Summary Opinions for the Week Ending 8/21/15

We here at PT are huge fans of self-promotion, so I am thrilled to link Les’ recent article in The Tax Lawyer.   Les’ article, Academic Clinics: Benefitting Students, Taxpayers, and the Tax System, was published in the Tax Section’s 75th Anniversary Compendium – Role of Tax Section in Representing Underserved Taxpayers.  There are various other articles in the full publication that are worth reading (and hopefully will make you all feel guilty enough that you aren’t doing enough pro bono work to either cause you to assist some underserved folks or donate some money to those who are).

To the tax procedure:

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  • Hopping in the not-so-wayback-machine, in October of 2014, SumOp covered Albemarle Corp. v. US, where the Court of Federal Claims held that tax accruals related back to the original refund year under the “relation back doctrine” in a case dealing with the special statute of limitations for foreign tax credit cases.   As is often the case in SumOp, we did not delve too deeply into the issue, but I did link to a more robust write up.  It seems the taxpayers were not thrilled with the Court of Federal Claims and sought relief from the Federal Circuit.  Unfortunately for the taxpayer, the Fed Circuit sided with its robed brothers/sisters, and affirmed that the court lacked subject matter jurisdiction because the refund claim had not been made within the ten year limitations period under Section 6511(d)(3)(A).   This case deserves a few more lines.  The language in question states,  “the period shall be 10 years from the date prescribed  by law for filing the return for the year in which such taxes were actually paid or accrued.”   When the tax was paid or accrued is what generated the debate.

In the case, a Belgium subsidiary and its parent company, Albemarle entered into a transaction, which they erroneously thought was exempt from tax, so no Belgian tax was paid.  Years in question were ’97 through ‘01.  In 2002, Albemarle was assessed tax on aspects of the transaction in Belgium, and paid the tax that was due.   In 2009, Albemarle filed amended US returns seeking about $1.5MM in refunds due to the foreign tax credit for the Belgian tax.  Service granted for ’99 to ’01, but not ’97 or ’98 because those were outside the ten year statute for claims related to the foreign tax credit under Section 6511(d)(3)(A).  Albemarle claimed that the language “from the date…such taxes were actually…accrued” means the year in which the foreign tax liability was finalized, which would be 2002 instead of the year the tax originated.  Both the lower court and the Circuit Court found that the statute ran from the year of origin.  The Circuit Court came to this conclusion after a fairly lengthy discussion of what “accrue” and “actually” mean, plus a trip through the legislative history and various doctrines, including the “all events test”, the “contested tax doctrine”, and the “relation back” doctrine.  The Court found the “relation back” doctrine was key for this issue, which states the tax “is accruable for the taxable year to which it relates even though the taxpayer contests the liability therefor and such tax is not paid until a later year.” See Rev. Rul. 58-55.  This can result in a different accrual date for crediting the tax against US taxes under the “relation back” test and when the right to claim the credit arises, which is governed by the “contested tax” doctrine.

  • Prof. Andy Grewal, a past PT guest poster, has uploaded an article on SSRN entitled “King v. Burwell:  Where Were the Tax Professors?”  The post discusses possible reasons why tax professors largely did not enter the public debate on the merits of the legal arguments in King v. Burwell, and encourages them to be more active in future similar cases.
  • Another fairly technical issue was addressed in PMTA 2015-009, where the Service discussed interest netting when it is later determined that there was no original overpayment.  Under Section 6621(d), interest is wiped out if there equivalent overpayments to the taxpayer and underpayment to the Service.  The PMTA has a fair amount of analysis, but the issue and conclusion are a sufficient summary for our purposes.  Issues are:

(1) Whether an underpayment applied against an equivalent overlapping overpayment to obtain a net interest rate of zero pursuant to Section 6621(d) is available for netting against another equivalent overlapping overpayment if the Service determines the first overpayment was erroneous, (2) Whether the same is true for an overpayment netted against an erroneous underpayment, and (3) Whether the cause of the error affects these answers.

And concludes:

(1)  An underpayment that was previously netted against an equivalent overlapping overpayment is not available to net against another equivalent overpayment if the taxpayer has retained the benefit of the original interest netting (the interest differential amount paid or credited to the taxpayer). If, however, the taxpayer did not retain the benefit of the original netting, then the underpayment is available for netting against another overpayment. (2) The same analysis applies to an overpayment netted against an erroneous underpayment. (3) We are unaware of any circumstance where the cause of the error would change our answers.

  • I haven’t highlighted Prof. Jim Maule’s blog, MauledAgain, in a while, which is a failing on my part.    Here you will find Prof. Maule’s post on tax fraud in the People’s Court and if you scroll down on this page you will find an update to the case.  Two schmohawks agreed to commit tax fraud by transferring the value of a child tax credit.  The plan fell apart, and one sued the other in People’s Court to enforce the “contract” between the co-conspirators.  The Judge dismissed the case because fraudulent contracts are not enforced.  Prof. Maule quotes from the show, where the plaintiff said, “What about pain and suffering?”  Stole my line.
  • TIGTA has released a report about Appeals penalty abatement decisions, and it isn’t great.  First, it isn’t great because, as the report concludes, Appeals is not adequately explaining its abatement decisions.  I agree Appeals should indicate why it is abating penalties, but I do not agree with the second conclusion, which is that Appeals is leaving money on the table.  Meaning, it should not be waiving those penalties.  TIGTA reports that an additional $34MM could have been collected on the abated penalties.  It also reported that many cases were inappropriately considered by Appeals because Compliance had not reviewed the abatement.  Given that penalties are essentially applied to every underpayment, with no consideration to whether the taxpayer reasonably attempted to comply, it seems inappropriate to assume those penalties are all collectible (or to encourage Appeals to abate less).
  • On Jack Townsend’s Federal Tax Procedure Blog is a discussion of the tax perjury case, US v. Boitano (What would Brian Boitano do?  Not perjure himself in a tax filing, that is for darn sure.  This is Steve Boitano- presumably not related to the super hero/figure skater).  Questions presented in the case were whether filing a document was required under Section 7206(1) for perjury, and what constituted filing.  In Boitano, the taxpayer provided returns to an agent who was not authorized to accept filed returns.  Agent realized the returns were questionable and never forwarded to appropriate Service employee for filing.  The 9th Circuit held filing was required (not stated in statute), and giving the return to the agent did not constitute filing.  Therefore, no crime under Section 7206(1).
  • Like Thor’s mighty hammer, the IRS has slammed down the tax law upon Marvel, and not even its super team of Avenger like lawyers could provide a  Shield (select from Captain America’s, or Agents of) from the consequences.  The Tax Court has decided the hulking consolidated group of the Marvel universe was required to offset its net operating loss by the cancellation of debt  income, and could be applied against the NOL of one member of the consolidated group.   I’ll touch on the holding below in broad strokes and I’ll stop trying to incorporate Marvel superheroes, but what I found most interesting about this case is that it arose out of the 1996 Chapter 11 Bankruptcy of Marvel, which seems to just print money with its movies now.  I had completely forgotten also that two real life titans (of industry) got in dustup in ’96 about that bankruptcy, Ronald Perelman and Carl Icahn.  You can read more about the amazing twenty year turn around here and here.   That story is more interesting than the law in this one.  Under Section 108(a), discharge of indebtedness income is not included as income if the discharge is pursuant to a Chapter 11 bankruptcy.  The excluded income reduces certain other tax attributes in certain circumstances, including a reduction of NOLs that carryover from prior years.  See 108(b)(1)(2).  Marvel’s subsidiary only reduced the carryover for the subsidiaries  in Chapter 11, and not the parent group that filed consolidated returns with the subs.  The Tax Court found that the aggregate approach was required, and the COD income had to reduce the NOLs of the consolidated full group.  I’ve glossed over the analysis, which is worthwhile if you have this specific type of issue.

 

 

 

Summary Opinions for July

Here we go with some of the tax procedures from July that we didn’t otherwise cover.  This is fairly long, but a lot of important cases and other materials.  Definitely worth a review.

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  • Starting off with some internal guidance from the Service, it has held that the signature of the president of a corporation that subsequently merged into a new corporation was sufficient to make a power of attorney binding on the new corporation (the pres served in the same capacity in NewCo).  In CC Memo 20152301F, the Service determined it could rely on the agent’s agreement to extend the statute of limitations on assessment based on the power of attorney.  There is about 14 pages of redacted material, which makes for a fairly uninteresting read.  There was some federal law cited to allow for the Service reliance, but it also looked to IL law to determine if the POA was still valid. This would have a been a more interesting case had the president not remained president of the merged entity.
  • The Tax Court, in Obiakor v. Comm’r, has held that a taxpayer was entitled to a merits review by the Service and the court during a CDP case of the underlying liability for the TFRP where the Service properly sent the Letter 1153 to the taxpayer’s last known address, but the taxpayer failed to receive the letter.  The letter was returned to the Service as undeliverable, and the Service did not show an intent by the taxpayer to thwart receipt. This creates a parallel structure for TFRP cases with deficiency cases regarding the ability of the Tax Court to review the underlying liability when the taxpayer did not previously have an opportunity to do so based on failure to actually receive a notice mailed to their last known address.  Unfortunately for the taxpayer, in the Court’s de novo review, the Court also found the taxpayer failed to make any “cogent argument” showing he wasn’t liable.
  • In Devy v. Comm’r, the Tax Court had an interesting holding regarding a deficiency created by a taxpayer improperly claiming refundable credit.  The IRS allowed the credit requested on the return and then applied it against a child support obligation the taxpayer owed.  Subsequently, the IRS determined that he was not entitled to the credit and assessed a liability.  The Tax Court found it lacked the ability to review the Service’s application of the credit under Section 6402(g), which precludes any court in the US to review a reduction of a credit or refund for past due child support obligations under Section 6402(c), as well as other federal debts and state tax intercepts .  The taxpayer also argued that he should not have to repay the overpayment because the Service elected to apply it against the child support obligation, not pay it to him.  The Court stated that whether it is paid over to the taxpayer or intercepted, the deficiency was still owed by the taxpayer.  See Terry v. Comm’r, 91 TC 85 (1988).
  • With a lack of splits in the Circuits, SCOTUS has denied certiorari in Mallo v. IRS.  Mallo deals with the discharge of tax debts when the taxpayer files late tax returns.  Keith posted in early June on the Solicitor General’s position before SCOTUS, urging it to deny cert.  Keith’s post has a link to our prior coverage on this matter.
  • The DC Circuit had perhaps its final holding (probably not) in Tiger Eye Trading, LLC v. Comm’r, where it followed the recent SCOTUS holding in Woods, affirming the Tax Court’s holding that the gross valuation misstatement penalty applied to a tax shelter partnership, but the Court could not actually adjust the outside basis downward.  The actual adjustment had to be done in a partner level proceeding, but the Court did not have to work under the fiction that the partner had outside basis above zero in an entity that did not exist.  Taxpayers interested in this area should make sure to read our guest post by Professor Andy Grewal on the Petaluma decision by the DC Circuit that was decided on the same day, which can be found here.
  • In Shah v. Comm’r, the 7th Cir. reviewed the terms of a settlement agreement between a taxpayer and the Service which contained a stipulation of facts, but did not contain a calculation of the deficiency in any applicable year.  The Tax Court provided an extension to calculation the amount outstanding.  No agreement could be made, and the Service petitioned the Court to accept its calculation.  Various additional extension were obtained, and the taxpayers went radio silence (apparently for health issues and inability to understand the IRS calculations).  The Tax Court then ordered the taxpayers to show cause why the IRS calculations should not be accepted, instead of providing a trial date.  The taxpayer objected due to IRS mistakes, but the Court accepted the IRS calculations somewhat because the taxpayers had not been cooperative.  The Seventh Circuit reversed, and held that the Tax Court was mistaken in enforcing the settlement, because there was not a settlement agreement to enforce.  The Seventh Circuit indicated that informal agreements may be enforceable, but the court may “not force a settlement agreement on parties where no settlement was intended”. See Manko v. Comm’r, 69 TCM 1636 (1995).  The 7th Circuit further stated that it was clear the taxpayers never agreed to the calculations (which the IRS acknowledged).  At that point, the Service could have moved for summary judgement, or notified the Tax Court that a hearing was required, not petitioned to accept the calculations.  Keith should have a post in the near future on another 7th Circuit case dealing with what amounts to a settlement, where the agreement was enforced.  Should be a nice contrast to this case.
  • The Service has issued a PLR on a taxpayer’s criminal restitution being deductible as ordinary and necessary business expenses under Section 162(a).  In the PLR, the taxpayer was employed by a company that was in the business of selling “Z”.    That sounds like a cool designer drug rich people took in the 80’s, but for the PLR that was just the letter they assigned to the product/service.  Taxpayer and company were prosecuted for the horrible thing they did, and taxpayer entered into two agreements with the US.  In a separate plea agreement, he pled to two crimes, which resulted in incarceration, probation, a fine, and a special assessment, but no restitution.  In a settlement agreement, taxpayer agreed to restitution in an amount determine by the court.  Section 162(f) disallows a deduction for any fine or similar penalty paid to the government in violation of the law, but other payments to the USofA can be deductible under Section 162(a) as an ordinary and necessary business expense.  The PLR has a fairly lengthy discussion of when restitution could be deductible, and, in this case, determined that it was payable in the ordinary course of business, and not penalty or other punishment for the crime that would preclude it under Section 162(f), as those were decided under the separate settlement agreement.  The restitution was simply a repayment of government costs.
  • This kind of makes me sad.  The Tax Court has held that a guy who lived in Atlantic City casino hotels, had no other home, and gambled a lot was not a professional gambler.  See Boneparte v. Comm’r.  Nothing that procedurally interesting in this case, just a strange fact pattern.  Dude worked in NYC, and drove back and forth to Atlantic City every day to gamble between shifts at the Port Authority.  Every day.  The court went over the various factors in determining if the taxpayer is engaging in business, but the 11 years of losses seemed to make the Court feel he just liked gambling (addicted) and wasn’t really in it for the profits.
  • S-corporations are a strange tax intersection of normal corporations and partnerships (which are a strange tax intersection of entity taxation and individual taxation), but the Court of Federal Claims has held that s-corps are clearly corporations in determining interest on a taxpayer overpayments.  In Eaglehawk Carbon v. US, the Court held that the plain language of Section 6621(a) and (c)(3) were clear that corporations, including s-corporations, were owed interest at a reduced rate.
  • The Third Circuit in US v. Chabot  has joined all other Circuits (4th, 5th, 7th, & 11th – perhaps others)  that have reviewed this matter, holding that the required records doctrine compels bank records to be provided by a taxpayer even if the Fifth Amendment (self-incrimination) might apply.  We’ve covered this exception a couple times before, and you can find a little more analysis in a SumOp found here from January of 2014.  This is an important case and issue in general, and specifically in the offshore account area.  We will hopefully have more on this in the near future.
  • A Magistrate Judge for the District Court for the Southern District of Georgia has granted a taxpayer’s motion to keep its tax returns and records under seal, which the other party had filed as part of its pleadings.  The defendants in this case were The Consumer Law Group, PA and its owners, who apparently offered services in reducing consumer debt.  In 2012, the Florida AG’s office filed a complaint against them for unfair and deceptive trade practices, and for misrepresenting themselves as lawyers.   Two years prior it was charged in NC for the same thing.  One or more disgruntled customers filed suit against the defendants, and apparently attached various tax returns of the defendants to a pleading.    Presumably, these gents and their entity didn’t want folks to know how profitable their endeavor (scamming?) was, and moved to keep the records under seal.  The MJ balanced the presumption of openness against the defendants’ interest.  The request was not opposed, so the Court stated it was required to protect the public’s interest.  In the end, the Court found the defendant’s position credible, and found the confidential nature of returns under Section 6103 was sufficient to outweigh the public’s interest in the tax returns.

 

 

A Pro Se King Royally Wins Interest Abatement on Employment Taxes

 

Carlton Smith recently emailed us regarding King v. Commissioner, a Tax Court case dealing with interest abatement on employment taxes- a fairly infrequent occurrence. The taxpayer in King successfully obtaining the interest abatement was interesting (bad pun not intended) by itself, but the case also touched on the Court’s jurisdiction to review an abatement action arising from the CDP context where the tax had been paid, and reinforced the Tax Court’s view on what is excessive interest (which is contrary to the IRS’s position and perhaps the most important aspect of the case).

Although Mr. King was pro se, he was a lawyer (50 years of experience) and his tax practice is what gave rise to the employment tax liability.  He was a solo lawyer, but employed at least one person in most quarters from 2002 to 2008.  Apparently, not all employment taxes were paid, and the IRS assessed taxes and penalties of just under $50k.  Most of Mr. King’s assets were real estate or his law practice, which would have been difficult or costly to liquidate.  Mr. King requested an installment agreement, which became a long, drawn out fiasco, resulting in Mr. King being passed around to various agents, TAS, and others in collections.  The IA was eventually denied due to the equity Mr. King had in various assets, and he requested a CDP hearing related to filed lien, which the IRS declined to withdraw.  In October of 2011, Mr. King was finally able to contact Arthur Fonzarelli (come on Henry, you are better than that) and obtain a reverse mortgage to pay the taxes.  Following the payment of the tax, Mr. King petitioned the Tax Court to review the denial of the installment agreement, and the IRS denial of penalty and interest abatement on the employment taxes.

The Court had to grapple with whether or not it could take jurisdiction over a CDP case where the tax had been paid (usually, no), whether interest abatement applied to employment taxes (usually, no), and if the Service’s increasing usual game of pass off and wait could result in excessive interest (usually, no).  As discussed below, the Tax Court for Mr. King (not to be confused with the Court of the King before the King Himself) was persuaded by the regal arguments, and held for the taxpayer on all three issues.

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Jurisdiction

As many of our readers know, in general if a taxpayer pays the assessment that gave rise to the CDP hearing, the Tax Court is divested of jurisdiction over the matter, and a taxpayer is forced to request a refund in a district court or the Court of Federal Claims.  See Sections 6320 and 6330; Green-Thapedi v. Comm’r, 126 TC 1 (2006) (though in the SaltzBook upcoming chapter on CDP we also discuss some cracks in the no refund in a CDP case, an issue Les touched on in in June in the post Recent Order Explores Scope of Tax Court powers in CDP Cases).  In the CDP hearing for Mr. King, however, Appeals considered the collection actions and alternatives, but also reviewed the interest abatement request.  Recent case law has made it clear that the Tax Court views the CDP decision as a final determination regarding the abatement of interest.  Although it is related to the CDP determination on the other matters, the abatement is independent and can provide jurisdiction on its own.  In 2012 and 2013, the Tax Court in Gray v. Comm’r, 138 TC 298,  declined to follow the IRS position that it lacked jurisdiction because the interest had been paid.  It held that it retained its jurisdiction under Section 6404(h); Section 6404(h)(2)(B) provides in interest abatement claims that the Tax Court had overpayment jurisdiction.  The Court, in foot note 12, gave the taxpayer a hand, by laying out how this was a claim for overpayment of interest due to failure to abate, as the petition did not specifically state an overpayment.

Section 6404(e) – (e) is not for “employment taxes”

Mr. King apparently argued that Section 6404(e) should have been a valid provision to rely upon for abatement of the interest related to his employment tax liability.  Section 6404(e) allows for the abatement of interest on any deficiency attributable to the IRS’s unreasonable error or delay, and is frequently relied upon for income tax interest abatement.  Unfortunately for the taxpayer here, there is pesky qualifying language relating to (e)(1)(B) that states the Service can only abate tax described in Section 6212, which restricts abatement to taxes imposed by subtitle A or B or chapter 41, 42, 43, or 44.  This generally includes income, gift, estate, gst and various excise taxes on nonprofits or retirement plans – not employment taxes.  King does not discuss (e)(1)(A), which allows for abatement of “any deficiency attributable in whole or in part to any unreasonable error or delay by [the IRS] in performing a ministerial or managerial act”, which does not contain the same reference to Section 6212.  As (e)(1)(B) speaks of payment of the tax and (e)(1)(A) the assessment of the deficiency, my assumption is the timing on the assessment was not an issue, only the prolonged process of the taxpayer being able to pay.  The Service position on (A) may be that the qualifying language applies to it also, but that may be susceptible to attack – I haven’t really researched the matter, but it seems like the key aspect is reliance on regulations that state the position, which seems outside the scope of the statutory language.

Section 6404(a) and when the IRS causes “excessive” interest

So when is the assessment of interest excess?  Probably not as often as taxpayers believe, but more often than the IRS would like.  Section 6404(e) did not provide relief, but Section 6404(a) provides for the abatement of the portion of an assessment, including interest, which “(1) is excessive in amount…or (3) is erroneously or illegally assessed.”  There is no restriction on the type of tax.

Mr. King claimed that the interest was excessive because of the various delays created by the IRS.  The Service position on this matter is that “excessive” is essentially a restatement of the third option of “erroneously or illegally assessed.”  The Service has lost on this matter before in the Tax Court in H&H Trim & Upholstry v. Commr, TC Memo 2003-9, and Law offices of Michael BL Hepps v. Comm’r, TC Memo 2005-138, so this is not breaking new ground, but good reinforcement of a taxpayer friendly ruling.  The Tax Court in the previous cases had interpreted “excessive” to “include the concept of unfairness under all of the facts and circumstances.”  A bit broader than simply erroneously or illegally assessed.   In H&H Trim, the taxpayer was able to show the interest would not have accrued “but for” the Services dilly-dallying.  In King, the Service argued that the prior case law was incorrect, but also argued that the taxpayer could have made a voluntary payment to stop the interest and was requesting an installment agreement, which would have incurred interest.  The Court essentially held that the taxpayer showed he would have perfected the installment agreement and paid it the underlying amount more quickly but for the IRS taking its sweet time and failing to follow its own IRM procedures in responding to the taxpayer’s IA request (albeit imperfect), and abatement was therefore appropriate.  As to the voluntary payment, the Tax Court stated that Section 6404(a) has no language barring abatement when a portion of the error or delay could have been attributable to the taxpayer (Section 6404(e) has that language).  Even if the taxpayer could have made the payment, the failure to do so did not alleviate the IRS’s requirement to abate.

Overall, a very instructive case on making employment tax and interest abatement claims.  Also helpful for those seeking abatement under Section 6404(a) who are arguing the tax is excessive, if the taxpayer can show that but for the IRS’s actions in inappropriately slowing the process the interest would have been less.

Congress Considering Procedural Legislation

There are some interesting developments percolating in Congress. In addition to a hearing today which features former Senators Bradley and Packwood and is meant to highlight lessons on tax reform from the 86 Tax Reform Act, Congress is considering a few procedural issues in less controversial bills. Specifically the Senate Finance Committee has scheduled for tomorrow a mark up of a number of relatively noncontroversial measures, including a grab bag of procedural provisions.

The Joint Committee has summarized those measures, under a title that pegs the changes to proposals relating to access and administration of the Tax Court. I have not yet seen language in the bill, but there are three items in particular that have received a fair bit of coverage in Procedurally Taxing over the past year. These items relate to venue of appeals of CDP cases, interest abatement disputes and the fallout from last year’s Kuretski litigation.

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Venue

One of the proposals addresses the venue issue for CDP and innocent spouse cases we have discussed previously in the context of last year’s DC Circuit Byers case. The Joint Committee summary states that the provision “amends section 7482(b) to clarify that Tax Court decisions rendered in cases involving petitions under sections 6015, 6320, or 6330 follow the generally applicable rule for appellate review. That rule provides that the cases are appealable to the U.S. Court of Appeals for the circuit in which is located the petitioner’s legal residence in the case of an individual or the petitioner’s principal place of business or principal office of agency in the case of an entity other than an individual.”

I am not sure that I agree with the notion that this is a clarification of current law; seems to me the DC Circuit’s analysis in Byers is persuasive that venue absent a legislative change for CDP cases not involving liability issues is the DC Circuit irrespective of the petitioner’s residence. Be that as it may, this will bring some certainty into an area that could use some certainty.

Interest Abatement

The Joint Committee also summarizes a proposal that would provide that a taxpayer can petition Tax Court even in the absence of a determination 180 days after an abatement request; a separate proposal would allow a taxpayer to elect small case procedures for abatement requests when the “total amount of interest for which abatement is sought does not exceed $50,000.”

Kuretski , or Where Does the Tax Court Belong?

We and others have discussed Kuretski and related cases on numerous occasions this past year. The Joint Committee indicates that the bill Senate Finance is considering would purport to essentially attempt to overturn the DC Court of Appeals holding that found (at least for some purposes) that the Tax Court is part of the Executive Branch. Here is the entire language (absent footnotes though we did enjoy that the Joint Committee Report dropped a footnote to Procedurally Taxing in its description):

Present Law

The Tax Court was created in 1969 as a court of record established under Article I of the U.S. Constitution with jurisdiction over tax matters as conferred upon it under the Code. It superseded an independent agency of the Executive Branch known as the Tax Court of the United States, which itself superseded the Board of Tax Appeals.

As judges of an Article I court, Tax Court judges do not have lifetime tenure nor do they enjoy the salary protection afforded judges in Article III courts. They are subject to removal only for cause, by the President. The authority to remove a judge for cause was the basis for a recent unsuccessful challenge to an order of the Tax Court, in which the taxpayer claimed that the removal authority was an unconstitutional interference of the executive branch with the exercise of judicial powers. In rejecting that challenge, the Court of Appeals for the District of Columbia held that the Tax Court is not part of the Article III Judicial Branch and is an independent Executive Branch agency, while acknowledging that the Tax Court is a “court of law” for purposes of the Appointments Clause.

Description of Proposal

The proposal clarifies that the Tax Court is not within the Executive Branch.

Effective Date

The provision is effective upon the date of enactment.

I will reserve comment on this proposal until I see the bill.

For those interested in this issue, and the confusion as to where the Tax Court fits, I commend readers to an excellent piece called Where the Bough Breaks: The U.S. Tax Court’s Branch Difficulties by Professor Leandra Lederman in the recent ABA Tax Section Newsquarterly. Professor Lederman is one of the (if not the) top tax procedure scholars in the country. This entertaining and well-researched piece shows how schizophrenic the government itself has been in describing where the Tax Court belongs.

 

 

 

 

The Gift that Keeps on Taking–Does Section 6324(b) Limit Gift Tax to the Value of the Gift or Can the IRS Take More?

AP,Webber Photography / AP

AP,Webber Photography / AP

In November, in US v. Marshall, the Fifth Circuit added to the split in circuits regarding the extent of a transferee’s liability for gift tax- specifically, whether the total amount of tax due can surpass the amount of the gift because of interest. The case likely will garner some attention, surprisingly not for the tax procedure issue, but because the underlying gift was made by J. Howard Marshall.  Mr. Marshall was an oilman, who made a fair portion of his fortune by partnering up (in the business sense) with the Koch bros. Later in life, he famously partnered up with Anna Nicole Smith (in the marriage sense).  Although that marriage only lasted fourteen months, it resulted in litigation lasting substantially longer– but the former Playmate and somewhat tragic figure was not involved in this litigation.  The indirect gift in question occurred in 1995 before their nuptials, and was made to various other relatives and trusts held for the benefit of his relatives.

The procedural issue of interest in Marshall deals with a donee’s liability for transfer taxes due on a gift “to the extent of the value of such gift” under Section 6324(b), and if that amount can surpass the value of the original gift because of interest.  The Courts have disagreed.

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The Facts

Perhaps not as splashy as a story about a buxom blond, but still interesting, Mr. Marshall sold his shares in Marshall Petroleum Inc.  (MPI) back to MPI in 1995.  Years later, it was determined that the sale was well below the fair market value of the stock, which indirectly increased the value of the stock for the remaining shareholders.  Those other shareholders were E. Pierce Marshall (his son), Eleanor Pierce Stevens (ex-wife), Elaine T. Marshall (daughter-in-law), the Preston Marshall Trust (trust fbo a grandson), and the E. Pierce Marshall, Jr. Trust (trust fbo a grandson).  Because everything is bigger in Texas, an agreed settlement with the IRS found that the indirect gift to all beneficiaries in 1995 totaled around $83MM, for which no gift tax had been paid.  There are a lot of tangential issues in the case, but for purposes of this write up, some of the donees paid around $45MM to the IRS, representing the amount of the gifts each received.  The IRS, unhappy with a host of issues, filed suit, alleging in one count that the government was entitled to charge interest on the amounts due from the donees, which was not capped at the amount of the gift – meaning the donees needed to cough up another Texas’ sized heaping of cash to get the feds of their backs.  The donees, already lamenting the lightness in their wallets, disagreed.

The Law

Under Section 6324(b), the Service can impose a tax lien for gift tax due on the donor’s assets, but also the donee, making the donee secondarily liable for the transfer tax.  Section 6324(b)  states:

[U]nless the gift tax…is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made.  If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift.

The argument boils down to the donees believing the final sentence above makes the donee liable for the donor’s tax debt, but only “to the extent of the value of such gift”.  The government, however, argued that Section 6324(b) creates a separate tax liability for the donee, which it can then impose interest on under Section 6511.

The donees advanced various arguments in favor of their position, but the primary argument was that Section 6324(b) is clear on its face in imposing a single liability for the donor’s tax and interest, which is capped at the value of the gift- no separate liability in the donee.    This was the position taken by the Third Circuit in Poinier v. Comm’r, where the Court held that no separate liability was created, but instead “merely a new procedure by which the Government may collect taxes.”  To the Third Circuit, “tax” included interest, but that also was limited to the value of the gift. Following the Third Circuit holding, the government attempted to bring Poinier before SCOTUS, but cert was denied. The Eighth Circuit, in Baptiste, held in line with Poinier.

The government’s position was that the language was not that plain and did not actually resolve the issue.  It argued that Section 6324(b) had to be read in conjunction with Section 6901 and Section 6601.  Section 6601 is the Code Section imposing interest in general, while Section 6901 provides that, “liabilities shall…be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred…[including][t]he liability, at law or in equity, of a transferee of property…of a donor in the case of…[gift tax].”  The Court sided with the government’s contention that when reading Section 6324(b) with Section 6901 there were two separate liabilities, and the donees’ were responsible for interest on its liability.  The Eleventh Circuit has also agreed with this line of reasoning (also a Baptiste).

Although the language may not be completely clear, it strikes me that most tax practitioners reading Section 6324 would view the language as limiting the potential amount outstanding that the donee could have to pay, and would view this more as a collection mechanism (similar to what the Third Circuit stated about Section 6324).  Congress is fairly good at creating liabilities clearly.

I also did not fully understand how the limitation under Section 6324(b) relating to the donor’s liability is meaningful under the Court’s holding.   The tax due on the gift would only be able to reach the value of the gift because of the addition of interest.  The Court noted that Congress had repealed the specific prohibition on interest being paid on interest, and enacted compounding interest, finding Congress was not against the double imposition of interest.  In reading the opinion, it seemed to me the Court was saying interest could be charged twice on the same amount (which is different than compound interest)—once on the donor’s debt up until the value of the gift, and then concurrently on the donee’s liability (which  based on this reading of creating a liability would start when the tax was due and unpaid also).  That would create an interest rate for some period of double the stated rate (significantly higher than corporate rates and the overpayment rate, which was statutorily brought in line with the underpayment rate for individuals).  I can’t imagine that is correct, and perhaps is contrary to other statutes.  If that is not what the Court intended, but the interest can run on the donee from the date of the return, I do not know how the limitation to the value of the gift would have meaning, unless interest can only start running on the donee’s liability after it stops running on the donor’s liability.  I’m not aware of a statutory provision indicating as much, and the Court did not indicate that.  Perhaps I am missing something here.

The donees also argued that reading Section 6901 and Section 6324 together in this way was inappropriate, because the Service did not rely on Section 6901 to collect the tax, and instead used a direct judgment under Section 7402 based on the amount outstanding under Section 6324(b).  The donees argued that Section 6901 requires assessment and collection in the normal fashion, which creates procedural safeguards, including notice and review.  The Service elected not to bother with those procedures.  In my mind, this is compelling.  Section 6901 may create rights for the Service, but it does so by also requiring the burdens of assessment and collection.  Section 6324(b) has no such requirement of assessment.  The Court was not persuaded, and held that it was not inappropriate and that Section 6901 could still provide guidance on the liability created under Section 6901.

Although I disagree with the holding, it is possible to massage the statute to create the Court’s result.  It seems significantly easier though to come to the result that the language limits the amount due by the value of the gift.

Perhaps SCOTUS will be more willing to review this matter now that the 5th has weighed in.

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.

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  • 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.

Ford v US: Sixth Circuit Resolves Interest Dispute and Brings Attention to Jurisdictional Issue

Earlier this month, the Sixth Circuit issued an opinion in Ford v US, a case I originally wrote about late last year when the Supreme Court remanded the matter to the Sixth Circuit. The case considered whether Ford was entitled to receive overpayment interest on about $875 million of deposits it made that it subsequently requested the IRS treat as advance payments.  It had made its deposits when IRS had audited Ford and had preliminarily determined that Ford had a sizeable liability. While Ford and IRS both eventually agreed that Ford overpaid its taxes, rather than underpaid, IRS and Ford disagreed on when the payments Ford made should generate overpayment interest.

In addition to the underlying issue as to when Ford was entitled to interest, the case has significant jurisdictional implications, as precedent outside the Sixth Circuit requires that disputes regarding the overpayment of interest are to be made in the Court of Federal Claims and not in federal district courts.

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On remand, the Sixth Circuit addressed the merits after it addressed the jurisdictional issue that generated the remand. Here is a bit more factual context:

Ford Motor Company remitted hundreds of millions of dollars to the United States Treasury after the Internal Revenue Service (IRS) notified Ford that it had underpaid its taxes in prior years. Ford designated the funds as “deposits in the nature of a cash bond” but later asked the government to convert its remittances into “advance tax payments,” which are treated differently under the IRS’s revenue procedures. When the government subsequently reexamined its computations and determined that Ford had overpaid its taxes in the relevant timeframe, the United States refunded Ford’s payments with interest. But the government refused to pay Ford any interest for the period during which the United States held Ford’s money as deposits—before the remittances were converted to advance tax payments. Ford demands about $450 million in additional interest from the government.

The jurisdictional issue before the Sixth Circuit was whether the district court had jurisdiction under 28 U.S.C. § 1346(a)(1), which vests the district courts with jurisdiction to hear claims “for the recovery of any . . . sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” The district court and the Sixth Circuit had previously not addressed this jurisdictional question, but the Supreme Court remanded for the appellate court to consider that, as well as whether the jurisdictional issue had any impact on the merits, and whether courts should view Section 6611 (the provision authorizing interest on overpayments) as a waiver of sovereign immunity.

A little backtracking may be helpful to appreciate how the case came back to the Sixth Circuit. Initially, the district court found in favor of the government in part because the district court deferred to Revenue Procedure 84-58 (since superseded); when Ford appealed, the US abandoned its argument that the Revenue Procedure was entitled to regulatory deference. The Sixth Circuit still held in favor of the government though, in part relying on the strict statutory construction canon applicable to waivers of sovereign immunity.

In opposing the cert petition Ford filed after it lost initially in the Sixth Circuit, the government argued for the first time that § 1346(a)(1) did not confer jurisdiction on the district court because “Ford did not seek to recover money already paid; rather, it demands interest that the IRS steadfastly refuses to pay.” The government maintained that “the only general waiver of sovereign immunity that encompasses [Ford’s] claim is the Tucker Act, 28 U.S.C. § 1491(a), which requires that suit be brought in the United States Court of Federal Claims.” It was that issue –which had not been briefed before—that triggered the Supreme Court’s remanding of the matter back to the Sixth Circuit.

Why does this matter? The Sixth Circuit is an outlier on this issue, as many other courts push these cases to the Claims Court and generally accept the government’s jurisdictional view. There is, however, a prior Sixth Circuit case, Scripps v US, that concluded that district courts have jurisdiction under 28 USC 1346(a)(1) to hear disputes about interest overpayments. In deciding the matter this month, despite its outlier status, the Sixth Circuit declined to accept the “government’s interest to poll the Sixth Circuit en banc to reconsider its view that the district court originally had jurisdiction under 28 USC 1346(a)(1).” To that end it discussed its view of the jurisdictional precedent in the Sixth Circuit:

In Scripps this court held that §1346(a)(1) confers jurisdiction on the federal district courts to adjudicate claims for overpayment interest because the term “recovery of any sum” in that statute includes suits to obtain overpayment interest. 420 F.3d at 597 (citing Flora v. United States, 362 U.S. 145, 149 (1960)). We concluded that our interpretation of § 1346(a)(1) was consistent with Library of Congress v. Shaw, 478 U.S. 310, 314 (1986), where the Court held that the United States is immune from any suit to obtain interest in the absence of express congressional consent to an award of interest. We noted that 26 U.S.C. § 6611, which specifically permits taxpayers to sue the government for overpayment interest, constitutes an express congressional waiver of the government’s immunity from suits to recover interest. Scripps, 420 F.3d at 597

On remand, the Sixth Circuit clarified its view as to how Supreme Court precedent treated interest claims against the federal government. Parsing Supreme Court cases such as Library of Congress v Shaw 478 US 310 (1986), the Sixth Circuit explained that waivers of sovereign immunity have two components: one jurisdictional one and one substantive:

Shaw thus appears to require two waivers of sovereign immunity in the context of a suit against the government to obtain interest—one jurisdictional waiver establishing the right to bring suit in an appropriate court, and a second substantive waiver expressly authorizing an award of interest.

While the Sixth Circuit in Ford backtracked and held that Section 6611 is not a jurisdictional waiver, it stated that it is a substantive waiver provision, subject to a court’s strict construction of the statute. Nonetheless, the Sixth Circuit clarified that the strict construction did not automatically forestall recovery of interest:

Because sovereign-immunity waivers must be strictly construed, the government contends, any doubts about whether Ford’s deposits constituted “overpayments” under § 6611 must be resolved in favor of the United States. Properly interpreted, however, Shaw does not stand for the proposition that any ambiguity in the scope of a statutory interest provision must be resolved in the government’s favor. It stands instead for the proposition that a litigant may not sue the United States to recover interest unless Congress has expressly authorized suits for interest.

After disposing of the jurisdictional issue and whether the matter involved sovereign immunity, the court went on to the merits. Not surprisingly it stuck to its guns and held (again) in favor of the government. It did so by using the “the usual tools of statutory interpretation to determine whether “the date of the overpayment” under § 6611 was the date Ford remitted its deposits, as Ford contends, or the date the IRS converted its deposits into advance tax payments, as the government contends.” To that end, it considered a dictionary definition of payment as “the act of paying or giving compensation: the discharge of a debt or an obligation.”

The heart of the issue according to the Court was that Ford’s intent when it remitted the money to the IRS, and that it could have designated the remittance as a tax payment but it chose not to:

That definition focuses on the purpose with which a person or entity sends the funds: A remittance is a payment when it is given to discharge a debt or obligation. …

According to IRS revenue procedures in effect at the time, both cash-bond deposits and advance tax payments stopped the government from charging interest on an estimated tax underpayment while the IRS finalized its tax assessment (as long as the deposit was eventually posted against the assessment.) But the revenue procedures treated deposits and advance tax payments differently in one important respect: A taxpayer could demand the immediate return of a deposit anytime, while an advance tax payment would be returned only through the IRS’s formal refund process, which take’s time. See Rev. Proc. 84-85 § 4.02.1. So when Ford sent its remittances, it faced a tradeoff: If a taxpayer remitted a cash-bond deposit but subsequently demanded the deposit’s return, the IRS would not pay the taxpayer any interest for the period during which the government held the funds.When a taxpayer demanded a refund of an excessive advance tax payment, by contrast, the IRS allowed the taxpayer to recoup interest. Thus the revenue procedures forced taxpayers to choose: immediate access without interest, or interest without immediate access.

Considered in this context, Ford’s purpose comes more sharply into focus, see Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006) (“Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis.”), and belies any claim that Ford’s purpose in remitting the cash-bond deposits was to discharge its estimated tax obligations. Ford could have designated its remittances as advance tax payments and instructed the IRS to apply its remittances against any tax liability ultimately assessed. Both parties agree that would have been a “payment” because such a remittance would have been made for the purpose of satisfying the estimated tax deficiency. Yet Ford chose instead to designate its remittances as deposits. Ford is a sophisticated taxpayer, and its designation of the remittances was not accidental. A taxpayer’s deliberate decision to designate its remittance as a deposit rather than an advance tax payment directly evidences an intent not to make a “payment.” That purpose is determinative.

(emphasis added; citations omitted)

Conclusion

This is a tough result for Ford. For other taxpayers, Steve has written about Section 6603 and interest on deposits before (and as we discuss in revised Saltzman/Book Chapter 6; the Ford dispute predates 6603). That provision allows taxpayers to get interest on deposits when the deposit is made for a disputable tax. What is potentially of more moment in this case, however, is whether other courts may follow the Sixth Circuit’s approach and allow federal district courts rather than the Court of Federal Claims to hear overpayment interest disputes. It is possible this will return to the Supreme Court, but at a minimum I would not be surprised to see other circuits wrestling with this issue.

UPDATE:

For an excellent earlier post discussing the Supreme Court remand last December, see Jack Townsend’s post Ford Wants Overpayment Interest While Its Remittance Was Held as a Deposit

Summary Opinions for 10/03/14

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

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

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

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

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

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

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