Tax Procedure Book Errata - Special Flora Mitigation Procedures for Certain Assessable Penalties (9/11/16)

I will revise the book to insert the following with respect to certain assessable penalties -- the return preparer penalties under § 6694 and the penalties under 6700-6703.  These penalties are assessable without predicate notice of deficiency or other such procedures permitting litigation before assessment.  Those penalties can be litigated in a traditional refund suit which will be subject to Flora's full payment rule.  The Flora full payment rule is mitigated in many contexts (included this context) by the divisible tax rule that would apply if the penalties are divisible.  There is another special Flora full payment mitigation rule applying to these penalties.  That mitigation rule is as follows:

This mitigation rule requires that (i) within 30 days of the assessment’s notice and demand, the person assessed the penalty pay 15% of the penalty and file a claim for refund and (ii) then file the refund suit in district court by the earlier of (a) 30 days from the denial of the claim or (b) 6 months and 30 days from the date the refund claim was filed.  If the taxpayer pursues this special district remedy, collection procedures on the balance will be suspended and the statute of limitations on collection will also be suspended.  [See § 6694(c) as to the preparer penalties and §§ 6703(c) as to the §§ 6700-6702 penalties.]

In addition, to the special procedure for partial payment and suit for refund, penalties subject to this special mitigation rule may be litigated in CDP procedures.

I have not yet incorporated these into the current working draft for the next version in 2017, but it will be included in that version.

I picked up the need for this revision from Taylor v. Commissioner, 2016 U.S. Dist. LEXIS 122216 (ED WA 2016), applying the rule to the § 6694 penalty.  In Taylor, the preparer timely paid the 15% and filed the claim for refund.  The denial of the claim was almost two years later.  By the time of denial of the claim, the period for filing the suit for refund for the special procedure had expired. The time for filing that suit was 6 months and thirty days after the filing of the claim for refund.

Tax Procedure Book Errata - Injured Spouse Relief for Joint Return Refunds Credited to Liability of Only One of the Spouses (9/2/16)

Keith Fogg posted a great discussion today on the Procedurally Taxing Blog: Special Statute of Limitations for Injured Spouse Relief (9/2/16), here.  I have added the paragraph below to my Federal Tax Procedure Book editions, appearing now as errata but will appear in the 2017 edition of the book editions.

Student Edition p. 151 and Practitioner edition at the end of the carryover section and immediately before 2. Constructive Overpayments, add the following paragraph (remember that the footnotes do not apply to the student edition):

Finally, as noted, the IRS may credit refunds otherwise due for tax debts and for nontax debts other federal, state agencies and even child-support payments certified by the state.  This creates a problem only one spouse owes the debt to which a refund on a joint return is credited.  In that case, the spouse who is not liable may have a separate interest in the refund on the joint return.  That spouse is called the injured spouse because that spouse’s asset is used to pay a debt of the liable spouse. n769.1  The IRS has procedures, called injured spouse relief, that permits the injured spouse to obtain the refund. n769.2  This relief to obtain the injured spouse’s share of overpayments credit to the liable spouse’s debt is sometimes confused with innocent spouse relief (discussed below beginning at p. 472 of the Student edition and p.  682 of Practitioner edition).  The IRM succinctly states the different as follows: “Innocent spouse status relieves a spouse of the responsibility for paying taxes that may then be collected from the other spouse. Injured spouse status involves obtaining a refund of a spouse's interest in an overpayment that has been offset under IRC 6402.”  n769.3  The injured spouse relief is based on general state law rights rather than being required by a particular Code section.

   n769.1 See generally IRM 25.18.5  Injured Spouse.  IRM 25.18.5.1  (03-04-2011), Background - IRC 6402 Offsets, subpar. 3 which is captioned “How Offset Issues Arise,” noting  in relevant part:
Offset issues arise where spouses file joint returns and only one spouse owes a IRC 6402 debt. In this circumstance, an allocation must be made to determine the liable spouse's interest in the overpayment, the amount that can be offset for the liable spouse's debt, and the amount to be refunded to the nonliable spouse. Rev. Rul. 80-7, 1980-1 C.B. 296, amplified by Rev. Rul. 87-52, 1987-1 C.B. 347. Due to different property rights in income tax and withholding and other credits, there is a difference in the allocation process for community property states as opposed to the other states. Rev. Rul. 85-70, 1985-1 C.B. 361.
In subsequent sections, the IRM provides the methods for allocating the amount of the refund to the injured spouse.  Having spent most of my career practicing in Houston, Texas, I was particularly interested to see a special IRM provision devoted allocations in Texas.  IRM 25.18.5.10  (03-04-2011), Injured Spouse Claims Involving Federal Tax Offsets in Texas.  Texas is just different. 

   n769.2 The relief is requested by Form 8379, titled Injured Spouse Allocation, which can be filed (i) with the return if the taxpayers know of the § 6502 creditable debt of the liable spouse and (ii) after notice of the credit in order to obtain the benefit for the injured spouse.  For more on the relief, see Keith Fogg, Special Statute of Limitations for Injured Spouse Relief (Procedurally Taxing Blog 9/2/16), discussing the TIGTA report titled Injured Spouse Cases Were Not Always Timely Resolved, Resulting in the Unnecessary Payment of Interest (Ref. No. 2016-40-042 5/19/16). One key point that Keith Fogg makes is that the statute of limitations for claiming injured spouse relief for credits to the liable spouse’s federal tax debts is three years whereas the statute of limitations for such relief for nontax debts is six years.  Keith also notes that one solution where a potential injured spouse knows of the creditable debt in advance is for the potential injured spouse to not file a joint return.  But, Keith notes, that might not be a satisfactory solution where the filing of a joint return will reduce the aggregate net tax liability.  

   n769.3 IRM 25.18.5.1  (03-04-2011), Background - IRC 6402 Offsets, subpar. 3.  The IRM also notes that some spouses entitled or potentially entitled to injured spouse relief filed mistakenly for innocent spouse relief.  Where that occurs, the IRS is instructed to notify the spouse of the difference via a specific form letter and provide a copy of Form 8379, titled Injured Spouse Allocation.

Tax Procedure Book Errata - Base to Which the Failure to File and Fraudulent Failure to File Penalty Rates Apply (9/1/16)

I did not state the penalty base for the failure to file penalty which comes in two flavors -- the fraudulent failure to file penalty and the general failure to file penalty.  See § 6651(a)(1) and (f).  (Actually, it is buried in the discussion of the fraudulent failure to file penalty, but being buried is not good enough.)  The respective failure to file penalty rates are 15% per month up to 75% for fraudulent failure to file and 5% per month up to 25% for the general nonfraudulent failure to file.  The base to which the respective rates apply is the same -- the tax due "reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return."  § 6651(b)(1).

The penalty base is important and needs to be stated explicitly.  I have made that addition as follows:

In the Student edition p. 233 and the Practitioner edition p. 331, I have added the following sentence immediately after the first sentence in the section under D. Fraudulent Failure to File Return - § 6651(f).:

The base to which the 15% per month fraudulent failure to file penalty rate applies is the same base as the general failure to file 5% per month penalty – the tax due “reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.” fn
  fn § 6651(b)(1).

In the Student edition p. 248 and the Practitioner edition p. 352, I have added the following sentence immediately after the fourth sentence in the section under F.1. Most Returns with Tax Due:

The base to which the 5% per month penalty rate applies is the tax due “reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.” fn
   fn § 6651(b)(1).

Remember that the indicated footnotes are not contained in the Student edition.

Filing Motions for Reconsideration (8/30/16)

Keith Fogg has a great posting titled, descriptively, Motion for Reconsideration (Procedurally Taxing Blog 8/30/16). here.  I highly recommend that students and new lawyers doing any type of trial practise and particularly tax litigation practise click on the link and read the blog entry.

The starting point for this discussion is Senyszyn v. Commissioner, TC Memo 2016-137,. here, which I have previously discussed in my Federal Tax Crimes Blog because, although a civil case, the background is a criminal tax evasion case.  See Tax Court Again Rejects Collateral Estoppel For Some Deficiency and Civil Fraud Penalty Where No Tax is Due (Federal Tax Crimes Blog 7/24/16), here.  The issue was whether the Court had to apply the doctrine of collateral estoppel based on on the tax evasion conviction that had as an element an evaded tax (sometimes call tax due and owing or tax deficiency).  A specific amount of evaded tax is not required for conviction.  So, in his case, there was just some unstated amount of tax due and owing.  The Court knew based on the record that, in fact there was no tax evaded.  That knowledge certainly casts doubt on the criminal conviction, but the criminal conviction was not an issue in the case.  Judge Halpern, the Tax Court Judge, had to do justice in the case before him where the facts showed that there was no tax deficiency.  He simply decided to do justice.

Some of the key points Keith discusses are:

• Filing motions for reconsideration is a strategic step.  Those motions can backfire.
• Keith notes the procedures that the IRS has to follow to obtain approval to file a motion for reconsideration.
• Keith notes that, bottom line, the doctrine of collateral estoppel exists to achieve efficient justice by avoiding re-litigating facts already determined.  But there may be outlier cases where following the previous determination will patently defeat justice.  This was one of them, and the judge exercised the equitable powers he perceived he had to do justice.

Again, I strongly urge that you read Keith's blog entry.

Tax Procedure Book Errata - Addition re Starting Date for Statute of Limitations to Return Filed Before Due Date (8/29/16)

I have made an addition to Example 1 on p.  115 of the Student Edition and 162 of the Practitioner edition.  I quote here the entire example, noting the text added in red and the footnote added in red.\

Example 1: The Year 01 return is mailed on February 1 of Year 02 and received by the IRS on February 6 of Year 02.  The return is timely filed, so the timely-mailing, timely-filing rule does not apply or need to apply.  The return is deemed filed on the due date of April 15 of Year 02.  (Note that this filing date applies to establish the filing date for purpose of the civil and criminal statutes of limitations even if April 15 falls on a weekend or holiday which is treated by § 7503 as being timley filed on the next succeeding.) fn.
   fn. See United States v. Johnson, 2016 U.S. App. LEXIS 15879 (6th Cir. 2016) and the relate case United States v. Johnson, 599 Fed. Appx. 242; 2015 U.S. App. LEXIS 5446 (6th Cir. 2015) dealing with the starting date for the criminal statute of limitations.  The same analysis applies for the civil statute of limitations, although if, as in Johnson, the return was fraudulent, the unlimited civil statute would apply.  The statutory analysis for both civil and criminal statutes is: (1) § 6501(b)(1) treats an early filed return as being filed on the “the last day prescribed by law;” (2) § 6072(a) provides that the last day prescribed by law for an individual return is April 15 of the next year; and (3) § 7503 provides that, where the day prescribed by law is a weekend or holiday, a return filed after the day prescribed by law but on the next business day after the weekend or holiday shall be “considered timely.”  The key point is that the day prescribed by law is still April 15; but a subsequent filing on the next succeeding business day is simply “considered timely.”  Hence, from a statutory interpretation context, conceded by the Government in the Johnson cases, the statute of limitations starts on the last day prescribed by law, which is April 15 for an early filed return.  Now, for a return filed after that normal due date which falls on a weekend or holiday, I suspect that the statute would start running on the date of filing. 

For more detail, see my Federal Tax Crimes Blog entry titled Government Avoids Hyde Amendment Fees and Expense Liability After It Blew the Criminal Statute of Limitations (Federal Tax Crimes Blog 8/29/16), here.

Tax Procedure Book Errata - Correction Related to Abatement of Erroneous Assessment (8/22/16)

Delete the entire section (1 paragraph) in Chapter 6 at V. Abatements of Erroneous Asessments (at p. 240 of the Practitioner edition and p. 167 of the Student edition substituting in its place the following (note that the footnote numbers may not tie to the current editions):

V. Abatements of Erroneous Assessments.

Section 6404(a) authorizes the IRS to abate an assessment of tax (or liability) which is “(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.”  All of these alternatives seem straight-forward.  For example, if the taxpayer has been assessed $100 in tax or interest but shows that the correct tax or interest liability is $50 rather than the $100 assessed, under subparagraph (1), the IRS can abate the excessive $50 amount assessed. n848
   n848 In King v. Commissioner, ___ F.3d ___, 2016 U.S. App. LEXIS 13269 (7th Cir. 2016), dealing with abatement of interest rather than tax, the Seventh Circuit reversed the Tax Court’s holding that “excessive” could mean “unfair.”  The Court cited several reasons, including the indeterminancy of the concept of “unfair” and the Chevron appropriate regulation saying that, in the context of tax, “excessive” means "in excess of the correct tax liability,” with the conclusion that, as to interest, it must mean in excess of the correct interest.  See Regs. § 301.6404-1(a).

As noted above, however, the taxpayer still must claim his right to a refund timely, and, if he fails to do so, the statute of limitations on actually getting the refund will prevent the IRS from refunding the tax.  If for some reason, after the statute of limitations for refund has closed, the taxpayer establishes his or her right to an abatement, the IRS may make the abatement because there is no statute of limitations on abatement.n849  The problem, of course, is that the IRS cannot refund or credit the abated tax liability, if paid, to the taxpayer and, instead, the payments will be posted internally by the IRS to the Excess Collections File.
   n849 ILM 200915034 (3/2/2009), published at 2009 TNT 68-16.

Excellent Law Review Article on Statutory Interpretation and Use of Legislative History (8/21/16)

An  important topic in all tax courses, including Federal Tax Procedure, is statutory construction.  One of the issues I discuss is the use of legislative history in statutory construction.  (See practitioner edition beginning on p. 6 and Student edition beginning on p. 4.)

I have just read a law review article that I think would be a worthy read for those wishing to dig further into the issue.  The article is:  Robert A. Katzman, Madison Lecture: Statutes, 87 N.Y.U.L. Rev. 637 (2012), here.   Katzman is a judge on the Second Circuit and a prominent constitutional scholar in his own right.  I offer below some snippets and my own comments.  In most quotes, I omit footnotes, except in some cases where I think the footnote is important

First, in a bow to James Madison who is often called the father of the Constitution because of his major contribution to the Constitution:

I owe much to James Madison, that diminutive giant, one of the founding architects of our constitutional structure.

Then, the author deploys Madison in support of his argument that legislative history is an important tool in statutory interpretation:

Generally, the interpretative problem arises because the statute is ambiguous. n127 From the start, the founders understood that legislation would often be unclear and admit of differing interpretations. Madison wrote in The Federalist No. 37, describing laws in general:

All new laws, though penned with the greatest technical skill, and passed on the fullest and most mature deliberation, are considered as more or less obscure and equivocal, until their meaning be liquidated and ascertained by a series of particular discussions and adjudications. Besides the obscurity arising from the complexity of objects, and the imperfection of the human faculties, the medium through which the conceptions of men are conveyed to each other, adds a fresh embarrassment... . No language is so copious as to supply words and phrases for every complex idea, or so correct as not to include many equivocally denoting different ideas. Hence, it must happen that however accurately objects may be discriminated in themselves, and however accurately the discrimination may be considered, the definition of them may be rendered inaccurate by the inaccuracy of the terms in which it is delivered. And this unavoidable inaccuracy must be greater or less, according to the complexity and novelty of the objects defined. n128
   n128. The Federalist No. 37, at 255 (James Madison) (Cynthia Brantley Johnson ed., 2004). It merits a note that Madison and other founders proposed an active role for judges in the legislative process by having members of the Supreme Court serve on a council of revision to help the President exercise the veto power. 2 The Records of the Federal Convention of 1787, at 73-80 (Max Farrand ed., 1911). Such a scheme, argued Madison, would help "preserve a consistency, conciseness, perspicuity & technical propriety in the laws, qualities peculiarly necessary; & yet shamefully wanting in our republican Codes." Id. at 74. With respect, I think that is one proposal whose rejection was well advised.