Why the District Court Found No Jeopardy in Former Senator Fumo’s Case, How the Statute Could Work Better and How Bankruptcy Might Impact These Liabilities

Yesterday, I started to explain the basis for the determination that jeopardy did not exist in former Senator Fumo’s case.  I primarily discussed the aspect of the case court found troubling.   and used that discussion to raise a systemic problem with IRS examinations, revenue agents pay no attention to what a taxpayer does with assets while they audit returns.  The troubling aspect of the case for the court and for me was the four year period of the audit – a remarkable pace.

The case involved more than simply a snail’s pace audit during which the IRS paid no attention to the transfer of almost all of the taxpayer’s assets.  In addition to transferring his cash assets and fully or partially transferring his real property assets, former Senator Fumo also made statements to his ex-wife that he intended to make himself judgment proof while still retaining control of his assets.  These statements generally do not lead to a good outcome for someone trying to fend off a jeopardy assessment.  However, they were not enough to carry the day for the IRS. .  So, how did the court find that the jeopardy assessment should be abated considering there was a transfer of a significant amount of assets coupled with damaging statements that seemed to cry out for a determination of jeopardy?

Certainly, the evidence presented played a critical role in the outcome.  As I will discuss below, two other issues present themselves here.  The first, and less important, concerns the Court’s possible misunderstanding of the case.  It made a couple of statements that left me thinking it did not quite understand enough about tax procedure to understand the result of its opinion.  It is also possible that I read more into those statements than I should.  The second issue concerns the structure of the jeopardy assessment statute and the problems that structure creates for the IRS in a case where the taxpayer has/had significant real property assets.

read more...

The Asset Transfers

The court looked closely at each of the transfers and at the statements in determining whether former Senator Fumo’s actions warranted a determination of jeopardy.  Just as the revenue agent did not move quickly to complete the audit of the income tax returns, the court did not race to its conclusions.  It wrote a lengthy opinion working carefully through the applicable regulations and the facts in the case.  The transferred assets fell broadly into two categories – cash and real property.  Former Senator Fumo transferred a significant amount of money to his son right about the time the prison sentence began.  Despite the fact that much of the money transferred from Senator Fumo’s bank accounts ended up in bank accounts owned solely in the name of the son, the court found that the money transfers were reasonable because the son took on the obligation of paying the bills while he father served time in prison.  The son showed a fair amount of the money was going to pay for the father’s bills.  I could not tell from the opinion that all of the money went for the father’s bills or that the son had returned the money now that the father could handle his own financial affairs again.  Perhaps my concerns about that aspect of the story seek a level of proof beyond the required showing of general use of the funds for the father’s affairs.  This part of the proof distinguished this case from others where courts upheld the jeopardy determination.

The court found the explanations about the real estate transfers reasonable as well.  The general explanation here involved estate planning.  The “Bush tax credits” were set to expire on December 31, 2011, former Senator Fumo’s accountant advised him to make gifts before they expired in order to do some estate planning.  The transfers, except for one, kept the property partially in the name of former Senator Fumo because he transferred his property from himself to himself and his son or himself and his girlfriend as joint tenants with rights of survivorship.  Steve may write a follow up post on whether the alleged estate planning aspect of these transfers had meaning.  I found myself much less convinced by the story about the transfer of the property in comparison to giving his son control of the bank account.  Making property transfers like this while an audit is underway, even a slow moving audit and even transfers with retention of a partial interest, seems inappropriate.  I think the court did not have the right statutory tools to deal with this behavior and I would change the statute as discussed below.

The Damaging Statements

After working through the transfers the court addressed the damning statements written to his former wife in which he states he wants to put his assets in someone else’s name while retaining control  and put the assets beyond the reach of the government.  The court found they “were written in the context of seeking her input and assistance regarding what he believed was a necessary renegotiation of the loan he had with a family trust account and more generally how to handle their daughter’s trust.”  Former Senator Fumo testified that the correspondence was not “about IRS concerns” but rather renegotiation of a loan with a family partnership.  The court found the explanations were convincing and found that the IRS did not find the existence of the correspondence until several months after the jeopardy assessment and therefore could not rely on the correspondence to show jeopardy.  I found the language about putting property beyond the government’s reach hard to reconcile with a family trust dispute but I did not read the transcript and perhaps a link exists that has passed me by.  I think the court simply did not find the words overcame the acts and the acts did not rise to the level of a jeopardy assessment.  The actions do matter much more.  Words like these can support a court’s decision or be brushed away when not supportive.  I do not fault the court for brushing them aside given its conclusion on the actions.

The Court’s Apparent Misunderstanding of Assessment and Federal Tax Liens

The court made two statements that make me think it does not quite understand what it has done.  First, it said “when Plaintiff was assessed with additional income taxes of approximately $2 million in October, 2012, the IRS did not believe a jeopardy assessment was necessary.”  This statement shows that the court does not understand the word assessment even though assessment is what the proceeding is all about.  The IRS did not make an assessment in October 2012 because it could not.  At that point it issued a notice of deficiency.  Had the IRS thought that jeopardy existed at that point, it would have made a jeopardy assessment.  The demonstrated lack of understanding of assessment leads to a lack of understanding of the lien which leads to a worry that the court may not understand what it has done here.

The second statement occurs later in the opinion.  In talking about the problem of the transferred properties the court says this is not a problem because the IRS knows the identities of the parties receiving the transferred interests – the son and the fiancée.  Knowing their identities is not the real problem.  Stopping them from further transferring or tying up the property is the problem and without an assessment the IRS cannot do anything about that, but sadly, the court seems to think that it can.  The court says “Defendant has already filed a nominee lien against Plaintiff’s fiancée.”  That statement suggests the court thinks the nominee lien will continue to exist after this opinion.  The opinion results in the abatement of the underlying assessment and will cause the IRS to release all of the liens it as filed including the nominee liens

The court’s misunderstanding of assessment and apparent misunderstanding of liens leaves me wondering if it thinks that the IRS is somehow protected from further transfer of the property.  It received an expert opinion report from a prominent local tax practitioner addressing  things the IRS can do to recover the property.  I found the conclusion of this report, that the IRS may be better off because of the transfers since it has the ability to sue more people to recover the proposed deficiencies, rather remarkable.  Sure, it can pursue claims against them but that does not guarantee recovery.  The better course is to tie up the property with nominee and “regular” tax liens. The IRS cannot do that now until the end of the Tax Court case which could be years away.  The IRS unsuccessfully objected to admission of the report.  I did not read the trial transcript.  The report seemed like a great opportunity to examine the expert and bring out all of the possibilities.

A Better Way

I would like the court to have upheld the jeopardy assessment for the purpose of allowing the IRS to file liens but not to levy.  Because of the amount and value of real property in this case, the filing of liens could serve to protect the interests of the IRS without creating a major cash flow problem for former Senator Fumo while he contests the correctness of the IRS determination of his liability.  While Congress has recognized the distinction between lien and levy in the Collection Due Process (CDP) context in a similar setting, it did not make a distinction between lien and levy in the jeopardy context.  The district court either had to give a thumb’s up or down on the assessment and the lien and levy rode together in that determination.  Other jeopardy cases exist like this one where what the IRS really needs to do is tie up property to keep it from dissipating during the sometimes lengthy path to normal assessment.  It should have a mechanism for doing so.  The jeopardy statute should allow the court to make a two part determination with respect to assessment and allow the IRS to make an assessment establishing the lien with a lesser showing while only allowing it to make a levy when a heavier showing is made.

The transfer of the cash and its use to pay bills during the period of incarceration rang true enough in the case to make the need for levy action a weak need in this setting.  The success on that story colored the court’s view of the need for jeopardy particularly if it held an erroneous view of the assessment and lien provisions.

Consequences of the Loss of the Lien if Bankruptcy Ensues

The loss of the lien also matters if former Senator Fumo decides to visit the bankruptcy court.  By chance, most of the liabilities the IRS says he owes are currently dischargeable.  The lien, or the absence of the lien or of the filed notice of federal tax lien, could play a big role if bankruptcy is in his future.   The IRS says he owes three types of taxes and sent him three notices of deficiency giving rise to three Tax Court cases.  Each of these liabilities has its own discharge rules although two overlap here.  First, the IRS says he owes income taxes.  The tax years of the income tax liabilities extend back for more than a decade.  These old taxes do not get priority treatment in the bankruptcy code because only the fraud penalty is keeping open the statute of limitations.  If the IRS can prove fraud, the income taxes are excepted from discharge (meaning he still will owe them after bankruptcy) by BC 523(a)(1)(C); however the fraud penalty equal to 75% of the tax liability would not survive bankruptcy because of the age of the tax years and the limitation of BC 523(a)(7) to penalties accruing within three years of the bankruptcy petition.  The only way the IRS would recover anything on the fraud penalty would be if it had a filed federal tax lien or if the estate had enough money to pay general unsecured claims.

The gift tax is an excise tax.  Excise taxes only retain their priority for three years from the due date of the return on the gift.  The IRS alleges that the gift took place in 2009 which is more than three years ago.  The IRS will have a general unsecured claim on the gift tax which would be discharged in bankruptcy the same way the fraud penalty would be discharged.  Without a lien, the IRS might recover little.  The third liability is an excise tax for wrongfully dealing with an exempt organization.  The wrongful acts occurred more than three years ago making this a general unsecured claim, it might also be an unsecured claim because the code section giving rise to the liability is treated as a penalty provision for bankruptcy purposes.  Either way, this debt gets discharged in bankruptcy similar to the gift tax and the fraud penalty.  Bankruptcy may not occur because former Senator Fumo has too many assets to make it worthwhile or he has concerns that fraudulent transfer actions against his son and fiancée might create too much trouble but depending on his finances moving forward, it remains a potentially attractive option for eliminating almost all of the liabilities in the absence of the lien.

Conclusion

This was a close case.  Former Senator Fumo’s counsel did an excellent job addressing the important issues and convincing the court that the actions supporting jeopardy really resulted from other issues.  The prompt payment of the sizeable restitution and fines no doubt also played a role in the decision.  If former Senator Fumo still has significant assets when the Tax Court case reaches its conclusion, this decision matters little to the IRS.  The jeopardy assessment seeks to protect it from financial loss.  It will lose nothing if it succeeds in establishing the liability and he promptly pays up.  Of course, if he wins in Tax Court, it also suffers no financial loss.  I am concerned about the property transfers and would like to have a system that prevents further transfers during the slow process of determining the liability.  Until Congress becomes concerned about this, my private concerns do not matter.

Jeopardy Assessment Abated in Former Senator Fumo’s Case

Last fall I wrote about former Senator Fumo here, here, and here as a way to introduce jeopardy assessment and jeopardy levy.  I noted at the time that the IRS took an amazingly long time to make a jeopardy assessment against him.  I stopped writing about the case in part because the slowness of the IRS in making the jeopardy assessment was matched by the slow movement of the jeopardy case in district court.  Watching a jeopardy case unfold in slow motion differs from the norm in these cases but perhaps brings its own lessons to situation.  The district court in Philadelphia has now decided that the IRS did not meet its burden with respect to jeopardy.  This means that the assessment the IRS has made in the case, the levies, the “regular” and nominee liens will all disappear with the possibility that at the end of the Tax Court case they will spring back.

The district court correctly criticized the IRS for the pace of the jeopardy case.  It also found that the explanation given by former Senator Fumo regarding the transfer of money from his bank accounts as well as the transfer of real property made business sense or made enough business sense to provide a basis for abating the jeopardy assessment.  I found myself agreeing with the court as to the cash but not agreeing as to the real estate and occasionally the court made statements that left me wondering if it understood what was going to happen as a result of this decision or what might happen.  In the end, the court seemed convinced that former Senator Fumo or his son or his fiancée still had enough assets to pay the taxes should the Tax Court permit assessment of the proposed deficiencies and that his prompt payment of the significant restitution amounts suggested he would promptly pay any tax liability the Tax Court might determine he owes.

In this post I primarily focus on the impact of the slow decision by the IRS to pursue jeopardy and how that timing seemed to impact the Court’s decision.  This is part of a two part post in which the second post will address the decision itself and how the statute might have led to this decision by failing to distinguish between the current need for a lien as opposed to a levy.

read more...

To reset the scene on this case, the IRS has proposed assessments against him for three different types of tax liabilities:  income tax for the years 2001-2005; excise taxes related to self dealing with an exempt organization he controlled for the years 2002-2004 and gift taxes for transfers in 2009.  On March 16, 2009, a jury found him guilty of 137 counts of conspiracy, fraud, obstruction of justice and aiding and abetting the filing of false tax returns of a tax-exempt organization.  His received a prison sentence of 61 months has paid over $4 million in fines, penalties and restitution in connection with the conviction.  The timing and length of the prison sentence matter with respect to the defense to the jeopardy and the timely payment of the fines, penalties and restitution also seemed to favorably influence the court.

As normally happens in criminal cases involving taxes, the IRS did nothing on the civil liabilities stemming from former Senator Fumo’s behavior until the conclusion of the criminal case.  Here, that decision may not have been routine since the tax charge played such a small role in the overall criminal case.  Nonetheless, shortly after the conviction the IRS assigned a revenue agent to examine former Senator Fumo’s income taxes.  The agent began his investigation in 2009 and concluded it in 2012.  I have been involved with or observed a lot of post conviction examinations but cannot remember one that went this long.  The agent explained in his affidavit that his examination was slowed by serious family issues.  This means that his manager decided that the case did not require expeditious handling and could wait for the agent’s return.  The manager may have had few options but that did not come out.  The fact that the statute of limitations on assessment had long since passed and fraud must keep it open took off some of the normal time pressure in an exam.  The court noted that the IRS could have reassigned the examination if it had significant concerns about its ability to collect the taxes.  Not only did the examination take four years but it resulted in a “regular” statutory notice of deficiency because no one at the IRS was paying any attention to the property transfers former Senator Fumo was making during this period.

I pause here to say this this demonstrates a serious flaw in the way the IRS does business.  It assigns cases to revenue agents who pay no attention to what the taxpayer does with assets during the months or years they engage in examination of the taxpayer.  Even where it has a taxpayer convicted of fraud, even where the proposed liability totals millions of dollars, and even when the case takes forever to come to completion, the IRS goes around with its head in the sand making no effort to determine if it should worry about collection.  Most of the transfers here took place in 2009.  Had former Senator Fumo wanted to hide assets, the IRS gave him three or four years, while it slowly examined him, to do so.  This business practice coupled with the amazing length of the examination convinced the district court that it should abate the jeopardy assessment even in a situation where doing so put the IRS collection at risk.  The IRS should consider assigning revenue officers to monitor taxpayers in high dollar, high risk, high profile cases so that it does not end up embarrassed like this.

Revenue agent’s jobs do not involve caring about collection.  So they do not.  They had so little concern they let the case languish in audit for four years while paying no attention to what former Senator Fumo did with his assets.  Only when the hometown newspaper ran a series of articles gathering information from public records did someone at the IRS, after the issuance of the statutory notice of deficiency, wake up to the fact that collection of the liability the IRS had invested many hours in developing may be at risk.  This business model, which pre-dates the changes to the IRS in 2000 deserves attention.  Slow moving audits producing high dollar deficiencies should not have only revenue agents who have no systemic reason to care about collection assigned to them.

The IRS spends a lot of potentially wasted resources on such audits because it does not keep its eyes on the assets.  Had it paid attention to the asset transfers and made the jeopardy assessment in 2009, I think this case has a different outcome but this is not the only high dollar case where no attention gets paid to the taxpayer’s assets until the slow moving revenue agents and potentially the slow moving Appeals Division and slow moving Tax Court finish their work.  The IRS does not have enough resources to have a revenue officer watch every case it audits, but it should have enough resources to have them watch cases like this one.  The business model needs tweaking and this case should serve as a wake-up call.

The relatively new restitution based assessment provisions may change this equation in cases in which the court orders restitution based on tax violations.  In those cases the IRS will have the opportunity to immediately assess following the restitution order and immediately begin collection.  Even in those cases, the IRS should consider assigning a revenue officer no later than the time at which the conviction occurs so that the revenue officer can begin gather information about the assets.  Cases involving criminal convictions where the taxpayer has significant assets deserve significant attention.  The IRS needs to devise a better strategy that includes collection at an early point.

I have swerved from discussing the court’s analysis to rant about slow audits and non-existent collection concerns.  In the next post concerning former Senator Fumo I will explain why I think the district court mostly got it right in deciding to abate the jeopardy assessment but seemed to fail to understand what abating the assessment will do to the protections the IRS has put in place following its wake call in this case.  Because the abatement of the assessment leaves the IRS with no protections from property transfers except to bring actions after the property sales and potentially after the dissipation of the proceeds of those sales, I have more concerns about the future collection of any liabilities determined assessable than the district court seemed to have.

Summary Opinions for 01/10/2014

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

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

Summary Opinions for 12/20/2013

Happy Holidays!!  And, sorry for the lack of posts over the last week or two. This will likely be the last post until the week of December 30.  We will be taking a brief respite to enjoy family time and the holidays (Keith is a new grandpa; Les is a newlywed—Congrats Les!!!), but will be back in full force in 2014.  Until then, there are a few procedure items below.  Have a happy and safe new year!

read more...
  • Jack Townsend has been prolific over the last week on both his Federal Tax Procedure Blog and his Federal Tax Crimes Blog.  It is all worthwhile, but one item I found very interesting was his write up on his Federal Tax Crimes Blog on the Clarke case.  The post is regarding the government filing a cert petition with SCOTUS, which we had previously indicated was coming.  Jack’s post has the entire 11th Circuit holding, which is somewhat counter to other circuits’ view of the issue, and portion of the filings, including the questions presented.  It comes down to whether a taxpayer is entitled to an evidentiary hearing on a summons if the taxpayer alleges improper purpose.  In Clarke, the taxpayer alleged that summons was only being issued to extend the statute of limitations.  Jack also includes large portions of his book to explain the issue, which is very useful; Saltz Book hits the circuit split in the issue in the update coming out in the next month.  Great write up, and a case that we will be watching.
  • Earlier this week I wrote about a client of mine who was the target of an IRS scam.  Wandering Tax Pro this week posted a very similar story here.
  • The Supreme Court has denied cert in Stocker v. United States, where the taxpayer has requested SCOTUS review the Sixth Circuit’s jurisdictional dismissal of a refund suit based on the taxpayer’s failure to show he filed amended returns within the three year period under Section 6511(a).  In declining to review the case, SCOTUS failed to address a circuit split on taxpayers using methods other than those under the statute to establish presumption of delivery.  The underlying issue is interesting here, but so is the fact that the 6th Circuit referred to Section 6511(a) as jurisdictional.  The trend over the last few years in non tax areas and some tax deadlines (including the look back period under 6511) has been to hold that many statutory time limits are not jurisdictional.  A few weeks ago, SCOTUS declined to review Boeri; the underlying Court of Appeals for the Federal Circuit decision can be found here.  Boeri applied to Section 6511(b), and clearly states this is not jurisdictional, relying on SCOTUS language. I will hopefully have more on Boeri soon. Regarding the evidence rule, the Sixth Circuit held that Section 7502 provided the sole exceptions to the physical delivery rule, and it would not look at additional evidence.  The Tax Court and various other Circuit Courts have allowed other evidence to show the document was timely mailed.  Had the Sixth Circuit determined Section 6511 was not jurisdictional, the taxpayer may have had an easier time making equitable arguments regarding the evidence and the treatment of its mailing.
  • TaxProfBlog has a summary of an article written by Calvin Johnson, which argues that for the reasonable cause exception to penalties, taxpayers should not be able to rely on the opinions of their own accountants or lawyers due to the inherent conflict in the practitioner desiring to retain the business.  We have lamented the attack on advisor reliance as a defense here at Procedurally Taxing, but this article approaches the matter in different way.  This is somewhat an extension of the promoter rationale for disallowing the defense.  I understand the position, but think it would be unrealistic for most taxpayers to go to those lengths.  Perhaps over the holiday, I will read the entire article and see if this is addressed.
  • The Service has released PMTA 2013-15, which has a good question and answer summary of various potential late filing scenarios with partnerships and S-corps, and what, if any, penalties should be imposed.
  • The Northern District of Florida has granted the Service’s request to levy the homestead of taxpayers in In Re Sanders, finding there were no reasonable alternatives and the property was not exempt under the state homestead exemption.  Case can be found at 112 AFTR2d 2013-7021.  Docket number is 4:13-cv-00352.  I could not find a link to the order – Sorry about that.
  • In the wake of Woods, SCOTUS has declined cert in two additional valuation misstatement cases, Alpha, LP v. United States and Crispin v. Comm’r.
  • In Bibby v. Comm’r, a somewhat unusual CDP case arising under 6330(f), which gives the taxpayer the right to a hearing within a reasonable time after a jeopardy levy.  This case involved a jeopardy levy and refund scam involving inflated credits.  The Tax Court sustained the levy and Appeals’ rejection of taxpayer’s suggested installment agreement because the taxpayer did not cooperate or respond to information requests. The refund scam included $203,000 of overstated withholding credits, among other inaccuracies.  The taxpayer’s behavior prior to his appeal, combined with the lack of responsiveness and cooperation by the taxpayer (who was represented), persuaded the Court that there was no abuse of discretion by Appeals in sustaining the levy and denying the installment agreement.
  • So 2013 doesn’t seem like a great year for MC Hammer.  Jay-Z gives him a shot out in Holy Grail, which would seem cool, except it is highlighting how he lost everything in the late ‘90s.  “I’m the [man], caught up in all these lights and cameras, but look what that [stuff] did to Hammer…bright lights is enticing…but soon as all the money blows, all the pigeons take flight.”  Jay-Z does also give a shout out to the Service in the song, but the language is a little colorful for these pages.  Mr. Hammer also seems to have some trouble with the Service, with TMZ reporting the IRS dropped an $800,000 lien on him.  Best bad pun line from TMZ is that “He got to PAY just to make it today”.  Hammer apparently tweeted that he had paid this debt, and has a receipt “stamped by a US Federal Judge”.  Do judges take payment and give receipts?
  • I’ve noted my interest in both the estate tax and tax procedure before on the blog, so I’m of course thrilled to comment on the Service’s release of PMTA 2013-014, which provides the Service’s position on whether CDP rights arise for a transferee of property from an estate when there has been an estate tax lien under Section 6324(a)(1), or the “like lien” described in (a)(2).  Chief Counsel has taken the position that the transferee is not entitled to CDP rights, and the regulations only allow CDP notice and hearing for “taxpayers”.  Prior guidance indicated that CDP rights did arise with a “like lien”, so this is a change in policy.  Practitioners handling a “like lien” situation should review this and prior guidance, and may find that an argument can be made in favor of providing CDP rights.
  • The Service has issued updated guidance on authorizing agents to act under Section 3504 for FICA and employment taxes.

Vince Fumo: IRS Finding of Jeopardy

As mentioned in a previous post, the Service recently invoked the rarely used jeopardy assessment procedure against former state Senator Vince Fumo in connection with the activities leading to his criminal conviction. In doing so, the Service cited concerns about Senator Fumo’s financial activities, including the sale of properties to his son and fiancée, and the transfer of $2.8 million to his son between August 2009 and January 2010. The details of the cash transfers to Senator Fumo’s son came to light in a memo that accompanied the Service’s notice of jeopardy assessment and levy delivered to Senator Fumo in March of this year.

The sales of Senator Fumo’s properties and the cash transfers led the Service to conclude that its ability to collect unpaid additional taxes was in jeopardy causing it to make a jeopardy assessment four years after his conviction.

In this post, I will primarily provide the background of the statutory scheme relating to jeopardy.  I will also summarily apply the statutory requirements to Fumo’s facts, revealing why the Service acted as it did in finding that there was jeopardy.  In the next post I will go into greater detail with respect to the specific facts supporting the jeopardy determination as well as the response from Senator Fumo’s lawyer.

read more...

Summary of Jeopardy Rules

A jeopardy assessment allows the Service to forgo ordinary assessment and collection procedures designed to allow a taxpayer to contest most assessments and some collection procedures before they happen.  The Service may only bypass these procedures where it concludes that following the ordinary procedures would threaten its ability to collect the taxes owed by the taxpayer. Exercising this option obviates the requirement that the Service provide the taxpayer with a formal notice of deficiency and instead allows the Service to immediately assess the taxes due. The Service has three types of immediate assessment processes at its disposal:

  • Section 6851of the Internal Revenue Code, which authorizes a termination assessment of income tax
  • Section 6861of the Code, which authorizes a jeopardy assessment of income, estate, or gift tax
  • Section 6867 of the Code, which authorizes possessor-of-cash assessments

While all three of these provisions permit the Service to make immediate assessments of tax when collection will be jeopardized by delay, the ability of the Service to use these procedures is tempered by its ability to prove that jeopardy exists.  Congress intended that the immediate assessment of federal taxes should be used sparingly and that the amount “should be limited to amounts which reasonably can be expected to protect the government.”

In Senator Fumo’s case the Service used the jeopardy assessment process.  While all three immediate assessment procedures require that the Service show that it faces jeopardy in the collection of the tax due, only one of the three processes carries the name jeopardy assessment.  The jeopardy assessment process occurs when the taxes at issue stem from a prior tax year.  Here, the Service used the jeopardy assessment process because the tax years at issue came prior to the year in which the assessment occurred.  The Service assessed taxes for the tax years 2002 through 2004 for the excise tax, 2001 through 2005 for the income tax, and 2009 for the gift tax.  If the Service had assessed taxes for 2013, it would have used the termination process.  The termination process gets its name from the fact that the Service actually terminates the tax year in the middle of a calendar year and immediately assesses the taxes for the newly created, partial year tax period.  The Service did not do that in Senator Fumo’s case. 

The final immediate assessment procedure occurs when a taxpayer possesses cash in which he disclaims an interest.  The typical possessor-of-cash case involves a drug dealer caught with a large amount of cash on his person, in his car or in his house during a search and seizure.  The individual knows (or soon learns from his lawyer) that the cash could provide evidence supporting the conclusion that the individual had engaged in an illegal activity.  The individual disclaims any interest in the cash.  The statute gives the Service the right to make an immediate assessment of tax related to this cash giving it the further right to take the cash in satisfaction of the assessment.  The possessor-of–cash basis for assessment played no part in the immediate assessment against Senator Fumo.

Collection is deemed to be in jeopardy, thus warranting immediate assessment using the jeopardy or termination process, where:

(i)                The taxpayer is or appears to be designing quickly to depart from the United States or to conceal him or herself.

(ii)              The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons.

(iii)            The taxpayer’s financial solvency is or appears to be imperiled.

If any one of these conditions exists and the Service makes an immediate assessment against the taxpayer, the assessed amount “shall become immediately due and payable and the district director shall serve upon such taxpayer notice and demand for immediate payment of such tax.”

Once the Service makes the jeopardy assessment, it must provide notice of the assessment to the taxpayer and provide the taxpayer with the opportunity to contest the jeopardy assessment in district court.  The district court proceeding focuses on the correctness of the jeopardy determination in order to make what is ordinarily a relatively quick decision regarding the correctness of the determination by the Service that the collection of the tax is in jeopardy.  The Service also sends to the taxpayer a statutory notice of deficiency allowing the taxpayer to contest the underlying liability in Tax Court. 

Bringing it Back to Fumo

In the case of Senator Fumo, the Service’s  decision to implement the jeopardy assessment procedure appears to primarily stem from the transfer of assets from Senator Fumo to his fiancée and son; however, as I will discuss in the next post, the Service also found some statements by Senator Fumo that support the determination of jeopardy.  The Service found that Senator Fumo’s actions placed his property beyond the reach of the Government or imperiled his financial solvency.

After making the jeopardy assessment of $2.9 million dollars, the Service immediately sought to protect its ability to collect on the assessment by filing notices of federal tax lien against Senator Fumo in five jurisdictions in which he owned real property.  The notice of federal tax lien serves an important function in establishing the priority of the tax lien vis a vis other creditors, makes it difficult to further transfer the property in a manner that can defeat the payment of taxes and makes public the existence of the tax liability.  In addition to filing the notices of federal tax lien the Service also began serving levies on various financial institutions thereby freezing access to his bank accounts.  Paragraph 37 of the complaint, discussed below, states that Senator Fumo and the Service reached an agreement concerning the levies allowing the bank to continue to hold the funds reached by the levies.  Such an agreement is unusual but, as with the liens, fixes the rights of the parties until the Court can make a determination concerning the underlying liability.  It also filed nominee liens against his son and his fiancée seeking to tie up the specific pieces of real property transferred to them.

These actions led Senator Fumo’s tax lawyer, Mark Cedrone, to criticize the Service on the grounds that it lacked a “plausible, legitimate justification supporting its decision to employ the draconian and infrequently used jeopardy assessment process” against Senator Fumo. As permitted by the jeopardy process, Senator Fumo filed a complaint in district court on June 13, 2013. See the 92 page complaint, including exhibits, here, here, here, here, here, and here. In addition to contesting the determination of jeopardy, the complaint also alleged collusion between the Service and U.S. Attorney’s Office “in retaliation for exercising his constitutional right to proceed to trial.” According to Cedrone, Senator Fumo was essentially forced to sue because frozen assets rendered him unable to pay court-ordered restitution. Further, Senator Fumo’s suit claims that none of the conditions precedent to a jeopardy assessment or levy was present as Senator Fumo was imprisoned at the time the assessment was implemented, had no plans to leave the country, and did not transfer real estate in an effort to place such property beyond the reach of the government.

Ordinarily, the District Court must decide whether jeopardy exists with 20 days of the petition.  Senator Fumo specifically waived the 20 day period in the complaint.  The statutorily contemplated quick determination of jeopardy status has slowed way down.  The Service has filed a motion for summary judgment in the district court case, which is currently pending. Senator Fumo’s response to the motion is due next week and a reply by the Service due in December.

Because the Service found that Senator Fumo owed three different types of federal taxes, it sent him three separate statutory notices of deficiency.  He timely filed three Tax Court cases (one each for the gift, income, and excise taxes.)  The answer in the Tax Court cases must be filed shortly.  The district court and Tax Court cases present an opportunity to witness implementation of the jeopardy assessment procedure. We will continue to track the development of Senator Fumo’s district court and Tax Court activities and welcome your input as we dig deeper into the tax issues that arise.

Vince Fumo: Local Political Corruption Meets Tax Procedure

 

Former Pennsylvania State Senator Vince Fumo has had his share of legal battles in the past few years, and it appears that those battles are far from over.  His new legal battles concern his tax liabilities, but present a number of interesting procedural issues regarding transferee liability, collection of restitution awards under the 2009 change in the law, jeopardy assessment and jeopardy levy, alleged conspiracy by government authorities, and others. For a discussion of the IRS liens filed against Fumo and the use of the jeopardy assessment process, see here and here.

read more...

 

Fumo, a Philadelphia Democrat who served in the state Senate from 1978 to 2008, began serving a prison sentence in 2009, after he was convicted on 137 counts of fraud, tax evasion, and obstruction of justice.  Along with former aide Ruth Arnao, Fumo was accused of having siphoned off $1 million in state funds and $1 million from a charity, Citizens Alliance, for personal and campaign use.  See the docket for Fumo’s criminal case, Docket No. 2:06-cr-00319, here.

Having been convicted on 45 counts, Arnao received a sentence of one year and one day in prison and three years of supervised release, and was jointly and severally liable with Fumo for $792,802 in restitution owed to Citizens Alliance.  Fumo was originally sentenced to 55 months in prison and was fined $411,000, and was ordered to pay $2,340,839 in restitution. Fumo and the government both appealed the district court’s decision, with the Fumo claiming jury partiality and the government arguing that the court made procedural errors in calculating the sentence.  The Third Circuit affirmed the convictions, but vacated the sentences and remanded to the district court in 2011.  Fumo’s prison term was ultimately extended by six months and he was ordered to pay additional restitution of $1.1 million.

Fumo was released in August 2013 after having served 4 ½ years in an Ashland, Kentucky federal prison. He returned to his Philadelphia home, where he currently resides in lieu of residing at a halfway house. Fumo holds a $10/hour job at his attorney’s law firm, although he is not allowed to give legal advice having lost his license to practice law following his conviction.

Despite having served most of his criminal sentence, Fumo’s legal troubles continue, as the IRS decided to seek additional federal taxes from him stemming from the activities leading to his conviction. See the docket for Fumo’s tax case, Docket No. 017754-13, here.  The timing of the IRS action appears quite late given the date of his conviction.  In addition to appearing to be slow to seek additional liabilities from Mr. Fumo, the IRS has made a jeopardy assessment against him asserting that the collection of the unpaid additional taxes it claims are due is in jeopardy because of his actions.  The IRS invoked the jeopardy assessment procedure amidst concerns about Fumo’s financial activities, which included “selling” several of his properties to his son and fiancée for only $10 and transferring $2.8 million to his son after his criminal sentencing. The IRS claims that Fumo owes $2.1 million in back income taxes, $354,000 in excise taxes for abusing his relationship with a non-profit entity, and $503,000 in unpaid gift taxes. As a result of the jeopardy assessments, the IRS levied Fumo’s bank accounts and filed notices of federal tax liens in the jurisdictions where he held real property including his home in Philadelphia, property on the New Jersey shore, and a 99-acre farm near Harrisburg.

The IRS sent Fumo a Notice of Deficiency for exise tax under tax code Section 4958 and additions to the tax code under Section 6651(a)(1). These notices categorize Fumo as a “disqualified person” under 4958(1) with respect to Citizens Alliance and allege that Fumo engaged in “excess benefit transactions” with Citizens Alliance.  Fumo was assessed as owing $191,000 in first tier excise taxes, $1 million in second tier excise taxes, and $48,000 in penalties.  Disputing the IRS’s claims, Fumo filed petitions with the United States Tax Court on July 31 to challenge the assessments and penalties, arguing that the IRS is collaterally estopped from making the assessments.

He also filed suit against the federal government in June accusing Department of Justice officials of conspiring with the IRS to seek revenge on him through the jeopardy assessment process. See the docket for Fumo’s federal suit, Docket No. 2:13-cv-03313, here.  In the suit, Fumo’s attorney, Mark Cedrone, argued that the IRS lacked any “plausible, legitimate justification supporting its decision to employ the draconian and infrequently used jeopardy assessment process” against Fumo. Citing his client’s frozen assets and inability to control his finances, Cedrone reasoned that Fumo was forced to sue in order to pay court-ordered restitution.  For a discussion of Fumo’s suit against the federal government, see here.

The Tax Court and the District Court cases offer the opportunity to watch several procedural issues unfold.  In coming blogs, we will examine the jeopardy assessments, the transferee issues, the alleged government improprieties and other procedural issues present in these cases.  While this case is a local one for those of us writing this blog, it offers us the chance to examine the unfolding of a case with somewhat unusual procedural tax issues in real time.  We welcome your comments as we follow this case.