No Overpayment For Tax Timely Assessed OR Collected (12/29/12)

In ILM 201252015, here, the IRS reached some interesting conclusions regarding the statute of limitations.  The ILM blazes no new legal trails, but is a helpful reminder of the rules that it applied.

I tried to develop a simplified set of facts that would illustrate the facts in the ILM but could not because there are some confusing dates which are identified by pseudonyms rather than actual dates.  If I had the actual dates it would likely not be confusing.  So, I will simply state the key legal propositions asserted in the ILM.

1. The normal statute of limitations is 3 years.  Section 6501(a).
2. The normal statute may be extended by agreement.  Section 6501(c)(4).  In this case it was by Form 872 Consent, which extends to a date stated.
3. In the case of an amended return filed within the 60 day window of the statute expiration date (whether the normal statute or the extended statute), the assessment date expires no later than 60 days after the amended returns.  Thus, for example, say that the year 01 return was timely filed on 4/15/02 and the normal statute date is 4/15/05.  If the taxpayer files an amended return on 4/1/05, the statute to assess the tax reported on the amended return does not expire before 5/31/05 (60 days after 4/1/05).
4. Tax actually collected by the IRS while the assessment statute is still open is not an overpayment even if the IRS does not assess the tax until after the statute expiration date.  Thus, in the above example,  assume that the same example, except that (i) the taxpayer sent a payment of $100,000 with the amended 01 return filed 4/1/05; (ii) the IRS posts the payment to the year 01 on 4/3/05; but (iii) the IRS does not assess until 9/1/05 (well after the period for assessment, even after the Section 6501(c)(7) 60 minimum extension).  There is still no overpayment because the IRS timely collected the tax.

With that background, the following legal analysis in the ILM is helpful.

Law School Diversity (12/24/25)

UVA Law School, here, where I went to law school, has a much more diverse student body than when I went -- in a lot of ways.  But more diversity is welcome.  I offer the following picture from Staci Zaretsky, Caption Contest Winner: Law School Has Gone to the Dogs (Above The Law Blog 12/20/12), here.  Wonder if dogs are graded on the same curve as other students?

Ford Motor Company Loses Claim for Interest on Deposit (12/18/12)

In Ford Motor Co. v. United States, 2012 U.S. App. LEXIS 25725 (6th Cir. 2012) (unpublished), here, the Sixth Circuit denied the taxpayer a claim for refund for interest that the taxpayer alleged should have accrued in its favor while a remittance was on deposit with the IRS at the taxpayer's request.  These were deposits for years prior to Section 6603's effective date (October 22, 2004); readers will recall that Section 6603, here, now provides a statutory regime for deposits for what previously was a court created regime emanating from Rosenman v. United States, 323 U.S. 658 (1945).  Contrary to prior law (under Rosenman), Section 6603 does allow interest on the disputable amount of a deposit during the time of the deposit.  But, as noted, that was not the law prior to Section 6603.  At least that is what everyone except Ford Motor Co. and its counsel thought.

The Court sets out the gravamen of the two side's arguments as follows:

The government seizes upon the plain meaning of the word "payment," arguing that there can be no overpayment until there has actually been a payment—and there was no payment until Ford requested that its deposits be converted into tax payments. Prior to that point, Ford's remittances were, at its own request, treated as deposits in the nature of a cash bond and Ford could have requested their return at any time. As Revenue Procedure 84-58 § 2.03 clearly states, "[a] deposit in the nature of a cash bond is not a payment of tax." Accordingly, the government argues that it does not owe Ford interest from the date of the original remittances because they were indisputably made only as deposits, not as payments of any tax obligation.
But, wait, this taxpayer argued. 

Ford counters that the "most appropriate starting point" is not § 6611, but rather § 6601, the provision that governs underpayment interest. First, Ford contends that these two sections should be interpreted symmetrically because they both use very similar language, compare § 6601 ("date paid"), with § 6611 ("date of the overpayment"), and both deal with the accrual of interest on tax payments. Second, Ford notes that under § 6601(a), only a "payment" stops the accrual of underpayment interest against a taxpayer, and since a deposit in the form of a cash bond stops the accrual of interest from the date it is remitted, Rev. Proc. 84-58 § 5.01, that deposit must be considered a payment under § 6601(a). And because a deposit is treated as a payment for underpayment interest purposes under § 6601, it should also be considered a payment for overpayment interest purposes under § 6611. In other words, if a mere deposit stops the accrual of underpayment interest, then a mere deposit must also start the accrual of overpayment interest.

Tax Court Rejects Scar Attack on Validity of Notice of Deficiency (12/14/12)

In Cross v. Commissioner, T.C. Memo. 2012-344, here, the Tax Court rejected a Scar claim that a notice of deficiency was invalid.  The holding is consistent with the trend to limit the application of the Scar analysis to invalidate notices of deficiency.  Students of tax procedure should know the background of Scar which is covered ably in the Cross opinion.  I offer here my shorter summary from the Federal Tax Procedure Book (footnotes omitted):

Where the IRS satisfies the Code requirement of an explanation, there are some practical pressures to force the IRS to make it a reasonably good explanation.  As noted above, the statute does require that the IRS determine a deficiency.  One court has held that where the notice of deficiency explains the deficiency based on facts that patently do not exist, then the IRS has not met the requirement that it make a deficiency determination.  In that case, Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), the notice of deficiency said that it was disallowing a deduction for certain tax shelter partnership items with respect to a named partnership.  The taxpayer was not a partner in the named partnership.  The taxpayer was a partner in a tax shelter partnership with another name, and it is likely that the IRS just plugged in the wrong name on the notice of deficiency.  Moreover, the notice of deficiency indicated that the IRS had not actually examined the taxpayer’s return but just calculated the tax proposed in the notice at the highest marginal rate rather than the progressive income tax rates.  The Ninth Circuit held that, on these facts on the face of the notice of deficiency, the IRS had made no determination as required by § 6212.  The result was that the notice of deficiency was invalid.  The invalidity of the notice of deficiency meant that the statute of limitations on assessment was not suspended under § 6503 and, by the time the IRS realized the error (i.e., when the Court of Appeals pronounced the notice invalid), the statute of limitations on assessments had likely expired.  Cases since Scar have read the holding narrowly; a notice of deficiency will be not honored “only where the notice of deficiency reveals on its face that the Commissioner failed to make a determination.”  As a result, Scar is an outlier, with its analysis and holding rarely invalidating a notice of deficiency.

The foregoing paragraph is a revision of the one currently appearing the 2012 versions as follows:  footnoted version at pp. 450-451; and nonfootnoted version pp. 332-333.

Tax Courts Rejects the Accuracy Related Penalty in Hokey Tax Shelter (12/10/12).

In Rawls Trading, L.P. v. Commissioner, T.C. Memo 2012-340, here, the Tax Court (Judge Vasquez) bought the taxpayer's assertions that he had reasonable cause for relying upon the accountant referred to him by the promoter, Mr. Poster.  The taxpayer used Mr. Poster for the partnership return instead of taxpayer's regular accountant.  The law firm referred by the promoter, Lewis Rice, had drafted a more-likely-than-not opinion but declined to finalize it because of concern about one aspect of the opinion.  The promoter explained to the taxpayer that the law firm was wrong.  So, essentially, the taxpayer's reliance was upon the promoter and the accountant referred by the promoter.

This is an unusual win for the taxpayer, so practitioners wanting to replicate the win should pray for similar facts and Judge Vasquez to decide the issue when litigated.

In a case like this, the facts are critical, and Judge Vasquez states the facts in a way that supports his conclusion (it seems to be a factual conclusion so will be bullet proof on appeal unless a panel so strongly disagrees that it is will to find that Judge Vasquez clearly erred on finding reasonable cause).  After finding the facts, Judge Vasquez's money conclusions (repeating some of the facts) are:

D. Good-Faith Reliance 

We conclude that Mr. Rawls relied in good faith on Mr. Poster's advice. Mr. Rawls credibly testified that he was "very emphatic with Larry that we should absolutely be compliant with the Tax Code and complete in our disclosure, and he said we absolutely were." This is consistent with Mr. Poster's testimony that they had "always assumed that these transactions would be audited."

Summary of Interest Start Date Rule (12/10/12)

The IRS has released ILM 201249015 (8/14/12), here, discussing the interest start date for a tax due with a gift tax return.  The ILM plows no new ground but does provide a succinct summary of the interest start date rule. I quote the conclusion:

Interest Start Date 

If any amount of tax is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. I.R.C. § 6601(a). Similarly, interest shall be paid on any unpaid amount of tax from the last date prescribed for payment of the tax (determined without regard to any extension of time for payment) to the date on which payment is received. Treas. Reg. § 301.6601-1(a)(1). The due date of a gift-tax return is generally April 15th of the year following the year in which the gift was made. I.R.C. § 6075(b). In general, the date prescribed for payment is the time fixed for filing the return, determined without regard to any extension of time for filing. I.R.C. § 6151(a). For determining interest on underpayments, "the last date prescribed for payment" is determined without regard to any extension for payment or filing. I.R.C. § 6601(b)(1). In this case, the assessment will be made for the Year 1 tax year; the due date of the Year 1 gift tax return was Date 1. Underpayment interest will thus run on the assessed deficiency from Date 1. I.R.C. § 6601(a). 

Nonpayment of Tax Liabilities Can Be Evasion and Defeat Discharge in Bankruptcy (12/10/12)

A recent district court case denying a discharge in bankruptcy serves as a warning for taxpayers and practitioners.  Rossman v. United States, 2012 Bankr. LEXIS 5615 (Bkr Ct D MA 2012), here.  11 USC § 523(a)(1)(C), here, titled Exceptions to Discharge, provides in part relevant that a discharge does not apply to any tax "(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax."  The question is whether nonpayment can constitute an attempt to evade or defeat tax.

The opinion is long, so I won't try to summarize it here.  The tax arose from a tax shelter investment in the 1980s.  The tax was thus a 1980s tax with resulting substantial interest now well exceeding the amount of the tax liability.  The aggregate liability was now substantial.  The shelter was a hokey shelter that has been litigated over many years, but by the early 2000s, although the taxpayer's case had not yet resulted in an assessment, the liability was clear and the assessment was only a matter of time.  The assessment was made  by 2004.

After the date that he knew of the liability and after the assessment was made,  the taxpayer earned substantial amounts of income.  Taxpayer made no payments.  And, although there appeared to be no evidence of a profligate lifestyle, the taxpayer failed to explain why he could not have made substantial payments during the period, given the amount of his income.

After making extensive findings of facts,  the Court concluded as follows:

The record is devoid of any direct evidence of the Debtor's willful intent to evade taxes in the form of implausible or inconsistent explanations of behavior; inadequate financial records; transfers of assets that greatly reduce assets subject to IRS execution; and transfers made in the face of serious financial difficulties. See Beninati, 438 B.R. at 758. Similarly, the Debtor did not engage in any manipulative conduct by failing to make estimated payments or failing to pay annual taxes after 1986 when due, and there was no evidence that he routinely applied for extensions of time within which to file returns. See Lacheen v. IRS (In re Lacheen), 365 B.R. 475, 484-86. Indeed, the Debtor testified, and the IRS did not dispute, that, with the exception of his tax liabilities from Rancho Madera Partners and Vista Ag-Realty Partners, Rossman paid all federal and state taxes on time and in full from 1987 to the commencement of his bankruptcy case.

Failure of Employer to Designate Payment to Employer's Trust Fund Taxes (12/10/12)

In paying less than all of the tax assessments that are due, it may become critical for the taxpayer to designate how the tax payment should be applied among the tax, penalties and interest, as a recent decision of the Sixth Circuit reminds us.  In re: Southeast Waffles, LLC v. United States, 2012 U.S. App. LEXIS 24991 (6th Cir. 2012), here.  In that case, the employer sent in undesignated payments to be applied against assessments for the employer's withholding tax obligations, penalties and interest.  As undesignated payments, the IRS applied the payments to the employers penalties.  The employer then went into bankruptcy.  In the bankruptcy proceeding, the employer argued that the application of the payments to the penalties was voidable because the penalties would have had a lower priority and would have been discharged, vis-a-vis the employer, in the bankruptcy proceeding.  (Note that these are penalties for the employer's direct payment obligation and are not trust fund recovery penalties (TFRP) under Section 6672 even though they relate to the trust fund liability; as to responsible persons, TFRP are not dischargeable.)

In my Federal Tax Procedure Text I discuss the issue of designating payment as follows (footnotes omitted):

We focus now on the issues confronting the taxpayer in making the payment of less than the amount of the IRS assessment.  The question here is whether the taxpayer can designate as among the various components of aggregate tax owed (e.g., as among years or within the same year as among taxes, penalties and interest). 

The taxpayer is permitted generally to so designate a voluntary payment to the IRS.  Voluntary for this purpose means any payment not resulting from the Government’s compulsory collection measures (e.g., levy), that we discuss later in this chapter.  If, however, the taxpayer fails to designate the application of the payment, the IRS can apply the payment as it sees fit. 

Designation may be critical in certain cases.  We shall give examples which are by no means exhaustive, but should illustrate the concepts:

Opinion Writing in the Appellate Process and the Place for Dissents (12/7/12)

I thought it might be helpful for students of the appellate process (hopefully some tax procedure students will  be interested) to know of this article by Judge Diane P. Wood of the Seventh Circuit Court of Appeals:  Diane P. Wood, When to Hold, When to Fold and When to Reshuffle: The Art of Decisionmaking on a Multi-Member Court, 100 Calif. L. Rev. 1445 (2012), here.  Judge Wood makes some salient observations about opinion writing in the appellate process.  Students can read and enjoy.

I will also cut and paste some discussion on the the role of the dissent -- certainly the grand dissent that stands the test of time -- from Kenji Yoshino, A Thousand Times More Fair: What Shakespeare's Plays Teach Us About Justice 205-208 (2012), in which the author develops concepts of justice presented in Shakespeare's major plays.  Key excerpts in his chapter on Hamlet:

In a 1931 essay titled “Law and Literature,” soon-to-be Supreme Court Justice Benjamin Cardozo explores both the importance of idealism and the importance of containing it. Cardozo observes that dissents tend to be more idealistic than majority opinions:  

The voice of the majority  may be that of force triumphant, content with the plaudits of the hour, and recking little of the morrow. The dissenter speaks to the future, and his voice is pitched to a key that will carry through the years. Read some of the great dissents, the opinion, for example of Judge Curtis in Dred Scott vs. Sandford, and feel after the cooling time of the better part of [a] century the glow and fire of a faith that was content to bide its hour. The prophet and the martyr do not see the hooting throng. Their eyes are fixed on the eternities.  

Cardozo observes that dissents can afford to be more idealistic because they have no immediate force in the world. The dissenter, who has already lost, can express an ideal justice for “the eternities.” 

Scope of Tax Court Authority in CDP Hearings (12/7/12)

If the taxpayer is not satisfied with the Appeals Office determination in a CDP Hearing, the taxpayer may file a petition to contest the determination in the Tax Court.  Section 6330(d), here.  In  a recent case, the Tax Court addressed the scope of the Tax Court's authority to remand to the Appeals Office and the IRS's disagreement with some of the Tax Court authority.  Van Camp v. Commissioner, T.C. Memo. 2012-336, here.  The key parts are:

Remand of a CDP case to the Appeals Office may be appropriate in limited circumstances where there occurred some omission or error in the original hearing or in the record of the hearing. [Case citations omitted] 

* * * * 

With regard to respondent's legal argument, we note generally that our jurisdiction in CDP cases is limited to a review of the Commissioner's CDP "determinations". Sec. 6330(d)(1). Once the CDP hearing is concluded, the statutory scheme provides a separate venue for review of a new collection alternative or to address a material change in a taxpayer's financial circumstance—namely, an appeal to the Appeals Office under its retained jurisdiction provided in section 6330(d)(2). The exercise of retained jurisdiction by the Appeals Office does not constitute a continuation of the original CDP proceeding, and the limitations periods that are suspended during CDP hearings are not suspended during review under section 6330(d)(2). The Commissioner's decisions made under section 6330(d)(2) cannot be appealed to this Court. See sec. 301.6320-1(h)(2), Q&A-H2, Proced. & Admin. Regs.; sec. 301.6330-1(h)(2), Q&A-H2, Proced. & Admin. Regs. Consideration and hearings under section 6330(d)(2) are subsequent to and separate from the original CDP hearing and are solely administrative. 

Respondent disagrees with petitioners and with a suggestion made in a number of our opinions that we have the authority to remand CDP cases to the Appeals Office merely where a remand may be regarded as "helpful", "necessary", "productive", and/or due to "changed circumstances." See e.g., Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008); Lunsford v. Commissioner, 117 T.C. 183; Kuretski v. Commissioner, T.C. Memo. 2012-262, at *11; Churchill v. Commissioner, T.C. Memo. 2011-182. Respondent contends that, absent the exercise of an abuse of discretion by the settlement officer or a defective or incomplete administrative record, this Court lacks any remand authority in CDP cases. 

In light of our factual resolution of the issue before us in these cases, we do not address that legal question.

Research on Positive Link Between Corporate Audits and Compliance

Jeffrey L. Hoopes, Devan Mescall, and Jeffrey Pittman, Do IRS Audits Deter Corporate Tax Avoidance? (SSRN 11/

The Stephen M. Ross School of Business at the University of Michigan

University of Saskatchewan

Memorial University of Newfoundland (MUN) - Faculty of Business Administration

November 2011

Abstract:    

We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.

Number of Pages in PDF File: 64

Keywords: tax enforcement, corporate governance, IRS audits, taxes, agency costs

JEL Classification: M40, G34, G32, H25

working papers series

SSRN Link for download here.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1668628

Articles on Federal Courts Role in Making Tax Law (12/5/12)

Lederman, Leandra, What Do Courts Have to Do With It?: The Judiciary's Role in Making Federal Tax Law (October 31, 2012). National Tax Journal, Vol. 65, No. 4, December 2012; Indiana Legal Studies Research Paper No. 216. Available at SSRN: http://ssrn.com/abstract=2169491

Ms. Lederman is Professor of Tax Law at Indiana University Maurer School of Law.  Her bio page at that law  school is here.

Here is the Introduction to the Lederman article.

I. INTRODUCTION 

The Internal Revenue Code (Code) generally is the fi rst place to look when confronting a federal tax question, but it is important to recognize that much federal tax law is not statutory. The U.S. Department of the Treasury (Treasury) promulgates regulations, and the Internal Revenue Service (IRS) issues important guidance, such as Revenue Rulings, Revenue Procedures, and Notices (Hickman, 2009). Federal courts interpret all of these authorities. In order to understand and apply federal tax law, it is important to appreciate the role that federal trial courts, Courts of Appeals, and the U.S. Supreme Court play in developing the law. This essay provides an overview of federal tax litigation, discusses the deference courts give to guidance issued by the Treasury and IRS, and discusses when taxpayers have “standing” to challenge the tax laws in court. The essay also discusses cases in which Congress may step in to amend the Code following a court decision.

A related article is:

Matthew H. Friedman, Reviving National Muffler: Analyzing  the Effect of Mayo Foundation on Judicial Deference as Applied to General Authority Tax Guidance, 107 Northwestern U. School of Law Law Review Colloquy 115 (2012)

Here is the Introduction to the Friedman article:

INTRODUCTION 

The topic of judicial deference arises each time a court reviews the legitimacy of an opinion or regulation by an administrative agency to which Congress has delegated some rulemaking authority. Determining the appropriate deference standard is important because it sets limits on an agency’s quasi-legislative power and informs taxpayers and practitioners on the likelihood of challenging seemingly invalid administrative rulings. Noting the importance of the deference issue, Professor Kristin E. Hickman,  one of the foremost authorities on administrative law in the federal income tax context, wrote that “[d]rawing fine distinctions among deference standards may seem a purely academic exercise . . . [but] deference standards matter.”
For thirty-five years, the 1944 case of  Skidmore v. Swift & Co. presented the primary method for judicial review of administrative guidance created under Congress’s general grant of rulemaking authority.  In 1979, a new standard was created in what became known as the tax-specific deference standard of  National Muffler Dealers Association v. United States. Five years later, the Supreme Court held in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. that a separate and much more deferential standard should apply to final regulations drafted pursuant to a  general grant of authority. 

The  Chevron decision cast doubt upon the viability of both  Skidmore and  National Muffler since it was unclear whether the decision applied to all regulations promulgated pursuant to general grants of authority and whether it applied to tax-related guidance. This confusion persisted until the Court decided two cases in 2000 and 2001 that distinguished  between  Skidmore and  Chevron  deference.  Unfortunately, the Court’s distinction did not provide specific or uniform direction for the treatment of all general authority guidance and to this day the Court has failed to give clearer instruction. 

In early 2011, the Court took a step closer to addressing the treatment of non-regulation general authority guidance by considering final regulations in the tax context. In Mayo Foundation for Medical Education and Research v. United States, the Court conclusively answered the question concerning which standard (Chevron or National Muffler) applies to final Treasury regulations promulgated pursuant to the general grant of authority.  The Court concluded—without attempting to overturn or replace National Muffler—that all final regulations should be reviewed under Chevron. However, the court failed to address the still unsettled question of which standard to apply to guidance other than final regulations, which can come in many forms and accounts for the vast majority of guidance available to taxpayers. Presently, the default review standard is  Skidmore, but National Muffler provides a more balanced approach that can be applied to all forms of general authority regulations rather than just non-regulation guidance. 

This  Essay explores the various standards of deference the Supreme Court has applied to general authority guidance over the past sixty-eight years and concludes that the Court should revive National Muffler as the dominant standard in the tax context. Part I discusses the role that deference plays in deciding tax-related issues in court, specifically presenting the current application of final Treasury regulations for background.  Part II examines the path the Supreme Court followed in establishing and applying judicial deference from  Skidmore through  Mayo. Part III discusses the necessity of the  Mayo  decision, analyzes its holding, addresses the weaknesses of the existing standard for general authority guidance, and proposes a broad application of the former tax-specific standard from National Muffler. Part IV offers concluding remarks.

ERISA Anti-Alienation and Tax Collection from Retirement Accounts (11/28/12)

I have just posted this blog entry on my Federal Tax Crimes Blog, Restitution And Tax Collection from Retirement Accounts - Anti-Alienation (11/28/12), here.  The bulk  of the blog is about the general rule preventing the collection of restitution from retirement accounts covered by ERISA's Anti-Alienation provision.

For tax assessments, the Anti-Alienation provision does not prevent an IRS levy.  Here is the relevant portion of the blog entry (at the end):

However, keep in mind that, in criminal tax cases, the restitution that is awarded to the IRS either by contract (i.e., the plea agreement) or by the court for tax-related Title 18 counts (such as conspiracy under Title 18 USC Section 371) is restitution for a tax liability that will be assessed as a tax.  And, even where restitution for the tax is not awarded, the IRS will likely move to assess the tax at issue in a criminal tax case.  As a tax, the IRS can collect from the retirement account even if otherwise protected by the Anti-Alienation provision.  See 26 USC § 6334 - Property exempt from levy, here.  Subsection (a) lists items exempt from a tax levy, but only exempts "certain" retirement plans as follows (emphasis supplied).

(6) Certain annuity and pension payments
Annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honor roll (38 U.S.C. 1562), and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.

For a related blog entry, see New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction (Federal Tax Crimes Blog 2/11/11), here.  [I recommend that this blog be read even if the tax procedure student is not particularly interested in tax crimes.]

Cardozo, Dissents and Hamlet

I was reading this morning in a book addressing concepts of justice in Shakespeare’s major plays. Yoshino, Kenji , A Thousand Times More Fair: What Shakespeare's Plays Teach Us About Justice (2012), here. In the book, the  author, an NYU law  professor, explores concepts of justice in Shakespeare's major plays.  I thought that the end of the chapter on Hamlet might be helpful to law students, so I cut and paste it (the rest of this blog entry is the quote, with the quote from Cardozo indented):

In a 1931 essay titled “Law and Literature,” soon-to-be Supreme Court Justice Benjamin Cardozo explores both the importance of idealism and the importance of containing it. Cardozo observes that dissents tend to be more idealistic than majority opinions:

The voice of the majority may be that of force triumphant, content with the plaudits of the hour, and recking little of the morrow. The dissenter speaks to the future, and his voice is pitched to a key that will carry through the years. Read some of the great dissents, the opinion, for example of Judge Curtis in Dred Scott vs. Sandford, and feel after the cooling time of the better part of [a] century the glow and fire of a faith that was content to bide its hour. The prophet and the martyr do not see the hooting throng. Their eyes are fixed on the eternities.

Cardozo observes that dissents can afford to be more idealistic because they have no immediate force in the world. The dissenter, who has already lost, can express an ideal justice for “the eternities.”

Arbitration to Settle Cross-Border Transfer Pricing Disputes between Competent Authorities Under Tax Treaties (11/26/12)

Reuters reports that the United States is having apparent success in using "baseball arbitration" to settle disputes under the mutual agreement procedure of the U.S. Canada Double Tax Treaty.  See Patrick Temple-West, International arbitration for tax disputes, "baseball" style (Reuters 11/15/12), here.  The treaty is here, with the Mutual Agreement Procedure Article XXVI.  Similar provisions are in other treaties and in the U.S. Model Treaty and the OECD Model Treaty.

The opening paragraphs of the article set the tone:

The United States remains undefeated in the nearly two years since it began settling corporate tax disputes with Canada through a winner-takes-all process popularly known as "baseball arbitration." 

Tax lawyers and accountants in both countries said the U.S. Internal Revenue Service had won three of the binding decisions and Canada none. They said the IRS had collected a significant sum of money, possibly in excess of $100 million. 

Launched in December 2010, the arbitrations follow the rules for settling salary disputes between Major League Baseball teams and their players. As in baseball, the two parties - revenue agents from the two countries - put forward a figure. 

As in baseball, third-party mediators settle disputes by picking the number they judge to be closest to the right answer. In the tax game, that's the amount a company pays. The winning country gets the tax revenue. The losing country goes home empty-handed. 

"It's baseball arbitration: One position wins and the other one loses," said Brian Trauman, a principal at Big Four accounting firm KPMG LLP. The cases that have been resolved have "really big dollars at stake," he said. 

Now the United States is adding an arbitration clause into tax treaties with other countries, hoping to broaden its winning streak to a global stage.

Practitioner Disbarment from Practice Before the IRS (11/26/12)

The Treasury Department regulates IRS practice before the IRS.  Under Circular 230, here, practitioners may be sanctioned for inappropriate conduct and disbarred from practice before the IRS.  I cover that process   (I cover that process in my Federal Tax Procedure Book at pp. 31-38 of the footnoted version and pp. 26 of the nonfootnoted version).  The ultimate sanction is, of course, disbarment.  That can severely impact a practitioner's ability to earn a living.  Hence, it would behoove practitioners to avoid the conduct that would draw any sanction, particularly the disbarment sanction.

In Banister v. United States Department of the Treasury, 2012 U.S. App. LEXIS 24179 (9th Cir. 2012), here, an unpublished opinion,  the Ninth Circuit affirmed the district court's decision affirming the disbarment of Mr. Banister from practice before the IRS.  The Court opens:

Banister admitted to advising clients that they were not liable for income taxes based on his belief that the Sixteenth Amendment was not properly ratified and his understanding that Section 861 of the Internal Revenue Code, 26 U.S.C. § 861, and the regulations thereunder ("Section 861") exempted the clients from having to pay income taxes. He also admitted to signing a client's tax returns as the returns' preparer when the returns stated that the client was not liable for income taxes under Section 861. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm.

The ho-hum, routine, nonprecedential affirmance is not surprising given the claims that Banister made.  But, I think the Court's discussion if Banister's Cheek good faith defense is noteworthy, as a reminder.  The Cheek defensen is that the defendant did not know the law and therefore could not have violated a known legal duty.  Cheek was a criminal case interpreted the statutory element for tax crimes that the defendant have acted "willfully."  Cheek interpreted that term as the intentional violation of a known legal duty.  Cheek embellished that this defense was not available to a person who knows the law but claims the law is invalid.  That was Mr. Banister's problem in asserting the belief that the Sixteenth Amendment had not been properly ratified.

But, Mr. Banister had another arrow in his quiver -- that Section 861, properly read, exempted the persons he counseled from the income tax.  The question here was the role of the reasonableness of his belief.  Readers will recall that Cheek established the even an unreasonable belief that the law, properly interpreted, did not apply is a defense, but that the trier of fact (there the jury) could consider the unreasonableness of the belief as bearing upon whether the defendant actually knew the law's command and intentionally violated the command.  The Ninth Circuit said:

IRS Use of Suspicious Activity Reports of Financial Institutions (11/24/12)

Financial institutions are required to file Suspicious Activity Reports with the Financial Crimes Enforcement Network (FinCEN).  31 USC § 5318(g), here; the SAR form is here; FinCEN guidance is here; see also Wikipedia entry here.  For general background, I offer the following from my Federal Tax Crimes book (footnotes omitted):

Although there is no general duty under American law to report crimes, certain financial institutions (including money services businesses and high cash businesses such as casinos) are required to file with FinCen a report, called a Suspicious Activity Report (“SAR,” but not to be confused with the Special Agent’s Report with the same acronym which we encountered earlier).  This SAR combines features of earlier reports and is in addition to the CTR if required.  The SAR is required if the financial institution “knows, suspects, or has reason to suspect the money was derived from illegal activities” or the transaction was “part of a plan to violate federal laws and financial reporting requirements (structuring).”  The financial institution is not required to investigate or confirm that a crime has been committed. The financial institution is prohibited from telling its customer of the filing of the report, even in response to a subpoena.  The financial institution is protected from liability to the customer.  The IRS may share this SAR with the IRS examination function having civil tax responsibility, but components of the IRS receiving the information are required to keep the information secure to the same extent as if received from a confidential informant.

Recently, some divisions of the IRS have released memoranda advising personnel about the control and confidentiality requirements with respect to accessing SAR information.  See e.g., a recent SB/SE Division Memorandum (SBSE-04-1012-063, dated 10/16/12), here, and an estate and gift tax memorandum dated July 13, 2012, here.  See also an earlier Memorandum of Understanding -- in Government acronym-speak, "MOU," referenced and available at IRM 4.26.14, here, Exhibit 4.16.14-2, here.  For some reason, the MOU is reviewable only on line and then on a page by page basis.

IRS Disclosures of Knowingly False Return Information is Subject to Civil Action for Wrongful Disclosure (11/24/12)

In Aloe Vera of America, Inc. v. United States, 699 F.3d 1153 (9th Cir. 2012), here, the Ninth Circuit addressed the application of the two year time limit for filing a suit for wrongful disclosure of return information.  Section 6103, here, titled Confidentiality and disclosure of returns and return information, generally requires that return information -- virtually everything the IRS knows about a taxpayer -- be confidential, with certain specified exceptions.  Section 7431, here, titled Civil damages for unauthorized inspection or disclosure of returns or return information, provides a taxpayer a civil remedy the IRS's disclosures of return information not authorized by Section 6103.  Section 7431(d) provides that the suit must be brought "within 2 years after the date of discovery by the plaintiff of the unauthorized inspection or disclosure."  The question addressed by the Ninth Circuit was when the limitations period begins.

The Court (with Judge Sidney R. Thomas, here, as author of the majority opinion) starts its exegesis with a crisp statement of the issue and the holding:

This appeal presents the question, among others, of what event triggers the running of the statute of limitations for a claim for wrongful disclosure of a tax return pursuant to 26 U.S.C. § 7431(d). We conclude that the statute of limitations begins to run when the plaintiff knows or reasonably should know of the government's allegedly unauthorized disclosures. We also conclude, in the circumstances presented by this case, that the statute of limitations did not begin to run when the plaintiffs became aware of a pending general investigation that would involve disclosures, but only later when they knew or should have known of the specific disclosures at issue. Applying these principles to the facts of this case, we affirm in part and reverse in part.

Contesting Liability in a CDP Hearing (11/23/12)

Judge Halpern has an interesting opinion in JAG Brokerage, Inc. v. Commissioner, T.C. Memo. 2012-315, here.  The case apparently involves John Gotti, reported to be an American mobster (Wikipedia, here),  who appears in the case along with Kim Gotti for the petitioner corporation.  Mr. Gotti was an officer of the petitioner and appears to have been incarcerated in solitary confinement when the notice of deficiency was issued to the corporate taxpayer, an artificial entity.  The notice of deficiency was copied to Mr. and Ms. Gotti (in her case under a different last name).  No Tax Court case was filed in response to the notice of deficiency.  The tax was assessed.  The IRS instituted collection procedures.  The corporate taxpayer sought to contest liability in a Collection Due Process process (CDP), in which the corporation was represented by Mr. and Ms. Gotti.  In a CDP hearing, the Appeals Office Employee (Appeals Officer or Settlement Officer) will not consider any issue previously disposed of in a CDP hearing or in a prior administrative or judicial proceeding in which the taxpayer could have contested liability and participated meaningfully.  As to the underlying liability, the taxpayer can only contest in the CDP hearing if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”  § 6330(c)(2)(B).  So the question was a nuanced one over whether the IRS's proof of mailing the notice of deficiency was adequate to establish that this receipt requirement was met, so as to preclude the taxpayer from contesting the liability.

Judge Halpern rejects the IRS's motion for summary judgment based on its mailing the notice to the petitioner at its last known address and to the two Gottis.  Judge Halpern reasons:

Reminder on Sweep of Form 872-I, Partner Level Consent to Extend Statute of Limitations (11/23/12)

The Tax Court recently issued a decision reminding taxpayers and practitioners how sweeping the scope of the Form 872-I is.  WHO515 Investment Partners v. Commissioner, T.C. Memo. 2012-316, here.  The Form 872-I, here, is titled titled Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership.  The Form is executed by the partner in the partnership and thus, by extending the Section 6501, here, limitations periods with special reference to partnership adjustments, in effect, pre-empts the special minimum partnership limitation provisions in the TEFRA rules.  The Form 872-I thus specifically says:

Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see section 6231 (a)(3)), affected items (see section 6231 (a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231 (b)). 

I have modified my Federal Tax Procedure book as follows (with the context indicating the new materials in bold):

IRS Chief Counsel Remarks Involving Tax Procedure (11/20/12)

Tax Notes Today published prepared remarks of William J. Wilkins, IRS Chief Counsel.  The prepared remarks are for the BNA Bloomberg Tax Policy & Practice Summit on 11/14/12.  The prepared remarks may be viewed here.  I excerpt below the items I think are particularly important or interesting for a tax practice practice.

1. "There is also a Circuit split on the application of the 40% substantial overvaluation penalty in certain settings, so we are watching that."  This split is as to whether, if the case is resolved by some predicate issues (such as economic substance before getting to the overvaluation), the overvaluation penalty can apply.  The split is with virtually every circuit applying the penalty except the Fifth and Eleventh Circuits, both of which may be ready to join the crowd.

2.  The Chief Counsel is also concerned about tax avoidance in so-called Midco transactions:

Earlier in the litigation chain, we are working to develop the law of transferee liability as it applies to intermediary or Midco transactions -- in particular transactions where a closely held C corporation sells its assets but winds up not paying the corporate tax, because a "Midco" purchaser of the shares of the cash-rich company essentially disappears without causing the correct tax to be paid. The government has had a difficult time holding the selling shareholders responsible in these cases, and we are urging different outcomes in both trial and appellate settings. There is a clear tax administration interest, both in getting the correct tax paid in old transactions and in eliminating the feasibility of future generations of dishonest Midco promoters from succeeding. We believe that current law, when correctly applied, provides the needed tools, but we will also be open to legislative solutions should the courts take different views.

3.  He is also concerned  about FATCA implementation:

Hardly Strictly Tax Procedure (11/19/12)

Mike Scarcella, In D.C. Circuit, Judge Calls Use of Acronyms 'Painful' (BLT Blog 11/19/12), here.

Jeffrey Toobin and Alan Dershowitz on the Supreme Court and the Obama Administration (92nd Street Y 11/16/12), here.

Christopher Schmidt, Justices Behaving Badly (Legal History Blog 11/19/12), here.


Daniel Altman, To Reduce Inequality, Tax Wealth, Not Income (NYT 11/18/12), here\.

Innovation in the Law School Classroom (11/8/12)

Law school students might be interested Jonathan Turley's posting here about a special lecturer in his class at  George Washington law school.  See Meet GW’s Newest Scholar: Professor Molly Turley, here.  This is a sneak preview picture.  For law students looking for a break from the tedium of studying, I do recommend Professor Turley's blog.

One Time Relief for Frivolous Return / Submission Penalty under Section 6702 (11/6/12)

The IRS has prescribed one-time penalty relief for frivolous return and submission penalties in section 6702, here..  Rev. Proc. 2012-43, 2012-49 IRB 1, here.  For refresher, here is my Tax Procedure text as revised for this new relief provision (footnotes omitted):

H. Frivolous Returns. 

Section 6702(a) imposes a $5,000 fine for filing a frivolous tax return.  This penalty applies in addition to any other penalty that may apply.  The penalty applies where the frivolous return is based on a position identified by the IRS as frivolous or reflects a desire to delay or impeded the administration of the tax laws.  

Section 6702(b) imposes a parallel $5,000 penalty for a “specified frivolous submission”. Such submissions include various forms of relief in IRS collection activity, including applications for compromise or installment agreements and requests for a collection due process hearing.  The submission is subject to the penalty if based on a position the IRS “has identified as frivolous” or “reflects a desire to impede the administration of Federal tax laws.”  We cover these collection activities below in Ch. 14.  The penalty is $5,000.  If the IRS provides notice of the frivolous position and the taxpayer withdraws the submission within 30 days of the notice, the penalty does not apply; however, the statute does not seem to require the IRS to give the notice that is the predicate for the 30 day period.

Creation of the Joint Committee on Taxation (10/31/12)

For those who like tax law and history, George Yin, Professor at UVA Law and formerly Chief of Staff of the Joint Committee on Taxation, has this fascinating piece on the intrigue that led to the creation of the Joint Committee on Taxation ("JCT":  Yin, George K., James Couzens, Andrew Mellon, the 'Greatest Tax Suit in the History of the World,' and Creation of the Joint Committee on Taxation and Its Staff (September 27, 2012). Virginia Law and Economics Research Paper No. 2012-10; Virginia Public Law and Legal Theory Research Paper No. 2012-61. Available at SSRN: http://ssrn.com/abstract=2151409 or http://dx.doi.org/10.2139/ssrn.2151409

From the article, here is the description of the current JCT and its role (footnotes omitted):

The JCT is a bipartisan committee of ten members of the House and Senate tax‐writing committees, and exists principally to provide justification for its staff. The committee does not report legislation, and rarely convenes hearings or performs other traditional functions of a legislative committee. The staff of the JCT — currently including about 50 economists, lawyers, and accountants — assists every member of Congress at each stage of the tax legislative process, and provides a source of tax expertise that is independent of the executive branch. The staff is nonpartisan rather than bipartisan; unlike staff supporting most other Congressional committees (including certain joint committees), the JCT staff is not affiliated with any party and is not separated into majority and minority party staff members. 

Although the staff serves all of Congress, its principal duty is to be a policy advisor to the chairs, ranking members, and other members of the tax‐writing committees. In this role, the staff helps to develop, analyze, and evaluate many tax policy options for those committees and assists with all of the legislative tasks necessary for enactment of a bill. In addition, the staff provides the official revenue estimates used by Congress for all proposed tax legislation. The staff also reviews all tax refunds in excess of $2 million and monitors the administration of the tax laws by the IRS. Occasionally, the staff performs tax‐related investigations, such as examining President Nixon’s tax returns and the tax positions of the Enron Corp. The JCT and its chief of staff are given direct access to otherwise confidential tax return information and permitted to delegate that access to others.

Here is the abstract of the article:

Review of CDP Appeals Procedures (10/30/12)

In Tucker v. Commissioner, 676 F.3d 1120 (D.C. Cir. 2012), here, the D.C. Circuit rejected the taxpayer's Appointments Clause arguments that IRS Appeals personnel who hear CDP appeals are "inferior Officers" within  the meaning of the Appointments Clause.  The Apppointments Clause issue is an important, but arcane area of constitutional law, at least in the context of tax cases.  So, I will not address that issue in this blog.  The taxpayer filed a petition for certiorari on the issue.  I have just reviewed the United States' Brief in Opposition, here, to the granting of certiorari and offer excerpts here to remind students of the background for CDP Appeals which is an important area of the tax practice.

STATEMENT 

1. After making an assessment of taxes, the Secretary of the Treasury, acting through the Internal Revenue Service (IRS), must notify the taxpayer of the assessment and demand payment. 26 U.S.C. 6303. If the taxpayer then neglects or refuses to pay such a tax, the (1) amount due becomes a "lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. 6321. That lien, however, is not self-executing. The IRS may file a notice of lien under 26 U.S.C. 6323 or seek to collect the tax by levy under 26 U.S.C. 6331(a). 

In 1998, Congress enacted 26 U.S.C. 6320 and 6330, which generally give a taxpayer the right to a hearing that reviews the propriety of collection activity after a notice of federal tax lien is filed or a notice of intent to levy is issued. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3401, 112 Stat. 746. Such a hearing -- known as a "collection due process" or "CDP" hearing -- is "held by the Internal Revenue Service Office of Appeals" (Appeals Office), 26 U.S.C. 6320(b)(1), 6330(b)(1), and is "conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax" at issue. 26 U.S.C. 6320(b)(3), 6330(b)(3). If the only issue raised relates to collection, the person conducting the hearing will generally be a "Settlement Officer"; if the underlying tax liability is also disputed, that person will be an "Appeals Officer." See Pet. App. 61a; Internal Revenue Manual (I.R.M.) 8.22.4.5.1, 8.22.4.5.2 (Mar. 29, 2012).

IRS Issues new Bankruptcy Tax Guide, Publ 908 (10/27/12)

The IRS has issued a new version of the Bankruptcy Tax Guide, Publication 908 (October 2012).  The pdf version is here and the html version is here.

The following is the discussion of discharge of tax liability in bankruptcy:

Discharge of Unpaid Tax 

If you are a debtor in a bankruptcy case, the bankruptcy court may enter an order providing you with a discharge of debts. However, not all of your debts may be discharged. The scope of the bankruptcy discharge depends on the chapter you are in and the nature of the debt. Many tax debts are excepted from the bankruptcy discharge. 

If you are an individual under chapter 7, the following tax debts, including interest, are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that you willfully attempted to evade or defeat. Penalties in a chapter 7 case are dischargeable unless the event that gave rise to the penalty occurred within 3 years of the bankruptcy and the penalty relates to a tax that is not discharged. Corporations and other entities that are not individuals do not receive a discharge in chapter 7 cases. 

The same exceptions to discharge that apply to individuals in chapter 7 cases apply to individuals in chapter 11 cases. Different rules apply for corporations. A corporation in chapter 11 may receive a broad discharge when the plan is confirmed, but secured and priority claims must be satisfied under the plan and there is an exception to discharge for taxes for which the debtor filed a fraudulent return or willfully attempted to evade or defeat, for bankruptcy cases filed after October 16, 2005.

Relationship Between Tax Court and Refund Fora - Burden to Prove Fraud (10/20/12)

In my Federal Tax Procedure course (and I presume similar courses taught by others), we cover the principal fora to litigate tax disputes.  Historically, tax disputes were litigated in the district courts and sometimes in the predecessor to the Court of Federal Claims.  With the enactment of the broader based income tax after the 16th Amendment, Congress felt that there were two key problems with the refund fora -- (i) the requirement of prepayment and (ii) the sometimes daunting technicalities of pleading and proof particularly in the district courts prior to adopt Federal Rules.  Accordingly, Congress created the Board of Tax Appeals to offer a prepayment tax litigation forum and a less technically daunting litigation experience.

The Board of Tax Appeals and its predecessor Tax Court occasionally struggled with the issue of the precise relationship of its jurisdiction to resolve tax disputes in comparison to that of the district court.  This struggled evidenced itself in the issue of whether the Tax Court had jurisdiction to consider equitable concepts such as equitable recoupment that district courts could apply in resolving tax disputes.  In our class, I assign Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001) here, that presents this issue well.  The Branson decision is by Judge Sneed (Wikipedia entry here), formerly a tax professor at several law schools and then Dean at Duke before being appointed to the Ninth Circuit.  There are technical jurisdictional issues involved because the Tax Court is a court of limited jurisdiction whereas the district court is a court of general jurisdiction.  However, I thought the issue should always turn upon whether, given the purpose of the Tax Court (and its predecessor Board of Tax Appeals), different substantive results should obtain in the district court than in the Tax Court when these equitable concepts otherwise could apply.  I think that there is no evidence that Congress intended such different results.  The Tax Court now has these powers.

Regarding the differences in the Tax Court and the refund fora, I just re-read a delightful decision by Judge Henry Friendly of the Second Circuit Court of Appeals.  Judge Friendly was one of the leading jurists of all time (Wikipedia entry here).  In Paddock v. United States, 280 F.2d 563 (2d Cir. 1960), here, the Court held that the same requirement that the Government prove fraud applied in the district court as applied in the Tax Court.  Congress expressly so provided as to the Tax Court in the predecessor to Section 7454(a) but did not make that provision applicable to the other fora.  So, in this refund case, the Government rotely chanted the "money had and received" refund burden in Lewis v. Reynolds, 284 U.S. 281 (1931), here, that the taxpayer must prove the right to refund, including the amount, and thus argued that the taxpayer must prove the absence of fraud where the taxpayer wants a refund of a civil fraud penalty he paid.  Essentially, working in the reverse, Judge Friendly was persuaded that Congress could not have wanted the IRS to bear that burden in a Tax Court case but not in a refund suit.

Trust Fund Recovery Penalty and Judge Posner

Judge Posner has been much in the news recently.  Last night in the UH Tax Procedure Class we covered the Trust Fund Recovery Penalty ("TFRP"), also known as the responsible person penalty.  In my Tax Procedure Book, I conclude my discussion of the TFRP with an extended quote from Judge Posner's decision in Mortenson v. National Union Fire Insurance Co., 249 F.3d 677 (7th Cir. 2001).  I have included that conclusion in a prior blog titled Trust Fund Recovery Penalty (TFRP) Procedures (10/3/12), here.  I therefore won't repeat it here, but encourage readers to go to that blog entry to read it.  Judge Posner just has a way to summarize key concepts in memorable ways.

Judge Posner expounds on topics well beyond the law.  Judge Posner and his colleague, Gary Becker, co-host a blog where they interact on significant issues of the day, particular in the intersection of the law and the economy.  The Blog is called the Becker-Posner Blog.  Judge Posner's Wikipedia entry is here; Gary Becker's Wikipedia entry is here.  They recently had this exchange in two entries:: Richard Posner, Luck, Wealth, and Implications for Policy--Posner (The Becker-Posner Blog 10/14/12), here, and Gary Becker, Luck and Taxation-Becker (10/14/12), here.

Judge Posner has some fascinating analyses about the proper level of taxation and whether anyone "deserves" to pay less than some normative level of tax.  Some provocative excerpts that he is prepared to back up:

First Time Abatement for FTF and FTP Penalties (10/17/12)

TIGTA issued a report on the First Time Abate Penalty waiver of failure to file (FTF) and failure to pay penalties under Section 6651(a)(1) and (2).  TIGTA, Penalty Abatement Procedures Should be Applied Consistently to All Taxpayers and Should Encourage Volulntary Compliance, Treasury Inspector General for Tax Administration (Ref. No. 2012-40-113 9/19/12), here.

The FTF penalty is usually 5 percent of the unpaid taxes for each month or part of a month that a tax return is late.  This penalty will not exceed 25 percent of the unpaid taxes.  If a taxpayer files his or her tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.    

If a taxpayer does not pay all taxes owed by the due date, he or she will generally have to pay an FTP penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid.  This penalty can be as much as 25 percent of the unpaid taxes.  The FTP penalty will continue to accrue after the initial assessment if the taxpayer fails to pay the total tax due when the tax return was due. 

The IRS can abate both penalties under certain circumstances.  Relief from these penalties is generally granted to taxpayers who show they exercised ordinary care and prudence, and failure to file or pay was due to reasonable cause and not due to willful neglect.  However, beginning in Calendar Year 2001, the IRS began granting penalty relief under an Administrative Waiver known as the First-Time Abate (FTA).  Using the FTA waiver, the IRS grants relief to taxpayers who receive an FTF or FTP penalty but have a compliant tax history for the prior three years.  The FTA waiver applies only to a single tax year.

For further background, see IRM 20.1.1.3.6.1  (11-25-2011), titled First Time Abate (FTA), here.

Incentives for Corporate Tax Planning and Avoidance (10/17/12)

John R. Graham, Michelle Hanlon, Terry Shevlin and Nemit Shroff, Incentives for Tax Planning and Avoidance: Evidence from the Field (SSRN 9/12/12), here.

Abstract: 

We analyze survey responses from nearly 600 corporate tax executives to investigate firms’ incentives and disincentives for tax planning. While many researchers suspect that reputational concerns affect the degree to which managers engage in tax planning, this hypothesis is difficult to test with archival data because it is only possible to observe the firms that engage in tax planning and that get caught. Our survey allows us to investigate reputational influences and indeed we find that reputational concerns are important – 69% of executives rate reputation as important and the factor ranks second in order of importance among all factors explaining why firms do not adopt a potential tax planning strategy. We also find that financial accounting incentives play a role. For example, 84% of publicly traded firms respond that top management at their company cares at least as much about the GAAP ETR as they do about cash taxes paid and 57% of public firms say that increasing earnings per share is an important outcome from a tax planning strategy. Finally, we examine whether FIN 48 and SOX affected tax planning and relationships with auditors, as conjectured in prior research. Executive responses confirm these conjectures.

Render Unto Caesar -- Another Intersection of Alleged Religion and Tax (10/9/12)

In Hovind v. Commissioner, T.C. Memo. 2012-281, here, the Tax Court decided decided that the taxpayer had "had unreported Schedule C income and expenses (collectively, net profit) attributable to Creation Science Evangelism (CSE) and Dinosaur Adventure Land (DAL) for each of the years at issue; " (ii) that the taxpayer whether petitioner is liable for additions to tax under section 6651(a)(1) for failing to timely file her income tax return for each of the years at issue; and (3) and that the taxpayer is liable for the fraud penalty under section 6663(a) for each of the years at issue.

The following is from the opinion and gives a good introduction (footnotes omitted):\

Mr. Hovind established CSE in 1989. CSE purported to be a nondenominational religious organization that advocated the message of creation science and opposed the theory of evolution. CSE promoted its message through live lectures by Mr. Hovind and Eric Hovind. Mr. Hovind frequently traveled, domestically and internationally, for speaking engagements, and petitioner occasionally accompanied Mr. Hovind on these trips.

The Ministry then somehow developed, with various revenue generating projects.  The Court then continued (some footnotes omitted):

Trust Fund Recovery Penalty (TFRP) Procedures (10/3/12)

In the UH Tax Procedure Class we will spend a good bit of time on the Trust Fund Recovery Penalty ("TFRP"), Section 6672, here.  That penalty is also called the responsible person penalty for reasons that will become obvious.  I write today to advise readers of the audit and assessment process that is covered only cryptically in the course and in my Federal Tax Procedure book.  First, I introduce the TFRP by cutting and pasting the introduction to the subject in my Federal Tax Procedure Book (footnotes omitted):

Trust Fund Recovery Penalty (TFRP) - § 6672. 

The Internal Revenue Code requires employers to withhold social security and federal excise taxes from their employees' wages. The employer holds these monies in trust for the United States.§ 7501(a). Accordingly, courts often refer to the withheld amounts as “trust fund taxes”; these monies exist for the exclusive use of the government, not the employer. Payment of these trust fund taxes is not excused merely because as a matter of sound business judgment, the money was paid to suppliers in order to keep the corporation operating as a going concern – the government cannot be made an unwilling partner in a floundering business. 

The Code assures compliance by the employer with its obligation to pay trust fund taxes by imposing personal liability on officers or agents of the employer responsible for the employer's decisions regarding withholding and payment of the taxes. Slodov v. United States, 436 U.S. 238  (1978).   To that end, § 6672(a) of the Code provides that “[a]ny person required to collect, truthfully account for, and pay over any tax . . . who willfully fails” to do so shall be personally liable for “a penalty equal to the total amount of the tax evaded, or not . . . paid over.” § 6672(a). Although labeled as a “penalty," § 6672 does not actually punish; rather, it brings to the government only the same amount to which it was entitled by way of the tax.  

Personal liability for a corporation's trust fund taxes extends to any person who (1) is "responsible" for collection and payment of those taxes, and (2) "willfully fail[s]" to see that the taxes are paid.

Mr. Romney's Returns Not Claiming All of His Charitable Deductions (10/1/12)

I normally did not stoop to politics (at least overtly) in this blog.  (Outside this blog, I do have opinions and sometimes express them.)  However, where politics intersects the criminal tax law, well, I feel it appropriate to post something on this blog.

The political backdrop is that presidential candidate Mitt Romney apparently did not claim all of his tax deductions for charitable contributions.  For most of us, that would seem odd.  At the most basic level, many taxpayers cannot afford to forego deductions -- they need the tax savings.  But money is one thing Mr. Romney has in abundance, so he does not have the same level of need and, to put it another way, he can easily afford to pay more tax than the law says he owes.  Besides, he had the goal of claiming to the American public that he has paid tax at something like 14% (rather than something less) and thereby can empathize with the taxpaying public.

But that does raise an issue as to how he presents the forebearance on his returns.  By reporting his taxable income and tax liability without claiming the deductions, has Mr. Romney done something immoral or even illegal?

A noted tax commentator, Charles I. Kingson, published a letter to the editor of Tax Notes noting that the Form 1040 Mr. Romney signed contains the standard jurat declaring under penalty of perjury that "to the best of my knowledge it is true, correct, and complete."  See Charles I. Kingson, Did Romney Violate the Jurat?, 137 Tax Notes 107 (Oct. 1, 2012)

TIGTA Report on Restrictions on Directly Contacting Represented Taxpayers (10/1/12)

TIGTA has a new report titled "Fiscal Year 2012 Statutory Review of Restrictions on Directly Contacting Taxpayers," TIGTA Reference No. 2012-30-089 (9/4/'12), here  The IRS should contact only the designated taxpayer representative except in certain cases where advance approval to "bypass" has been obtained.  See 26 C.F.R. § 601.506(b), here (containing the conditions for the bypass authority); see also this IRS memo dated 8/26/05 here (stating also that, even if the taxpayer contacts the IRS, the IRS should not have substantive discussions outside the presence of the representative).

Here is a cut and paste of the summary of the TIGTA report:

IMPACT ON TAXPAYERS 

IRS employees are required to stop an interview if the taxpayer requests to consult with a representative and may not bypass a representative without supervisory approval.  Between October 2010 and September 2011, TIGTA’s Office of Investigations closed 19 direct contact complaints involving IRS employees, of which eight were disciplined or counseled for their actions by IRS management officials. 

WHY TIGTA DID THE AUDIT 

This audit was initiated because TIGTA is required to annually report on the IRS’s compliance with Internal Revenue Code Sections 7521(b)(2) and (c).  The overall objective of this audit was to determine whether the IRS complied with the legal guidelines addressing the direct contact of taxpayers and their representatives.  

WHAT TIGTA FOUND 

The IRS has a number of policies and procedures in place to help ensure taxpayers are afforded the right to designate a qualified representative to act on their behalf in dealing with IRS personnel in a variety of tax matters.  However, TIGTA reviewed a statistical sample of 73 of 25,264 Small Business/Self-Employed Division closed field collection investigations and found that revenue officers were not always involving representatives appropriately in some key actions.

Thoughtful Article on the Meek and Aggressive Tax Practitioner (10/1/12)

In the UH Tax Procedure class, we studied the gradations in confidence in tax reporting positions.  I cut and paste this from the Tax Procedure book:

The tax law has developed the following jargon in quantifying levels of confidence in reporting return positions, with the percentage being the projected chances for success if litigated:
nonfrivolous = 10 percent or better chance of winning
reasonable basis = 20 to 25 % or better chance of winning
realistic possibility of success = 33 1/3 % or better chance of winning
substantial authority = perhaps 35 to 40 % chance of winning
more likely than not = more than 50 % chance of winning
probable = 70 to 80 % chance of winning 

These standards can be stated in the inverse:
nonfrivolous = 90% chance of losing
reasonable basis = 75-80% chance of losing
realistic possibility of success = 66 2/3 % chance of losing
substantial authority = perhaps 60 to 65% chance of losing
more likely than not = less than 50 % chance of losing
probable = 20-30 % chance of losing

Substantial / Gross Valuation or Basis Misstatement Majority Rule Case (9/29/12)

I write this blog to advise readers of an important decision -- Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), here, which continues the majority trend holding that the significant / gross valuation or basis misstatement penalty can apply even if there is some basis other than valuation misstatement for knocking out the shelter -- such as lack economic substance or, in lay terms, just bullshit.

The taxpayer, of course, got into a bullshit tax shelter.  I won't go into it, but suffice it to say that it was bad at many levels and, of course, lacked economic substance (and was therefore bullshit in lay terms).  Bullshit shelters usually go by acronyms or initialisms; this was was called CARDS (I won't tell you what that stands for).  Here is the guts of the holding (footnotes omitted):

A. Gross Valuation Misstatement Penalty in I.R.C. § 6662

Gustashaw argues that the Tax Court erred in upholding the IRS's imposition of the 40% gross valuation misstatement penalties for 2000 through 2002. See I.R.C. § 6662(a)—(h). Specifically, Gustashaw contends that because the CARDS transaction lacked economic substance, there was no value or basis to misstate as to trigger the valuation misstatement penalties, and the penalties should not apply as a matter of law. Gustashaw also argues that Congress has penalized lack-of-economic-substance transactions by enacting I.R.C. §§ 6662A and 6663, and therefore, he should not be subject to gross valuation misstatement penalties under § 6662. 

The Internal Revenue Code establishes penalties for underpayment of tax. Section 6662(a) of the Code imposes an accuracy-related penalty of 20% of the portion of an underpayment of tax "attributable to," inter alia, negligence, any substantial understatement of income tax, or any substantial valuation misstatement. I.R.C. § 6662(a), (b)(1)—(3). Under the applicable regulations, only one penalty may apply to a particular underpayment of tax, even if the IRS determines accuracy-related penalties on multiple grounds. Treas. Reg. § 1.6662-2(c).

Updates to Tax Procedure Text re Work Product and Expert Witnesses (9/29/12)

I have just made changes to my Federal Tax Procedure text to update certain portions to reflect changes in Tax Court Rules for discovery and, in one case, the Federal Rules of Civil Procedure discovery provisions related to work product.

The text as revised (sometimes with context) is as follows (footnotes omitted):

Text at 9. VI.F.1.f. -  footnoted version, p. 399; nonfootnoted version p. 293

f. Work Product Privilege. 

The work product privilege (also referred to as the work product doctrine) protects the work product and thought processes in preparing for litigation.  The work product privilege was blessed in the Supreme Court case of Hickman v. Taylor, 329 U.S. 495  (1947) and is now contained in Rule 26(b)(3))(B) of the Federal Rules of Civil Procedure as follows: 

(3) Trial Preparation: Materials.
(A) Documents and Tangible Things. Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if:
(i) they are otherwise discoverable under Rule 26(b)(1); and
(ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.
(B) Protection Against Disclosure. If the court orders discovery of those materials, it must protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party's attorney or other representative concerning the litigation.
(C) Previous Statement. Any party or other person may, on request and without the required showing, obtain the person's own previous statement about the action or its subject matter. If the request is refused, the person may move for a court order, and Rule 37(a)(5) applies to the award of expenses. A previous statement is either:
(i) a written statement that the person has signed or otherwise adopted or approved; or
(ii) a contemporaneous stenographic, mechanical, electrical, or other recording—or a transcription of it—that recites substantially verbatim the person's oral statement.
Tax Court Rule 70(c)(3) now substantially tracks these provisions for work product.

An Estate Tax Fantasy (on the Keller case) (9/28/12)

I write a fictional story inspired by a recent decision, Keller v. United States,, 697 F.3d 238 (5th Cir. 2012), here.  That decision gave the taxpayer a big estate tax victory for the uber rich.  I personally think the estate tax benefit achieved in the case was extravagant.  But I do not write on the substantive planning involved.  I write rather to address another feature of the case.  This issue I discuss is present whether the taxpayer wins or loses.  The attorney and other administrative costs paid by an estate in a large estate tax case substantially mitigated by the estate tax savings benefit they can achieve.  I just want students to understand the phenomenon.

The Keller case involved a very large estate.  The marginal estate tax rate was 55% at the time and that is the rate that should be assumed for the issues that I will discuss.  The substantive issue was the common estate planning technique whereby the older generation stuffs assets into a partnership to achieve minority discounts thus shifting real value to the objects of her beneficence without the consequent estate or gift tax cost.  This should be old hat for observers of estate tax schemes -- the minority discount just magically appears without diminution in value.  I would have thought the gambit might not work with highly liquid assets, but Keller tells us otherwise.  In Keller, the gambit just caused, for tax purposes, vast amounts of value to disappear from the tax base when, in fact, in terms of the wealth of the family, it did not disappear.  Never mind for present purposes the validity or invalidity, morality or immorality, of the substantive gambit.  I want to focus on the estate's claims for administrative expenses, including in part here pertinent fees related to the estate tax litigation.

As noted, the estate was a very large estate; not surprisingly, the administration expenses, also very large, would apparently achieve a 55% tax benefit under the rate in effect when the estate tax was due and would magnify that 55% tax benefit by the interim interest that would otherwise be due from the estate.  Among the administrative expenses claimed by the estate were various professional fees related to the litigation.  The one that caught my eye was a $9.5 MM "contingency fee" for the lawyers who handled the estate tax litigation.  Here is the district court's discussion resulting in the contingency fee being disallowed (Keller v. United States, 1010 U.S. Dist. LEXIS 96465 (S.D. TX 20110)).

Former IRS Agent Charged with Conflict of Interest and Disclosing Return Information Including Whistleblower Name (9/27/12)

Manhattan U.S. Attorney Charges Former IRS Official With Violating Conflict Of Interest Laws And Illegally Disclosing Whistleblower’s Identity (USAO SDNY Press Release 9/27/12), here.

Here is a cut and paste of the described conduct and charges:

From June 2010 until August 2011, LERNER worked as an International Examiner in the New York office of the IRS. For several months leading up to his resignation from the IRS, one of LERNER’s chief responsibilities involved conducting an audit of an international bank (“Bank 1”) related to approximately $1 billion in allegedly unreported income. This audit was triggered by confidential whistleblower information LERNER reviewed during the course of his IRS employment. Shortly before his resignation, LERNER led negotiations on behalf of the IRS which resulted in a proposed $210 million settlement between Bank 1 and the IRS. The settlement was still pending final approval at the time of his departure. Unbeknownst to his colleagues and supervisors, LERNER applied and interviewed for the position of Tax Director at Bank 1 during the time period in which he was representing the IRS in the Bank 1 settlement discussions. He also sent multiple emails to an individual in which he expressed both his dissatisfaction with his job at the IRS and his hope that he would secure the Bank 1 job. At no time did he notify the IRS of his efforts to obtain employment with Bank 1. 

After LERNER announced his resignation from the IRS, he received written notification of certain restrictions imposed on former IRS employees regarding improper contacts with current IRS officials. However, when the IRS sent Bank 1 additional inquiries regarding the audit after he began working as Tax Director in September 2011, LERNER subsequently placed numerous phone calls to IRS employees and initiated meetings with them regarding the continuing audit. LERNER persisted with attempts to encourage IRS employees to provide information regarding the audit, and to approve the settlement between the IRS and Bank 1, despite warnings that he should not be participating in the audit or settlement discussions.
LERNER also engaged in improper disclosure of IRS tax return information during the time period that he worked as an IRS International Examiner. Specifically, LERNER divulged the identity of a whistleblower who had provided the IRS with confidential information regarding Bank 1 that had triggered the audit to someone not employed by the IRS, and provided details regarding pending IRS audits of other companies to individuals who were not employed by the IRS.

An Interesting Ethical Question (9/27/12)

The Volokh Conspiracy Blog has an interesting blog at the intersection of NFL Football and Legal Ethics.  Eugene Volokh, An Interesting Ethical Question (The Volokh Conspiracy 9/26/12), here.

The lead in is:

Prof. Richard Painter (Legal Ethics Forum) asks: 

If a referee’s call is wrong, does the “winning” player have to say: “Sorry ref, you got it wrong; I did not have the ball; the other guy had it”? No, he does not (please let me know if there is a NFL rule on this that I am not aware of). 

What are the obligations of a lawyer if a judge makes or is about to make a wrong call in litigation? See Rule 3.3. The answer turns on why the judge is getting it wrong. 

What about the same issue in the context of an IRS agent or the Tax Court making the same call?

Barred Collection on Assessment Closes Unlimited Statute of Limitations on Assessment (9/24/12)

In ILM 201238028 (6/19/12), here, the IRS held that, even if the IRS otherwise has an unlimited statute of limitations (either for a fraud return or failure to file per Section 6501(c)(1) and (3)), once the IRS assesses a tax for the year, the unlimited statute on assessment becomes moot if the IRS does not collect the assessed tax within the 10-year collection statute of limitations period in Section 6502(a), here.  Under the facts in that memo, the IRS made the assessment after making a substitute for return under Section 6020(b) and issuing a notice of deficiency.  Once the assessment was made, the 10 year limitations period under Section 6502(a)(1) commenced and expired.  The IRS's reasoning is:

The Service may execute a return for any taxpayer who fails to make a return required by any internal revenue law or regulation at the time prescribed, or who makes, willfully or otherwise, a false or fraudulent return. I.R.C. § 6020(b). The execution of a section 6020(b) return will not start the running of the period of limitations on assessment and collection without assessment. I.R.C. § 6501(b)(3) [here]. Accordingly, until the taxpayer files his own return, there will be no deadline by which the Service must assess the tax or file a suit to collect without assessment. Once the Service chooses to assess the tax, however, a 10-year period of limitations on collection of that assessment begins. I.R.C. § 6502(a)(1).

IRS Queasiness Over the Reaches of Allen (9/22/12)

I have recently blogged on the issue of whether the fraud of some person other than the taxpayer signing the return which makes the return fraudulent allows the IRS an unlimited statute of limitations under Section 6501(c)(1), here.  I list below the blogs that deal with that issue.  In Allen v. Commissioner, 128 T.C. 37 (2007), the Tax Court held that a preparer's fraud with no fraud on the taxpayers' part can invoke the unlimited statute of limitations under 6501(c)(1).  In my blogs, I questioned that holding and noted some of the possible other situations that, if correct, the Allen holding could and logically should apply.  Specifically, I mentioned that proliferation of abusive tax shelters such as Son-of-Boss that, in criminal cases, have resulted in convictions of the promoters for tax evasion with respect to the taxpayers' returns.  Even if one were to assume that the taxpayers were not guilty of fraud (the Government conceded that for purposes of the criminal case), the promoters' fraud that resulted in the returns being fraudulent seems to comfortably fit the Allen holding if Allen is correct.

The IRS has released a new internal guidance legal memorandum, ILM 201238026, here.  In that memorandum, one of the owners of an S Corporation had caused income to be falsely underreported and hence, when the underreported income was passed through to the two shareholders, their returns underreported the income.  With respect to the underreported income, the culpable partner had been convicted of "one count of 18 U.S.C. § 371, Conspiracy to Commit Mail Fraud and Tax Fraud, one count of 26 U.S.C. § 7201, Tax Evasion, one count of 26 U.S.C. § 7206(1), Filing a False Individual Tax Return, and one count of 26 U.S.C. § 7206(1), Filing a False Corporate Tax Return for the year 2001."  The issue addressed in the memorandum was whether the nonculpable owner who reported the fraudulently understated net income on his return (1040) was subject to the unlimited states of limitations under Section 6501(c)(1).

Facially, at this point, there is little to distinguish the key facts in the memorandum from the Allen facts and holding.  In Allen, the fraudulent position on the return was attributable to a preparer; in the memorandum, the fraudulent position on the return was attributable to the other S corporation owner.  There is nothing to distinguish the fraudulent position on the return other than its source -- the preparer or the other shareholder.  Nevertheless, the memorandum concludes that the unlimited statute of limitations does not apply.

Updates on Interest Rates (9/23/12)

In my Federal Tax Procedure text, I state the interest for quarters earlier than the 3d quarter of 2012.  The following are the interest rates for the third quarter of 2012.  Please keep in mind that these interests rates are provided for illustration only.  The interest rates can change each quarter, depending upon the federal short term rates.

INTEREST RATES FOR THIRD QUARTER 2012

Underpayment interest rate - 3%  [Text footnoted p. 244, nonfootnoted p. 174]
Underpayment larger corporate (Hot Interest) rate - 5% [Text footnoted p. 244, nonfootnoted p.  174]

Overpayment rate - general - 3% [Text footnoted p. 255, nonfootnoted p.   181]
Corporate overpayment rate - general - 2% [Text footnoted p. 255, nonfootnoted p. 182]
Large Corporate Ovepayments (over $10,000) - .5% [Text footnoted p. 255-6 nonfootnoted p.  182]

See the IRS web page on these interest rates here.

Is there A Statute of Limitations for the Section 6702 Frivolous Return Penalty (9/21/12)

In Crites v. Commissioner, T.C. Memo. 2012-267, here, the Tax Court held that the frivolous return penalty in Section 6702, here, was timely.  Section 6702 penalizes a "frivolous return" and a "specified frivolous submission."  In Crites, the frivolous return penalty applied.  The taxpayer's original return was filed more than 3 years before the penalty assessment.  The amended return which was penalized was filed less than a year before the penalty was assessed.  The holding on the statute of limitations is:

Section 6501(a) does place limits on assessments. With certain limited exceptions not relevant here, the Commissioner must assess a tax liability within three years after a return is filed. Sec. 6501(a). Crites argues that because penalties are generally included within the definition of "tax", see sec. 6665(a)(2), section 6501(a) prevents the Commissioner from assessing a penalty against her under section 6702(a) more than three years from the time she filed her original return. 

We disagree. As the Commissioner observes, penalties under section 6702 do not have a readily observable statute of limitations. The section penalizes not  just frivolous "returns"—and even here Congress was careful to penalize not just returns but "what purports to be a return"—but frivolous "submissions". It would be odd if penalties keyed to "submissions" had somehow to be tied to the limitations period for tax that is supposed to be shown on a "return". 

But let us assume—and here we are expressly assuming without deciding—that Crites is right that the filing date of her "return" is the key date. She had two returns, and the one that the Commissioner wants to punish her for is the amended return that she sent the IRS in October 2008. He assessed the penalty in July 2009, well within three years of her submitting it. Crites of course would prefer that we hold that the clock for penalizing her under section 6702 began to run when she filed her original return, but she cites no authority for her implicit proposition that a statute of limitations can start running before a cause of action accrues or, in a case like hers, before a taxpayer even files a sanctionable submission.