New Policy Statement That Appeals Is Not to Raise New Issues (7/23/13)

The IRS released a Memorandum for Appeals Employees, here, on the subject of Implementation of the Appeals Judicial Approach and Culture (AJAC) Project.  "The AJAC Project is returning Appeals to a quasi-judicial approach in the way it handles cases, with the goal of enhancing internal and external customer perceptions of a fair, impartial and independent Office of Appeals."  For purposes of this blog entry, the approach should limit Appeals to deciding the controversies that the parties put before it, rather than raise new issues not previously spotted by Exam or re-visit issues settled or dropped by Exam.  In furtherance of that objective, the Memorandum advises of a new IRS Policy Statement as follows:

Policy Statement 8-2 (Formerly P-8-49) 

(1) New issues not to be raised by Appeals. 

(2) Appeals will not raise new issues. Appeals also will not reopen an issue on which the taxpayer and the Service are in agreement.

The memorandum implements this policy with new IRM provisions in various contexts -- Collection Due Process, Offers in Compromise, Collection Appeals Program, and Examination Cases.  I focus here on Examination Cases.  The effect of the new approach on Examination cases is set forth in Attachment 5 to the Memorandum.  Key points in attachment 5 are:

• The prohibition on raising new issues also applies in Appeals consideration of docketed cases.  (IRM 8.4.1.15.3).
• Guidance is given when the taxpayer raises new issues.  Id.
• Guidance is given when an issue not before Appeals is identified; although the Appeals  Officer cannot raise it on appeal, if it is a systemic issue, a process for the issue to be reported is provided.  "A systemic issue is an issue that requires a change or modification to an established procedure, process or operation (e.g., training issues, computer program, campus procedure for processing claims). These are issues that potentially impact more than one taxpayer."  IRM 8.6.1.6(1).
• "Reopening a previously agreed issue or raising a new issue has the same implications, and is, for all practical purposes, one and the same. Therefore, for purposes of this section, treat reopening an agreed issue the same as raising a new issue."
• "A new issue is a matter not raised during Compliance's consideration. (3) A new theory or alternative argument is not a new issue."
• "(1) Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process."  IRM 8.6.1.6.2(1).  "In resolving disputes, Appeals may consider new theories and/or alternative legal arguments that support the parties' positions when evaluating the hazards of litigation in a case. However, the Appeals hearing officer will not develop evidence that is not in the case file to support the new theory or argument."
• "In docketed cases, the Appeals hearing officer will consider a new issue affirmatively raised by the government in pleadings and may consider any new evidence developed by Compliance or Counsel to support the government's position on the new issue. The Appeals hearing officer's consideration of a new issue in a docketed case will take into account that the government has the burden of proof."

 The old version (currently on the web as of 7/23/13), here, is:

1.2.17.1.2  (Approved 01-05-2007)
Policy Statement 8-2 (Formerly P–8–49) 

1. New issues not to be raised unless material 

2. An issue, on which the taxpayer and the Service are in agreement, should neither be reopened by Appeals nor should a new issue be raised, unless the ground for such action is a substantial one and the potential effect upon the tax liability is material. The existence of unreported income, deductions, credits, gains, losses, etc. stemming from a tax shelter which is a listed transaction constitutes such a substantial ground with a material effect upon the tax liability.

Appeals raising of new issues was extremely rare under this old rule.  I have been practicing for over 35 years and have never had a new issue raised on Appeal.  But it was a possibility and a risk.

At least in some cases, the old policy gave incentives to avoid an appeal at the conclusion of which is probably the most efficient timing from an administrative perspective.  Some taxpayers would get to appeals after filing the petition in the Tax Court, with the thought that the press of the expected docket call would limit the time Appeals would be substantively involved and likely to spot new issues.  Other taxpayers pursued their refund remedies with careful attention to timing so that, if new issues were raised, the statute of limitations would foreclose any adjustment other than by offset.

This is a welcome clarification of Appeals' role.

Of course, the fact that Appeals will not raise new issues does not mean that, should litigation ensue in the Tax Court or a refund forum, the Government will not be permitted to raise new issues.  Then, the ability of the Government to raise and pursue new issues will be governed by the respective court's control of its docket.

Interview of Swiss Bank Whistleblower (7/17/13)

Der Spiegal has a great interview of Swiss Bank whistleblower, Herve Falciani.  Swiss Bank Leaker: 'Money Is Easy to Hide' (Spiegel Online International 7/16/13), here.  Some interesting excerpts are:

At the end of 2008, Hervé Falciani committed what is believed to have been the most portentous theft of banking data in history. The systems engineer and former employee at the Geneva offices of HSBC left Switzerland for France and took data from around 130,000 customers at the Anglo-Asian bank along with him. 

* * * * 

Falciani, 41, has also cooperated with the American authorities. Indeed, on the strength of the information he provided, HBSC was forced to pay a $1.9 billion settlement with the United States after a Senate committee found that failures in HSBC's money-laundering controls had enabled terrorists and drug cartels to gain access to the US financial system. 

* *  * * 

Falciani: Banks such as HSBC have created a system for making themselves rich at the expense of society, by assisting in tax evasion and money laundering. 

* * * * 

SPIEGEL: Many Swiss banks now profess to engage only in legal practices, kicking out any clients who don't disclose whether they have paid taxes. Do you find this shift credible? 

Falciani: No, I don't. Just the fact that they face international competition ensures that banks will continue to offer wealthy clients ways to evade tax authorities. 

SPIEGEL: The European Commission wants to create a comprehensive automatic system for exchanging information throughout Europe. How effective would such regulations be in putting a stop to shady practices engaged in by banks and tax evaders? 

Falciani: Banks have a strong self-preservation instinct and are quick to adapt to new regulations. Money is easy to hide. HSBC has a strategy division that takes care of such things. For example, a bank might bring in intermediary companies, sometimes at multiple levels, and make sure business isn't conducted through the bank's own accounts. They offer clients non-banking products, life insurance policies that exist for the sole purpose of tax evasion for example, or gold, which the bank stores in its safety deposit boxes for a fee. 

* * * *

SPIEGEL: The United States has taken tougher action against Swiss banks. Should the EU follow that lead? 

Falciani: At first glance, that appears to be true -- the US, for example, imposed a heavy fine against HSBC for money laundering. But I was surprised that the American authorities decided HSBC was "too big to jail" -- in other words, they shied away from imposing prison sentences on bank managers, although it's hard to imagine that top-level managers knew nothing of the bank's systemic participation in money laundering. 

Pay Attention to Court Filings Not Qualifying for the Timely Mailing-Timely Filing Rule (7/10/13)

Every tax controversy practitioner and student is aware of the time-mailing, timely-filing rule in Section 7502, here. The general concept is easily stated -- a document timely mailed to the IRS or a petition to the Tax Court will be deemed timely filed even if it arrives after the due date.  The rule is subject to some nuance and risks.  I won't get into the nuances and risks now.

But, I do want to remind readers that there is no such timely mailing-timely filing rule for other filings.  Perhaps the other most common filing that tax practitioners will deal with is the filing of the suit for refund, necessarily in a court other than the Tax Court.  There is a statute of limitations for a suit for refund -- 2 years from the date the refund claim is denied.  There is no timely-filing, timely-mailing rule for such suits.

I guess I could leave it at that, but I do call readers' attention to a recent case, Langan v. United States, 2013 U.S. Claims LEXIS 740 (Fed. Cl. June 28, 2013), here.  In this case, the claim disallowance was mailed on 12/16/09.  The taxpayer's lawyer delivered the envelope containing the Court of Federal Claims complaint to the USPS in Massachusetts late on 12/15/11, just one day before the statute closed.  The Court of Federal Claims received the envelope and stamped the complaint on 12/19/11.  Too late.

The taxpayer tried to save the day on some older authority from the court that could be read to say that a filing timely delivered to the USPS in time to be timely received by the court will be deemed to have been timely delivered even if was not timely delivered.  In effect, there would be some type of equitable relief if the timely mailing was prudent because of the expectation of timely delivery. This authority even if it were still good, did not apply because the late delivery in Langan to the USPS on the day before the complaint was required to be filed was not filed in time that, in due course, it would be timely delivered the next day.  (The taxpayer's counsel actually used a type of USPS service that would have promised timely next-day delivery had it been deposited with the USPS earlier in the day, but the late delivery (around 11pm) did not qualify for USPS assurance of next day delivery and thus taxpayer's counsel did not act prudently, a necessary condition for the special relief if it even continued to exist.)

This is a cautionary tale.  Just based on the bare facts, the taxpayer's lawyer appears to have botched this and, if so, the tax dollars paid are gone forever.  (As I read the rules, the IRS is  now forbidden to make a refund even if it were to discover that it was due.)

Cancellation of APA for Failure to Meet Terms and Conditions Reviewed on Abuse of Discretion Standard (7/10/13)

One of the major IRS initiatives for a number of years is to enter Advance Pricing Agreements ("APAs) with taxpayers to determine, in advance, transfer pricing methodologies.  APAs require taxpayer representations as to underlying facts and conditions and taxpayer economic studies justifying the methodology requested.  The IRS reviews the presentations, performs such testing and economic studies as it deems appropriate, and then attempts to reach an agreement with the taxpayer.  Those agreements are contracts, but do incorporate the terms of the relevant Revenue Procedure (currently Rev. Proc. 2006-9, 2006 IRB 1).  Among the provisions of the Rev. Proc. is the IRS authority to terminate the APA is the terms and conditions are not met.

In Eaton Corp. v. Commissioner, 140 T.C. No. 18 (2013), here, the IRS revoked the taxpayer's Advance Pricing Agreement.  Tax Court was presented the following arguments:

Taxpayer argument:  The APA is a contract and, if the IRS terminates for failure to meet the terms and conditions, the IRS bears the burden of establishing that the taxpayer failed to meet the terms and conditions.

IRS argument:  The taxpayer must show abuse of discretion for the IRS decision to terminate the APA.

Holding:  For the IRS.  Taxpayer must establish abuse of discretion.

Here are the key excerpts that show the line of reasoning (some footnotes omitted):

On Writing: Strunk & White's Elements of Style (7/1/13)

This writing is on Today's Writer's Almanac, here.  Since I recommend Struck and White's Elements of Style (4th Edition 1999), here (Wikipedia entry here) to my students, I thought I would pass the Writer's Almanac Entry on:

It's the birthday of American grammarian William Strunk Jr. (books by this author). (1869), born in Cincinnati, Ohio. He was an English teacher at Cornell for 46 years, and edited works of Shakespeare and James Fenimore Cooper. In 1918, he self-published a little book for the use of his students, called The Elements of Style. It was a 45-page volume intended, according to Strunk's introduction, "to lighten the task of instructor and student by concentrating attention ... on a few essentials, the rules of usage and principles of composition most commonly violated." He revised it in 1935; and in the late 1950s, one of his former students, the writer and New Yorker editor E.B. White, revised and reissued the 1935 edition. It's now colloquially known as "Strunk and White." 

The Elements of Style is full of helpful advice to aspiring writers and students everywhere. In it, one may find such wisdom as, "Instead of announcing what you are about to tell is interesting, make it so," and "Never call a stomach a tummy without good reason." 

American author Dorothy Parker once wrote: "If you have any young friends who aspire to become writers, the second-greatest favor you can do them is to present them with copies of The Elements of Style. The first-greatest, of course, is to shoot them now, while they're happy."