Thursday, August 28, 2014

UH Tax Procedure Class 2014

Tonight the class for tax procedure starts.  I will periodically post updates and errata here for students and mark those with a keyword "UH TPC 2014."  So, click on that keyword to retrieve the entries relevant for the class.  Not all entries will be relevant to the case, so students may not want to spend their valuable time with those entries.

Please note the errata page in the column at the right.

Wednesday, August 27, 2014

BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (8/27/14)

I have previously written on the Allen issue -- whether Section 6501(c)(1)'s unlimited statute of limitations may be triggered by fraud on the return that is not the taxpayer's fraud.  See Allen v. Commissioner, 128 T.C. 37 (2007), here.  (For my blogs on the issue, see here.)

Since Allen, the courts addressing the issue have been  sparse, but seemed to accept the validity of Allen's holding that fraud on the return triggers the unlimited statute of limitations even if it was not the taxpayer's fraud.  Allen involved a run of the mine fraudulent preparer, but the more prominent instances where the holding could apply involves the plethora of bullshit / fraudulent tax shelters that were popular with the wealthy in the 1990s and in the early 2000s.  Apparently not anticipating the holding in Allen, the IRS walked away from making adjustments to taxpayers investing in those shelters where it could not find an open statute of limitations under the other rules.  The IRS did try to get some relief by asserting the 6 year statute, but came up short on that in  U.S. v. Home Concrete & Supply, LLC, ___ U.S. ___, 132 S.Ct. 1836 (2012), here.  (See The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (Federal Tax Crimes Blog 4/25/12), here.) Then, the IRS belatedly discovered the implications of Allen.

In BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here, the Court of Federal Claims rejected Allen and held that the unlimited statute in Section 6501(c)(1) required the taxpayer's fraud.  That holding, of course, warmed the hearts of taxpayers who invested in bullshit / fraudulent tax shelters -- a win on the audit lottery they willing and  joyously played.  For prior discussions of BASR, see Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (Federal Tax Procedure Blog 10/3/13), here,  and Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (Federal Tax Crimes Blog 11/14/13; revised 11/16/13), here.

The  Government appealed BASR to the Court of Appeals for the Federal Circuit.  That case is now pending.  But it has been briefed.  I offer today in this blog entry the briefs of the parties and of Amicus Curiae (arguing that the Allen holding is incorrect).  Those briefs are:
  • Government Opening Brief, here.
  • BASR Answering Brief, here.
  • Amicus Curiae Brief, here.
  • Government Reply Brief (Responding to BASR Brief and Amicus Brief), here.

I will cut and paste the Summaries of the Arguments in the Briefs:

Saturday, June 14, 2014

Eleventh Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (6/14/14)

In United States v. Carlson, ___ F.3d  ___, 2014 U.S. App. LEXIS 11001 (11th Cir. 6/13/14), here, the issue was the plaintiff's liability for " aiding and abetting understatement of tax liability in violation of I.R.C. § 6701."  Section 6701 is here.  In relevant part, Section 6701 imposes the penalty upon a person:
(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.
Section 6701 may be viewed as the civil penalty analog to the tax crime of aiding and assisting, Section 7206(2), here.

One issue on the appeal was the appropriate burden of  proof the Government must bear.  Carlson argued that it was by clear and convincing evidence; the Government argued that it was by a preponderance.  The Court held that the standard of proof is by clear and  convincing evidence.  Here is the Court's discussion:
I. The Government must prove violations of I.R.C. § 6701 by clear and convincing evidence. 
At trial, the parties disputed the correct standard of proof. Carlson contends the correct standard should be clear and convincing evidence while the Government contends the correct standard is a preponderance of the evidence. The district court agreed with the Government and instructed the jury that the Government must prove its case by a preponderance of the evidence. We conclude that this instruction misstated the law. 
Under the Eleventh Circuit's longstanding precedent, the Government must prove fraud in civil tax cases by clear and convincing evidence. See, e.g., Ballard v. Comm'r of Internal Revenue, 522 F.3d 1229, 1234 (11th Cir. 2008) ("The Commissioner has the burden of proving allegations of fraud by clear and convincing evidence."); Korecky v. Comm'r of Internal Revenue, 781 F.3d 1566, 1568 (11th Cir. 1986) ("The IRS bears the burden of proving fraud, which must be established by clear and convincing evidence."); Marsellus v. Comm'r of Internal Revenue, 544 F.2d 883, 885 (5th Cir. 1977) (holding fraud must be proved by clear and convincing evidence); Webb v. Comm'r of Internal Revenue, 394 F.2d 366, 378 (5th Cir. 1968) (same); Goldberg v. Comm'r of Internal Revenue, 239 F.3d 316, 320 (5th Cir. 1956) ("The Commissioner has the burden of proving fraud by clear and convincing evidence."); Jemison v. Comm'r of Internal Revenue, 45 F.2d 4, 5-6 (5th Cir. 1930) ("Fraud is not to be presumed, but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case."). Our sister courts of appeals follow the same rule. See, e.g., Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (holding that a finding of fraud must be supported by clear and convincing evidence); Lessmann v. Comm'r of Internal Revenue, 327 F.2d 990, 993 (8th Cir. 1964) (same); Davis v. Comm'r of Internal Revenue, 184 F.2d 86, 86 (10th Cir. 1950) (same);Rogers v. Comm'r of Internal Revenue, 111 F.2d 987, 989 (6th Cir. 1940) ("Fraud cannot be lightly inferred, but must be established by clear and convincing proof."); Duffin v. Lucas, 55 F.2d 786, 798 (6th Cir. 1932) (same); Griffiths v. Comm'r of Internal Revenue, 50 F.2d 782, 786 (7th Cir. 1931) ("Fraud is never presumed but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.").

Monday, June 2, 2014

Procedural Predicates for Setoffs in Refund Suits (7/2/14)

In Lewis v. Reynolds, 284 U.S. 281 (1932), here,modified in 284 U.S. 599 (1932), the Supreme Court held that, in a refund suit, the Government can raise a previously unasserted basis for denying a taxpayer a refund.  The notion is that, in a refund suit, the issue is whether the taxpayer overpaid the tax and therefore is entitled to a refund.  If there is some other basis to conclude that the taxpayer did not overpay the tax, the taxpayer is not entitled to a refund.  The issue usually arises after the IRS has audited an issue and assessed a deficiency.  The taxpayer pays the assessed tax and sues for refund, asserting that the taxpayer does not owe tax with respect to that issue.  Lewis v. Reynolds holds that, in that refund suit, the Government can assert any other basis that shows the taxpayer is not entitled to a refund for that year or is entitled to less than the taxpayer assert.  This is often referred to as a setoff.

The setoff concept is important in tax practice.  One significant issue is what the Government must do to assert the setoff.  This issue arose in a recent case, Lockheed Martin Corp. v. United States, 973 F. Supp. 2d 591 (D. Md. 2013), where the Court addressed the pleading requirements for the Government to raise the setff as a defense.  In Lockheed, the Government pled the following under a caption titled "Second Defense":
Should the Court determine that Plaintiff raised a meritorious argument that would otherwise establish that Plaintiff overpaid its taxes, the United States is entitled to reduce that overpayment based on any additional tax liabilities that the Plaintiff may owe, whether or not previously assessed or alleged. The United States is entitled to such reduction because the redetermination of the Plaintiff's entire federal income tax liability for the litigated tax years is at issue in this refund suit.
Note that the Government pleads nothing except its theoretical right to the setoff.

Of course, the taxpayer in a refund suit does not want the Government to be able to assert the right to a setoff at all.  And, the theoretical assertion of the right may raise concern that the Government will use the refund suit litigation to re-audit in search of something to setoff.  So, in Lockheed, the taxpayer moved to strike that portion of the pleading, alleging that setoff should be pled like an affirmative defense, which, as Lockheed read the cases, would prohibit this type of conclusory pleading without a factual basis for the claim.  The Government argued that, although labeled a defense, it is not an affirmative defense at all, but merely goes to the issue of whether this taxpayer has proved that it is entitled to the refund the taxpayer claims.  The Court does not engage on this theoretical difference between a setoff and an affirmative defense, but treats the setoff as being subject to the affirmative defense pleading requirements.

Focusing on those pleading requirements for affirmative defenses, the Court notes that there is a split of authority over whether any notice of factual predicate for the legal claim is required to be pled.  The Court first identifies the split of authority and then turns to rationale for the majority and minority views as follows:

Thursday, May 15, 2014

Another Bullshit Shelter Bites the Dust Even with Variations (5/15/14)

I write today on the defeat of another bullshit tax shelter of the Son-of-Boss ("SOB") variety.  The Markell Company, Inc. v. Commissioner, T.C. Memo. 2014-86, here, decided yesterday.  If it were just another ho-hum SOB, it would be worth noting only in passing.  But, it has a twist -- both the twist and the outcome is projected in the opening two short paragraphs:
This case began when the Commissioner found the remains of a corporation on an Indian reservation in an extremely remote corner of Utah. The tribe claimed not to know how the corporation's stock had ended up in its hands. And there was little or no money or valuable property left inside the corporate shell. 
All signs pointed to the corporation's manager, a sophisticated East Coast moneyman, as the key person of interest. And his method was a series of complex transactions that bore a striking resemblance to Son-of-BOSS deals already examined many times before by this Court -- but with a corporate-partner twist.
The last sentence of the first paragraph resonates with the equally bullshit intermediary transactions.  One of the strategies in shelters is to push tax consequences to an empty shell of a company, so that the IRS is left without anyone to collect tax clearly due.

The Son-of-Boss transactions in their pure bullshit form seemed to promise to the gullible or complicit that the taxable income disappearing from the taxpayer's tax ledger would just go away.  But, every one I know that gave a hard and knowledgeable look knew that, even if the imagined scheme worked to push the income from the original taxpayer (always a doubtful proposition), some taxpayer down the line would be liable for the tax.  Enter the intermediary gambit to make sure that taxpayer down the line had no assets to pay the tax because the taxpayer and the promoters would have sucked all the value out of the company.  Thus, this intermediary was designed to deal with an inherent and blatant flaw in the SOB transactions.  (Of course, SOB transactions had flaws in them before reaching this stage, but the intermediary was a fine artistic touch to put on the bullshit.)

The Merits

Tuesday, May 6, 2014

The Chevron Two-Step (5/6/14)

Tax Procedure enthusiasts know -- or should know -- that Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), here, empowered the administrative state whereby agencies' interpretations of statutes entrusted by Congress to their administration are given deference.  The Chevron analysis involves two key steps, explained as follows from my Federal Tax Procedure book (footnotes omitted):
The Court established a “two-step” inquiry.  The First Step inquires whether the meaning of the statute is plain and unambiguous?  An alternative way to say this is whether the meaning of the statute is “clear” and needs no interpretation either by the courts or the agency.  If so, the regulation is irrelevant because the plain or clear meaning of the statute itself pre-empts the interpretive field.  A regulation inconsistent with the clear (or plain or unambiguous) meaning is invalid.  The Second Step, reached only if the text is determined to be not clear (or not plain or not unambiguous) in the First Step, is whether the agency interpretation is unreasonable? Under this Second Step, the agency’s interpretation in the regulations is given deference so long as it is not arbitrary, capricious or manifestly contrary to the statute it seeks to interpret (I generally just truncate this litany to “unreasonable”). This gives the IRS authority to interpret and determine the law where in the conceptual space between clear statutory text and an interpretation that is unreasonable under the statutory text.  This two-step inquiry is very important; students, practitioners and scholars must know the steps instinctively; I encourage readers of this text to commit them to memory – at least the formulation of the steps.
With that introduction, here are creative NYU Law students demonstrating the Chevron two-step.


Hat tip to the Tax Prof Blog for bringing the video to my attention.

Sunday, May 4, 2014

Role and Culpability of Taxpayers Participating in Bullshit Tax Shelters (4/4/14)

I write today to collect and update some thoughts I have expressed before on this blog.  The background is the bullshit tax shelters on which I have written and even fulminated, if not eloquently, at least often.  I start with my own definition from my Tax Procedure Book (footnotes omitted).
  Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (i) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”
The bullshit tax shelter with which I am most familiar is the Son-of-Boss shelter.  That shelter purported to generate offsets to taxable income.  The offsets were wrapped in commotion but ultimately simply created from thin air -- very thin, indeed a perfect vacuum.  Bullshit shelters appear in many guises other than Son-of-Boss.  The commotion they are wrapped in serve two purposes:  (i) creating the illusion of some basis for the magical tax benefits and (ii) hiding the fact that the illusion is an illusion.  Bottom-line, several courts have characterized the imagined benefits as "too good to be true" and indeed recognizably "too good to be true."

As readers of this blog know, many bullshit tax shelter promoters have been convicted for their participation in the bullshit tax shelters.  Taxpayers themselves have not been prosecuted or convicted.  I do understand that some taxpayers have been named targets or subjects of grand jury investigations for their participation but those investigations ended in only promoter prosecutions.