Notes from Last Week’s ABA Tax Section Meeting in Atlanta

Christine, Les and I attended the ABA Tax Section meeting in Atlanta from October 4-6. We did a little speaking and a lot of listening. One of the benefits of the meeting is to hear the government speakers to obtain insights on their world. Here is a short post coming from a meeting in which government speakers provided updates.

Comments from Chief Judge of the Tax Court

The Tax Court is developing a new case management system and has signed a contract with the vendor to build the system. No date on when it might be launched.

The Tax Court currently has 175 cases with over $10 million in dispute

The ABA Tax Section submitted a proposal to the Tax Court to allow limited scope representation. The Chief Judge has submitted the proposal to the Court’s Rules Committee, Pro Bono Committee and Admissions Committee for review and a report back. [These comments resulted from remarks by Chief Special Trial Judge Lewis Carluzzo at the Tax Court’s judicial conference back in March of this year. Note that PT’s own Christine Speidel was one of the primary persons responsible for the comment. The ABA comment recommends that the Tax Court adopt limited practice rules especially to cover lawyers assisting with calendar call. This is a positive development that has been discussed for many years.]

There were over 27,000 cases filed in the Tax Court last year and over 29,000 cases closed.

Comments from the Office of Chief Counsel

The comments focused on the implementation of IRC 7345 and the passport revocation program. As of August 31, 2018, 272,656 taxpayers have been certified by the IRS to the State Department. Of those taxpayers, slightly over 17,000 have been decertified or reversed.

A taxpayer cannot just pay the debt under $51,000 and have the passport revocation lifted. Once a taxpayer is selected and referred, full payment must be made to have the IRS decertify the debt.

The Tax Court has chosen to use the letter “P” after the docket number to indicate that a case is a passport case.

The Tax Court is not the exclusive forum for contesting the passport revocation. Chief Counsel takes the position that: 1) a taxpayer cannot raise the merits of the underlying liability in the passport revocation case; 2) an equivalent hearing does not stop a passport revocation from moving forward the same way a CDP hearing would; 3) the scope of review is the administrative record; 4) the standard of review is abuse of discretion; 5) Chief Counsel will not refer these cases to Appeals after the filing of a Tax Court petition; and 6) the appellate venue in these cases is the DC Circuit. The Chief Counsel initial positions on passport revocation can be found in CC-2018-5.

It is not clear how to figure out what the State Department is doing with the information that the IRS sends over. The taxpayer generally will not hear from the State Department unless it revokes the passport or rejects an application for a passport. If a taxpayer applies and the State Department rejects the application because of an IRS certification, the State Department will hold open the application for 90 days for the individual to get the IRS to withdraw the referral. Thereafter, the individual will need to reapply for the passport.

The IRS has no control over what the State Department does with the referrals. It is not clear that an individual has a path to talk to someone in the State Department. It has not yet published procedures for handling these cases. The State Department is held harmless by the statute for the actions it takes (or fails to take) in these cases. The State Department may issue a passport for humanitarian or emergency reasons but does not have a requirement to do so.

Comments from DOJ, Tax Division

It is focusing on three matters this year:

  • Offshore
  • Return Preparer Injunctions – it has brought 40 complaints so far this year
  • Employment taxes – it has obtain 100 permanent injunctions against individuals and businesses pyramiding liability since 2016

Comments from Treasury

It is working hard to publish regulations as quickly as possible. It is not giving commenters additional time to submit comments generally because of the push to get out the regulations. The goal is to publish all of the regulations within 18 months of enactment so that the government gets the benefit of the relation back to the date of enactment rule.

Unsuccessful Constitutional Challenges to the Collection Treaty Provision in the Tax Treaty between Canada and the United States

This summer I visited Canada twice, Montreal and Toronto. Canada and the United States have long seemed like best friends. I wondered if I would be treated any differently now that our government policies do not seem to treat Canada as our best friend. Happy to report the Canadians remain as friendly as ever on the personal level. They do, however, want to collect the taxes due to them and that results in the case of Retfalvi v. United States, No. 5:17-cv-00468 (E.D.N.C. Aug., 15, 2018).

I have written before about the collection language that exists in two of the five tax treaties that have this special language, France and Denmark. Canada, along with the Netherlands and Sweden, is one of the other three countries that have the collection provision in their tax treaty with the United States. The Canadians invoked the treaty to ask the Unites States, specifically the IRS, to collect some unpaid Canadian taxes from an individual who at one point was a Canadian citizen but who had become a citizen of the United States. The taxpayer raised a number of constitutional arguments regarding the treaty to collect taxes. Most individuals raising constitutional arguments bring the phrase ‘tax protestor’ to mind but these were legitimate and well-argued constitutional arguments. In the end, the taxpayer lost but we gain insight regarding the constitutional underpinnings of the collection treaty provisions.

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Mr. Retfalvi moved from Hungary to Canada and became a citizen in 1993. He later moved to the United States and obtained permanent resident status in 2005 followed by citizenship in 2010. In 2006 he sold a pair of condominiums he had purchased earlier in Vancouver before he knew he was moving to the United States. He and his wife reported the sales on their Canadian tax returns; however, the returns were selected for audit. The audit resulted in a proposed increase in tax of over $100,000. He did not petition the Canadian Tax Court to fight the assessment of this additional tax. After the assessment became final, Canada invoked the treaty to secure the assistance of the IRS in collecting the taxes.

As the treaty requires, the IRS sprang into action. In November of 2015 it sent to Mr. Retfalvi a “Final Notice – Notice of Intent to Levy” giving him a chance to pay the liability before the IRS took administrative collection action against him. He objected to the notice of intent to levy and let the IRS know that he did not owe the tax. The IRS let him know that he had no ability to contest the tax in the United States. He filed a Form 12153 seeking a Collection Due Process (CDP) or equivalent hearing. The IRS let him know that he could not use the CDP process but could seek a CAP appeal. The IRS subsequently denied his CAP appeal because he tried to use the CAP process to challenge the underlying liability.

After failing to obtain a CDP hearing and losing the CAP appeal, Mr. Retfalvi filed suit in the United States District Court for the Eastern District of North Carolina seeking declaratory and injunctive relief from the collection action. The IRS moved to dismiss for lack of subject matter jurisdiction and failure to state a claim. The court dismissed the case citing the anti-injunction statute. Mr. Retfalvi then paid the tax and filed a suit for refund. The IRS rejected his claim for refund and he filed this suit because of alleged constitutional infirmities with the collection treaty provisions. He cited to nine specific constitutional problems with the treaty:

  • Article 26A [the collection provision of the treaty] violates the Origination Clause because it is a bill to raise revenue that did not originate in the House of Representatives:
  • Article 26A is invalid because it is not self-executing;
  • Article 26A violates the Taxing Clause because Congress has the exclusive authority to lay and collect taxes;
  • Article 26A violates the Taxing Clause because Congress cannot use its taxing power to levy or collect taxes of a foreign country;
  • Article 26A violates the Taxing Clause because it purports to amend the Internal Revenue Code;
  • The IRS is not authorized to assess and collect taxes imposed by Canadian laws;
  • Article 26A denies taxpayers due process;
  • Article 26A denies taxpayer equal protection of the law that is available to taxpayers who have had taxes assessed under the Internal Revenue Code; and
  • Article 26A creates an impermissible sub-classification of United States taxpayers.

The court addressed each of the nine alleged grounds for striking the treaty provision. It found as to each that a basis existed for the provision to be deemed constitutional. As a result, it struck his refund suit. I do not know if he has the ability to bring a refund suit in Canada but that is where he must go next if he wants the return of his money.

I am not going to go through each of the separate reasons that the court found the treaty provision constitutional but anyone with an interest in treaties and in constitutional law may find the opinion interesting. It provides a fair amount of detail with respect to each of the claimed bases for unconstitutionality including case citations and, in some instances, analysis of the treaty language as it relates to the constitution. The case also provides a good discussion of what is a tax bill that must originate in the House of Representatives and what is not.

This case continues the general theme of the collection treaty cases both here and in the other treaty countries. That theme, succinctly stated, is that if you want relief you must seek it in the country in which the liability arose. The country to whom the liability is sent pursuant to the treaty provision simply goes out and collects the money with basically no questions asked about the correctness of its origins.

 

Recognizing Pat Mullarkey

This afternoon in the Great Hall of the Department of Justice people will gather to recognize and celebrate Pat Mullarkey who has served for almost four decades as the Chief of the Northern Trial Section of the Civil Section of the Tax Division.  He retires after working over 52 years at the Department of Justice.  I had the pleasure to work with Pat on several occasions.  He is a great lawyer and a great section chief who has mentored hundreds of trial lawyers over the course of his career.  You can find an interview of Pat about his career here on PT. More recently Pat was interviewed by Paul Merrion for MLex US Tax Watch (Lexis subscription required).

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I reached out to one of his assistants, Henry Riordan, who provided me with the following details about about Pat’s career:

In 1966, Mr. Mullarkey joined the Tax Division as a civil trial attorney.  In recognition of his exceptional talent, he was promoted to an Assistant Chief for the Civil Trial Section’s Western Region in 1977, and then to a Special Litigation Counsel position in early 1979.  Mr. Mullarkey became the Chief of the Civil Trial Section’s Northern Region in July of 1979 and has served continuously in that capacity since his appointment, except for two periods, one for six months and the other for two years, when he served as the Tax Division’s Acting Deputy Assistant Attorney General for Civil Litigation.

Mr. Mullarkey is a 1962 graduate of Marquette University with a B.S. in Accounting.  He received his J.D. from the Georgetown University Law Center in 1965, and an LL.M. in Taxation from that same institution in 1967.  After law school, Mr. Mullarkey was a judicial law clerk for a federal district court judge in the District of Columbia.

Mr. Mullarkey is a legend in the Department, as well as the federal tax bar.  He has been the recipient of a number of governmental awards including the President’s Meritorious Executive Award (twice), the Attorney General’s John Marshal Award for Outstanding Legal Achievement and, most recently, the Attorney General’s Mary C. Lawton Lifetime Service Award. Mr. Mullarkey has been a member of the J. Edgar Murdock Inns of Court of the Tax Court for thirty years.  He has served as an instructor at the Department’s National Advocacy Center and bankruptcy schools sponsored by the Office of Chief Counsel, Internal Revenue Service.  He has been a panelist at tax law conferences sponsored by the Federal Bar Association, sessions presented by the Tax Section of the American Bar Association and programs presented by other groups.  In February 2018, he received the Kenneth H. Liles Award from the Taxation Section of the Federal Bar Association.

Mr. Mullarkey has counseled many attorneys and is well known for his intellect and common sense.  He has supervised and mentored generations of attorneys, who have uniformly recognized their tutelage as the best experience in their careers.  Mr. Mullarkey’s enthusiasm for tax litigation has been infectious and his expertise and institutional knowledge will be greatly missed.

Section Chiefs in the Civil Trial Section play a critical role in developing tax litigation.  Because they serve as the lawyers for the IRS in district and bankruptcy courts, they interact regularly with the attorneys in Chief Counsel’s office where I worked.  Pat worked closely with the Chief Counsel attorneys served by the Northern Trial Section which primarily handles cases in the Northeast and he also worked closely with the Procedure and Administration Division of the National Office of Chief Counsel, IRS.  I reached out to Drita Tunuzi, currently the Deputy Chief Counsel (Operations) who previously served as the head of Procedure and Administration and who started her career in an office in the Northeast.  She had this to say about Pat:

Pat Mullarkey has seen many generations of DOJ and Chief Counsel lawyers over his years and they are all better for having worked for and with him.  He has provided outstanding service and wise counsel to the IRS over his career.  We wish him well in his retirement. 

I also received these comments made by John DiCicco, a colleague of Pat’s at DOJ and a former Acting Assistant Attorney General of the Tax Division:

I am not going to spend time telling you what a great lawyer Pat is.  That is indisputable.  Suffice it to say I learned more from Pat than any other lawyer I worked with. 

Instead, I want to talk about what a fine man Pat is.                 

I relied on Pat from the time I started working in the Division in 1974.  He always patiently answered my questions no matter how stupid they were.  He did the same for all the other lawyers who sought him out.  And seek him out they did.  No matter how busy he was, he would give his time to help the rest of us.               

Inclusive- I remember when I first started with the Division and Pat was a Senior Trial Attorney.  Every morning he would walk by and ask lawyers, especially the new lawyers if they wanted to go next door for breakfast or for coffee.  It made all of us feel we were part of a team working together toward a common goal.  Pat really fostered a sense of camaraderie.  

As an aside, unfortunately, the only place around that served breakfast was something called the “Kitchateria”.  How the Board of Health allowed that place to stay open was always a source of wonderment.   But we went with Pat. Not only to learn about our cases, but to learn about each other.  He made us feel we were working with top people, and maybe more importantly, that the work we did was important.  (Too, we always marveled at how Pat could hold down the “Kitchateria” food.) 

Pat was unceasingly fair and loyal.  He cared about all of his staff, not just his lawyers. And he cared about them not just professionally but personally. He always stood up for and supported his troops.  I remember once he even quit drinking a brand of beer because I had a case (no pun intended) with the Brewery and was always complaining about that piece of litigation. (Of course that I would complain about something was something of a rarity.) 

Pat was one of the four Division employees that I worked with who I always thought were irreplaceable—Pat, Steve Csontos, Bob Markham and Tommy Thompson.  The rest of us were fungible, but not Pat. 

Pat helped me immeasurably when I was the acting AAG. He agreed to serve as my deputy.  I knew that being a deputy was not his first choice (or second choice for that matter), and that he really loved being a section chief. He had little interest in the deputy position, else he would have had it years before.  Nonetheless, he willingly agreed to help, and as always, his help was superb. 

In sum, I owe a debt of deep gratitude for all Pat did for me.  But more importantly, the American people owe him a huge debt of gratitude.  It is outstanding, selfless and unstinting civil servants like Pat, who make our Government function.        

Pat, thank you for all that you have done, and all the best in your new “career”.  I hope it lasts as long as last one. 

For over half a century Pat has impacted tax procedure because of the large role he has played in shaping the litigation strategies at the Tax Division.  The next chief of his section has very large shoes to fill. 

 

 

 

Temple and Gonzaga Seek Tax Clinicians

Professor Alice Abreu from Temple Beasley School of Law has passed on the news that Temple has an opening for a clinic position. There is no subject matter limitation; the position will be part of the Sheller Center for Social Justice, and the Committee is  interested in considering applications from individuals who propose to establish and run a tax clinic. More information about the Temple position can be found here.

Professor Ann Murphy from Gonzaga also has passed on information about an opening in its existing tax clinic. Gonzaga seeks applicants for a three-quarter-time Lecturer in its Federal Tax Clinic, with flexibility to serve in other areas as needed by the clinical program. More information about the Gonzaga position can be found here.

As the leaves start to fall here in the northeast it is hard to believe that we are now into the third decade of the federally funded low income taxpayer clinic program. For those wanting context Keith wrote a terrific article about the history of tax clinics; a recent blog post from the NTA touts the 20th anniversary of federal matching funding, puts the program in perspective and highlights some recent tax clinic successes.

Villanova Seeks to Hire Faculty Director of Graduate Tax Program

Villanova is seeking to fill a faculty position and is in the process of a national search for a new Faculty Director of the Graduate Tax Program. The Graduate Tax Program is jointly run by the Law School and School of Business, and offers a Masters of Laws for lawyers and Masters in Tax for accountants.

The program is innovative and includes an extensive suite of online classes and classes on the ground. Villanova is looking for an experienced practitioner with teaching experience and management skills.

More information about the position as well as information on how to apply can be found here.

Some Tax Court Geography

We welcome back as a guest poster frequent commenter Bob Kamman.  Those of you who are regular readers of the blog know that Bob has a sharp eye and an inquisitive mind. He saw in a designated order post the statement by the National Taxpayer Advocate that her office is looking to add a tax clinic to Hawaii. Drawn to the beautiful islands, Bob began to do his research about the tax issues he might face should he seek to establish a low income taxpayer clinic (LITC) in that state. I think he is sharing the information in case there are other readers who might also be interested. As you can see from our prior post, Hawaii is not the only state looking for an LITC. Keith

The seas are infested with sharks. The land is scorched by flowing lava. It is no place for a young person. But volunteers are needed. So in the twilight of my tax years, I could accept the risks. The National Taxpayer Advocate has asked for help with establishing a low-income taxpayer clinic in Hawaii, and I am ready. I understand grant money is available.

First, of course, I checked out whether there is really a need for tax help in the middle of the South Pacific. Does federal enforcement of tax laws really extend that far?

One measure of need (and there are probably better ones) is the number of Tax Court petitions filed from a place. The Tax Court website provides an easy, although somewhat inaccurate count. A “Docket Inquiry” yields the number of petitioners from each state. Of course, in many cases there are two names for each petition because of joint returns, or multiple petitions for the same issue, if partnerships and their members are counted.

Yet you can imagine yourself at the Tax Court door, watching about 100 people file their petitions each business day (mostly, by mail or delivery service), and asking, “Where do they all come from?”
And it is of some interest, at least to me, if there are geographical differences in the origins of these tax disputes.

So here are the results of my research. I started with the 2017 rank by population of each state, along with the District of Columbia and Puerto Rico. And then I found how many petitioners came from each location, so far this year.

This method works for most states, but not the ten largest by petitioner count, because the Tax Court docket inquiry function lists only the first 500. So those were ranked according to earliest date of the first 500 petitions.

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What stands out from this table is that nothing much stands out. With few exceptions, the results are about what you would expect.

Some states rank five or six places lower in petitioner count than in population rank. It is not unreasonable to assume that compliance levels are higher in them: Kentucky, Alabama, North Carolina, West Virginia, Indiana, Nebraska, Wisconsin and Maine. Or, you could assume that a higher percentage of rural residents discourages trips to Tax Court trial sites.

Delaware ranks five places higher, and Maryland eight places higher, in petitioners compared to population. Delaware is home to many corporations, but most file from some other state. The IRS Baltimore District used to administer Washington, D.C., also. Maybe the IRS staffing in Maryland is still weighted more heavily than needed.

And then there are the four contiguous Western states where petitioner rank significantly exceeds population rank: Utah, Nevada, Colorado and Arizona. What do they have in common? A low percentage of rural residents. Someone with more access to data than I have, should research what percentage of Tax Court cases are filed by taxpayers who live within a two-hour drive of the courthouse.

Of course, for most of Hawaii trial attendance requires a flight to Oahu. But there are still more petitioners in Hawaii, than in twelve other states; Washington, D.C.; and our Atlantic islands of Puerto Rico. Help is definitely needed. I am just waiting for a call.

Celebrating the 5th Anniversary of Procedurally Taxing

Today marks the 5th Anniversary of the first Procedurally Taxing post. As we have mentioned before, the blog is the brainchild of Les. He recruited Steve and me to join him in this endeavor as he recruited us to join him in working on the “IRS Practice and Procedure” treatise. When we met to discuss the blog prior to the first post, we anticipated that we might post once or twice a week. Before the end of the first year, we were posting almost daily, and we have tried to keep up the daily posting practice though there are days when we do not get our act together. Regular readers know our blog does not run like clockwork but rather operates based on the varying schedules of those of us trying to pull it together.

In the first post Welcome to Procedurally Taxing! Les wrote the following:

Welcome to Procedurally Taxing. Our blog will be a place where you can learn about important developments in federal tax procedure and tax administration, as well as occasional musings on general items that interest us. We started this blog because we want to be a site that readers can trust to learn about important developments. In addition, Keith, Steve and I are all involved in editing and rewriting books that deal with tax procedure; we are constantly reading and thinking about cases and administrative developments that may not jump out at the reader. We will highlight some of these less obvious developments and provide analysis and context reflective of our many years of practice in the area.

The most amazing stats of our first five years involve you. We have 1841 email subscribers to the blog. It has been 1825 days since we started. We have maintained a pace of approximately one additional email subscriber per day since the beginning of the blog. We know that readers access the blog through media other than email but the one additional subscriber per day stat has been a constant. You have accessed the web site slightly over 750,000 times since we started.

Some other stats about the blog:

– 373 guest posts written on a wide variety of topics which greatly enriched the blog

– 332 posts by Les, 372 by Keith, 164 by Stephen and 3 by Christine (plus 10 guest posts)

– 96 posts by frequent guest blogger Carl Smith

– 392 comments by frequent commenter Bob Kamman

In addition to bringing on Christine as a regular contributor, we have added regular bloggers Samantha Galvin, William Schmidt, Caleb Smith and Patrick Thomas, who comment on the Tax Court’s designated orders.

We hope that we have met our stated goal to keep you current on important developments in federal tax procedure and administration. We also have reported on less obvious developments and we have definitely provided our views on the developments.

As we mark this anniversary we invite you to comment on the blog – the good, the bad and the ugly. Tell us about anything that has made the blog useful or not useful to you and tell us how we can improve it going forward. Thanks for being our loyal readers. Our hats are off to you.

Eleventh Circuit Affirms Disgorgement in Tax Return Preparer Case

We welcome first time guest blogger Matthew Mueller. Matt practices in Florida representing individuals with tax issues and white collar crime issues. Prior to moving to private practice, he had the perfect background for the work he currently does. He represented the IRS in criminal prosecutions at the Department of Justice Tax Division, Criminal Section and then he moved to the United States Attorney’s Office in Tampa. He brings to this discussion of disgorgement over a decade of experience with these types of cases both inside and outside the government. Keith

As this blog has covered previously, the Department of Justice Tax Division has increasingly sought disgorgement from tax return preparers in civil injunction cases. This growing trend has been on display nationwide, but especially in the Middle and Southern Districts of Florida. While the government experienced some initial growing pains in court—see this prior post discussing an MDFL case in which the district court denied disgorgement—the effort to disgorge return preparers from their profits has continued. Last month, the Eleventh Circuit Court of Appeals issued an unpublished opinion in United States v. Stinson affirming the district court’s judgment entering a permanent injunction against the return preparer and affirming a $949,952.47 disgorgement order.   Armed with favorable appellate precedent, return preparers and owners of tax preparation businesses should expect to see the government continue this trend.

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What is disgorgement?

Disgorgement is an equitable remedy employed by courts to prevent unjust enrichment. Case law defining the contours of disgorgement has largely evolved out of civil enforcement actions brought on behalf of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC). Relying on precedent from the securities fraud context, the Eleventh Circuit in Stinson described disgorgement as follows:

“Disgorgement is an equitable remedy intended to prevent unjust enrichment.” S.E.C. v. Levin, 849 F.3d 995, 1006 (11th Cir. 2017) (quoting S.E.C. v. Monterosso, 756 F.3d 1326, 1337 (11th Cir. 2014)). To be entitled to disgorgement, the Government need only produce a reasonable approximation of the defendant’s ill-gotten gains. See S.E.C. v. Calvo, 378 F.3d 1211, 1217 (11th Cir. 2004). “Exactitude is not a requirement; so long as the measure of disgorgement is reasonable, any risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.” Id. (quotation marks omitted and alterations adopted).

United States v. Stinson, 2018 WL 2026928, at *6 (11th Cir. May 1, 2018). The Stinson Court affirmed that disgorgement was an available remedy under Title 26, United States Code, Section 7402(a).

Having established the authority to disgorge profits from a return preparer, the Court in Stinson went on to discuss the boundaries of this remedy in, at times, conflicting terms. The Court first points out that disgorgement is limited to the amount the defendant “profited from his wrongdoing.” Id. At the same time, the Court also asserts that courts have accepted gross receipts as a reasonable approximation of disgorgement “in cases involving the operation of a fraudulent business.” Id. The theory being that “wrongdoers are not entitled to deduct costs associated with committing their illegal acts.” Id. While gross revenue in a wholly fraudulent business might be a reasonable approximation of ill-gotten gains or profit, the issue is more complicated when applied to businesses that engage in legitimate business activity in conjunction with the alleged instances of fraud. In those instances, the government must show a link between the disgorgement amount they seek and the alleged fraudulent transactions.

Another outer boundary applicable to disgorgement is the five year statute of limitations found at Title 28, United States Code, Section 2462 for “an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” In 2017, the Supreme Court rejected the SEC’s argument that there was no statute of limitations for disgorgement in securities fraud cases. Kokesh v. S.E.C., 137 S.Ct. 1635, 1645 (2017). In applying the five-year statute of limitations in Kokesh, the Court stressed that disgorgement “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.” Id. at 1644. While the Court was addressing disgorgement in SEC cases in Kokesh, the rationale extends to disgorgement sought in tax preparer injunction cases in all significant respects.

How does the government prove disgorgement?

As the government has increasingly sought disgorgement in tax return preparer cases, district courts have predictably undertaken a highly fact-intensive inquiry into the amount of disgorgement sought. As a result, in United States v. Mesadieu the district court refused to order disgorgement because the government failed differentiate between compliant and noncompliant returns and asked the court to extrapolate from one tax year and one geographical area. 180 F.Supp.3d 1113 (M.D. Fla. 2016). Yet in Stinson, the very same district court judge in Orlando awarded $949,952.47 out of the greater than $1.5 Million sought by the government at trial. The trial in Stinson spanned six days and included testimony by more than 15 taxpayers and deposition testimony by 41 witnesses including taxpayers. That disgorgement figure included so-called “Category 1” calculations based on 1,861 returns containing unreimbursed business expenses on Schedule A. The total disgorgement amount also included “Category 2” calculations based on returns prepared by Stinson himself, as opposed to his employees. The Eleventh Circuit found these calculations reasonable and supported by the record.

The Eleventh Circuit also disposed of Stinson’s argument that disgorgement could only include fees from tax returns specifically proven to be false returns. The Court invoked as an analogy the United States Sentencing Guidelines–for the proposition that only a reasonable estimate was required:

Although this was a civil matter, in the analogous criminal context, the U.S. Sentencing Guidelines “do not require that the sentencing court calculate the amount of loss with certainty or precision … [but only] a reasonable estimate based on the available facts.” United States v. Bryant, 128 F.3d 74, 75-76 (2d Cir. 1997). As we have held, a trial court may extrapolate from available evidence, and such extrapolation may occur without interviewing every customer and preparer for every allegedly false or fraudulent return. See United States v. Barber, 591 Fed.Appx. 809, 823-24 (11th Cir. 2014).

Clearly, the government’s ability to prove disgorgement in a given case will depend on its ability to demonstrate patterns and to persuade the court to make reasonable extrapolations from known samples.

Conclusion

In addition to defending against possible injunctions, and criminal charges in select cases, tax return preparers will have to continue to contend with disgorgement for the foreseeable future. The Department of Justice undoubtedly hopes the pain of separating preparers from their profits will serve as an additional deterrent against business practices that do not otherwise appear to be on the wane. Restitution is available as a remedy in criminal preparer prosecutions, but even that has posed some problems for the DOJ and IRS, see here, for example. In the meantime, practitioners who represent return preparation businesses and their owners can learn from cases like Stinson and the more developed body of law in the securities fraud context for guidance on how disgorgement should and should not be computed.