Court Sentences Kroupa; NTA On Appeals’ Changes; Tax Reform Still Percolating

Kroupa Sentenced

Earlier this week Keith discussed the differing views that former Tax Court Judge Kroupa and the government had on sentencing. Yesterday the court, agreeing with the government, sentenced former Judge Kroupa to 34 months. Her ex-husband received 20 months. The Minnesota Lawyer recounts the tale; for those interested our prior posts link to the underlying documents in the case.


NTA Blogs on Appeals’ Changes

I am a keen reader of what the National Taxpayer Advocate writes; her take on tax administration often offers both an insider and outsider perspective. Her recent blog post on Appeals’ changes in bringing in Compliance and Counsel to Appeals conferences does just that; she appreciates what motivated Appeals to make the changes, and then discusses and reflects on why practitioners, such as the ABA Tax Section, have raised concerns. I recommend a full read of this post but this snapshot shows some of the issues she has with the new procedures:

The new approaches being put into place by Appeals make it appear as though Appeals no longer trusts its own Hearing Officers and that these Hearing Officers require the guidance and oversight of Counsel and Compliance to reach the correct determinations. As a former practitioner, I would think long and hard before bringing a case to Appeals under these new rules.

Tax Reform on the Horizon (and Some Thoughts on Tax Administration)

There is lots of talk this week on the Senate’s proposed health care legislation. On a separate legislative track is deeper tax reform for business and individual taxpayers. On Procedurally Taxing we steer clear from most of the big macro policy issues underlying the tax reform policy choices. We have, however, noted that many reform proposals do implicate key issues of tax administration. For example, last year Keith discussed the House Blueprint for tax reform and its proposal to add a new small claims court to hear tax cases.

The other day Speaker Ryan offered his tax reform pitch and assurance that reform will happen in 2017 as part of a talk he gave to the National Association of Manufacturers. Now, I have scratched my head thinking about border adjustability and contemplated the possible ways that service providers may try to shift income into pass through entities in light of some of the specific proposals that many are kicking around. But my ears perked up when I heard the Speaker justify, at least in part, individual tax reform on the difficulties Americans face when they file their tax returns:

Look at what happens during tax season. I could describe the complexity of the code all day, but what really defines our tax code is that sense of dread that you feel. You know that feeling?

You have to navigate long, complicated forms to file your returns. You need to wade through a seemingly endless amount of deductions and credits, each with its own rules and eligibility requirements.

And then, after you tally up those deductions, you are placed in up to seven different federal tax brackets based on your income level.

And at the end you hope—I mean really hope—that you do not owe a bunch this year. You hope, because you do not really know ahead of time. How could you? This whole system is too confusing, and just too darn expensive.

The solution, according to Ryan is to “start over.”

First, we will eliminate harmful, burdensome taxes including the death tax and Alternative Minimum Tax.

Next, we will clear out special interest carve outs and excessive deductions, and focus on keeping those that make the most sense: home ownership, charitable giving, and retirement savings.

We will consolidate the existing seven brackets into three, double the standard deduction, and simplify things to the point that you can do your taxes on a form the size of a postcard. Wouldn’t that be nice?

And finally—and most importantly—we will use the savings from eliminating these loopholes to lower tax rates.

Let me say that again: We are going to cut taxes

I am intrigued by the Speaker’s reference to the way that Americans meet their annual tax return obligations. A brief article  from Bloomberg earlier this year estimates that only 5 million out of the 165 million or so individual returns are done manually.The overwhelming majority of Americans today do not wade through IRS forms. Instead, they answer user friendly prompts generated by increasingly freely provided software; those that do not use a DIY product either pay a preparer or use free preparers at VITA or TCE sites.

The Speaker is thinking about taxpayer burden using a 20th century model; fewer and fewer taxpayers actually work with an actual IRS form. The bigger point the Speaker makes though I think is that despite the decreasing mental burden on Americans in actually filing their tax returns, many Americans are clueless going into filing season when it comes to understanding their individual and family tax situation. Many Americans, especially lower and moderate income Americans, do not grasp the hodgepodge of credits and deductions that Congress has put in the Code for one reason or another.

If thinking about tax administration when it comes time to pass reform, Congress should simplify our tax system so the average American can understand what their return reflects and how their actions may in fact align with tax law. When thinking about tax reform, Congress should strongly consider paring back the myriad credits and deductions that leave most Americans befuddled. In addition, while Congress may choose (and have good reason) to use the IRS to administer social policy provisions, including some credits, actually aligning the substantive provisions with the reality of Americans’ lives would contribute to a tax system that the IRS could administer and the public could understand.

Former Tax Court Judge Kroupa Pleads Guilty to Conspiracy

We have written before about the indictment of former Tax Court Judge Kroupa and the collateral impact of her indictment.  Her husband pled guilty last month and on Friday, October 21, she also pled guilty.  If you have never gone to a guilty plea hearing, you should take the time to read the transcript of this hearing.  You will see how detailed the court is when accepting a plea seeking to foreclose all opportunity for the defendant to later argue that they were not really guilty of the count(s) to which they made a guilty plea.  Between the judge and the Assistant U.S. Attorney, it takes over 40 pages of transcript to get in all of the questions.  As you will see, the answers are short and sweet.


Occasionally, I have clients or prospective clients in the clinic who have pled guilty to a tax crime. Some tell me they were not really guilty but just pled to end the process.  I remind them of their conversation with the judge at the taking of the plea.  Although most profess little memory of the event, I know they had to answer the essentially the same questions posed to former Judge Kroupa.  While many motivations to plea exist, after going through the plea process the defendant really has little room to wriggle.  In a recent HBO series, The Night Of, involving the taking of a state rather than a federal plea, the defendant cannot make the necessary statements of guilt and ends up going to trial.  Former Judge Kroupa gave all the right answers.  The Court accepted her guilty plea.  Now a sentence report must be written and a sentencing hearing held.

What does Former Judge Kroupa get by pleading guilty? She gets a reduction in the sentencing guidelines, she gets only one felony conviction, and she gets to avoid the stress and cost of trial.  Let’s look at each of the things she gets but not forget that in all likelihood she also gets to go to prison.  The guilty plea is not something she will go home and celebrate about.

Sentencing Guidelines

The Supreme Court decided several years ago that the federal sentencing guidelines provide guidance to federal judges in imposing criminal sentences; however, the guidelines do not impose mandatory time periods that the judges must follow. Despite the non-binding nature of the guidelines, most judges pay careful attention to them and for that reason so do most defendants.

For tax crimes the guidelines usually start with the amount of tax the defendant has underpaid due to their criminal action. That amount usually provides a baseline number in the guidelines which translates into a recommended sentence.  That, however, is just the start.  In the case of someone like former Judge Kroupa, the guidelines provide for enhancements because of her special knowledge of the tax laws and her special position in the system.  Because of these factors she received a higher number under the guidelines which translates into a higher sentence.  By pleading guilty, she receives a reduction because of acceptance of responsibility.  If you read the plea transcript you will see a discussion of the enhancements and the reduction.

Building on the base amount and the adjustments, the guideline in her case result in a recommended sentence of 30-37 months. The judge carefully explained in the plea hearing that she will not necessarily follow the guideline and the ultimate sentence could end up higher or lower.  The defendant receives no guarantees.  The sentencing report will influence the judge as could anything that happens between now and the time of sentencing; however, making the guilty plea does have the effect of reducing the guideline amount from what a guilty verdict would produce.  That provides motivation for pleading guilty in weighing the pros and cons.


In pleading guilty former Judge Kroupa received the opportunity to plea to one count and have the remaining counts dismissed. This allows her to control the count to which she pleads guilty and the collateral impact of the plea.  She did not plead guilty to the felony of evasion of tax under IRC 7201 which carries with it the consequence of collateral estoppel on the fraud penalty.  I wrote recently about a very unusual case in which a guilty plea did not result in collateral estoppel.  By negotiating a plea agreement, she had several counts drop away.  This may prove beneficial to her although the Department of Justice need not be criticized for entering into the plea since the number of counts may have had little or no impact on the sentence and on the payment of the fraudulently unreported tax.

The IRS may not need collateral estoppel here in order to collect the proper amount of tax. She has already made some tax payments.  The 2010 change in the law regarding restitution allows the IRS to assess without having to issue a notice of deficiency the amount order for restitution.  When the IRS pursues a criminal tax case, it sets the civil case to the side until the criminal matter ends.  The end of her criminal case will mark the renewal of the civil tax audit.  Of course, she can agree to the taxes and penalties proposed by the IRS at the end of that audit and terminate the civil case without a fight.

If it does come to a fight about the imposition of the fraud penalty or additional amounts of tax not included in the restitution order, the IRS will issue a notice of deficiency and former Judge Kroupa will have the opportunity to litigate the correctness of the notice before the Tax Court. In such a case the Chief Counsel attorney will wish the plea included the IRC 7201 counts and former Judge Kroupa will undoubtedly wish that she did not have to go to Tax Court to get an opinion on the issue.  Of course, she can always pay and go to district court via the refund procedure.

Stress and Cost

The plea agreement transcript contains a detailed list of the medications former Judge Kroupa now takes. I do not know if she took any of these drugs before the criminal investigation but getting investigated for a criminal tax violation is extremely stressful.  I would not be surprised to learn that all or most of the drugs assist in dealing with the stress of the investigation.  With the plea agreement life will not turn into a bed of roses but the bleakest period may have passed.

Trying a criminal tax case not only creates additional stress but often depletes the bank account of the accused. Already, she will have paid handsomely for the representation she has received.  Many former criminal cases produce little tax revenue for the IRS because the defendant spends all of their money on the defense and has very limited job prospects after the conviction.  Ending the case with a plea saves some of the costs and may preserve assets to deal with the unpaid taxes and other necessary expenses.


The guilty plea brings the criminal phase of former Judge Kroupa’s case near to conclusion. The IRS has obtained the thing it wants most in a criminal case – publicity.  A case like this draws far more attention than the ordinary criminal tax prosecution.  Perhaps the silver lining for the tax system in this case is that is may provide more deterrence and this painful event will influence others to file their taxes correctly.


Summary Opinions for the weeks of 3/06/15 through 3/20/15

Image from

This will be the last post for the week, as we will all be busy with family activities (and taxes).  We should be back on Monday with some new content, and it looks like next week will cover some really interesting areas, including the recent Godfrey case, and sealing Tax Court records.

We have been very lucky over the last month to have a lot of really great guest posts.  We cannot thank those guest posters enough for the quality content, especially as the three of us have been very busy with our various other jobs (or appearing before the Senate–perhaps more on that next week also).  For the weeks that SumOp is covering in this post, we had Mandi Matlock writing on TPA Most Serious Problem # 17 on how deficient refund disallowance notices are harming taxpayers.  Peter Lowy wrote on the really interesting Gyorgy case, which deals with the taxpayer’s requirement to notify the Service on a change of address, but also highlights a host of other procedure items.   Patrick Smith joined us again, writing on Perez v. Mortgage Bankers Associate, and illuminating us on APA notice and comment requirements for different types of rules and the possible eventual reversal of Auer.  We also welcomed Intuit’s CTO, David Williams who wrote a response to Les’ prior post on H&R Block’s CEO indicating it should be harder to self-prepare (which Les was potentially in favor of).  And, another first time guest blogger, Patrick Thomas, joined us writing on the calculation of SoLs on collections matters.

We were also very lucky again to have Carl Smith writing for us, this time updating us on the Volpicelli jurisdiction case and the Tax Court pleading rules on penalties looking at the El v. Comm’r case.  A thank you to all of our guests over those two weeks, and a special thanks to Carl for his continued support.

To the other procedure items (if you keep reading, the image will make more sense):

  • The Service released CCA 201510043, in which Chief Counsel stated a taxpayer is entitled to two sets of collection due process rights for the same period when there were two assessments; one for assessment arising out of a civil exam and the other from restitution-based assessment.  Section 6201(a) was recently (five years ago) amended to require assessment and collection of restitution in the same manner as tax.  The advice has a nice summary of cases outlining why this double assessment of the same tax is not double jeopardy.  Although the general rule is that a taxpayer is entitled to one CDP hearing with respect to tax and tax years covered by the CDP notice, there are situations where multiple hearings are appropriate.  The advice highlights Treas. Reg. 301.6320-1(d)(2) Q&A D1 and Treas. Reg. 301.6330-1(d)(2) Q&A D1 as examples of allowing two CDP hearings when there has been additional assessments of tax or new assessments for additional penalties.  The Advice determined that this situation was analogous and warrants two separate CDP hearings.
  • The Northern District of California in In Re Wilson held that penalties for failure to timely file were dischargeable when the original due date was outside of the three year look back under BR Code 523(a)(7)(b), but the taxpayer had extended the due date and the extended date was within the three years.  The Court indicated this was a case of first impression.  Another interesting BR Code Section 523 issue.
  • This clearly only pertains as a practitioner point, and not something any of our readers would personally need, but OPR has announced a standard information request letter to make a Section 6103 request for information maintained by OPR relating to possible violations of Circ. 230.  Info about the letter is found here, and you can get the actual letter here.
  • The Ninth Cir. affirmed the Tax Court in Deihl v. United States in finding a widow spouse did not qualify for innocent spouse relief.  In the case the Court did not find there was clear error by the Tax Court in reviewing the widow’s testimony and find it was not credible.  The surviving spouse provided testimony that conflicted with other evidence regarding the couples’ business, and she did not offer any third party testimony regarding the abuse.  The widow argued that since the Service did not offer contrary testimony regarding the abuse, the Tax Court had to accept her testimony, which the Ninth Circuit stated was incorrect.  Further, looking to Lerch v. Comm’r, a Seventh Circuit decision, stated that the Tax Court did not have to accept testimony that was questionable, even if uncontradicted (tough to overcome the presumption of guilt that comes along with a name like Lerch).
  • Gambling causes fits for the Service.  Tipped casino employees used to underreport frequently, but apparently casinos will provide estimates to the Service.  Gambling website accounts might be offshore accounts (even if sourced in US banks). Add to that list of problems how to treat bingo, keno and slot machine winnings.  This blurb will focus on slot machines.  New proposed regulations offered in a recent IRS Notice would provide a safe harbor to determine gains and losses from a slot machine.  The issue is that gains from “transactions” are included in income.  Losses are deductible to the extent of winning, but generally as itemized deductions.  For slot machines, a “transaction” is session based.  What is a session can be a point of disagreement between the Service and taxpayers.  This is apparently becoming more murky now that people don’t use actual coins.   So, what are those retirees on the bus trips to AC or Vegas to do?  The Service is soliciting suggestions, but the current proposed safe harbor states that a session of play:

A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game before the end of the same calendar day. For purposes of this section, the time is determined by the time zone of the location where the patron places the wager. A session of play is always determined with reference to a calendar day (24-hour period from 12:00 a.m. through 11:59 p.m.) and ends no later than the end of that calendar day

The Notice then goes on to explain how to calculate gains and losses during the session.

  • Add this to the list of things that will not get you out of the failure to timely file penalties – taxpayer could not access tax records because his storage unite doors had frozen over.  The argument received an icy reception (oh, man that was bad) with both the Service and the Tax Court. See Palmer v. Comm’r., TC Memo 2015-30 (for some reason this isn’t up on the TC web page anymore – sorry).
  • If you are going to cheat on your taxes, you probably should do so using offshore accounts (I usually charge clients a .5 for that advice, and you all just got it for free!).  Check out Jack Townsend’s blog on US v. Jones, an “ordinary tax cheat”, as Mr. Townsend put it, who got dinged with 80% of the bottom of the guideline range for sentencing.  He was using “sophisticated means”, which seemed fairly run of the mill.  Jack compares this to the sentencing of another UBS client, who ended up getting 22% of the bottom of the guideline range.  Switzerland should use this in its promotional materials.
  • In MSSB v. Frank Haron Weiner, the Eastern District of Michigan found that Section 6332(a) did not establish priority for competing liens, and instead Sections 6321, 6322 and 6323 established the priority (in favor of the IRS in this case).  In MSSB, a debtor owed funds to the IRS and a lawyer named Frank.  The Service recorded four liens, each before December 3, 2012.  Around $1.6MM was owed.  On December 6, 2012, Frank sued the debtor to recover unpaid legal fees and won.  In 2013, Frank obtained a writ to garnish the debtors IRA (Michigan must not offer much in terms of creditor protection for IRAs).  The Service stepped in, arguing it had priority on the IRA.  Frank countered, arguing that Section 6332(a) would give him the money.  The Section states:

Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Frank’s position was that his claim was the type of claim referenced by the “subject to an attachment or execution under any judicial process.”  The Court, however, held that the language did not direct which claim (that of the IRS or Frank) had priority, and only stated that the financial institution did not have to turn the funds over to the IRS.  The Court then looked to the other lien provisions, and found the IRS had priority and directed payment.

  • I went to see roller derby one time, which was really entertaining.  A perfect mix of roller skating and WWF.  All of the young women have funny/clever names, and often have slogans.  The announcer said of one that she had “champagne for her real friends, and real pain for her sham friends.”  Unfortunately, this has really nothing to do with this next case, except the tax court was dropping some real pain on a sham partnership.  In Bedrosian v. Comm’r, the Tax Court held that whether legal fees paid by a sham partnership were deductible was an affected item subject to TEFRA, and the Court had jurisdiction to make such a determination.  This was not the Bedrosians’ first Tax Court rodeo, and they keep making new TEFRA law, which now comprises a substantial chunk of revised Saltzman and Book Chapter 8 dealing with general exam procedures and a growing subsection dealing just with the complex world of TEFRA.

Summary Opinions for 10/03/14

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

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

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

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

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

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

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



Summary Opinions for 9/19/14


Another great tax procedure week.  We have news on two (alleged for one) celebrity tax cheats.  More importantly, the Tax Court issued another qualified offer holding regarding concessions, and one on what constitutes a prior opportunity to dispute a liability when the Service denies such a request.  Plus a handful of other tax procedure matters, and an interesting case on when the proceeds from suing your accountant will not be taxable income.

  • The Tax Court, in Bussen v. Comm’r, had another holding on whether a full IRS concession is tantamount to a settlement for purposes of qualified offers under Section 7430(c)(4)(E)(ii)(I).  For those of you unfamiliar with the issue, I wrote on it in the infancy of PT here , and Keith followed up with an excellent post focusing on interesting issues in the Knudsen appeal.  A full concession by the Service during the pendency of the court case has been held to both be a settlement and not a settlement in the past, although the majority of the holdings appear to be leaning towards concessions being settlements.  I am not sure I agree with the holdings, and think it advances a Service-favorable policy that is contrary to the statute, allowing the Service to go well beyond the ninety day qualified offer period and still thwart fees.  Unfortunately, Bussen is a terrible fact pattern for the taxpayer.  In Bussen, the taxpayer withheld the information from the Service that it needed to make its determination.  The Service requested the information repeatedly.  Only after filing with the court did the taxpayer provide the information, and the Service promptly conceded.  This is not the type of case where the taxpayer equitably seems entitled to costs.  Jan Pierce of Lewis and Clark Law school, who knows as much on this topic as just about anyone, also noted that in Bussen the Service conceded before the actual trial, where in other cases, notably Knudsen, the Service waited until after the trial.

 Given the bad facts, if a court were inclined to hold concessions were not settlements, perhaps an appropriate holding in Bussen would have been a limiting of the “reasonable administrative costs”  and “reasonable litigation costs” because it was unreasonable for the Bussens to protract the process and not provide the requested information-thereby making the costs unreasonable and not appropriately payable.   Keith also noted that the statute specifically provides that a prevailing party that unreasonably protracts the proceedings will not be entitled to costs.  See Section 7430(b)(3).

  • In Johnson v. Comm’r, the Tax Court offered an interesting discussion of what constitutes a prior opportunity to dispute a liability.  In a prior CDP hearing, the settlement officer affirmatively told the taxpayer he could not challenge amount or existence of the underlying liability in connection with an unclaimed notice of deficiency.  In a subsequent CDP hearing, the taxpayer was denied the opportunity to question the amount or existence of the underlying liability because he may have had the right in the first hearing and did not challenge the settlement officer’s preclusion.   It is hard to find that the second settlement office abused his or her discretion, but the Service did bar the taxpayer from contesting the underlying liability when it perhaps was allowed, leaving a somewhat inequitable result.
  • Not exactly tax procedure, but the Tax Court, in Cosentino v. Comm’r,  has held that malpractice proceeds received by taxpayers from their accountants was not taxable income.  The accountants assisted the taxpayers in the disposition of some rental property pursuant to a bunk plan that increased basis somehow offsetting boot received in a 1031 exchange.  The plan was disallowed, and the taxpayers paid tax on the gain (or at least the boot).  The taxpayers sued their accountants for bad advice, and were made reimbursed for the tax paid.  The Service took the position this was taxable income, while the taxpayers argued they would have otherwise done a 1031 exchange with no boot, thereby not recognizing the gain.  The Court agreed that the malpractice proceeds were a return of capital and not taxable.
  • In Dynamo Holdings, LP v. Comm’r, the Tax Court has allowed the IRS to use predictive coding in digging through very large quantities of electronic documents to determine what is and what is not privileged and relevant to the IRS discovery requests.  We may have more on this in the future, so I won’t delve too much into the topic.  And, my knowledge of coding is about as strong as Keith’s knowledge on the Jersey Shore (I would say Les also, but I think he secretly loves that show)…more on that below.
  • In the most recent celebs behaving tax badly, the Situation has ended up before a judge on tax evasion charges(Keith was not familiar with the Situation’s work, and is on a Jersey Shore binge this weekend after completing some amazingly long MS bike ride ).  Sometimes you just completely misjudge a celebrity.  I was certain that Mike “the Situation” Sorrentino was smart enough not to get embroiled in tax evasion, he just seemed to have such a good head on his shoulders.  TMZ (I am starting to question the amount of times we have referenced them) reports that the Sitch is blaming his business manager, who is, of course, his brother, and claiming he knew nothing of his finances (sort of believable).  His Bro, in turn, is blaming their accountant.  The NY Times reports (now I feel slightly better about covering this) the indictment was based on the Situation and his brother running personal expenses through their pass through entities to reduce their taxable income, including personal grooming expenses (appropriate tanning salon and hair gel jokes are made).  All of which may have been hidden from the accountant.
  • In the immortal words of just about every rapper ever, “I gotsta get paid”, and, as such, I’m a pretty big fan of Section 6323(b)(8) giving lawyers a super priority in settlement provisions for reasonable compensation in obtaining the settlement.  The Eastern District of Louisiana recently reviewed this provision in Barnett v. D’Amico.  Although the case did not break any new legal ground, it did provide an outline for the reasons behind the priority and what lawyer fees could be deemed to relate to the settlement (and were reasonable), and which advances were properly made under Louisiana law and could be part of the priority lien.

Summary Opinions for 01/17/2014

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

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