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.