No Bankruptcy Discharge for Taxpayers Attempting to Defeat Payment of Tax (7/25/12)

In United States v. Coney, ___ F.3d ___, 2012 U.S. App. LEXIS 15283 (5th Cir. 2012), here, the Fifth Circuit affirmed a denial of a bankruptcy discharge.  The background is that a chapter 7 discharge normally covers all debts of the debtor, but there are certain exceptions.  One of the exceptions is in 11 U.S.C. § 523(a)(1)(C) which excludes from discharge a tax liability "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax[.]"  [Emphasis supplied, to show the disjunctive.]

The debtors in the case were husband (now deceased) and wife, who we will refer to as Curtis and Barbara and together as the Coneys.  Curtis was a lawyer operating through a sole owner S corporation.  The tax liabilities arose from his law practice.  Without going through all the details, the Coneys had a large amount of taxable income coming from the law firm.  They apparently reported the income, but went to extraordinary lengths to prevent the IRS from discovering available assets to pay their resulting large tax liabilities.  In negotiating with the IRS regarding payment of the liabilities, the debtors committed to turn over certain fees as received.  They failed to turn over one large fee.  Furthermore, the law firm "engaged in a high volume of cash transactions."  Some of the cash proceeds it received were used to make illegal payments to runners for the law firm.  In order to disguise the withdrawal of the cash, the husband debtor instructed staff to draw checks under the $10,000 reporting requirement to obtain the cash to pay the runners, thereby avoiding the CTR reporting requirement.

Things unraveled from there.  Husband debtor was charged with

(a) one count of conspiracy to structure financial transactions in violation of 31 U.S.C. § 5324 from 1997 to 2001, (b) ten counts involving ten separate incidents of structuring financial transactions in violation of 31 U.S.C. § 5324 from 1997 to 2001, and (c) one count of obstruction of justice for attempting to influence [a staff member's] grand jury testimony.

Barbara was charged with "one count of obstruction of justice for attempting to influence [the staff member's] grand jury testimony.

The Coneys thereafter pled to all charges.  [I am sure there is a story there, but it is not given in the case.]

The IRS's Constraints on Large Partnership Audits (7/21/12)

I am adding the following to both texts (the nonfootnoted text at  p. 490 (Insert at the end of the page (i.e., at the end of the section on Large Partnerships) and the footnoted text at p. 674 at the end of the Large Partnerships section):

There is some concern that large partnerships, particularly those whose operations are on the scale of large corporations, not electing under this simplified procedure and thus remaining subject to the TEFRA rules are not audited as frequently as they should because of the difficulty of implementing the TEFRA rules.  An author recently noted:

Hampered by the 1982 Tax Equity and Fiscal Responsibility Act, the law governing large partnership audits, and its aging information technology systems, the IRS lacks the capacity to audit more than a few large, widely held partnerships each year. 

That capacity constraint -- a numerical figure known to only a select few at the IRS -- concerns the number of partner-level tax bills that the IRS can send out each year. Because partnerships are passthrough entities, IRS agents can't determine the resulting net tax revenue from any partnership-level adjustments until they've calculated their impact on a partner-by-partner basis (as some partners may be tax-exempt foreigners, pension funds, or taxpayers with net losses). If the IRS doesn't audit the partnership itself, it generally can't challenge the partnership profits and losses reported on an individual partner's return. 

The problem is severe enough that the Obama administration has proposed treating some very large partnerships as corporations for audit purposes.

The quote is from Amy S. Elliott, Audit Proof? How Hedge Funds, PE Funds, and PTPs Escape the IRS, 136 Tax Notes 351 (July 23, 2012).  The article is quite good and offers more detail than I can offer in this survey book.

Trust Fund Taxes, Including Collected State Sales Taxes, Are Not Dischargeable in Bankruptcy (7/21/12)

In In re: Calabrese, ___ F.3d ___, 2012 U.S. App. LEXIS 14897 (3d Cir. 2012), here, the Third Circuit held that state sales taxes that a seller collects from purchasers is a trust fund tax that is not dischargeable in bankruptcy.  The bankruptcy statute exempts from discharge "trust fund" taxes.  

The issue as posited by the Court was:

We must decide whether the sales taxes held by Calabrese are "trust fund" or "excise" taxes under 11 U.S.C. § 507(a)(8). Excise taxes receive priority, and are non-dischargeable, if they are less than three years old, as measured from the date of the bankruptcy petition. See 11 U.S.C. § 507(a)(8)(E) (priority); 11 U.S.C. § 523(a)(1)(A) ("A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for a tax or a customs duty . . . of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed . . . ."). Trust fund taxes are always prioritized and are never dischargeable irrespective of the age of the debt. See 11 U.S.C. §§ 507(a)(8)(C), 523(a)(1)(A). 

Three of our sister courts of appeals have considered the question presented here. In each case, the court determined that the statutory text of § 507(a)(8) does not resolve the dispute. See Shank v. Wash. State Dep't of Revenue, Excise Tax Div. (In re Shank), 792 F.2d 829, 832 (9th Cir. 1986); DeChiaro v. N.Y. State Tax Comm'n, 760 F.2d 432, 435 (2d Cir. 1985); Rosenow v. State of Ill., Dep't of Revenue (In re Rosenow), 715 F.2d 277, 279 (7th Cir. 1983). Proceeding to analyze the legislative history, all three concluded that a sales tax paid by a third party is a trust fund tax within the meaning of subsection (C), and not an excise tax under subsection (E).

Case Applying Refund to Federal Government Nontax Debt (7/21/12)

In Kipple v. United States, 2012 U.S. Claims LEXIS 821 (2012), here, the Court of Federal Claims blessed § 6402 offset from a tax refund for repayment of student loans owed to the Department of Education (by acquisition from the original lender).  The offset was made  under the Treasury Offset Program, acronymed to TOP.  A description of the TOP program is here, with the summary being.

The Treasury Offset Program is a centralized offset program, administered by the Financial Management Service's (FMS) Debt Management Services (DMS), to collect delinquent debts owed to federal agencies and states (including past-due child support), in accordance with 26 U.S.C. § 6402(d) (collection of debts owed to federal agencies), 31 U.S.C. § 3720A (reduction of tax refund by amount of the debts), and other applicable laws. FMS disburses federal payments, such as federal tax refunds, for agencies making federal payments (known as "payment agencies"), such as the Internal Revenue Service. "Creditor agencies," such as the Department of Education, submit delinquent debts to FMS for collection and inclusion in TOP and certify that such debts qualify for collection by offset.

The key statutory provisions are 26 USC 6402(d), here, and 31 USC 3720A, here.

One of the key requirements is that the agency seeking the offset (DOE in the case) must have given the federal debtor notice and opportunity to object before implementing the TOP procedure for the debt.  That notice, like many tax notices (specifically notices of deficiency and notices of assessments) and, I am sure other governmental notices, must be sent to the addressee's last known address.  The agency must prove proper sending, not actual receipt.  (Put another way, the statute assigns the risk of nonreceipt to the addressee rather than to the Government agency.)  Echoing what is said on this issue in many tax cases, the Kipple court said:

First Circuit Rejects IRS Regulations Interpretation With Caveat to Taxpayers About Penalties (7/20/12)

In Kaufman v. Shulman, ___ F.3d ___, 2012 U.S. App. LEXIS 14858 (1st Cir. 2012), here, the First Circuit reversed the Tax Court's acceptance of the IRS regulations' interpretation of the requirements for claiming a charitable contribution for a facade easement.  The substantive issue was whether the statute's requirement that the easement be granted "in perpetuity" (§ 170(h)(2)(C)) was not met if there was a remote chance that the charity could abandon the easement.  The substantive issue is more nuanced than that, but is not critical for a discussion of the procedure issues.  I focus here on the two procedure issues I think important in the case:  First, the Court rejected the IRS's interpretation of its regulations.  This is a Chevron issue in the case (Chevron is not mentioned but the Mayo interpretation of Chevron is, Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711-13 (2012)).  Second, the Court had cautionary warnings for taxpayers claiming aggressive valuations fore easements.

Regarding the IRS's proferred interpretation of the regulations, the Court noted the absurdity of the position which, if traced to the logical extreme, would defeat almost all charitable contributions of easements that Congress clearly intended to allow.  The Court then noted:

We normally defer to an agency's reasonable reading of its own regulations, e.g., United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001), but cannot find reasonable an impromptu reading that is not compelled and would defeat the purpose of the statute, as we think is the case here. Cf. Grunbeck v. Dime Sav. Bank of N.Y., FSB, 74 F.3d 331, 336 (1st Cir. 1996).

In rejecting the interpretation, the First Circuit aligned itself with the D.C. Circuit in Commissioner v. Simmons, 646 F.3d 6, 10 (D.C. Cir. 2011).  The Court then reasoned:

Review of Scalia Book on Statutory Interpretation (7/17/12)

Antonin Scalia & Bryan A. Garner have a new book called Reading Law: The Interpretation of Legal Texts (Westlaw 2012).  The Westlaw URL for the book is here.  The book is principally about constitutional and statutory interpretation a process which is at the heart of the Tax Procedure course and many of the courses in law school.  In the opening chapter or the course book for Tax Procedure, I discuss some of the issues for statutory interpretation.

Stanley Fish, an online commentator for the Opinionator at the New York Times  reviews the book in a blog titled "Intention and the Canons of Legal Interpretation," here.  Fish starts with a timely discussion of Justice Roberts' decision sustaining the individual mandate in the recent NFIB v. Sibelius case, citing the Constitutional Doubt Canon #38 from the book --  “A statute should be interpreted in a way that avoids placing its constitutionality in doubt.”

Fish offers a very favorable review of the book, although noting that the book did not require the polemical thesis about textualism that Justice Scalia just cannot avoid.  Fish then nitipicks a bit and concludes:

Nothing I have said here should be read as a retreat from my judgment that “Reading Law” is a wonderful book. The falsity (as I take it to be) of the authors’ polemical thesis does not detract at all from the considerable accomplishment of laying bare the inner workings of legal interpretation. And since that thesis — that interpretation begins and ends with the text — is so often belied by the examples offered in support of it, we can safely put it aside and be grateful for the pleasure and illumination Scalia and Garner provide.

I have just added some further discussion about the book on Federal Tax Crimes Blog, IRS Data-Mining Program re Offshore Accounts; with a Diversion to the Real Golden Rule (9/1/12), here.  Since that discussion is buried in the main topic of that blog entry, I cut and past the relevant portions here.

Since I mention Judge Posner and Justice Scalia, I can't help but mention their recent tiff.  The opening round was fired by Justice Scalia and his writing pal, Bryan Garner.  The book they co-authored is Reading Law: The Interpretation of Legal Texts (Westlaw 2012).  The Westlaw URL for the book is here and the Amazon URL is here.   

Judge Posner fired the next round in Richard Posner, The Incoherence of Antonin Scalia (The New Republic 8/24/12), here.  For those interested, I recommend reviewing Judge Posner's article and don't think I am up to the task of even summarizing it.  That is not a negative comment.  Judge Posner has something to say; I find that generally he is worth listening to.
The has now rebuttal appeared in the form of someone perhaps serving as a surrogate for Judge Posner.  Ed Whelan, Richard A. Posner’s Badly Confused Attack on Scalia/Garner (National Review Online 8/31/02), here.  I also will not attempt a summary of it.  It is worth reading. 

Although there are sharp edges in the back and forth, I imagine that Judge Posner and Justice Scalia can not only survive he punches but welcome them in the intellectual fray thus joined.