Summary Opinions for 01/17/2014

Summary Opinions is very late this week due to my various day jobs and the shoveling of snow.  We covered a few big items last week, and here are a few others that we thought deserved a few words.

  • First, United States v. Clarke was granted cert by SCOTUS to  determine if taxpayers have a right to a hearing when a taxpayer alleges a summons was issued for an improper purpose.  We’ve mentioned this case a few times, and are glad this will be reviewed.  The incomparable Jack Townsend covered this issue very well on his Federal Tax Procedure Blog back in December.
  • Jack Townsend also covered another Clark case this week, where the Court of Federal Claims held the taxpayer failed to show full payment under Flora, so it lacked jurisdiction.  What makes it interesting is that the Court transferred the case to the Tax Court for prepayment review, because the taxpayer had filed within the ninety days allowing for Tax Court review.  Not something you see every day.
  • The Tax Court had a holding regarding captive insurance companies – something that is actively discussed a lot lately by planners and I had heard was under heavier audit review lately.  In Rent A Center, Inc. v. Comm’r, the Tax Court held that the wholly owned captive life insurance company of the parent, Rent A Center, was not a sham and was created for non-tax reasons.  There are lengthy discussions regarding the funding levels and the insurable risks in the case.
  • I found this link through Joe Kristan’s Roth & Co. blog, which is the Tax Foundations advice to same sex couples this tax filing season.  The post includes a link to how each state is handling the issue.
  • Mr. Beanie Baby gets probation.  Damn.   Money can’t buy you happiness…but he is probably happy all that money bought his way out of jail time for that $100 million plus hidden offshore account.  Last fall, Villanova hosted the 2013 Norman J. Shachovy Symposium, reviewing pressing issues in US Tax Administration.  The third panel that day discussed criminal sentencing guidelines, specifically the fairness of them and the deterrent value.  You can hear the panel discussion at the above link, where the panel does somewhat discuss how wealth can impact sentencing.  I suspect a future panel on this topic would include this case.
  • Here is a brief article from Bryan Cave, LLP about the United States v. Doe holding from the Fifth Amendment that we touched on before in SumOp.  Doe dealt with a taxpayer claiming Fifth Amendment privilege on a subpoena for foreign bank records, with the Court holding the required records doctrine trumped the privilege.
  • Here is a post from IRS Medic discussing the IRS Offer in Compromise Pre-Qualifier calculator. As Anthony Parent points out, the calculator can have interesting (taxpayer friendly) results, but that is not binding on the Service.  Mr. Parent doesn’t seem to like the calculator much (“the IRS Offer in Compromise Pre-Qualifier is a dumb calculator”).  I like the idea behind the calculator, but haven’t used it yet, so cannot offer my own thoughts.
  • Here is a post about whether or not you have to pay your employees on snow days.  Not exactly tax procedure related (there would be withholdings), but the snow is horizontal out my window, and I think the post was written by another Villanova alum.  Villanova needs some good press after the blowout loss to Creighton last night.  Thankfully, Procedurally Taxing covers tax procedure significantly better than Villanova’s basketball team covers the three.

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.

DOMA Followup

Last week, I added a post (found here) regarding the CRS position on the imposition of taxes following the Windsor holding that Section 3 of DOMA was unconstitutional.  The Social Security Administration has provided internal guidance regarding its handling of the Windsor case in the form of Program Operation Manual System GN 00210.100.  Obviously, this is a completely different branch of the government, but given the overlap with the Service, it may provide some insight into how the Service is currently thinking.  The SSA guidance is fairly clear that only “married” couples will be included for benefits, and not those in civil unions.  Further, the couple must be married in a state that permits marriage, and “domiciled” at the time of the benefit request in a state that recognizes same sex marriage.  The SSA has apparently not decided how to handle the situation where a same sex couple lived in a state that did not recognize same sex marriages (for example, DE prior to July 1, 2013), and was married in a state allowing for marriage (NY), but now still lives in the original jurisdiction that has changed its laws to allow for same sex marriages (DE after July 1, 2013).  For now, benefits are being withheld but not disallowed.

Congressional Research Service weighs in on DOMA repeal.

When SCOTUS ruled that section 3 of the Defense of Marriage Act was unconstitutional in late June in Windsor , I wrote a lovely blog entry thinking our blog would be live within a day or two.  We were slightly naive about what goes into creating a functioning blog, and it was well over a month before we could post.  The Congressional Research Service (CRS), which provides research for Congress, has recently issued a report outlining some of the tax effects of the repeal of section 3, which overs some insight into Congress’ thinking on the matter, and allows me to reuse some content I previously drafted.  The CRS summary is pretty much in line with most of the other quality commentary that has been offered since the holding, but does add a few interesting facts and shows the issues that CRS thinks should be important to Congress.


The Windsor case removed the prohibition that the federal government had from recognizing same-sex marriages, with SCOTUS stating it violated the equal protection clause of the US Constitution.   The Windsor case dealt with the marital deduction for federal estate tax purposes, but the ruling allows all tax provisions applying to married couples and spouses to extend to same-sex couples.  Overall, there are close to 200 statute provisions in the Internal Revenue Code that refer to a “spouse” or the term “married”.

Moving forward, same-sex married couples will be able to file joint returns.  One of the largest procedural questions surrounding this ruling is whether or not same-sex couples will be able to amend past income tax returns back to 2010 (or further, if protective refunds were claimed)?  This could also apply to gift tax returns and estate tax returns; however, there were far fewer of those filed.  Generally, taxpayers can file an amended return that results in a refund, within three years of the due date of the return.  An exception to the general rule permits a taxpayer to file an amended return claiming a refund within two years of any payment made for a tax year; but in that case the refund is limited to the amount of the payment. For income tax purposes, if the ruling applies retroactively, same-sex married couples could amend prior returns to file married filing jointly.  This would potentially save income tax, unless the marriage penalty applies.  Here is a great marriage penalty calculator I use on occasion when trying to do a quick calculation:

A second widely recognized question is how the Service will treat couples who were married in a state that recognizes same-sex marriages, but are currently residing in a state that does not recognize a marriage from another state.  This issue also extends to the treatment of people who have entered into civil unions or domestic partnerships.  Those do not fall within the current definition of “lawful marriage”.

The CRS report does not specifically answer any of these questions.  The report states that the law may not extend to couples who are married but reside in a state that does not recognize the marriage and states that over 50% of same-sex married couples live in states that don’t recognize their marriage.  See Pg. 2. It specifically states that residence is the key, but that the Service may extend these benefits by regulations.  No specific authority for the Service to promulgate such a regulation is stated.  If nothing else, the Service should have the authority under Section 7805(a) to issue regulations, which would be subject to notice and comment.  Given the subject matter, I would believe there will be lots of comments, many of which probably not actually applicable to the administration of federal taxes.  Substantial comments or not, it will be some time before the final regulations are done.  Given the potential for disparate treatment of taxpayers depending on residence or the type of legal relationship, they may also be challenged.

For people who have entered into a civil union, or some other legally recognized relationship that was not defined as a marriage, the report is ominously silent, only stating in a footnote that the holding may not extend to these relationships.

For this issue and the issue about residence, IRS guidance may be coming soon.  The current guidance to same sex couples can be found on a web page FAQ.  FAQs have been a favorite manner of providing guidance to taxpayers by the IRS.  These are incredibly helpful, but are not subject to the review like regulations, and the binding effect is not clear.  If the FAQ denies the ability to file jointly to someone who has had a civil union, it is not clear the court will have jurisdiction to review the matter, until there were a deficiency or denied refund claim that would generate the possibility for court involvement.  See  ¶3.04[9] in Saltzman, which has a discussion of the impact of this type of IRS guidance. The report goes on to discuss the estate tax impacts, followed by the income tax impacts.  There is an extensive discussion about filing status, marginal rates, and brackets.  This is followed with a summary of various credits that may be impacted by filing status and other ancillary benefits from being able to file jointly.  Finally, the report then goes to speculate about the potential income tax consequences and quotes statistics indicating that on average there is a marriage penalty imposed of $450 for same sex couples because of equal distribution in income and a lower number of children, and states that the overall budgetary impact will be close to nil.

The CRS report doesn’t answer the question of who should file amended refund claims.  Taxpayers consider should first make a determination of whether the marriage penalty would apply.  Second, taxpayers should then determine if there is some reason they would not want the Service to have an extended statute to review their returns (i.e. aggressive positions).  This matter will not be fully resolved in the near future, but it would appear that same sex couples who have a legally recognized relationship should file protective refund claims prior to the expiration of the period.  Guidance from the Service could still be months away, and it seems likely that there will be a few more chapters in this story before taxpayers will know precisely how to navigate this area