Summary Opinions — Catch Up Part 1

Playing a little catch up here, and covering some items from the beginning of the year.  I got a little held up working on a new chapter for SaltzBook, and a supplement update for the same.  Both are now behind us, and below is a summary of a few key tax procedure items that we didn’t otherwise cover in January.  Another edition of SumOp will follow shortly with some other items from February and March.

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  • In CCA 201603031, Counsel suggests various procedures for the future IRS policy and calculations for the penalty for intentional failure to file electronically.  The advice acknowledges there is no current guidance…I wrote this will staring at my paper 1040 sitting right next to my computer.  Seems silly to do it in pencil, and then fill it into the computer so I can file electronically.
  • This item is actually from March.  Agostino and Associates published its March newsletter.  As our readers know, I am a huge fan of this monthly publication.  Great content on reducing discharge of indebtedness income and taxation.  Also an interesting looking item on representing real estate investors, which I haven’t had a chance to read yet, but I suspect is very good.
  • The IRS has issued a memo regarding its decision to apply the church audit restrictions found under Section 7611 (relating to exemption and UBI issues) to employment tax issues with churches also.
  • Panama Papers are all the rage, but I know most of you are much more interested in Iggy Azalea’s cheating problems (tax and beau).  Her Laker fiancé was recorded by his teammate bragging about stepping out and she had a sizable tax lien slapped against her for failure to pay.  She has threatened to separate said significant other from reproductive parts of his body, but it appears she has approached the tax debt with a slightly more level head, agreeing to an installment agreement.
  • I’m a rebel, clearly without a cause.  I often wear mismatched socks, rarely take vitamins, and always exceed the speed limit by about 6 MPH.  But, professionally, much of my life is about helping people follow the rules.  In Gemperle v. Comm’r, the taxpayers followed the difficult part of the conservation easement rules, and obtained a valid appraisal of the value, but failed to follow the simple rule of including it with his return.  Section 170(h)(4)(B)(iii) is fairly clear in stating the qualified appraisal of the qualified property interest must be included with the return for the year in question.  And, the taxpayers failed to bring the appraiser to the hearing as a witness, allowing the IRS to argue that the taxpayer could not put the appraisal into evidence because there was no ability to cross examine.  In the end, the deduction was disallowed, and the gross valuation misstatement penalty was imposed under Section 6662(h) of 40%.  The Section 6662(a) penalty also applied, but cannot be stacked on top of the 40% penalty pursuant to Reg. 1.6662-2(c).  The Court found that there was no reasonable cause because the taxpayer failed to include the appraisal on the return, so, although relying on an expert, the failure to include the same showed to the Court a lack of good faith.  Yikes! Know the rules and follow them. It is understandable that someone could get tripped up in this area, as other areas, such as gift tax returns, have different rules, where a summary is sufficient (but perhaps not recommended).
  • The Shockleys are fighting hard against the transferee liability from their corporation.  Last year we discussed their case relating to the two prong state and federal tests  required for transferee liability under Section 6901.  In January, the Shockleys had another loss, this time with the Tax Court concluding they were still liable even though the notice of transferee liability was incorrectly titled and had other flaws.  Overall, the Court found that it met and exceed the notice requirements and the taxpayer was not harmed.
  • The Tax Court, in Endeavor Partners Fund, LLC v. Commissioner, rejected a partnership’s motion for injunction to prevent the IRS from taking administrative action against its tax partner.  The partnership argued that allowing the IRS to investigate the tax matters partner for items related to the Tax Court case (where he was not a party) would “interfere with [the Tax] Court’s jurisdiction” because the Service could be making decisions on matters the Court was considering.  The Court was not troubled by this claim, and held it lacked jurisdiction over the matters raised against the tax matters partner, and, further, the partnership’s request did not fall within an exception to the Anti-Injunction Act.
  • Wow, a financial disability case where the taxpayer didn’t lose (yet).  Check out this 2013 post by Keith (one of our first), dealing with the IRS’s win streak with financial disability claims.  Under Section 6511(h), a taxpayer can possibly toll the statute of limitations on refunds with a showing of financial disability.  From the case, “the law defines “financially disabled” as when an “individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment … which has lasted or can be expected to last for a continuous period of not less than 12 months,” and provides that “[a]n individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.””  I’ve had some success with these cases in the past, but I also had my ducks in a row, and compelling facts.  So, not something the IRS would want to argue before a judge.  The Service gets to pick and choose what goes up, which is why it wins.  In LeJeune v. United States, the District Court for the District of Minnesota did not grant the government’s motion for summary judgement, and directed further briefing and hearing on whether the taxpayer’s met their administrative requirements.
  • Another initial taxpayer victory, which could result in an eventual loss, but this time dealing with TFRP under Section 6672.  In Hudak v. United States, the District Court for the District of Maryland dismissed the IRS’s motion for summary Judgement, finding that a jury could determine that a CFO (here Mr. Mules) was not a responsible person with the ability to pay.  The CFO admitted he knew the company wasn’t complying with its employment tax obligations, and knew other creditors were being paid.  He alleged, however, that he lacked the ability (as CFO) to make the required payments…seems like an uphill battle.  He could win though, as the contention is that the owner/CEO/President (Mr. Hudak) made those decisions, had that authority, and misled the CFO to believe the payments were made.  Neither side will likely be able to put much past the Court in this matter, as Judge Marvin Garbis is presiding (he who authored various books on tax, including Cases and Materials on Tax Procedure and Tax Fraud and Federal Tax Litigation).

 

Important New Partnership Audit Rules Change Taxation of Partnerships

Today’s guest post is written by attorneys from the San Antonio office of Strasburger & Price LLP, a Texas based firm with a strong tax practice area. Farley P. Katz is a partner at Strasburger who focuses his practice on civil and criminal tax controversies. He has written a variety of tax articles including The Art of Taxation: Joseph Hémard’s Illustrated Tax Code, 60 Tax Lawyer 163 (2007) and The Infernal Revenue Code, 50 Tax Lawyer 617 (1997). Joseph Perera represents clients on a variety of federal and state tax matters. Before joining Strasburger, he worked in the National Office of the Office of Chief Counsel. Katy David is a partner at Strasburger who counsels clients on tax matters, including federal income taxation and state margin and sales taxation.  We welcome these first time guest bloggers who provide an explanation of the new law impacting partnership tax procedures.  I always hoped that if I waited long enough I would not have to learn TEFRA.  Keith 

On November 2, 2015, the Bipartisan Budget Act of 2015 (BBA) became law. Buried in the BBA are new rules replacing the long-standing Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the Electing Large Partnership rules that previously governed partnership audits. These new rules turn established partnership tax law on its head.

Under BBA rules, if a partnership understates its income or overstates its deductions, it is subject to income tax. Not only can the partnership owe income tax, the tax will not be based on the income for the year in question, but instead on one or more prior years’ income. Consequently, the economic burden of the tax could be borne by partners who had no interest in the partnership when the income was generated. Conversely, if a partnership overstated its income in a prior year, the benefit of correcting that overstatement will accrue to the current partners, not those who were partners in the earlier year. Finally, if a partnership elects out of the new provisions (assuming it is eligible), the IRS will no longer be able to conduct a centralized audit controlling each partner’s distributive share, but will instead have to audit each partner individually.

The BBA rules apply to partnership returns filed after 2017, although a partnership may elect to have these rules apply to returns filed before 2018. Not only will these new rules vastly complicate the audit of partnerships that elect out, but they will also require that virtually every partnership in existence consider electing out or revising its partnership agreement to address BBA.

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Who is subject to BBA?

All partnerships are subject to the new rules unless they elect out. Although TEFRA excluded partnerships with 10 or fewer individual (excluding NRAs), C corporation or estate partners, BBA has no such automatic exception. As a result, all partnerships are now covered: even those with as few as two individuals, family limited partnerships, LLCs treated as partnerships for tax purposes, and tiered partnerships. The only excluded partnerships are those that are eligible to elect out and do so on a timely basis.

What does BBA do?

BBA is similar to TEFRA in many respects. Like TEFRA, it requires that all items of income, loss, deduction or credit be determined at the partnership level. Like TEFRA, BBA provides that a partner’s tax return is consistent with the K-1 the partnership issued, unless the partner files a notice of inconsistent treatment. If a partner fails to file the notice, the IRS may treat any underpayment of tax resulting from the partner taking an inconsistent position as a mere mathematical or clerical error and assess the tax without issuing a deficiency notice.

Like the Tax Matters Partner under TEFRA, BBA’s “Partnership Representative” (who does not have to be a partner) is the point of contact for the IRS and can bind the partnership. Unlike TEFRA, however, BBA provides that all tax attributable to adjustments (called the “imputed underpayment”) is assessed against and collected from the partnership, along with interest (determined from the due dates for the reviewed years) and penalties. Also unlike TEFRA, BBA provides that penalties are exclusively determined at the partnership level; there is no partner-level defense. 

How does BBA calculate an underpayment?

Under BBA the years audited are called the “reviewed years,” and the year in which an audit becomes final is called the “adjustment year.” The imputed underpayment is determined by adding together or “netting” all adjustments to items of income, gain, loss and deduction and multiplying the result by the highest tax rate in effect for the reviewed years under section 1 (individuals) or section 11 (corporations). The imputed underpayment is calculated without regard to the nature of the adjustments; all positive or negative adjustments to capital gains, losses, whether long or short term, items of ordinary income or other types of income or loss, are netted. Nor does it appear to matter that items might be subject to restrictions on deduction at the partner level such as the “at risk” or “passive activity” limitations. If the audit adjusts tax credits, those adjustments are taken into account.

Changes in partners’ distributive shares are treated differently and are not netted. For example, if an audit reallocates income from one partner to another, BBA counts only the increase in income, not the decrease, and adds the increase to the partnership underpayment. This treatment will result in phantom income and tax to the partnership even though it does not change the net income reported on the Form 1065.

What if there would be less tax if the adjustments flowed through to the partners?

In many circumstances, the imputed underpayment will be less overall if the adjustments flowed through to the partners. For example, a partner might have a net operating loss that could absorb an adjustment. BBA provides that Treasury shall issue procedures allowing partners to elect to file amended returns for the reviewed years (i.e., the audited years). If the amended returns take into account all adjustments made, and if the tax is paid, then the adjustments will be removed from the partnership level adjustment. Reallocations of distributive shares will be removed only if all the partners affected file amended returns.

Treasury also will issue rules to reduce the partnership level tax rate without requiring amended returns from the partners in certain situations, such as where there are tax-exempt partners. A similar rule will apply lower tax rates if the adjustment includes ordinary income to a C corporation partner (which would pay a lower tax than an individual partner would) or if the adjustment includes capital gain or qualified dividends to an individual partner. Finally, Treasury may issue regulations that make other modifications to the imputed underpayment in similar circumstances.

A partnership seeking to reduce its imputed underpayment under this provision must supply supporting documentation to the IRS within 270 days of issuance of a Proposed Partnership Adjustment.

Can a partnership elect to make the partners liable for the adjustments?

A partnership may elect to have the adjustments shown in a Final Partnership Adjustment (FPA) flow through to its partners. The partners’ tax for the year of the election will be increased by the amount their tax in the reviewed years would have increased based on their distributive share of the adjustments made. In addition, the tax will include any tax that would have resulted from those adjustments in the years after the reviewed year and before the election year. All tax attributes, such as basis, will be affected by these adjustments.

The partnership must elect this flow-through within 45 days of issuance of the FPA. If it makes the election, the partnership will not be liable for any tax. Although the statute is unclear, it appears that the partnership can still contest the FPA in court.

The effect of this election is similar to a TEFRA adjustment, but instead of actually imposing tax in the earlier years, it imposes a tax in the year of the election. In addition to the tax, partners will liable for any penalties and interest, but the interest rate is increased by two percentage points and runs from the earlier years that generated the liability.

What if an audit reduces the tax reported?

If a partnership audit reduces the income originally reported or increases the net loss originally reported, these changes will constitute adjustments for the adjustment year (audit year) and will flow through to the partners for that year.

As under TEFRA, partnerships that have over reported their income may file an Administrative Adjustment Request (AAR), but the IRS will treat any decrease in income or increase in loss as occurring in the year the AAR is filed. If the partnership determines it underpaid its tax, it may file an AAR, but payment of tax is due on filing.

TEFRA provided that the Tax Matters Partner could file an AAR on behalf of the partnership or that any other partner could file an AAR on the its own behalf. However, under BBA, only the partnership can file an AAR; a partner no longer may file its own AAR.

Who can elect out? 

Partnerships with 100 or fewer partners can elect out, if the partners are all individuals (including NRAs), C corporations, foreign entities that would be treated as C corporations if they were domestic, or estates of deceased partners. An S corporation also may qualify, if it identifies all of its shareholders to the IRS. In that event, each of the S corporation’s shareholders counts as a partner for purposes of the “100 or fewer partners” test. A partnership that has even one partner that is itself a partnership cannot elect out, nor does it appear that a partnership could elect out if it has a trust as partner. Although TEFRA contained a provision that a husband and wife counted as one partner for the similar “10 or fewer” rule, BBA contains no such exception. 

How does a partnership elect out?

An election applies to one year only and must be made in a timely filed return for that year. The partnership must identify all the partners to the IRS and give the partners notice of the election.

What happens if a partnership elects out?

If a partnership elects out of BBA, the consistency provisions no longer apply. As a result, each partner may take an inconsistent position regarding partnership items reported on its K-1, without providing notice to the IRS of the inconsistent position.

If a partnership elects out, the IRS still could audit the partnership, but it must make all tax adjustments at the partner level. Accordingly, it would have to issue 30-day letters or notices of deficiency to the individual partners. We expect many partnerships that were subject to TEFRA to elect out of BBA, which will put the IRS in a bind. If the IRS issues a taxpayer a notice of deficiency and the taxpayer petitions the Tax Court, the IRS ordinarily is barred from issuing another deficiency notice if it later discovers additional adjustments. Accordingly, if a partnership elects out of BBA and the IRS makes adjustments on audit, it will have to decide whether to fully audit the returns of the partners (significantly increasing its workload) or issue notices of deficiency and thereby risk losing the opportunity to make further adjustments to those returns.

What are the procedural rules for audits? 

The procedural rules are similar to those under TEFRA. The IRS must give notice of the beginning of the audit. The IRS, however, is required to give notice of any Proposed Partnership Adjustment and then must wait at least 270 days before issuing a FPA. The 270 days gives the partnership time to produce documentation supporting lower tax rates for an imputed underpayment. The IRS must wait 90 days after issuing the FPA before assessing, and—if the partnership timely petitions in court—the IRS must wait until the decision is final to assess. Petitions in Tax Court do not require pre-payment, but a partnership filing in district court or the Claims Court requires payment of the estimated imputed underpayment.

There are, however, a number of procedural differences between BBA and TEFRA. For example, BBA requires that the IRS issue a Proposed Partnership Adjustment, which has legal consequences, whereas TEFRA did not require that an analogous 60-day letter be issued. TEFRA also provided that any partner could participate in the audit and many could bring suit, whereas BBA provides that only the partnership may take those actions. TEFRA also provided procedures by which the IRS or a partner could convert partnership items to partner-level items, effectively opting out of TEFRA, but BBA contains no such provisions. TEFRA provided that if an AAR is filed and the IRS did not act on it, the taxpayers could bring a suit in court, whereas BBA provides for such suit only if the IRS issues an FPA, apparently leaving taxpayers without remedy.

Statute of limitations 

BBA provides that an adjustment generally must be made (presumably “assessed”) within 3 years from the later of (1) the date the partnership return for the reviewed year was filed, (2) the due date for that return, or (3) the date the partnership filed an AAR for the year. However, if the partnership timely submitted documentation to support a reduced tax rate, the adjustment may also be made within 270 days of the date all such documentation was submitted, plus any extensions of time given to submit. Finally, even if the partnership did not request a reduced tax rate, an adjustment also will be timely if made within 270 days of the date a Proposed Partnership Adjustment was issued. An adjustment made within any of these periods is timely, and the partnership can extend the time to make the adjustment. The periods also are extended in other situations. If the amount of unreported income exceeds 25 percent of the gross income of the partnership for the reviewed year, the IRS has 6 years to make the adjustment. Moreover, if the partnership did not file a return or filed a fraudulent return, there is no limitation.

Will there be guidance? 

The BBA rules make fundamental changes in the tax treatment of partnerships and raise a multitude of new questions. Treasury has been directed to issue regulations, and the IRS is expected to issue additional guidance. Nevertheless, the rules undoubtedly will result in much confusion and litigation in the coming years.

What should partnerships do now? 

The BBA raises a number of issues that taxpayers should consider. Among them is whether partnership agreements need to be revised to address the BBA. Some partnerships, for example, might consider provisions that require electing out of the BBA (if that is possible). Under the BBA, the economic consequences of a tax audit of a given year or years will accrue in a subsequent year when the partnership might have different partners. Taxpayers might consider provisions addressing such possibilities and providing for appropriate tax sharing or allocation provisions. In any event, taxpayers using partnerships for businesses or investments and persons buying or selling partnership interests need to be aware of these provisions and should consult with their tax advisors.

Summary Opinions for 9/21/15 to 10/2/15

Running a little behind on the Summary Opinions.  Should hopefully be caught up through most of October by the end of this week.  Some very good FOIA, whistleblower, and private collections content in this post.  Plus fantasy football tax cheats, business on boats, and lots of banks getting sued.  Here are the items from the end of September that we didn’t otherwise write about:

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  • Let’s start with some FOIA litigation. The District Court for the District of Columbia issued two opinions relating to Cause of Action, which holds itself out as an advocate for government accountability.  On August 28th, the Court ruled regarding a FOIA request by Cause for various documents relating to Section 6103(g) requests, which would include all request by the executive office of the Prez for return information, plus all such requests by that office that were not related to Section 6103(g), and all requests for disclosure by an agency of return information pursuant to Sections 6103(i)(1), (2), & (3)(A).   The IRS failed to release any information pursuant to the last two requests, taking the position that records discussing return information would be “return information” themselves, and therefore should be withheld under FOIA exemption 3.  There are various holdings in this case, but the one I found most interesting was the determination that the request by the Executive Branch and the IRS responses may not be “return information” per se, which would require a review by the IRS of the applicable documents.  Although the petition was drafted in broad terms, this Washington Times article indicates the plaintiff was seeking records regarding the Executive Branch looking into them specifically, presumably as some type of retaliation.

In a second opinion issued on September 16th, in Cause of Action v. TIGTA, Judge Jackson granted TIGTA’s motion for summary judgement because after litigation and in camera review, the Court determined none of the found documents were responsive.  This holding was related to the same case as above, but the IRS had shifted a portion of the FOIA request to TIGTA.  Initially, TIGTA issued a Glomar response, indicating it could not confirm or deny the existence (I assume for privacy reasons, not national defense).  The Court found that was inapplicable, and TIGTA was forced to do a review and found 2,500 records, which it still withheld.  Cause of Action tried to force disclosure, but the Court did an in camera review and found the responsive records were not actually applicable.

  • That was complicated.  Now for something completely different.  This HR Block infographic is trying to get you all investigated for tax fraud.  In summary, 75 million of the 319 million people in America play fantasy football, and roughly none are paying taxes on their winnings.  If you click on the infographic, we know you are guilty.  Thankfully, my teams this year are abysmal, so I won’t be committing tax fraud…my wife on the other hand has a juggernaut in our shared league…To all of our IRS readers, please ignore this post.
  • Now a couple whistleblower cases.  In Whistleblower One 10683W v. Comm’r, the Tax Court held that the whistleblower was entitled to review relevant information relating to the denial of the award based on information provided by the whistleblower.  The whistleblower had requested information relating to the investigation of the target, the disclosed sham transaction, and the amounts collected, but the IRS took the position that certain items requested were not in the Whistleblower Office’s file, and were, therefore, beyond the scope of discovery (denied, but we don’t have to explain ourselves).  The Court disagreed and found the information was relevant and subject to review by the whistleblower.  Further, the IRS was not unilaterally allowed to decide what was part of the administrative record.  Another case that perhaps casts a negative light on how the IRS is handling the whistleblower program.
  • On September 21st, the District Court for the Middle District of Florida declined a pro se’s request for reconsideration of a petition for injunctive relief against the IRS to force it to investigate his whistleblower claim in Meidinger v. Comm’r (sorry couldn’t find a free link to this order).  Mr. Meidinger likely knew the court lacked jurisdiction, and this was the purview of the tax court —  Here is a write up by fellow blogger, Lew Taishoff, on Mr. Meidinger’s failed tax court case.  Lew’s point back in 2013 on the case still rings true:  “But the administrative agency here has its own check and balances, provided by the Legislative branch.  There’s TIGTA, whose mission is ‘(T)o provide integrated audit, investigative, and inspection and evaluation services that promote economy, efficiency, and integrity in the administration of the internal revenue laws.’ Might could be y’all should take a look at how the Whistleblower Office is doing.”  The tax court really can’t force an investigation, but TIGTA could put some pressure on the WO to do so.  After taking a shot at the IRS, I should note I know nothing of the facts in this case, and Mr. Meidinger may have no right to an award, and TIGTA has flagged various issues in the program.  It just doesn’t feel like significant progress is being made.
  • I found Strugala v. Flagstar Bank  pretty interesting, which dealt with a taxpayer trying to bring a private action under Section 6050H.  Plaintiff Lisa Strugala filed a class action suit against Flagstar Bank for its practice of reporting, and then in future years ceasing to report, capitalized interest on the borrower’s Form 1098s.  Flagstar Bank apparently had a loan that allowed borrowers to pay less than all the interest due each month, resulting in interest being added to the principal amount due.  At year end, the bank would issue a 1098 showing the interest paid and the interest deferred.  In 2011, the bank ceased putting the deferred interest on the form.  Plaintiff claims that the bank’s practice violated Section 6050H, which only requires interest paid to be included.  The over-reporting of interest, she claims, causes tens of thousands of tax returns to be filed incorrectly.  Further, upon the sale of her home, Strugala believed that the bank received accrued interest income that it didn’t report to her.  A portion of the case was dismissed, but the remainder was transferred to the IRS under the primary jurisdiction doctrine.  The Court found the IRS had not stated how the borrower should report interest in this particular situation, and that it should determine whether or not this was a violation.  In addition, Section 6050H didn’t have a private right under the statute.  I was surprised that this was not a case of first impression.  The Court references another action from a few years ago with identical facts.  However, perhaps I shouldn’t not have been, as this is somewhat similar to the BoA case Les wrote about last year, where taxpayers sued Bank of America alleging fraudulent 1098s had been issued relating to restructuring of mortgage loans.
  • The Tax Court has held in Estate of John DiMarco v. Comm’r, that an estate was not entitled to a charitable deduction where individual beneficiaries were challenging the disposition of assets.  Under the statute, the funds have to be set aside solely for charity, and the chance of it benefiting an individual have to be  “so remote as to be negligible.”  Here, the litigation made it impossible to make that claim.
  • My firm has a fairly large maritime practice, which makes sense given our sizable port in West Chester, PA (there is not actually a port, but we do a ton of maritime work).  That made me excited about this crossover tax procedure and maritime  Chief Counsel Advice dealing with Section 1359(a).  Most of our readers probably do not run across Section 1359 too frequently.  Section 1359 provides non-recognition treatment for the sale of a qualifying vessel, similar to what Section 1031 does for like kind real estate transactions.  This applies for entities that have elected the tonnage tax regime under Section 1352, as opposed to the normal income tax regime.  In general, the replacement vessel can be purchased one year before the disposition or three years afterwards.  But, (b)(2) states, “or subject to such terms and conditions as may be specified by the Secretary, on such later date as the Secretary may designate on application by the taxpayer.  Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.”  Those regulations do not exist.  The CCA determined that even though the regulations do not exist, the IRS must consider a request for an extension of time to purchase a replacement vessel, as the Regs are clearly supposed to deal with extensions by request.
  • From The Hill, another article against the IRS use of private collection agencies.

 

 

 

Summary Opinions for August 1st to 14th And ABA Tax Section Fellowships

Before getting to the tax procedure, we wanted to let everyone know the application for the ABA Tax Section fellowships is now open.  Here is a link to the release regarding the applications and the Christine A. Brunswick Public Service Fellowships.   Here is another link regarding the process, which also highlights recent winners.   I’ve had the pleasure of meeting many of the recipients, and it is an esteemed group providing amazing services thanks to the ABA Tax Section.

A few quick follow ups to some items from last week.  We had a wonderful post from Robin Greenhouse on the BASR Partnership case dealing with the statute of limitations and fraud of the tax preparer, which can be found here.  Ms. Greenhouse and Les were both also quoted in a story on the topic for Law360, which can be found here (may be behind a subscription wall, sorry).  Keith posted on the Ryscamp case, which dealt with jurisdiction to review a determination that a taxpayer’s position is frivolous.  Keith was also quoted about the case in the Tax Notes article, which can be found here (also behind subscription wall, sorry again).

Here are some of the other tax procedure items we didn’t otherwise cover:

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  • We flagged earlier in the month that Congress has overturned Home Concrete with the new Highway Bill.  The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 has a few other changes to tax procedure laws.  Probably the biggest news is that partnerships and s-corps will need to file tax returns three months and fifteen days after the close of their tax years (for calendar filers, that will be March 15).  This is a change for partnerships, but not s-corps.  C-corporations, however, will not have to file until four months and fifteen days after the close of the tax year (April 15 for calendar year filers).  The goal of this is to get k-1s to individuals prior to the April 15 filing deadline.  I assume c-corps were pushed back a month on work flow concerns for preparers.  The act also revised the extended due dates for various types of returns.  In addition, next year, FBARs will be due April 15, and there will be a possible six month extension.
  • The District Court for the District of New Jersey decided a lien priority case where a bank recorded a mortgage regarding a home equity line of credit (HELOC), some portion of which may have been withdrawn after a federal tax lien was filed.  In US v. Balice, the bank argued that the withdrawal date of the funds on the HELOC was irrelevant and state law directed that the date related back to the original recording date (the Court declined to offer an opinion about whether or not this is the actual NJ law).  The government argued that federal law applied, which held first in time is first in right, but only to the extent the funds were already withdrawn.  The Court held that state law defined the property rights, but federal law governed the lien priority.  Under federal the federal statute, the security interest was only perfected when the funds were actually borrowed.  See Section 6323(a).
  • The IRS has issued two important Revenue Rulings in the international arena.  The first outlines the procedures for making competent authority requests.  The second is for taxpayers seeking advanced pricing agreements, and can be found here.
  • Jack Townsend on his Federal Tax Procedure blog has a discussion of Sissel v. US Dept. HHS, where the majority, concurring and dissenting opinions all review the Originations Clause of the Constitution and its application to Obamacare.
  • I unabashedly praised John Oliver’s sultry singing about the IRS with Michael Bolton previously in our pages.  In that ditty, Oliver pointed out we should be hating on Congress, not the IRS.  Peter Reilly over at Forbes makes a good point that in Oliver’s new IRS bit, he should probably be complaining about Congress again and not the IRS about the lack of church audits (check out Section 7611, which is Congress’ doing).
  • Service issued guidance to its new international practice unit on transactions that might generate foreign personal holding company income under subpart F.  Caplin & Drysdale have coverage here.
  • The Tax Court seems to have just thrown an assist to the Service in Summit Vineyard Holdings v. Comm’r, holding that an individual had apparent authority to execute an extension for the statute of limitations, even though the individual lacked actual authority.  The Court somewhat saved the Service, because it probably should have known that the TMP was a different entity in the year in question, as it had been informed of the switch.  The Court noted the auditing agent had very limited TEFRA knowledge (I’m not sure that excuses the IRS from properly following the rules).  The agent had the manager of the then current TMP sign, instead of the TMP for the year in question.  There appears to be somewhat of a split on this, but the Court determined that the Ninth Circuit (where the appeal would lie) would apply state law and find apparent authority based on the evidence and actions taken by the individual.  Saved by the Court!  Based on the facts, it does not seem that unfair though, as the individual was the manager of both TMPs, and it seems like he also thought he was properly executing the paperwork and extending the SOL.
  • In Chief Counsel Advice, the Service has concluded it can only apply the Section 6701 aiding and abetting penalty one time against a person who submitted false retirement plan application documents.  This is the case even though multiple documents could be submitted with fraudulent information, and even though it could result in an understatement for the plan and each participant.
  • The Service has also released PMTA 2015-11, which outlines the application of the penalty under Section 6662A(c) for taxpayers who failed to disclose participation in listed transactions involving cash value life insurance to provide welfare benefits.  This is a very specific issue, so I won’t go into much detail, but the guidance is fairly thorough and provides good insight into the Service’s thoughts on the matter.
  • And another Section 7434 case.  I wrote about the Angelopolous case earlier in the week, which dealt with who was the “filer” of the information return.  In US v. Bigley, the District Court for the District of Arizona reviewed whether an employee’s claim against his employer for false returns was time-barred.  The suit was well past the six year statute, and the employee clearly had knowledge over the last year.  Section 7343(c) outlines the statute of limitations, and states the statute is the later of six years or one year after the return is discovered by exercise of reasonable care.    The Court found that the employee received the information returns upon filing, so the six year statute clearly applied, and it would be impossible to have the one year statute in that situation.  The actual language is “1 year after the date such fraudulent information return would have been discovered by exercise of reasonable care.”  I wonder if it would be possible to create a larger fraudulent scheme, whereby the recipient would receive the information return but not realize it was fraudulent until a later date.  Would the one year statute then apply?
  • My brother-in-law just got a Ph.D. (congrats Alex! I doubt he will ever read this).  In honor of that esteemed accomplishment, here is an infographic highlighting all kinds of negative financial and other statics related to Ph.Ds.  I make no assurances to the veracity of the graphic’s claims, and I am generally in favor of graduate degrees, but I found the stats interesting.

 

Summary Opinions for July

Here we go with some of the tax procedures from July that we didn’t otherwise cover.  This is fairly long, but a lot of important cases and other materials.  Definitely worth a review.

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  • Starting off with some internal guidance from the Service, it has held that the signature of the president of a corporation that subsequently merged into a new corporation was sufficient to make a power of attorney binding on the new corporation (the pres served in the same capacity in NewCo).  In CC Memo 20152301F, the Service determined it could rely on the agent’s agreement to extend the statute of limitations on assessment based on the power of attorney.  There is about 14 pages of redacted material, which makes for a fairly uninteresting read.  There was some federal law cited to allow for the Service reliance, but it also looked to IL law to determine if the POA was still valid. This would have a been a more interesting case had the president not remained president of the merged entity.
  • The Tax Court, in Obiakor v. Comm’r, has held that a taxpayer was entitled to a merits review by the Service and the court during a CDP case of the underlying liability for the TFRP where the Service properly sent the Letter 1153 to the taxpayer’s last known address, but the taxpayer failed to receive the letter.  The letter was returned to the Service as undeliverable, and the Service did not show an intent by the taxpayer to thwart receipt. This creates a parallel structure for TFRP cases with deficiency cases regarding the ability of the Tax Court to review the underlying liability when the taxpayer did not previously have an opportunity to do so based on failure to actually receive a notice mailed to their last known address.  Unfortunately for the taxpayer, in the Court’s de novo review, the Court also found the taxpayer failed to make any “cogent argument” showing he wasn’t liable.
  • In Devy v. Comm’r, the Tax Court had an interesting holding regarding a deficiency created by a taxpayer improperly claiming refundable credit.  The IRS allowed the credit requested on the return and then applied it against a child support obligation the taxpayer owed.  Subsequently, the IRS determined that he was not entitled to the credit and assessed a liability.  The Tax Court found it lacked the ability to review the Service’s application of the credit under Section 6402(g), which precludes any court in the US to review a reduction of a credit or refund for past due child support obligations under Section 6402(c), as well as other federal debts and state tax intercepts .  The taxpayer also argued that he should not have to repay the overpayment because the Service elected to apply it against the child support obligation, not pay it to him.  The Court stated that whether it is paid over to the taxpayer or intercepted, the deficiency was still owed by the taxpayer.  See Terry v. Comm’r, 91 TC 85 (1988).
  • With a lack of splits in the Circuits, SCOTUS has denied certiorari in Mallo v. IRS.  Mallo deals with the discharge of tax debts when the taxpayer files late tax returns.  Keith posted in early June on the Solicitor General’s position before SCOTUS, urging it to deny cert.  Keith’s post has a link to our prior coverage on this matter.
  • The DC Circuit had perhaps its final holding (probably not) in Tiger Eye Trading, LLC v. Comm’r, where it followed the recent SCOTUS holding in Woods, affirming the Tax Court’s holding that the gross valuation misstatement penalty applied to a tax shelter partnership, but the Court could not actually adjust the outside basis downward.  The actual adjustment had to be done in a partner level proceeding, but the Court did not have to work under the fiction that the partner had outside basis above zero in an entity that did not exist.  Taxpayers interested in this area should make sure to read our guest post by Professor Andy Grewal on the Petaluma decision by the DC Circuit that was decided on the same day, which can be found here.
  • In Shah v. Comm’r, the 7th Cir. reviewed the terms of a settlement agreement between a taxpayer and the Service which contained a stipulation of facts, but did not contain a calculation of the deficiency in any applicable year.  The Tax Court provided an extension to calculation the amount outstanding.  No agreement could be made, and the Service petitioned the Court to accept its calculation.  Various additional extension were obtained, and the taxpayers went radio silence (apparently for health issues and inability to understand the IRS calculations).  The Tax Court then ordered the taxpayers to show cause why the IRS calculations should not be accepted, instead of providing a trial date.  The taxpayer objected due to IRS mistakes, but the Court accepted the IRS calculations somewhat because the taxpayers had not been cooperative.  The Seventh Circuit reversed, and held that the Tax Court was mistaken in enforcing the settlement, because there was not a settlement agreement to enforce.  The Seventh Circuit indicated that informal agreements may be enforceable, but the court may “not force a settlement agreement on parties where no settlement was intended”. See Manko v. Comm’r, 69 TCM 1636 (1995).  The 7th Circuit further stated that it was clear the taxpayers never agreed to the calculations (which the IRS acknowledged).  At that point, the Service could have moved for summary judgement, or notified the Tax Court that a hearing was required, not petitioned to accept the calculations.  Keith should have a post in the near future on another 7th Circuit case dealing with what amounts to a settlement, where the agreement was enforced.  Should be a nice contrast to this case.
  • The Service has issued a PLR on a taxpayer’s criminal restitution being deductible as ordinary and necessary business expenses under Section 162(a).  In the PLR, the taxpayer was employed by a company that was in the business of selling “Z”.    That sounds like a cool designer drug rich people took in the 80’s, but for the PLR that was just the letter they assigned to the product/service.  Taxpayer and company were prosecuted for the horrible thing they did, and taxpayer entered into two agreements with the US.  In a separate plea agreement, he pled to two crimes, which resulted in incarceration, probation, a fine, and a special assessment, but no restitution.  In a settlement agreement, taxpayer agreed to restitution in an amount determine by the court.  Section 162(f) disallows a deduction for any fine or similar penalty paid to the government in violation of the law, but other payments to the USofA can be deductible under Section 162(a) as an ordinary and necessary business expense.  The PLR has a fairly lengthy discussion of when restitution could be deductible, and, in this case, determined that it was payable in the ordinary course of business, and not penalty or other punishment for the crime that would preclude it under Section 162(f), as those were decided under the separate settlement agreement.  The restitution was simply a repayment of government costs.
  • This kind of makes me sad.  The Tax Court has held that a guy who lived in Atlantic City casino hotels, had no other home, and gambled a lot was not a professional gambler.  See Boneparte v. Comm’r.  Nothing that procedurally interesting in this case, just a strange fact pattern.  Dude worked in NYC, and drove back and forth to Atlantic City every day to gamble between shifts at the Port Authority.  Every day.  The court went over the various factors in determining if the taxpayer is engaging in business, but the 11 years of losses seemed to make the Court feel he just liked gambling (addicted) and wasn’t really in it for the profits.
  • S-corporations are a strange tax intersection of normal corporations and partnerships (which are a strange tax intersection of entity taxation and individual taxation), but the Court of Federal Claims has held that s-corps are clearly corporations in determining interest on a taxpayer overpayments.  In Eaglehawk Carbon v. US, the Court held that the plain language of Section 6621(a) and (c)(3) were clear that corporations, including s-corporations, were owed interest at a reduced rate.
  • The Third Circuit in US v. Chabot  has joined all other Circuits (4th, 5th, 7th, & 11th – perhaps others)  that have reviewed this matter, holding that the required records doctrine compels bank records to be provided by a taxpayer even if the Fifth Amendment (self-incrimination) might apply.  We’ve covered this exception a couple times before, and you can find a little more analysis in a SumOp found here from January of 2014.  This is an important case and issue in general, and specifically in the offshore account area.  We will hopefully have more on this in the near future.
  • A Magistrate Judge for the District Court for the Southern District of Georgia has granted a taxpayer’s motion to keep its tax returns and records under seal, which the other party had filed as part of its pleadings.  The defendants in this case were The Consumer Law Group, PA and its owners, who apparently offered services in reducing consumer debt.  In 2012, the Florida AG’s office filed a complaint against them for unfair and deceptive trade practices, and for misrepresenting themselves as lawyers.   Two years prior it was charged in NC for the same thing.  One or more disgruntled customers filed suit against the defendants, and apparently attached various tax returns of the defendants to a pleading.    Presumably, these gents and their entity didn’t want folks to know how profitable their endeavor (scamming?) was, and moved to keep the records under seal.  The MJ balanced the presumption of openness against the defendants’ interest.  The request was not opposed, so the Court stated it was required to protect the public’s interest.  In the end, the Court found the defendant’s position credible, and found the confidential nature of returns under Section 6103 was sufficient to outweigh the public’s interest in the tax returns.

 

 

Petaluma FX v. Commissioner: The D.C. Circuit Erases Temporary Regulations

We welcome back guest blogger Andy Grewal who discusses the DC Circuit’s recent decision in Petaluma.  Keith

It took more than 7 months from the close of oral arguments, but the D.C. Circuit finally issued its decision in Petaluma FX v. Commissioner.  The unusually long wait shouldn’t be surprising, given that the case involved some open questions of tax and administrative law, which I’ve discussed here and here. However, the long wait for guidance was apparently for naught, because the D.C. Circuit resolved the case through a strange reading of a TEFRA regulation’s effective-date provision.  In doing so, the court avoided the broad questions raised in Petaluma’s brief, but it unwittingly stepped into a thicket of issues related to Treasury’s authority to issue retroactive regulations.

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In Petaluma, the taxpayers argued that the Tax Court lacked jurisdiction over its sham partnership.  Although Section 6233 grants the Treasury the authority to issue regulations extending TEFRA to sham partnerships, Petaluma argued that the relevant regulations (Temp. Regs. 301.6233-1) failed to comply with the APA’s notice and comment requirements.  Those regulations, issued in 1987, remained on the books until they were finalized in 2001, after the tax year at issue in the case.

The government did not meaningfully dispute that the temporary regulations governed the jurisdictional question.  However, it argued that the regulations satisfied the APA.  To determine the validity of the temporary regulations, the D.C. Circuit thus had to explore the relationship between tax and administrative law.

But in a surprise move, the D.C. avoided that task.  It concluded, contrary to both parties, that the 2001 final regulations applied retroactively to Petaluma’s 2000 tax year, making the taxpayers’ procedural challenges to the temporary regulations irrelevant.  Petaluma had to prove some defect in the final regulations, but it had not done so.  The D.C. Circuit’s prior opinion in Petaluma held that the temporary regulation controlled the controversy and the government was on board with that view, so Petaluma understandably never presented a challenge to the final regulations.

My new article in Bloomberg BNA,Petaluma Takes a Bizarre Turn,” explains the flaws in the court’s analysis.  In brief, the D.C. Circuit failed to heed the final regulation’s preamble and applied a strange construction to its effective-date provision.  The preamble plainly states that the final regulations “apply to unified partnership proceedings with respect to partnership taxable years beginning on or after October 4, 2001” and, for prior years, taxpayers “are directed to the temporary regulations.” T.D. 8965, 66 F.R. 50541, 50544 (Oct. 4, 2001).  This leaves no doubt about the Treasury’s intention to issue the final regulations prospectively, but the D.C. Circuit did not even cite the preamble.

The body of the regulation seemingly parrots the preamble, saying first that the final regulations apply to future tax years and then saying that taxpayers should look to the temporary regulations for prior years.  See  Reg. 301.6233-1(d) (“This section is applicable to partnership taxable years beginning on or after October 4, 2001. For years beginning prior to October 4, 2001, see § 301.6233-1T contained in 26 CFR part 1, revised April 1, 2001.”).  However, the D.C. Circuit read the second sentence as incorporating the temporary regulations into the final regulations via cross-reference.  As detailed in my BNA article, that interpretation suffers from a technical flaw.

The temporary regulations, not the final regulations, should have controlled the controversy, and the court’s contrary and erroneous holding stemmed from its inquisitorial approach.   When a court independently raises a dispositive issue after oral arguments and never seeks briefing on that issue, mistakes are inevitable.

Petaluma leaves one wondering why the court would take such unusual steps to resolve the case.  The D.C. Circuit might have believed that its reading of Final Reg. 301.6233-1(d) allowed it to avoid some of the fundamental questions raised in Petaluma’s brief, but its holding actually implicates complex issues of administrative law.  The court held that the final regulation applies retroactively to “all tax years,” Slip Op. at 14, but it made no mention of the special issues raised by this retroactivity.

As my BNA article explains, the court’s facile extension of the final regulations to prior tax years raises serious concerns.  Although the Treasury may generally enjoy the authority to issue retroactive regulations, the issues are far more complex where, as here, the governing statute is not self-executing and where the final regulations purportedly cure defects in prior regulations.  However, these special issues received no attention from the court.

In dismissing the taxpayers’ challenge, the D.C. Circuit emphasized that, upon publishing the final regulations, the Treasury removed the temporary regulations from the books.  In the court’s view, this established that those regulations were of “no continuing significance” and were “no-longer-operative.”  Slip Op. at 15.  The temporary regulations enjoyed force only because they were cross-referenced in the final regulations.

This strange analysis could create massive problems for the government.  In Petaluma, the dismissal of the temporary regulations did not hurt the IRS because the final regulations allegedly incorporated the otherwise-defunct temporary ones.  But there are various final regulations that remove and replace temporary regulations, and the body of those final regulations might not always contain alleged cross-references of the type seen in Reg. 301.6233-1(d).  Rather, the Treasury may cross reference temporary regulations only in the Preamble of the final regulations.

In these circumstances, a final regulation’s removal of temporary regulations could nullify the effect of the temporary regulations for prior tax years.  That is, if temporary regulations were in effect from, say, 2008 to 2010, and final regulations are issued in 2011, taxpayers who are engaged in disputes concerning their 2008-2010 tax years can legitimately argue that the temporary regulations no longer apply.  After all, the Treasury will likely have removed the temporary regulations from the books, and Petaluma is quite clear about the consequences of such removal.

Taxpayers should thus closely examine any temporary regulations that have been replaced by final regulations, especially when the governing, taxpayer-adverse statute depends for its effect on regulations.  In this situation, the removal of the temporary regulations would retroactively eliminate the IRS’s ability to enforce the statute, unless the temporary regulations are cross-referenced in the body of the final regulations.

I don’t think this is a terribly sensible result because in legal drafting, it’s quite common to remove provisions even though they remain effective.  When amending the tax code, for example, Congress routinely replaces a particular section or subsection.  Yet no one seriously suggests that that removal renders the section or subsection ineffective in disputes over prior tax years. Nonetheless, Petaluma clearly gives enterprising taxpayers some ability to disregard temporary regulations, at least in litigation that might end up in the D.C. Circuit.  I would not recommend planning a transaction under this approach, but once a matter has reached the dispute stage, it makes sense to deny the effect of any adverse temporary regulations that have been scrapped from the books and for which no final regulation makes a cross-reference.

Petaluma should also provide some measure of encouragement for taxpayers who wish to present arguments along the lines of those contained in the taxpayers’ brief.  That is, rather than go through the gymnastics with the final regulations, the court could have simply rejected the challenge to the temporary regulations.  The court’s decision not to do so reflects some acknowledgement regarding the seriousness of those challenges.  In other words, taxpayer challenges to temporary regulations remain viable in the D.C. Circuit, except where they have been subsequently removed by final regulations in circumstances similar to those in Petaluma.

The court also left the door open to challenges regarding Reg. 1.6662-5(g), which extends the gross valuation misstatement penalty to zero-basis circumstances.  I explained the defects in that regulation here and also debated my conclusions with attorney Michael Schler in Tax Notes.  During oral arguments, the D.C. Circuit seemed hostile to the taxpayers’ arguments, but rather than reject them, the court deemed the arguments waived.  Petaluma thus adopted a cautious approach and reserves on the validity of Reg. 1.6662-5(g). Slip Op. at 18.

It’s unclear whether Petaluma will provide the last word on the Section 6233 temporary regulations.  The taxpayers still have time to petition for a rehearing, but it’s unknown to me whether they intend to do so.  Petaluma suffers from faulty legal analysis, so perhaps the court will be receptive to correcting its mistake.  Nonetheless, the D.C. Circuit almost always leaves its panel decisions undisturbed.  Thus, a petition for panel rehearing or an en banc petition would face uphill battles.  However, I’m aware of at least one other circuit that is considering a challenge to the Section 6233 regulations and may blog about it as the case develops.

 

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:

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  • 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 fivethirtyeight.com, 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).