Summary Opinions for October 19th through the 30th

Happy Thanksgiving Week! And thank you all for reading, commenting and guest posting!  SumOp this week is full of great tax procedure content that was released or published in the end of October, including updates to many items we previously covered in 2014 and 2015.  In addition, I am pretty confident that I solved all of your holiday shopping needs, so no reason to fight the Black Friday crowds.

  • From Professor Bryan Camp, a review of Effectively Representing Your Client Before the IRS (which was edited by Keith) can be found here.  This article was originally published in Tax Notes.  I have not read the article, so I suppose he could be bashing the book; however, knowing Keith and the book, I’m pretty confident that isn’t the case (perfect holiday gift for that tax procedure nut in your life; you can pick it up here).  Completely unrelated, unless you are looking for holiday gift ideas for me, I’ve always wanted a Lubbock or Leave It t-shirt to go with my Ithaca is Gorges t-shirt.  At that point, it would become a bad pun t-shirt collection….How did I make this bad transition – Professor Camp teaches at Texas Tech, which is located in Lubbock, TX.
  • Keith forwarded this article to me from the AICPA newsletter regarding ten things to do while on hold with the IRS.  I say just sit back and enjoy the music…wait, we already discussed how that music seems to have been designed to slowly drive you insane (see Keith’s post, A Systemic Suggestion – Change the Music).  I sort of feel terrible admitting this, but I make my assistant sit on hold and then transfer the calls to me.   Wait times do not appear to be getting much better, but, since misery loves company, I would suggest checking while waiting, or post your own.  Everyone loves complaining.
  • Kearney Partners Fund has generated a lot of tax procedure litigation over the last few years, which continues with the Eleventh Circuit affirming the GA District Court in Kearney Partners Fund, LLC v. United States.  At issue in this case was whether one particular participant was responsible for the accuracy related penalties.  The Eleventh Circuit agreed with the District Court that the transaction was in fact a tax shelter, but that the participant had disclosed the tax shelter in a voluntary disclosure program under Announcement 2002-2.  The Service argued that the participant only made disclosure in his individual capacity, not on behalf of the partnerships involved.  The Courts, relying on the doctrine of nolite jerkus, found it was disingenuous for the Service to attempt to collect the penalties on a shelter it was notified about through a disclosure program (I know that actually isn’t Latin, or a court doctrine).
  • In Notice 2015-73, the Service has identified additional transactions as “of interest” or as listed, including Basket Option Transactions.
  • In US v. Sabaratnam before the District Court for the Central District of California , a taxpayer lost his attempt to toss a Section 6672 TFRP assessment as untimely, which was made more than three years after the deemed filing date of the returns.  Although normally this would have not been timely as there is a three year statute for assessment, the taxpayer made a timely protest thereby tolling the time for assessment under Section 6672(b)(3).  The taxpayer actually argued his protest was not timely, thereby allowing the statute to run, and, in the alternative, that it wasn’t valid because it failed to contain the required information and because his representative did not tell him the letter was filed.  The Court disagreed, and found the filing was valid and timely.  Interestingly, in the letter, the representative stated that he did not “know personally whether the statements of fact…[were] true and correct. However…[he] believe[d] them to be true and correct,” which the taxpayer argued was damning because no one was attesting to the allegations.  The Court found that since the IRS instructions only required the representative to indicate if the facts were true, his statement was sufficient, as opposed to requiring that the representative actually state the facts were true.
  • The Senate is apparently checking up on Big IRS Brother.  In a hearing regarding the handling of the Tea Party applications, the Senate inquired about news that the Service would be using a high-tech gadget that could locate cell phones and collect certain data (couldn’t listen in on conversations though).  The Service indicated this was going to be used in criminal matters to help locate drug dealers and money launderers.  The Senate was nervous that Louis Lerner would target Republicans the Service would abuse this power (which twelve other agencies are currently using).  Don’t all drug dealers solely use burners?  And, aren’t the ones who don’t in jail already?  Looks like this will be moving forward, hopefully for tax crimes not thoughtcrimes.
  • In December, guest blogger Jeffrey Sklarz blogged about Rader v. Comm’r, a Tax Court case discussing substitutes for returns and when those have been validly issued under Section 6020(b).  In October, Mr. Rader was in court again, where the Tenth Circuit affirmed the Tax Court’s treatment of the SFRs and the imposition of sanctions by the Tax Court for frivolous arguments.
  • I’m in the process of working with Les on a rewrite of Chapter 5 of SaltzBook, which contains a discussion of the mitigation provisions for the statute of limitations.  One case dealing with those mitigation provisions that has been interesting to us over the last few years was Karagozian v. Commissioner, where the Tax Court and then Second Circuit held the mitigation provisions could not provide relief where a taxpayer overpaid employment taxes in one year, only to have income taxes imposed for that year after a worker reclassification.  SCOTUS did not find it as interesting as we did, and will not be granting cert.
  • From Jack Townsend’s incomparable Federal Tax Crimes Blog in early November was a post about nonresident aliens failing to pay US estate tax.   Jack offers some thoughts on how to start chipping away at that tax gap in his post.
  • The Eastern District of Pennsylvania in Giacchi v. United States decided another dischargeability of late returns case.   EDPA held in line with recent cases that the tax due on the late returns was not dischargeable.  Keith’s has written a fair amount on this topic, and I think the most recent was in June and can be found here.
  • Do you ever wonder if those companies claiming to give a % of their revenue to charity ever actually give the funds to charity?  I can proudly say PT will be donating 100% of its proceeds to charity, but deductibility and follow through won’t be an issue (it’s zero, we just do this for the love of the game; well maybe a hope that some publisher buys us out for millions).  Is there a watchdog group that tracks this?  Well, apparently some are actually donating the funds just out of charitable inclination, and the IRS has issued guidance on the deductibility of those payments.  In CCA 201543013, the advice concludes that the company taxpayer and not its customers are entitled to the deduction.  It also goes through the deductibility of payments to various types of entities, including exempt and non-exempt.

Summary Opinions for the week ending 04/03/15

FullSizeRenderYikes, this post is getting a little stale, as it relates to early April, but it still has a lot of great info.  Before getting to the other tax procedure items from the week of April 3rd  that we didn’t otherwise cover, there are a few housekeeping items to touch on.

On April 22nd, Les Posted about the ATPI Conference.  Since then, various folks have asked about a link to the audio.  Les has tracked down a link, and for those of you interested, you can listen to the full webcast here.

Les and Keith are currently on their way to the ABA Tax Section Meeting in DC.  Please let them know your thoughts on the blogs, what topics you would like to see us cover in greater detail, and if you have any interest in guest posting.

I will sadly be missing the meeting this year, but for a wonderful reason.  My wife gave birth to our first son, Oliver, who is pictured to the above. Both mother and babe are doing great, and Oliver has been close to perfect over his first two weeks of life; however, taking a three day trip away from them (on mother’s day weekend) just wasn’t in the cards.

We also had a few guest posters from around the week of April 3rd that I haven’t highlighted yet.  We were very pleased to have Villanova professor Tuan Samahon, co-counsel for the Kuretskis, posting on the Solicitor General’s brief opposing cert.  Also posting was Sean Akins of Covington & Burling, writing on when to seal the Tax Court record.  We are, as always, very appreciative of their efforts.

To the other procedure:

  • I don’t do much bankruptcy work, so perhaps this is run of the mill, but I found the facts of In re: Elrod, pretty interesting as they related to an IRS levy.  In Elrod, the IRS issued a broad levy to a chapter 13 trustee.  The levy sought to collect taxes owed by a creditor (not someone in bankruptcy) of various individuals who had filed for chapter 13 bankruptcy.  The trustee filed a motion to quash the levy, which the Court granted.  The Court found that the levy violated the automatic stay under 11 USC 362(a).  As I said, this is not my area and those who do bankruptcy may be thinking I am quite uninformed, but I was initially surprised that the automatic stay protected someone other than the debtor in this way.  Most of the provisions under (a) relate to the debtor, but (a)(3) includes as  being prohibited “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  The Court found that based on other BR sections, “property of the estate” was defined very broadly, and found it inappropriate for the trustee to have to hand the creditor’s payments over to anyone other than the creditor.  The holding also noted that the levy did not specify which cases it applied to, which was one of a few factors that created substantial administrative burden for the trustee.  This also potentially opened the trustee up to personal liability for failure to properly comply with the levy, which was unfair and too onerous.
  • Usually when you set up a BS tax shelter, and you get caught, substantial penalties are headed your way.  In CNT Inv. LLC, v. Comm’r (loyal SumOp readers will remember this case from the last SumOp, dealing with statutes of limitations) however, the taxpayer was able to get out of the gross valuation misstatement penalties where the Tax Court found the taxpayer relied on competent advisers.  Facts worth noting: the taxpayer did fail to hand over some information to his lawyer; the CPA involved was admittedly confused by what was happening; and the lawyer involved was not a tax lawyer.  I’ll admit, this opinion is pretty long, and I did not read it all in great detail.  From a quick review though, it seems like the taxpayer’s current counsel earned his fee, as those facts can often tank a reliance/reasonable cause argument.
  • The IRS has issued PMTA 2014-018, which addressed an interesting statute of limitations issued, specifically:

Does section 6501(c)(8) operate to extend the period of limitations for the assessment of tax with respect to an estate’s Form 1041 or Form 706 if the executor of the estate files the deceased individual’s final Form 1040 and fails to provide information required to be furnished with the final Form 1040 under the provisions of section 6038D?

The Service determined that this would extend the limitations period.  For those unfamiliar with Section 6501(c)(8), the Code provides that if certain foreign transfers are required to be disclosed to the Service and are not, “the time for assessment of any tax…with respect to any return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the [Service] is furnished” with the required information.  This applies to the entire return, in general, unless the failure was due to reasonable cause, in which case the extended period only applies to the undisclosed information.  The Service found that where the executor is required to file the decedent’s last lifetime return under Treas. Reg. 1.6012-3(b)(1), and fails to disclose information required under Section 6038D on the Form 1040, the statute of limitations will be extended for the Form 1040, the estate’s Form 1041 (interesting because the estate is a separate legal entity), and Form 706.  The Service stated the broad language under the statute indicates that “any return” should mean at a minimum all returns required to be filed by the taxpayer “to which such information relates”.  The notices indicates this is very fact specific.  In addition, if a surviving spouse, who was not the executor filed the Form 1040, the result could be different, since the executor wouldn’t be filing the Form 1040.

  • The Service has issued final regulations on the extended statute of limitations under Section 6501(c)(1) on assessment and collection for taxpayers who failed to disclose involvement in listed transactions.  The regs are similar to the proposed regulations, with a  few modifications on how the one year extension works with the normal period when disclosure by an advisor occurs.
  • Over at one of my favorite tax blogs, Jack Townsend’s Federal Tax Crimes Blog, Jack has some thoughts on the recent oral argument in BASR Partnership v. US.  We’ve touched on the issue in BASR a few times, most notably in Les’ initial coverage of the case found here.  For those interested in the issue, Jack’s post is not long but provides some good insights into the positions being offered on whether or not the unlimited statute of limitations for fraud under Section 6501 extends to actions taken by someone other than the taxpayer.
  • The Service lost (again) arguing federal law applied to show transferee liability under Section 6901.  The Court, in Stuart v. Commissioner, held that state law applied to determine the third prong of whether liability existed for the other party, and again rejected the Service’s two step process where it first recasts a transaction with the substance over form doctrine, and then applies state law to determine if the other party is liable.  We’ve touched on prior cases out of the tax court, First, Second, and Forth Circuits.  This case would be appealable to Eighth Circuit.
  • From, an updated look at exactly when the marriage penalty and bonus go into effect.  I emailed this to a friend who is about to get hitched, and was assuming a tax savings…marriage would have cost him $3k this year.  Bye the way, Nate Silver’s page has won me multiple Oscar pools (I’ve never seen any of the movies), and sports wagers – none of which were for money, of course.
  • And now for something completely different, Andrew Brandt touches on legal issues in the NFL for Sports Illustrated.  Not tax procedure whatsoever, but Mr. Brandt is the Director of the Jeffry Moorad Center for the Study of Sports Law at Villanova University School of Law, where Les and Keith hangout while thinking about PT posts.  The article provides some insights into a host of hot legal topics in the NFL currently, including the unfortunate cases of Aaron Hernandez and Darren Sharper (who Mr. Brandt knew fairly well).

Summary Opinions for the week ending 3/27/15

How could I not start with John Oliver and Michael Bolton singing about the IRS.  This link is not really great for work, and to say it is sophomoric may overstate the sophistication and maturity.  Sexy singing is at the end of a fairly long clip, which is all pretty funny (on the IRS, “it combines two things we hate, people taking our money and math”).  This is probably the funniest Michael Bolton clip from the month, which is really impressive since it is about the IRS and he recently recreated the Office Space scenes with the character sharing his name – if you liked that movie, you should find the clip.  Equally as entertaining and enlightening were our guest posters during the week ending March 27, 2015.  Peter Hardy and Carolyn Kendall of Post & Schell did a two part post (found here and here) regarding the definition of willfulness in civil offshore enforcement cases.  First time guest poster, Bob Nadler, posted on the recent Sanchez case dealing with an interesting innocent spouse issue that hinged on whether a joint return was actually filed.  Thank you again for the great content.

I also need to thank our guest posters from the last week and a half.  Carlton Smith provided two of the three posts on the Godfrey case, the last of which can be found here and links to the first two.  Godfrey is an interesting case raising a couple issues regarding appropriate notice with collection actions.  We were also pleased to have Prof. Bryan Camp with a three part post on Eight Tax Myths, the last of which can be found here and links the first two.  Both sets of posts were very well received, and both generated a fair amount of discussion.  I would encourage everyone who has not read both sets to do so, and, for those who have, you might consider going back and reading the comments and responses.

To the other procedure: 

  • In a FOIA dump, the Service has released PMTA 2014-015, which discusses the erroneous refund penalty under Section 6676.  The following points are discussed in the memo:

1. Does the Section 6676 penalty apply to refund claims made on Form 1040 and Form 1040X and does it matter whether the Service has paid the claim?

2. Does the nature of the item to which the excessive amount is attributable have any bearing on the penalty?

3. Is the Section 6676 penalty subject to deficiency procedures?

4. Are there any specific taxpayer notifications required for the penalty to apply?

5. Does the ‘reasonable basis’ exception to the Section 6676 penalty have the same general meaning as the reasonable basis exception to negligence found in Reg. 1.6662-3(b)(3)?

 I’m not sure there are any earth-shattering realizations to be found in the IRS response, but some points seem worth noting.  As to the first point, the Service stated the penalty can be imposed even when the IRS does not actually refund the amount requested.  For the second point, the Service discussed the various situations where other penalties would apply (reportable transactions, EIC, etc.).  As to the third question, the Service stated the general rule that the penalty is not subject to the deficiency procedures, but stated that for some refundable credit cases the penalty will have to be assessed pursuant to the procedures.  No court has apparently addressed either point.  The last thing that jumped out at me was that the Service stated the reasonable basis exception under Section 6676 has the same meaning as under the accuracy related penalty provisions found in Section 6662, which is not news, but good reinforcement of the prior position.

  • Harper Int’l Corp v. US is a case we (I) missed in January (see page 13 of this PDF for a more robust recitation of facts and holding).  In the case, the IRS denied a refund request.  On May 2, 2012 the IRS issued a Notice of Disallowance, which stated the taxpayer had two years to challenge the determination.  About a month later, another notice was received by the taxpayer, stating the claim was rejected and another formal Notice of Disallowance would be issued – but it never was.  Taxpayer petitioned the Court of Federal Claims in June of 2014, more than two years after the first letter, but less than two years after the second letter.  The Court of Federal Claims held that although equitable provisions might apply, it was not reasonable for the taxpayer to rely on the second notice (and they failed to comply even if using the date of the second notice because timely mailing was not timely filing for CFC).
  • Another sham(wow) partnership case in CNT Invest., LLC v. Comm’r, where the Tax Court has held that gain recognized in a collapsed step of a multi-step transaction was gross income for determining the extended statute of limitations under Section 6501(3)(1)(A).  Case also confirmed limitations period was the longer of the period found under Section 6229 or Section 6501.
  • Businessweek thinks the IRS sucks.  The reasons are largely outlined by the John Oliver video above.  I’m sure this has generated a lot of scoffs, but I honestly do try to keep this in mind as I sit on hold for 90 minutes.  Maybe it helps me from being a complete jerk to the person who eventually picks up.  Solid chance that person’s day is worse than mine. How much longer before this all implodes? Is that the goal?  Might work.
  • Kardash v. Commissioner was decided by the Tax Court on the 18th, and has a good discussion of transferee liability but a difficult result for taxpayer minority shareholders in a company where the Service found transferee liability for tax due that was the result of theft by the majority shareholders.  This is going to get a little longwinded, sorry.  In Kardash, a concrete company was largely owned by two shareholders, who controlled all aspects of the business.  Two other minor shareholders oversaw sales and operations; neither had any control over the overall management or finances of the company.  During the early 2000s, the company was very successful and the minority shareholders received huge additional compensation.  Unfortunately, during this time, the majority shareholders were plundering the coffers and not paying any taxes ( one of whom is in the clink and the other is no longer with us).  Here is some more background on that sad story.  The finances of this company were apparently open for the taking, as two other employees were jailed for stealing over $5.5MM from it before the IRS got involved.  On audit, for 2003 to 2007, the Service assessed over $120MM in tax, penalties and interest.  The company was insolvent at that point, payment was not possible, and the company and the Service entered into an installment agreement to pay $70,000 a year until the end of time.  The Service reached agreements with the two majority shareholders, but substantial amounts of tax were still outstanding.  The Service then attempted to recoup a portion of the remaining amount from the minority shareholders pursuant to Section 6901(a).  For Kardash, the amount was around $4MM.  There were a host of questions before the Court regarding the IRS’s collection actions against the company and majority shareholders cutting off liability, but what I found interesting was the issue about whether, under state law, the minority shareholders were responsible for the tax due to fraudulent transfers to them by the majority shareholders.

For the fraud, the Court looked to Florida law to determine the extent of the potential transferee liability.  As an initial point, the Court did not aggregate the transfers with those of the majority shareholders (contrary to the Service argument), and instead looked at each payment to the minority shareholders to determine constructive or actual fraud of each payment.  The FL statute provides that if the company did not receive “reasonably equivalent value” for the payments, they may be fraud if: “(1) the debtor was engaged…in a business…for which the remaining assets of the debtor were unreasonably small…;(2) the debtor intended to incur…debts beyond his ability to pay as they became due; and (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.”  Kardash argued his work for the company was reasonably equivalent value, and the Court agreed for certain “loans” in 2003 and 2004, which were really advanced on compensation.  For 2005 through 2007, the funds were provided to Kardash in the form of a dividend from the Company.  The Court noted the conflict in cases regarding the treatment of dividends as “reasonably equivalent value” as compensation for work done.  The Court seems to indicate the general position is that dividends are not compensation for services rendered and therefore not an exchange for value.  In the limited cases holding the opposite, the dividend has been directly tied to work provided.  See In re Northlake Foods, Inc., 715 F3d 1251 (11th Cir.) (holding dividend made as tax distribution to pay tax due on s-corp shares); In re TC Liquidations, LLC 463 BR 257 (ED NY 2011) (dividend made to shareholder to repay loans taken out to expand business).  Although I have not read these cases, this seems like a point that could be open to other interpretation in this case.  The dividends here effectively replaced a prior bonus program.  The program was stopped and the company made the loan/advances to the minority shareholders because the company knew the minority shareholders needed that level of compensation.  This was a temporary solution until the dividends were to start.  Since at least a portion was compensation provided in a different form, a finding that it was received in exchange for equivalent value would not seem unreasonable in this case.  The Court did address this by stating the company did not benefit from the dividends as clearly as in the above two cases, but I am not sure I agree.  Had the dividends not be issued to take the place of the prior bonus program and advances, the minority shareholders may have left.  During the period in question, the company was very successful, arguably because of the minority shareholders.  The second reason is that the company and shareholders treated it as dividend income and not compensation.  Although a factor worth consider, I am not sure it has to be dispositive.

The issue of insolvency was reviewed next, with a few pages devoted to the debts and income stream.  The Court relied on the IRS’s expert’s opinion that since there were no tax returns, no buyer would ever pay more than the gross value for the land and tangibles, and the company had no intangibles.  Based on that, the company was insolvent most of, if not the entire time.  Interestingly, the opinion includes the gross revenue, but I don’t think it includes the asset values.  Ignoring the various other ways to value a company, I think this is also open to other interpretation.  I am not sure the conclusion that no one would be willing to buy the company is correct—obviously that would be a substantial risk, but business people often take risk if the reward appears sufficient.  I am also not sure the value of the intangibles was $0, since the revenue for the years in question was north of $100MM, which was substantially more than the hard assets.  Clearly, the company, as a going concern, had some value that exceeded hard assets.  The company may have still been insolvent, I just wasn’t sold on those particular points.  An interesting case, and what seems to be a tough result for some transferees who were screwed by their employer.

  • The Service has issued internal guidance indicating that it will no longer allow taxpayers to enter into installment agreements for post-petition liabilities when the taxpayer has filed for Chapter 13 bankruptcy.  The guidance indicates that this was previously allowed in some jurisdictions, but that the Service believes this potentially violates the BR stay.
  • 2014 data book has been issued by the Service in electronic form, and can be found here.  Lots of interesting stuff.  Looks like 40% of penalties were abated in terms of amount.  Less business returns, but more individual in 2014 than 2013.
  • Barry and Michelle paid an effective tax rate of 18.8% (maybe slightly higher –I’m finding some conflicting reports and too lazy to do the math) for federal income tax purposes.  I think that is a little higher than mine…although we made slightly different amounts.

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.

Petaluma v. Commissioner: TEFRA for Everyone?

Today we welcome back guest blogger Andy Grewal. Andy is an Associate Professor at University of Iowa Law School and has a keen eye for TEFRA issues. Those of you willing to brave this dark corner of tax procedure will enjoy this insightful post. Keith

I have previously written about the TEFRA issues of first impression raised in Petaluma FX Partners v. Commissioner, pending in the D.C. Circuit (Docket #12-1364).  The taxpayers in that case argue that TEFRA procedures do not extend to their tax shelter controversy because their transaction involved a sham partnership, not a bona fide one.  The various provisions of TEFRA, including the Section 6226(f) jurisdictional provision, explicitly refer to matters relating to a partnership, not a sham partnership.   Section 6233 authorizes regulations extending TEFRA to sham partnerships, but the taxpayers argue that the relevant regulations were defectively issued.

Oral arguments held recently might have been expected to address the validity of the Section 6233 regulations.  But the D.C. Circuit panel did not offer any questions to either party regarding procedural defects.  Most of the argument time was spent sorting out an argument proffered by Judge Sri Srinivasan that would render the Section 6233 issue moot.

As best as I could tell from the sometimes-muffled audio recording, Judge Srinivasan believed that Section 6226(f) by itself established jurisdiction over sham partnerships, regardless of anything under Section 6233.  That line of argument was apparently motivated by the Supreme Court’s holding in United States v. Woods, in which the Supreme Court held that Section 6226(f) establishes TEFRA jurisdiction to determine the applicability of the valuation misstatement penalty for the inflation of outside basis in a sham partnership.

Judge Srinivasan observed that Section 6226(f) established jurisdiction over the determination of partnership items, and he believed that a partnership item includes the determination that a partnership does not exist.  Consequently, Section 6226(f) took the jurisdictional question “all the way home”;  whether the Treasury properly promulgated regulations under Section 6233 was beside the point.

That argument enjoys some superficial appeal, and I understand how a judge would want to explore that question as he takes on the unenviable task of learning about TEFRA.  It seems almost sadistic to require generalist judges to decide TEFRA-related issues, and we should thank the dedicated public servants who produce thoughtful opinions on the statute.  However, Judge Srinivasan’s suggested argument does not comport with the TEFRA regime.


First, Section 6226(f) simply does not extend to sham partnerships.  Under Section 6226(f), a court determines partnership items “of the partnership,” and the quoted language refers to an actual partnership, not a sham partnership.  Section 6231(a)(1)(A) specifically defines “partnership” for TEFRA statutes by reference to Section 761(a)’s definition, which includes only bona fide partnerships.  Consequently, Section 6226(f) presupposes the existence of a real partnership.  If Section 761(a) actually reaches sham partnerships, we are all in a lot of trouble – that would invite abuse of Subchapter K.

Second, although Section 6226(f) allows the determination of partnership items, and the status of an entity reflects a partnership item, that does not provide backdoor jurisdiction for TEFRA jurisdiction over sham partnerships.  A partnership item, under Section 6231(a)(3)’s definition, refers to an item “with respect to a partnership,” not an item with respect to a sham partnership.  Consistent with the statute, the relevant regulations provide definitions of partnership items that presuppose the existence of a partnership.  See Treas. Reg. § 301.6231(a)(3)-1.  Section 6226(f) and 6231(a)(3) allow a TEFRA court to determine whether a partnership exists, as required by those statutes, but they do not establish further jurisdiction to determine items related to a sham partnership. This makes perfect sense, given that TEFRA originally did not apply to sham partnerships and that the Section 6231 regulations were drafted before Section 6233 came along.  See 48 Fed. Reg. 1759 (1983) (proposed Jan. 14, 1983)(available upon request to PT).

Consistent with the statutory regime, guidance under Section 6231 indicates that sham partnership items become partnership items only via the Section 6233 regulations.  In explaining the partnership item regulations, the Treasury acknowledged regulations under Section 6233 would provide the TEFRA “extension” to sham partnerships.  T.D. 8082 (Apr. 18, 1986) (available upon request to PT).  This is consistent with Section 6233’s purpose.  Congress added Section 6233 because of the practical difficulties that would arise under existing statutes when a purported partnership turned out to be a sham, because the IRS or a court would suddenly realize that TEFRA could no longer apply.

The Section 6233 temporary regulations, if valid, establish TEFRA jurisdiction to determine items “which would be partnership items” if the entity weren’t a sham.  See Temp. Reg. 301.6233-1T(a) & (b).  So, even if one dismissed Section 6226(f)’s limitation to actual partnerships and dismissed the scope of partnership items under Section 6231(a)(3), the Section 6233 regulations remain necessary to establish TEFRA jurisdiction over a sham partnership.  One simply cannot extend TEFRA to non-partnerships without the Section 6233 regulations.

The D.C. Circuit previously recognized the integral relationship between Section 6233 and the partnership item regulations.  In an earlier opinion, the D.C. Circuit specifically acknowledged that the “jurisdiction . . . over this case is governed by Section 6233.”  The court then relied on “Section 6233, its implementing regulations, and the regulations elucidating the meaning of ‘partnership item,’” to conclude that the partnership sham determination reflects a partnership item.

Judge Srinivasan seemed bothered that the Supreme Court in Woods made no reference to Section 6233, and he believed that that statute was not even on the “radar screen” in that case.  But the Supreme Court’s review was limited to whether the gross valuation misstatement penalty for inflation of outside basis “relates to” a partnership item, not to whether TEFRA applied at all to sham partnerships.  Also, Judge Srinivasan wondered why the government did not mention Section 6233 in its briefs in Woods.  But of course it did.  Its brief explicitly acknowledged that Section 6233 and its regulations extend TEFRA to sham partnerships.  But the government cited the “more readily accessible regulations” rather than the temporary regulations, and the taxpayer missed the opportunity to present a procedural challenge.

The narrow briefing on the jurisdictional question in Woods should not be surprising.  Both parties completely missed the jurisdictional issues at the district court and the circuit court level.  Jurisdiction was first mentioned in a footnote in the government’s certiorari-stage reply brief, and the parties finally argued jurisdiction only when the Court, on its own, added that issue to the question presented in the government’s petition for certiorari.

Judge Srinivasan also thought it strange that administrative regulations, like those under Section 6233, could establish or deny a court’s jurisdiction over a taxpayer.  But that improperly frames the issue.  Of course courts enjoy jurisdiction to determine the tax liabilities of participants in a sham partnership.  Any regulations simply go to whether jurisdiction must be exercised in a partnership-level proceeding or instead in a partner-level proceeding.  Section 6233 does not allow the Treasury to arbitrarily determine the jurisdiction of Article III courts.

To her immense credit, the government’s attorney, Ms. Joan Oppenheimer, did not embrace Judge Srinivasan’s suggested argument, even though the court’s adoption of that argument would secure an IRS victory.  Instead, Oppenheimer attempted to explain, consistent with the government’s brief, that Section 6233 reflects a necessary component to the extension of Section 6226(f) to sham partnerships.  After some prodding, Oppenheimer acknowledged that she would not resist a holding along the lines suggested by Judge Srinivasan.

Perhaps she should have.  If Judge Srinivasan’s suggested argument were accepted, then TEFRA would necessarily attach to sham partnerships, regardless of the discretion conferred by Section 6233.  TEFRA jurisdiction would also extend to C corporations, REITs, trusts, and every other entity because, under Judge Srinivasan’s approach, partnership items include determinations over whether an entity is a partnership or instead a C corporation, REIT, trust and so on.  In the long run, the Treasury would likely want to exercise its discretion under Section 6233 to determine the scope of entities that fall under TEFRA, and not allow Section 6226(f) to establish TEFRA procedures for every entity imaginable.

The most dangerous part of Judge Srinivasan’s suggested argument relates to the elimination of the partnership tax return requirement.  That is, Section 6233 allows for the jurisdictional extension of TEFRA to sham partnerships and non-partnership entities only when a partnership tax return has been filed.  Section 6226(f), however, contains no return limitation.  Thus, if that statute independently establishes TEFRA jurisdiction over sham partnerships and non-partnership entities, the IRS can pull taxpayers into the TEFRA regime even when they never represented themselves as partnerships.  Or perhaps taxpayers will seek strategic advantage and argue that the IRS failed to comply with TEFRA notice requirements under Section 6223 regarding their sham partnerships or non-partnerships.  Simply put, holding that Section 6226(f) extends TEFRA jurisdiction to sham partnerships opens up the door to unending mischief.  It’s thus no surprise that Congress used Section 6233 to make that extension, and it wisely conditioned TEFRA jurisdiction on the filing of a partnership tax return and the promulgation of regulations.

Judge Srinivasan’s argument also raises problems because it contemplates that a sham partnership qualifies as a bona fide partnership under Section 6226(f) and, by extension, under Section 761(a).  Any suggestion that a sham partnership qualifies as a real one threatens to open the door to abuse of the partnership tax regime.  I do not mean to suggest that any reputable practitioner would allow her client to play games with Subchapter K simply because sham partnerships are recognized as bona fide partnerships under Sections 761(a) and 6226(f).  But tax cheats come in two classes – those who simply hide their money under their mattresses (or in offshore accounts), and those who seize on some hyper-technicality to establish that “they are just beating the IRS at their own game.”  Treating a sham partnership as a real partnership, even if only indirectly via a TEFRA ruling, potentially provides the protective rationalization needed for the second miscreant to justify his abuse.

Of course, as long as we are talking about general policies and not the command of the law, we must balance that potential for abuse against any ruling in favor of the taxpayers in Petaluma.  The taxpayers in that case surely engaged in improper behavior.  Maybe, if we are not concerned about applying statutes, it will be better for the court to adopt a creative argument that goes beyond TEFRA’s plain language and denies the taxpayer the right to present its jurisdictional challenge, so as to discourage improper behavior in the future.

In the end, it’s impossible to tell whether the D.C. Circuit will address the merits of the taxpayer’s challenge.  On the one hand, the taxpayer’s argument goes to jurisdiction and is generally non-waivable.  On the other hand, under Judge Srinivasan’s suggested line of analysis, the Section 6233 issue is non-jurisdictional and can be waived.  But the government has itself waived Judge Srinivasan’s argument.  So, to reject the taxpayer’s argument on waiver grounds, the court would have to use an argument that the government waived and is contrary to its briefs.  That seems weird.

Ultimately, I hope that the D.C. Circuit addresses the validity of the Section 6233 regulations.  Questions over how to address improper tax shelters should be left to Congress and the Treasury.  The D.C. Circuit should simply focus on reaching the correct interpretation of the law.



Summary Opinions for 8/08/14

Although I’m not thrilled to be back to work this week after vacation, I am excited about having scheduled time to work on Procedurally Taxing again.  Below you will find a summary of some items we didn’t otherwise cover last week while I was away, but first I wanted to highlight Carlton Smith’s post from this Monday on the IRS trying to conflict lawyers out of representing taxpayers in court when they also represented the taxpayers in CDP hearings.  The response to the post was very strong, with many practitioners chiming in through LinkedIn, email, and in our comment section.  I commend the post and the comments to anyone who has not yet reviewed the material.  Here are the other procedure items that caught our eye:

  • From JOTWELL, Professor Christopher Walker reviews Professor Kristen E. Hickman’s contribution to this year’s Duke Law Journal Symposium on administrative law and tax.  Professor Walker provides a great write up of Professor’s Hickman’s article and her current research into whether revenue raising is actually a valid reason for tax exceptionalism.  I would recommend this summary and the article (and symposium issue) to anyone interested in the intersection of administrative law and tax (as you all know, we are fairly high on this topic).
  • From Jack Townsend’s Criminal Tax Crimes Blog, a write up of Whistleblower 2231-12W v. Comm’r, where the IRS argued that FBAR penalties are outside the scope of the whistleblower statute, Section 7623(b).  The Tax Court found it lacked jurisdiction as no determination had been made, and declined to address the alternate IRS argument.  Jack indicates that these penalties are likely outside the scope of the payment regime.
  • Anyone heard of walk-up payments?  Sounds vaguely illegal, like it should involve ‘stutes (my short slang for prostitutes).  Walk-up payments with the IRS are where a taxpayer who largely only deals with cash can bring the funds to a third party that then allows the funds to be electronically transferred to the IRS.  Many lower income taxpayers are unbanked and this is a way to pay; also, however taxpayers who may have illicit business dealings but who choose to pay their taxes may use this method.  The Service recently released Chief Counsel advice on whether this is a valid payment method under Sections 6311 and/or 6302.  The advice indicates that Section 6302 is the applicable authority, and these types of payments could be acceptable with no additional regulations if other informal guidance was issued by the Service.  Perhaps such guidance will be forthcoming.
  • Some interesting summons info post Clarke.  Here may be the first post-Clarke ruling in Hawaii Pacific Finance v. US.  The Court found that the respondent had not raised an inference of bad faith by claiming the Revenue Officer threatened to pull the respondent’s individual tax returns and threatening him with potential jail time.  The Court held that although the Officer’s intent and actions were important, it was the agency’s intent on honestly pursuing the goals of Section 7602 by issuing the summons that mattered.  “Tough language” by the Officer would not be sufficient to show an improper purpose. Revised chapter 13 in Saltz/Book on summons will be coming out later this fall. This case and likely other post-Clarke cases will be discussed.
  • For those of you who had perhaps hoped that the Service would view Clarke as taxpayer friendly, my man from the Magic City, Joe DiRuzzo (who seems to have a hand in a case with every major tax procedure matter), forwarded a reply brief from the government, where the government largely argues Clarke has not changed how courts should review allegations of improper purpose.  I’ve recreated some of the position on Clarke from the government brief:


In Clarke, the Supreme Court reversed the Eleventh Circuit, holding “that a bare allegation of improper purpose” on the part of the IRS in issuing a summons “does not entitle a taxpayer to examine IRS officials.  Rather, the taxpayer has a right to conduct that examination when he points to specific facts or circumstances plausibly raising an inference of bad faith.”…


The [summonsed individual] is wrong to rely on Clarke in criticizing this Court’s characterization of the “heavy” burden that the party challenging a summons must meet in order to overcome the government’s prima facie showing of the four elements of Powell…But the Court’s own three uses of the word “heavy”…are all in quotations from other cases…and this “heavy” burden is well-established, with its origin in Supreme Court…


Contrary to this well-established “heavy” burden, [the summonsed individual] contends the Supreme Court in Clarke “lowered the bar” that a party challenging a summons must meet and instead created “a new analytical framework,” but he is incorrect.

  • The long awaited final whistleblower regulations have been issued.  Accounting Today has a nice summary here.  You can find the entire regulations here, “if you’re not into the whole brevity thing.”  We will hopefully post some insight and practical tips on these regulations shortly.
  • The Fifth Circuit in Salty Brine I, LTD v. United States (is there a type of brine that is not salty?) has held it and the district court had jurisdiction to review the purchase of annuities by partners after royalty interests were distributed out of a TEFRA partnership, concluding the determination of a partnership item “requires a holistic approach to examining the classification of potential income items.”  And, although the partnership was not involved in the subsequent transactions, “under TEFRA [the courts had jurisdiction] to address every part of the royalty interest transaction, and ultimately to disregard the entire transaction, including the annuity sale, for tax purposes.”
  • The Jack Townsend had a post last week regarding practitioner frustration with the move to the streamlined OVDP process, which can be found here.

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.