Failure to Timely Raise Financial Disability Argument

We have written on several occasions about the exception to the two and three-year lookback periods of IRC 6511 that exist as a possibility if the taxpayer can show financial disability.  You can find posts on the subject here, here and here.  This year my clinic represented someone making the financial disability argument in Tax Court, where petitioners can make refund claims but do so less frequently than through district court litigation.  We succeeded in obtaining a concession of the refund despite the client’s primary use of providers not described in Rev. Proc. 99-21; however, the case of Schmidt v. Internal Revenue Service, No. 2:20-cv-02336 (E.D. CA. 2021) provides another example in the government’s streak of victories against individuals seeking to extend the statute of limitations through financial disability.  Like the majority of litigants raising this issue, she proceeded pro se.


Ms. Schmidt filed her 2013 return late on February 22, 2015.  On December 15, 2017, she filed an amended return seeking a refund of $31,904.  The IRS sent her a letter informing her that it intended to disallow her claim due to lateness.  She wrote back, obviously confused by the somewhat confusing construct of IRC 6511, arguing that she filed her amended return timely within three years of the filing of her tax return.  She did file the amended return within three years of filing her original return for 2013; however, the filing of the return within three years was not the important fact here.  Most important, as the IRS pointed out, was the three-year lookback rule of IRC 6511(b)(2), which limited her refund to payments with three years.  Since the payments occurred on the original due date of the return because withholding credits get credited on that date, she filed her amended return too late to recover any money even though she filed her amended return within three years of filing the original return.

Once Ms. Schmidt understood the lookback rule, she pivoted and began arguing that she missed the time period for timely filing the amended claim due to financial disability.

Plaintiff acknowledges the Refund Claim did not demonstrate financial disability to the IRS and argues it would have been illogical to submit the information at that time because she was still sick and still meeting the requirements for financial disability for all of 2017.1 In addition, when plaintiff received notice of the IRS’s intent to disallow the Refund Claim, plaintiff believed the IRS was rejecting the Refund Claim for a reason other than the time limits of 26 U.S.C. § 6511(b)(2).  Plaintiff asks the court to consider the evidence submitted with her complaint of her financial disability based on the special circumstances of her case, including the fact that the IRS issued a Private Letter Ruling (PLR) declaring the 2013 disability income tax-exempt.

Now, she hits another roadblock for those seeking a refund – variance.  While I think the court imposes the variance rule against her, it does not use that term, but instead discusses how her refund claim fails to meet the onerous requirements of Rev. Proc. 99-21.  It lists the requirements set forth in the Rev. Proc. and notes that she met none of them.  She submitted no information about financial disability with her amended return.  The court does not offer her a chance to submit it at this point.  Some of the prior cases in which IRC 6511(h) has been raised did allow the taxpayer to supplement their submissions, though in those cases the taxpayer may have engaged in more signaling about the possibility of financial disability than Ms. Schmidt did in filing her amended return.

She appears to have disability issues.  The information in the opinion does not provide a basis for deciding if she might have succeeded had she submitted her request with the amended return.  It also does not make clear whether she has a valid refund claim.  I don’t blame the court for these omissions since that information has nothing to do with the basis for denial of her claim; however, the result is harsh.  A pro se individual will struggle to take the correct procedural steps.  A disabled and sick pro se individual will struggle even more.  The law does not need to require such precision that she must file with her claim a full blown statement as required by the Rev. Proc. and the Rev. Proc. does not need to make the requirements as draconian as it does.

I have sympathy for Ms. Schmidt but the financial disability provision designed to assist people struggling to make life work offers little sympathy.  The mismatch between the purpose for the law and the administration of the law continues.

Perkins Case Raises Variance and Issue Preclusion In Context of Taxation of Native Americans

The case of Perkins v United States raises interesting procedural issues, including collateral estoppel (also known as issue preclusion) and variance. Earlier this month a federal district court judge adopted the magistrate judge’s recommendation to deny the government’s motion for summary judgment in a refund suit involving a Native American tribe member who along with her husband ran a trucking and gravel extraction business. 

The magistrate’s recommendation situates the dispute: 

The federal income taxation of American Indians is not a sexy topic.” John Lentz, When Canons Go to War in Indian Country, Guess Who Wins? Barrett v. United States: Tax Canons and Canons of Construction in the Federal Taxation of American Indians, 35 Am. Indian [pg. 2018-5250] L. Rev. 211, 211 (2011). Neither is gravel. Yet the two topics have come together in this case to present a question that no prior case has had to answer directly. When Indians extract gravel from Indian land through an Indian-owned sole proprietorship, is the resulting income exempt from federal income tax based on treaties that promise the “free use and enjoyment” of land or protection from “all taxes”? And even if the Court answers in the affirmative, have plaintiffs Fredrick Perkins (“Fredrick”) and Alice J. Perkins (“Alice”) made enough of a showing of business income and expenses that treaty protection would make a practical difference on their 2010 federal income tax return? 


The substantive issues relate to the Canandaigua Treaty and the Treaty of 1842. Native Americans, like other citizens, are subject to tax on income unless a treaty provides otherwise.  The Perkins and the IRS have been fighting about whether the treaties exempt income they earned in their gravel business in 2008, 2009 and 2010. The 2008 and 2009 years were the subject of a deficiency case in Tax Court. In 2018 the Tax Court, in a reviewed opinion that generated a dissent by Judge Foley, held that the treaties did not exempt their income from the gravel business from US income tax. The Perkins have appealed that decision to the Second Circuit. 

The 2010 year is the subject of a refund suit in federal court in New York. The magistrate’s recommendation, adopted by the district court judge last month, explicitly disagrees with the Tax Court’s analysis and finds that the treaties do provide an exemption for the income though the taxpayers’ entitlement to a refund awaits a jury trial that would establish the amount of tax exempt gravel income and allocable expenses. 

This creates the somewhat odd situation where two different courts have reached differing views on the same substantive issue with respect to the same taxpayer. 

Rather than dig into the substantive treaty issue in this post I will discuss the procedural issues that last month’s federal district court opinion raises.

Issue Preclusion (Collateral Estoppel)

In federal district court, the government pointed to the Tax Court decision in its favor. In doing so, the government argued that the taxpayers should be prevented from relitigating the same issue, basing its argument on collateral estoppel. That doctrine prevents parties from relitigating an issue that has been previously litigated and subject to a final determination. The district court disagreed, noting that there has yet to be a final decision, given that the Perkins appealed the Tax Court decision and that the decision “does not become final until a petition for certiorari is denied, the time to file such a petition expires, or the Supreme Court issues a mandate.”

In addition, the district court noted that the magistrate’s recommendation preceded the Tax Court opinion, and collateral estoppel prevents litigation in a subsequent case.


One other procedural issue in the case warrants highlighting.  In objecting to the magistrate’s report, the government raised variance. The variance issue arose because during discovery the government established that the Perkins’ failed to report fully gross receipts from the part of the business that the parties agreed was not covered by the treaties’ exemption.  The Perkins responded by acknowledging the underreporting but also establishing that they underclaimed expenses relating to the taxable portion of the business.

As a refresher, the variance doctrine means that the argument raised in a refund suit must have been made in the claim. As the district court noted, the “variance doctrine does not require exact precision; if the issue raised in court is derived from or is integral to the ground timely raised in the refund claim, it `may be considered as part of the initial ground.” (internal cites omitted).

The refund claim the Perkins submitted focused on the application of the treaties and whether the treaties exempted a portion of their income from the gravel business: 

As enrolled members of the Seneca Nation of Indians (the “Nation”), the taxpayers have been given permission by the Nation to sell gravel from [the] property on the Nation’s territory, in exchange for royalty payments made to the Nation. Under the Supremacy Clause, the [IRS] may not tax income derived directly from the land protected by federal treaties. The taxpayers correctly reported these sales as exempt from federal taxation. The IRS, however, determined the income to be taxable. Taxpayers have paid the taxes and now seek a refund.

In rejecting the government’s variance argument, the district court emphasized that the Perkins’ were not basing their claim to a refund on their entitlement to deduct expenses, and they had properly teed up the treaty issue in their claim:

Cutting through all the back and forth, the crux of the plaintiffs’ claim is that their gravel income was improperly taxed. That issue was fully presented in their refund claim to the IRS. The IRS had a full opportunity to investigate all aspects of their claim for a refund; as the plaintiffs observe, however, the IRS chose not to “examine the 2010 income or business expenses, and did not request or review any receipts, statements, workpapers, or other records.” 

Because the plaintiffs’ theory as to why they are entitled to a refund has not changed, their claim is not barred by the variance doctrine. And the fact that the IRS has now come up with a new reason why the plaintiffs were taxed in the correct amount (or even less than they should have been) does not change that.

While the Perkins’ claim did not identify their entitlement to deduct expenses, the expenses themselves were not the reason why the Perkins’ claimed to have made an overpayment:

Stated another way, the plaintiffs are not now alleging a new reason why they are entitled to a refund; rather, they are responding to the defendant’s argument why they are not. The plaintiffs claimed that they were due a refund for reason A. The defendant responded that even if the plaintiffs were correct about A, they had no claim because of B. The plaintiffs then said that the defendant was wrong about B because of C. That does not mean that the plaintiffs are raising A and C in support of their claim; rather, they are raising A and using C as a response to defense argument B. That is not a variance by any definition.


The longstanding dispute for the 2010 year now moves to trial.  For the 2008 and 2009 years, the Second Circuit heard oral argument earlier this spring. The earlier years involved deficiencies of hundreds of thousands of dollars. The 2010 year involves just under $7,000.  The disparity in amounts at issue likely explains why the Perkins decided to bifurcate the cases, as the Flora full payment rule likely left Tax Court as the only forum for 2008 and 2009.  As a practical matter, the outcome of the live Second Circuit case will control whether the treaties promise of the “free use and enjoyment” of land insulates the Perkins from income tax on the earnings from their gravel extraction business.

Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty

Another variation on the Graev issue just popped up.  This one is in the refund context where the decision turned on who had the most important duty.  Did the duty of the IRS to obtain managerial approval before imposing a penalty override the duty of the taxpayer to raise the issue in the claim for refund?  The district court finds that the duty to exhaust administrative remedies by giving the IRS a chance to address the issues on which the taxpayer’s claim for refund is based must be satisfied and the taxpayer cannot rely on the duty of the IRS to properly approve a penalty to absolve the taxpayer’s duty to let the IRS know why the refund is sought.  The case is Ginsburg v. United States, 123 A.F.T.R.2d 2019-553 (M.D. Fla. 3/11/2019).


Mr. Ginsburg engaged in a tax shelter promotion known as short option strategy.  He realized an economic loss of $113,950, and claimed a net loss of $10,069,506 for tax purposes.  He did not disclose the transaction on his tax return but simply reported the loss on a partnership return and netted a tax savings of over $3 million.  When the IRS audited his 2001 return, it disallowed the claimed loss and hit him with a 40% gross valuation misstatement penalty on the underpayment of tax attributable to partnership items. Of course this occurred long before Frank Agostino taught us all, including the IRS, about the importance of IRC 6751 which was enacted not long before the year at issue.  It seems that the IRS did not obtain the necessary written supervisory approval before imposing the penalty.

Mr. Ginsburg paid the taxes, penalties and interest in full as required by the Flora rule and then filed a claim for refund.  On his claim Ginsburg requested a refund of the gross valuation misstatement penalty, the interest paid on the penalty, and a portion of the underpayment interest he paid. He asserted that he reasonably and in good faith relied on accounting advice, legal advice, a tax opinion, his return preparer and a financial advisor.  This situation is classic in tax shelter situations because professionals do provide advice to the taxpayer about these types of transactions and taxpayers always want to use the professional advice to insulate themselves from the penalties that result when abusive tax shelters get picked up by the IRS.  In his refund claim, however, Mr. Ginsburg did not mention that he wanted a refund because the IRS did not fulfill its obligations under IRC 6751 as interpreted by Graev and other cases.

The IRS disallowed his claim for refund and he filed suit.  By the time his suit rolled around Mr. Ginsburg, or his representative, had read about the Graev case and realized that they might have a winner based on this case.  Hundreds of thousands of dollars are at stake so he wanted to make this argument even though he did not alert the IRS to it when he filed his claim for refund.  In his summary judgment motion, Mr. Ginsburg argued that the IRS had a duty to comply with IRC 6751 whether or not he raised the issue in his refund claim and, therefore, the court should allow his claim despite the variance between the claim and the basis for his argument in court.  The IRS, of course, disagreed and argued that the Court lacked jurisdiction because of the failure to exhaust administrative remedies.

The district court denied his claim pointing out he cited to no authority in support of his position that the duty to properly approve the penalty overrode the variance doctrine.  Citing Logan v. United States, 121 A.F.T.R.2d 2018-2193 (M.D. Fla. 6/21/2018), the court stated that it lacked subject matter jurisdiction to hear the case in the absence of a claim clearly identifying the issue the taxpayer now sought to use to overturn the decision.

Mr. Ginsburg also argued that the variance did not apply because he did not know that the IRS had failed to comply with IRC 6751. In making this argument he relied on El Paso CGP Co. v. United States, 748 F.3d 225; 113 A.F.T.R.2d 2014-1420 (5th Cir. 2014); however, the court here pointed out that the IRS took action subsequent to the filing of the claim in El Paso which the taxpayer there could not have known about.  Here, the taxpayer knew of the relevant facts, or could have known of them, but did not realize the importance of the supervisory approval until after making the claim.  The IRS did nothing to keep the taxpayer from knowing and nothing after the submission of the claim.  So, the court determined that the El Paso case did not provide any assistance to Mr. Ginsburg.

Mr. Ginsburg also argued that he should not be penalized because he relied on the advice of professionals.  The IRS responded with respect to each of the advisors he listed.  For several of the advisors, the IRS argued, and the court agreed, that he could not rely on their advice because the advisor promoted the scheme or was an agent of the promoter.  For one advisor he mentioned, the court found that he did not allege that the advisor knew the full facts and for one the court found that he did not list the advisor in his claim for refund triggering the variance doctrine with respect to that advisor.  The IRS also argued that he could not obtain relief from the penalty because as a businessman he knew that the deal was too good to be true.  In response to this argument the court stated:

The improbable tax advantages offered by the transaction should have alerted Plaintiff that the transaction was too good to be true, especially in light of his business experience. See Gustashaw, 696 F.3d at 1141–42 (finding transaction too good to be true where sophisticated taxpayer claimed a loss of $9,938,324 in exchange a $800,000 fee) ….

I find the decision consistent with the variance doctrine.  The taxpayer here did not give the IRS a chance to fix the mistake administratively and brought a new theory to court.  The decision shows that it is easier to raise the Graev issue in Tax Court where the variance doctrine does not apply.  I suspect there may be others out there in the same situation as Mr. Ginsburg who have a large penalty imposed against them for tax shelter activity that occurred well before the IRS appreciated its responsibility under IRC 6751.  This case reminds those individuals to make sure that their claim for refund includes a Graev argument.  It’s hard to fault Mr. Ginsburg for failing to put this argument into his refund claim but it’s also hard to say the Court got this wrong.  I doubt this will be the last case on variance and Graev.

Summary Opinions for 7/25/14

While Steve is enjoying some well-deserved time away in the sun and surf, he still found time to put together a summary opinion. Here is this week’s addition, covering some developments from last week. Les


  • The Service has issued final regulations under Section 6707 for the penalty on material advisors who fail to timely file returns disclosing reportable transactions. Under Section 6707, a penalty is imposed on “material advisors” who fail to file information returns on reportable transactions, which is imposed in an amount of the greater of $50k (or $200k for a listed transaction) or 50% of the amount of gross income derived. The regulations largely follow the proposed regulations, and includes an explanation of the imposition of the penalty, factors to consider in rescission, and what is incomplete or false information.
  • The IRS has released Chief Counsel Advice regarding the amount of refund under Section 6511(b)(2) under the language “portion of tax paid within period,” and the Service has concluded it includes any interest and penalties. The term “tax” is defined under Section 6665 and Section 6601(e)(1) to include both interest and penalties, generally, which applied to Section 6511. Nothing earthshattering, but interesting that someone in the Service was wondering about the topic.
  • The Tax Trials blog has a nice and brief write up of the Palmer Ranch case, where the Tax Court found it had jurisdiction to review the Section 6662 penalties (a la Woods), and found the taxpayer had overstated the value of a conservation easement; however, no penalties were imposed because the taxpayer had retained a tax attorney and licensed appraiser to assist, and both were disinterested and credible.
  • In Lamb v. United States, the District Court for New Jersey found it lacked jurisdiction to hear a refund matter because the taxpayer failed to make a refund claim before the Service, and the Service had not assessed tax beyond the self-reported amount making any challenge to the IRS audit determination was barred by the AIA. I flagged the case, because the District Court also denied the taxpayer’s request to transfer the case to the Tax Court. This is not novel, but we have seen it come up a few times in cases over the last year, so it seemed worth mentioning. Under 28 USC 1631, courts can transfer a case “if it is in the interest of justice” and can transfer it “to such court in which the action or appeal could have been brought.” I’m not sure if the Lamb’s had a legitimate claim that could have been brought before the Tax Court, but that doesn’t matter in this instance, since the allowable courts are listed under 28 USC 610, and the Tax Court is not listed.
  • Tax Prof. Timothy Todd has a write up of the Crawford Tax Court case, which shows the difficulty in substantiating certain deductions, and provides direction to students and lawyers about how not to evidence those items.
  • In Shiner v. Turnoy, the Court for the Northern District of Illinois found that a taxpayer had willfully filed a fraudulent form 1099 and was liable for the penalty under Section 7434. Peter Reilly has a nice write up over at Forbes of the case. The Court found the information return was bunk because the issuer had sent a check with a restrictive covenant on it saying the check satisfied a debt. The other taxpayer disputed it was in full payment, never cashed the check, and threatened legal action. The issuer then sent a Form 1099, and presumably took a deduction. Turns out, that doesn’t make the check binding or settle the underlying dispute.
  • In Free-Pacheco v US, the Court of Federal Claims has a longwinded but interesting discussion of the variance doctrine and how a taxpayer may not argue a legal theory in a suit if it was not raised below in a refund claim. The opinion painstakingly goes through many of the main cases in the area and the challenge of determining if an argument is subsidiary to one that was in a claim or different enough to warrant a jurisdictional bounce. The issue arose in the context of a refund suit relating to gambling losses from slots; taxpayer argued for the first time in court the losses should be on a per session approach along the lines of a DC circuit court case (Park v US) that was issued after this refund claim was before the IRS. The court bounced the per-session loss argument, as in theory taxpayer could “have brought up the per-session taxation theory approved by the United States Court of Appeals for the District of Columbia Circuit in Park in front of the IRS, yet did not.” Three lemons for Free-Pacheco.
  • In Eichler v Commissioner, the Tax Court held that IRS could issue a notice of intent to levy when a taxpayer submitted a request for an installment agreement, notwithstanding Section 6331(k)(2), which generally precludes levy when an installment agreement request is pending. The case was a regular Tax Court opinion; I suspect as much because in Eichler the court notes that in the 2011 Tax Court case Tucker v Commissioner the Tax Court in dicta said otherwise and suggested that 6331 precluded the notice of intent to levy. Looks like the court got it right this time.

Summary Opinions aka Procedure Roundup for 11/08/13

Busy day today.  In addition to writing up Summary Opinions, we will be raking leaves, starting holiday shopping, and working on some school projects in my household.  My daughters are also making paper turkey caricatures for each family member to decorate our house.  They have decided that mine will be a Tax Atturkey.  Not sure if the bad puns are a nature or nurture thing, but I’m sure it’s my fault.  On to the tax procedure:


  • TaxProfBlog has a summary of Patrick Smith’s recent article in the Virginia Tax Review, “Chevron’s Conflict with the Administrative Procedures Act.”  Mr. Smith writes in this area frequently.  This article specifically discusses the Chevron mandate on the court to defer to an agency’s interpretation, and the APA rule that the court shall interpret statutory provisions.  Although there is an apparent conflict, Mr. Smith notes that Chevron is likely here to stay.  The article advocates raising this issue with SCOTUS to draw attention to the matter, and perhaps obtain further Chevron guidance.
  • ITS Financial, LLC, and its owner Fesum Ogbazion, are on double not-so-secret probation.  Federal District Court slapped a permanent injunction prohibiting them from operating or being involved with any business relating to tax return preparation.  Journal of Accountancy has coverage here, including a huge list of transgressions.  This franchise was the real deal, in that it was filing over 100,000 returns a year, and over 150 franchisees.  Two related entities, Tax Tree and TCA Financial were also shuttered.  If the reports are true, I hope Mr. Ogbazion finds himself bunking with Freddie Mitchell.  Defrauding and stealing refunds from low income taxpayers isn’t terribly endearing.
  • Over at TaxControversyWatch (another Southeastern PA tax blogger) there is a summary of Johnson v. United States out of the Fourth Circuit.  The Court held that a wife was responsible for the responsible officer penalty under Section 6672 for her husband’s failure to pay employment taxes.  Tax bill was over $300k.  He may volunteer for being roomies with Freddie.  In all seriousness, it is an interesting case, where Mrs. Johnson was an officer, but appears to have had limited knowledge of her husband’s failure to pay the taxes.
  • Let’s head back towards unscrupulous tax advisors and the NFL. Gary J. Stern, a tax attorney, was permanently barred from promoting tax fraud schemes and preparing related returns.  Tax Update Blog has the story.  I took that language from the blog, and perhaps it is incorrect, because a court order permanently barring someone from promoting tax fraud seems silly. Apparently, one of the people who followed Mr. Stern’s terrible advice was NFL quarterback, Kyle Orton.  Kyle is holding a clipboard in Dallas now, along with stewing in anger and suing Mr. Stern for his bad tax advice.
  • Dan (the man) Alban of Loving oral argument fame tweeted this Institute for Justice article regarding the Eastern District of Michigan directing the Service to produce witnesses to testify about the handling of the seizure of the checking account of the owners of Schott’s Supermarket.  Apparently, on Sept. 25, the Service seized the account without warning, and little explanation has followed.  Hard to defend the Service if these facts are true.
  • From the Gawthrop Greenwood business blog, which I sometimes add content to, is an article regarding the IRS extending fast track settlement to smaller businesses.  There was also a second tax article posted regarding the expiration of the exclusion from gain on qualified small business stock, which can be found here.  Multiple tax posts…I’m going to have to start making them attend the tax department meetings.
  • At the, there was a post regarding whether or not IRS liens remain valid when someone changes his or her name.  I recently handled a name change as a favor for a friend, and almost changed his name to the wrong new name.  Long story, but the judge almost signed an order with a very different name that was the wrong gender.  To the post, which outlines the Service’s affirmative duty to amend its lien filing when it is notified regarding a name change in order for the IRS lien to apply and have priority to property purchased after the name change.  I’ve never researched this issue, and was slightly surprised.
  • To the Journal of Accountancy, with an article on the characterization of remittances as deposit or payment.  I am doing some extensive work with Les on Chapter 6 of Saltzman and Book, which covers this topic, so I was excited to see this analysis.  This article deals specifically with the Syring Estate case decided in August.  In Syring, the estate made a remittance that was characterized under Rev. Proc. 2005-18 as a payment.  The taxpayer requested a refund, attempting to characterize it as a deposit, but had not specified it was a deposit at the time of the remittance.  The request was outside the statute for refund on a payment, and the Court held for the Service.
  • The Tax Court recently decided John D. Moore v. Commissioner, which involved the reasonable cause exception to the delinquency penalties based on reliance on a tax advisor.  This case is not that notable, but it is a taxpayer win on reasonable cause.  Taxpayer was able to show that he engaged competent professionals who were fully apprised of the facts regarding the sale and basis in his S-corp.  The basis was overstated, resulting in an underpayment of tax, but the taxpayer was protected from the penalties by relying on tax advisors to explain and report the transaction. For more on this exception to the delinquency penalty, see part one of my two part series on this exception as applied to some recent estate tax cases.
  • The Eastern District of California last week decided motions for summary judgment in New Gaming Systems, Inc. v. United States in a refund action for penalties collected by the Service in 1999.  New Gaming is a video game company that makes electronic gambling machines for Indian Reservation casinos.  My gambling is limited to obscure Olympic sports and beauty pageants, so I was not familiar with the company name.  Issue stems from an estimated tax payment made in 1999 that was filed with the extension, but was substantially less than what was actually due.  The Court said game over to the government’s summary judgment request on the issue of whether the estimate was reasonable, which would have provided abatement from the penalty.  The Court found this matter involved a finding of fact, and was not undisputed as the Service stated.  The Court also gave New Gaming an extra life to argue reliance on its accountant as another reason the penalty should be abated, even though it had not previously been raised.  The Government argued variance, but the Court found that New Gaming’s refund request indicating the payment was reasonable put the Service on notice that reasonable cause based on preparer reliance might be raised.  The opinion on the variance issue is interesting, and seemed to work hard to allow the taxpayer to move forward.
  • Magistrate judge for the Western District of Michigan, Southern Division, recommended in Charles v. United States, that a preparer’s petition to quash a third party summons be denied.  This was accepted by the Court last week here.  Magistrate recommendation can be found here on Checkpoint, if you have a subscription.  The main argument was that the Service had previously issued “no notice” summonses that were impermissible.  The Service had argued that the summonses were issued under Section 7609(c)(2)(C), which allows a summons to be issued without notice if it is solely to determine the identity of any person having a numbered account with a bank.  This was found to be inapplicable, and the taxpayer argued the information gathered from those summonses was used to generate other summonses which should be quashed.  Sort of fruit from the tainted summons tree.  The Court held that the only remedy was found under the Right to Financial Privacy Act, and it did not provide for disallowing the second set of summonses.  I don’t know enough about this area of the law to have an opinion as to whether this was right or wrong, but it doesn’t seem favorable to taxpayers.
  • And of course, last but not least, on Procedurally Taxing (where we racked up our 100th email subscriber and 10,000th page visit), in addition to the post I wrote on Knappe and reasonable cause I mentioned above, Keith wrote a thought provoking (and slightly tongue in cheek) take on the Service’s new IDR process, and Les suggested that TIGTA and IRS’s focus on EITC error rates stems from deep feelings that are suggestive that errors from refunds are qualitatively different from underpayments




Court Denies Refund Claim on Collection Action of Divisible Tax Due to Variance Rule

In his tax procedure blog, Jack Townsend posted some material on Cencast Services LP v. United States,  a Court of Appeals for the Federal Circuit case decided  on September 10, 2013, which upheld the Court of Federal Claims decision that a taxpayer’s refund claim was barred by the variance doctrine.  From Mr. Townsend’s tax procedure blog, the holding was as follows:

1. “Cencast’s liability for employment taxes under the Federal Unemployment Tax Act (‘FUTA’) and the Federal Insurance Contribution Act (‘FICA’) is determined by reference to the employees’ “employment” relationships with the common law employers for which Cencast remits taxes (i.e., the production companies), and that the common law employers cannot decrease their liability by retaining entities such as Cencast to actually make the wage payments to the employees.”

2. Cencast is barred by the doctrine of variance from raising a theory in its refund suit not raised in its claim for refund. The new argument was that some of the workers were independent contractors rather than employees.


The entire post can be found here, and it is a great summary of an interesting case, which gives some insight into the production of movies, and has an in depth discussion of the refund rules, substantial variance doctrine, divisible taxes, and some clever (but failed) arguments to circumvent the variance doctrine.

We recently updated our variance discussion in Saltzman and Book to include the lower court holding in ¶11.06[5].  I write here to supplement’s Jack’s post just to note some of the implications of the case with the Flora full payment rule that were focused on more by the lower court. From our update based on the lower court holding:

The taxpayer responded to the counter-claim, taking the position that it could defend the counter-claim with any legal theory, thereby vesting the Court with jurisdiction to hear the independent contractor theory.  The Court stated that new arguments could only be raised by the taxpayer when the counter-claim presented new theories that the taxpayer had previously not responded to, still barring the taxpayer’s new theory.

Cencast had tried to argue in its response to the government’s counter-claim that the workers were not truly employees, but were independent contractors, an argument it had not made in its refund claim, which focused rather on who was the employer. The divisible nature of the tax, and the multiple collection actions arising from the divisible nature, did not provide Cencast with the ability to raise new arguments unless the counter-claim stated new issues not originally raised when dealing with the refund claim for the portion of the tax paid under Flora.  Prepayment of a portion under Flora put the full amount at issue.