Deja Vu All Over Again (1/24/13)

The U.K. Supreme Court held that "Advice by accountants cannot be kept secret in the same way that legal counsel is confidential."  See Estelle Shirbon, Tax advice not secret like legal counsel, UK court rules (Reuters 11/23/13), here.

I use the famous Yogi Berra quote (Wikipedia entry here) as the title of this article, but the U.S. has been through this fight before and reached the same result.

I offer the following on the U.S. rule from the most recent draft of my Federal Tax Procedure book (footnotes omitted):

The Courts have resisted expanding the common-law privileges that are available even when strong policy arguments are made that privileges should be available.  Courts thus routinely reject the existence of an accountant/client privilege even though one may exist under state law.  Couch v. United States, 409 U.S. 322 (1973).  In United States v. Arthur Young & Co., 465 U.S. 805 (1984), the IRS issued a summons to the taxpayer's independent certified public accountants to obtain the information and documents behind the tax reserve reported on the taxpayer's certified financial statements.

At this point, I should explain generally the jargon that helps explain the law and IRS policy and practice in this area.  Publicly held companies prepare and file public financial statements that report the financial results of their operations for a period.  The financial statements include a profit and loss statement for a period (a year period for the major filings), as well as an ending balance sheet, and extensive notes to assist in making the statements comprehensible.  In reporting a result for the period, a company must accrue liabilities that arose during the period and, on the ending balance sheet, must show any accrued but unpaid liabilities.  Under financial accounting standards, reserves for federal income tax liabilities must be accrued and reserved in certain cases.  Specifically, with respect to tax planning that might otherwise be reflected as a benefit on the financial statements, reserves must be accrued to reflect the probability that the benefits may not be ultimately sustained.  In making a decision whether and how much to reserve for such unpaid potential liabilities, a company internally will prepare workpapers that back up its decisions.  Similarly, when the independent auditor then attests the financial statements, the auditor prepares audit workpapers that back up the attestation.  The company’s and the auditor’s workpapers underlying that type of liability or reserve are called “tax accrual workpapers” or some variation of that term.  The tax accrual workpapers should be distinguished from the “tax reconciliation workpapers” which reconcile the financial reporting to the tax return.  The tax reconciliation workpapers are not audit workpapers, because they are not prepared by the company in making the financial statements or by the independent accountants in attesting them.

Tax Court Applies Willful Blindness to Find Civil Fraud by Clear and Convincing Evidence (1/19/13)

I have posted a discussion on this topic on my Federal Tax Crimes blog.  The title is the same, Tax Court Applies Willful Blindness to Find Civil Fraud by Clear and Convincing Evidence (1/19/13), here.  That gravamen of my discussion is that (i) in Fiore v. Commissioner, T.C. Memo. 2013-21, the Tax Court applied the criminal law concept of willful blindness to find that the IRS had proved civil fraud to hold the taxpayer liable for the civil fraud penalty under Section 6663; and (ii) the Court's discussion of the concept of willful blindness is confusing.  Since willful blindness is a criminal law concept that certainly is not -- at least not yet -- mainstream in its application to the tax civil fraud discussion, I do not repeat the discussion here and just review readers to the discussion.

Is the Timely-Mailing, Timely-Filing Statute Exclusive (1/19/13)

In Stocker v. United States, 705 F.3d 225 (6th Cir. 2013), here, the Sixth Circuit applied its precedent in holding that the statutory time-mailing, timely-filing rule in Section 7502, here, is the exclusive exception to actual timely filing requirement for returns and similar documents.  Here is the key holding with the circuit split noted in the footnote and even quoting the Sixth Circuit's expressed prior reservations about its precedent.

Nonetheless, the Stockers insist that the two methods set forth in § 7502 for establishing timely filing are not the sole avenues of proof for overcoming the physical delivery rule, and that taxpayers remain free to prove timely filing through other means.  This contention, however, runs directly counter to our decision in Miller, in which we expressly held that "the only exceptions to the physical delivery rule available to taxpayers are the two set out in section 7502." 784 F.2d at 731. In that case, the plaintiff sought to rely on an affidavit from his attorney stating that he had timely sent a claim for a refund by ordinary mail, but the IRS had no record of ever receiving this claim. Because the plaintiff could not produce a postmarked envelope that could confirm the timely filing of his claim, and because this claim had been sent by ordinary rather than registered or certified mail, we found that "the exceptions in section 7502 do not apply to the filing of [the plaintiff's] refund claim." Id. at 730. We then rejected the plaintiff's contention that the two exceptions set forth in § 7502 merely created "safe harbor[s]" to which a taxpayer could appeal "without question, while not barring him from relying on other exceptions created by the courts." Id. Instead, we elected to follow the decisions of other courts holding that the "exceptions embodied in [§ 7502] [a]re exclusive and complete." Id. at 731 (following Deutsch v. Comm'r, 599 F.2d 44, 46 (2d Cir. 1979), and other cases cited therein). n5
   n5 As noted by the Stockers, there is a circuit split on this issue, with other circuits having concluded that § 7502 does not altogether displace the common-law rules, such as the mailbox rule, that the courts have invoked to determine whether a tax return or other document has been timely filed with the IRS. See, e.g., Philadelphia Marine Trade Ass'n — Int'l Longshoremen's Ass'n Pension Fund v. Comm'r, 523 F.3d 140, 150 (3d Cir. 2008) (reasoning that Congress's intent in enacting § 7502 "was to supplement, not supplant, [the] means by which taxpayers can timely file documents with the IRS"); Anderson v. United States, 966 F.2d 487, 491 (9th Cir. 1992) ("[W]e decline to read section 7502 as carving out exclusive exceptions to the old common law physical delivery rule."). We, of course, are bound to adhere to this Circuit's resolution of this issue in the published Miller decision. See Carroll v. Comm'r, 71 F.3d 1228, 1232 (6th Cir. 1995) (expressing reservations about the ruling in Miller but confirming that it "remain[s] good law in the Sixth Circuit").

IRS Nonacquiesces in Holding that Uncertainty in Law is Factor in Penalty Defense (1/19/13)

In AOD 2012-05, IRB 2013-7  (2/11/13), here, the IRS announced nonacquiescence as to the holding in Patel v. Commissioner, 138 T.C. No. 23 (2012), here, that "the uncertain state of the law, without a finding regarding a taxpayer's efforts to determine the state of the law, is a factor in determining whether a taxpayer has demonstrated reasonable cause and good faith for purposes of avoiding the accuracy-related penalties."  The AOD Is short, so I quote the discussion section in its entirety:

Taxpayers Upen G. and Avanti D. Patel purchased property in Virginia in 2006 with the intention to demolish the house on the property and construct a new one. Taxpayers' real estate agent informed them that the local fire department had a program through which the fire department acquired houses for purposes of conducting training exercises by burning the houses and extinguishing the fires. Taxpayers completed all of the necessary paperwork to participate in the program, and hired a construction company to remove the remaining debris. In October 2006, the fire department conducted training exercises and destroyed the house on taxpayers' property. Taxpayers claimed a noncash charitable deduction of $339,504 for the claimed contribution of the property to the fire department. The Commissioner disallowed the deduction and determined an income tax deficiency and accuracy-related penalty under section 6662. 

In the Tax Court, the Commissioner filed a motion for partial summary judgment that taxpayers were not entitled to the charitable contribution deduction and were liable for the accuracy-related penalty on the alternative grounds of negligence or substantial understatement of income tax. In response to the motion, taxpayers denied their liability for the tax and penalty, stating that they had complied with the law and, with respect to the penalty, had acted with reasonable cause and good faith by relying on Scharf v. Commissioner, T.C. Memo. 1973-265. In a reviewed opinion, the Tax Court granted the Commissioner's motion on the contribution issue, but did not uphold the penalty, finding that taxpayers fell within the "reasonable cause exception" under section 6664(c). In determining that taxpayers were not entitled to the charitable deduction, the court found that any reliance on Scharf was "unfounded." The court previously held in Rolfs v. Commissioner, 135 T.C. 471, 487 (2010), aff'd, 668 F.3d 888 (7th Cir. 2012) that the Scharf standard was superseded by the quid pro quo standard for charitable deductions articulated by the Supreme Court in United States v. American Bar Endowment, 477 U.S. 105, 118 (1986). Significant also was the fact that Congress amended section 170 to disallow a deduction for contributions of partial interests in property, such as that in Scharf, for contributions made after 1969. Although finding reliance on Scharf was "unfounded," the court held that taxpayers acted with reasonable cause and good faith "given all the facts and circumstances, including the uncertain state of the law" and, accordingly, taxpayers were not liable for the section 6662 penalty. Slip. op. at 39.

Summary of the Innocent Spouse Provisions (1/19/13)

In Wilson v. Commissioner,  705 F.3d 980 (9th Cir. 2013), here, the Ninth Circuit held that the Tax Court review of the IRS's denial of innocent spouse relief under Section 6015(f), here, is de novo, so that new matters raised for the first time before the Tax Court may be considered.  The Court rejected the Government's argument that, as a review of the IRS's exercise of discretion, the review should not be de novo but for abuse of IRS's discretion on the basis of the administrative record provided to the IRS to use in the exercise of its discretion.   There is a dissent in Wilson that, properly construed, the review should be based on the administrative recorrd.

The Tax Court holds that review is de novo, and has now been sustained in that holding Wilson and the other other circuit to address the issue.  Commissioner v. Neal, 557 F.3d 1262 (11th Cir. 2009).  Wilson offers a good analysis of the statutory interpretation analysis the Court used to reach that interpretation.  I commend the decision to readers who are interested in statutory interpretation.

I blog this case principally because of its summary of the history and current status of the innocent spouse provisions (including administrative processing) currently appearing in Section 6015, here.  Here is that summary (footnotes omitted)

Thousands of citizens each year discover to their surprise that they are liable for their former spouse's tax debt. Most of them are recently divorced, separated, or widowed women. Many are victims of domestic abuse, whose ability to review or correct a joint return before it is filed is impaired. A substantial number are low-income, single parents. 

Congress has not turned a blind eye to this situation, and the legislative history of its response is important to our understanding of the Tax Court's role. 

Before 1918, each spouse was required to file a separate return. In 1918, Congress first permitted married couples to file a joint return, and in 1921 clarified that the tax on a joint return was to be computed on aggregate income. Shortly thereafter, the Internal Revenue Service ("IRS") took the position that each spouse was individually responsible for the entire tax debt. However, we rejected that joint and several liability interpretation in 1935 and held that the IRS should apportion tax liability on the basis of each spouse's respective income. Cole v. Comm'r, 81 F.2d 485, 489 (9th Cir. 1935). Congress legislatively overruled Cole in 1938, adopting the IRS theory of joint and several marital tax liability, and in 1948 created a separate tax schedule for joint returns.

TFRP Refund Suits - How Much Must be Paid (1/18/13)

I write today on the Government's position -- pressed only once that I am aware of and not accepted or specifically rejected by any court that I am aware of -- that the Trust Fund Recovery Penalty (TFRP) (and any other divisible tax) must meet the Flora full payment rule for each assessed quarter.  For the TFRP, because of the divisible tax concept, only one employee's tax must be paid for a quarter.  But, practitioners filing a TFRP refund suit should consider the impact of the Government's argument should it continue to press it.  I have previously written on the case, but addressed the issue toward the end of that blog entry.  Ah, the Flora Full Payment Rule Raises Its Ugly Head (Federal Tax Procedure Blog 1/16/13), here.  I have decided to present the issue as a separate blog entry because TFRP refund suits are very common; if the Government is correct, the position could require dismissal of the refund suit if the minimum payments are not made for each quarter.

I present the issue by cutting and pasting my revised discussion in my Federal Tax Procedure book and now offer the following excerpts that she the background for the issue and the Government's argument (most footnotes omitted):

The TFRP is generally litigated in refund suits in either the district court or Court of Federal Claims.  There is no “ticket to the Tax Court” (notice of deficiency) in TFRP cases. Denial of access to the Tax Court -- which is a prepayment forum for litigating liability -- can have a harsh effect.  The Flora rule requires in tax refund suits that the tax must be fully paid before the taxpayer may file a refund suit.  It is not unusual for trust fund penalties to be quite large and thus prohibitive if the Flora rule were to apply full bore.  Fortunately, the due process issues – and certainly general fairness issues – that might otherwise inhere in the full bore application of the Flora rule are avoided by two procedural techniques -- one statutory and the other non-statutory -- that permit the putative responsible person to litigate the liability without payment of the entire amount.

Tax Lien Against Shareholder Prevails Against Creditor of His Single Member LLC (1/17/13)

In Berkshire Bank v. Town of Ludlow, MA, 708 F. 3d 249 (1st Cir. 2013), here, the First Circuit affirmed the district court's grant of priority to the IRS for its tax lien.  The facts may be summarized as follows.

An individual was a real estate developer.  He got a bank loan commitment for himself or "nominee," but requiring him to guarantee the loan if to a nominee.  I think this was simply to permit him to operate through an LLC which he then formed.  The LLC was a single member LLC with the individual as "owner, resident agent, and manager," and with the business address as his home address.  The resulting loan was to the LLC, with the individual guaranteeing the loan.

The individual thereafter incurred tax liabilities which he did not pay.  The development ran into financial difficulties, whereupon the loan became delinquent.  The IRS filed notice of federal tax lien against the individual (but not the LLC) in March 2009.

In August 2010, the bank foreclosed and sold the LLC's assets for an amount sufficient to pay the outstanding loan, leaving $92,703.94 surplus proceeds.  Apparently, since the loan was to the LLC and the foreclosed property was titled to the LLC, the bank held the surplus proceeds for the LLC.

The bank then interpled the surplus proceeds, naming the IRS, the Town of Ludlow (a judgment creditor who had obtained its judgment against the LLC in June 2010), another judgment creditor (who dropped out of the contest when the case was removed to federal court), and the LLC which disclaimed an interest.  So, as it was finally tried, the contestants were (i) the U.S. which had a tax lien against the individual and a notice of tax lien filed on the individual in March 2009 and (ii) the Town of Ludlow which had a judgment lien against the LLC dated June 2010 against the LLC.

Ah, the Flora Full Payment Rule Raises Its Ugly Head (1/16/13)

In Roseman v. United States, 2013 U.S. Claims LEXIS 2 (2013), here, a nonpublished opinion and order, the Court of Federal Claims (Judge Allegra) dismissed the taxpayer's trust fund recovery refund suit for failure to meet the prepayment requirement for refund suits.  This just applies the so-called Flora rule (see Flora v. United States, 362 U.S. 145, 150 (1960)) that a refund suit requires full payment, a rule that is mitigated in so-called divisible tax cases to require only the payment for one such divisible tax.  I explain this below, but first address the Rosenman opinion.

The body of the opinion is short, but a good reminder for practitioners and their clients:

Jurisdiction in this tax refund suit lies, if at all, under 28 U.S.C. § 1491(a)(1). n2 As a general rule, before bringing a refund suit, a taxpayer must, inter alia, pay his or her full tax liability. See Shore v. United States, 9 F.3d 1524, 1526 (Fed. Cir. 1993) (citing Flora v. United States, 362 U.S. 145, 150 (1960)); see also Ledford v. United States, 297 F.3d 1378, 1382 (Fed. Cir. 2002). This rule, however, does not apply to so-called divisible taxes, including the penalty under section 6672. Rather, "a taxpayer assessed under section 6672  need only pay the divisible amount of the penalty assessment attributable to a single individual's withholding before instituting a refund action." Boynton v. United States, 566 F.2d 50, 52 (9th Cir. 1977); see also Steele v. United States, 280 F.2d 89, 90-91 (8th Cir. 1960). n3 Courts have held that this requirement is satisfied where a plaintiff pays the penalty attributable to one employee's wages for one quarter. See, e.g., Ruth v. United States, 823 F.2d 1091, 1092 (7th Cir. 1987); USLIFE Title Ins. Co. of Dall. v. Harbison, 784 F.2d 1238, 1243 n.6 (5th Cir. 1986); Boynton, 566 F.2d at 52; Suhadolnik v. United States, 2011 WL 2173683, at *5 (C.D. Ill. June 2, 2011); Todd v. United States, 2009 WL 3152863, at *3-4 (S.D. Ga. Sept. 29, 2009); Lighthall v. Comm'r of Internal Revenue, 1990 WL 53127, at *2 (N.D. Ill. Apr. 12, 1990), aff'd, 948 F.2d 1292 (7th Cir. 1991). n4
   n2 It is worth repeating that jurisdiction for refund suits in this court is not provided by 28 U.S.C. § 1346. See Hinck v. United States, 64 Fed. C1. 71, 74-76 (2005), aff'd, 446 F.3d 1307 (Fed. Cir. 2006), aff'd, 550 U.S. 501 (2007).
   n3 "This relaxed requirement is based on the theory that section 6672 assessments represent  a cumulation of separable assessments for each employee from whom taxes were withheld." Boynton, 566 F.2d at 52.
   n4 Defendant argues that payment must be made for one employee for each of the periods involved. Given the facts presented, this court need not address this argument. 

Plaintiff's payment of $25 per quarter satisfies neither the Flora "full payment" rule nor the Boynton exception for divisible taxes. As confirmed by the tax records filed in this case, the penalties in question were imposed based on a finding that plaintiff was an employee of his corporation. The amount of employment tax owed with respect to plaintiff for any of the quarters at issue far exceeds the $25 payment amount. Accordingly, the jurisdictional prerequisite for bringing this refund action has not been satisfied. 

Based on the foregoing, the court GRANTS defendant's motion to dismiss under RCFC 12(b)(1). The Clerk is hereby ordered to dismiss the complaint.

Petitions for Cert Filed in Bullshit Tax Shelters to Resolve Lopsided Circuit Split on Gross Valuation Misstatement Penalty (1/16/13)

Tax Notes Today reports that two petitions for certiorari have been filed asking the Supreme Court to resolve the issue of whether a taxpayer's concession of a threshold problem -- such as lack of economic substance -- with a tax shelter precludes the IRS from applying the Section 6662(h), here, gross valuation misstatement penalty.  Notice that, in this statement of the issue presented, I have used the polite term -- tax shelter.  The equally accurate, less polite term that gives appropriate nuance to the stinkiness of the tax shelter is "bullshit tax shelter."  In effect, in these cases, the IRS applies the penalty and, upon filing the litigation, the taxpayer concedes that the tax shelter was a bullshit tax shelter so that the issue of whether the gross valuation misstatement was a disqualifier is never reached and therefore the penalty does not apply. So, in my view, we have a bullshit argument intended to mitigate the intended costs of taxpayer's investing in bullshit tax shelters.  Amazingly, two Circuits -- the Fifth and the Ninth -- have accepted the bullshit argument about the bullshit tax shelter.  Fortunately, critical mass among the circuits is against the bullshit argument -- 8 circuits reject it.  But the Fifth and Ninth Circuits remain intransigent, bestowing a largesse on taxpayers with bullshit tax shelters in their circuits that taxpayers in the other circuits do not get.

So the Government is asking the Supreme Court to resolve the conflict by applying the penalty.  (See docket here.)  The case is Woods v. United States, 471 Fed. Appx. 320 (5th Cir. 2012), a nonprecedential short-shrift opinion in its entirety as follows:

This Court has considered this appeal on the basis of the briefs and the record on appeal. Having  done so, we are convinced that this issue is well settled and that the district court should be affirmed. See Bemont Invs., L.L.C. v. United States, No. 10-41132,     F.3d    , 679 F.3d 339, 2012 U.S. App. LEXIS 8505, 2012 WL 1435608 (5th Cir. Apr. 26, 2012); Heasley v. Comm'r of Internal Revenue, 902 F.2d 380 (5th Cir. 1990); Todd v. Comm'r of Internal Revenue, 862 F.2d 540 (5th Cir. 1988).

The other petition for certiorari is filed by a taxpayer in one of the majority 8 circuits rejecting the bullshit argument in another bullshit tax shelter.  The case is Alpha I, L.P. v. United States, 682 F.3d 1009 (Fed. Cir. 2012).  The Supreme Court docket is here. The taxpayer there, having lost, claims offense that taxpayers in the Fifth and Ninth Circuits get better treatments for their bullshit tax shelters.  The taxpayer wants the Supreme Court to fix that problem by granting relief to the taxpayers in all circuits.