Principal Life -- A Masterpiece of Tax Procedure (11/29/13)

In my last Tax Procedure Class, we spent most of the class discussing Principal Life Ins. Co. v. United States, 95 Fed. Cl. 786 (Fed. Cl. 2010).  The Court's slip opinion is here; students can link to a nonofficial version (Harvard Caselaw Access Project) but with local page citations, here.  I do ask, however, that students download the actual case with the local page citations. 

The reasons I think the case is important are: (i) it is a tax procedure case; (ii) it is a tour de force tax procedure case; and (iii) it covers a lot of ground that we covered earlier in the class.  I promised the students that I would post a blog on the case in order to help them learn Tax Procedure and, even, study for the examination.  THIS POSTING IS NOT INTENDED AND SHOULD NOT BE USED AS A SUBSTITUTE FOR ACTUALLY READING AND STUDYING THE CASE.

Judge Allegra (Wikipedia here) introduces the case as follows:

"The procedural aspects of the tax laws are of overriding importance in many controversies," one commentator has noted, "eclipsing or making moot substantive issues such as the allowance of deductions or credits, recognition or deferral of income, and methods of accounting." Theodore D. Peyser, 627-3rd Tax Management Portfolio, "Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation" at 1 (2010). At times, the questions spawned by these procedures take on an almost "metaphysical" cast, Baral v. United States, 528 U.S. 431, 436, 120 S. Ct. 1006, 145 L. Ed. 2d 949 (2000), like "when is taxable income taxed?" The ontology needed to solve such abstruse inquiries comes not from philosophical tomes, but from Chapters 63 through 66 of the Internal Revenue Code of 1986, which supply interfused rules mapping the contours of commonly-used, but frequently-misunderstood, tax concepts such as "assessment," "deposit," and "overpayment." 

Though the background provided by these rules can be numbing in its intricacy, the dispute presented by the cross-motions for summary judgment pending before the court can be stated simply: Plaintiff, Principal Life Insurance Company and Subsidiaries (plaintiff or Principal) argues that it is entitled to certain overpayments because its taxes were not timely assessed by the Internal Revenue Service (IRS). Defendant responds that the taxes in question were timely assessed and that even if they were not, they are not recoverable as an overpayment. Plaintiff is wrong; defendant is right. It remains to explain why.

KEY FACTS:

Follow the Rules for Timely Mailing, Timely Filing (11/26/13)

In Eichelburg v. Commissioner, T.C. Memo. 2013-269, here, the taxpayer failed to perfect his qualification for timely-mailing, timely filing under Section 7502, here.  The taxpayer in Eichelburg unknowingly used a private delivery service provider otherwise qualified for the rule -- Federal Express -- but he used the type of service offered by that provider that did not qualify -- that service was the "FedEx Express Saver."  The Court held that he did not qualify, saying (only one footnote included):

In Notice 2004-83, 2004-2 C.B. 1030, the IRS listed all private delivery services that have been designated by the Secretary under section 7502(f). The Federal Express delivery services included on this list are as follows: FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Priority, and FedEx International First. Notice 2004-83, 2004-2 C.B. at 1030, explicitly states that "FedEx * * * [is] not designated with respect to any type of delivery service not identified above." Thus, FedEx Express Saver is not a "designated private delivery service" within the meaning of section 7502(f). See Scaggs v. Commissioner, T.C. Memo. 2012-258 (holding that the "timely mailed, timely filed" rule of section 7502 does not apply to "Fed Ex Express Saver Third business day" service because that service is not a designated private delivery service under Notice 2004-83, supra); see also Raczkowski v. Commissioner, T.C. Memo. 2007-72 (holding that the "timely mailed, timely filed" rule of section 7502 does not apply to "UPS Ground" service because that service is not a designated private delivery service under Notice 2004-83, supra). 

Petitioner mailed his petition on September 10, 2012, using the FedEx Express Saver delivery service. Because FedEx Express Saver is not a "designated private delivery service," petitioner cannot avail himself of the "timely mailed, timely filed" rule of section 7502(a) and (f). His petition was not filed until September 12, 2012, two days after the expiration of the 90-day period. It was therefore untimely, and this Court lacks jurisdiction to redetermine the deficiency. 

We acknowledge that the result we reach may seem harsh. Notice 2004-83, supra, was issued nine years ago; private delivery companies may have since initiated delivery services resembling those listed in Notice 2004-83, supra; and many taxpayers may be unaware of the nuanced differences among these services.4 However, this Court may not rely on general equitable principles to expand the statutorily prescribed time for filing a petition. See Austin v. Commissioner, T.C. Memo. 2007-11 (citing Woods v. Commissioner, 92 T.C. 776, 784-785 (1989)). The statute gives us jurisdiction under the "timely mailed, timely filed" rule only if a private delivery service has been "designated by the Secretary." Sec. 7502(f)(2). Because FedEx Express Saver has not been so designated, our hands are tied.  n5
   n5 Although petitioner cannot pursue his case in this Court, he may not be without a judicial remedy. He may pay the tax, file a claim for refund with the IRS, and, if his claim is denied, sue for a refund in the appropriate U.S. District Court or the U.S. Court of Federal Claims. See McCormick v. Commissioner, 55 T.C. 138, 142 n.5 (1970).

See prior blogs on this issue:  Pay Attention to Court Filings Not Qualifying for the Timely Mailing-Timely Filing Rule (Federal Tax Procedure Blog 7/10/13); here, and Watch the Details in Relying on the Timely Mailing, Timely Filing Rule (Federal Tax Procedure Blog 2/7/13), here.

This is a cautionary tale.  I tell my students that this is such an easy rule to comply with, I better not read a case in which they failed to comply.  Of course, it is often the pro se taxpayer who is caught by this nuance.

Tax Court Rejects Unusual Path to Admission of Expert Testimony (11/20/13)

In Estate of Tanenblatt v. Commissioner, T.C. Memo. 2013-263, here, the Tax Court excluded an expert witness report that the petitioner attempted to introduce as the expert's testimony by attaching the report to his petition, by a failed motion to admit the report, and an IRS stipulation that the petition was the petition but not for purposes of admission.  The Court said that "Petitioner's path for attempting to introduce the Tindall appraisal into evidence as expert testimony is, to say the least, unusual."

The Court immediately described the usual way:

Generally, a party obtains the testimony of an expert witness by calling that witness to testify. See Rule 143(g)(1). Pursuant to that Rule, the expert witness must prepare a written report, which is marked as an exhibit and, after having been identified by the witness and adopted by him, received into evidence as his direct testimony unless the Court determines that the witness is not qualified as an expert. The Rule further provides that, not less than 30 days before the call of the trial calendar on which a case appears, a party calling an expert witness shall serve on each other party and submit to the Court a copy of the expert's report. Finally, the Rule also provides that, generally, we will exclude an expert witness' testimony altogether for failure to comply with the Rule. Those requirements are echoed in our standing pretrial order, which was served on petitioner.

The Court inferred that the petitioner chose the unusual method because of a fee dispute with the appraiser.

The Court then rejected the attempt to back door the expert report into evidence, concluding:

Petitioner did not call Dr. Tindall as a witness but asks us to rely on her report (which, under our Rules, would serve as her direct testimony) as her expert opinion. Petitioner has neither qualified Dr. Tindall as an expert entitled pursuant to rule 702 of the Federal Rules of Evidence to give her opinion on technical matters nor has he satisfied our procedural rules for expert testimony, found in Rule 143(g) and in our standing pretrial order. In other words, petitioner has failed to satisfy the preconditions for our receiving Dr. Tindall's opinion into evidence. Because her report (i.e., the Tindall appraisal) is not in evidence, we may not consider her opinion.

The Court then accepted the IRS's valuation of $2,303,000.

Second Circuit Resolves Standard of Review on Tax Court Appeals in Transferee Liability Case (11/18/13)

Peter Reilly has posted a good discussion of the Second Circuit decision in Diebold Found. v. Commioner,  736 F.3d 172 (2d Cir. 2013), here.  Peter's blog entry Charitable Foundation Haunted by 1999 Corporate Tax Assessment (Forbes 11/17/12), here.

The substantive decision in the case deals with the application of Section 6091 transferee liability.  The case gets into some esoterica of transferee liability, so I will leaves readers of the opinion and Peter's blog to ferret that out.  I will, however, just offer a gratuitous comment that the sophisticated players in the underlying game -- generically referred to as Midco transactions -- knew that when all the shuffling was over, the IRS would be left holding the bag for a large amount of tax dollars that was due and that those tax dollars not paid would be shared among the players in various ways intended to disguise the fact that they had just participated in key steps to evade federal taxes.  Evade may be a strong word here, but for the level of sophistication -- lawyers involved -- by the players I have observed in the game, they knew -- certainly should have known -- that was the consequence of their participation in the Midco game.  I think the Second Circuit gets that point and is not too bashful to say so.  In this regard, Calvin Johnson, UT Law Professor, is quoted as saying that the shareholders (including the Diebold Foundation) [a]s a matter of economics, * * * got a price for their shares that included, by my estimates, 85 percent of the value of the tax evaded.  Andrew Velarde, Second Circuit Holding on Midco Acquisitions Seen as Big Win for Government, 2013 TNT 223-3 (11/19/13).

Moving on, at the bottom of his blog, Peter addresses the procedural issue that the Second Circuit resolves at the threshold in reaching the substantive issue it addressed.  That procedural issue is the appropriate standard of review for appeals from the Tax Court.  Section 7482(a)(1), here, confers jurisdiction upon the courts of appeals to review decisions from the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury."  Pretty straight-forward.  But the Second Circuit had to correct an error of its own making in order to calibrate the right standard for "mixed questions of law and fact."  The Court's discussion of the problem and its resolution is relative short, so I just cut and paste it.  However, in order to cut out some of the "noise," I omit most of the citations and some quotations marks.

In an appeal from the Tax Court, it is without dispute in this Circuit that we review legal conclusions de novo and findings of fact for clear error. While we have previously held the standard of review for mixed questions of law and fact to be one for clear error, all Courts of Appeals are to "review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. § 7482(a)(1). Our case law enunciating the standard of review for mixed questions of law and fact in an appeal from the Tax Court is in direct tension with this statutory mandate. Following a civil bench trial, we review a district court's findings of fact for clear error, and its conclusions of law de novo; resolutions of mixed questions of fact and law are reviewed de novo to the extent that the alleged error is based on the misunderstanding of a legal standard, and for clear error to the extent that the alleged error is based on a factual determination. Two recent panels of our Court have recognized this contradiction between our case law and 26 U.S.C. § 7482(a)(1) but did not resolve the tension, as they determined that under either standard of review the outcome in the particular case would be the same. In the instant case, the standard of review affects the outcome, so our Court can avoid the question no longer. 

The standard that mixed questions of law and fact are reviewed under a clearly erroneous standard when we review a decision of the Tax Court was established in this Circuit's jurisprudence in Bausch & Lomb Inc. v. Comm'r, 933 F.2d 1084, 1088 (2d Cir. 1991). Bausch & Lomb imported the standard from the Seventh Circuit, which, in Eli Lilly & Co. v. Comm'r, 856 F.2d 855, 861 (7th Cir. 1988), held the clearly erroneous standard to be applicable. Eli Lilly in turn relied upon another Seventh Circuit case, Standard Office Bldg. Corp. v. United States, 819 F.2d 1371, 1374 (7th Cir. 1987), a tax case on review from the district court. None of these decisions mention 26 U.S.C. § 7482(a)(1), which has been a part of the Internal Revenue Code since 1954. In Standard Office Building, the Seventh Circuit indicated that one of the open questions in the appeal was "the kind of 'mixed' question of fact and law . . . that, in this circuit at least, is governed by the clearly-erroneous standard." Id. (emphasis added). That court then cited a handful of cases from their circuit that stated this standard from cases reviewing the decision of a district court. The Seventh Circuit uses the clearly erroneous standard of review for mixed questions of law and fact when reviewing both decisions of the Tax Court and those of the district courts. Its standard is thus not in tension with 26 U.S.C. § 7482(a)(1), unlike this Court's.

Tax Court Side-Steps a "Beard" Return Issue to Get to Equitable Estoppel (11/16/13)

In Reifler v. Commissioner, T.C. Memo. 2013-258, here, the Tax Court was presented with an interesting issue of whether a returned original joint return without the spouse's signature was the return for purposes of the statute of limitations when the taxpayers later filed a delinquent return without any notice to the IRS about the original return.  The Tax Court ultimately held against the taxpayers on the basis of equitable estoppel, but in the interim discussed an issue of whether the "tacit consent" rule permitting the treatment of an unsigned return to be a return under Beard.

The Tax Court's summary of the opinion is:

On or about Oct. 15, 2001, the extended due date for Ps' 2000 Federal income tax return, Ps submitted to R's Andover, Massachusetts, Service Center a joint Federal income tax return for 2000, signed under penalties of perjury by P-H, but not by P-W. Upon receipt, the service center date-stamped the return, made handwritten markings indicating a missing signature, and mailed the return back to Ps with a form requesting that P-W sign it and that Ps return it to the service center within 20 days. Ps did not mail back the 2000 return with P-W's signature to the service center as requested. On July 29, 2002, respondent issued a "Taxpayer Delinquency Notice" to Ps. In response, Ps submitted a second joint Federal income tax return for 2000. The second 2000 return was identical to the first except that it was signed by both Ps opposite a date of Aug. 25, 2002, and bore neither the Oct. 15, 2001, date stamp nor the service center's markings on the original return. It was received by the service center on Sept. 2, 2002. Beginning on July 1, 2005, R obtained from Ps a series of consents extending the period of limitations on assessment and collection for 2000 until June 30, 2010, a date after the May 17, 2010, issuance of the notice of deficiency covering Ps' 2000 tax year. Ps allege that those consents are invalid because the I.R.C. sec. 6501(a) period of limitations on assessment and collection with respect to Ps' 2000 Federal income tax expired on Oct. 15, 2004, three years after they filed the initial 2000 return. 

Held: Ps are estopped from raising the affirmative defense of the period of limitations with regard to any 2000 deficiencies; 2000 remains open for assessment and collection of Federal income tax.

By way of background on the Beard return issue not addressed in the TC summary, I offer the following excerpts from my Federal Tax Procedure Book (footnotes omitted):

Fourth Circuit Affirmance of Summary Judgment in TFRP case (11/11/13)

In Johnson v. United States, ___ F.3d ___, 2013 U.S. App. LEXIS 22444 (4th Cir. 2013), here, the Fourth Circuit affirmed summary judgment for the Government in a trust fund recovery (also called responsible person) penalty case.  That penalty is imposed by Section 6672, here.  Johnson is a good case to illustrate the potential sweep of this penalty, which is frequently encountered by tax controversy practitioners.

I call readers attention to an excellent blog discussion of Johnson.  See Matt Lee, Fourth Circuit Affirms Responsible Officer Penalty Against Wife for Husband’s Unpaid Employment Taxes (Blank Rome Tax Controversy Watch 11/8/13), here.  I want try to recreate the blog, so to speak.  Mr. Lee's blog entry is very good and detailed.  I do offer his conclusion:

The Johnson case illustrates that personal liability may be assessed against corporate officers where a company fails to pay over employment taxes, even if the corporate officer was unaware of the failure to pay in prior periods.  Once the corporate officer learns of the tax delinquency, he or she has a duty to ensure that corporate funds are used to pay off those liabilities.  If the corporate officer fails to do so, personal liability for those taxes may be asserted. 

One interesting feature is the following from the opinion (footnote omitted):

Subsequently, the IRS assessed trust fund recovery penalties (the "100% penalty") against Mr. and Mrs. Johnson individually, pursuant to 26 U.S.C. § 6672.8 Mrs. Johnson later paid $351.00 toward her assessed penalty. 

On March 30, 2009, Mrs. Johnson filed suit in the United States District Court for the District of Maryland seeking a refund of the penalty she had paid, asserting that the § 6672 assessment against her was erroneous. The Government filed a counterclaim against both of the Johnsons in order to reduce its assessments to judgment, seeking to recover the balance of assessments due, including penalties, interest, and costs. Based upon transcripts of account showing the balances due as of August 22, 2011, the Government ultimately sought to recover $304,355.90 from Mrs. Johnson and $240,071.12 from Mr. Johnson.

I have previously posted on the issue of how much needs to be paid to insure that Flora's requirements are met. See  Flora v. United States, 362 U.S. 145 (1960).  Readers desiring to read the blogs on that issue can do so by clicking the subject labels below for Flora Full Payment Rule and Divisible Tax.

Thanks to the bloggers at Procedurally Taxing, here, for the lead to Mr. Lee's blog entry.  And thanks to Mr. Lee for the entry itself.

Isley Brother (of Isley Brothers) CDP Case Decision with Tax Procedure Issues (11/11/13)

Earlier today, I posted a blog on the Federal Tax Crimes Blog, IRS Authority to Settle After Referral to DOJ Tax (11/11/13), here.  In that blog, I point readers to an excellent blog by Peter Reilly -- An Isley Brother In Tax Court - Does Tax Crime Pay (Forbes Taxes 11/10/13), here.  Peter discusses the recent decision in Isley v. Commissioner, 141 T.C. No. 11 (2013), here.  I refer readers to Peter's excellent discussion of the issues in the case.  In my Federal Tax Crimes Blog entry, rather than re-covering the ground that Peter does so well -- I urge readers to read his blog -- I focused on one aspect of the case that particularly interested me -- the application of Section 7122(a), here, that gives DOJ authority over compromises of criminal and civil matters that have been referred to DOJ.  I won't repeat my discussion here, but refer interested readers to that blog entry.

On John Doe Summonses and the Appearance of Impartiality - Unrelated Topics But Both Discussed (11/4/13)

I assign my Tax Procedure students the case of United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), here.  I contrast the case with United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), here.  The context is the John Doe Summons under Section 7609(f), here.  Briefly, the John Doe Summons is an IRS summons issued to a person within the summons power of the IRS for information or documents about unknown taxpayers -- hence John Doe -- as to whom the IRS believes and can show that there is a potential, not fanciful tax compliance issue within the scope of its investigative authority.  The John Doe Summons has been used in the offshore account area.  Here is the discussion of Tiffany Fine Arts and Gertner from my Federal Tax Procedure text (footnotes omitted).

The John Doe Summons procedures were designed to provide checks and balances.  But, the IRS often finds that the procedures slow it down.  The IRS must convince DOJ Tax, whose attorneys are plenty busy with other work, that it is worth going through the procedures to get the summons.  DOJ Tax must gear up and present the matter to a frequently skeptical and almost always overworked District Judge who must play devil's advocate to the Government's ex parte application for the summons.  Obviously, the IRS would much prefer just to use its administrative summons which has no such cumbersome steps.  

In United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), the Supreme Court blessed the IRS's use of the regular administrative summons rather than the John Doe summons where the target of the summons has transactions relevant to its tax liability which, if discovered, might also identify unknown third parties’ and be relevant to their tax liabilities.  The context there was a tax shelter promoter who sold the product to unknown third parties.  By allegedly investigating the promoter’s tax liability to support inquiries into whether it reported its income from those unknown third parties, the IRS could summons the information under the general administrative summons by meeting the minimal requirements of Powell. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure.  After Tiffany Fine Arts, the IRS saw the end-run around the John Doe Summons  procedures -- simply find a reason to audit the third party record-keeper such as the tax shelter promoter and find some pretext that obtaining the names of the third parties is relevant under the Powell standards to the audit of the record-keeper. 

In United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), which you should now read, a law firm filed a Form 8300 (currency transaction report) notifying the IRS that the law firm had received in excess of $10,000 in cash.  The form, however, failed to identify the taxpayer, asserting ethical grounds, the attorney client privilege and constitutional grounds. The IRS then issued a regular IRS summons to the law firm to produce the withheld information.  The IRS used the regular IRS summons as opposed to the John Doe summons on the ground the Supreme Court blessed in Tiffany Fine Arts -- i.e., that the summonsee's taxes were being investigated as well as the unknown taxpayer's taxes.  Analyzing the case under the Powell good faith standard, the district court concluded that the IRS's grounds for using the general summons -- i.e., that it was investigating the law firm's tax liability -- was pretextual, mere smoke and mirrors to achieve the real goal of investigating the unidentified taxpayer.  The Court of Appeals affirmed, noting importantly that the John Doe Summons procedure required advance court approval, a procedure the Government sought to avoid here on the pretext that it was after something more than the taxpayer's identity.  The Court of Appeals noted that the requirement of advance court approval could not be ignored by the IRS simply by chanting a litany based on Tiffany Fine Arts.

Readers may be aware of a very recent kerfuffle in the Second Circuit regarding a nontax issue where the Second Circuit took the highly unusual step of removing a federal district judge from a case in which the judge took the City of New York to task for, very generally, " improperly steering cases and commenting out of court."  The New York Times has a wonderful "Room for Debate" series of articles on the issues raised.  The series is titled "The Appearance of Impartiality" and may be viewed here.  One of the authors in the series is Nancy Gertner, who became a U.S. district judge herself after the skirmish in the case above.  So I thought I would post links to the series and Nancy Gertner's article here as an excuse to post the foregoing about the concepts of the John Doe Summons (hoping, of course, that those interested in the John Doe Summons might also have an interest in the Appearance of Impartiality).