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