Summary Opinions for 02/06/15

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As always, a special thanks to Carlton Smith for his post on the Eighth Circuit oral argument on “separate returns” under Section 6013(b)(1) in Ibrahim.  The comment to the post raises a related issue, which Carl responded to and is worth practitioner review. More in the way of comments: Les’ post on proposed legislation kicking around that would address appellate venue in CDP cases drew some worthwhile comments from Carl and frequent commentator JT discussing the implications (and shortfalls) of the proposal.

And, even though it is immediately below this post, I do want to draw attention to Les’ post on the Villanova Graduate Tax Faculty position. I cannot speak from a faculty perspective, but as Les indicated I did receive my LLM in taxation from the traditional program.  The program offers a great mix of academic and practitioner resources to the students, and I feel that translates to the program itself.  I found the student population to be driven and smart. It seems as though everyone at the school is very excited about the expansion of the program and the role the new faculty would be taking on.

To the procedure:

  • Finally, the IRS has told me how to keep the books for my illegal drug business.  See Chief Counsel Memo 201504011.  Chief Counsel has explained how those of us trafficking in Schedule I and Schedule II controlled substances should capitalize our inventoriable costs.  I’m sure the accountants for the drug dealers will adjust accordingly.  You think I would have picked up something regarding tax from this, but really I was just surprised that marijuana is a Schedule I “hallucinogenic substance”.  I guess you are not really tired and hungry, you are just hallucinating that.
  • From The Taishoff Law Firm, a post on the American Airlines v. Comm’r Tax Court case, where the Service argued the court did not have jurisdiction to review the Airline’s challenge of employment taxes on certain flight attendants because of a prior “RA ’78 Sec. 530 determination.”  From the blog:

Notwithstanding anything to the contrary hereinabove stated, as my two-Martini-lunch colleagues say, and an earlier IRS audit that accorded the cabineers RA ’78 Sec. 530 relief (once a non-employee, always a non-employee), IRS comes back trying to hit AA with FICA, FUTA and all that jazz.

Now there is a material fact (did AA change how they treated the cabineers since the audit years they got off on?), so all we have is partial summary J: does Tax Court have jurisdiction?…

IRS hangs its fifty-mission-crush on Section 7436(a), but wants to ignore Section 7436(a)(2), which specifically mentions RA ’78 Sec. 530 determination. IRS claims neither Section 7436(a)(1) nor Section 7436(a)(2) gives Tax Court jurisdiction.

You’ll have to check out Mr. Taishoff’s blog for the rest.

  • Its tax time, meaning it is time to collect up your W-2s and 1099s, try to find receipts for all those deductions, wish the government would get out of your pocket, and…head butt the heck out of some tax preparers.  The craziest aspect of this story is the head-butting woman didn’t make it on to that People of Walmart webpage (which I’m not going to link to—SumOp is classier than that, even if we do know that webpage exists).  This seems to happen every year now.  Perhaps tax preparation training should include some aspect of self-defense.
  • USVI and its crazy tax credits have appeared quite a bit in SumOp over the last year.  The Service lost another case in Estate of Sanders v. Comm’r.   The Tax Court looked at the recent Vento and Appleton cases out of the Third Circuit and found that the decedent qualified as a USVI resident.  The law firm of Solomon Blum (who I know nothing about) has a nice summary found here.
  • The Third Circuit confirmed the holding of the district court in Patterson v. USVI, where the court found that the Virgin Island Bureau of Internal Revenue (VIBIR) did not have any overpayment from which a refund could be given to the taxpayer.   In the case, the government (here USVI) failed to file any response after getting a handful of extensions.  After chastising government attorney, the Court held that it still had to review the matter.  The salient facts are that Patterson alleged he was a USVI resident.  He paid about $813k to the IRS in the year in question to be applied to his USVI tax debt.  Later, he filed a tax return with VIBIR showing an overpayment of $179,000, requesting a refund of the same, which he never received.  After receiving the payment, the IRS opened an audit to determine if Patterson was really a resident (which it determined was not the case), and contemporaneously VIBIR sought to have the funds transferred to it from the IRS.  The funds were never transferred.  The Code provides that the IRS is supposed to transfer USVI residents’ payments over to USVI, and the taxpayer can take those into account regardless if the transfer actually occurs in determining their tax due to USVI.  The taxpayer argued the “regardless of transfer” aspect should allow him to obtain a refund.  The Court, however, held that the regulation did not direct how a refund was to be obtained, and, for a variety of reasons including the IRS position on his residency, it was not clear he had a valid claim.
  • A lot going on in those tiny islands.  In US v. Bailey, the Third Circuit confirmed the convictions of two individuals for conspiring to defraud the US and evade USVI taxes.  Jack Townsend has extensive coverage on his Federal Tax Crimes blog, found here.  Jack’s summary of the case is:

As described in the opinion, the principal scheme appears to be just garden variety enabler tax fraud.  The defendants were principals in a Virgin Islands company that billed U.S. taxpayers for “services” never rendered and then, after the customers paid, returned most of the amounts to the taxpayers.  The U.S. taxpayers deducted the payments for “services” and treated the amounts returned as “gifts.”  The defraud conspiracy charged related to this conduct. The VI company also claimed certain tax credits against it VI tax liability that it was not entitled to.  The offense conspiracy charge related to this conduct.

 Mr. Townsend then goes on to outline eight findings and holdings, highlighting what he views as important.

  • The Tax Court tossed an IRS determination to reject an OIC and move forward with a levy as an abuse of discretion in Estate of Sanfilippo v. Comm’r.  In Sanfilippo, the original settlement officer and the estate were in serious negotiations over a long period of time regarding the value of assets in an estate and the appropriate amount of tax due (pretty big estate, worth around $63MM at one point).  A second settlement officer took over the case, quickly came to a determination and rejected the OIC.  The Court found the settlement officer failed to properly analyze the situation.  Somewhat surprising that the settlement officer would move so quickly on such a big estate.
  • The 11th Circuit precluded the review of a guaranteed payment issue based on collateral estoppel in Wallis v. Comm’r.  Mr. Wallis was a tax partner at Holland and Knight who left the firm in 2002.  He was entitled to around $338k based on his capital account and interest in the firm (hmm, I need a better capital account), which was paid out over a couple years.  He was audited in one year, and argued that a portion was not taxable –lost- and that a portion was capital gain and not ordinary income—lost.  He later tried to make the same arguments before the courts for different tax years, which the Tax Court and 11th Circuit both indicated were barred by collateral estoppel.  The Courts found that the identical issues were brought and decided before, that Wallis was a participant in the prior hearing, and the issues was fully litigated in the prior preceding.


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Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.



  1. I agree that Frank DiPietro’s § 6013 “separate return” argument, as reported to us by Carl Smith, is worth practitioner review. I am puzzled, however, by Carl’s reply to my comment.

    At least impliedly, Carl acknowledges my contention that Mr. Ibrahim’s attorneys argue that Mr. Ibrahim filed no return that § 6013 recognizes. Carl notes, however, that the IRS long ago abandoned any exclusive reliance on § 6013(b)(2)(B). But that fact can be of no moment to the 8th Circuit’s forthcoming opinion.

    The 8th Circuit can affirm the Tax Court’s decision on any ground found in the record. The record shows the Commissioner issued Mr. Ibrahim a notice of deficiency and Mr. Ibrahim timely petitioned the Tax Court to redetermine the deficiency in that notice. The 8th Circuit could therefore conclude that § 6013(b)(2)(B) bars Mr. Ibrahim’s joint filing election. Apparently, Carl believes that the 8th Circuit would not do so. I am not persuaded.

    The 6th Circuit has already lit the path for the 8th Circuit to follow. In Morgan v. CIR, that court observed:

    “I]f a husband who has filed a return as a separate taxpayer, eschewing the joint return option available to him, is bound by the limitations of section 6013(b)(2), we see no reason why those same limitations should not apply to the husband who has attempted to file as a separate taxpayer, but was unsuccessful because [the IRS concluded his return was invalid].” Morgan v. CIR, 807 F.2d 81, 87 (1986).

    I don’t think there is much difference between the Morgan unsuccessful (invalid) separate return attempt and the Ibrahim “unsuccessful” (HOH) separate return attempt. In both cases, one can say that neither petitioner filed a § 6013 recognized return. But the 6th Circuit’s reasoning about should result from their non-filing persuades me as to what should happen next.

    If Ibrahim has his way, then we will see married taxpayers treated very differently in the Tax Court. The married who filed a MFS return cannot file a MFJ return. Yet the married who didn’t file any return can file a MFJ return. And the married who filed a HOH return can file a MFJ return. As for the married who filed a “single” return….? I’m not sure Congress had these outcomes in mind when it enacted what is now § 6013(b)(2)(B), with all respect to the Phillips’ discussion of that law’s legislative history.

    Speaking of Phillips, the Tax Court there forecasted that it would hold against an Ibrahim. See Phillips at 440 (citing Glaze v. United States, 641 F.2d 339 (5th Cir. 1981) holding that “the limitations of section 6013(b)(2) applied only where a taxpayer had previously filed a return on which he claimed ‘married filing separate’ status, but stating a belief “that that reading of section 6013(b) is too narrow.”)

    Phillips is dangerous.

  2. Can IRS obtain, through a Tax Court subpoena, the payroll records of a state court?

    That’s an interesting question raised in Jones v. Commissioner, Docket No. 27187-12. Michael Jones is a Maricopa County (Arizona) Superior Court judge. The “very narrow legal issue” in the case, according to Judge Holmes, involves “analysis of the proper construction of Section 62(a)(2)(C).” (Judge Holmes’ October 9, 2014 order referred to Section 61, but that’s clearly incorrect.) The case also involves “a very large amount of substantiation.”

    Without online access to most court documents it’s impossible to determine what that substantiation might require, but IRS issued a subpoena to the state court, requesting production of certain payroll records of Judge Jones. Public access to these, according to a motion filed by the state attorney general, is restricted by Rule 123 of the Arizona Rules of the Supreme Court.

    Judge Holmes “spoke with the parties at the end of the trial about how to brief the case most efficiently. The Court wants to consider the legal issues first.” Judge Jones’ attorneys filed their “seriatim opening brief” in December. IRS’s “seriatim answering brief” on the legal issues is due next week. Perhaps the decision on the legal issues will obviate the need for the court payroll records. Stay tuned.

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