Saturday, February 11, 2017

Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)

In BASR Partnership v. United States, [citation coming later] (2017), here, the  Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate.  There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.

BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied.  I previously blogged on these decisions, but link here to the one on the appeals decision:  Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.

Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees.  That leads to § 7430, here.  Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party."  The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million).  BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)

The prevailing party requirement is a bit more nuanced.  Certainly, in ordinary parlance, BASR was the prevailing party.  It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures.  But, prevailing party is defined to exclude positions as to which the government was "substantially justified."  Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.

But wait, there is an exception to the substantially justified exception.  If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  See § 7430(c)(4)(E).  The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered.  Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate.  The aggregate award was $314,710.49.

Tax Procedure Book Errata - Notice of Deficiency Determination (2/11/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 11 Notice of Deficiency
I.   The Notice of Deficiency and its Role in the System (A Reprise).
     A.  General.
     B.   What is a Notice of Deficiency?
            1.  A Deficiency.
             2.  The Notice of Deficiency.
                     a.   The Notice, Determination and Explanation.
                            (1)    The Determination Requirement.
Discussion of a recent case, Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion), here, holding that a notice of deficiency stating $0.00 deficiency but with attachments indicating that a claimed tax benefit had been denied was a valid notice of deficiency
Student Ed. P. 358 (after the 2d full paragraph)

Practitioner Ed. p.  504 (after the carryover paragraph at the top)

               The tolerance for some level of imperfection in notices of deficiency is understandable given the ability to resolve or moot the problems by filing a Tax Court petition for redetermination.  But, what about a document in the regular form of a notice of deficiency that states the amount of the deficiency as $0.00?  A taxpayer receiving such a document would know that it is described as a notice of deficiency and that he may file a petition for redetermination is he does not agree.  But the deficiency is stated to the $0.00, and he may agree with that number.  In a 2017 reviewed opinion of the Tax Court (with strong concurring and dissenting opinions), the Court held that the standard form letter for a notice of deficiency that stated that the deficiency amount was $0.00 but included attachments clearly indicating that a deficiency had been determined because a claimed credit was disallowed met the requirements for a notice of deficiency.  n1635a The majority formulated the questions presented as:
   n1635a   Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion).
  • “Whether the notice objectively put a reasonable taxpayer on notice that the Commissioner determined a deficiency in tax for a particular year and amount.  If the notice, viewed objectively, sets forth this information, then it is a valid notice”
  • If, however, that inquiry does not provide an answer (i.e., the notice is ambiguous as to the requirements for a deficiency, then, for the notice to be valid, the evidence “establish that the Commissioner made a determination and that the taxpayer was not misled by the ambiguous notice.”  The majority elsewhere in the opinion frames the latter inquiry as to whether the “taxpayer was prejudiced by an ambiguous notice.”  On the latter point, the majority concluded as follows:

The notice on its face is ambiguous, but the Commissioner has established that he made a determination and that Mr. Dees was not misled by the notice. Mr. Dees timely filed a petition to challenge the notice, and that petition makes clear that Mr. Dees understood that the Commissioner had disallowed his refundable credit: He stated in his petition both that the Commissioner had erred in denying his premium tax credit and that he had documents to substantiate his entitlement to the credit. This establishes that Mr. Dees was not misled by the notice.
 The tests thus enunciated may be described as an objective test and a subjective test. n1635b
   n1635b Judge Ashford’s concurring opinon says that “The opinion of the Court delineates a two-prong approach (with both objective and subjective elements) to determining our deficiency jurisdiction * * * *.”

               As with the last known address requirement for notices, a taxpayer desiring to present this issue should consider the statute of limitations on assessment.  If the taxpayer brings the issue to the IRS’s attention while the statute is still open (either in some administrative process or by petition to the Tax Court, the IRS may solve the problem by issuing a new notice.  If the taxpayer files a petition in the Tax Court while the statute is still open, the mere filing of the petition will suspend the statute of limitations until the Tax Court decision is final even if the notice is ultimately determined by the Tax Court to be invalid. n1635c
   n1653c  §§ 6213(a) (prohibition on assessment which Tax Court petition for redetermination is pending; and 6503(a)(1) (suspension during period of prohibition).  See Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012) (holding that the filing of a Tax Court petition invoked the suspension even if the notice of deficiency was invalid or the filing was not by the proper person; per § 6503(a)(1), the suspension occurs “if a proceeding in respect of the deficiency is placed on the docket of the Tax Court”).

Addendum:  Links to statutes cited:
  • § 6213(a), here.
  • § 6503(a)(1), here.

Thursday, February 9, 2017

Tax Procedure Book Errata - Correct Status of the Tax Court (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 2 III.B.2. Article I Courts
Correct the status of the Tax Court as an Article I court independent of the judicial system subject to Article III and independent of the executive branch.  Prior to this change, the text in the current version indicated that the Tax Court was within the executive branch of Government.  It is not.  An error that should have been corrected previously.
Student Ed. P. 70
Practitioner Ed. p. 101

Change the paragraph on the United States Tax Court to read as follows:
               The United States Tax Court is an Article I court independent of the Article III judicial system and independent of the executive branch.  § 7441.  n339 The Tax Court has jurisdiction over tax related claims only.  Generally, the Tax Court has jurisdiction to redetermine deficiencies proposed by the IRS and resolve certain other disputes with the IRS. The Tax Court is the principal court in which tax controversies are litigated.
   n339 See Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392, 395 (1971); and Freytag v. Commissioner, 501 U.S. 868, 890-892 (1991. In 2015, in response to the Kuretski case (cited below in the footnote), Congress added this sentence to § 7441: “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government;” that sentence codifies a clause from Freytag v. Commissioner, p. 891 “[t]he Tax Court remains independent of the Executive * * * Branch[es].” The President does have the power to power to remove Tax Court judges “for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.”  § 7443(f).  Two key cases have held that the President’s limited power to remove Tax Court judges does not violate separation of powers principles (although the two cases reach the conclusion for different reasons).  Battat v. Commissioner, 148 T.C. ___, No. 2 (2017) (holding that the interbranch removal power did not implicate Article III because the Tax Court does not exercise Article III judicial power; Battat also has a good discussion of the history of the Tax Court from its inception as the Board of Tax Appeals to its current status); and Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014) (holding before the amendment noted above, that the Tax Court was an executive branch court that could permissibly be subject to Presidential removal); see also Byers v. United States Tax Court, 2016 U.S. Dist. LEXIS 135596 (D. D.C. 2016) (holding that the Tax Court is a court exempt from FOIA and containing a good discussion of the status of the Tax Court).  See also Brant J. Hellwig, The Constitutional Nature of the United States Tax Court, 35 Va. Tax Rev. 269 (2015).

Tax Procedure Book Errata - Corporation Income Tax Return Filing Date (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 5 ¶ 4.A., Time for Filing Returns - General
State C Corporation filing date as a result of 2015.  For most C Corporations, the statute changes the return due date for most C Corporations from the 15th day of the third month to the 15th day of the fourth month (from March 15 to April 15 in the case of C Corporation calendar year taxpayers).  The first two sentences will be replaced with the text below.
Student Ed. P. 108-109
Practitioner Ed. p. 152

Insert as indicated
               Individual and most C Corporation income tax returns are due on the 15th day of the fourth month after the close of the tax year (i.e., April 15 for calendar year returns; virtually all individual returns are calendar year returns, but for taxpayers on a fiscal year, the return is due on the 15th day of the fourth month after the close of the fiscal year). 530a  This filing date rule does not apply until 2025 to C Corporation taxpayers with a fiscal year of June 30. 530b  Partnership and S Corporation returns are due on the 15th day of the third month after the end of the tax year (March 15 for calendar year returns).   530c   n530a § 6072(a).  The filing date of the 15th day of the fourth month (April 15 for calendar year reporters) for C Corporations is effective for 2016 returns filed in 2017.  Prior to that effective date, the due date for C Corporation returns was the 15th day of the third month (March 15 in the case of calendar year reporters).
   n530b Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, (P.L. 114-41) § 2006(a)(3).   I have no idea as to the reason for this exception to the general rule due date of the 15th day of the fourth month.  The net effect of the new rules is that for those Corporate taxpayers wanting to file by the pre-change date of 15th day of third month can still do so and can still file by the former extension date of 15th day of the ninth month because the extension date for the new rule will be October 15th.  So, I am not sure what was achieved by excepting fiscal year Juen 30 filers in the real world.
   n530c § 6072(b).
I will make consistent changes to the discussion of extension dates in the next section in both editions.  Essentially, returns now due on the 15th day of the fourth month (April 15 for calendar year individuals and most C Corporations) can be extended for  six months to the 15th day of the tenth month.

Monday, January 16, 2017

Statistics from the 2016 Whistleblower Office Report (1/16/17)

The IRS Whistleblower Program Fiscal Year 2016 Annual Report to Congress, here, reports the following statistics:

Table 1: Amounts Collected and Awards under Section 7623, Fiscal Years  2014 to 2016
Total Claims Related to Awards
Total Number of Awards fn4
Total IRC 7623(b) Awards
Collections over $2,000,000 fn5
Total Amount of Awards fn6
Amounts Collected  fn7
Awards as a Percentage of Amounts Collected
Average Awards
fn4  For Table 1, “Total Number of Awards” reflects the number of payments to whistleblowers. In some cases, awards can
include proceeds from multiple taxpayers, which are reflected in the “Total Claims Related to Awards.”
fn5  This row includes pre-enactment section 7623(a) claims that were greater than $2 million and section 7623(b) claims.
fn6 The “Total Amount of Awards” is prior to sequestration reductions.
fn7  The “Total Amount of Awards” [for FY2015] was overstated by $441.84 on the FY 2015 Annual Report, and Table 1 has been revised to
reflect the correct amount.

JAT Comments on the Statistics:

My own calculations the following averages per award from the numbers above:

Average Awards

These average award numbers are low because of the large number of § 7623(a) awards which generally tend to be significantly less than the § 7623(b) awards.  My inference is that the § 7623(b) awards – 0 in FY 2014, 19 in FY2015, and 18 in FY2016 - would average much more than the indicated average for all awards.  Indeed, I suspect that, although § 7623(b) awards made are a low percentage of total awards, the lion's share of the Total Amount of Awards is under § 7623(b).

These numbers for claims awarded under § 7623(b) may seem low, but § 7623(b) is still relatively new (enacted effective 2007) and processing whistleblower claims to fruition with collected proceeds (collections after the refund statute of limitations has expired) takes a long time.  So, the number of awards and the amounts awarded are probably not indicative of the future where awards may be in the pipeline for claims already made or will be received and processed in later years. 

Back to the Report:

The Report contains a discussion of "Other Issues of Interest."

Tax Procedure Book Errata - Nonexistent or Phantom Regulations (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 2
II. Executive Branch.
  B. IRS.
    6. IRS Rule Making Authority.
      (4) Nonexistent or Phantom Regulations.
Complete Revision of this section
Student Ed. P. 64
Practitioner Ed. p. 84-85

                                                            (4)          Nonexistent or Phantom Regulations.

              Congress will sometimes direct or authorize the IRS to issue regulations to flesh out the statutory scheme.  The direction or authorization may be for either interpretive regulations or legislative regulations.  For any number of reasons, the IRS may not get around to promulgating the required regulations for long periods and in some cases not at all. n195  The party – most often the taxpayer – suffering from the absence of regulations may seek in audits or litigation the result that would have obtained had the regulations been promulgated.  How do the IRS and the courts resolve cases which would be subject to such regulations if they existed?  Should the IRS or the courts create, in effect, a “phantom” regulation to resolve the case based on the policies and directions reflected in the statute (as discerned from the statute or legislative history that is persuasive as to the legislative intent)?

               The Tax Court has defined the problem thusly:
               This case thus requires us to address a question that has arisen with some frequency: How should a court respond when a taxpayer or the IRS desires to have a particular tax treatment apply in the absence of the regulations to which the statute refers? In some cases, the Secretary may have affirmatively declined to issue regulations, having concluded that they are unnecessary or inappropriate. In other cases, the Secretary may intend to issue regulations but may have encountered delays because of subject matter complexity or the press of other business. Courts have described the question presented here as whether the statute is “self-executing” in the absence of regulations. [Case citations omitted] 
               The courts have struggled to define the proper judicial response in these scenarios. In each case, Congress has delegated to an executive branch agency the task of using its expertise to craft appropriate regulations. Under the Administrative Procedure Act and familiar separation-of-powers principles, a court’s usual role is to review the regulations an agency has issued, not to conjure what regulations might look like had they been promulgated. On the other hand, if it is absolutely clear that Congress intended that a particular tax benefit or tax treatment should be available, a legitimate question arises as to whether the IRS may prevent that outcome by declining to engage in rulemaking. Commentators have described this scenario as one of “spurned delegations” and the resulting judicial dilemma as one of crafting “phantom regulations.” [Law review citations omitted] n196
The Tax Court concluded the task is to determine whether the statutory text, considered in light of the legislative history, can be applied without further explication in a regulation  n197 The analysis turns upon whether “Congress couched its delegation of rulemaking authority in mandatory or permissive terms.” I add that the mandatory terms inquiry means that Congress intended the regulations to allow the treatment requested by the taxpayer or the IRS.

               As to statutory text which, as interpreted, is mandatory in the delegation and Congress’ intent as to the result is clear:
               In sum, this Court and other courts have frequently, but not always, held to be self-executing taxpayer-friendly Code provisions that include a mandatory delegation to the Secretary. One commentator has described this as “the equity approach,” on the theory that “treating such delegations otherwise would inequitably deprive taxpayers of legislatively intended benefits.” In several of these cases, the IRS conceded (or did not seriously dispute) that the statute was self-executing in the absence of regulations.  The “whether/how” approach has been employed mainly “with respect to taxpayer-unfriendly delegations.” In many of those cases, the central question was whether the statute by its terms made the taxpayer liable for the tax. n198
                As to statutory text which, as interpreted, is permissive in the delegation, so that they are interpreted to delegate discretionary or policy choices to the IRS (whether taxpayer-friendly or not), the courts will generally not impose result. n199  Of course, as thus framed so that different results may obtain by characterizing the delegation as mandatory or permissive, one needs to distinguish between those two characterizations.  Without offering anything definitive, I suspect the answer to that may be like the definition of pornography – you know it when you see it.

               I wonder whether one analytical tool to determine when the court can supply the rule in the absence of regulations would be to use the Chevron analysis for testing the validity of regulations (I discuss Chevron below).  Chevron basically tests the validity of regulations using the tools of statutory construction in a two-step process.  The concept would be that, if there were a regulation that did not include the relief the party seeks, the regulation would be invalid.  This would be a notional regulation analysis.  This would simply say that, based on the Chevron analysis, Congress clearly intended the relief and therefore, even in the absence of the regulation, the Court can supply the relief.


  n195 A classic example is § 385, enacted in 1969.  Section 385 authorizes–but does not direct–the IRS to promulgate regulations to adopt a test for distinguishing between corporate debt and equity.  The courts had developed general rules which were so squishy in application that they were difficult for taxpayers, the IRS and the courts to apply.  Congress punted to the IRS the authority to make the rules.  The IRS tried but finally realized that it could not do that in a way that might not create more problems than it solved.   The IRS has yet to promulgate regulations.  Taxpayers, the IRS and the courts are left with the same squishy rules as before.  In 2016, the IRS issued proposed regulations.

   n196 15 West 17th Streeet LLC v. Commissioner, 147 T.C. ___, No. 19 (2016) (Reviewed opinion).

   n197 Id., citing Temsco Helicopters, Inc. v. United States, 409 F. App’x 64, 67 (9th Cir. 2010) (citing Francisco v. Commissioner, 119 T.C. 317, 322-323 (2002), aff’d on other grounds, 370 F.3d 1228 (D.C. Cir. 2004)).

   n198 Id. (Citations omitted.)

   n199 Id.

The Tax Court Jurisdictional Brouhaha that Should Never Have Been - Malpractice Alert (1/16/2017)

For many years through 2015, I taught Tax Procedure at the University of Houston Law School.  Some professors teach the subject at a more theoretical level, spending a lot of time, for example, on Chevron and its policy implications.  I do a combination of the theory and the every day rules required to work through the various aspects of tax procedure to benefit the client.  In conjunction with that course, I have published a free downloadable Tax Procedure text.  Actually, the text comes in two editions -- a student edition without footnotes and a practitioner edition with footnotes.  (These may be downloaded from the links to the right of the blog page; I update these two editions annually by mid-August for use by students and law professors.)  The design of the nonfootnoted student edition is for a tax procedure class.  My goal for the student edition is to provide summaries of the procedures, with only key Code sections and key cases cited in the text.  In the practitioner edition, I provide authority and digressions in the footnotes that I don't expect students to know for the class.

One of the important subjects I discuss is the timely mailing, timely filing statute, § 7502, here, for key documents required to be filed under the Code.  In a nutshell, as I state in my text:  the timely mailing, timely filing statute, often called a rule, "treats the mailing date as the filing date for a return (or certain other documents) received by the IRS after the due date (either the original due date where there is no extension or the extended due date if there is an extension) but mailed on or before that due date."  The discussion of the rule from the book may be viewed on line or downloaded, here.  This linked document is from the practitioner version with footnotes for more detail.  I do provide at the end of this blog entry, the cut and paste from the student edition without footnotes.

One of the points I hammered into my students in class when we covered this subject in class was that there is an easy way to absolutely assure that the conditions for application of the rule will be met and that easy way should be used in all -- ALL -- cases where mailing is close to the deadline (and even in other cases from an abundance of caution).  If that easy way is chosen (see the linked materials), the document will be treated as timely filed even if it never gets to the place of filing (the IRS or the Tax Court).  That easy way is to use an authorized USPS service or an authorized private postage service (such as FedEx or UPS).  (Must be careful to use the authorized service in each case).

Filing dates are critical to avoid penalties (e.g., for late filed returns).  Penalties are bad, but it could be worse.  In one key facet of the tax practice they are critical.  That is the filing of certain documents with the Tax Court, most commonly the petition for redetermination of a notice of deficiency.  Timely filing is required for a key remedy -- prepayment judicial review in the Tax Court for a deficiency redetermination.  Section 6213(a), here, requires filing within 90 days for Tax Court review to redetermine the deficiency.  Thus, given the importance of timely filing of the petition for redetermination (and some other filings with the Tax Court), as a practitioner, I always use one of the guaranteed methods.  (See the linked portions of my text above and the cut at paste at the end of this blog entry.)

In Tilden v. Commissioner, ___ F.3d ___, here, the Seventh Circuit addressed a situation where the tax practitioner failed to use a guaranteed easy way to assure application of the timely mailing, timely filing rule.  The practitioner used the the third party service that operates like a private postage meter.  The statute generally makes postmarks made by the USPS dispositive, but other non-USPS postmarks are dispositive only pursuant to regulations issued by the IRS.  § 7502(b). Those regulations appear at 26 CFR § 301.7502-1, here.

For application of the rule to a private post metering service (including postage the mailing must meet the conditions in the regulations.  I won't get into the details here of the various faints and starts encountered in the Tax Court's and then the Seventh Circuit's meandering through the applicable regulations.  The Tax Court held that the taxpayer did not meet the conditions.  The Seventh Circuit held that the taxpayer did, although it was a thin reed of a victory for the taxpayer.