Summary Opinions for 05/30/14

Before getting to the summary of tax procedure items from last week, we have to thank Professor Scott Schumacher for his wonderful guest post on the Roberts case.  We hope Scott will grace our pages with his presence again sometime in the near future.

To the tax procedure:

  • The District Court for the District of Columbia in Z Street v Koskinen considered the applicability of the Anti-Injunction Act and the Declaratory Judgment Act in allowing a lawsuit challenging the IRS’s “Israel Special Policy” that IRS employed when reviewing the organization’s application for Section 501(c)(3) status. The underlying suit considers whether the IRS policy  violated the organization’s First Amendment rights. The district court, relying in large part on the DC Court of Appeals analysis in the Cohen telephone excise refund cases, allowed the case to proceed, finding that the suit did not seek to restrain the assessment or collection of taxes and thus was not barred by either the AIA or DJA. We have written before on the cracks appearing in the AIA and DJA and will likely speak to this issue again soon.   For more on this case, check out the coverage by NonProfit Law Blog here.
  • Here is one we missed from Mid-May (we won’t let it happen again), the Tax Court in The Markell Co., Inc. v. Comm’r, held that the Treasury Regulation 1.752-6, which applied retroactively to transactions beginning in 1999, was valid.  The Court noted that courts have split on the retroactivity issue referring to the 7th Cir. in Cemco v. US in favor of retroactivity, and Court of Federal Claims and ED of Texas against.  For those readers unfamiliar with these regulations, they were promulgated in response to Son-of-BOSS transactions, and provide that if a partnership in a Section 721 transaction assumes a liability of a partner, the partner’s basis may be reduced by the amount of the liability determine on the date of the exchange.  As you can imagine, since this is part of subchapter K, what I have just stated is substantially less complex than the actual provision.
  • The Tax Court had a fairly important holding last week in Julia R. Swords Trust v. Comm’r, declining to apply the federal substance over form doctrine to recast a transaction being reviewed under Section 6901 for transferee liability.  The Court noted that it had never specifically held that federal law did not apply, but that the First (Frank Sawyer Trust), Second (Diebold Foundation), and Fourth (Starnes) had all rejected the Service position that the last requirement of the Section 6901 test was in fact a two prong test.   Section 6901 requires 1) one party to owe the tax, 2) another party to be a transferee under Section 6901, and then 3) an independent state law/equity principal holding the other party liable for the tax.  The Service has argued (unsuccessfully) that the third requirement necessitates first a federal “substance over form” determination-or other federal analysis-, followed by the application of the state’s fraudulent transfer analysis.  Often, the state law on substance over form will not be as robust, allowing the pesky form to thwart the liability review under state law.
  • $#!!, don’t mess with Whistleblower 11332-13W, he/she won’t back down.  The Tax Court has agreed to allow this case to move forward anonymously.  Although my voyeuristic tendencies make me wish I knew what company was evading taxes (and possibly connected to terrorists), the facts do seem to lean towards keeping this one buttoned up.  Apparently, Mr. or Mrs. Whistleblower had already been threatened with death, and armed guards had broken into his or her office.  S/He was also able to show specific recognizable events would allow the employer and other targets to identify the Whistleblower, and there could be considerable social and professional stigma if his or her identity were to be disclosed.  Perhaps I am too anxious, but working somewhere that was involved in tax evasion and terroristic organizations would really add a level of stress to my life that I could do without.
  • From Jack Townsend’s Federal Tax Crimes Blog, a good discussion on the Zwerner verdict upholding a 150% FBAR penalty, which links to another great discussion on the Tax Controversy Report.  I have no objection, overall, to the US going after folks who stash money overseas and fail to report it to the Service, but this does seem fairly harsh—I should add the caveat that I do not know the underlying facts, and perhaps those would sway me to believe Mr. Zwerner received his just deserts.
  • SCOTUS will not review Nakano v. United States, which we covered previously in SumOp here, where the 9th Cir. held that a levy notice constituted notice and demand for Section 6303 purposes.  Keith should have another post on Nakano in the near future.


Summary Opinions for 11/29/2013

Happy Holidays!  Sorry for the delay in posting, hectic weekend, but what a great weekend.  Thanksgiving, the start of Hanukkah, Keith had his first grandson, and it seemed like every third car had a Christmas tree tied to the top.  Although it was a short week, there was still some excellent procedure news.  Let’s start with a few Thanksgiving related items.

  • I found this estimate of the amount of taxes paid on the average Thanksgiving dinner on Accounting Today.  The Tax Foundation has a summary of travel taxes and tolls (road taxes) for travel along the northeast found here.  I’m not sure how accurate either are, but interesting posts about Thanksgiving and taxes.
  • Jack Townsend’s Tax Procedure Blog has a summary of Eichelburg v. Comm’r, where the taxpayer’s claim was tossed for failing to timely file under the timely mailing is timely filing rule in Section 7502.  His sin—thriftiness (and not following the rules).  He went for the FedEx Express Saver, which is not an enumerated acceptable private delivery service under Notice 2004-83.
  • From the Freakanomics blog, a podcast regarding fighting poverty. This post has to do with charity, but I think the concepts apply to the reallocation of assets (EITC) under the Code and the incentives that could raise a family up the socioeconomic ladder (student loan interest deduction, mortgage interest deduction).  Oversimplifying the post, cash infusions are great at doing certain things like eliminating a current need, but not very good at assisting a family in moving out of poverty.  Although this is not a stunning revelation, the stories and examples are very interesting, and made me wonder if we had good evidence behind a lot of the incentives and deterrents under the code.  More behavioral economics.  Perhaps we should change this to a behavioral economics blog.
  • MauledAgain has a discussion of the Tax Court’s holding in Jibril v. Comm’r, where the Court disallowed dependency exemptions for a taxpayer’s cousins.  The Court held that cousins did not fall within “qualifying children” under Section 152(c)(2) or “qualifying relatives” under Section 152(d)(2).  Although this is not a novel holding, the last paragraph of Jim Maule’s post highlights the Court’s comments regarding the “sympathetic” taxpayer, and outlines some suggestions  from Professor Maule on how to eliminate the harsh application of the statue when family members are supporting family members not specifically outlined in the statute.
  • Messrs. Lipton, Richardson, and Jenner, attorneys at Baker & McKenzie, have written an article published at 119 Journal of Taxation 267 (December 2013), about the Tax Court holding in Barnes Group, Inc. v. Comm’r, concluding that the Tax Court wrongly applied the step transaction doctrine and discussing the imposition of penalties even though the taxpayer had a “substantial authority” opinion from PWC.  The Baker attorneys disagree with the collapsing of the transaction under step-transaction, arguing that the transaction was very similar to a Rev. Rul. previously issued, and the differences were minor technicalities. What caught my eye was the discussion regarding the imposition of penalties even though PWC had issued a substantial authority opinion.  Initially, I thought this was going to be more like the Canal Corp case, where the Court found the messy, aggressive opinion by PWC was not reasonable to rely upon.  However, upon reviewing Barnes, the holding regarding the penalty was that Barnes failed to follow PWC’s advice when it did not comply with the “mere technicalities”, and waived its right to rely on PWC’s opinion.  The Baker attorneys felt reasonable cause should be available, since the taxpayer relied on a competent advisor and that this opinion created substantial issues regarding advisor reliance.  I, personally, thought the step-transaction doctrine was the key, and the case did not tread any new ground on advisor reliance.
  • The Tax Court, in Meyer v. Comm’r, remanded a case back to Appeals for review after the SO failed to properly verify that statutory notice had been issued after the IRS issued a substitute for return.  The case has a good discussion of the IRS procedures in this area, including how an SFR relates to a stat notice and how Appeals is supposed to verify that the IRS issued a stat notice when the taxpayer claims to have not received it.  In light of Appeals not having adequately verified the stat notice’s issuance, there was also a discussion regarding whether the Court should remand or simply hold for the taxpayer. In this case, the Tax Court remanded, though it suggested that in the future, it may toss not remand and find for the taxpayer, and invalidate the assessment. If time permits, we may have more on this case later in the week or next week.
  • Chief Counsel has issued advice, found here, regarding whether the Service must apply restitution payments required because of corporate income tax to the income tax, or whether it may be applied to other unpaid liabilities.  Counsel determined that the Service can apply the payments as involuntary payments, in the Service’s best interests.  Counsel relied on US v. Pepperman, out of the Third Circuit, which held that involuntary payments are defined as “any payment received by…the United States as a result of distrait or levy or from a legal proceeding in which the Government is seeking to collect its delinquent taxes or file a claim therefor.”  Counsel determined that restitution only comes from court orders or settlements, and therefore was an involuntary payment.  I would be surprised if there was not some argument to the contrary. This notice relates to restitution that arose prior to the effective date of Section 6201(a)(4), which allows IRS to assess certain orders of restitution.  Either way, practitioners should be cognizant of this issue. Saltzman and Book Chapter 10 (revised and coming out next month) has a thorough discussion on the new restitution provisions, and I suspect a post on this coming up soon.
  • Last week we touched on Notices 2013-78 and 2013-79, which contained draft procedures for seeking competent authority assistance and advance pricing agreements.  KPMG provides a small summary of some of the changes in the new notices. I will either try to provide more information regarding these notices in the coming days and weeks, or find other good summaries, as the changes are substantial and important.