9th Circuit Affirms Tax Court’s Ruling in Kollsman Disregarding the Report of Taxpayer’s Appraiser

We welcome back guest blogger Cindy Charleston-Rosenberg. Cindy is a past president and a certified member of the International Society of Appraisers. She and I both posted on the Tax Court’s earlier decision in the Kollsman case. Now, the 9th Circuit, in an unpublished opinion, has affirmed the Tax Court’s opinion. I am somewhat surprised that the taxpayer appealed this case because the burden to overturn the Tax Court’s decision was high. The 9th Circuit seemed to have little trouble finding that the Tax Court correctly relied on the appraiser used by the IRS and dismissing the taxpayer’s appraiser who came burdened with conflict problems and a desire not to use comparables in setting a value. The 9th Circuit stated “The Tax Court did not err in rejecting Wachter’s (the petitioner’s appraiser) opinion in part because he did not support his valuations with comparable sales data.” The 9th Circuit did not directly address the conflict of the taxpayer’s appraiser that greatly influenced the Tax Court to ignore or deeply discount his opinion but instead continued to focus on the deficiencies of his opinion stating “the Tax Court did not err in finding that Wachter failed to explain the nearly fivefold increase in value between his valuation and the sale price.” As Cindy explains and as we discussed in the prior posts, getting the right appraiser makes a huge difference in getting the “right” outcome. Trying to fix a problem with an appraisal through an appeal will generally not end well. Keith

On July 26, 2019, The Appraisal Foundation released a press statement urging legal advisors and wealth managers, in light of the recent affirmation of Kollsman v Commissioner, (T.C. Memo. 2017-40) to recognize the primacy of the personal property appraisal profession. The Appraisal Foundation is the nation’s foremost authority on valuation services, authorized by Congress as the source of appraisal standards and appraiser qualification criteria.

The 9th Circuit affirmation of Kollsman establishes that attorneys and other allied professionals should, as a minimum standard of care, recognize appraising as a professional discipline distinct from other types of art market expertise. From the Foundation’s release: 

with this ruling, the competency and professionalism of personal property appraisers has been confirmed for the second time by the judicial system in the United States … wealth managers and estate attorneys now have a greater fiduciary duty to their clients to fully understand appraiser qualification criteria and appraisal standards when vetting personal property appraisal experts.

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The Tax Court decision in Kollsman essentially disregarded an appraisal submitted by a high ranking executive of a premiere auction house as lacking basic qualification, credibility, support and objectivity. The decision relied almost exclusively on the opinion of the IRS expert, who was a relevantly credentialed, professional appraiser. The 9th Circuit opinion found the Tax Court did not err in rejecting the auction house expert’s opinion, in part because it was not supported by comparable sales data and failed to consider relevant past sales. In disregard to established caselaw and standard professional appraisal practice, the auctioneer testified that when he arrived at his valuations, he was “not interested” in comparables, and had only reviewed comparables after the IRS challenged his methodology. In finding the auction house appraisal to be “unreliable and unpersuasive” the Tax Court opinion deemed the omission of comparables supporting the valuations to be “remarkable”, stating; “we have repeatedly found sale prices for comparable works quite important to determining the value of art”. In contrast, the court found the credentialed appraiser engaged by the IRS explained his methodology, relied on comparables, and conducted research as to the impact of the subject property’s condition to an expected level of professional performance and objectivity. 

To help ensure a trustworthy level of professional competency, The Appraisal Foundation’s sponsoring professional personal property organizations, the International Society of Appraisers, the Appraisers Association of America, and the American Society of Appraisers, have embraced and are bound to implement the Personal Property Appraiser Minimum Qualification Criteria in issuing credentials to members. Each organization maintains a public registry where the appraiser’s level of credentialing, areas of specialization, education and experience may be accessed and confirmed. Members of these associations earn their credentials through a stringent admissions, training and testing process. They are required to comply with IRS guidelines and the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP), are bound to continuing education requirements and to submit to the oversight of their professional organization’s ethics committee. 

As a member of the Appraisal Foundation’s Board of Trustees, I welcome the opportunity to collaborate with the legal and wealth management professions on best practices in identifying and engaging qualified appraisers, particularly for IRS use appraisals. As we see here, every appraisal report submitted to the IRS has the potential to become the subject of litigation. Procedurally Taxing readers are invited to review my earlier post for an in-depth analysis of the implications of the original ruling, and Keith Fogg’s earlier coverage of this case highlighting the avoidable perception of bias when engaging an expert seeking any involvement in the sale of purchase of the subject of an appraisal. 

Last September the American College of Trust and Estate Counsel (ACTEC) Regional Meeting in Baltimore hosted a panel addressing this issue. The feedback from the considerable post-presentation engagement from attendees was that the qualification criteria for real property appraisers are well understood by the legal profession. However, qualification criteria and practice standards for personal property and business valuation experts, sourced by the same authority, are clearly less so, often with devastating outcomes for consumers.

In the wake of the Kollsman affirmation,particularly as the ruling applies to the benefits of engaging relevantly credentialed experts for IRS valuations, and critically, the Appraisal Foundation’s now public stance on this issue, it will be increasingly difficult for tax and legal advisors to defend engagement of less than fully qualified valuation experts. 

Appointments Clause Errors in the Taxpayer First Act that the President is Deeming that He Corrected

On July 1, 2019, the President signed into law H.R. 3151, the Taxpayer First Act – bipartisan legislation primarily making a number of changes to the IRS. Section 1001 of the Act amends Code section 7803 to add a new subsection (e), creating the IRS “Independent Office of Appeals” as a separate office within the IRS, whose “Chief of Appeals” reports directly to the Commissioner of Internal Revenue. Section 2101 of the Act also amends Code section 7803 to add a new subsection (f), creating within the IRS a new position of IRS “Chief Information Officer” (CIO).

No doubt the drafters of the legislation (presumably, the staffs of the Joint Committee on Taxation, the Senate Finance Committee, and the House Ways & Means Committee) have little experience with the requirements of the Constitution’s Appointments Clause (art. II, sec. 2, cl. 2), since there are so few appointed “Officers of the Unites States” in the IRS. Indeed, as far as I can tell, the only appointed “Officers” in that vast bureaucracy are the Commissioner, the Chief Counsel, and the members of the IRS Oversight Board (each appointed by the President with the advice and consent of the Senate); sections 7802(b)(1)(A) and 7803(a)(1)(A) and (b)(1); and the National Taxpayer Advocate (appointed by the Secretary of the Treasury). Section 7803(c)(1)(B)(ii).

New Code section 7803(e)(2)(B) and (f)(1) provide that the Chief of Appeals and the CIO shall be appointed by the Commissioner of Internal Revenue. Unfortunately, assuming that those individuals are “inferior officers” under the Appointments Clause (as opposed to a mere governmental employee lacking “significant authority” to act on behalf of the government), those appointment delegations would be invalid.

Somebody at the White House or DOJ noticed this error before the President signed the bill and thought that the President had an easy work-around. So, in signing the bill into law, the President executed a signing statement that reads in its entirety:

Today, I have signed into law H.R. 3151, the “Taxpayer First Act” (the “Act”). Sections 1001(a) and 2101(a) of the Act require the Commissioner of Internal Revenue to appoint persons to positions responsible for significant functions of the Internal Revenue Service (IRS). Such persons are likely inferior officers under the Appointments Clause of the Constitution. Because the IRS is a component of the Department of the Treasury, the Commissioner is not the head of a department and thus lacks constitutional authority to appoint inferior officers. I therefore direct the Secretary of the Treasury, as the head of the department, to approve any appointments made pursuant to sections 1001(a) and 2101(a) of the Act. DONALD J. TRUMP

Having litigated a case involving the Appointments Clause; see Tucker v Commissioner, 676 F. 3d 1129 (D.C. Cir. 2012), aff’g 135 T.C. 114 (2010) (holding that Appeals Settlement Officers and their Team Managers holding Collection Due Process hearings are not inferior officers, but mere employees not needing appointment), I am quite familiar with case law under the Clause outside the tax area. And, it is my considered opinion that if the Supreme Court were asked if the President’s fix worked, the ghost of former Justice Scalia would cause the Court to call the President’s signing statement “applesauce”. In my view, only Congress can fix the problem, not the President.

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The Appointments Clause provides in relevant part:

[The President] . . . shall nominate, and by and with the Advice and Consent of the Senate, shall appoint . . . Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

The Framers sought to prevent the diffusion of appointment power by limiting who may make appointments and to whom Congress, by enacting a law, may delegate appointing power. The default is that, assuming a delegation law is invalid, the appointment of inferior Officers must be made by the President with the advice and consent of the Senate. There is little question that, if these new IRS individuals are “Officers of the United States” (which I am confident that they are), they are inferior officers, since they report to a higher officer, the Commissioner. Edmond v. United States, 520 U.S. 651, 662 (1997) (“Generally speaking, the term ‘inferior officer’ connotes a relationship with some higher ranking officer or officers below the President: whether one is an ‘inferior’ officer depends on whether he has a superior.”)

In the case of Cabinet Departments, only the Department’s Secretary has been held to be the Head of a Department under Supreme Court Appointments Clause case law. Freytag v. Commissioner, 501 U.S. 868, 886 (1990) (“This Court for more than a century has held that the term ‘Department’ refers only to “‘a part or division of the executive government, as the Department of State, or of the Treasury,'” expressly ‘created’ and ‘giv[en] . . . the name of a department’ by Congress.”). (Note that, since Freytag, the Supreme Court has also held that independent agencies, such as the SEC, can also be “Departments”. See Free Enterprise Fund v. PCOAB, 561 U.S. 477, 510-511 (2010).) Thus, the Commissioner of Internal Revenue, as the head of a mere unit within the Treasury Department, is not one of the individuals to whom Congress may delegate appointment power for an inferior officer. The Commissioner is not the Head of a Department.

This is not the first time Congressional drafters made an Appointments Clause error in naming an appointer who was not the Head of a Department. What happened most recently to the Patent and Trademark Judges is instructive. The history is set out in detail in Stryker Spine v. Biedermann Motech GmbH, 684 F. Supp. 2d 68, 80-88 (D.D.C. 2010). The Patent and Trademark Judges were part of the Patent and Trademark Office of the Department of Commerce. Congress had long given the Secretary of Commerce the power to appoint such judges. But, in 2000, some bright bulb in Congress changed the law so that the Director of the Patent and Trademark Office could appoint such judges. When Prof. John Duffy, in a 2007 blog post, questioned the constitutionality of this appointment if the judges, as he argued, were inferior officers, not employees, patent and trademark lawyers started to raise this issue in the courts in challenges to the post-2000 rulings of such judges. Congress solved the problem by enacting a law allowing the Secretary of Commerce to appoint such judges – i.e., reverting to the prior law. Congress purported to make the new law retroactive to cure any error, something at least Duffy thought not constitutional, either. But, no court has ever held the Congressional fix improper.

I don’t see how the Secretary of the Treasury has been authorized by law to appoint the new IRS officers. The President’s mere deeming the Secretary to be the proper co-appointer has not been approved by Congress.

On the bright side for Congress, though, they can clearly add this fix to a Technical Correction Act. And, when they do so, I expect that they will follow the lead of what they did in fixing the similar problem with the Patent and Trademark Judges – complete with making the fix retroactive.

Also on the bright side for both the President and the IRS, I have a hard time figuring out who has the standing to bring a legal challenge under the Appointments Clause to what the President just did. After all, who is aggrieved by the error? The Chief of Appeals doesn’t make individual taxpayer rulings within Appeals. Perhaps some government contractor, whose proposed information technology contract was turned down by the IRS CIO, though, might have standing to complain. But, really, would such a lawsuit really be worth it to anyone?

Seeking Clarity from the IRS for Foreign Entities

Today we welcome first-time guest blogger R. D. David Young of RDDY Consulting LLC. David specializes in transaction structuring and global tax planning. Here David explains IRS’s planned changes to the EIN application process, and proposes clarifications that would be helpful for foreign entities in need of an EIN. Christine

As the IRS prepares to update its Employer Identification Number (EIN) application process to enhance security, it should also update the process to add some needed clarity for foreign entities.

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The IRS announced on March 27, 2019 that it is revising its EIN application process to enhance security. As part of that process, the IRS indicated that starting May 13 only individuals with tax identification numbers may request an EIN. The announcement indicated that the change will provide greater security to the EIN application process by prohibiting entities from being “responsible parties” and using their own EINs to obtain additional EINs. Interestingly, since December 2017, the only entities that have been permitted to utilize their own EIN to obtain additional EINs are government entities, so it is unclear what security issue the IRS is seeking to address.

Clarification for Responsible Parties Ineligible to Obtain SSN or ITIN

While the details of the specific changes to the EIN application process aren’t yet available, if the revised process will truly allow only individuals with tax identification numbers to request an EIN as the responsible party, the revised process could make obtaining EIN’s more challenging for many foreign entities. Under the current EIN application process, if a responsible party of an entity does not have and is ineligible to obtain a social security number (SSN) or individual taxpayer identification number (ITIN), as is the case for responsible parties of many foreign entities, the instructions provide that they should leave line 7b (which requests the SSN, ITIN, or EIN of the responsible party) blank. It is possible that the IRS will continue to allow a responsible party that does not have and is ineligible to obtain an SSN or ITIN to leave line 7b blank, but clarification on this point would be welcomed.

Clarification of “Foreign Equivalent” of a Limited Liability Company

While the IRS is revising the EIN application process, another clarification that would be welcomed is with respect to the definition “foreign equivalent” of a limited liability company. Line 8a of Form SS-4 asks the question, “Is this application for a limited liability company (LLC) (or a foreign equivalent)?” The term “foreign equivalent” is not defined in the instructions to Form SS-4 and an applicant is instructed to “see Form 8832 and its instructions.” Unfortunately, instructions to Form 8832 are no more enlightening.

The instructions to Form 8832 correctly provide that a foreign eligible entity’s default characterization is an association taxable as a corporation if all members have limited liability, and either a disregarded entity or a partnership if the single owner, or at least one member, does not have limited liability, respectively. However, the term “foreign equivalent” does not appear in the instructions to Form 8832, leaving one to divine what the IRS means by its use of the term “foreign equivalent” on Line 8a of Form SS-4.

Since the hallmark of an LLC formed in the United States is generally that no member is obligated personally for any liability of the LLC solely by reason of being a member of the LLC, one would be reasonable in concluding that the “foreign equivalent” of a domestic LLC must be a foreign entity in which no member is obligated personally for any liability of the foreign entity solely by reason of being a member of the foreign entity.  Applying the default classification rules to such an entity results in such “foreign equivalent” being treated as an association taxable as a corporation. However, where such a foreign entity (such as a Cayman Islands LLC or a UK Private Limited Company) intuitively answers “yes” to Line 8a and identifies the appropriate default classification of such an entity as a corporation on Line 9a, such entity will be surprised to receive an EIN acceptance letter indicating that the IRS has assigned the entity an EIN as a disregarded entity or a partnership depending on the number of members.

Surprisingly, when processing Forms SS-4, the IRS interprets the term “foreign equivalent” to refer to a foreign eligible entity in which the single owner or at least one member does NOT have limited liability (precisely not the “equivalent” to a domestic LLC). The IRS appears to interpret “foreign equivalent” to mean a foreign eligible entity that has a default classification that is equivalent to the default classification of a domestic LLC. This interpretation ignores the fact that the default classification of a foreign eligible entity in which all members have limited liability is not equivalent to the default classification of a domestic LLC in which all members have limited liability.

Given that the IRS applies such a strained and counterintuitive interpretation of the term “foreign equivalent” to processing applications for EINs, the IRS should update the instructions for Form SS-4 to clearly explain that the IRS interprets the term “foreign equivalent” to mean a foreign eligible entity in which the single owner or at least one member does NOT have limited liability.

Procedurally Taxing at the ABA Tax Section 2019 May Tax Meeting

The American Bar Association Tax Section 2019 May Tax Meeting commences in Washington, D.C. and runs May 9 through 11, 2019. Several Procedurally Taxing contributors will be speaking at the conference and this is your guide to finding those sessions.

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Leslie Book –
Saturday, May 11, 9:30 – 10:30 a.m.
Pro Bono & Tax Clinics Committee
Procedural Due Process and the Tax System: A Fresh Look.

Procedural due process is rooted in the Magna Carta and is embedded in our constitution. The right to notice and the opportunity for a hearing are the two key ways that the constitution helps ensure that the sovereign does not erroneously deprive people of essential rights, including the right to property. Procedural due process, a concept closely related to procedural justice, ensures that the sovereign treats its subjects as human beings entitled to a sense of dignity and is a foundational aspect of good government in general and tax administration in particular. In this panel, we will explore the historical roots of procedural due process jurisprudence, consider the ways that that current and proposed IRS procedures relate to due process protections and procedural justice norms, and explore insights from areas other than tax when there have been challenges to agency actions that violate procedural due process protections.
Moderator: Sarah Lora, Legal Aid Services of Oregon, Statewide Tax Clinic. Portland, OR
Panelists: Professor Leslie Book, Charles Widger School of Law, Villanova University, Villanova, PA and Professor in Residence, Taxpayer Advocate Service, Washington, DC; Nina E. Olson, National Taxpayer Advocate, Taxpayer Advocate Service, Washington, DC; Professor Susannah Camic Tahk, University of Wisconsin School of Law, Madison, WI
Cosponsored by: Individual & Family Taxation and Teaching Taxation
Note: Professor Jamie Andree, Maurer School of Law, Indiana University, Bloomington, IN, is no longer able to attend due to injury.

Keith Fogg –
Thursday, May 9, 1:45 – 2:45 p.m.
Tax Bridge to Practice, Sponsored by: Young Lawyers Forum and Diversity Committees
Statutes of Limitations in Tax Litigation: Friend or Foe?

Statutes of limitations are an important, but often overlooked, aspect of tax litigation that can work to the advantage or the detriment of a party. Most practitioners are familiar with the general three-year period of limitation on assessment, as well as basic exceptions, including those for a false return, no return, or a substantial omission of gross income. This panel will address more nuanced rules affecting statutes of limitations in tax, including the interplay of section 6511(a) and (b) in refund suits (and, as appropriate, Tax Court litigation), the failure to notify the IRS of certain foreign transfers, and the failure to disclose listed transactions. The panelists will also discuss strategies for navigating statute of limitation issues in litigation, as well as the effect of the government shutdown on both statute of limitations and filing deadlines with courts and the IRS.
Moderator: Kelley C. Miller, Reed Smith LLP, Washington, DC
Panelists: Paul Butler, Kostelanetz & Fink LLP, Washington, DC; Professor T. Keith Fogg, Director of the Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Elie Mishory, Attorney, Office of Associate Chief Counsel (Procedure and Administration), IRS, Washington, DC; Lawrence A. Sannicandro, McCarter & English LLP, Newark, NJ; Rebecca M. Stork, Eversheds Sutherland LLP, Atlanta, GA
Co-sponsored by: Court Procedure & Practice and Young Lawyers Division Tax Law Committee

Keith Fogg & William Schmidt –
Friday, May 10, 9:00 – 10:00 a.m.
Individual & Family Taxation Committee
CDP – Beyond the Weeping and Gnashing of Teeth; What Can be Done to Fulfill CDP’s Beneficial Intent?

Collection due process (CDP) rights launched twenty years ago to provide additional procedural protections to taxpayers facing tax liabilities. CDP is an essential part of the practitioner’s toolkit: It offers independent review of IRS collection actions, including the chance for alternatives to enforced collection and, in certain instances, review of the liability itself. CDP may be used to achieve meaningful and lasting collection resolutions for both pro se and represented taxpayers. However, CDP also may be an expensive and emotionally wrenching experience for taxpayers who enter the process in good faith, only to be greeted by inflexible, unrealistic deadlines, overworked IRS professionals applying cookie cutter tactics to move a file off their desk, and a Court swamped with equally cookie cutter motions for summary judgment by the IRS against which pro se taxpayers are ill-equipped to defend. Even seasoned tax practitioners are frustrated by inadequate case records, inelastic government responses, and seemingly limited judicial remedies. This program will move beyond “let me tell you how it all went wrong” to brainstorm what realistically might be done to fulfill the promise of CDP.
Moderator: Carolyn Lee, Morgan Lewis and Brockius, San Francisco, CA
Panelists: The Honorable David Gustafson, US Tax Court, Washington, DC; Professor Keith Fogg, Harvard Law School, Boston MA; Mitchel Hyman, IRS Office of Chief Counsel, IRS, Washington, DC; William Schmidt, Kansas Legal Services Low Income Tax Clinic, Kansas City, KS; Professor Erin Stearns, University of Denver Low Income Tax Clinic, Denver, CO
Co-Sponsored by: Pro Bono & Tax Clinics

I will be speaking with Keith Fogg at the panel listed above. First of all, I want to thank Leslie Book for providing creative input at the starting stages of planning the panel. Next, I want to mention that the panel is not going to be a history or a gripe session about collection due process. It is a panel designed for dialogue between practitioners in several areas of tax law with the intent of finding solutions to improve taxpayer interactions with the IRS. We will be looking at the administrative and judicial levels, plus discussing creative remedies that may be available. We hope this panel brings more debate and leads to positive systemic change.
-William

Christine Speidel –
Saturday, May 11, 8:30 – 9:30 a.m.
Pro Bono & Tax Clinics Committee
Family Members as Caregivers

Section 131 promotes community care for disabled adults by excluding certain state payments from caregivers’ gross income. Historically, Service challenged the excludability of payments to a parent caring for an adult disabled child in the provider’s home. In 2014 the Service reversed this position for certain Medicaid waiver payments, effecting a major economic change for affected families. This panel will discuss the impact of the 2014 guidance, areas of continued uncertainty, and other remaining barriers to the uniform treatment of caregivers’ income.
Moderator: Camille Edwards Bennehoff, Attorney, IRS Office of Chief Counsel (Income Tax & Accounting), Washington, DC
Panelists: Victoria J. Driscoll, Senior Attorney, IRS Office of Chief Counsel (Income Tax & Accounting), Washington, DC; Professor Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA; Wayne Turner, Senior Attorney, National Health Law Program, Washington, DC
Cosponsored by: Individual & Family Taxation and Diversity

Caleb Smith –
Thursday, May 9, 3:45 – 5:00 p.m.
Low Income Taxpayer Representation Workshop (Pro Bono & Tax Clinics Committee)
EITC and Benefits Law: Conceptualizing, Understanding (and Navigating) the Interplay of EITC and Benefits Law

What makes the EITC “different” from other tax provisions? And when do those differences matter (in a legal sense)? This panel will discuss the history and purpose of the EITC, how it interfaces with other disparate areas of law like benefits and bankruptcy.

Moderator: Professor Caleb Smith, University of Minnesota Law School, Minneapolis, MN
Panelists: Margot Crandall-Hollick, Congressional Research Service, Washington, DC; Carrie Welton, Center for Law and Social Policy, Washington, DC

When A Promise to Pay Is Not A Debt

In this post, frequent guest blogger Bob Kamman provocatively explores possible links between the Thrift Savings Plan, tax refunds, and the federal debt limit. Christine

An army of accountants and lawyers is standing by while its employer cooks the books of their pension plan, but it’s nothing you should expect a special prosecutor to investigate.

That’s because their employer is the federal government, and the consent of IRS professionals along with all of their colleagues in other agencies and the military who participate in the Thrift Savings Plan was never requested. Like a shutdown with mandatory work hours, they have to take it or leave.

This situation arose when the federal debt limit returned on March 2, after being suspended for a year. Congress has told the Treasury not to borrow any more money. However, Congress has also told the government to spend more money than it collects. Treasury has a solution to this paradox, at least for the short term. It makes a side deal, off the books, with the employees who pay into the federal equivalent of a 401(k) retirement savings plan.

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The Thrift Savings Plan (TSP), created in 1986, allows investments in several funds based on the stock or bond markets. The most popular is the “G” fund, which invests in a special variable-rate United States Treasury bond. Last year its rate of return was 2.91%. Today it earns 2.50%.

What could be safer than Treasury bonds, right? But right now the Treasury can’t issue those bonds, because of the pesky debt limit. So Treasury simply promises to sell them to TSP just as soon as Congress allows. Meanwhile, accounts are credited with interest as if these phantom bonds really existed. For those who want to withdraw their funds or take out an allowable loan, the account value includes this phantom interest.

On March 5, the Thrift Savings Plan assured federal employees that the TSP money in their “G” spot was safe. It issued a statement:

As of Tuesday, March 5, 2019, the U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 30 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected.

Further details on this scheme are provided in an article on the Govsmith website.

Why does this matter to tax law practitioners? Maybe it doesn’t. But in my mind, it’s a useful reminder that federal government employees, including those at IRS with whom we occasionally interact, face different challenges from many of the rest of us.

More importantly, the future of the IRS depends on recruiting qualified professionals to protect the Treasury’s revenue without violating taxpayer rights. The IRS “brain drain” is a real problem. The GAO recently reported that attrition is causing a serious risk to the IRS mission:

IRS officials told GAO that resource constraints and fewer staff with strategic workforce planning skills due to attrition required IRS to largely abandon strategic workforce planning activities. …

IRS staffing has declined each year since 2011, and declines have been uneven across different mission areas. GAO found the reductions have been most significant among those who performed enforcement activities, where staffing declined by around 27 percent (fiscal years 2011 through 2017). IRS attributed staffing declines primarily to a policy decision to strictly limit hiring. Agency officials told GAO that declining staffing was a key contributor in decisions to scale back activities in a number of program and operational areas, particularly in enforcement, where the number of individual returns audited from fiscal years 2011 through 2017 declined by nearly 40 percent.

While reduced budgets and government shutdowns bear most of the responsibility for the IRS brain drain, underfunding the Thrift Savings Plan can only make matters worse. Imagine a Chief Counsel recruiter at a law school campus, trying to answer questions about this make-believe bookkeeping.

On the other hand, the Thrift Savings Plan might be easier to sell because it is guided by BlackRock, one of the world’s largest money managers with nearly $6 trillion of assets under supervision. BlackRock recently disclosed  that its funds have an $11 million stake in Curaleaf Holdings, a Massachusetts-based medical cannabis company.

TSP does not yet have a W fund, for investments in the marijuana industry. But to my knowledge, no one has yet ruled it out.

Meanwhile, I am still wondering whether a record $45 billion in tax refunds was paid out on February 27, as I reported here, because the new debt limit was based on how much the federal government owed on March 1. Did Treasury tell IRS to clean out the bank account because the balance sheet needed to show as little cash as possible?

My suspicions grew when I saw the refund check my clients received that was dated March 1, based on an amended return they had filed in August. The explanation for the refund (“this is what you asked for with the amended return”) was not dated and mailed until March 11. Checks seldom arrive at the same time as the notices that explain them, but a ten-day lag seems unusual.

But I digress. At some point federal employees’ tolerance for TSP shenanigans may grow thin. Congress cannot afford to worsen the already critical brain drain at our nation’s revenue collection agency.

Refund checks, and other “news” inspired by the IRS

We welcome back guest blogger Bob Kamman. Today Bob delves into the “real-time” tax return statistics available during the filing season. Christine

You might remember February 27, 2019 as the day of a House committee hearing in Washington, or a summit meeting in Hanoi. But for millions of Americans, it was Jackpot Wednesday, when the Treasury made, in one day, seventeen percent of the Form 1040-related payments it will issue all filing season.

The news media have been fascinated more than usual this year by IRS refund checks. They simply disregard that in many cases they are not refunds, and in most cases they are not checks.

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So let’s agree that when we read about “refund checks,” we know what the journalists and IRS itself mean are largely electronic deposits to individual bank accounts, often representing credits claimed by people who pay no federal income tax.

For actual taxpayers, 2019 refund amounts may be more or less than those of previous years because of changes both to tax law, and to the way that wage and pension withholding is calculated. There is anecdotal evidence, and nothing else, that many are receiving smaller amounts.

But for those whose annual budget relies on the earned income credit or the child tax credit, the annual concern is whether IRS will question eligibility and sequester payments until it is sure that there is no fraud or mistake involved. That’s why the February 27 mass payout of $45 billion was good news for the poor and for those who help them with tax procedure.

Last filing season, IRS paid out about $265 billion in “refunds” through April 20. IRS will tell you once a week, how many returns it had processed cumulatively through the previous week. But Treasury will tell you by this afternoon, how much tax money it collected and how much in IRS payouts it made yesterday; so far this month; and to date this fiscal year. The data can be found online in the Daily Treasury Statement.

There is a lag between when IRS counts a refund return, and when Treasury makes the payment. That’s why the IRS weekly report for Friday, February 22, showed a huge increase in refunds, while the Treasury report for February 22 still showed a lag. The following week’s $45-billion payout explained the IRS calculation.

Treasury does not report the number of payments, just the amount. So we must rely on IRS for the “average refund” figure, which answers the question: “Of those who get refunds, what is the average amount?” This figure does not attempt to answer the question: “Of those who file returns, how many owe nothing or must pay?”

However, the March 1, 2019 IRS report shows that the number of refunds was 81.6% of the total returns processed. This was down slightly from 82.1% in the comparable report from March 2, 2018. Half a percentage point is not that much unless you filed one of the 650,000 or so returns which that number represents. Elections have been decided by smaller margins.

IRS does not tell us, until much later this year or next, how many returns showed no tax owed. Nor does it report the average payment with balance-due returns. What we do know from the Daily Treasury Statement is how much money was deposited into its account at the Federal Reserve. (This number also includes employment taxes not paid through the “Federal Tax Deposit” system, but those are mostly from small employers.)

Through March 7, the total “individual income and employment taxes, not withheld” for the fiscal year that began October 1 was $125.3 billion. The comparable amount for the previous year was $123.7 billion. But keep in mind that IRS offers a “file now, pay later” option for electronic filers. Taxpayers can request the balance due be withdrawn from their account on a certain date – for example, April 15. Last year, tax returns were due on Tuesday, April 17. The one-day count on that date for this category was $28.1 billion. The next three days, the checks continued falling out of the envelopes: $11.6 billion on Wednesday, $11.8 billion on Thursday, and $15.2 billion on Friday.

While the weekly IRS reports shed little light on collections, they raise a couple of interesting questions about tax administration. For example:

1) Where have all the practitioners gone?

Through March 1, 2019, the returns prepared by tax professionals had dropped by 1.7 million, or 5.8%. Meanwhile, self-prepared returns had increased by about 371,000. Does this mean the new 1040 forms, and higher standard deduction, have made do-it-yourself an option for more people? Are improvements in commercial software responsible? Are more kitchen-table preparers just refusing to sign off on their work because of the Form 8867 “due diligence checklist” interrogatories?

2) Why did direct-deposit become so popular?

Last year, about 84% of refunds were deposited directly to taxpayer accounts. So far this year, the rate is about 93%. Do Americans trust the financial-services industry more, or the Post Office less?

The Daily Treasury Statement provides some interesting information about tax-related issues, as well. For example:

  • Customs “and certain excise taxes” collected for the fiscal year through March 7 were $35.3 billion, up from $20.3 billion for the same period last year. What could the Treasury do with an extra $15 billion? Well, corporation income tax FTD receipts were down from $94.1 billion to $73.5 billion.
  • FTD’s for “withheld income and employment taxes” are holding steady at $1.108 trillion through March 7, about the same as $1.120 trillion last year.
  • The “Treasury Offset Program” collected nearly $3 million in February from tax refunds that would otherwise have been paid to people who owe federal, state or child-support debts. The amount for February 2018 was $2.4 million.
  • Social Security benefit payments increased from $72.35 billion in February 2018 to $76.83 billion in February 2019. Some of that 6.2% growth can be explained by the 2.8% “cost of living adjustment” this year.
  • “Business” tax refunds so far this fiscal year total $28.9 million, and more than half of them were paid by check, not direct deposit. The comparable amount for FY 2018 is $35.4 million.

How reliable are any of these reports? My confidence was somewhat shaken by the Daily Treasury Statement for Friday, March 8, which showed a negative $32 million for “IRS Tax Refunds Individual (EFT).” A footnote explained, “reported as a negative amount due to a return/reversal of $32 million.”

Well, I suppose if some economists can advocate a negative income tax, others can support a negative income tax refund.

The Supreme Court Clears the Way for a State Tax Refund to a Class of Federal Employees

Thanks to Carl Smith for bringing the case of Dawson v. Steager to my attention.  This case was decided by the Supreme Court on February 20 in a unanimous victory for a federal marshal who retired to West Virginia.  Even though the issue in the case concerns a refund of state taxes, it has a procedural aspect and deserves some attention.  I do not know if the decision has implications beyond West Virginia but knowing about the decision will allow you to check to see if any problems continue to exist with the laws in your state. 

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Mr. Dawson spent the bulk of his career as a federal marshal.  After retiring to West Virginia, he noticed that the state had a law that exempted from taxation the pensions of certain law enforcement officials who retired after working for the state of West Virginia.  It’s not clear how he knew about the Supreme Court precedent in this area or maybe he just felt the law was unfair and happened to bring the issue up across the dinner table from a tax lawyer with knowledge of the precedent but his case follows closely behind a Supreme Court case decided three decades ago, Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989). 

 Justice Gorsuch, rendering the opinion for a unanimous court, framed the issue as follows: 

If you spent your career as a state law enforcement officer in West Virginia, you’re likely to be eligible for a generous tax exemption when you retire. But if you served in federal law enforcement, West Virginia will deny you the same benefit. The question we face is whether a State may discriminate against federal retirees in that way. 

The problem for West Virginia is that 30 years ago the Supreme Court faced a very similar issue concerning state employees in Michigan whose pensions were exempted by state statue there and retired federal employees living in Michigan whose pensions were not exempted.  In the Davis case the Supreme Court decided that the state could not exempt the pensions of its employees while taxing the pensions of federal employees because of 4 USC 111.  Describing that statute Justice Gorsuch stated:  

In that statute, the United States has consented to state taxation of the “pay or compensation” of “officer[s] or employee[s] of the United States,” but only if the “taxation does not discriminate against the officer or employee because of the source of the pay or compensation.” §111(a). 

He provided background for the adoption of section 111: 

Section 111 codifies a legal doctrine almost as old as the Nation. In McCulloch v. Maryland, 4 Wheat. 316 (1819), this Court invoked the Constitution’s Supremacy Clause to invalidate Maryland’s effort to levy a tax on the Bank of the United States. Chief Justice Marshall explained that “the power to tax involves the power to destroy,” and he reasoned that if States could tax the Bank they could “defeat” the federal legislative policy establishing it. Id., at 431–432. For the next few decades, this Court interpreted McCulloch “to bar most taxation by one sovereign of the employees of another.” Davis v. Michigan Dept. of Treasury, 489 U. S. 803, 810 (1989). In time, though, the Court softened its stance and upheld neutral income taxes—those that treated federal and state employees with an even hand. See Helvering v. Gerhardt, 304 U. S. 405 (1938); Graves v. New York ex rel. O’Keefe, 306 U. S. 466 (1939). So eventually the intergovernmental tax immunity doctrine came to be understood to bar only discriminatory taxes. It was this understanding that Congress “consciously . . . drew upon” when adopting §111 in 1939. Davis, 489 U. S., at 813. 

In Mr. Dawson’s case the trial court in West Virginia determined that his duties were essentially similar to the duties of the state law enforcement officers whose pensions were exempted.  Based on that determination the trial court held for Mr. Dawson applying the Davis precedent; however, the Supreme Court of West Virginia reversed finding that the state did not intend to discriminate against this class of retired federal employees but only intended to benefit certain state law enforcement retirees.  The Supreme Court was not buying what West Virginia was selling and reversed the decision of the state supreme court.  Read the opinion to see the other arguments made by the state but the Supreme Court rightly dismissed them with little effort.   

I have to think that this decision did not come as a big surprise in West Virginia.  It’s possible that other federal law enforcement officers who have retired to West Virginia will seek to show that their duties paralleled the duties of the individuals exempted by the state.  I do not know if the fight will now morph to see how close others may be to federal marshals or if the state will amend its statute to eliminate the exemption altogether.  Given the small number of individuals covered here and the types of work performed by those individuals, I doubt that the state will eliminate the exemption just because of this opinion. 

So, Mr. Dawson is going to get a refund of taxes he has paid; however, the procedural issue facing him and others who are similarly situated is how far back can he go?  In the Davis case federal retirees could not obtain the state taxes they had paid for every year but were limited to the years for which the refund statute remained open.  So, retired federal law enforcement officials in West Virginia who were not already clued into this case need to file their refund claims ASAP in order to preserve the right to obtain as many years of refunds as possible. 

After the Davis case came out, and not before it because his son was not paying attention to the issue, my father, a retired federal employee living in Virginia filed claims for all open years and eventually received a nice refund.  It took several years before he received his refund because of the high number of federal employees in Virginia and the strong efforts by Virginia to obtain a ruling from the Supreme Court that the Davis case did not apply in Virginia for a variety of reasons similar in spirit to the arguments made by West Virginia in the Dawson case. 

Information Letter Shows Need for Broader Guidance on Difficulty of Care Exclusion

At the Low-Income Taxpayer Clinic Grantee conference in December, I presented on the tax treatment of state payments for in-home care, alongside Daniel Kempland of Washington University and Sarah Lora of Legal Aid Services of Oregon. The topic will also be discussed at the Pro Bono and Tax Clinics Committee meeting during the ABA Tax Section’s May Meeting. So a related item in February 5th’s Tax Notes caught my eye. IRS Information Letter 2018-0034 responds to questions about “difficulty of care” payments under section 131(c). The letter must have gotten caught by the shutdown on its way out the door; its official release date is 12/28/18. 

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Difficulty of Care 

Section 131 promotes community care for severely disabled adults by excluding certain state payments from caregivers’ gross income. Specifically, section 131 excludes from gross income any “qualified foster care payments” and “difficulty of care” payments received by a foster care provider from a state or from a qualified foster care placement agency.  

There are multiple tax questions that arise in this context. When in-home care is provided to adults with disabilities, one question is whether the “difficulty of care” exclusion applies to any of the caregiver’s income. Difficulty of care payments are defined in 131(c) as

payments to individuals which are not [qualified foster care payments], and which— 

(A) are compensation for providing the additional care of a qualified foster individual which is— 

(i) required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and 

(ii) provided in the home of the foster care provider, and 

(B) are designated by the payor as [difficulty of care payments] 

In health care, community or home care is contrasted with institutional care, e.g. in a nursing home. Government programs that pay for care at home allow people with disabilities to continue living in their communities, where they may enjoy greater “family relations, social contacts, work options, economic independence, educational advancement, and cultural enrichment.” (Olmstead v. L.C., 527 U.S. 581 (1999)) 

For caregivers who are family members or low-wage workers, the gross income exclusion can make a significant difference by freeing up funds for other living expenses. (At certain income levels caregivers may be better off with taxable income for the Earned Income Credit; the tax impact is not uniform.) Also, under the Affordable Care Act adults can qualify for Medicaid based on their modified AGI. Sec. 131 is not one of the modifications, so the difficulty of care exclusion gives some caregivers access to nearly free health care. This is a big deal. 

In several cases in the 1990s and 2000s, the Service challenged the applicability of section 131 to family members who cared for disabled relatives. The general theory was that a biological parent cannot be a “foster parent” within the meaning of the statute. However, in 2014 it reversed this position in Notice 2014-7. For unclear reasons, Notice 2014-7 only addresses one specific type of Medicaid waiver program. It also does not address FICA or FUTA treatment of qualifying payments. Since then, the IRS has not issued any regulations or other guidance under section 131 besides website FAQ and a PLR.  

Unfortunately, the wide variety of state programs, a lack of general reliable guidance from the IRS, and differing levels of state responsiveness to caregiver groups have led to disparate treatment of caregivers’ income depending on where they live. There is much more to say on this topic. For more on Notice 2014-7 and the FAQ, the National Health Law Program has an excellent summary written for health care advocates.

Information Letter 2018-0034  

On September 25, 2018, a requester wrote to the IRS on behalf of  

business clients who provide “Alzheimer, dementia, adult and family care and mental health and residential support services.” Specifically, you asked about the tax treatment of “social security personal care services funding” and “Medicaid waiver payments” received by these clients under a program by the “Division of Social Services via a network of oversight groups.” 

The IRS’s answer is quite short.

Notice 2014-7 specifically addresses payments made under § 1915(c) of the Social Security Act (Act), relating to Home and Community-Based Services waivers, and does not specifically address the tax treatment of other state Medicaid programs. Whether the Internal Revenue Service (IRS) will treat payments received under a state program other than a program under of § 1915(c) of the Act as difficulty of care payments depends on the nature of the payments and the purpose and design of the program. See Q&A1 at www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income. 

If your clients would like the IRS to address whether payments described in your letter or other similar payments are excludible from gross income under § 131 of the Code, they may request a private letter ruling. Revenue Procedure 2018-1, 2018-1 I.R.B. 1, (and the first revenue procedure of each year), provides the procedures and fees for a taxpayer to request a private letter ruling. 

This response is likely frustrating for the requester, but it was to be expected.

An Information Letter “provides general statements of well-defined law without applying them to a specific set of facts.” There is no user fee to request one, but the advice given is not binding on the IRS, so it does not protect the taxpayer from audit or penalty. For binding and reliable advice, taxpayers must pay a hefty user fee to get a Private Letter Ruling (PLR). The parties who requested Information Letter 2018-0034 would likely need to pay $30,000 if they wanted a PLR. There are reduced fees for taxpayers with gross income less than $250,000 (a fee of $2,800) and for taxpayers with gross income less than $1 million (a fee of $7,600). One can understand why the requesters tried the free option first.  

In the wake of Notice 2014-7, the State of California paid for a PLR (PLR-127776-15), and it now has guidance on the applicability of section 131 to its four programs that support in-home care for disabled adults. But not every state or company can afford $30,000. For many individual caregivers, the reduced fee of $2,800 may as well be $30,000. Also, technically only the requester can rely on a PLR. The letter to the State of California posted by the IRS is redacted so the public cannot see which specific programs were at issue. If the state had not posted an unredacted version, California families would not be able to tell whether the guidance applied to their program.

The analysis in California’s PLR has uniform application to thousands of individual taxpayers. Yet in order to rely on it, each caregiver needs to request their own PLR. This is an inefficient system; the PLR is simply not the right tool for issues that have broad, relatively uniform application to third party taxpayers.

It is not clear why the 2014 guidance was so narrow in scope. While caregiver programs do vary by state, the IRS has identified principles in its FAQ that could provide a basis for broad national guidance. I hope the IRS will develop a regulation project or a broader guidance project on the difficulty of care exclusion. IRS and Treasury Department resources are stretched thin and have been for many years. However, the government should prioritize guidance for issues that have a deep impact on thousands of low-income taxpayers and that are not suitable for individual guidance through the PLR process.