Taxpayer Judicially Estopped from Refund For Taxes Admitted in Plea Agreement (9/25/13)

In Mirando v. United States, 2013 U.S. Dist. LEXIS 135659 (ND OH 2013), the taxpayer pled guilty to conspiracy and tax evasion.  The plea agreement stated that the parties:

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13.

The taxpayer paid and sued for refund.

As I note in the comments below, there was no basis in the normal judicial doctrines of res judicata [claim preclusion] and collateral estoppel [issue preclusion] to prevent the taxpayer from asserting that the tax was less than stipulated in the plea agreement.  And, apparently this plea agreement was not specific that it was intended to contractually bind the taxpayer to the amounts -- even as minimum amounts -- in any subsequent civil tax case.  So something else would have to apply if the taxpayer were going to be bound.

The Court applied judicial estoppel [issue preclusion].  Here is the reasoning (footnotes omitted):

The Court finds judicial estoppel prevents Plaintiff Mirando from bringing his refund claim. First, Mirando's position that he is entitled to a refund for overpaid taxes for the years 1995, 1996, and 2000 is directly contrary to his plea agreement in his 2007 criminal case. Recall Mirando's 2007 plea agreement states that the parties: 

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13. 

Because Mirando initialed the page on which the total tax liability was determined and signed the entire document, Mirando specifically agreed he owed $448,776.13. Mirando cannot now dispute these figures and demand a refund from the IRS after the court accepted his plea agreement. 

Moreover if Mirando was allowed to proceed in this action, he would gain an unfair advantage. By pleading guilty to tax evasion and specifically agreeing to a total tax liability of $448,776.13, Mirando avoided the possibility of a longer sentence and the United States agreed not to prosecute Mirando's ex-wife or two children.37 After obtaining this benefit from the United States, Mirando cannot turn around and sue the United States for a refund. 

Plaintiff Mirando relies on United States v. Hammon [277 F. App'x 560 (6th Cir. 2008)] for its position that his refund claim is not barred by estoppel. In Hammon, the Sixth Circuit held that the defendant was not collaterally or judicially estopped from denying the accuracy of the government's assessments despite pleading guilty to tax evasion and agreeing to pay $2.39 million in restitution. However, the present case can be distinguished from Hammon. In Hammon, the plea agreement only stipulated that the defendant willfully attempted to evade taxes assessed by the government in "the amount of approximately $2.39 million." Since the plea agreement was ambiguous as to whether the defendant admitted that the $2.39 million assessment was correct, the defendant was not estopped from challenging the accuracy of the tax assessment. In contrast, Plaintiff Mirando specifically agreed in his 2007 plea agreement that "beyond a reasonable doubt ... [a]s of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13." Consequently, Hammon is not controlling, and judicial estoppel prevents Mirando from bringing his refund claim.

Government Refusal to Grant Immunity Shifts Burden of Proof to IRS in Tax Court Case (9/24/13)

In an Order dated 9/17/13 in AD Investment 2000 Fund LLC v. Commissioner (Dkt Nos. Docket No. 9177-08, 9178-08), here, the Tax Court (Judge Halpern) shifted the burden of proof to the Commissioner because the Government declined to assure the Court that a witness -- allegedly the key witness -- would not be prosecuted.  The term for such assurance is immunity.

The background, highly summarized, is that one James Haber was a promoter of a tax shelter in which the taxpayer, an LLC treated as a partnership, participated.  I cannot say that I am familiar with the particular shelter involved, but I am familiar with Haber's tax shelter activity.  He was long a subject and perhaps a target of the major tax shelter probes and prosecutions in SD NY (those probes, some of which involved Haber shelters, included the KPMG, E&Y and Daugerdas / Jenkens probes beginning in the early to mid-2000s).  For some reason never known to me, Haber was never prosecuted despite the fact that he was at the center of shelters that were prosecuted against others.

The taxpayer in this case argued that Haber was at the center of the shelter and was the key witness.  "Petitioners represent, and respondent does not contradict, that the principal witness having knowledge of these issues is James Haber, the President of The Diversified Group Incorporated. Diversified is the Tax Matters Partner of AD Investment and AD Global.

The Tax Court sustained Haber's assertion of the Fifth Amendment privilege.  The taxpayer urged that it was not fair that the Government's continued threat of prosecution of Haber should prevent it from getting a fair trial based on truth and not failure to meet the normal burden of proof assigned to taxpayers in the Tax Court.

Petitioners represent, and respondent does not contradict, that, in the absence of Mr. Haber's testimony, petitioners will find it difficult or impossible to carry their burden of proof at trial. Petitioners describe Mr. Haber's role in the transactions at issue; they list facts that they will be difficult or impossible to prove without his testimony.

At the Court's suggestion, the IRS attorney asked USAO SDNY "whether the United States Attorney would be willing to grant Mr. Haber immunity in connection with his tax shelter activities."  USAO SDNY responded "that the United States Attorney would not do so 'and would not explain why.'"

The taxpayer urged that, in effect, the  IRS and the USAO for SDNY which refused to grant immunity were agencies of one Government and should not impair the search for truth and the Court's obligation to render justice by forcing on the taxpayer a burden that its own actions prevented it from meeting.

IRS New Revenue Procedure for Innocent Spouse Equitable Relief (9/21/13)

The IRS has released Rev. Proc. 2013-34, 2013-42 IRB 1, here, which " provides guidance for a taxpayer seeking equitable relief from income tax liability under section 66(c) or section 6015(f) of the Internal Revenue Code (a “requesting spouse”)."  Section 66 dealing with community income is here; Section 6015 dealing with joint return joint and several liability is here.  The statutes and the entire Rev. Proc. are required reading for those studying and practicing in this area.  I provide here only the portions of the Rev. Proc. dealing with background and significant changes:

SECTION 2. BACKGROUND 

* * * * 

.03 Section 6015 provides relief only from joint and several liability arising from a joint return. If an individual signs a joint return under duress, the election to file jointly is not valid and there is no valid return with respect to the requesting spouse. The individual is not jointly and severally liable for any income tax liabilities arising from that return. In that case, section 6015 does not apply and is not necessary for obtaining relief. If an individual files a claim for relief under section 6015, but also maintains that there is no valid joint return due to duress, the Service will first make a determination as to the validity of the joint return and may accordingly deny the request for section 6015 relief based on the fact that no joint return was filed (and thus, relief is not necessary). If it is ultimately determined that a valid joint return was filed, the Service will then consider whether the individual would be entitled to relief from joint and several liability on the merits. 

.04 Under section 6015(b) and (c), relief is available only from an understatement or a deficiency. Section 6015(b) and (c) do not authorize relief from an underpayment of income tax reported on a joint return. Section 66(c) and section 6015(f) permit equitable relief from an underpayment of income tax or from a deficiency. The legislative history of section 6015 provides that Congress intended for the Secretary to exercise discretion in granting equitable relief from an underpayment of income tax if a requesting spouse "does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse's benefit." H.R. Conf. Rep. No. 105-599, at 254 (1998). Congress also intended for the Secretary to exercise the equitable relief authority under section 6015(f) in other situations if, "taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return." Id.

SECTION 3. SIGNIFICANT CHANGES 

On January 5, 2012, the Department of Treasury and the Service released Notice 2012-8, 2012-4 I.R.B. 309, which set forth a proposed revenue procedure to update and revise Rev. Proc. 2003-61, 2003-2 C.B. 296. Notice 2012-8 also modified and clarified the criteria for equitable relief, and it eliminated the two-year rule for filing a claim for relief as set forth in Notice 2011-70, 2011-2 C.B.135. Notice 2012-8 invited public comment regarding the proposed revenue procedure. A total of 54 comments were received, 45 of which were general comments either in support of the revisions, asking for assistance in specific cases, or totally unrelated to innocent spouse relief. The nine substantive comments ranged from discussing one or two discrete issues to commenting on all aspects of the proposed revenue procedure and innocent spouse relief in general. Treasury and the Service considered all comments received, and the proposed revenue procedure has been modified to take into account many of the concerns raised. 

This revenue procedure supersedes Rev. Proc. 2003-61. The structure and format of this revenue procedure generally follows that of Rev. Proc. 2003-61 with the following significant changes: 

Schedule UTP and Penalties (9/21/13)

Lee Sheppard has an interesting article on privileges addressing issues in Wells Fargo & Company v. United States, 2013 U.S. Dist. LEXIS 78714 (D MN 2013).  See Lee A. Sheppard, The New Look of Privilege, 140 Tax Notes 1159 (Sept. 16, 2013).  Wells Fargo is a lengthy opinion with extensive analysis of privileges for Uncertain Tax Positions and tax accrual workpapers.  I do not link the opinion here or otherwise discuss it  because it is not relevant to the subject of this blog entry.

Addressing the Schedule UTP, Lee says in the article:

There is no penalty for failure to file a complete or accurate Schedule UTP. Indeed, there is no penalty for failure to file a complete return, as the IRS discovered during the offshore account imbroglio. There is a statutory penalty for failure to file a return at all (section 6651).

I want to address that statement, but first briefly describe the Schedule UTP.  See the IRS website for the Schedule UTP Form 1120, here.  The instructions provide:

Reporting Uncertain Tax Positions on Schedule UTP 

Tax positions to be reported.   

Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return for which two conditions are satisfied. 

1. The corporation has taken a tax position on its U.S. federal income tax return for the current tax year or for a prior tax year. 

2. Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. 

A tax position for which a reserve was recorded (or for which no reserve was recorded because of an expectation to litigate) must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP).

I want to question Lee's statement quote above.  As to a direct penalty for failure to file a complete or accurate Schedule UTP, this is the jurat for the Form 1120, corporate return:

Yet Another Bullshit Tax Shelter Goes Down; BB&T's Streak on Bullshit Tax Shelters Continues (9/21/13)

In Salem Financial, Inc. v. United States, 112 Fed. Cl. 543, 2013 U.S. Claims LEXIS 1372 (9/20/13), here, the court (Judge Wheeler) rejects yet another bullshit tax shelter wrapped in complexity but no substance.  This one's acronym is STARS ("Structured Trust Advantaged Repackaged Securities") "The acronym "STARS" 

is not particularly descriptive of the transaction at issue. There is no indication of a loan in the acronym and there are no "repackaged securities" in the transaction. The evidence suggests that the concept of STARS began as something different, and only grew to include a loan when marketed to banks in the United States..  

The beginning of the opinion sets the tone (bold face supplied by JAT):

The BB&T STARS transaction was in effect for nearly five years, from August 1, 2002 through April 5, 2007. The purpose of the STARS transaction was to generate large-scale foreign tax credits for a U.S. taxpayer, which could be used to enhance revenue and reduce taxes in the United States. The amount at issue in this case, including the potential assessment of taxpayer penalties, is $772,144,153.45. This amount is comprised of the following: disallowed foreign tax credits ($498,161,951); disallowed interest deductions ($74,551,947.40); the tax paid on "Bx" payments from Barclays to BB&T ($84,033,228.20); disallowed transaction cost deductions ($2,630,125.05); and penalties ($112,766,901.80). 

The complexities of the STARS transaction, including the concept of a Bx payment, will become apparent below. Stripped to its essence, however, STARS called for the U.S. taxpayer, in this case BB&T, to establish a trust containing approximately $6 billion in revenue-producing bank assets. The monthly revenue from the trust was then cycled through a U.K. trustee, an act that served as a basis for U.K. taxation. Although the revenue was immediately returned to BB&T's trust, the assessment of U.K. taxes generated U.K. tax credits that were shared 50/50 between Barclays and BB&T. A $1.5 billion loan from Barclays to BB&T also was part of the structured transaction, although the loan was not necessary to the objective of generating foreign tax credits. The Barclays monthly Bx payment to BB&T represented BB&T's share of the tax credits, and had the effect of reducing the interest cost of BB&T's loan. The main question presented is whether the STARS transaction had any purpose other than to generate tax savings, and if not, whether penalties should be assessed against BB&T.
The parties provided a STARS tax tutorial presentation to the Court on February 13, 2013 before the trial began. The Court held 21 days of trial in Washington, D.C. from March 4 through April 2, 2013. During the trial, the Court heard the testimony of 26 witnesses, of which thirteen were experts. The Court admitted deposition excerpts for eleven additional witnesses, principally from those persons who reside outside the United States or where the parties agreed that a deposition could substitute for relatively brief testimony. The Court received in evidence approximately 1,250 exhibits during the trial. The parties submitted post-trial findings of fact and memoranda of law on June 7, 2013, and post-trial reply briefs on July 3, 2013. The Court heard closing arguments on July 30, 2013.

TIGTA Report Recommends Steps to Minimize Risk of Outside Influence in Letter Rulings (9/18/13)

Here is the summary of the TIGTA report with links to the report

CHIEF COUNSEL SHOULD TAKE STEPS TO MINIMIZE THE RISK OF OUTSIDE INFLUENCE ON ITS LETTER RULINGS
Issued on August 29, 2013

Highlights
Highlights of Report Number: 2013-10-081 to the Internal Revenue Service Chief Counsel.

IMPACT ON TAXPAYERS
The IRS issues letter rulings that interpret and apply the tax laws to a specific set of facts provided by corporations, individuals, and international entities. Because each letter ruling can impact millions of dollars of tax collections, the IRS must protect the integrity and independence of the letter ruling process. The appearance that practitioners could possibly manipulate the letter ruling process may result in the risk that inappropriate favorable rulings could cost the Government substantial tax revenues.

WHY TIGTA DID THE AUDIT
This audit was initiated to assess Chief Counsel’s policy to limit the number of letter ruling requests handled by its attorneys from the same taxpayer or practitioner. Chief Counsel implemented this policy in order to address the taxpayers’ and practitioners’ reported strategy to increase their chances of obtaining expeditious and favorable letter rulings by having their requests handled by a preferred attorney.

WHAT TIGTA FOUND
Chief Counsel does not have written policies or an effective management information system to prevent practitioners or taxpayers from having letter ruling requests assigned to a preferred attorney. Specifically, five of the six associate offices that provide rulings had no written policies and insufficient management information to assess the potential risk of outside influence on the assignment of their letter rulings.
The remaining associate office responsible for corporate tax issues developed a written policy to limit the number of rulings assigned to an attorney from the same taxpayer or practitioner. However, TIGTA found that this policy was not effectively implemented due to the lack of complete management information on its letter rulings inventory. Instead, management relied on each attorney to determine whether he or she should work directly assigned letter rulings or have them assigned to another attorney through the normal case assignment process. However, the attorneys did not always provide specific information about their decisions to work or not work the ruling to the front office for input in its inventory system.

WHAT TIGTA RECOMMENDED
TIGTA recommended that the Chief Counsel 1) develop written policies for all Associate Chief Counsel offices to oversee, manage, and, as appropriate, limit the number of letter ruling assignments from the same practitioner; 2) establish a centralized processing location for receipt and review by the Office of the Associate Chief Counsel (Corporate) for letter rulings sent directly to attorneys and require management to periodically review the inventory system to ensure that established policies and procedures are effective in limiting the number of letter rulings assigned to a specific attorney that originates from the same practitioner; and 3) periodically review the Technical Management Information System to ensure that front office staff is receiving and inputting all applicable letter ruling requests and related information in the inventory system.
The IRS agreed with all of our recommendations and plans to revise the written procedures on letter rulings to formalize and strengthen management oversight of its case assignment process.

READ THE FULL REPORT
To view the report, including the scope, methodology and full IRS response, go to:
http://www.treas.gov/tigta/auditreports/2013reports/201310081fr.html.

E-mail Address: TIGTACommunications@tigta.treas.gov
Phone Number: 202-622-6500
Website: http://www.treasury.gov/tigta

Good Review Case on Claims for Refund and Variance for Tax Procedure Students (9/14/13)

In Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013), here, the Federal Circuit (Judge Dyk) held that 

1.  "Cencast's liability for employment taxes under the Federal Unemployment Tax Act ('FUTA') and the Federal Insurance Contribution Act ('FICA') is determined by reference to the employees' "employment" relationships with the common law employers for which Cencast remits taxes (i.e., the production companies), and that the common law employers cannot decrease their liability by retaining entities such as Cencast to actually make the wage payments to the employees."

2.  Cencast is barred by the doctrine of variance from raising a theory in its refund suit not raised in its claim for refund.  The new argument was that some of the workers were independent contractors rather than employees.

First, it is useful to note the role served by Cencast and the other companies involved in the suit because it offers a small window into the movie production business.  Here is the background from the opinion:

The evolution of the motion picture and television industries over the past century has resulted in this tax case concerning FUTA and FICA tax liability. In the early part of the twentieth century, motion picture productions were primarily controlled by large, major motion picture and television studios, and production workers enjoyed long-term, continuous employment relationships with those studios. These studios paid wages to these employees, and, as the common law employers of these workers, were liable for employment taxes on those wages, and remitted those taxes directly to the Internal Revenue Service ("IRS"). 

Since the late 1970s, however, many smaller production companies have emerged and have created movies and television programs independently from the large studios. As a result of this trend, many production workers are now employed by several different production companies during the course of a year, rather than by a single large production studio. Thus, in any given year, a given production worker might earn wages from several production companies, all of whom (being common law employers) would be individually liable for employment taxes on those wages. The complex web of production companies and production workers that evolved made administration of payroll, benefits, collective bargaining agreements, and taxes increasingly difficult. 

Entities like Cencast, which are also known as payroll service companies ("Service Companies"), emerged to address these problems. Over the last twenty-five years, virtually all independent production companies have contracted with Service Companies for payroll and related services. Cencast and other Service Companies compute and pay compensation to production workers, report and pay compensation to multi-employer pension and benefit funds, provide post-production financial reporting, and pay employment taxes to the IRS. 

Although they contract with the Service Companies, production companies both hire and supervise the individual production workers—as they had done in the pre-Service Company era. In general, Cencast and other Service Companies have no role in selecting or supervising production workers. The only change is that entities like Cencast—and not the production companies—now pay the production workers and administer the production companies' payroll and employment tax obligations. It is undisputed in this case that Cencast is not the common law employer of production workers.

Appeals Judicial Approach and Culture Project (AJAC) (9/10/13)

Stephen Olsen blogs on the Procedurally Taxing blog on IRS's appeals new initiative / approach, called Appeals Judicial Approach and Culture Project (AJAC).  See Stephen Olsen, AJAC is here! (Procedurally Taxing 9/9/13), here.  I highly recommend that blog entry to tax procedure afficionados.  (Note that one advantage is that the authors of the Procedurally Taxing Blog has appropriate materials from and references to the Saltzman and Book treatise which is the most cited treatise on tax procedure.)

I had recently blogged on AJAC's new issues approach, New Policy Statement That Appeals Is Not to Raise New Issues (Federal Tax Procedure Blog 7/23/13), here.

Tax Court Blesses a Taxpayer Designation of Payment (9/6/13)

I had intended to do a blog on the Tax Court decision in Dixon v. Commissioner, 141 T.C.; No. 3 (2013), here.  The background is that a taxpayer may generally designate how "voluntary" payments to the IRS gets applied among its various outstanding tax liabilities, but when not voluntary (I mean to be somewhat fuzzy here), the IRS may apply the payment in the best interest of the fisc.  There, in a reviewed opinion, the Tax Court held that, in a somewhat convoluted fact pattern, a corporation owing large amount of tax could receive money from its shareholders and pay it against its withholding obligations for the shareholders, thereby give the shareholder credit against their tax liabilities.  The shareholders, of course, could have paid their own tax liabilities directly, but they hoped to achieve collateral benefits by shuffling the payment through the corporation (one would be, they hoped, to have the income tax credit as of the date it should have been originally withheld and paid over, thereby avoiding the interim interest on their personal tax liability which they could not avoid with a direct payment).  But, the Stephen Olsen of the Procedurally Taxing Blog beat me to the punch and, actually, has done an excellent job, so I refer readers to that blog entry for a great discussion.  Tax Court Holds IRS Must Follow Corporation’s Designation on Tax Payment. (Procedurally Taxing Blog 9/6/13), here.

I do cut and paste below the Tax Court's Syllabus of the decision (which summarizes the majority decision, but refer readers also to Judge Holmes' dissent discussed in the Procedurally Taxing Blog:

Ps were criminally prosecuted for failure to file individual income tax returns for 1992-95. At the time, Ps were owners, officers, and employees of Tryco Corp., which failed to file employment tax returns and corporate income tax returns during this period. As part of a plea agreement with the Department of Justice, Ps agreed that their wrongdoing had inflicted a "tax loss" on the IRS of $61,021 and acknowledged that they could be required to make restitution of this amount. On advice of their attorney they transferred funds to Tryco with instructions that Tryco remit the funds to the IRS. In December 1999 Tryco remitted $61,021 to the IRS with a cover letter from Ps' attorney designating the payment as "payment of [Form] 941 taxes of the corporation" that was "to be applied to the withheld income taxes" of Ps for specified calendar quarters of 1992-95. In early 2000 Ps' accountants determined that Ps actually owed $30,202 more in individual income tax for 1992-95 than Tryco had remitted to the IRS in December 1999. Accordingly, Ps transferred additional funds to Tryco, and in June 2000 Tryco remitted to the IRS an additional check for $30,202. The cover letter from Ps' attorney stated that the payment was "submitted as a pre-assessment designated payment of [Form] 941 taxes of the corporation" which "represents the withheld income taxes of * * * [Ps]" for the fourth quarter of 1995. Ps argued for a downward adjustment to their sentence and for a probated sentence on the ground that they had remitted taxes to the IRS in excess of the "tax loss" determined in the plea agreements. They were sentenced to probation and a small fine. 

Subsequently, R filed a notice of intent to levy on Ps' assets in satisfaction of their assertedly unpaid 1992-95 income tax liabilities. Ps were granted a collection due process (CDP) hearing in which they challenged the levy on the ground that Tryco's 1999-2000 remittances had discharged their 1992-95 income tax liabilities in full. The Appeals officer upheld the levy, concluding that Tryco's 1999-2000 payments "were not withheld at the source and * * * cannot be designated to the withholding of a specific employee." Ps timely petitioned under I.R.C. sec. 6330(d)(1) for review of this determination. 

Tax Controversy is a Hot Growth Area of the Practice (9/4/13)

From the estimable Tax Prof Blog - Tax Controversy and Litigation: One of the 12 Hot Practice Areas for 2020 and Beyond (Tax Prof Blog 9/4/13), here, which links to this article - David Ogul, What LEGAL Fields will be Hot?, National Jurist, p. 28, 30 (Sept. 2013), here.  Key excerpt:

Tax Controversy and Litigation 

Despite the recent scandal regarding the IRS' handling of conservative groups seeking nonprofit status, [Richard] Hermann expects tax controversy and litigation to become one of the hottest practice areas during the next decade or so.  

"The government is going to get more diligent about pursuing tax dollars, not only at the federal level, but at the state and local levels, too," he said. "This is an area that is growing, and it is always a good idea for someone who has been audited or wants to appeal their taxes to hire a tax controversy lawyer."