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).