Summary Opinions for the week ending 3/27/15

How could I not start with John Oliver and Michael Bolton singing about the IRS.  This link is not really great for work, and to say it is sophomoric may overstate the sophistication and maturity.  Sexy singing is at the end of a fairly long clip, which is all pretty funny (on the IRS, “it combines two things we hate, people taking our money and math”).  This is probably the funniest Michael Bolton clip from the month, which is really impressive since it is about the IRS and he recently recreated the Office Space scenes with the character sharing his name – if you liked that movie, you should find the clip.  Equally as entertaining and enlightening were our guest posters during the week ending March 27, 2015.  Peter Hardy and Carolyn Kendall of Post & Schell did a two part post (found here and here) regarding the definition of willfulness in civil offshore enforcement cases.  First time guest poster, Bob Nadler, posted on the recent Sanchez case dealing with an interesting innocent spouse issue that hinged on whether a joint return was actually filed.  Thank you again for the great content.

I also need to thank our guest posters from the last week and a half.  Carlton Smith provided two of the three posts on the Godfrey case, the last of which can be found here and links to the first two.  Godfrey is an interesting case raising a couple issues regarding appropriate notice with collection actions.  We were also pleased to have Prof. Bryan Camp with a three part post on Eight Tax Myths, the last of which can be found here and links the first two.  Both sets of posts were very well received, and both generated a fair amount of discussion.  I would encourage everyone who has not read both sets to do so, and, for those who have, you might consider going back and reading the comments and responses.

To the other procedure: 

  • In a FOIA dump, the Service has released PMTA 2014-015, which discusses the erroneous refund penalty under Section 6676.  The following points are discussed in the memo:

1. Does the Section 6676 penalty apply to refund claims made on Form 1040 and Form 1040X and does it matter whether the Service has paid the claim?

2. Does the nature of the item to which the excessive amount is attributable have any bearing on the penalty?

3. Is the Section 6676 penalty subject to deficiency procedures?

4. Are there any specific taxpayer notifications required for the penalty to apply?

5. Does the ‘reasonable basis’ exception to the Section 6676 penalty have the same general meaning as the reasonable basis exception to negligence found in Reg. 1.6662-3(b)(3)?

 I’m not sure there are any earth-shattering realizations to be found in the IRS response, but some points seem worth noting.  As to the first point, the Service stated the penalty can be imposed even when the IRS does not actually refund the amount requested.  For the second point, the Service discussed the various situations where other penalties would apply (reportable transactions, EIC, etc.).  As to the third question, the Service stated the general rule that the penalty is not subject to the deficiency procedures, but stated that for some refundable credit cases the penalty will have to be assessed pursuant to the procedures.  No court has apparently addressed either point.  The last thing that jumped out at me was that the Service stated the reasonable basis exception under Section 6676 has the same meaning as under the accuracy related penalty provisions found in Section 6662, which is not news, but good reinforcement of the prior position.

  • Harper Int’l Corp v. US is a case we (I) missed in January (see page 13 of this PDF for a more robust recitation of facts and holding).  In the case, the IRS denied a refund request.  On May 2, 2012 the IRS issued a Notice of Disallowance, which stated the taxpayer had two years to challenge the determination.  About a month later, another notice was received by the taxpayer, stating the claim was rejected and another formal Notice of Disallowance would be issued – but it never was.  Taxpayer petitioned the Court of Federal Claims in June of 2014, more than two years after the first letter, but less than two years after the second letter.  The Court of Federal Claims held that although equitable provisions might apply, it was not reasonable for the taxpayer to rely on the second notice (and they failed to comply even if using the date of the second notice because timely mailing was not timely filing for CFC).
  • Another sham(wow) partnership case in CNT Invest., LLC v. Comm’r, where the Tax Court has held that gain recognized in a collapsed step of a multi-step transaction was gross income for determining the extended statute of limitations under Section 6501(3)(1)(A).  Case also confirmed limitations period was the longer of the period found under Section 6229 or Section 6501.
  • Businessweek thinks the IRS sucks.  The reasons are largely outlined by the John Oliver video above.  I’m sure this has generated a lot of scoffs, but I honestly do try to keep this in mind as I sit on hold for 90 minutes.  Maybe it helps me from being a complete jerk to the person who eventually picks up.  Solid chance that person’s day is worse than mine. How much longer before this all implodes? Is that the goal?  Might work.
  • Kardash v. Commissioner was decided by the Tax Court on the 18th, and has a good discussion of transferee liability but a difficult result for taxpayer minority shareholders in a company where the Service found transferee liability for tax due that was the result of theft by the majority shareholders.  This is going to get a little longwinded, sorry.  In Kardash, a concrete company was largely owned by two shareholders, who controlled all aspects of the business.  Two other minor shareholders oversaw sales and operations; neither had any control over the overall management or finances of the company.  During the early 2000s, the company was very successful and the minority shareholders received huge additional compensation.  Unfortunately, during this time, the majority shareholders were plundering the coffers and not paying any taxes ( one of whom is in the clink and the other is no longer with us).  Here is some more background on that sad story.  The finances of this company were apparently open for the taking, as two other employees were jailed for stealing over $5.5MM from it before the IRS got involved.  On audit, for 2003 to 2007, the Service assessed over $120MM in tax, penalties and interest.  The company was insolvent at that point, payment was not possible, and the company and the Service entered into an installment agreement to pay $70,000 a year until the end of time.  The Service reached agreements with the two majority shareholders, but substantial amounts of tax were still outstanding.  The Service then attempted to recoup a portion of the remaining amount from the minority shareholders pursuant to Section 6901(a).  For Kardash, the amount was around $4MM.  There were a host of questions before the Court regarding the IRS’s collection actions against the company and majority shareholders cutting off liability, but what I found interesting was the issue about whether, under state law, the minority shareholders were responsible for the tax due to fraudulent transfers to them by the majority shareholders.

For the fraud, the Court looked to Florida law to determine the extent of the potential transferee liability.  As an initial point, the Court did not aggregate the transfers with those of the majority shareholders (contrary to the Service argument), and instead looked at each payment to the minority shareholders to determine constructive or actual fraud of each payment.  The FL statute provides that if the company did not receive “reasonably equivalent value” for the payments, they may be fraud if: “(1) the debtor was engaged…in a business…for which the remaining assets of the debtor were unreasonably small…;(2) the debtor intended to incur…debts beyond his ability to pay as they became due; and (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.”  Kardash argued his work for the company was reasonably equivalent value, and the Court agreed for certain “loans” in 2003 and 2004, which were really advanced on compensation.  For 2005 through 2007, the funds were provided to Kardash in the form of a dividend from the Company.  The Court noted the conflict in cases regarding the treatment of dividends as “reasonably equivalent value” as compensation for work done.  The Court seems to indicate the general position is that dividends are not compensation for services rendered and therefore not an exchange for value.  In the limited cases holding the opposite, the dividend has been directly tied to work provided.  See In re Northlake Foods, Inc., 715 F3d 1251 (11th Cir.) (holding dividend made as tax distribution to pay tax due on s-corp shares); In re TC Liquidations, LLC 463 BR 257 (ED NY 2011) (dividend made to shareholder to repay loans taken out to expand business).  Although I have not read these cases, this seems like a point that could be open to other interpretation in this case.  The dividends here effectively replaced a prior bonus program.  The program was stopped and the company made the loan/advances to the minority shareholders because the company knew the minority shareholders needed that level of compensation.  This was a temporary solution until the dividends were to start.  Since at least a portion was compensation provided in a different form, a finding that it was received in exchange for equivalent value would not seem unreasonable in this case.  The Court did address this by stating the company did not benefit from the dividends as clearly as in the above two cases, but I am not sure I agree.  Had the dividends not be issued to take the place of the prior bonus program and advances, the minority shareholders may have left.  During the period in question, the company was very successful, arguably because of the minority shareholders.  The second reason is that the company and shareholders treated it as dividend income and not compensation.  Although a factor worth consider, I am not sure it has to be dispositive.

The issue of insolvency was reviewed next, with a few pages devoted to the debts and income stream.  The Court relied on the IRS’s expert’s opinion that since there were no tax returns, no buyer would ever pay more than the gross value for the land and tangibles, and the company had no intangibles.  Based on that, the company was insolvent most of, if not the entire time.  Interestingly, the opinion includes the gross revenue, but I don’t think it includes the asset values.  Ignoring the various other ways to value a company, I think this is also open to other interpretation.  I am not sure the conclusion that no one would be willing to buy the company is correct—obviously that would be a substantial risk, but business people often take risk if the reward appears sufficient.  I am also not sure the value of the intangibles was $0, since the revenue for the years in question was north of $100MM, which was substantially more than the hard assets.  Clearly, the company, as a going concern, had some value that exceeded hard assets.  The company may have still been insolvent, I just wasn’t sold on those particular points.  An interesting case, and what seems to be a tough result for some transferees who were screwed by their employer.

  • The Service has issued internal guidance indicating that it will no longer allow taxpayers to enter into installment agreements for post-petition liabilities when the taxpayer has filed for Chapter 13 bankruptcy.  The guidance indicates that this was previously allowed in some jurisdictions, but that the Service believes this potentially violates the BR stay.
  • 2014 data book has been issued by the Service in electronic form, and can be found here.  Lots of interesting stuff.  Looks like 40% of penalties were abated in terms of amount.  Less business returns, but more individual in 2014 than 2013.
  • Barry and Michelle paid an effective tax rate of 18.8% (maybe slightly higher –I’m finding some conflicting reports and too lazy to do the math) for federal income tax purposes.  I think that is a little higher than mine…although we made slightly different amounts.

Summary Opinions for the weeks of 3/06/15 through 3/20/15

Image from

This will be the last post for the week, as we will all be busy with family activities (and taxes).  We should be back on Monday with some new content, and it looks like next week will cover some really interesting areas, including the recent Godfrey case, and sealing Tax Court records.

We have been very lucky over the last month to have a lot of really great guest posts.  We cannot thank those guest posters enough for the quality content, especially as the three of us have been very busy with our various other jobs (or appearing before the Senate–perhaps more on that next week also).  For the weeks that SumOp is covering in this post, we had Mandi Matlock writing on TPA Most Serious Problem # 17 on how deficient refund disallowance notices are harming taxpayers.  Peter Lowy wrote on the really interesting Gyorgy case, which deals with the taxpayer’s requirement to notify the Service on a change of address, but also highlights a host of other procedure items.   Patrick Smith joined us again, writing on Perez v. Mortgage Bankers Associate, and illuminating us on APA notice and comment requirements for different types of rules and the possible eventual reversal of Auer.  We also welcomed Intuit’s CTO, David Williams who wrote a response to Les’ prior post on H&R Block’s CEO indicating it should be harder to self-prepare (which Les was potentially in favor of).  And, another first time guest blogger, Patrick Thomas, joined us writing on the calculation of SoLs on collections matters.

We were also very lucky again to have Carl Smith writing for us, this time updating us on the Volpicelli jurisdiction case and the Tax Court pleading rules on penalties looking at the El v. Comm’r case.  A thank you to all of our guests over those two weeks, and a special thanks to Carl for his continued support.

To the other procedure items (if you keep reading, the image will make more sense):

  • The Service released CCA 201510043, in which Chief Counsel stated a taxpayer is entitled to two sets of collection due process rights for the same period when there were two assessments; one for assessment arising out of a civil exam and the other from restitution-based assessment.  Section 6201(a) was recently (five years ago) amended to require assessment and collection of restitution in the same manner as tax.  The advice has a nice summary of cases outlining why this double assessment of the same tax is not double jeopardy.  Although the general rule is that a taxpayer is entitled to one CDP hearing with respect to tax and tax years covered by the CDP notice, there are situations where multiple hearings are appropriate.  The advice highlights Treas. Reg. 301.6320-1(d)(2) Q&A D1 and Treas. Reg. 301.6330-1(d)(2) Q&A D1 as examples of allowing two CDP hearings when there has been additional assessments of tax or new assessments for additional penalties.  The Advice determined that this situation was analogous and warrants two separate CDP hearings.
  • The Northern District of California in In Re Wilson held that penalties for failure to timely file were dischargeable when the original due date was outside of the three year look back under BR Code 523(a)(7)(b), but the taxpayer had extended the due date and the extended date was within the three years.  The Court indicated this was a case of first impression.  Another interesting BR Code Section 523 issue.
  • This clearly only pertains as a practitioner point, and not something any of our readers would personally need, but OPR has announced a standard information request letter to make a Section 6103 request for information maintained by OPR relating to possible violations of Circ. 230.  Info about the letter is found here, and you can get the actual letter here.
  • The Ninth Cir. affirmed the Tax Court in Deihl v. United States in finding a widow spouse did not qualify for innocent spouse relief.  In the case the Court did not find there was clear error by the Tax Court in reviewing the widow’s testimony and find it was not credible.  The surviving spouse provided testimony that conflicted with other evidence regarding the couples’ business, and she did not offer any third party testimony regarding the abuse.  The widow argued that since the Service did not offer contrary testimony regarding the abuse, the Tax Court had to accept her testimony, which the Ninth Circuit stated was incorrect.  Further, looking to Lerch v. Comm’r, a Seventh Circuit decision, stated that the Tax Court did not have to accept testimony that was questionable, even if uncontradicted (tough to overcome the presumption of guilt that comes along with a name like Lerch).
  • Gambling causes fits for the Service.  Tipped casino employees used to underreport frequently, but apparently casinos will provide estimates to the Service.  Gambling website accounts might be offshore accounts (even if sourced in US banks). Add to that list of problems how to treat bingo, keno and slot machine winnings.  This blurb will focus on slot machines.  New proposed regulations offered in a recent IRS Notice would provide a safe harbor to determine gains and losses from a slot machine.  The issue is that gains from “transactions” are included in income.  Losses are deductible to the extent of winning, but generally as itemized deductions.  For slot machines, a “transaction” is session based.  What is a session can be a point of disagreement between the Service and taxpayers.  This is apparently becoming more murky now that people don’t use actual coins.   So, what are those retirees on the bus trips to AC or Vegas to do?  The Service is soliciting suggestions, but the current proposed safe harbor states that a session of play:

A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game before the end of the same calendar day. For purposes of this section, the time is determined by the time zone of the location where the patron places the wager. A session of play is always determined with reference to a calendar day (24-hour period from 12:00 a.m. through 11:59 p.m.) and ends no later than the end of that calendar day

The Notice then goes on to explain how to calculate gains and losses during the session.

  • Add this to the list of things that will not get you out of the failure to timely file penalties – taxpayer could not access tax records because his storage unite doors had frozen over.  The argument received an icy reception (oh, man that was bad) with both the Service and the Tax Court. See Palmer v. Comm’r., TC Memo 2015-30 (for some reason this isn’t up on the TC web page anymore – sorry).
  • If you are going to cheat on your taxes, you probably should do so using offshore accounts (I usually charge clients a .5 for that advice, and you all just got it for free!).  Check out Jack Townsend’s blog on US v. Jones, an “ordinary tax cheat”, as Mr. Townsend put it, who got dinged with 80% of the bottom of the guideline range for sentencing.  He was using “sophisticated means”, which seemed fairly run of the mill.  Jack compares this to the sentencing of another UBS client, who ended up getting 22% of the bottom of the guideline range.  Switzerland should use this in its promotional materials.
  • In MSSB v. Frank Haron Weiner, the Eastern District of Michigan found that Section 6332(a) did not establish priority for competing liens, and instead Sections 6321, 6322 and 6323 established the priority (in favor of the IRS in this case).  In MSSB, a debtor owed funds to the IRS and a lawyer named Frank.  The Service recorded four liens, each before December 3, 2012.  Around $1.6MM was owed.  On December 6, 2012, Frank sued the debtor to recover unpaid legal fees and won.  In 2013, Frank obtained a writ to garnish the debtors IRA (Michigan must not offer much in terms of creditor protection for IRAs).  The Service stepped in, arguing it had priority on the IRA.  Frank countered, arguing that Section 6332(a) would give him the money.  The Section states:

Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Frank’s position was that his claim was the type of claim referenced by the “subject to an attachment or execution under any judicial process.”  The Court, however, held that the language did not direct which claim (that of the IRS or Frank) had priority, and only stated that the financial institution did not have to turn the funds over to the IRS.  The Court then looked to the other lien provisions, and found the IRS had priority and directed payment.

  • I went to see roller derby one time, which was really entertaining.  A perfect mix of roller skating and WWF.  All of the young women have funny/clever names, and often have slogans.  The announcer said of one that she had “champagne for her real friends, and real pain for her sham friends.”  Unfortunately, this has really nothing to do with this next case, except the tax court was dropping some real pain on a sham partnership.  In Bedrosian v. Comm’r, the Tax Court held that whether legal fees paid by a sham partnership were deductible was an affected item subject to TEFRA, and the Court had jurisdiction to make such a determination.  This was not the Bedrosians’ first Tax Court rodeo, and they keep making new TEFRA law, which now comprises a substantial chunk of revised Saltzman and Book Chapter 8 dealing with general exam procedures and a growing subsection dealing just with the complex world of TEFRA.

Summary Opinions for 12/14/2014

Merry Christmas, Happy (last day of) Hanaukka, Joyous Holidays and a wonderful Festivus for the restofus.

A quick note on posting; we probably will not have regular substantive content up over the next few days, and perhaps not until January 5th – although we do have one guest post we may put up before then because it is somewhat time sensitive.

1314snowI am a little behind on SumOp again after spending a few days in the Upper Peninsula of Michigan last week for my brother-in-laws graduation from his Ph.D. program (he still has to defend, so I don’t have to call him doctor yet).  It was in the mid to high-20s, sunny, and there was no snow.  Apparently, that is not the norm for the UP in the winter.
Michigan is a huge state, and, interestingly, it is further to drive from Houghton, Michigan (where I was- and in that band that got over 341 inches of snow last year — can that be correct?!) to Detroit than it is from Detroit to Washington DC.  Thankfully, we flew.

To the procedure.

  • In response to SECC Corp v. Comm’r, which we discussed before in SumOp here,  Chief Counsel has issued a notice to its lawyers as to when to advise the Service to issue a Notice of Determination of Worker Classification under Section 7436, and how to handle docketed Tax Court cases where employment taxes are at issue with similar facts as SECC.  In SECC, the Court found that an informal letter from the Service indicating worker classification was a sufficient determination to confer jurisdiction, and a Formal Letter 3523, Notice of Determination of Worker Classification was not required.   Notice CC-2014-011 can be found here.  Chief Counsel urged its lawyers to distinguish SECC where possible, and otherwise acknowledge SECC Corp. v. Comm’r, but indicate the IRS does not agree and argue that only a Notice of Determination of Worker Classification is sufficient to confer jurisdiction.  It will be interesting to see how the Circuit Courts shake out on this.
  • Frank Agostino of Agostino & Associates has published his December newsletter.  Unfortunately, no hot tubbing, but, as always, the content is great, and like mini-law review articles.  A fitting follow to the first item above, one of the two articles in the newsletter is a comprehensive review of employment misclassification issues.
  • The Eastern District of Michigan, in Field v. US (13-cv-12605), has held that a deed severing tenants by entireties property was not intended to go into effect until the death of the first spouse, which worked to extinguish the tax lien filed against the first spouse to die.  Both spouses signed the deed, but it was given to their lawyer to hold in escrow until one of them died.  At that point, it was transferred to a revocable trust.  The Court found that the issue was whether or not the deed was “delivered.”  Looking to Michigan law, the Court found that a deed takes effect from the time of delivery, and not the date of execution.  Sorry no free link.
  • The District Court for Idaho held that a largely uninvolved investor was a responsible person for employment tax purposes.  Shore v. United States seems like an unfortunate case, but the result is not surprising.  Shore funded a company, and hired a gentleman named Lewis to run the company.  Although Shore was named as President, and owned all the shares, Lewis was completely in charge and both Shore and Lewis assumed he would purchase the company.  Lewis also held himself out as the owner.  When Shore was informed by the IRS that employment taxes had not been paid over, he realized that Lewis had been embezzling substantially from the company (amazing how often this fact pattern occurs).  Shortly thereafter, Shore paid creditors other than the IRS.  The company then didn’t pay all the taxes.   The Court found that Shore was clearly a responsible person under Section 6672.  Shore attempted to argue that the Slodov v. US, 436 US 238, applied, which limits the imposition under Section 6672 in limited circumstances when new management takes over and pays creditors (allows new management to attempt to salvage a company without fear of personal liability for TFRP).  The Court, citing to the 9th Circuit, declined to extend  the exception to situations where the “new management” was the existing president. Joe Kristan’s RothCPA blog has coverage.
  • I wasn’t familiar with the name Jon Edelman, but a quick Google search showed that he really screwed over the government.  The Feds caught on, and assessed a whole bunch of tax, and then Mr. Edelman got to spend some time doin time in Texarkana.  The IRS is still trying to collect some of the hundreds of millions of dollars, and Mr. Edelman is apparently trying to minimize that.  The Tenth Circuit affirmed the district court, finding that Mr. Edelman moved funds from one trust (presumably reachable by the IRS) to another trust (presumably less reachable).  The district court applied a constructive trust on the current and future assets of the second trust.  The trustee of the trust and Mr. Edelman raised on appeal that the funds could not be traced.  The Circuit Court held it would normally apply the plain error standard, but this was not urged by Mr. Edelman.  It further held that this was not raised at the lower court, and was therefore not properly reviewable by the Appeals Court.
  • The IRS is expanding its pilot post appeals mediation program for OIC and TFRP cases that Appeals could not settle, which will now be available throughout the U.S.  The new rules can be found here.  An Appeals officer trained as a mediator will serve as mediator, and the taxpayer can elect to hire a second outside mediator.  Certain topics cannot be mediated, a list of which is found here, along with a summary of the program.  Although I haven’t seen numbers lately, my understanding is that mediation is fairly successful, but probably underutilized by taxpayers.  From a quick review of the Rev. Proc., it doesn’t appear like anything has drastically changed, except for the nationwide rollout.

Madoff Fallout Continues in Tax Court

An earlier version of the following post appeared on the Forbes Procedurally Taxing site on December 8, 2014.

Bernard Madoff’s sister-in-law recently filed suit against the IRS. The suit stands out not only because the name of the taxpayer and the infamy of her brother-in-law (See Patricia Hurtado Peter Madoff Admits Aiding Brother’s Ponzi Scheme, Bloomberg (June 30, 2012)Walter Pavlo, Peter Madoff Gets What He Expected – 10 Years Prison, Forbes (Dec. 20, 2012), but because the suit reveals an incompetence that makes me wonder if Appeals is capable of achieving its self-described goal of becoming more judicial. Its actions in this case and others suggest that it is far from judicial. I feel sorry for Ms. Madoff, who has likely had to incur substantial costs to prove what should not have required a federal lawsuit to establish. While she may ultimately lose on the merits of the tax issue she seeks to raise, the Appeals division of IRS mishandled her attempt to raise the correctness of the underlying liability in this collection case, foisting the issue off on the Tax Court prematurely.

Her Collection Due Process (CDP) Tax Court case results from a notice of intent to levy. Following receipt of that notice she timely requested a hearing with Appeals. In a determination letter, Appeals rejected Ms. Madoff’s proposed alternative to levy.

The determination letter issued by Appeals in response to her request for a CDP hearing demonstrates a lack of quality. I thought this level of quality was reserved for low-income cases in which the taxpayers represented themselves. In some ways seeing that a relatively high dollar case with an excellent representative would receive a determination of this quality made me feel better that my clients received the same treatment. Of course, one never feels great when viewing work of poor quality. Perhaps I should celebrate that all taxpayers receive equal service from Appeals.

I do not intend this post to simply serve as a bashing of Appeals. Appeals, like the rest of the IRS, faces severe financial constraints. I get it. Still, this case, the Antioco case, other cases we have blogged, and cases I see coming through my office point to a problem that should not occur at the top level of the IRS food chain. See Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, Procedurally Taxing (Dec. 1, 2014). Appeals considers itself almost judicial officers. See Appeals Judicial Approach and Culture Project (AJAC) Implementation, Procedurally Taxing (Sept. 4, 2014). To have others join in that perception, it needs to produce written products that support such a status. Ms. Madoff’s case will not advance that ball.


The determination letter appears to contain two serious flaws. First, it mischaracterizes Ms. Madoff’s attempt to discuss the merits of the underlying liability. Second, it mischaracterizes the exchange between the settlement officer (SO) and the representative if the allegations stated in the petition accurately depict the exchange. Because of the surrounding circumstances, the description of the exchange in the petition makes much more sense.

In her CDP case Ms. Madoff sought to address the merits of the liability underlying the collection action. Because the petition and the determination letter do not describe the situation with sufficient detail to allow certainty, I make some assumptions concerning the merits case. I requested information from Ms. Madoff’s representative but did not receive it due to Ms. Madoff’s understandable desire for privacy. I respect that decision and apologize for inaccuracies resulting from my assumptions.

The liability at issue here stems from the closing of two IRA accounts in the name of Ms. Madoff that the government took as a part of the forfeiture proceedings relating to the criminal sentence of her husband. When she filed her CDP request on April 30, 2014, Ms. Madoff alerted the IRS in Form 12153 (the request for the CDP hearing) that she might amend her 2012 return, the return for the year at issue, and seek a refund based on a recently decided Court of Federal Claims case, Nacchio v. United StatesSee Insider Trading and Forfeiture of Millions in Stock Gains Runs into Section 1341 and Issue Preclusion, Procedurally Taxing (Mar. 17, 2014). The petition states that the amended return was filed on June 17, 2014 and that “if accepted, will reduce her tax liability to zero.” At the time of filing the petition she alleges that the IRS had not yet processed the amended return.

Without getting too far into the substance of the amended return, Ms. Madoff claims that she should get a credit recomputation under Section 1341 for the amount of the forfeited assets based on the reasoning of the Nacchio decision and that such a credit would eliminate her tax liability. In other words she would get to decrease her liability in later year by the amount of the tax increase as a result of the inclusion in the earlier year (restoring an amount previously received under a claim of right). The determination letter states that the “tax portion was paid when return prepared and filed.” That leads me to believe that the liability at issue in the CDP case stems from a penalty or from the early distribution excise tax imposed by IRC 72(t). The important issue here centers on the fact that the liability results from a position taken on the original return that Ms. Madoff has not previously contested. The Tax Court has held that a taxpayer who did not previously have the opportunity to contest a liability, even if the taxpayer self-reported the liability, may raise the correctness of the liability in a CDP case. See Busche v. C.I.R., T.C. Memo. 2011-285Montgomery v. C.I.R., 122 T.C. 1 (2004). A recent case also made clear that if Appeals considers the appeal of the denial of a refund claim simultaneously with a CDP hearing, the hearing on the refund claim is not a prior opportunity to contest the liability. See Mason v. Commissioner, 132 T.C. 14 (2009)see also Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice, Procedurally Taxing (Dec. 4, 2014).

In Ms. Madoff’s case Appeals determined that “[Ms. Madoff] submitted an amended tax return to the Service Center in which [sic] is under review for acceptance. This is considered a prior opportunity in challenging the tax liability.” Yes. This SO considers the mere submission of an amended return, even though the amended return had not yet received any form of review – much less Appeals review – to bar Ms. Madoff from consideration of the merits of her case. As discussed in Mason,the Tax Court permitted a merits case to move forward to Tax Court under IRC 6330(c)(2) even where the Appeals officer simultaneously considered the merits in a separate refund matter. The circumstances here cannot possibly fit within the statutory language applicable to denying a merits review since no SO, or any IRS employee, has considered the merits of the argument in Ms. Madoff’s amended return. This determination ignores the statute and cites nothing in support of its decision.

Moving on from the bad substantive determination, the determination letter only gets worse because of the complete misunderstanding of the position of Ms. Madoff’s representative as seen when comparing the petition with the determination. In the petition Ms. Madoff’s counsel alleges that she requested the CDP case pause to allow consideration of the amended return. The petition states,

Petitioner’s counsel provided the Appeals Officer with a copy of the amended return for 2012, and requested that respondent stay the Collection Due Process Hearing until after the Service had acted on the amended return because petition may have no tax liability for 2012. Petitioner further requested, alternatively, that she be afforded an opportunity to submit an Offer in Compromise based on extreme hardship and exceptional circumstances.

Contrast that with the determination letter which states, “Your representative, Megan Brackney, represented to the Settlement Officer, Ms. Perez, you agree with the case resolution described below.” The description below says, “The taxpayer agrees to full pay the balance due of $128,585.43 by October 28, 2014.” The phone lines between New York City and Fresno must have had a lot of static that day.

Is it an abuse of discretion to ignore the taxpayer’s request in such a cavalier way? I hope so. At the time I reviewed the file the IRS had not yet filed an answer in this case. One hopes the answer simply requests an immediate remand and does not simply deny all of the facts alleged for lack of knowledge. This case raises serious issues concerning the ability of Appeals to properly perform their work.

Appeals should seek to have the taxpayer sign a consent form if the taxpayer agrees to full payment as the disposition just as it has taxpayers sign a consent agreeing to a deficiency. Appeals has a form, Form 12256 and the Internal Revenue Manual (IRM) states that Appeals will use this form when it requests taxpayers sign to withdraw their case when they no longer seek to pursue a CDP hearing. The IRM also provides that Appeals uses Form 12257 when it requests that a taxpayer waive their right to a judicial hearing. The petition and determination letter do not make clear if Appeals sought Ms. Madoff’s signature on either of these forms. If Appeals sought consent to terminate the CDP hearing or to waive the determination letter leading to a judicial hearing and she refused, that should signal the need for a determination of something other than agreement with the determination. If Appeals did not seek Ms. Madoff’s signature on either of these forms, it should consider creating a similar form when a taxpayer agrees to the determination – particularly a decision to fully pay the liability. This is not the first case I have seen in which an SO has stated the taxpayer agreed to full pay as the disposition and the taxpayer has stated no such agreement existed because the taxpayer still disagrees with the outcome.

What does it mean when the determination finds the taxpayer agrees and the taxpayer does not agree? Is that an automatic remand so that Appeals can actually make a determination? Why does Appeals make this type of determination without documenting the concession? Is this what a judicial officer would do?

International Collection Efforts by the IRS – Expanding the Number of Treaties in which We Have Collection Language    


The United States has treaty language that allows us to work with the taxing authorities in other countries to collect U.S. taxes owed from U.S. Citizens or their property located in those countries and to allow those countries to have IRS collect from their citizens or property located in the U.S.  (For an example of the treaty language used to effectuate bilateral assistance and support in collecting tax, see U.S.-France Income Tax Treaty, Article 28).  In the countries where this treaty language exists, U.S. collection officials initiate the contact with the treaty partners though the competent authority to request that the collection officials in the treaty country take action to collect the unpaid taxes from the assets available in their country.  Currently, the U.S. has this treaty language allowing collection with only five countries – Canada, France, Holland, Denmark and Sweden.  The treaties containing this language were written long ago and the U.S. has not sought to insert this language into treaties in the recent past (For a brief discussion of the history of this treaty language, see Brenda Mallinak, , 16 Duke J. Comp. & Int’l L. 79, 94 (2006)).

As I was writing this post, I received a Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2014-30-054 dated September 12, 2014.  I want to talk about that report and how I think it highlights the problems in international collection while missing the mark because it fails to address the gaping hole in our treaty language as a major source of improving international collection.


The TIGTA report looks at the international collection efforts of the IRS and finds them lacking.  I agree with the conclusion but find that blaming the IRS collectors badly misplaces the blame for the failures in this area.  Congress makes a lot of noise about offshore issues and has implemented some reasonably good legislation to seek to improve matters on the liability side while doing almost nothing to assist IRS collectors in their efforts to put money into our coffers that has moved overseas.  Similarly, Treasury makes a lot of noise about offshore liability issues but has not aided the problem because it has not moved to put collection language into treaties leaving IRS collectors with meager remedies to seek to collect from persons keeping themselves and their assets offshore.  The TIGTA report does not to address the structural problems with the offshore collection system.  Without structural changes the IRS collectors will continue to experience frustration and obtain victories on the margins while losing the battle to those parking themselves and their assets out of the reach of the IRS given the current legal situation.

As the world has gotten smaller and as the movement of people and assets offshore has become routine, the IRS finds itself in a situation not unlike creditors seeking to collect when the Articles of Confederation rather than the Constitution existed.  One of the big reasons for ditching the Articles and moving to the Constitution stemmed from the inability of creditors to collect from persons moving from one state to another.  We now face that situation on a more global level.  We have recognized it over the past fifteen years in the area of finding the money parked offshore in tax havens but we have not yet addressed it in the collection area.

The TIGTA report spends most of its energy talking about failures of vision and implementation in the IRS collection division with respect to its international collection efforts.  I will return to that but want to point out that despite the failures discussed in the report, the 40 or 41 International Revenue Officers collected over $53 million in both fiscal years.  Without knowledge of how the amounts reported were calculated, this seems like a great return on investment for the very small number of people working these cases and a much higher return than normal for dollars invested with the IRS.  Without more context, however, it is impossible to know if this $53 million collected in the past two years is a significant, or I suspect, insignificant amount of the total dollars that might have been collected from citizens and assets parked offshore.

TIGTA criticizes the IRS for a lack of management oversight, the lack of a legitimate strategy and poor procedures and policies for the revenue officers attempting to collect.  While these criticisms undoubtedly have some merit, TIGTA offers little guidance on how the revenue officers might better perform the task of collecting where the money and the taxpayer sit offshore.  Better policies and better training can only do so much when the structure of the system stymies the IRS collection efforts at every turn.

In domestic collection the IRS can file the notice of federal tax lien against the delinquent taxpayer and cripple the person’s credit rating.  It can levy on assets it identifies and obtain property without having to work through a court or through another agency.  Those types of collection efficiencies do not exist for the international collection efforts and may never exist but if international collection has a chance of becoming more efficient, it needs a structure that keeps people from avoiding collection simply by moving themselves and their assets offshore.  If the Government has serious intentions of collecting delinquent taxes from persons moving themselves and their money around the globe, it needs to look to multilateral efforts to solve the problem and not try to go it alone squeezing marginal gains out of an understaffed group of revenue officers.

The TIGTA report mentions the one “easy” collection tool available for collecting taxes from individuals who have parked their money and their assets overseas – the “Customs Hold.”   The report explains this devise as follows:

 International revenue officers can request that a Customs Hold be input into the Treasury Enforcement Communication System (TECS) for delinquent taxpayers.  Once the taxpayer is on the TECS, the U.S. Department of Homeland Security (DHS) notifies the IRS whenever the taxpayer travels into the United States.

The TECS is a database maintained by the DHS and is used extensively by the law enforcement community.  Taxpayers are informed with a Letter 4106, Letter Advising Taxpayer of Department of Homeland Security Notification, that an international revenue officer has taken action to advise the DHS that the taxpayer has outstanding tax liabilities and that this may result in an interview by a Customs and Border Protection Officer if the taxpayer attempts to enter the United States.  There is a Memorandum of Understanding [create link to memo] between the IRS and the DHS that allows Customs and Border Protection Officers to stop delinquent taxpayers identified on the TECS to collect their contact information of where they will be staying while in the United States.

According to the TECS Coordinator, the international revenue officer must submit a completed Form 6668, TECS Entry Request, to have a Customs Hold placed on a taxpayer.  The form is sent to the group manager for a signature and e-mailed to the TECS Coordinator.  The TECS Coordinator maintains a spreadsheet to document taxpayer added to or deleted from the TECS.  According to the Spreadsheet there are approximately 1,700 taxpayers on the TECS with approximately $1.6 billion in delinquent tax assessments.  This includes assessments of approximately $1.1 billion solely owed by international taxpayers.

In an earlier post I wrote about the writ ne exeat.  This is a labor intensive option available to the IRS to seek to stop a taxpayer from leaving the country with their money.  The taxpayer discussed in that case was stopped at the border undoubtedly because of a “Customs Hold” as he sought to return to the United States while taxes remained unpaid.  That example demonstrates part of the power of the “Customs Hold” but does not tell the whole story.  Just because someone gets stopped as they seek to reenter the U.S. and sent to a little room off in the corner of an airport does not mean that they will pay the tax or that they will be held in the little room for a long period of time.  Holding individuals as they seek to return to the U.S. no doubt raises revenue but it only works if the individual seeks to return and only when the hold itself proves effective as a means for convincing them to pay.

It is time to expand the list of countries with whom we have collection treaties, to make it a regular part of our bilateral treaties or to begin an effort to make cross border collection of taxes a part of a multilateral effort.  The international revenue officers have only labor intensive tools that rely on the taxpayer living in one of five countries or returning to the U.S.  Their arsenal of weapons no longer matches the ability of individuals to move themselves and their money.  The TIGTA report may have found problems in the operation of the current program but misses the overall problem.  If we want to collect globally we need to ban together with other countries the way we have done with FATCA.  Trying to catch these individuals one by one as they return to the country does not solve the problem.



Summary Opinions for 10/31/14

The first week of November had two great guest posts.  The first post, which can be read here, was by attorney Michelle Feit, who discussed the extended statute of limitations found under Section 6501(c)(8).  The second, found here, was by Robert Everett Johnson, an attorney with the Institute for Justice, who discussed two recent cases where the IRS was found to have improperly seized assets using the Anti-Structuring Laws. I would suggest our readers review the comments to that post, found here, which were very strong. I would also commend to our readers the comments to Keith’s post on the suspension of the statute of limitations due to continuous absence from the US.  Lots of good information.

To the other procedure:

  • The Fifth Circuit, in Hoeffner v. Comm’r, reviewed a collection case, and found no reasonable cause for failure to file and pay, although the taxpayer did have obstacles in obtaining information to file.  Mr. Hoeffner was a prominent attorney in Houston.  In 2007, he was indicted on fraud, conspiracy, and money laundering, where he allegedly bribed adjusters at The Hartford Financial Services group with luxury cars, trips, night life and cash.  It seemed as though this counselor was headed to be a jailhouse lawyer, but the case resulted in a mistrial. He later paid costs related other criminal charges, which were then dropped.   Mr. Hoeffner then sued the Hartford and its general counsel (who was then the US Deputy Treasury Secretary) for negligently causing the bribery charges to be brought against him, and for a related cover-up for what he claimed was the extortion of him for the “bribes” to have cases settled.  Much of this summary is taken from a Bloomberg article found here.  In 2012, that case was settled.  Here is an article, including an interview with Mr. Hoeffner, from after the settlement.  So, Mr. Hoeffner lost his law license for a few years, and a couple million bucks, but somewhat cleared his name.

The tax case revolves around whether or not Mr. Hoeffner had reasonable cause for failing to timely file his 2008 tax return and timely paying his tax liability.  Mr. Hoeffner argued that a pre-trial order in his criminal case barred him from contacting his accountant, who had his tax records.  The Court held that neither unavailability of records, nor involvement in litigation, was reasonable cause, and he could not rely on his criminal defense lawyer’s advice to not file the incomplete or incorrect return.   The accountant did testify, and said it would have been impossible for another preparer to figure out the returns without his papers, but the Court still imposed the penalties.  Peter Reilly has additional coverage over at Forbes.

  • The Feds have removed and withdrawn regulations relating to the qualified payment card agent program.  The Service indicated that the program is now obsolete because of the reporting obligations found under Section 6050W.
  • As mentioned in the intro, we were fortunate to have Mr. Johnson from the Institute for Justice posting this week on the government seizing assets using the Anti-Structuring Laws.  Jack Townsend shared his initial thoughts on the NYT article last week, which can be found here.  Like all of Jack’s content, this is well worth your time.
  • Taxpayer who prevailed on about ¼ of Section 7431 wrongful disclosure case that was settled in part and dismissed in part was not entitled to attorney’s fees under Section 7430, as it did not “substantially prevail” in the amount or the most significant issue.  In The National Organization for Marriage (NOM) v. US, NOM and the Service disagreed on the amounts in question, and the Court held for the government.  I can say with certainty NOM will not be on my giving Tuesday list, but I am not sure how I feel about this holding.  I think it is correct, but have concern about how the holding could be expanded…but perhaps unfounded concern.  My concerns pertain to the Court’s determination of the amount in question, and as to what the “most significant issue” was in the case.

As to the most significant issue, the Court highlighted that the IRS conceded the wrongful disclosure claim in the answer to the complaint.  The complaint apparently had a bunch of other trumped up First Amendment/government conspiracy claims by NOM that the disclosure was related to.  These were dismissed, leaving only the amount of the damages to be determined.  The Court found that the other B.S. claims were the real reason for the suit, which was evidenced by the suit moving forward even though the government admitted to the disclosure.  The Court also noted that the government was substantially justified, which also precluded the award, which I did not take issue with.  The parties settled for $50k on the improper disclosure.  I suspect NOM did protract litigation on potentially bogus claims, but the underlying, primary claim was wrongful disclosure, which the IRS did.

I also was slightly uncomfortable with the “amount in question” conclusion.  NOM’s position was that the amount in question was either $60, 500 or $58,586, which were the specified damages in the complaint.  The government said that amount should have been $117,586, plus the pled (or pleaded) unspecified punitive damages.  The Service’s $117k number was based on the fact that NOM amended its claims, withdrawing a portion of around $50k, and then adding back in a similar amount for a different claim.  The Service added both together.   The Court accepted the $117k base number, and then went through a rational and lengthy discussion about including punitive damages.  The Court eventually concluded it needed to calculate a number and add it to the other damages, which it did, ending with a substantially higher number.  Had the Court accepted the government’s stated number, the recovery would have been a little under 50%.  Whereas with the punitive damages it is around 25% recovered.  Only recovering 45% is not sufficient, but in a different circumstance, the punitive damages number could have been the difference.

This is something to think about when throwing in “plus punitive damages”, and when including ancillary arguments in your complaint beyond your primary issue.

  • In US v. Briggs (couldn’t find a free link, sorry), the US District Court for the Eastern District of North Carolina denied a trustee’s motion to dismiss the government’s claim to foreclose a lien against the trust’s interest in an LLC.  The Court indicated state law stated the interest in the LLC was a property right, which then in turn allowed the government to lien the property under Section 7403, and levy the same.  I do not know N.C. law on this matter, but I wonder if it restricts collection against LLC interests to charging orders.  I also wonder how those laws interact with the government’s collection powers.
  • The Information Reporting Program Advisory Committee issued its annual report.  The report suggests an increased use of TIN matching to increase accuracy and compliance, a minimum threshold for 1099 corrections, and various other suggestions to increase compliance while making said compliance easier for taxpayers and information reporters.
  • Tax Court dismissed a petition for failure to timely file the same when the taxpayer attempted to use  The postmark was clearly on the last permitted filing day, and there was evidence that the 3rd party who mailed the petition did so at the post office on the last day for filing; however, the envelope also contained a postmark from the USPS the following day.  See Sanchez v. Comm’r, TC Memo 2014-223.  Another unfortunate result due to using the wrong mailing service.
  • SCOTUS granted certiorari in King v. Burwell, one of the ACA cases dealing with whether the tax credits are available for insurance purchased on a non-state exchange.  We have prior coverage here.

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.