Is the Traditional Formulation of Seminole Rock and Auer Deference in Play? (3/28/13)

The Supreme Court's decision in Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) has been the most important administrative decision in modern times.  Through deference, it cedes to an administrative agency -- the IRS included -- great power, through regulation, to control how courts must apply the statutes the agency administers.  In effect, the agency can determine what the law is, so long as the statute has some ambiguity requiring interpretation and the agency's interpretation in the regulation is not unreasonable (i.e. arbitrary, capricious and manifestly contrary to the statute's text (and presumably intent)).  But the regulation itself may have some ambiguity requiring further interpretation.  When the ambiguity is recognized, the agency can amend the regulation to make the clarification.  But, the agency will often attempt the clarification by some lesser form of agency pronouncement (in the case of the IRS, by such a pronouncement as a Revenue Ruling or Notice).  Indeed, the IRS may attempt to state its interpretation of the regulation in a brief in litigation.  The question is what authority such interpretations of the regulations should be accorded.  This is obviously a hot-button issue in the tax law and well as in other areas of the law administered by federal agencies.

The standard holding of the Supreme Court has been that such interpretations are entitled to deference.  Justice Kennedy states the standard holding in the majority opinion in Decker v. Northwest Environmental Defense Center, ___ U.S. ___, 2013 U.S. LEXIS 2373 (3/20/13), here, a nontax case, as follows:

It is well established that an agency’s interpretation need not be the only possible reading of a regulation—or even the best one—to prevail. When an agency interprets its own regulation, the Court, as a general rule, defers to it “unless that interpretation is ‘plainly erroneous or inconsistent with the regulation.’” 

This deference is commonly referred to as "Seminole Rock" or "Auer" deference." See Bowles v. Seminole Rock & Sand Co., 325 U. S. 410 (1945); and Auer v. Robbins, 519 U. S. 452 (1997).

This broad deference to agency interpretations is not without its critics, even on the Supreme Court.  In Decker, the issue surfaced again.  Justice Scalia took the opportunity to swipe at it in detail in a dissent, and Chief Justice Roberts, with Justice Alito joining, in a concurring opinion, suggested that the issue might be reconsidered in another case.  I first cover Chief Justice Roberts' short discussion and then cover Justice Scalia's full-throated -- is there any of way with Justice Scalia? -- criticism.

Ethicist Question About Tax Professionals Exploiting Loopholes (3/24/13)

Note to readers, I posted this entry on my Federal Tax Crimes Blog, here, and offer it hear because it relates as well to Federal Tax Procedure.

In this blog, I usually discuss tax crimes and matters related to tax crimes.  At least for tax professionals, there are parallel ethical issues.  The ethical issues certainly are recognized or should be recognized by tax professionals whose conduct approaches the criminal tax line -- that line where they cross over into intentionally violating a known legal duty, the mens rea standard for tax crimes.

The Ethicist, a column in the New York Times, addressed a facet of the ethical issue, in a context that does not necessarily implicate a tax crime.  Chuck Klosterman, A Tax Lawyer's Quandary (NYT Ethicists 3/22/13), here.  The question the anonymous tax lawyer asks is:

I am a tax lawyer. Is advising wealthy companies of ways to reduce their tax bills through sophisticated legal structures ethically permissible? The structures take advantage of legal loopholes in the tax legislation. 

The Ethicist answer, very short, is:

The ethics of specific professions create unique realms of responsibility. In the same way that a defense attorney is ethically obligated to give his client the best possible defense — even if he’s convinced of the individual’s guilt — your principal responsibilities lie with the company hiring you. You need to do your job to the best of your abilities, within the existing rules. You should, however, voice your moral apprehension about the use of such loopholes to the company you represent.

For a good, short general discussion, I suppose this works.

Availability of Jack's Federal Tax Procedure Book (3/22/13)

I have posted my Student Edition of my Federal Tax Procedure book on SSRN here.  The Student Edition has no footnotes and includes only the key statutory provisions and other authorities in the text.  Anyone may download that edition free here.

I also offer for purchase an footnoted edition suitable for practitioners.  The text is the same in both editions.  The footnotes contain citations to authority in support of the statements in the text and further discussion of nuance.  By way of contrast, the 2013 Student Edition is 533 pages, with (obviously) no footnotes.  The 2013 Practitioner Edition is 726 pages, with 2,336 footnotes.  This Practitioner Edition is available for purchase here.

By way of example, the following includes the text of the discussion on informal refund claims which is in both editions and the footnotes for that text which is in the practitioner edition only:

(2) Informal Claims.

The statute requires a claim for refund.  Administrative necessity reflected in the regulations requires that the claim be formally presented.  Accordingly, claims should be presented with the proper forms (discussed above) and, where required by procedures, with any required accompanying information. n731  However, from time to time, courts will recognize informal claims as satisfying the statutory predicate for a claim for refund where the taxpayer has in fact presented a claim to the IRS and, in the court's view, the IRS did or should have considered the claim.  These cases are rare and are driven by unusual facts and equities. n732

Tax Court Adopts Majority View to Impose Gross Valuation Misstatement Penalty Despite Concessions on Other Grounds (3/14/13)

I recently posted a discussion of a case, Crispin v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 3852 (3d Cir. 2013), here, that had a good discussion of the current trend -- representing a majority view -- in the Circuits to impose the gross valuation misstatement penalty in Section 6662(h) despite a taxpayer's concession to disallow the claimed tax benefits on other bases than valuation misstatement.  See Yet Another Bullshit Tax Shelter Bites the Dust (2/26/13), here.  Yesterday, reversing its prior precedent, the Tax Court fell in line with the majority view in AHG Investments LLC et al. v. Commissioner, 140 T.C. No. 7 (2013), here.  Of course, in all decided cases, under its Golsen precedent, the Tax Court must follow the precedent of the Circuit Court of Appeals to which an appeal would be taken, so its holding technically only affects cases in which the applicable Circuit Court of Appeals has not spoken.  In this regard, the Tax Court noted in footnote 5 of the opinion:

The Supreme Court has not ruled on the issue * * * , but the U.S. Government has recently filed a petition for a writ of certiorari as a result of the Court of Appeals for the Fifth Circuit's ruling for the taxpayer on a closely related issue in Woods v. United States, 471 Fed. Appx. 320 (5th Cir. 2012). The Supreme Court has not yet granted or denied the Government's petition.

There is a good discussion of the use of the Blue Book to help courts in interpreting a statute.  The Blue Book requires its own interpretation.  The minority view seems to have been based on a misinterpretation of the Blue Book which resulted in a misinterpretation of the statute.

Rettig Article on CTR Form 8300 and Its Context in Tax and Criminal Law Enforcement (3/11/13)

In my Federal Tax Procedure Book, I devote a short section to Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, often referred to as a Currency Transaction Report or "CTR."  The Form is here.  The short discussion is adequate for the book that must cover so much other ground.  However, there is a lot of detail behind the summary.  Fortunately, Chuck Rettig, a prominent practitioner, provides that detail in a recent article, Form 8300: Reporting Domestic Currency Transactions (J. Tax Prac. & Proc. December 2012-January 2013).  His article is posted on his website and may be linked here.  In addition to developing the nuances relating to the CTR, Chuck's article places in the CTR in the universe of federal reporting requirements and enforcement initiatives relating to money laundering activities.  To be sure, the Form 8300 is in the Internal Revenue Code and plays a prominent role in tax enforcement.  But it also plays a more prominent role in detecting money laundering and the crimes behind money laundering.

I strongly recommend Chuck's article to the readers of this blog interested in the Form 8300 and its criminal enforcement context.

I offer the following which is my summary description of the Form from my Tax Procedure Book (footnotes omitted).

(2) Currency Transaction Reports (“CTRs”).

There are still other return reporting requirements that are designed to identify income of types that might easily escape the tax system or that might evidence nontax illegal conduct.  The broadest example is § 6050I which requires that persons involved in a trade or business who receive cash payments in excess of $10,000 in one transaction (or more than one transaction, if the transactions are related) to report the receipt to the IRS.  The report is made by Form 8300 (sometimes referred to as a currency transaction report or “CTR”), which in its latest iteration is called both IRS Form 8300 and FinCEN Form 8300.  This means that the information is available to each of those agencies and may be used for congressionally approved purposes, most specifically federal law enforcement (not just tax law enforcement).  FinCEN is the acronym for the Government’s Financial Crimes Enforcement Network which gathers information useful in investigating and prosecuting financial crimes.  As most pertinent to this class, of course, the information is available to the IRS for both civil and criminal tax purposes.  But, ultimately, the information may be most useful for money laundering enforcement in which the IRS is a principal investigative and information source.

Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/8/13)

The following is a copy of a blog from my Federal Tax Crimes Blog, Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/7/13), here.

A recent article in Tax Notes summarizes a recent PLI conference on tax penalties.  Marie Sapirie, Revised Guidance on Tax Shelter Definition on the Way, 2013 TNT 42-9 (3/4/13).

Perhaps most importantly for tax crimes afficionados are statements made by Daniel W. Levy, AUSA SDNY, who is a prominent player in the Government's offshore crimes juggernaut.  The article discusses Mr. Levy's comments as follows:

"What we're trying to do is drive deterrence," said Daniel W. Levy, assistant U.S. attorney, Southern District of New York. At some point people who pay their housekeepers and nannies off the books will be prosecuted for criminal tax fraud, he said. "If it all revolves around housekeepers, I've already got my snappy code name in the can and it's Operation Clean Sweep," he joked.  

For now, however, "we're looking for clear violations of law, clear evidence of willfulness, cases that don't involve the possibility of negligence," Levy said. "We want the strongest possible evidence of willfulness because those are the strongest possible criminal cases we have." But that doesn't mean that the government shies away from complex cases, he added.  

Offshore bank accounts sometimes presented situations of relatively low tax loss and low evidence of willfulness. "We've had to make hard judgment calls about whether it's worth prosecuting that person given relatively limited tax evasion -- that is, relatively limited tax loss to the United States," Levy said. "There are some people who just passed into the night."

Guest Blog - Morris on Inadvertently Running Afoul of the Tax Law (3/6/13)

Inadvertently Running Afoul of the Tax Law

Donald Morris, Professor of Accounting, University of Illinois Springfield

Author of Tax Cheating: Illegal—But Is It Immoral?

The term negligence holds an important place when talking about the work of a professional or a manufacturer or even about driving a car, where expectations for performance are clear and well established. Negligence in those circumstances is the “failure to use such care as a reasonably prudent and careful person would use under similar circumstances.” But what about negligence when applied to a taxpayer?  IRC § 6662 employs a generic meaning for negligence, which includes “any failure to make a reasonable attempt to comply with the provisions of the Code.” But measuring “reasonable” in the context of individual taxpayers is a contentious issue.

In 2011, the IRS audited 1,594,049 individual income tax returns, 1.1 percent of the 143,608,000 returns filed for the previous year. For correspondence audits, the IRS identified errors 79 percent of the times, resulting in corrections, and for field audits, the IRS identified errors 91percent of the time, resulted in IRS changes. Also for 2011, 28,749,882 of the returns filed—or one out of five—was assessed a civil penalty, while 500,472 of the returns audited was assessed an accuracy related (or negligence) penalty—a 31% penalty rate for negligence. If these results can be generalized to the taxpaying population, it is possible that 80 to 90 percent of individual tax returns, if examined by the IRS, would be found wanting, and of those, almost one-third would involve taxpayer negligence.

One question raised by these figures is whether taxpayers are truly that negligent—failing to use such care as a reasonably prudent and careful person would use under similar circumstances—or more likely, that the concept of negligence is out of place when applied to individual taxpayers confronting the notoriously complex tax law. At some point, what is officially seen as taxpayers failing to make a reasonable attempt to comply with the provisions of the Code, must instead be viewed as the congressional failure to provide a code that offers plain and clear guidance so that what a reasonably prudent and careful person would do under similar circumstances can be fairly determined.

A recent case in the U.S. Tax Court illustrates how easily the average taxpayer can cross the line to negligence without even knowing there was a line. In David P. Durden, et ux. v. Comm., TC Memo 2012-140 (05/17/2012), here, the taxpayers contested the IRS’s disallowance of a $25,171 charitable donation to their church. The IRS determined a tax deficiency of $7,552 and an accuracy-related penalty (§ 6662) of $1,510.40 with respect to the taxpayers’ 2007 jointly filed income tax return.

Second Circuit Holds That Fraud on the Return -- Even If Not the Taxpayer's -- Causes an Unlimited Civil Assessment Statute of Limitations to Apply (2/4/13)

THIS BLOG ENTRY IS A CUT AND PASTE FROM AN ENTRY WITH THE SAME TITLE ON MY FEDERAL TAX CRIMES BLOG, HERE.

I have written in the past on nontaxpayer fraud as the fulcrum for an unlimited statute of limitations under Section 6501(c)(1) & (2), here.  I provide a list of the most pertinent blogs on my Federal Tax Crimes Blog this issue.  The issue arose from the Tax Court's opinion in Allen v. Commissioner, 128 T.C. 37 (2007), which held for the first time that preparer fraud invokes the unlimited statute of limitations.  The IRS had earlier held that, where a joint tax return was filed, one spouse's fraud would permit the unlimited statute as to the innocent spouse.  But the conventional wisdom to that point was that some taxpayer fraud was required to the unlimited statute.  The Tax Court in Allen read the statute literally; it included no requirement of taxpayer fraud.

In City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013), here, the Second Circuit -- the second court to confront the issue head on -- aligned itself with Allen in a case involving preparer fraud that was included on the return of otherwise innocent taxpayers.  I quote the key parts of the Second Circuit decision (I have bold-faced some portions that, I think, are worthy of attention):

In analyzing § 6501(c)(1), we remain mindful that "limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the [Commissioner]." Bufferd v. Comm'r, 506 U.S. 523, 527 n.6 (1993) (internal quotation marks and citations omitted). "Accordingly, taking [that obligation] into account, we conclude that the limitations period for assessing [the taxpayer's] taxes is extended if the taxes were understated due to fraud of the preparer." Browning v. Comm'r, 102 T.C.M. (CCH) 460, 2011 WL 5289636, at *13 n.14 (2011) (quoting Allen v. Comm'r, 128 T.C. 37, 40, 2007 WL 654357, at *40 (2007)). This makes intuitive sense because "the special disadvantage to the Commissioner in investigating fraudulent returns is present if the income tax return preparer committed the fraud that caused the taxes on the return to be understated." Allen, 2007 WL 654357, at *40.