax tie in with this, but I’m working on it.  Here is an article by Pedro Pavon of Carlton Fields about the internet of things.  I am sure there are more in depth articles on this subject, but this one happened across my email this week.  It also touches on the We are Watching You Act, which is a creepy name for a creepy need for a law, where home electronics would have to provide notification to the consumer before collecting visual or audio information from the consumer.  If I were in law enforcement, I would certainly be trying to figure out ways to get authorization to do this instead of just wiretapping a phone.
  • Shameless/full self-promotion!  Villanova Law has revamped its curriculum in what I think is a very positive way.  It is also freezing tuition prices for each class, and it is offering 50 additional full scholarships.  Can I retroactively get a full scholarship?  And, my firm was named the Chester County small business of the year.  I’m fairly certain it is because I launched this blog with Keith and Les.
  • Call me old fashion, but I think tax shelter schemes should have dumb acronyms, and things like a “Dutch sandwich” and “double Irish” should be references to occurrences found on web pages polite society won’t visit.  Whether it is legal tax avoidance, or adult content, silicon valley is trying to ensure it is here to stay.
  • From Tax Trials, a review of Willie Nelson’s IRS troubles, and his settlement offer that allowed him to write an album and have the proceeds pay off his debt. I wonder why MC Hammer didn’t suggest this….
  • Forbes had an interesting article on envy in tax policy.
  • Forbes also had some tax haiku by Tax Girl.  I found this link from Joe Kristan’s tax blog, and he also provided one of his own:

Here comes tax season

April 15 arrives swiftly

I need a stiff drink

  • I’m more of an epic tax procedure poem type of guy, which is why I am thrilled to be working with Les on the revised version of IRS Practice and Procedure.
  • Thompson Reuters’ Checkpoint reminded me that protective refund claims for FICA taxes for 2010 severance pay should be made by April 2014.  This should be done because of SCOTUS’ review whether or not severance pay is subject to FICA tax in US v. Quality Stores.

Summary Opinions for 01/10/2014

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

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

Tax Procedure Roundup 9/27/13 –aka Recaptured Ox aka Procedure Notes Weekly

Still working on the name of this weekly or biweekly summary of procedure items that piqued our interest.  Please feel free to keep suggesting names.  Attorney Bob Kamman thought we should come up with a clever anagram instead of a bad pun, which I like, but I am failing to generate any good ideas myself.  To the content.  Here are some of the items we read last week:

  • Sticking with being enlightened by Mr. Kamman, late last week he highlighted the order in AD Investment 2000 Fund, LLC, which is getting a lot of buzz.  Order can be found here.  Bob’s comment was, “what happens when taxpayer’s key witness takes the Fifth, because the federal government is conducting a criminal investigation of him and refuses to grant immunity?  Tax Court Judge Halpern found it appropriate this week to order under Rule 142(a)(1) that the burden of proof shifts to IRS.”  Mr. Jack Townsend has a great write up of this, which can be found on his tax procedure blog here.
  • This one is a bit old, and we may do a more in depth summary in the future, but TaxProf Blog has a write up of Professor Richard Harvey’s article, Worldwide Taxation of U.S. Citizens Living Abroad: Impact of FATCA and Two Proposals.  As many of you probably know, there are few, if any, people who are more knowledgeable about this topic.
  • If Loving You (tax preparer regs) is Wrong, I Don’t Want to Be Right, but it appears that most commentators think Dan Alban’s argument for the return preparers will carry the day as the Court of Appeals for the DC Circuit seemed to side with him.  See Reuters, (Hey) Tax Grrrl at Forbes, Miller and Chevalier here, and TaxProf Blog has a summary of a few others here.  If the Circuit Court upholds the lower court holding that the regs are invalid, will SCOTUS review?  Les’ prior coverage of the oral argument can be found here.
  • Reviewing US v. Clarke, an 11th Circuit decision where the Court vacated and remanded a summons enforcement, holding taxpayer was entitled to evidentiary hearing on its allegation of improper purpose of summons or the summons was used for retribution for failing to extend limitations period.  The Service has, or likely will soon, filed a petition for cert in the Supreme Court.
  • Jack Townsend reviews Lee Sheppard’s article on privilege in the wake of the Wells Fargo case out of the District of Minnesota.  The opinion is long, and, as Mr. Townsend indicates, really is not important for his blog post discussion.  The thrust of his post, found here, is that Sheppard’s statement that incompletely filed UTPs, or non-filed UTPs, do not specifically raise a penalty is not 100% accurate.  We discussed this case, although not that particular point, in Saltzman and Book, ¶13.11[2].  This case is very interesting for a handful of other reasons in addition to the discussion above.  One, it highlights that the Eighth Circuit follows the “because of” approach to determine if something is prepared in anticipation of litigation for the work product doctrine to apply (circuit split).   It is also important because work product was extended to some tax accrual workpapers and the Schedule UTP of the taxpayer, and also to the tax accrual workpapers of the taxpayer’s accountant.  This is an area that in house tax counsel is very interested in.
  • Reed v. Comm’r, where the Court held it had jurisdiction to review the Service’s refusal to reconsider a three year old offer-in-compromise during a later CDP levy hearing. The Service argued that since the taxpayer had not proposed a new offer-in-compromise, the Court had nothing to consider.  The Court did not agree, but the Service prevailed in the end, as it did not abuse its discretion.
  • At the intersection of two of my favorite topics (estates and tax procedure), Winford v. United States  was an interesting deposit/payment case decided by the Western District of Louisiana, where the taxpayer argued that its remittance with its extension request should be treated as a deposit, so it could obtain a refund outside of the statutory period.  Court held arguments failed under Rev. Proc. 84-58.  Service argued that all payments with an extension should be per se payments, not deposits.  The Court would not agree to that per se rule.
  • In Redondo v. United States, the Federal Circuit held that a taxpayer failed to meet the requirements of Section 6511(h), “financial disability”, because his doctor’s letter failed to meet the requirements of Rev. Proc. 99-21.  The doctor’s letter did not have the signed certification, and was not specific about the time period.  This is an unfortunate result if this individual was suffering from a debilitating disease.  The Court states he was suffering from Meniere disease (hearing and inner ear issues, including tinnitus and vertigo) and depression.  Depression is an uphill battle in these cases, and you need good physician testimony.  Keith posted on financial disability recently, which can be found here.
  • Notice 2013-61 provides guidance to employers and employees to make claims for refund or adjustments of overpayments of Federal Insurance Contributions Act (FICA) taxes and Federal income tax withholding (employment taxes) resulting from the Supreme Court decision in United States v. Windsor, 133 S.Ct. 265 (2013), and the holdings of Rev. Rul. 2013-17.
  • The Court held that the Dude (Phillips v. Comm’r) must abide the Commissioner, and his deductions for part-time bowling were not deductible because he lacked profit motive. That is a Big Lebowski reference; I suspect Mr. Phillips is not really like the Dude, just an avid bowler who can probably best my 89s and doesn’t need the bumpers.  This is more of a tax court procedure issue, but the Service was allowed to amend its pleading to conform to the evidence, which showed additional disallowed deductions.  The Court found implied consent by Mr. Phillips (who was Pro Se) for failing to object to the evidence during the proceeding.
  • New Jersey Court decides that civil union statute is unconstitutional because it does not provide equal tax benefits to marriage. CNN provides coverage.  The Governor of Pennsylvania is hiring a law firm to appeal the decision and defend the statute…not really.