Another Bull Shit Shelter Bites the Dust (12/19/13)

We have yet another of the genre out of the Tenth Circuit, this time proving Michael Graetz's famous observation that an abusive tax shelter is “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  The new case is Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013), here.

Before discussing the case, I offer this description of tax shelters from my Federal Tax Procedure Book (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

Blum fits the pattern.

Mr. Blum was a very successful businessman.  He was apparently very capable in assessing risks and rewards of financial ventures.  Mr. Blum retained KPMG who sold him one of its tax shelter products which it marketed in the 1990s and early 2000s.  This particular product was OPIS, a basis enhancement strategy. The abusive basis enhancement strategies claimed to create large amounts of basis without the taxpayer having to incur a cost for the basis.  The taxpayer would then use the artificial basis to offset otherwise taxable gain, thereby artificially reducing the tax liability.  Mr. Blum got into the deal when he had a large gain that would otherwise be taxed.

When KPMG's representative made the pitch, Mr. Blum "claims he saw an investment opportunity; the Commissioner claims Mr. Blum saw a tax evasion opportunity."  (Emphasis supplied.) Mr. Blum bought the pitch and made a representation to KPMG that he was doing the deal for a legitimate nontax business or investment purpose.  (That representation was essential to KPMG's participation in implementing the transaction.)  Bottom-line, the Tax Court concluded and the Tenth Circuit concluded that the representation was false.

Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (12/13/13)

The United States has petitioned the Supreme Court in United States v. Clarke, 517 Fed. Appx. 689, 2013 U.S. App. LEXIS 7773 (11th Cir. 2013), here, an unpublished decision.  The Eleventh Circuit's opinion in Clarke is short and pithy, so I quote it all (except I omit the caption and two of the three footnotes):

This case involves the Internal Revenue Service's (IRS) issuance of five administrative summonses, pursuant to 26 U.S.C. § 7602, during an investigation into the tax liabilities of Dynamo Holdings Limited Partnership (Dynamo). Specifically, [List of summonsed parties omitted] appeal the district court's orders granting the IRS's petitions to enforce the summonses. After careful review of the record, and having had the benefit of oral argument, we vacate the district court's order enforcing the summonses and remand for the district court to hold a hearing. 

To obtain enforcement of a summons, the IRS must make a four-part prima facie showing that (1) "the investigation will be conducted pursuant to a legitimate purpose," (2) "the inquiry may be relevant to the purpose," (3) "the information sought is not already within the Commissioner's possession," and (4) "the administrative steps required by the Code have been followed." United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964); see also Nero Trading, LLC v. U.S. Dep't of Treasury, IRS, 570 F.3d 1244, 1248 (11th Cir. 2009). Once the IRS makes its prima facie showing, the burden shifts to the party opposing the summons to either (1) disprove one of the four elements of the IRS's prima facie case, or (2) "convince the court that enforcement of the summons would constitute an abuse of the court's process." Nero, 570 F.3d at 1249 (internal quotation omitted). The Supreme Court has stated that because the district court's process is used to enforce a summons, the court should not permit its process to be abused by enforcing a summons that was issued for an improper purpose. See Powell, 379 U.S. at 58. According to the Powell Court, an improper purpose may include any purpose "reflecting on the good faith of the particular investigation." Id. 

In Powell, the Supreme Court also explained that a party opposing a summons is entitled to an adversary hearing before enforcement is ordered, and that, at the hearing, the opponent "may challenge the summons on any appropriate ground." Id. (internal quotation omitted). Subsequently, in United States v. Southeast First National Bank of Miami Springs, we held that "an allegation of improper purpose is sufficient to trigger a limited adversary hearing where the taxpayer may question IRS officials concerning the Service's reasons for issuing the summons." 655 F.2d 661, 667 (5th Cir. 1981) (footnote omitted). More recently, we have reaffirmed Southeast First National Bank, calling it "the legitimate offspring of the Supreme Court's seminal decision in Powell." Nero, 570 F.3d at 1249. 

Appellants contend they were entitled to discovery and an evidentiary hearing before the district court granted the IRS's petitions to enforce the summonses because they alleged the IRS may have issued and sought to enforce the summonses for at least four improper purposes.One of the reasons the IRS may have issued the summonses, according to Appellants, was solely in retribution for Dynamo's refusal to extend a statute of limitations deadline. Although Appellants raised the possibility of numerous improper purposes, federal pleading standards allow claims and defenses to be pled in the alternative, and do not require them to be consistent. See Fed. R. Civ. P. 8(d)(2) & (d)(3). If the IRS issued the summonses only to retaliate against Dynamo, that purpose "reflect[s] on the good faith of the particular investigation," and would be improper. See Powell, 379 U.S. at 58. 

Public Policy as a Basis for Denying OICs (12/10/13)

Can the IRS deny an otherwise proper offer in compromise because the taxpayer has been involved in some type of activity that the IRS deems against the public interest?  For example, can the IRS deny an offer solely because the taxpayer was prosecuted for evasion of assessment or even payment of the taxes in question?  Or, even if not prosecuted, the taxpayer's activity had the characteristics of being prosecuted?

Keith Fogg of the Procedurally Taxing Blog has an interesting blog on the issue of whether developments in the law "will soon eliminate the ability of the IRS to make public policy or best interest of the government the basis for rejecting an offer in compromise."  See Keith Fogg, Oversight of Offers – Response to Comment raising Thornberry v. Commissioner (Procedurally Taxing Blog 12/6/13), here.  The article has a short summary of the history of the OIC and some valuable links. Professor Fogg believes that the IRS retains some residual right to reject claims on public policy or public interest bases.  The discussion is quite good, so I recommend it generally.

I have posted some comments on the issue on my Federal Tax Crimes Blog.  See Criminal and FBAR Noncompliance, Offers in Compromise and the Public Interest (Federal Tax Crimes Blog 12/10/13), here.

Ford Wants Overpayment Interest While Its Remittance Was Held as a Deposit (12/6/13)

In Ford Motor Co. v. United States, 571 U.S. ____ (2013), here, the Supreme Court entered the following order on Ford's petition for certiorari (caption omitted):

PER CURIAM. 

When a taxpayer overpays his taxes, he is generally entitled to interest from the Government for the period between the payment and the ultimate refund. See 26 U.S.C. § 6611(a). That interest begins to run "from the date of overpayment." §§ 6611(b)(1), (b)(2). But the Code does not define "the date of overpayment." 

In this case, after the Internal Revenue Service advised Ford Motor Company that it had underpaid its taxes from 1983 until 1989, Ford remitted a series of deposits to the IRS totaling $875 million. Those deposits stopped the accrual of interest that Ford would otherwise owe once the audits were completed and the amount of its underpayment was finally determined. See § 6601; Rev. Proc. 84-58, 1984-2 Cum. Bull. 501. Later, Ford requested that the IRS treat the deposits as advance payments of the additional tax that Ford owed. Eventually the parties determined that Ford had overpaid its taxes in the relevant years, thereby entitling Ford to a return of the overpayment as well as interest. But the parties disagreed about when the interest began to run under 26 U.S.C. § 6611(b)(1). Ford argued that "the date of overpayment" was the date that it first remitted the deposits to the IRS. Ibid. The Government countered that the date of overpayment was the date that Ford requested that the IRS treat the remittances as payments of tax. The difference between the parties' competing interpretations of § 6611(b) is worth some $445 million. 

Ford sued the Government in Federal District Court, asserting jurisdiction under 28 U.S.C. § 1346(a)(1). The Government did not contest the court's jurisdiction. See Brief in Opposition 3, n. 3. The District Court accepted the Government's construction of § 6611(b) and granted its motion for judgment on the pleadings. A panel of the Court of Appeals for the Sixth Circuit affirmed, concluding that § 6611 is a waiver of sovereign immunity that must be construed strictly in favor of the Government. 508 Fed. Appx. 506 (2012). 

Ford sought certiorari, arguing that the Sixth Circuit was wrong to give § 6611 a strict construction. In Ford's view, it is 28 U. S.C. § 1346 -- not § 6611 -- that waives the Government's immunity from this suit, and § 6611(b) is a substantive provision that should not be construed strictly. See Gómez-Pérez v. Potter, 553 U.S. 474, 491 (2008); United States v. White Mountain Apache Tribe, 537 U.S. 465, 472-473 (2003). In its response to Ford's petition for certiorari, however, the Government contended for the first time that § 1346(a)(1) does not apply at all to this suit; it argues that the only basis for jurisdiction, and "the only general waiver of sovereign immunity that encompasses [Ford's] claim," is the Tucker Act, 28 U.S.C. § 1491(a). Brief in Opposition 3, n. 3. Although the Government acquiesced in jurisdiction in the lower courts, if the Government is now correct that the Tucker Act applies to this suit, jurisdiction over this case was proper only in the United States Court of Federal Claims. See § 1491(a). 

This Court "is one of final review, 'not of first view.'" FCC v. Fox Television Stations, Inc., 556 U.S. 502, 529 (2009) (quoting Cutter v. Wilkinson, 544 U.S. 709, 718, n. 7 (2005)). The Sixth Circuit should have the first opportunity to consider the Government's new contention with respect to jurisdiction in this case. Depending on that court's answer, it may also consider what impact, if any, the jurisdictional determination has on the merits issues, especially whether or not § 6611 is a waiver of sovereign immunity that should be construed strictly. 

The petition for certiorari is granted, the judgment of the Sixth Circuit is vacated, and the case is remanded for further proceedings. 

It is so ordered.

Did Justice Scalia Smuggle Legislative History Into the Woods Opinion? (12/6/13)

Justice Scalia touts his disdain for legislative history, at least when he is noisy about it.  Others may have noted that Justice Scalia is prone to hyperbole.  He wrote the unanimous opinion in United States v. Woods, ___ U.S. ___ (2013), here, so in order to hold the unanimity, he was a little more muted about the subject, saying in fn 5:

We do not consider Woods’ arguments based on legislative history. Whether or not legislative history is ever relevant, it need not be consulted when, as here, the statutory text is unambiguous. Mohamad v. Palestinian Authority, 566 U. S. ___, ___, 132 S. Ct. 1702, 1709, 182 L. Ed. 2d 720 (2012). Nor do we evaluate the claim that application of the penalty to legal rather than factual misrepresentations is a recent innovation. An agency’s failure to assert a power, even if prolonged, cannot alter the plain meaning of a statute.

The question I address today is whether Justice Scalia smuggled some legislative history into his opinion and that smuggled history did affect his decision?  I think the answer to that question is yes.  Readers should know that my answer is an inference of a fact and not necessarily proof of a fact.  So, I state the basis for my inference.

After Justice Scalia states the facts and the procedural posture, he opens his legal analysis "with a brief explanation of the statutory scheme for dealing with partnership-related tax matters."  Then in very few words, he states the purpose for the TEFRA partnership rules for unified audits and litigation:

A partnership does not pay federal income taxes; instead, its taxable income and losses pass through to the partners. 26 U. S. C. § 701. A partnership must report its tax items on an information return, § 6031(a), and the partners must report their distributive shares of the partnership’s tax items on their own individual returns, §§ 702, 704. 

Before 1982, the IRS had no way of correcting errors on a partnership’s return in a single, unified proceeding. Instead, tax matters pertaining to all the members of a partnership were dealt with just like tax matters pertaining only to a single taxpayer: through deficiency proceedings at the individual-taxpayer level. See generally §§6211-6216 (2006 ed. and Supp. V). Deficiency proceedings require the IRS to issue a separate notice of deficiency to each taxpayer, §6212(a) (2006 ed.), who can file a petition in the Tax Court disputing the alleged deficiency before paying it, § 6213(a). Having to use deficiency proceedings for partnership-related tax matters led to duplicative proceedings and the potential for inconsistent treatment of partners in the same partnership. Congress addressed those difficulties by enacting the Tax Treatment of Partnership Items Act of 1982, as Title IV of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). 96 Stat. 648 (codified as amended at 26 U. S. C. §§ 6221-6232 (2006 ed. and Supp. V)). 

Under TEFRA, partnership-related tax matters are addressed in two stages. First, the IRS must initiate proceedings at the partnership level to adjust “partnership items,” those relevant to the partnership as a whole. §§ 6221, 6231(a)(3). It must issue an FPAA notifying the partners of any adjustments to partnership items, § 6223(a)(2), and the partners may seek judicial review of those adjustments, § 6226(a)-(b). Once the adjustments to partnership items have become final, the IRS may undertake further proceedings at the partner level to make any resulting “computational adjustments” in the tax liability of the individual partners. § 6231(a)(6). Most computational adjustments may be directly assessed against the partners, bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post-payment refund actions. § 6230(a)(1), (c). Deficiency proceedings are still required, however, for certain computational adjustments that are attributable to “affected items,” that is, items that are affected by (but are not themselves) partnership items. §§ 6230(a)(2)(A)(i), 6231(a)(5).

More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (12/4/13)

I offer more detailed comments on United States v. Woods, ___ U.S. ___ (2013), here.  This blog entry is primarily for students.

1.  The opinion has a good summary of the state of the law leading to the original enactment of the TEFRA partnership provisions.  Slip Op. 6 & 7.  This context is important to understand the general nature of the TEFRA partnership provisions and its policy choices.  The context is useful far beyond the context of the immediate issue.

2.  The immediate threshold question was the court's jurisdiction to determine penalty issues in the unified TEFRA proceeding.  The penalty in question was one of the accuracy related penalties.  In 1997, the TEFRA provisions were amended to have such penalties determined at the partnership level with respect to partnership items despite the fact that at least one critical component of the Section 6662 penalty has a defense of reasonable cause and good faith -- see Section 6664(c)(1), here -- that must be asserted by a partner at the partner level and not in the partnership level proceeding.  The statutory solution to this problem is to permit the partner to assert the defense at the partner level but in a separate refund proceeding (rather than in a Tax Court proceeding pursuant to a notice of deficiency).  Justice Scalia said pithily:  "Barring partnership-level courts from considering the applicability of penalties that cannot be imposed without partner-level inquiries would render TEFRA’s authorization to consider some penalties at the partnership level meaningless."  (Slip Op. 9.) Justice Scalia then reasons (Slip Op. 10):

Applying the foregoing principles to this case, we conclude that the District Court had jurisdiction to determine the applicability of the valuation-misstatement penalty — to determine, that is, whether the partnerships’ lack of economic substance (which all agree was properly decided at the partnership level) could justify imposing a valuation-misstatement penalty on the partners. When making that determination, the District Court was obliged to consider Woods’ arguments that the economic-substance determination was categorically incapable of triggering the penalty. Deferring consideration of those arguments until partner-level proceedings would replicate the precise  [*20] evil that TEFRA sets out to remedy: duplicative proceedings, potentially leading to inconsistent results, on a question that applies equally to all of the partners.
To be sure, the District Court could not make a formal adjustment of any partner’s outside basis in this partnership-level proceeding. See Petaluma, 591 F. 3d, at 655. But it nonetheless could determine whether the adjustments it did make, including the economic-substance determination, had the potential to trigger a penalty; and in doing so, it was not required to shut its eyes to the legal impossibility of any partner’s possessing an outside basis greater than zero in a partnership that, for tax purposes, did not exist. Each partner’s outside basis still must be adjusted at the partner level before the penalty can be imposed, but that poses no obstacle to a partnership-level court’s provisional consideration of whether the economic-substance determination is legally capable of triggering the penalty.  n2
   n2 Some amici warn that our holding bodes an odd procedural result: The IRS will be able to assess the 40-percent penalty directly, but it will have to use deficiency proceedings to assess the tax underpayment upon which the penalty is imposed. See Brief for New Millennium Trading, LLC, et al. as Amici Curiae 12-13. That criticism assumes that the underpayment would not be exempt from deficiency proceedings because it would rest on outside basis, an “affected ite[m] . . . other than [a] penalt[y],” 26 U. S. C. § 6230(a)(2)(A)(i). We need not resolve that question today, but we do not think amici’s answer necessarily follows. Even an underpayment attributable to an affected item is exempt so long as the affected item does not “require partner level determinations,” ibid.; see Bush v. United States, 655 F. 3d 1323, 1330, 1333-1334 (CA Fed. 2011) (en banc); and it is not readily apparent why additional partner-level determinations would be required before adjusting outside basis in a sham partnership. Cf. Petaluma FX Partners, LLC v. Commissioner, 591 F. 3d 649, 655, 389 U.S. App. D.C. 64 (CADC 2010) (“If disregarding a partnership leads ineluctably to the conclusion that its partners have no outside basis, that should be just as obvious in partner-level proceedings as it is in partnership-level proceedings”).

Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (12/3/13)

In United States v. Woods, ___ U.S. ___ , 134 S. Ct. 557 (12/3/13), here, the Court rejected procedural arguments and applied the special 40% accuracy related penalty for valuation and basis overstatements.  §§6662(a), (b)(3), (e)(1)(A), (h).  The unanimous opinion is written  by Justice Scalia, the plain language justice, who not surprisingly concludes:  "The penalty’s plain language makes it applicable here."

I am sure others and even I will have a lot to say about the opinion and its ramifications later. (Here is my follow through post, More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

For now, this caught my eye as Justice Scalia jabs at the use of the Blue Book (what else could he do with such a tempting target):

Woods contends, however, that a document known as the “Blue Book” compels a different result. See General Explanation of the Economic Recovery Tax Act of 1981 (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.Comm. Print 1980). Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” Flood v. United States, 33 F. 3d 1174, 1178 (CA9 1994). We have held that such “[p]ost-enactment legislative history (a contradiction in terms) is not a legitimatetool of statutory interpretation.” Bruesewitz v. Wyeth LLC, 562 U. S. ___, ___ (2011) (slip op., at 17–18); accord, Federal Nat. Mortgage Assn. v. United States, 379 F. 3d 1303, 1309 (CA Fed. 2004) (dismissing Blue Book as “a post-enactment explanation”). While we have relied on similar documents in the past, see FPC v. Memphis Light, Gas & Water Div., 411 U. S. 458, 471–472 (1973), our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive. But the passage at issue here does not persuade. It concerns a situation quite different from the one we confront: two separate, non­overlapping underpayments, only one of which is attributable to a valuation misstatement. 

In my Federal Tax Procedure book (not yet revised for the above, which, I doubt, is the last word on the issue), I discuss the Blue Book as follows (footnotes omitted):

Appeals from the Tax Court (12/2/13)

I write today to point readers to the excellent blog Procedurally Taxing blog entry:  Keith Fogg, Appellate Venue in Tax Court cases – Taking Care in Applying Golsen in non-deficiency cases (11/26/13), here.  I strongly recommend that readers of this blog link to it and read it.

Inspired by the posting, I have revised my Federal Tax Procedure text to include the points that some Tax Court appeals are exclusively to the Court of Appeals for the District of Columbia Circuit and that, at least as to those appeals for now, the application of the Golsen rule will mean that the District of Columbia Court of Appeals will set uniform national law on the issues, meaning that certiorari to the Supreme Court will be based exclusively on importance of the issue and not on conflict among the circuits.  (That is overbroad, but a sufficient generalization for now.)

The concept of a single court of appeals, variously formulated, for tax cases has been around for many years, with many proponents and opponents.  It is a long history which is suggested by the following quote from an article (in a footnote, no less):  Ruth Bader Ginsburg and Peter W. Huber, The Intercircuit Committee, 100 Harv. L. Rev. 1417, 1429 n. 61 (1987):

There may be a few discrete bodies of law so arcane and complex that no other solution will do. The Federal Circuit now satisfies the need for early appellate declaration of national law in certain areas, notably, patent disputes. See 28 U.S.C. § 1295 (1982) (assigning to the United States Court of Appeals for the Federal Circuit exclusive jurisdiction over enumerated matters, including appeals from the district courts in patent cases, appeals from the Merit Systems Protection Board, appeals from the agency boards of contract appeals, and appeals from the district courts in certain cases against the United States); see also S. REP. NO. 275, 97th Cong., 2d Sess. 3, 4, reprinted in 1982 U.S. CODE CONG. & ADMIN. NEWS 11, 13, 14. Congress believed that the federal judicial system lacked sufficient capacity "to provide reasonably quick and definitive answers to legal questions of nationwide significance." Id. at 13. It therefore established the Federal Circuit to adjudicate definitively in areas where the legislators found "special need for nationwide uniformity." Id. at 14. 

A single court of tax appeals could promote uniformity and coherence in another federal law domain populated by specialist advocates and rarely benefited by the labors of generalist judges, including those on the Supreme Court. See H. FRIENDLY, FEDERAL JURISDICTION: A GENERAL VIEW 161-71 (1973); Ginsburg, Making Tax Law Through the Judicial Process, 70 A.B.A. J. 74 (1984); Griswold, The Need for a Court of Tax Appeals, 57 HARV. L. REV. 1153 (1944).

Principal Life -- A Masterpiece of Tax Procedure (11/29/13)

In my last Tax Procedure Class, we spent most of the class discussing Principal Life Ins. Co. v. United States, 95 Fed. Cl. 786 (Fed. Cl. 2010).  The Court's slip opinion is here; students can link to a nonofficial version (Harvard Caselaw Access Project) but with local page citations, here.  I do ask, however, that students download the actual case with the local page citations. 

The reasons I think the case is important are: (i) it is a tax procedure case; (ii) it is a tour de force tax procedure case; and (iii) it covers a lot of ground that we covered earlier in the class.  I promised the students that I would post a blog on the case in order to help them learn Tax Procedure and, even, study for the examination.  THIS POSTING IS NOT INTENDED AND SHOULD NOT BE USED AS A SUBSTITUTE FOR ACTUALLY READING AND STUDYING THE CASE.

Judge Allegra (Wikipedia here) introduces the case as follows:

"The procedural aspects of the tax laws are of overriding importance in many controversies," one commentator has noted, "eclipsing or making moot substantive issues such as the allowance of deductions or credits, recognition or deferral of income, and methods of accounting." Theodore D. Peyser, 627-3rd Tax Management Portfolio, "Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation" at 1 (2010). At times, the questions spawned by these procedures take on an almost "metaphysical" cast, Baral v. United States, 528 U.S. 431, 436, 120 S. Ct. 1006, 145 L. Ed. 2d 949 (2000), like "when is taxable income taxed?" The ontology needed to solve such abstruse inquiries comes not from philosophical tomes, but from Chapters 63 through 66 of the Internal Revenue Code of 1986, which supply interfused rules mapping the contours of commonly-used, but frequently-misunderstood, tax concepts such as "assessment," "deposit," and "overpayment." 

Though the background provided by these rules can be numbing in its intricacy, the dispute presented by the cross-motions for summary judgment pending before the court can be stated simply: Plaintiff, Principal Life Insurance Company and Subsidiaries (plaintiff or Principal) argues that it is entitled to certain overpayments because its taxes were not timely assessed by the Internal Revenue Service (IRS). Defendant responds that the taxes in question were timely assessed and that even if they were not, they are not recoverable as an overpayment. Plaintiff is wrong; defendant is right. It remains to explain why.

KEY FACTS:

Follow the Rules for Timely Mailing, Timely Filing (11/26/13)

In Eichelburg v. Commissioner, T.C. Memo. 2013-269, here, the taxpayer failed to perfect his qualification for timely-mailing, timely filing under Section 7502, here.  The taxpayer in Eichelburg unknowingly used a private delivery service provider otherwise qualified for the rule -- Federal Express -- but he used the type of service offered by that provider that did not qualify -- that service was the "FedEx Express Saver."  The Court held that he did not qualify, saying (only one footnote included):

In Notice 2004-83, 2004-2 C.B. 1030, the IRS listed all private delivery services that have been designated by the Secretary under section 7502(f). The Federal Express delivery services included on this list are as follows: FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Priority, and FedEx International First. Notice 2004-83, 2004-2 C.B. at 1030, explicitly states that "FedEx * * * [is] not designated with respect to any type of delivery service not identified above." Thus, FedEx Express Saver is not a "designated private delivery service" within the meaning of section 7502(f). See Scaggs v. Commissioner, T.C. Memo. 2012-258 (holding that the "timely mailed, timely filed" rule of section 7502 does not apply to "Fed Ex Express Saver Third business day" service because that service is not a designated private delivery service under Notice 2004-83, supra); see also Raczkowski v. Commissioner, T.C. Memo. 2007-72 (holding that the "timely mailed, timely filed" rule of section 7502 does not apply to "UPS Ground" service because that service is not a designated private delivery service under Notice 2004-83, supra). 

Petitioner mailed his petition on September 10, 2012, using the FedEx Express Saver delivery service. Because FedEx Express Saver is not a "designated private delivery service," petitioner cannot avail himself of the "timely mailed, timely filed" rule of section 7502(a) and (f). His petition was not filed until September 12, 2012, two days after the expiration of the 90-day period. It was therefore untimely, and this Court lacks jurisdiction to redetermine the deficiency. 

We acknowledge that the result we reach may seem harsh. Notice 2004-83, supra, was issued nine years ago; private delivery companies may have since initiated delivery services resembling those listed in Notice 2004-83, supra; and many taxpayers may be unaware of the nuanced differences among these services.4 However, this Court may not rely on general equitable principles to expand the statutorily prescribed time for filing a petition. See Austin v. Commissioner, T.C. Memo. 2007-11 (citing Woods v. Commissioner, 92 T.C. 776, 784-785 (1989)). The statute gives us jurisdiction under the "timely mailed, timely filed" rule only if a private delivery service has been "designated by the Secretary." Sec. 7502(f)(2). Because FedEx Express Saver has not been so designated, our hands are tied.  n5
   n5 Although petitioner cannot pursue his case in this Court, he may not be without a judicial remedy. He may pay the tax, file a claim for refund with the IRS, and, if his claim is denied, sue for a refund in the appropriate U.S. District Court or the U.S. Court of Federal Claims. See McCormick v. Commissioner, 55 T.C. 138, 142 n.5 (1970).

See prior blogs on this issue:  Pay Attention to Court Filings Not Qualifying for the Timely Mailing-Timely Filing Rule (Federal Tax Procedure Blog 7/10/13); here, and Watch the Details in Relying on the Timely Mailing, Timely Filing Rule (Federal Tax Procedure Blog 2/7/13), here.

This is a cautionary tale.  I tell my students that this is such an easy rule to comply with, I better not read a case in which they failed to comply.  Of course, it is often the pro se taxpayer who is caught by this nuance.

Tax Court Rejects Unusual Path to Admission of Expert Testimony (11/20/13)

In Estate of Tanenblatt v. Commissioner, T.C. Memo. 2013-263, here, the Tax Court excluded an expert witness report that the petitioner attempted to introduce as the expert's testimony by attaching the report to his petition, by a failed motion to admit the report, and an IRS stipulation that the petition was the petition but not for purposes of admission.  The Court said that "Petitioner's path for attempting to introduce the Tindall appraisal into evidence as expert testimony is, to say the least, unusual."

The Court immediately described the usual way:

Generally, a party obtains the testimony of an expert witness by calling that witness to testify. See Rule 143(g)(1). Pursuant to that Rule, the expert witness must prepare a written report, which is marked as an exhibit and, after having been identified by the witness and adopted by him, received into evidence as his direct testimony unless the Court determines that the witness is not qualified as an expert. The Rule further provides that, not less than 30 days before the call of the trial calendar on which a case appears, a party calling an expert witness shall serve on each other party and submit to the Court a copy of the expert's report. Finally, the Rule also provides that, generally, we will exclude an expert witness' testimony altogether for failure to comply with the Rule. Those requirements are echoed in our standing pretrial order, which was served on petitioner.

The Court inferred that the petitioner chose the unusual method because of a fee dispute with the appraiser.

The Court then rejected the attempt to back door the expert report into evidence, concluding:

Petitioner did not call Dr. Tindall as a witness but asks us to rely on her report (which, under our Rules, would serve as her direct testimony) as her expert opinion. Petitioner has neither qualified Dr. Tindall as an expert entitled pursuant to rule 702 of the Federal Rules of Evidence to give her opinion on technical matters nor has he satisfied our procedural rules for expert testimony, found in Rule 143(g) and in our standing pretrial order. In other words, petitioner has failed to satisfy the preconditions for our receiving Dr. Tindall's opinion into evidence. Because her report (i.e., the Tindall appraisal) is not in evidence, we may not consider her opinion.

The Court then accepted the IRS's valuation of $2,303,000.

Second Circuit Resolves Standard of Review on Tax Court Appeals in Transferee Liability Case (11/18/13)

Peter Reilly has posted a good discussion of the Second Circuit decision in Diebold Found. v. Commioner,  736 F.3d 172 (2d Cir. 2013), here.  Peter's blog entry Charitable Foundation Haunted by 1999 Corporate Tax Assessment (Forbes 11/17/12), here.

The substantive decision in the case deals with the application of Section 6091 transferee liability.  The case gets into some esoterica of transferee liability, so I will leaves readers of the opinion and Peter's blog to ferret that out.  I will, however, just offer a gratuitous comment that the sophisticated players in the underlying game -- generically referred to as Midco transactions -- knew that when all the shuffling was over, the IRS would be left holding the bag for a large amount of tax dollars that was due and that those tax dollars not paid would be shared among the players in various ways intended to disguise the fact that they had just participated in key steps to evade federal taxes.  Evade may be a strong word here, but for the level of sophistication -- lawyers involved -- by the players I have observed in the game, they knew -- certainly should have known -- that was the consequence of their participation in the Midco game.  I think the Second Circuit gets that point and is not too bashful to say so.  In this regard, Calvin Johnson, UT Law Professor, is quoted as saying that the shareholders (including the Diebold Foundation) [a]s a matter of economics, * * * got a price for their shares that included, by my estimates, 85 percent of the value of the tax evaded.  Andrew Velarde, Second Circuit Holding on Midco Acquisitions Seen as Big Win for Government, 2013 TNT 223-3 (11/19/13).

Moving on, at the bottom of his blog, Peter addresses the procedural issue that the Second Circuit resolves at the threshold in reaching the substantive issue it addressed.  That procedural issue is the appropriate standard of review for appeals from the Tax Court.  Section 7482(a)(1), here, confers jurisdiction upon the courts of appeals to review decisions from the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury."  Pretty straight-forward.  But the Second Circuit had to correct an error of its own making in order to calibrate the right standard for "mixed questions of law and fact."  The Court's discussion of the problem and its resolution is relative short, so I just cut and paste it.  However, in order to cut out some of the "noise," I omit most of the citations and some quotations marks.

In an appeal from the Tax Court, it is without dispute in this Circuit that we review legal conclusions de novo and findings of fact for clear error. While we have previously held the standard of review for mixed questions of law and fact to be one for clear error, all Courts of Appeals are to "review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. § 7482(a)(1). Our case law enunciating the standard of review for mixed questions of law and fact in an appeal from the Tax Court is in direct tension with this statutory mandate. Following a civil bench trial, we review a district court's findings of fact for clear error, and its conclusions of law de novo; resolutions of mixed questions of fact and law are reviewed de novo to the extent that the alleged error is based on the misunderstanding of a legal standard, and for clear error to the extent that the alleged error is based on a factual determination. Two recent panels of our Court have recognized this contradiction between our case law and 26 U.S.C. § 7482(a)(1) but did not resolve the tension, as they determined that under either standard of review the outcome in the particular case would be the same. In the instant case, the standard of review affects the outcome, so our Court can avoid the question no longer. 

The standard that mixed questions of law and fact are reviewed under a clearly erroneous standard when we review a decision of the Tax Court was established in this Circuit's jurisprudence in Bausch & Lomb Inc. v. Comm'r, 933 F.2d 1084, 1088 (2d Cir. 1991). Bausch & Lomb imported the standard from the Seventh Circuit, which, in Eli Lilly & Co. v. Comm'r, 856 F.2d 855, 861 (7th Cir. 1988), held the clearly erroneous standard to be applicable. Eli Lilly in turn relied upon another Seventh Circuit case, Standard Office Bldg. Corp. v. United States, 819 F.2d 1371, 1374 (7th Cir. 1987), a tax case on review from the district court. None of these decisions mention 26 U.S.C. § 7482(a)(1), which has been a part of the Internal Revenue Code since 1954. In Standard Office Building, the Seventh Circuit indicated that one of the open questions in the appeal was "the kind of 'mixed' question of fact and law . . . that, in this circuit at least, is governed by the clearly-erroneous standard." Id. (emphasis added). That court then cited a handful of cases from their circuit that stated this standard from cases reviewing the decision of a district court. The Seventh Circuit uses the clearly erroneous standard of review for mixed questions of law and fact when reviewing both decisions of the Tax Court and those of the district courts. Its standard is thus not in tension with 26 U.S.C. § 7482(a)(1), unlike this Court's.

Tax Court Side-Steps a "Beard" Return Issue to Get to Equitable Estoppel (11/16/13)

In Reifler v. Commissioner, T.C. Memo. 2013-258, here, the Tax Court was presented with an interesting issue of whether a returned original joint return without the spouse's signature was the return for purposes of the statute of limitations when the taxpayers later filed a delinquent return without any notice to the IRS about the original return.  The Tax Court ultimately held against the taxpayers on the basis of equitable estoppel, but in the interim discussed an issue of whether the "tacit consent" rule permitting the treatment of an unsigned return to be a return under Beard.

The Tax Court's summary of the opinion is:

On or about Oct. 15, 2001, the extended due date for Ps' 2000 Federal income tax return, Ps submitted to R's Andover, Massachusetts, Service Center a joint Federal income tax return for 2000, signed under penalties of perjury by P-H, but not by P-W. Upon receipt, the service center date-stamped the return, made handwritten markings indicating a missing signature, and mailed the return back to Ps with a form requesting that P-W sign it and that Ps return it to the service center within 20 days. Ps did not mail back the 2000 return with P-W's signature to the service center as requested. On July 29, 2002, respondent issued a "Taxpayer Delinquency Notice" to Ps. In response, Ps submitted a second joint Federal income tax return for 2000. The second 2000 return was identical to the first except that it was signed by both Ps opposite a date of Aug. 25, 2002, and bore neither the Oct. 15, 2001, date stamp nor the service center's markings on the original return. It was received by the service center on Sept. 2, 2002. Beginning on July 1, 2005, R obtained from Ps a series of consents extending the period of limitations on assessment and collection for 2000 until June 30, 2010, a date after the May 17, 2010, issuance of the notice of deficiency covering Ps' 2000 tax year. Ps allege that those consents are invalid because the I.R.C. sec. 6501(a) period of limitations on assessment and collection with respect to Ps' 2000 Federal income tax expired on Oct. 15, 2004, three years after they filed the initial 2000 return. 

Held: Ps are estopped from raising the affirmative defense of the period of limitations with regard to any 2000 deficiencies; 2000 remains open for assessment and collection of Federal income tax.

By way of background on the Beard return issue not addressed in the TC summary, I offer the following excerpts from my Federal Tax Procedure Book (footnotes omitted):

Fourth Circuit Affirmance of Summary Judgment in TFRP case (11/11/13)

In Johnson v. United States, ___ F.3d ___, 2013 U.S. App. LEXIS 22444 (4th Cir. 2013), here, the Fourth Circuit affirmed summary judgment for the Government in a trust fund recovery (also called responsible person) penalty case.  That penalty is imposed by Section 6672, here.  Johnson is a good case to illustrate the potential sweep of this penalty, which is frequently encountered by tax controversy practitioners.

I call readers attention to an excellent blog discussion of Johnson.  See Matt Lee, Fourth Circuit Affirms Responsible Officer Penalty Against Wife for Husband’s Unpaid Employment Taxes (Blank Rome Tax Controversy Watch 11/8/13), here.  I want try to recreate the blog, so to speak.  Mr. Lee's blog entry is very good and detailed.  I do offer his conclusion:

The Johnson case illustrates that personal liability may be assessed against corporate officers where a company fails to pay over employment taxes, even if the corporate officer was unaware of the failure to pay in prior periods.  Once the corporate officer learns of the tax delinquency, he or she has a duty to ensure that corporate funds are used to pay off those liabilities.  If the corporate officer fails to do so, personal liability for those taxes may be asserted. 

One interesting feature is the following from the opinion (footnote omitted):

Subsequently, the IRS assessed trust fund recovery penalties (the "100% penalty") against Mr. and Mrs. Johnson individually, pursuant to 26 U.S.C. § 6672.8 Mrs. Johnson later paid $351.00 toward her assessed penalty. 

On March 30, 2009, Mrs. Johnson filed suit in the United States District Court for the District of Maryland seeking a refund of the penalty she had paid, asserting that the § 6672 assessment against her was erroneous. The Government filed a counterclaim against both of the Johnsons in order to reduce its assessments to judgment, seeking to recover the balance of assessments due, including penalties, interest, and costs. Based upon transcripts of account showing the balances due as of August 22, 2011, the Government ultimately sought to recover $304,355.90 from Mrs. Johnson and $240,071.12 from Mr. Johnson.

I have previously posted on the issue of how much needs to be paid to insure that Flora's requirements are met. See  Flora v. United States, 362 U.S. 145 (1960).  Readers desiring to read the blogs on that issue can do so by clicking the subject labels below for Flora Full Payment Rule and Divisible Tax.

Thanks to the bloggers at Procedurally Taxing, here, for the lead to Mr. Lee's blog entry.  And thanks to Mr. Lee for the entry itself.

Isley Brother (of Isley Brothers) CDP Case Decision with Tax Procedure Issues (11/11/13)

Earlier today, I posted a blog on the Federal Tax Crimes Blog, IRS Authority to Settle After Referral to DOJ Tax (11/11/13), here.  In that blog, I point readers to an excellent blog by Peter Reilly -- An Isley Brother In Tax Court - Does Tax Crime Pay (Forbes Taxes 11/10/13), here.  Peter discusses the recent decision in Isley v. Commissioner, 141 T.C. No. 11 (2013), here.  I refer readers to Peter's excellent discussion of the issues in the case.  In my Federal Tax Crimes Blog entry, rather than re-covering the ground that Peter does so well -- I urge readers to read his blog -- I focused on one aspect of the case that particularly interested me -- the application of Section 7122(a), here, that gives DOJ authority over compromises of criminal and civil matters that have been referred to DOJ.  I won't repeat my discussion here, but refer interested readers to that blog entry.

On John Doe Summonses and the Appearance of Impartiality - Unrelated Topics But Both Discussed (11/4/13)

I assign my Tax Procedure students the case of United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), here.  I contrast the case with United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), here.  The context is the John Doe Summons under Section 7609(f), here.  Briefly, the John Doe Summons is an IRS summons issued to a person within the summons power of the IRS for information or documents about unknown taxpayers -- hence John Doe -- as to whom the IRS believes and can show that there is a potential, not fanciful tax compliance issue within the scope of its investigative authority.  The John Doe Summons has been used in the offshore account area.  Here is the discussion of Tiffany Fine Arts and Gertner from my Federal Tax Procedure text (footnotes omitted).

The John Doe Summons procedures were designed to provide checks and balances.  But, the IRS often finds that the procedures slow it down.  The IRS must convince DOJ Tax, whose attorneys are plenty busy with other work, that it is worth going through the procedures to get the summons.  DOJ Tax must gear up and present the matter to a frequently skeptical and almost always overworked District Judge who must play devil's advocate to the Government's ex parte application for the summons.  Obviously, the IRS would much prefer just to use its administrative summons which has no such cumbersome steps.  

In United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), the Supreme Court blessed the IRS's use of the regular administrative summons rather than the John Doe summons where the target of the summons has transactions relevant to its tax liability which, if discovered, might also identify unknown third parties’ and be relevant to their tax liabilities.  The context there was a tax shelter promoter who sold the product to unknown third parties.  By allegedly investigating the promoter’s tax liability to support inquiries into whether it reported its income from those unknown third parties, the IRS could summons the information under the general administrative summons by meeting the minimal requirements of Powell. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure.  After Tiffany Fine Arts, the IRS saw the end-run around the John Doe Summons  procedures -- simply find a reason to audit the third party record-keeper such as the tax shelter promoter and find some pretext that obtaining the names of the third parties is relevant under the Powell standards to the audit of the record-keeper. 

In United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), which you should now read, a law firm filed a Form 8300 (currency transaction report) notifying the IRS that the law firm had received in excess of $10,000 in cash.  The form, however, failed to identify the taxpayer, asserting ethical grounds, the attorney client privilege and constitutional grounds. The IRS then issued a regular IRS summons to the law firm to produce the withheld information.  The IRS used the regular IRS summons as opposed to the John Doe summons on the ground the Supreme Court blessed in Tiffany Fine Arts -- i.e., that the summonsee's taxes were being investigated as well as the unknown taxpayer's taxes.  Analyzing the case under the Powell good faith standard, the district court concluded that the IRS's grounds for using the general summons -- i.e., that it was investigating the law firm's tax liability -- was pretextual, mere smoke and mirrors to achieve the real goal of investigating the unidentified taxpayer.  The Court of Appeals affirmed, noting importantly that the John Doe Summons procedure required advance court approval, a procedure the Government sought to avoid here on the pretext that it was after something more than the taxpayer's identity.  The Court of Appeals noted that the requirement of advance court approval could not be ignored by the IRS simply by chanting a litany based on Tiffany Fine Arts.

Readers may be aware of a very recent kerfuffle in the Second Circuit regarding a nontax issue where the Second Circuit took the highly unusual step of removing a federal district judge from a case in which the judge took the City of New York to task for, very generally, " improperly steering cases and commenting out of court."  The New York Times has a wonderful "Room for Debate" series of articles on the issues raised.  The series is titled "The Appearance of Impartiality" and may be viewed here.  One of the authors in the series is Nancy Gertner, who became a U.S. district judge herself after the skirmish in the case above.  So I thought I would post links to the series and Nancy Gertner's article here as an excuse to post the foregoing about the concepts of the John Doe Summons (hoping, of course, that those interested in the John Doe Summons might also have an interest in the Appearance of Impartiality).

Another Bullshit Tax Shelter Bites the Dust (10/23/13)

Here is yet another of the genre.  UnionBanCal Corporation v. United States , 113 Fed. Cl. 117 (10/23/13), here.

The first tip-off as to the Court's (Judge Allegra's) view of the shelter is in its opening quote:

“When does a taxpayer cross the fault line between the cheering fields of tax planning and the forbidding elevations of form over substance, far enough, at least, to require a transaction to be recharacterized for tax purposes? No map – statutory, regulatory or otherwise – precisely reveals this point of no return. Rather, . . . the judicial traveler [is] guided only by multi-factored analyses, balancing tests and other forms of ad hocery, which, if properly employed, serve hope that the terrain’s true character will be revealed.”

The quote, by the way, is from Principal Life Ins. Co. v. United States, 70 Fed. Cl. 144, 145 (2006). As an aside, Judge Allegra penned a subsequent Principal Life opinion that, in my view is fantastic and, hence I assign it to my Tax Procedure class to read.  Principal Life Insurance Co. v. United States, 95 Fed. Cl. 786 (2010)  Readers wishing to read this opinion can download my class materials here.  Judge Allegra's Wikipedia page is here.

The Court continues:

This case is about LILOs and, relatedly, SILOs. No, not the Disney character, mind you, nor anything remotely agricultural or martial. Rather, the LILOs and SILOs at play here are acronyms, given to so-called “lease in/lease out” and “sale in/lease out” transactions, respectively. In the world of Federal taxation, LILOs and SILOs are labyrinthine, leveraged-lease transactions in which United States taxpayers seek the tax benefits associated with the ownership of properties that the actual owners – owing to their tax-exempt status – cannot enjoy. Before such transactions were banned by Congress, a variety of prodigious assets owned by foreign corporations and government agencies were so leased – rail cars, hydroelectric plants, locomotives, public transit lines, cellular telecommunications equipment, sewer systems, to name a few – all with the same objective, namely, to take advantage of deductions that would otherwise be “wasted.”

We have this saying in parts of the South that a day without grits is a day wasted.  I guess the same notion that potential deductions captured in tax indifferent entities are deductions wasted.

I won't get into the labyrinth of the details of the shelter -- all  of these are wrapped with detailed to make their substance less visible.  I will give some key snippets penned in Judge Allegra's inimitable way:

The rent deductions taken here presuppose that UBC, via the Head Lease, possessed an ownership interest in the Pond. But is this so? To be sure, “[t]here is no simple device available to peel away the form of this transaction and to reveal its substance.” Frank Lyon, 435 U.S. at 576. On the other hand, as Burke once said, “[t]hough no man can draw a stroke between the confines of night and day still light and darkness are on the whole tolerably distinguishable.” And this is neither a hard case nor one of first impression.

Tax Court Announcement on Effect of Government Shutdown (10/21/13)

The United States Tax Court, here, has issued an announcement regarding the resumption of Tax Court operations after the Government Shutdown.  The announcement is here.  I think that, for most readers of this blog, the key part of the announcement relates to statutory filing deadlines during the shutdown.  The following is the announcement

Statutory Filing Deadlines 

The Court lacks authority to extend statutory filing deadlines imposed in the Internal Revenue Code (I.R.C.). For example, I.R.C. section 6213(a) provides that a taxpayer must file a petition with the Court to redetermine a deficiency within 90 days after the mailing of a notice of deficiency, and I.R.C. section 6330(d)(1) provides that a taxpayer must file a petition to review a determination involving a proposed lien or levy within 30 days after the mailing of the notice of determination. Hand-delivery to the Courthouse was not available during the period the Court was closed due to the Federal government shutdown. During that period, taxpayers were required to comply with the statutory deadlines by timely mailing petitions to the Court. Timeliness of mailing of the petition is determined by the United States Postal Service’s postmark or the delivery certificate of an approved private express delivery company.

The Code sections cited are 6213, here, and 6330(d)(1), here.  As I remind my students, Section 6213(a) is the key code section for the prepayment remedy afforded by the Tax Court.  That section kicks in provisions from other sections (such as suspension of the statute of limitations) to assure that prepayment remedy.  The key point here is that the petition for redetermination has be filed in the 90-day period from the date of the notice of deficiency.

Contesting Liability -- CDP, Audit Reconsideration and OICs for Doubt as to Liability (10/19/13)

Last week in my Tax Procedure Class, we covered Collections generally.  Subsets of collections that were covered were (i) audit reconsideration, (ii) offers in compromise and (iii) Collection Due Process (CDP) hearings.  Today, I write on a Tax Court order in Seifert v. Commissioner (T.C. No. 24735-12) Order dated 10/18/13, here, that in a short order covers key concepts for these three topics.

The taxpayers were assessed taxes in amounts that they claimed they did not owe.  Essentially, the IRS based its assessment on Form 1099 information of gross sales without reducing the gain for basis.   The taxpayers failed to contest the amounts after receiving a notice of deficiency.  So, the assessment on the allegedly excessive amounts was made.  When the IRS tried to collect, the taxpayers invoked the CDP procedures.  The Court rejected the taxpayers attempt to contest the merits of the amounts as follows:

Mr. Seifert asserts that "the sole subject" of this case is his contention that he does not actually owe the tax that the IRS is attempting to collect from him for 2007. That is, he challenges the asserted liability. We observe that it is a very plausible challenge, since gain on a sale must take into account the seller's cost. 

When Mr. Seifert received the notice of deficiency, he had an opportunity to challenge that liability in Tax Court. He could have presented evidence of his cost basis in the securities and, depending on his proof, could have seen his liability reduced or eliminated. But he did not do so. Consequently, the IRS's determination went unchallenged, and the IRS therefore had the right and the responsibility to assess and collect the tax it had determined. When the IRS undertook to collect the tax, then Mr. Seifert attempted for the first time to challenge that liability -- in the CDP hearing. 

However, under section 6330(c)(2)(B), Mr. Seifert may raise a challenge to the underlying liability as part of the CDP hearing only 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." But Mr. Seifert does not dispute that he did receive a notice of deficiency with respect to his 2007 liability. As a result, he is not permitted in the agency-level CDP hearing (nor in this judicial review of it) to challenge that liability.

But, as the IRS conceded and the Tax Court specifically observed, all is not lost to these taxpayers to achieve a fair result.  The Tax Court specifically said (emphasis supplied by JAT)

ORDERED that the Commissioner's motion for summary judgment is granted. However, Mr. Seifert is strongly encouraged to consider accepting the invitation of the Commissioner (made at pages 2-7 of his reply filed September 30, 2013) either to request audit reconsideration or to submit an Offer in Compromise based on Doubt as to Liability, outside of the CDP context.

A Not So Bullshit Tax Shelter -- Maybe; Its All in the Eye of the Beholder (10/18/13)

Today's blog addresses yesterday's decision from a very good judge, George A. O'Toole, Jr. of USDC MA (Wikipedia here).  The decision is Santander Holdings USA, Inc. v. United States, 2013 U.S. Dist. LEXIS 149441 (D MA 2013), here.  The tax shelter was the STARS shelter -- for "Structured Trust Advantaged Repackaged Securities".  (Where do they get these names from?).  The Judge holds, in effect, that the shelter was not so bullshit and not bullshit at all.  For holdings in the prior cases that the shelter was quite bullshit, see here.

The Santander arrangement was complex, a common feature of bullshit tax shelters designed to deflect attention and/or comprehension.  Judge O'Toole says:

Up close, however, the transaction was surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant. The government might be forgiven for suspecting that the designers of anything this complex must be up to no good, but that understandable instinctive reaction is not a substitute for careful analysis, and on careful analysis, the government's position does not hold up.

For more discussion of the transaction, I direct readers to the opinion for Judge O'Toole's summary explanation of the transaction (footnotes omitted):

A very brief overview of the transaction is sufficient for present purposes. Sovereign created a trust to which it contributed $6.7 billion of income generating assets. The trustee of the trust was purposely made a U.K. resident, causing the trust's income to be subject to U.K. income taxation at a rate of 22 percent. The trust income was also subject to U.S. income taxation and was attributed to Sovereign, but  with a credit available for the amount paid in U.K. income taxes under section 901 of the Internal Revenue Code ("the Code"). 26 U.S.C. § 901. Sovereign paid U.K. taxes and then claimed credits for the amounts paid in calculating its U.S. income tax liability for the tax years in question. 

The transaction included a number of contrived structures and steps that, each viewed in isolation, would make little or no sense. For example, Barclays had an ownership interest in the trust and as a result received monthly distributions from the trust, which, under the terms of the transaction, it was required immediately to re-contribute to the trust. Standing in isolation, this circular movement of distributions would make no sense. In the context of the entire transaction, however, it was crucial to Barclays' obtaining favorable tax treatment under U.K. law, which gave it the ability to lower its effective lending rate to a U.S. bank. The result of the STARS transaction for Barclays was a net tax gain, which it was able to use to reduce other U.K. tax liabilities that it owed. 

The loan aspect of the transaction was also highly structured in an idiosyncratic way, although it was consistently treated by Sovereign for accounting and regulatory purposes as a secured loan, acceptably to regulating agencies, including the Securities and Exchange Commission and the Office of Thrift Supervision. One feature of the loan arrangements was what was denominated the "bx payment," or the "Barclays payment." It was calculated as approximately one-half of the amount Sovereign paid in taxes to the U.K. on the income earned by the trust. While in the intricacies of the transaction it was actually a monthly credit to Sovereign figured into its interest costs, the government refers to it as an affirmative payment in support of its "effective rebate" argument, and Sovereign accepts that characterization for purposes of this motion.

Is the Tax Court Constitutional? (10/16/13)

My fellow tax procedure bloggers over at the Procedurally Taxing Blog have posted this item.  Potential Storm Over Removal Power of Tax Court Judges (Procedurally Taxing Blog 10/16/13), here.  It is not often that credible (not necessarily the same as winnable or persuasive) constitutional issues are presented in tax cases, so maybe we should savor them when they come along.  This particular issue is interesting.  I cannot speak to whether it is winnable or persuasive.

So what is it about?  The specific argument is in the context of the statute permitting the president to remove a Tax Court judge for cause.  See Section 7443(f), here. Quoting from a law review article (co-authored by a colleague), the complaint seems to be:

This cross-branch removal power confers upon the President a power to control those officers and threatens the independent exercise of the judicial power. This mixing of judicial and executive authorities violates a basic separation-of-powers maxim and courts the attendant danger of tyranny (citations omitted).

The Government argues that there is a judicial-type role for the Tax Court outside Article III, which could include the power to terminate judges for cause.

In conclusion, the blog states:

The government is urging the DC Circuit to adopt a rationale that that the majority declined to adopt in Freytag [a prior case about the role of Special Trial Judges in the Tax Court], that is, Justice Scalia’s approach that the Tax Court is not exercising judicial power in the constitutional sense of the term.  If the DC Circuit reaches the issue, we may see the Supreme Court once again wrestling with the fundamental nature of the Tax Court’s place in our governmental system.

Well, I probably have muddied the issue up, so I will quit.  At least, I hope readers can ask the right questions even if I don't provide the answers.

I wonder, though, whether there is a straightforward larger issue here.  The issue may be presented in a type of syllogism.  The Constitution exclusively vests judicial power Article III courts.  The Tax Court, which is not an Article III court, exercises judicial power.  It is, therefore, unconstitutional.

And, I think there have to be issues swirling around all of this.  If the Tax Court is really exercising Executive Branch authority rather than Judicial Authority, are the everyday judicial authority analogs used for the Tax Court's role appropriate.  For example, is it appropriate to treat, on appeal, Tax Court decisions the same as district court judgments -- e.g., review for clear error.  Alternatively, since Tax Court decisions are authority in other cases, should the review be a type of Chevron review?  I know you are asking by now what, exactly, am I smoking?  Well, nothing, but I do think I need a cup of coffee.

Addendum 10/16/13 6:30 pm:

On Qualified Amended Returns and Avoiding Amnesty Penalty Costs (10/16/13)

I picked up today a recent post on the Tax Appellate Blog, Miller & Chevalier's offering to the world on things tax (at least the appellate subset of things tax).  Miller & Chevalier is a premier tax firm (see website, here) and through the Tax Appellate Blog pundits in this area.  The particular blog to which I direct my attention is this one:  Oral Argument Scheduled in Bergmann (Tax Appellate Blog 10/15/13), here.

Now, what is Bergmann about such that anyone other than the Bergmanns and the Government should even care about oral argument in the case?  First the background.  From my Federal Tax Procedure book (with bold face emphases on the particularly relevant portions):

2. Penalty Base - Tax Understatement; Qualified Amended Return (“QAR”). 

The accuracy related penalties apply a penalty rate (20% or 40%) to a penalty base which is the tax underpayment.  If a taxpayer reports $100 of tax and upon audit is determined to have owed $150, the underpayment is $50.  Some portion or all of the underpayment may be subject to the accuracy related penalty. 

I mentioned earlier in discussing amended returns that there is a special category of amended return called a qualified amended return (“QAR”).  The QAR permits a taxpayer to treat the amount of tax reported on the QAR as the tax reported on an original return so that the accuracy related penalty will not apply.  In the example above, if the taxpayer files a QAR reporting the correct $150 tax liability after reporting only $100 on the original return, the reporting of the correct $150 liability will avoid the accuracy related penalty.  QAR relief does not apply, however, as to the amounts originally underreported attributable to fraud.\ 

What are the circumstances in which the taxpayer may achieve the benefit of the QAR?  A QAR is an amended return filed after the original due date of the return (determined with extensions) but before any of the following events: (i) the date the taxpayer is first contacted for examination of the return; (ii) the date any person is contacted for a tax shelter promoter examination under § 6700; (iii) as to a pass-through entity item, the date the entity is first contacted for examination; (iv) the date a John Doe Summons is issued to identify the name of the taxpayer; and (v) as to certain tax shelter items, the dates of certain IRS initiatives published in the Internal Revenue Bulletin.  Undisclosed listed transactions are excluded.   

The QAR is a formal procedure to achieve a result in the civil penalty arena that a “voluntary disclosure” – often effected by amended return(s) – does in the criminal tax enforcement arena in generally the same relevant equitable circumstance – i.e., the IRS has not yet started a criminal investigation against the taxpayer or a related proceeding (e.g., § 6700 investigation or John Doe Summons) likely to lead to the taxpayer.  These programs that permit taxpayers to avoid penalties – civil in the case of a qualified amended return and criminal in the case of the voluntary disclosure practice – are designed to encourage taxpayers to get right voluntarily with the IRS.  The programs produce significant additional revenue that might otherwise escape the IRS net; in the circumstances, foregoing the penalties is consistent with overall revenue enforcement policies.  I discussed the criminal voluntary disclosure policy earlier in this book. 

Litigating Trust Fund Recovery Penalties -- the Flora Rule, Divisible Taxes and Unfairness (10/11/13)

UPDATE, most of the discussion below is still good, but Judge Wheeler of the Court of Federal Claims issued a new opinion going the opposite way and finding jurisdiction.  I posted a blog entry on the new opinion on 1/29/14.  See Revised Opinion in TFRP Case Involving Flora Full Payment Requirement (Federal Tax Procedure Blog 1/29/14), here.

Tax procedure enthusiasts will know the venerable Flora Rule, sometimes referred to as the Flora rule, after the case of Flora v. United States, 362 U.S. 145 (1960).  The following is a cut and paste of my explanation of this rule in my Federal Tax Procedure book (footnotes omitted):

In order to file a claim for refund and then sue for refund, the taxpayer must be able to assert that he or she overpaid taxes.  The critical question has been how much the taxpayer must pay in order to assert an overpayment.  The historical answer was that the taxpayer must have fully paid the assessment (which includes penalties and interest) in order to bring a refund suit.  This is referred to as the prepayment requirement which tax practitioners sometimes refer to as the Flora rule, after the Supreme Court case, Flora v. United States, 362 U.S. 145 (1960). 

Why is a prepayment rule important?  As the Supreme Court in Flora viewed the history and fabric of the procedures Congress adopted for tax litigation, any other rule would be counterproductive to those procedures.  Congress created the Tax Court as the forum for litigating most tax controversies.  The Tax Court is a prepayment judicial forum, and is the only prepayment judicial forum we have for resolving the merits of tax liabilities (excepting of course collection suits in the district courts).  If the IRS could assert a deficiency of, say, $100,000 and the taxpayer could get a prepayment remedy simply by paying $1 against the assessment that follows, the taxpayer could effectively turn the district courts into a prepayment forum. 

Of course, this highlights one of the problems with the prepayment rule.  A taxpayer who does not have the money to pay (the $100,000 assessed amount in the above example) doesn't really have a choice.  He or she must pursue the prepayment remedy in the Tax Court.  Is that fair?  Do citizens get better choices solely because they have substantial resources?  That is a policy question, and of course the answer is yes (just as substantial resources open up better and more choices throughout the law and life). 

Many authorities and commentators felt that Flora required full payment of not only the principal amount of tax liability, but also any penalties and interest assessed by the IRS.  This, of course, makes the cost of entry to refund litigation more expensive, particularly if distant years are involved where the interest can be more than the tax or penalties.  It is not unusual in tax cases involving old years to have the interest alone, because of the passage of time, cause the total bill with interest to triple or quadruple the principal amount involved.  With this “cost” of refund litigation, many taxpayers are forced to pursue the Tax Court route if it is available to them, as it is when income tax, estate and gift tax and certain types of miscellaneous tax liabilities are in dispute. 

As you can see, one of the issues is whether it is fair to force litigation into the Tax Court simply because the taxpayer is not rich.  (OK, that is a bit of hyperbole, but makes the point.)  And, some taxes and penalties like the TFRP cannot even get to the Tax Court (except late in the process via a CDP hearing, which is a relatively recent development). Accordingly, as I note in the book, the Courts have developed the divisible tax concept to mitigate some unfairness in the Flora rule.  The divisible tax concept (again from my book with only one footnote quoted) is:

IRS Information on Operations During Government Shutdown (10/10/13)

The IRS has a website advising of operations during the shutdown.  See IRS Operations During The Lapse In Appropriations, here.  Here are some key points for readers:

• All tax filing, tax payment and other deadlines remain in effect.  The individual returns on extension to 10/15 must be filed timely.
• Tax refunds will not be issued.
• Taxpayer services other than web site are generally not available.
• "IRS is not sending out levies or liens."  (Don't know what they mean by sending out the lien; the lien arises by operation of law when the notice of assessment and demand for payment is mailed and the taxpayer fails to pay; perhaps what they mean is the notice and demand.)

IRS Not Liable for Opening FBAR Investigation Based on Return Information Subject to Section 6103 (10/4/13)

In Hom v. United States, 2013 U.S. Dist. LEXIS 142818 (ND CA 9/30/13), the taxpayer brought suit for damages for alleged IRS violations of Section 6103.  The amount of damages sought was "$40,874,000 in damages and "at least" $500,000 in punitive damages."  The claim was that the IRS was conducting an IRS examination and, based on information discovered in the IRS investigation, improperly opened an FBAR investigation without authority or making the determination required to do so.  I quote the court's entire analysis:

1. Unauthorized Disclosure Under Section 6103. 

Plaintiffs are authorized to file this suit under 26 U.S.C. 7431. Plaintiffs argue that, under 26 U.S.C. 6103, the use of information discovered in the tax return investigation cannot be used for an FBAR investigation. Section 6103(a) states: 

[r]eturns and return information shall be confidential, and except as authorized by this title —
(1) no officer or employee of the United States . . . shall disclose any return or return information obtained by him in any manner in connection with his services as such an employee or otherwise or under the provisions of this section . . . .

Defendant's motion to dismiss argues that Section 6103(h)(1) provides an exception that allows such a disclosure:

[r]eturns and return information shall, without written request, be open to inspection by or disclosure to officers and employees of the Department of the Treasury whose official duties require such inspection or disclosure for tax administration purposes.

Tax administration is defined as "the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws or related statutes . . . and includes assessment, collection, enforcement, litigation, publication, and statistical gathering functions under such laws, statutes, or conventions." 26 U.S.C. 6103(b)(4). 

Thus, the issue here is whether Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure permissible). The United States argues that Section 5314 is a "related statute" under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for Section 5314 to fall under "tax administration." See Staff of Joint Comm. on Taxation, 108th Cong., General Explanation of the Tax Legislation Enacted in the 108th Congress, 378 (Comm. Print 2005) ("The Congress . . . believed that improving compliance with this reporting requirement is vitally important to sound tax administration . . ."). Section 5314 is therefore a related statute under Section 6103 and the disclosures at issue in this action were lawful. 

Plaintiffs' opposition argues that the IRS did not follow the proper procedure pursuant to the Internal Revenue Manual ("IRM") Sections 4.26.17.2 and 4.26.14.2.2. The IRM states: "[w]ithout a related statute determination, Title 26 information cannot be used in the Title 31 FBAR examination. Any such use could subject the persons making the disclosure to penalties for violating the disclosure provisions protecting Title 26 return information." IRM 4.26.17.2(1)(G). Plaintiffs argue that defendant IRS failed to properly obtain a related statute determination because they did not follow the stated procedure for doing so. 

Plaintiffs' argument fails because the IRM holds no legal significance. Our court of appeals has held that "[t]he Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers." Fargo v. Comm'r of Internal Revenue, 447 F.3d 706, 713 (9th Cir. 2006). Even assuming that the IRS did not follow its own procedures, plaintiffs have no claim for relief. 

Plaintiffs also argue that the IRS reports contained false statements and that these false statements are "actionable" under Section 6103 of Title 26. In support of this argument, plaintiffs cite Aloe Vera v. United States, 699 F.3d 1153 (9th Cir. 2012). Aloe Vera is not dispositive here because that decision analyzed the disclosure under Section 6103(k)(4), which exempts information that is authorized by treaty. Id. at 1163. The treaty in Aloe Vera authorized the disclosure of "pertinent" information. The court in Aloe Vera held that "knowingly false information" could not be pertinent under the treaty. Id. at 1163-64. Aloe Vera is irrelevant here because neither Section 6103(k)(4) nor the treaty are at issue.

Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (10/3/13)

In BASR Partnership et al. v. United States, 113 Fed. Cl. 181 (2013), here, the Court of Federal Claims (Judge Susan G. Braden), in a partnership TEFRA proceeding, held that Section 6501(c)(1), here, required the taxpayer's fraudulent intent in order for the unlimited statute of limitations to apply.  In so holding, the Court rejected the reasoning and holding of Allen v. Commissioner, 128 T.C. 37, 40 (2007), here, and of the Second Circuit in City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013), here.  (Note:  I think the is Judge Braden's bottom-line holding, although one has to work through the TEFRA context and special Section 6229 rules to get there; see the TEFRA summary at the end of the blog.)

In BASR, the partnership reported a fraudulent tax shelter item that, under the partnership reporting rules found its way to the ultimate taxpayer's returns in a way that was less visible to the IRS.  Apparently in order to test the legal position that Section 6501(c)(1) applied at the partnership level solely by virtue of the return finding its way to individual taxpayer's return, the IRS did not urge that the taxpayers signing the ultimate returns had the required fraudulent intent.  Hence, the only issue was whether the reporting of a fraudulent item on the ultimate taxpayers' returns was alone sufficient to invoke Section 6501(c)(1).

The statutory text at issue is as follows (Section 6501(c)(1)):

(1) False return. -- In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

Textually, there is no requirement that the requisite intent be the taxpayer's intent.  Read literally, therefore, fraud on the return will invoke Section 6501(c)(1).  Essentially, that is the holding of the Judge Kroupa in Allen.  Judge Kroupa in Allen just could not find any other persuasive interpretive sources that could permit her to say that the statute should be read to limit the "intent" to the taxpayer's intent.

A literalist or strict constructionist such as Justice Scalia would, I project, have reached the same conclusion as Judge Kroupa.  The statute appears plain on its face and contains no explicit or implicit ambiguity regarding who must be the author of the fraud that is on the return.

The question is whether there are other sources for interpretation that would permit a court to hold that a limitation that it be the taxpayer's fraudulent intent can be read into the text (meaning, I supposed, that the text is not so plain when the other sources are consulted).  When and how courts undertake such an extra-textual inquiry is a broad subject in the law, so I cannot do little more than say that it is undertaken if the reviewing court finds the text itself not to be plain.  It all depends upon what plain is.  That is the process that Judge Braden undertook.

Judge Braden started her analysis with Section 6501(a) which states the general rule that the assessment statute of limitations is three years from the date the return is filed.  Judge Braden noted the following text in Section 6501(a) that the return in question is  "the return to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer received an item of income gain, loss, deduction, or credit)."  In other words, for example, a partnership return does not affect the application of Section 6501(a) to the partner's return even though the partner reports partnership items.  That is an unstartling proposition.

SCOTUS Blog on Woods Supreme Court Case on Basis Overstatement Penalty (10/3/13)

The SCOTUS Blog has a nice write up on United States v. Woods (Sup. Ct. No. 12-562), here, set for argument on October 9.  The case involves the Section 6662(e), here, substantial basis overstatement 20%/40% penalty.  The statutory text is:

(e) Substantial valuation misstatement under chapter 1
  (1) In general. For purposes of this section, there is a substantial valuation misstatement under chapter 1 if—
     (A) the value of any property (or the adjusted basis of any property) claimed on any return of tax imposed by chapter 1 is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be), * * * *

The author thinks that the argument may not be as dry as its tax subject might suggest at first blush.  I think that the author is enamored of the lawyer for the taxpayer in the case.

The objective facts is that the current circuit split is 8-2.  And, even judges within the 2 minority circuits have questioned the validity of those circuit's minority holding.  While the Supreme Court does not just pick the majority circuit holding, that large a split has to have some effect.

And, of course, the merits seem to me to be in the Government's favor.  Congress clearly intended the penalty to apply to basis overstatements.  The genre of tax shelters in which these cases arise clearly have egregious basis overstatements.  Why should the penalty not apply just because the shelters were so bad that they would fail on any number of grounds other than basis overstatement.  At the end of the day they had basis overstatements.  The penalty should apply, in my judgment.

Justice Oliver Wendell Holmes on Profusion of Pages, Briefs and Arguments in Briefs (10/2/13)

This snippet appeared on the Legal History Blog -- Dan Ernst, Something to Remember When Reading a Holmes Opinion (Legal History Blog 10/2/13), here:

The quote is from Erwin Griswold [Wikipedia entry here], former Solkictor General of the U.S., Dean Harvard Law, and renowned tax expert (from Wikipedia, "He became an expert at arguing tax cases before the Supreme Court, and is considered one of the great scholars in tax law."  Dean Griswold remembers a conversation with Justice Oliver Wendell Holmes [Wikipedia entry here], a giant himself, as follows:

“As we went into his room he took a great big thick brief and threw it in the wastebasket,” Griswold recalled.  Holmes said, “‘147 pages long, I don’t read ‘em when they’re that long and I don’t care who knows it either.'  And then he said, ‘I don’t see why lawyers do the things they do.  First they make the point and then they put it in black letters and then they repeat it and then they put it in italics and then they say it again and then they put it all capital letters.’  He said, ‘I don’t see why they write it the way the Germans do, with emphasis and reiteration.  I don’t see why they don’t . . . suggest something and leave it to our imagination, like a questionable French novel.’”

Oliver Wendell Holmes also said “Taxes are what we pay for civilized society.”  Compania de Tobacos v. Collector, 275 U.S. 87, 100 (1927) (dissenting).