Thoughts on Estate of Elkins and Valuations (10/21/14)

I write today on the Fifth Circuit's opinion in Estate of Elkins v. Commissioner, ___ F.3d ___, 2014 U.S. App. LEXIS 17882 (5th Cir. 2014), here.  In that case, the Fifth Circuit reversed the Tax Court in a valuation case involving discounts for fractional interests in valuable art.  The Fifth Circuit opens with a summary of its reasoning, such as it is (footnote omitted):

In the Tax Court, the Commissioner steadfastly maintained that absolutely no fractional-ownership discount was allowable. This presumably accounts for his failure to adduce any affirmative evidence—either factual or expert opinion—as to the quantum of such discounts in the event they were found applicable by the court.
The Tax Court rejected the Commissioner's zero-discount position, but also rejected the quantums of the various fractional-ownership discounts adduced by the Estate through the reports, exhibits, and testimony of its three expert witnesses—the only substantive evidence of discount quantum presented to the court.1 Instead, the Tax Court concluded that a "nominal" fractional-ownership discount of 10 percent should apply across the board to Decedent's ratable share of the stipulated FMV of each of the works of art; this despite the absence of any record evidence whatsoever on which to base the quantum of its self-labeled nominal discount.
We agree in large part with the Tax Court's underlying analysis and discrete factual determinations, including its rejection of the Commissioner's zero-discount position (which holding we affirm). We disagree, however, with the ultimate step in the court's analysis that led it not only to reject the quantums of the Estate's proffered fractional-ownership discounts but also to adopt and apply one of its own without any supporting evidence. We therefore affirm in part, reverse in part, and render judgment in favor of Petitioners, holding that the taxable values of Decedent's fractional interests in the works of art are the net amounts reflected for each on Exhibit B of the Tax Court's opinion. This, in turn, produces an aggregate refund owed to the Estate of $14,359,508.21, plus statutory interest.

Just a few paragraphs down, the Fifth Circuit continues:

This entire appeal thus begins and ends with the question of the taxable value of Decedent's fractional interests in those 64 items of non-business, tangible, personal property that were jointly owned in varying percentages by Decedent and his three adult children at the instant of his death. And, the answer to that one question begins and ends with the proper administration of the ubiquitous willing buyer/willing seller test for fair market value: "Fair market value is defined as 'the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.'"

The context for the Fifth Circuit’s opinion is the Tax Court’s opinion below.   In Estate of Elkins v. Commissioner, 140 T.C. No. 5, 2013 U.S. Tax Ct. LEXIS 6 (T.C. 2013), here, the issue was the familiar one of the appropriate discounts for fractional interests.  The IRS generally disfavors fractional interests, due in no small part to taxpayers’ frequent – perhaps even common – use of aggressive discounts which will either prevail because they win the audit lottery or, if caught, will be recognized as improperly inflated and reduced accordingly.  (Most practitioners would say that it is entirely proper to assert aggressive discounts -- but not so aggressive that serious penalties would apply in the full expectation that, if contested, there will likely be some adjustment; that is the way the game is played.) Essentially, as I read the opinion, the Tax Court judge, Judge Halperin, found the estate's proffered too aggressive and found an alternative discount.  The estate, of course, had "experts" to testify as to the discounts.  The IRS essentially had no "experts" to testify that no discount or any discount less than testified by the estate's experts was appropriate.  So, on the record presented, Judge Halperin found that the proper discount was 10%, substantially below the discounts claimed by the estate.  He based that on the entire record before him.

Failure of Taxpayers' Proof of Value Loses Case (10/8/14)

In Cavallaro v. Commissioner, T.C. Memo 2014-189, here, the Tax Court held that the parents owning a company merged with a company owned by the children had not received enough value in the merged companies and thereby made a gift to the children.  The court also held that the parents had reasonable cause to rely upon their tax advisors and thus avoided penalties.

I focus here on the valuation issue of whether a gift was made.  The law is clear that a gift can be made under such circumstances if one party shifts value to other related parties.  The Court resolved the actual value issue on the basis of the burden of proof.  Most of the time, valuation issues are decided after each side has proffered expert testimony with the Court finding a value somewhere in between.  Even where the parties are reasonable in their valuations, they are usually reasonably aggressive positions and the value really is somewhere in between.  In Cavallaro, however, the Court found the value the Commissioner claimed because, it found, that taxpayers had failed to meet the burden of proof imposed upon them.  Basically, the potential for a shift in value from the parents to the children occurred only if the parents' company did not own certain valuable technology.  The parents' claim was that the children's company owned the valuable technology, hence the parents did not receive less than they contributed to the merger and did not make a gift to the children.  The parents' experts made their expert reports assuming the validity of the claim that the parents' company did not own the technology.  The Court found, however, that the parents' company did own the technology, thereby rendering the parent's expert witness reports irrelevant.  All the Court then had was the claim by the Commissioner (which had been reduced from the amount originally asserted in the notice of deficiency), supported, of course, by the Commissioner's expert report.  The Court thus had no basis for doing anything other than sustaining the Commissioner based on the taxpayers' failure to meet the burden of proof.

Key components of the holding are:

1.  The Court first held that the taxpayers had the burden of proof even though the IRS had substantially reduced its valuation from the amount originally asserted in the notice of deficiency.  The Court reasoned.

In general, the IRS's notice of deficiency is presumed correct, "and the petitioner has the burden of proving it to be wrong". Welch v. Helvering, 290 U.S. 111, 115, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112 (1933); see also Rule 142(a). The Commissioner has conceded that the taxable gifts totaled not $46.1 million (as in the notices of deficiency) but instead $29.6 million (as yielded by Mr. Bello's analysis). Where the Commissioner has made a partial concession of the determination in the notice of deficiency, the petitioner has the burden to prove that remaining determination wrong. See Silverman v. Commissioner, 538 F.2d 927, 930 (2d Cir. 1976) [**52]   (holding that the burden of proof does not shift where the Commissioner's change of position operates in favor of the taxpayer), aff'g T.C. Memo. 1974-285; cf. Rule 142 (shifting the burden "in respect of * * * increases in deficiency").

2.  The Court then rejected the argument that the reduction shifted the burden under Tax Court Rule 142(a)(1) which imposes the burden of proof on the commissioner "in respect of a new matter."  For much the same reason as Silverman, the Court rejected the argument.  The Court did say that the IRS's assertion of the accuracy related penalty rather than the fraud penalty was a new matter (even though the taxpayer's claim of reasonable cause would have been a defense to the fraud penalty originally asserted); and in any event, the Court found the defense proved so neither penalty applied.

UH Tax Procedure Class 2014

Tonight the class for tax procedure starts.  I will periodically post updates and errata here for students and mark those with a keyword "UH TPC 2014."  So, click on that keyword to retrieve the entries relevant for the class.  Not all entries will be relevant to the case, so students may not want to spend their valuable time with those entries.

Please note the errata page in the column at the right.

BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (8/27/14)

I have previously written on the Allen issue -- whether Section 6501(c)(1)'s unlimited statute of limitations may be triggered by fraud on the return that is not the taxpayer's fraud.  See Allen v. Commissioner, 128 T.C. 37 (2007), here.  (For my blogs on the issue, see here.)

Since Allen, the courts addressing the issue have been  sparse, but seemed to accept the validity of Allen's holding that fraud on the return triggers the unlimited statute of limitations even if it was not the taxpayer's fraud.  Allen involved a run of the mine fraudulent preparer, but the more prominent instances where the holding could apply involves the plethora of bullshit / fraudulent tax shelters that were popular with the wealthy in the 1990s and in the early 2000s.  Apparently not anticipating the holding in Allen, the IRS walked away from making adjustments to taxpayers investing in those shelters where it could not find an open statute of limitations under the other rules.  The IRS did try to get some relief by asserting the 6 year statute, but came up short on that in  U.S. v. Home Concrete & Supply, LLC, ___ U.S. ___, 132 S.Ct. 1836 (2012), here.  (See The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (Federal Tax Crimes Blog 4/25/12), here.) Then, the IRS belatedly discovered the implications of Allen.

In BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here, the Court of Federal Claims rejected Allen and held that the unlimited statute in Section 6501(c)(1) required the taxpayer's fraud.  That holding, of course, warmed the hearts of taxpayers who invested in bullshit / fraudulent tax shelters -- a win on the audit lottery they willing and  joyously played.  For prior discussions of BASR, see Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (Federal Tax Procedure Blog 10/3/13), here,  and Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (Federal Tax Crimes Blog 11/14/13; revised 11/16/13), here.

The  Government appealed BASR to the Court of Appeals for the Federal Circuit.  That case is now pending.  But it has been briefed.  I offer today in this blog entry the briefs of the parties and of Amicus Curiae (arguing that the Allen holding is incorrect).  Those briefs are:

• Government Opening Brief, here.
• BASR Answering Brief, here.
• Amicus Curiae Brief, here.
• Government Reply Brief (Responding to BASR Brief and Amicus Brief), here.

I will cut and paste the Summaries of the Arguments in the Briefs:

Eleventh Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (6/14/14)

In United States v. Carlson, ___ F.3d  ___, 2014 U.S. App. LEXIS 11001 (11th Cir. 6/13/14), here, the issue was the plaintiff's liability for " aiding and abetting understatement of tax liability in violation of I.R.C. § 6701."  Section 6701 is here.  In relevant part, Section 6701 imposes the penalty upon a person:

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

Section 6701 may be viewed as the civil penalty analog to the tax crime of aiding and assisting, Section 7206(2), here.

One issue on the appeal was the appropriate burden of  proof the Government must bear.  Carlson argued that it was by clear and convincing evidence; the Government argued that it was by a preponderance.  The Court held that the standard of proof is by clear and  convincing evidence.  Here is the Court's discussion:

I. The Government must prove violations of I.R.C. § 6701 by clear and convincing evidence. 

At trial, the parties disputed the correct standard of proof. Carlson contends the correct standard should be clear and convincing evidence while the Government contends the correct standard is a preponderance of the evidence. The district court agreed with the Government and instructed the jury that the Government must prove its case by a preponderance of the evidence. We conclude that this instruction misstated the law. 

Under the Eleventh Circuit's longstanding precedent, the Government must prove fraud in civil tax cases by clear and convincing evidence. See, e.g., Ballard v. Comm'r of Internal Revenue, 522 F.3d 1229, 1234 (11th Cir. 2008) ("The Commissioner has the burden of proving allegations of fraud by clear and convincing evidence."); Korecky v. Comm'r of Internal Revenue, 781 F.3d 1566, 1568 (11th Cir. 1986) ("The IRS bears the burden of proving fraud, which must be established by clear and convincing evidence."); Marsellus v. Comm'r of Internal Revenue, 544 F.2d 883, 885 (5th Cir. 1977) (holding fraud must be proved by clear and convincing evidence); Webb v. Comm'r of Internal Revenue, 394 F.2d 366, 378 (5th Cir. 1968) (same); Goldberg v. Comm'r of Internal Revenue, 239 F.3d 316, 320 (5th Cir. 1956) ("The Commissioner has the burden of proving fraud by clear and convincing evidence."); Jemison v. Comm'r of Internal Revenue, 45 F.2d 4, 5-6 (5th Cir. 1930) ("Fraud is not to be presumed, but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case."). Our sister courts of appeals follow the same rule. See, e.g., Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (holding that a finding of fraud must be supported by clear and convincing evidence); Lessmann v. Comm'r of Internal Revenue, 327 F.2d 990, 993 (8th Cir. 1964) (same); Davis v. Comm'r of Internal Revenue, 184 F.2d 86, 86 (10th Cir. 1950) (same);Rogers v. Comm'r of Internal Revenue, 111 F.2d 987, 989 (6th Cir. 1940) ("Fraud cannot be lightly inferred, but must be established by clear and convincing proof."); Duffin v. Lucas, 55 F.2d 786, 798 (6th Cir. 1932) (same); Griffiths v. Comm'r of Internal Revenue, 50 F.2d 782, 786 (7th Cir. 1931) ("Fraud is never presumed but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.").

Procedural Predicates for Setoffs in Refund Suits (7/2/14)

In Lewis v. Reynolds, 284 U.S. 281 (1932), here,modified in 284 U.S. 599 (1932), the Supreme Court held that, in a refund suit, the Government can raise a previously unasserted basis for denying a taxpayer a refund.  The notion is that, in a refund suit, the issue is whether the taxpayer overpaid the tax and therefore is entitled to a refund.  If there is some other basis to conclude that the taxpayer did not overpay the tax, the taxpayer is not entitled to a refund.  The issue usually arises after the IRS has audited an issue and assessed a deficiency.  The taxpayer pays the assessed tax and sues for refund, asserting that the taxpayer does not owe tax with respect to that issue.  Lewis v. Reynolds holds that, in that refund suit, the Government can assert any other basis that shows the taxpayer is not entitled to a refund for that year or is entitled to less than the taxpayer assert.  This is often referred to as a setoff.

The setoff concept is important in tax practice.  One significant issue is what the Government must do to assert the setoff.  This issue arose in a recent case, Lockheed Martin Corp. v. United States, 973 F. Supp. 2d 591 (D. Md. 2013), where the Court addressed the pleading requirements for the Government to raise the setff as a defense.  In Lockheed, the Government pled the following under a caption titled "Second Defense":

Should the Court determine that Plaintiff raised a meritorious argument that would otherwise establish that Plaintiff overpaid its taxes, the United States is entitled to reduce that overpayment based on any additional tax liabilities that the Plaintiff may owe, whether or not previously assessed or alleged. The United States is entitled to such reduction because the redetermination of the Plaintiff's entire federal income tax liability for the litigated tax years is at issue in this refund suit.

Note that the Government pleads nothing except its theoretical right to the setoff.

Of course, the taxpayer in a refund suit does not want the Government to be able to assert the right to a setoff at all.  And, the theoretical assertion of the right may raise concern that the Government will use the refund suit litigation to re-audit in search of something to setoff.  So, in Lockheed, the taxpayer moved to strike that portion of the pleading, alleging that setoff should be pled like an affirmative defense, which, as Lockheed read the cases, would prohibit this type of conclusory pleading without a factual basis for the claim.  The Government argued that, although labeled a defense, it is not an affirmative defense at all, but merely goes to the issue of whether this taxpayer has proved that it is entitled to the refund the taxpayer claims.  The Court does not engage on this theoretical difference between a setoff and an affirmative defense, but treats the setoff as being subject to the affirmative defense pleading requirements.

Focusing on those pleading requirements for affirmative defenses, the Court notes that there is a split of authority over whether any notice of factual predicate for the legal claim is required to be pled.  The Court first identifies the split of authority and then turns to rationale for the majority and minority views as follows:

Another Bullshit Shelter Bites the Dust Even with Variations (5/15/14)

I write today on the defeat of another bullshit tax shelter of the Son-of-Boss ("SOB") variety.  The Markell Company, Inc. v. Commissioner, T.C. Memo. 2014-86, here, decided yesterday.  If it were just another ho-hum SOB, it would be worth noting only in passing.  But, it has a twist -- both the twist and the outcome is projected in the opening two short paragraphs:

This case began when the Commissioner found the remains of a corporation on an Indian reservation in an extremely remote corner of Utah. The tribe claimed not to know how the corporation's stock had ended up in its hands. And there was little or no money or valuable property left inside the corporate shell. 

All signs pointed to the corporation's manager, a sophisticated East Coast moneyman, as the key person of interest. And his method was a series of complex transactions that bore a striking resemblance to Son-of-BOSS deals already examined many times before by this Court -- but with a corporate-partner twist.

The last sentence of the first paragraph resonates with the equally bullshit intermediary transactions.  One of the strategies in shelters is to push tax consequences to an empty shell of a company, so that the IRS is left without anyone to collect tax clearly due.

The Son-of-Boss transactions in their pure bullshit form seemed to promise to the gullible or complicit that the taxable income disappearing from the taxpayer's tax ledger would just go away.  But, every one I know that gave a hard and knowledgeable look knew that, even if the imagined scheme worked to push the income from the original taxpayer (always a doubtful proposition), some taxpayer down the line would be liable for the tax.  Enter the intermediary gambit to make sure that taxpayer down the line had no assets to pay the tax because the taxpayer and the promoters would have sucked all the value out of the company.  Thus, this intermediary was designed to deal with an inherent and blatant flaw in the SOB transactions.  (Of course, SOB transactions had flaws in them before reaching this stage, but the intermediary was a fine artistic touch to put on the bullshit.)

The Merits

The Chevron Two-Step (5/6/14)

Tax Procedure enthusiasts know -- or should know -- that Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), here, empowered the administrative state whereby agencies' interpretations of statutes entrusted by Congress to their administration are given deference.  The Chevron analysis involves two key steps, explained as follows from my Federal Tax Procedure book (footnotes omitted):

The Court established a “two-step” inquiry.  The First Step inquires whether the meaning of the statute is plain and unambiguous?  An alternative way to say this is whether the meaning of the statute is “clear” and needs no interpretation either by the courts or the agency.  If so, the regulation is irrelevant because the plain or clear meaning of the statute itself pre-empts the interpretive field.  A regulation inconsistent with the clear (or plain or unambiguous) meaning is invalid.  The Second Step, reached only if the text is determined to be not clear (or not plain or not unambiguous) in the First Step, is whether the agency interpretation is unreasonable? Under this Second Step, the agency’s interpretation in the regulations is given deference so long as it is not arbitrary, capricious or manifestly contrary to the statute it seeks to interpret (I generally just truncate this litany to “unreasonable”). This gives the IRS authority to interpret and determine the law where in the conceptual space between clear statutory text and an interpretation that is unreasonable under the statutory text.  This two-step inquiry is very important; students, practitioners and scholars must know the steps instinctively; I encourage readers of this text to commit them to memory – at least the formulation of the steps.

With that introduction, here are creative NYU Law students demonstrating the Chevron two-step.

Hat tip to the Tax Prof Blog for bringing the video to my attention.

Role and Culpability of Taxpayers Participating in Bullshit Tax Shelters (4/4/14)

I write today to collect and update some thoughts I have expressed before on this blog.  The background is the bullshit tax shelters on which I have written and even fulminated, if not eloquently, at least often.  I start with my own definition from my Tax Procedure Book (footnotes omitted).

  Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (i) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

The bullshit tax shelter with which I am most familiar is the Son-of-Boss shelter.  That shelter purported to generate offsets to taxable income.  The offsets were wrapped in commotion but ultimately simply created from thin air -- very thin, indeed a perfect vacuum.  Bullshit shelters appear in many guises other than Son-of-Boss.  The commotion they are wrapped in serve two purposes:  (i) creating the illusion of some basis for the magical tax benefits and (ii) hiding the fact that the illusion is an illusion.  Bottom-line, several courts have characterized the imagined benefits as "too good to be true" and indeed recognizably "too good to be true."

As readers of this blog know, many bullshit tax shelter promoters have been convicted for their participation in the bullshit tax shelters.  Taxpayers themselves have not been prosecuted or convicted.  I do understand that some taxpayers have been named targets or subjects of grand jury investigations for their participation but those investigations ended in only promoter prosecutions.

Discovery from IRS Files and Employees About Fair Notice of Liability and Treatment of Other Taxpayers (5/2/14)

In NetJets Large Aircraft, Inc. v. United States, 2014 U.S. Dist. LEXIS 58677 (SD OH 2014), here, Magistrate Judge Terence P. Kemp, here, resolved discovery disputes in this tax refund and abatement action relating to transportation tax under Section 4261, here.  Magistrate Judge Kemp does a very good job addressing discovery issues related to the IRS's alleged inconsistent application of the Section 4261 tax.  I am not sure the opinion will survive unscathed on appeal to the district judge, but it is a good opinion.  So I offer it to readers of this blog.

The taxpayers "provide aircraft management and aviation support services to aircraft owners and leaseholders (with whole and/or fractional interests in the aircrafts)."  I think the question in terms of the substantive application of the law is whether the taxpayers' role in providing ownership or leasing and all related services to fractional owners/leaseholders is serving in an analogous role to airline companies who must collect the tax from their customers (who, after all, can viewed as leasing the space on the plane for the time of the trip).

In a prior case, Executive Jet Aviation, Inc. v. United States, 125 F.3d 1463 (Fed. Cir. 1998), here, the Court held "the occupied hourly fees that fractional management companies received from fractional owners were subject to the tax imposed by section 4261(a)."  The taxpayers in NetJets apparently try to differentiate that case on the basis that the Executive Jet decision was premised on the arrangement not being "a bona fide economic arrangement."

Subsequently, the IRS promulgated regulations that, according to the taxpayers, make such arrangements bona fide when agreements of the type that the taxpayers used with their customers.

Notwithstanding the alleged distinction of the Executive Jet Aviation decision, the IRS asserted the tax against the taxpayers.

The litigation and the discovery disputes ensued.

The basic rule of discovery is that it be relevant to a legitimate dispute in the case.  To determine that, the Court reviewed the relief the taxpayers sought as follows:

(1) Plaintiffs do not provide "taxable transportation" under 26 U.S.C. §4261, and thus the payments Plaintiffs receive from aircraft owners are not subject to the section 4261 excise tax;
(2) The IRS failed to provide clear guidance to Plaintiffs that they were required to collect and remit the section 4261 excise tax on the monthly management and fuel variable surcharge fees they received from aircraft owners;
(3) The IRS violated its duty to treat similar taxpayers in a consistent manner because it has assessed the section 4261 excise tax against certain of the fees that Plaintiffs charge fractional aircraft owners while not assessing the tax against those same fees with respect to certain of Plaintiffs' competitors; and
(4) The IRS is legally bound by a Technical Advice Memorandum ("TAM") it issued to Plaintiffs' predecessor, Executive Jet Aviation, in 1992, which provides that only the occupied hourly fees paid by fractional aircraft owners, and not monthly management or fuel variable surcharge fees, constitute payments for "taxable transportation" under 26 U.S.C. §4261. Under applicable Treasury regulations, as well as the IRS's own internal guidelines, the IRS is bound by the 1992 TAM until such time as the IRS issues Plaintiffs another TAM modifying or replacing the one from 1992. The IRS has never issued such a subsequent TAM, and thus its assessment of the section 4261 tax against Plaintiffs' monthly management and fuel variable surcharge fees, in violation of Treasury regulations and IRS guidelines, was unlawful.

What Does Shall Mean? Herein of Slippery Mandatory Language and Summons Enforcement (5/1/14)

In Jewell v. United States, 2014 U.S. App. LEXIS 7899 (10th Cir. 2014), here, the Court held that shall means shall.  So stated, not a surprising holding.  The context -- ah yes, context is important -- was the statutory textual requirement in Section 7609(a)(1), here, that the taxpayer being investigated "shall be given" notice of the summons "within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined."  Now for further background.

The summons authority is in Section 7602, here.  Section 7609 is titled "Special procedures for third-party summonses."  The critical "shall" is in Section 7609(a)(1).

Summonses generally must meet the four part Powell test established in United States v. Powell, 379 U.S. 48 (1964), here (brackets added to highlight the four parts]:

[i] that the investigation will be conducted pursuant to a legitimate purpose, [ii] that the inquiry may be relevant to the purpose, [iii] that the information sought is not already within the Commissioner's possession, and [iv] that the administrative steps required by the Code have been followed * * * .

The issue in Jewell was whether, given the command of the Section 7609(a)(1) that notice "shall be given," the IRS's failure to give Jewell notice in the time period required prevents the IRS from having issued a valid summons and therefore prevents the IRS from petitioning the district court to enforce the summons.

Essentially, the Court held that shall means shall and denied enforcement of the petition.  And, to complete the reasoning, the Court said that the giving of timely notice was an administrative step required by Powell.

The Court engages in a lawyerly discussion over the meaning of shall.  When is the use of shall mandatory or simply precatory, a guide but not a straightjacket?  The court discusses the contrary authority in other circuits where a no harm no foul approach was adopted -- i.e., the summons would be enforced unless the taxpayer shows prejudice (or perhaps the IRS shows lack of prejudice), so that the requirement was merely a technicality that can be dispensed with or ignored.  Not so, says the Court.  The use of shall, properly and plainly interpreted, established an administrative step that Powell requires to be met.

Consider the implications.  One that comes readily to mind is the use of shall in statutory requirements for a notice of deficiency.  For example, uncodified Section 3463 of the Internal Revenue Restructuring and Reform Act of 1998 ("Act") states that the IRS "shall include on each notice of deficiency . . . the date determined by [the IRS] as the last day on which the taxpayer may file a petition with the Tax Court." Courts have not invalidate the notice of deficiency for failure to meet this "shall" requirement. A number of cases have so held, and the Tax Court made this holding less than a year ago.  John C. Hom & Assocs. v. Comm'r, 2013 U.S. Tax Ct. LEXIS 12 (T.C. 2013), here. Here is the Tax Court's reasoning:

Crossing the Line in Tax Planning (4/22/14)

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case.  In Moreland v. Koskinen, 2014 U.S. Dist. LEXIS 53308 (ND AL 2014), here, the taxpayers, husband and wife, complained that the IRS had denied their first time homebuyer credit.  (The precise procedural posture of the case is unclear, but I assume it was a refund suit; the taxpayers appeared pro se.)  Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the credit, but the facts outside the paperwork showed that they did not qualify.

The law requires that property acquired from a related person does not qualify.  The Morelands and Mollie Holland, another otherwise unrelated taxpayer  (unrelated in the sense of the statutory disqualification), wanted to qualify otherwise unqualified properties.  In order to give the appearance that the properties qualified, they created a paperwork façade to make it appear that the Morelands temporarily owned property disqualified as to Ms. Holland so that she could "purchase" the property from the Morelands and vice-versa.

The key part of the decision is (bold-facing by JAT):

In the present case, the paperwork related to all of the real estate conveyances at issue appears to indicate, on its face, that Kevin Moreland purchased the Killen property from Noble and Donna Holland, who are not related to him in any way. If the technical form of that transaction were the only relevant consideration, Kevin and Melissa Moreland might be entitled to the receive the FTHBC. However, when viewed as a whole and in the light of all of the credible evidence, it is clear that the substance of the transaction was very different from its form. In substance, Noble and Donna Holland engaged in a property swap with Janie Moreland for the purpose of making it appear that their respective children qualified for the First Time Home Buyer Credit. There was no actual transfer of the subject properties. Noble and Donna Holland never took possession of the Killen property, and Kevin and Melissa Moreland never vacated it. Kevin and Melissa Moreland paid Noble and Donna Holland only a very small percentage of the money they purportedly owe for the property, and the Hollands never tried to collect from the Morelands. Similarly, Janie Moreland never took possession of the Leighton property, and Mollie Holland did not even move into that property after it had purportedly been transferred to her. Mollie Holland never paid Janie Moreland anything for the Leighton property, and Janie Moreland has never tried to collect anything from Mollie Holland. 

Stated in terms that are most favorable to the parties involved, the only substantive transactions that took place were the transfer of the Killen property from mother (Janie Moreland) to son (Kevin Moreland), and the transfer of the Leighton property from parents (Noble and Donna Holland) to daughter (Mollie Holland). Stated less charitably, each family, in exchange for the sum of $8,000, concocted a scheme to defraud the United States government via the Internal Revenue Service. Under either construction, plaintiffs are not entitled to the First Time Home Buyer Credit.

The case involved only one set of the taxpayers involved, the Morelands.  The other set also claimed the credit.  The Court described their situation as follows:

Mollie Holland claimed a First-Time Home Buyer Credit ("FTHBC") on her Form 1040EZ Income Tax Return for 2010.29 The IRS granted her the credit, but she decided in early 2014 to return all the money she received because, after further consultation with the IRS, she determined she was not entitled to the credit and that "it wasn't right" for her to retain the money.

GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (4/17/14)

I have previously written on GE's bullshit tax shelter twice blessed by the district court and twice swatted down by the Court of Appeals..  See Second Circuit Strikes Down Another BS Tax Shelter (Federal Tax Crimes Blog 1/24/12); here, and Thoughts on the the Corporate Audit Lottery (Federal Tax Crimes 2/11/12), here.  The irrepressible district court, smarting over two failed attempts to approve a GE raid on the fisc, makes another go at it in TIFD-III-E Inc. v. United States, 2014 U.S. Dist. LEXIS 41472 (D. Conn. 2014), here.  (The judgment entered shortly thereafter is here.)

The Second Circuit had already approved the application of the 20% substantial understatement penalty, but, as it turns out, when pushed to the taxpayer, the tax involved, though large, would not meet the threshold requirement that the understatement be "substantial" -- defined as exceeding "(i) 10 percent of the tax required to be shown on the return for the taxable year."  Section 6662(d)(1)(A)(i), here.

Readers will recall that the 20% accuracy related penalty has another basis -- if the position is due to negligence, which has no threshold limitation.  Section 6662(c), here.  So, the Government made another run to extract from GE some penalty for having played the audit lottery and lost for its bullshit tax shelter.  Again, this time, the district court tilted for GE, thus insulating GE from any cost or penalty for playing the audit lottery.  Why?

The Court opens its opinion as follows:

Defendant, the United States, moves for an order imposing a negligence penalty on plaintiff TIFD III-E Inc. ("TIFD") for tax years 1997 and 1998. During the 1990s, TIFD's parent company, General Electric Capital Corporation ("GECC"), joined with a pair of Dutch banks ("the Dutch Banks" or "the Banks") to form an aircraft leasing company. TIFD considered the Dutch Banks to be its partners in the venture, and did not report any income allocated to the Banks on its own tax returns. During the course of this litigation, I twice found that decision to be more than reasonable; indeed, I found that the company correctly deemed the Banks to be equity stakeholders rather than lenders. TIFD III-E v. United States, 342 F. Supp. 2d 94 (D. Conn. 2004)  [*4] ("Castle Harbour I"); TIFD III-E v. United States, 660 F. Supp. 2d 367 (D. Conn. 2009) ("Castle Harbour III"). The Second Circuit twice disagreed. TIFD III-E v. United States, 459 F.3d 220 (2d Cir. 2006) ("Castle Harbour II"); TIFD III-E v. United States, 666 F.3d 836 (2d Cir. 2012) ("Castle Harbour IV"). So, after more than a decade of litigation, TIFD ultimately lost this case. In addition, the Second Circuit held that the IRS could impose a 20% accuracy penalty against TIFD for substantial understatement of its income taxes in 1997 and 1998.

Despite having "twice found that [GE's] decision to be more than reasonable," the judge candidly acknowledges that the Second Circuit disagreed.  The court then proceeds to find GE reasonable again.

I won't review the facts, for the court itself that "I assume the parties' familiarity with the facts underlying this case."  I will note that, as is common in these bullshit corporate tax shelters, a foreign bank was the linchpin to make it have the superficial appearance of working.  (Foreign banks also played an essential role in the bullshit individual Son-of-Boss tax shelters; in this regard, see my postings Credit Suisse DOJ Investigation Status and New NY Investigation (Federal Tax Crimes Blog 4/7/14), here; and NY State Agency Makes New Moves in Investigation of Credit Suisse (Federal Tax Crimes Blog 4/17/14), here.)

The Mitigation Provisions of the Code - An Example of How They Work to Open an Otherwise Closed Year (4/3/14)

All taxpayers facing a tax liability hope that the IRS will fail to assess within the applicable period of limitations.  For example, the IRS often requests a Form 870, Waiver of the Restrictions on Assessment, which, because it waives the notice of deficiency which, in turn, would have suspended the statute of limitations, hope that the IRS will not get around to assessing in time.  (That is vain hope in the overwhelming number of cases.)  There are a myriad of other circumstances where a similar situation occurs.

One such circumstance applied in El Paso CGP Company, L.L.C. v. United States of America, 748 F.3d 225 (5th Cir. 2014), here.  In this case, the facts are complex, but I think I can distill them for purposes of the point I want to make in this blog entry. Normally, when a year is closed, it is just closed.  If the taxpayer got a benefit he was not entitled to, that is just the IRS's tough luck; and vice versa.  However, various Code provisions and judicial doctrines may apply to mitigate the effect of the improper benefit in the closed year.  Indeed, the most beautiful such provisions are called the mitigation provisions of the Code -- Sections 1311-1314.  Essentially, the effect of those mitigation provisions in most of  the circumstances of adjustment to which they apply is to take away a double benefit to a taxpayer from achieving a tax benefit for the treatment of an item in a correct open year when the taxpayer has previously achieved a benefit in an incorrect otherwise closed year.

Without getting into the facts in too great a detail (read the opinion), the taxpayer claimed credits in 1986 which because of limits were carried forward to some later years.  After some audit activity, the parties agreed that the taxpayer had overstated the credits in question but was entitled to other credits so that, for the year 1986, the taxpayer was still entitled to a refund.  However, because the credits in question had been overstated in 1986, the carry forward of those credits to post-1986 years was wiped out, meaning that the taxpayer had deficiencies in those post-1986 years which were then closed.  This apparently was a circumstance of adjustment under the mitigation provisions.  (I have not chased down that issue, but the Court and the parties seemed to assume it.)  Under the mitigation provisions of the Code, the IRS has a one-year window from the time of the determination to assess, collect, refund or credit the tax, as appropriate for the type of adjustment.  See Section 1314(b), here.

The IRS netted the agreed upon deficiencies for the post-1986 years in the aggregate against the refund due for 1986 and refunded the difference (with appropriate interest).  But, as best I understand the opinion, the IRS did not assess the netted amount to the particular post-1986 years within the one-year period.  In other words, the IRS had collected the tax by offset but had not made the assessments for the particular years involved in that one-year period.  The taxpayer argued that, therefore, the IRS had not met the procedures required for mitigation and therefore, must treat the collection via netting as an overpayment for the post-1986 years that must be refunded.

A taxpayer making that argument or any argument that the IRS has not timely assessed does not want to launch the argument when the IRS still has time to assess.  Therefore, for example, it is common practice -- albeit perhaps not the best form -- to file a claim for refund for a year when there are not previously adjustments that would increase the tax liability near the end or after the assessment period of limitations.  (I say that is perhaps not the best form, because it may be difficult to sign a claim for refund under oath when the taxpayer knows that the unspotted adjustments wipe out the claim for refund; but that's a subject for another day.)

At any rate, this taxpayer did a mitigation variant of this timing strategy.  "A year after the Closing Agreement was executed, in August 2006, El Paso sent a precisely timed memorandum to the IRS claiming that the deficiencies for 1987-1990 must be refunded to El Paso because the IRS had failed properly to assess those deficiencies before the just-expired one-year statute of limitations."  (Bold-face supplied by JAT.) That memorandum was treated as a claim for refund.

The IRS Levy Power (4/4/14)

I have recently had email discussions with Leslie Book and Keith Fogg, authors of the Procedurally Taxing Blog, here, regarding some aspects of the levy power, particularly levy on right to receive future payments.  As a result of that discussion, I have been better educated about the levy and have made some revisions to my text.  I thank Les and Keith for their contributions to my education.

I cut and paste below the section revised and note in red-line the revised portions.  I do not include the footnotes.

VIII. Administrative Levy and Judicial Enforcement. 

A. Administrative Levy and Sale. 

  1. General Rules of Levies.

Levy includes the power to seize and sell the taxpayer's property (including interests in property and personal service compensation, such as wages).  § 6331(b) (levy); § 6335 (rules for sale).  A levy – often referred to as a seizure – is a “summary, non-judicial process, a method of self- help authorized by statute which provides the Commissioner with a prompt and convenient method for satisfying delinquent tax claims.”  The Supreme Court has said: “The IRS need never go into court to assess and collect the amount owed; it is empowered to collect the tax by non-judicial means . . . without having to prove to a court the validity of the underlying tax liability.”   

The IRS levy can involve a direct seizure of the property but more often the levy is accomplished by notice of levy to the taxpayer or third parties requiring them to turn over the taxpayer’s property in their possession.  Thus, the IRS can serve notice of levy a bank to obtain the funds in the taxpayer's bank account or can levy a brokerage firm to obtain the investments in the taxpayer's bank account.  The IRS can also levy persons or entities who appear to be third parties, asserting that they are nominees or alter egos of the taxpayer.  (I cover nominee and alter ego liability later in the text.) 

As noted, the IRS often levies on third parties by issuing “notice of levy,” which, like the IRS summons studied earlier, is simply a form that the IRS collection officer fills out and delivers to the person upon whom levy is made.  Once the person is given the notice of levy, the United States has the right to the property levied.  As to the property, the person receiving the notice of levy holds the property in a form of custodial relationship to the United States. 

The person receiving the notice of levy takes substantial risks in not responding to the levy.  The person receiving a levy is liable for the value of the property levied upon and not turned over, plus a penalty of 50%.  § 6332(d).  The defenses available to the party levied to avoid the levy are quite limited.  Nonpossession of the taxpayer’s property is a defense.  However, the “validity of the levy and competing claims to the ownership of the funds are not valid reasons for refusing to honor a levy.” The person can be relieved from the 50% penalty for reasonable cause, which would be something beyond the person's control that prevents compliance.  The IRM advises the agent to be judicious in assertion of the penalty, and courts also may give a liberal application of reasonable cause where the taxpayer is already penalize by liability for the value of the property that he may have turned over to the taxpayer. In order to protect the levied party, the levied party responding to the levy by delivering the property to the IRS is “discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.”  § 6332(e).  As a result, practically speaking, the levied party “has two, and only two, possible defenses for failure to comply with the demand: that it is not in possession of property of the taxpayer, or that the property is subject to a prior judicial attachment or execution.” 

Writ Ne Exeat Republica to Restrain from Foreign Travel as Tax Collection Tool (2/11/14)

Readers might like to read two good discussions of the writ ne exeat republica, which courts may issue in tax cases under 7402(a), here.  The writ, if issued  in a tax case, will restrain the defendant from leaving the jurisdiction (or some subset thereof) pending payment of some or all of a tax debt.  The two excellent discussions were prompted by a case, United States v. Barrett, 2014 U.S. Dist. LEXIS 10888 (D. CO. 2014), where the writ was granted.  The two discussions are:

• Keith Fogg, Holding People Hostage for the Payment of Tax – Writ Ne Exeat Republica (Procedurally Taxing Blog 2/11/14), here.
• Jay Adkisson, A Wedding And The Writ Of Ne Exeat Republica (Forbes 2/7/14), here.

I have done a prior parallel blogs on the issue in which I quoted from my text.  See Restraining Taxpayers for Tax Debts (Federal Tax Crimes Blog 8/19/13), here; and Restraining Taxpayers for Tax Debts (Federal Tax Procedure Blog 8/19/13), here.  I offer the following of my text as I have revised it (footnotes omitted):

The United States does not generally allow imprisonment – or, more broadly, constraining a person’s liberty -- for the nonpayment of debt.  The exception for purposes of tax matters is the statutory approval in § 7402(a) for the writ of ne exeat republica.  The Latin is “let him not go out of the republic,” and was developed in England as a chancery writ.  The exercise of the writ implicates constitutional protections, including the “right to travel” which is “a constitutional liberty closely related to rights of free speech and association, * * *.”  Notwithstanding this implication of constitutional rights, in extraordinary cases it can be granted.  

The writ is sometimes used in domestic relations contexts to restrain someone from leaving the jurisdiction.  In tax collection contexts: 

The writ ne exeat republica is an extraordinary remedy and should only be considered when all other administrative and judicial remedies would be ineffective. In appropriate cases, the writ ne exeat may be used as a collection device against a United States taxpayer who is about to depart from the territorial jurisdiction of the United States, or who no longer resides but is temporarily present in the United States and who has transferred his assets outside of the United States in order to avoid payment of his federal tax liabilities. The writ ne exeat is a court order which generally commands a marshal to commit to jail a defendant who fails to post bail or other security in a specified amount. The authority for the United States District Courts to issue writs ne exeat in tax cases is found in I.R.C. section 7402(a) and 28 U.S.C. section 1651.  

The debt relied on to support the writ must be enforceable against the defendant, be of a pecuniary nature and be presently payable. Thus, in tax cases, an assessment should be outstanding against the taxpayer.  

The purpose of the writ in tax cases is to prevent taxpayers from defeating the collection of tax liabilities by removing themselves and their assets from the territorial jurisdiction of the United States. As a practical matter collection by administrative means is ineffective where the taxpayer has either secreted his assets or removed them from the United States. If the taxpayer leaves the United States, judicial remedies may be likewise defeated since the court would then be powerless in most cases to enforce its orders or judgments against the taxpayer or his property, if located outside of the United States. Thus, the writ ne exeat ensures the continuing submission of the taxpayer to the jurisdiction of the court.

Revised Opinion in TFRP Case Involving Flora Full Payment Requirement (1/29/14; 2/21/14)

I recently blogged on the Court of Federal Claims' Kaplan case, Kaplan v. United States, 2013 U.S. Claims LEXIS 1530 (10/9/13) application of the Flora rule in the Section 6672, TFRP contextg.  See Litigating Trust Fund Recovery Penalties -- the Flora Rule, Divisible Taxes and Unfairness (Federal Tax Crimes Blog 10/11/13), here.  Readers unfamiliar with the contents of that blog entry might want to review it.  The essence of the concern discussed was a dismissal because of the taxpayer's inability to prove sufficient payment of the TFRP divisible tax for one employee per quarter and show that the amount he paid ($100) was sufficient.

Judge Wheeler has a revised the opinion, Kaplan v. United States, 2014 U.S. Claims LEXIS 24 (2014), here.

Here is the basis for the new opinion:

However, in order to establish the Court's subject matter jurisdiction, Mr. Kaplan must prove by a preponderance of the evidence that he has paid the assessed tax for at least one employee. Cencast Servs., L.P. v. United States, 94 Fed. Cl. 425, 435 n.7, 439 (2010), aff'd, 729 F.3d 1352 (Fed. Cir. 2013). More precisely, he must show that his payments of $100 were sufficient to cover the full assessment attributable to at least one employee in each quarter. This, of course, cannot be done without some record of the amount of payroll taxes assessed per employee per quarter. In his motion for reconsideration, Mr. Kaplan relates in detail his diligent but futile efforts at obtaining these records. Pl.'s Mot. for Recons. 6-11. He then explains that he is unable to provide this evidence for exactly the same reason he is not liable for the assessed taxes, that is, he is not a responsible person under § 6672. Id. at 12. 

Thus, assuming these representations are true, Mr. Kaplan is caught in an "evidentiary Catch-22." In order to prove the merits of his argument that he is not a "responsible person," he must first produce the evidence for which he is not responsible. This inequity is magnified by the fact that the Government is itself unable to state what minimum payment would be sufficient. See id. at 9-10; Def.'s Resp. to Pl.'s Mot. for Recons. 7.\ 

In the end, the merits of this case will turn on whether Mr. Kaplan is liable for the full $86,902.76 penalty, and the divisible amount at issue is merely representative of that full amount. Indeed, "[w]hen a taxpayer sues for a refund based on a divisible refund claim, it is meant to 'test the validity of the entire assessment. '" Cencast, 729 F.3d at 1366 (quoting Lucia v. United States, 474 F.2d 565, 576 (5th Cir. 1973)). Under the circumstances of this case, the Court is not inclined to prevent Mr. Kaplan from challenging that full assessment in this forum simply because the representative amount he paid might not be representative enough. Accordingly, the Court accepts the three $100 payments as sufficient to establish subject matter jurisdiction. See, e.g., Schultz v. United States, 918 F.2d 164, 165 (Fed. Cir. 1990) (accepting plaintiff's payment of $100 toward the $20,691.38 penalty assessed against him); Cook v. United States, 52 Fed. Cl. 62, 66 (2002) ($97,760.00 penalty).

I don't have time to develop the concept here, but I think this is a further holding in a line of cases that responsibly mitigate the full bore and inequitable application of the Flora rule.  Congratulations to Professor Rubinstein, counsel for the taxpayer, and kudos to Judge Wheeler.

Addendum 2/21/14 11:30 pm:

Professor Rubinstein has written two outstanding guest blogs for Procedurally Taxing.  They are:

• Refund Suits, Divisible Taxes and Flora: When is a representative payment representative enough? Part 1 (2/17/14), here.
• Refund Suits, Divisible Taxes and Flora: When is a representative payment representative enough? Part 2 (2/19/14), here.

Fifth Circuit Allows Tax Court Discretion in the Application of the Cohan Rule (1/28/14)

In Shami v. Commissioner, 741 F.3d 560 (5th Cir. 2014), here, the Fifth Circuit affirmed the Tax Court's denial R&D credits claimed by the taxpayer.  One of the taxpayer's arguments was that the Tax Court should have applied the Cohan rule, named for named for Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), here,  to allow some credits.  In rejecting the argument, the Fifth Circuit explained the "venerable" Cohan rule and its limitations, including the discretion allowed the trier of fact (bold facing supplied by JAT]:

Petitioners next assert that "[t]he use by [FSI] of [estimates of the amount of time Shami and McCall spent performing qualified services] was indisputably permissible" and that the type of documentation provided was adequately supportive. We disagree. 

First, Petitioners' claim is waived. In their initial brief, the extent of Petitioners' argument is the sentence quoted above and a citation to this court's precedent in United States v. McFerrin [570 F.3d 672 (5th Cir. 2009)], which, following the venerable Second Circuit case Cohan v. Commissioner, held that "[i]f the taxpayer can establish that qualified expenses occurred . . . , then the court should estimate the allowable tax credit." Aside from a parenthetical to the citation, Petitioners make no effort to explain the Cohan rule or how it would apply to their case. Petitioners make only the bare assertion that their use of estimates was appropriate. Petitioners therefore have waived this issue by failing to brief it adequately. 

In the alternative, Petitioners' claim fails on the merits. A line of case law—beginning with the Second Circuit's decision in Cohan—holds that if a taxpayer proves that he is entitled to a tax benefit but does not substantiate the amount of the tax benefit, the court "should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." The underlying logic of the rule is that allowing no benefit at all "appears . . . inconsistent with [the finding] that something was spent." In McFerrin, this court held that the Cohan rule applies in the context of the § 41 credit. 

Cohan did not compel the Tax Court to make an estimate in this case. As the preceding discussion makes clear, the Cohan rule is not implicated unless the taxpayer proves that he is entitled to some amount of tax benefit. In the context of the § 41 credit, a taxpayer would do so by proving that its employee performed some qualified services. In this case, a careful reading of the Tax Court's opinion reveals that the Tax Court made no such finding. 

Even if the Tax Court had determined that Petitioners proved that Shami and McCall performed some amount of qualified services, Cohan and McFerrin are not the only case law on this issue. As the Tax Court observed, another decision of this court issued between those two cases explains that the Tax Court has discretion to make an estimate under Cohan. In Williams v. United States [245 F.2d 559 (5th Cir. 1957)], this court made clear that, even though the Tax Court "might have considerable latitude in making  estimates of amounts probably spent," the Cohan rule "certainly does not require that such latitude be employed." Our decision in Williams explicitly held that the Tax Court "may not be compelled to estimate even though such an estimate, if made, might have been affirmed." This was so because "the basic requirement is that there be sufficient evidence to satisfy the trier that at least the amount allowed in the estimate was in fact spent or incurred for the stated purpose," and "[u]ntil the trier has that assurance from the record, relief to the taxpayer would be unguided largesse."

Tax Court Holds It Lacks Jurisdiction to Review Interest Suspension Under 6404(h) (1/28/14)

Professor Leslie Book has another great blog on a recent tax court case, Corbalis v. Commissioner, 142, T.C. ___, No. 2 (2014), here.  See Corbalis v Commissioner: Tax Court Holds it Has Jurisdiction to Review Interest Suspension Decisions (Procedurally Taxing Blog 1/28/14), here.

The Tax Court's summary of the decision is:

Petitioners seek judicial review of Letters 3477 denying their claim for interest suspension under I.R.C. sec. 6404(g) and stating that the determinations are not subject to judicial review under I.R.C. sec. 6404(h). Respondent has moved to dismiss for lack of jurisdiction. 

Held: The Court has jurisdiction under I.R.C. sec. 6404(h) to review denials of interest suspension under I.R.C. sec. 6404(g). 

Held, further, the Letters 3477 were final determinations for purposes of I.R.C. sec. 6404(h) even though petitioners' concurrent claims for abatement under I.R.C. sec. 6404(e) were still pending.

I refer readers to the Procedurally Taxing Blog entry for a further rounded discussion of the Corbalis decision.

I want to bore down on a subsidiary question addressed in the Corbalis decision -- the deference, if any, to be accorded Revenue Procedures.  The Revenue Procedure made a distinction between types of 6404 relief, stating that one type may be entitled to judicial review and not the other, but provided no reasoning.  The Court said:

In many cases, we have discussed the deference due to pronouncements of the IRS. See, e.g., Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 208-210 (2009) (dealing with a disputed revenue ruling), aff'd, 679 F.3d 1109 (9th Cir. 2012). Revenue rulings are "an official interpretation by the Service". Sec. 601.601(d)(2)(i)(a), Statement of Procedural Rules. By contrast, section 601.601(d)(2)(i)(b), Statement of Procedural Rules, states that "[a] 'Revenue Procedure' is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code and related statutes or information that, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge." A statement of procedure does not purport to be an official interpretation, and respondent does not argue here that the procedure is entitled to deference as an interpretation of section 6404. The revenue procedure, in respondent's terms, "provides guidance for circumstances" in which taxpayers may file a claim for abatement of interest that should have been suspended. Respondent argues only "an intuitive interpretation" of the procedural guidance. 

There is no reasoning in support of the conclusion stated in the revenue procedure, and we discern none for distinguishing between section 6404(e) requests and section 6404(g) requests. Thus, the revenue procedure is not entitled to deference. See Exxon Mobil Corp. v. Commissioner, 689 F.3d 191, 200 (2d Cir. 2012), aff'g 136 T.C. 99, 117 (2011). A procedural pronouncement cannot restrict or revise section 6404(h). See Commissioner v. Schleier, 515 U.S. 323, 336 n.8 (1995); Estate of Kunze v. Commissioner, 233 F.3d 948, 952 (7th Cir. 2000), aff'g T.C. Memo. 1999-344. The wording and context of the statute, supplemented by more general legal principles, control.

Yet Another BullShit Tax Shelter Goes Down Flaming (1/25/14)

In NPR Investments, LLC v. United States, 740 F.3d 998 (5th Cir. 2014), here, following the Supreme Court's lead in United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Fifth Circuit applied the 40% gross valuation misstatement penalty to the partnership's bullshit tax shelter (the Son-of-Boss (SOB) type shelter).  For discussion of Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. The 40% penalty will, of course, be applied to the partners, which will then permit them to assert in a separate refund proceeding any partner level defenses they may be entitled to.

I could perhaps leave it at that, but there are some interesting features of the case.

Let's start with some the facts recounted by the Court:

Harold Nix, Charles Patterson, and Nelson Roach are partners in the law firm of Nix, Patterson & Roach, LLP. They represented the State of Texas in litigation against the tobacco industry and in 1998 were awarded a fee of approximately $600 million that is to be paid over a period of time. They also received fees totaling approximately $68 million in connection with tobacco litigation in Florida and Mississippi. Nix, Patterson, and Roach share the fees 40%, 40%, and 20%, respectively. 

Nix and Patterson have participated in at least two "Son-of-BOSS" tax shelters. BOSS stands for "Bond and Options Sales Strategy." Courts, including our court and the district court in this case, have described a Son-of-BOSS transaction as "a well-recognized 'abusive' tax shelter." Artificial losses are generated for tax deduction purposes. 

Before creating NPR and engaging in the transactions at issue in this appeal, Nix and Patterson invested in another Son-of-BOSS tax shelter, known as BLIPS. It involved sham bank loans, and our court considered various tax issues related to Nix's and Patterson's transactions with regard to that shelter in Klamath Strategic Investment Fund ex rel. St. Croix Ventures v. United States.

Further, here is a critical fact conceded apparently for strategic reasons:

The joint pre-trial order in the district court reflects that NPR, Nix, Patterson, and Roach conceded that NPR lacked a profit motive during 2001.

 All of the "investors" in SOB shelters claimed that their profit motive inhered in some long-shot investment razzle-dazzle which they called the "sweet spot," wherein the economic circumstances would line up to generate a profit from the adventure. Some of the taxpayers involved, although having large otherwise uncovered income, claimed that they did not consider the tax consequences at all but focused instead solely on the sweet spot opportunity.  However, the taxpayers in NPR (the ultimate taxpayers were involved by the attorney R.J. Ruble (since convicted of tax crimes for his participation in tax shelters, including SOB shelters) apparently did consider the tax consequences (duh!):

DC Court Rejects Bankers Attack on FATCA Regs (1/18/14)

In Fla. Bankers Ass'n v. United States Dep't of Treasury, 2014 U.S. Dist. LEXIS 3521 (D.D.C. 2014), here, the court sustained the IRS regulations "the regulations requir[ing] U.S. banks to report the amount of interest earned by accountholders residing in foreign countries."

The Court says in its opening:

The Bankers Associations contend, in a Motion for Summary Judgment, that the IRS got the economics of its decision wrong and that the requirements will cause far more harm to banks than anticipated. Because the Service reasonably concluded that the regulations will improve U.S tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor — other than a tax evader — to withdraw his funds from U.S. accounts, the Court upholds the regulations and grants the Government's Cross-Motion for Summary Judgment.

In reaching this decision, the Court rejected various challenges to the regulations based on the Administrative Procedure Act, often referred to as APA, and the Regulatory Flexibility Act.  Interestingly, the Court did reject the Government's threshold argument that the suit was barred by the Anti-Injunction Act, Section 7421(a), concluding:

Although the Court owes some deference to the Government's opinion of whether or not the AIA applies, see Seven-Sky v. Holder, 661 F.3d 1, 13 (D.C. Cir. 2011), abrogated on other grounds by Nat'l Fed'n of Indep. Bus., 132 S. Ct. 2566, it must nevertheless heed the D.C. Circuit's admonition that the AIA does not bar suits like this one brought merely for "purpose of enjoining a regulatory command." Id. at 8. Indeed, the AIA "has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement," even if a tax-related penalty could follow. Id. at 9. And the regulations at issue here, like the Foodservice reporting requirement, fit that bill. As the DJA and AIA are coterminous, neither Act prevents the Bank Associations' suit.

Ninth Circuit Substantially Affirms Adjustments for Bullshit Tax Shelter (1/18/14)

In Candyce Martin 1999 Irrevocable Trust v. United States, 739 F.3d 1204 (9th Cir. 2014), here, the Ninth Circuit largely affirmed the IRS's partnership adjustments denying the benefits of a bullshit tax shelter.  For an earlier blog on another aspect of this case at the trial level, see The Role of the Taxpayer's Independent Lawyer in Tax Shelter Promotions with Promoter Opinions (10/8/11), here.

In the appeal case just decided, the Court (Judge Thomas) opens with

In this appeal, we examine some of the tax consequences arising from the sale of the Chronicle Publishing Company and, specifically, whether the Internal Revenue Service's proposed adjustment of certain partnership tax items was time barred. Although the ultimate issue is relatively straightforward, both the back story and the legal framework are somewhat complex, requiring us to delve deep in the heart of taxes.

I won't try to deleve deep in the heart of taxes, but will just state that the case, involving multi-tiered partnerships, ultimately turned on an interpretation of a restrictive consent to extend the statute of limitations.  The consent involved was the Form 872-I executed by the Martin Family Trusts, the ultimate partner.  The Form 872-I is titled:  Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. An unrestricted version of that form is here.  The restriction in the Form in the case was:

The amount of any deficiency assessment is to be limited to that resulting from any adjustment directly or indirectly (through one or more intermediate entities) attributable to partnership flow-through items of First Ship LLC, and/or to any adjustment attributable to costs incurred with respect to any transaction engaged in by First Ship LLC, any penalties and additions to tax attributable to any such adjustments, any affected items, and any consequential changes to other items based on any such adjustments.

Essentially, the Court held that, because of the wording of the restrictions, the consent applied to the bulk of the adjustments (some $318 million) in issue but did not apply to others (some $4 million).  So, it appears to be a substantial win for the Government.

See also Reminder on Sweep of Form 872-I, Partner Level Consent to Extend Statute of Limitations (Federal Tax Procedure Blog 11/23/12), here.

DC Circuit Decides Proper Venue for CDP Appeals Not Involving Challenge to Liability (1/18/14)

Professor Leslie Book has this great post on the DC Circuit's decision yesterday in Byers v. Commissioner, ___ F.3d ___, 2014 U.S. App. LEXIS 933 (DC Cir. 2014), here.  See DC Circuit Decides Byers: Venue in Appeal of CDP Cases Upended (Procedurally Taxing 1/17/14), here.  Professor Book aptly summarizes the holding as:

Byers essentially held that in CDP cases where there is no challenge to the underlying liability, venue for an appeal is the DC Circuit Court of Appeals, unless the parties stipulate otherwise. For CDP cases where there is a mixed question of liability and collection matters, or a CDP case where there is solely a question as to the amount or existence of an underlying liability, venue for individuals would likely be tied to the legal residence of the taxpayer at the time of filing the petition, or, if a corporation, the principal place of business or principal office or agency of the corporation.

I strongly recommend Professor Book's blog entry for much more nuanced discussion of the issues.

For related discussion, see Golsen and Small Cases -- S Cases -- in the Tax Court (Procedurally Taxing 1/15/14), here.

Court of Federal Claims Transfers to Tax Court Case Failing Flora Full Payment Rule (1/18/14)

Caution: the decision discussion immediately below has been reversed; the revised decision is discussed toward the end of this blog.

In Clark v. United States, 2014 U.S. Claims LEXIS 3 (Fed. Cl. 2014), here, the Court of Federal Claims, Chief Judge Campbell-Smith, found that the pro-se complaint the taxpayer filed failed to meet the Flora requirement for full payment but, since the complaint had been filed during the 90 days that the plaintiff could have petitioned the Tax Court, the case was ordered transferred to the Tax Court.

I had never seen this disposition before and just thought I would call it to readers' attention in case they ever needed it for their bag of tricks.

Plaintiff has not alleged that she has paid the tax at issue in her tax refund suit. This court does not have jurisdiction to entertain her claim unless the tax has been paid in full. See Flora, 357 U.S. at 75. Plaintiff recognizes that her claim should have been brought before the Tax Court. 

The court next considers whether the claim merits transfer. Plaintiff attached to the complaint the Notice of Deficiency letter from the  [*5] IRS, which contained instructions to file a petition with the Tax Court if plaintiff wished to contest the IRS determination before making any payment. See Notice of Deficiency Letter 1. Plaintiff's deadline to petition the tax court was November 4, 2013. See id. Plaintiff filed suit in this court on October 29, 2013. See generally Compl. According to plaintiff's letter from the IRS, plaintiff's attempt to protest the Notice of Deficiency would have been brought properly in the Tax Court on the date she filed here. The court therefore determines that the transfer of plaintiff's complaint to the United States Tax Court is "in the interest of justice." 28 U.S.C. § 1631. 

III. Conclusion 

For the foregoing reasons, the court finds that it lacks jurisdiction over plaintiff's claim. Plaintiff's motion to transfer is GRANTED. Pursuant to 28 U.S.C. § 1631, the complaint is TRANSFERRED to the United States Tax Court.

The authority cited, 28 USC, 1631 is here.   It short, so I cut and paste it:

28 U.S. CODE § 1631 - TRANSFER TO CURE WANT OF JURISDICTION
Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

CAUTION:

Supreme Court Grants Cert to Consider Summons Opponent's Right to Question IRS Personnel re Reason for Summons (1/18/14)

The Supreme Court granted certiorari in United States v. Clarke, 517 Fed. Appx. 689, 2013 U.S. App. LEXIS 7773 (11th Cir. 2013), here.  See the SCOTUS Blog on the case, here, which on an ongoing basis reports the Supreme Court developments in the case and has links to the briefs.  I previously reported on the Government's petition for writ of certiorari.  See Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (12/13/13), here.

The question presented, per the Government's petition, is:

Whether an unsupported allegation that the Internal Revenue Service (IRS) issue a summons for an improper purpose entitles an opponent of the summons to an evidentiary hearing to question IRS officials about their reasons for issuing the summons.

The Eleventh Circuit's opinion in Clarke and its predecessor opinions gave the opponent that right.  The other circuits do not give the opponent that right, but require that opponents develop their proof of improper purpose some other way.

Taxpayer Advocate Report on Efficacy of Accuracy-Related Penalties (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers?, here.  The following is the Executive Summary (one footnote omitted):

Executive Summary 

Accuracy-related penalties are supposed to promote voluntary compliance. Congress has directed the IRS to develop better information concerning the effects of penalties on voluntary compliance, and it is the IRS’s official policy to recommend changes when the Internal Revenue Code (IRC) or penalty administration does not effectively do so. The objective of this study was to estimate the effect of accuracy-related penalties on Schedule C filers (i.e., sole proprietors) whose examinations were closed in 2007. TAS compared their subsequent compliance to a group of otherwise similarly situated “matched pairs” of taxpayers who were not penalized. TAS used Discriminant Function (or “DIF”) scores — an IRS estimate of the likelihood that an audit of the taxpayer’s return would produce an adjustment — as a proxy for a taxpayer’s subsequent compliance. 

While all groups of Schedule C filers who were subject to an examination assessment improved their reporting compliance (as measured by reductions in their DIF scores), those subject to an accuracy-related penalty had no better subsequent reporting compliance than those who were not. Thus, accuracy-related penalties did not appear to improve reporting compliance among the Schedule C filers who were subject to them. Further, penalized taxpayers who were also subject to a default assessment or who appealed their assessment had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to similarly situated taxpayers who were not penalized. n2 Similarly, those whose penalty was abated had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to taxpayers whose penalty was not abated.
   n2 Except as otherwise indicated, all differences discussed in this report are statistically significant (with 95 percent confidence). We note, however, that the DIF is an approximate measure of reporting compliance, and small differences, although statistically significant, may not indicate a real difference in reporting compliance 

Prior research suggests that a taxpayer’s perception of the fairness of the tax law, the IRS and the government drive voluntary compliance decisions, and the findings of this study are consistent with that research. Taxpayers subject to default assessments may be more likely to feel the penalty assessment process was unfair, which may have caused lower levels of future compliance. Similarly, those who appeal may be more likely to feel that the actual result was unfair, which may have caused lower levels of future compliance. Finally, those subject to a penalty assessment that is later abated may also feel that the IRS initially sought to penalize them unfairly, potentially causing lower levels of future compliance. 

Golsen and Small Cases -- S Cases -- in the Tax Court (1/15/14)

Professor Keith Fogg of the Procedurally Taxing Blog has this excellent blog:  Forum Shopping in the Tax Court – Small Tax Case Procedure and the Rand Decision (Procedurally Taxing 1/14/14), here.  Here is an interesting blurb from  it that I hope encourage tax procedure enthusiasts to read and savor Keith's entire blog entry.

IRC 7463(a) creates a special procedure for cases in which less than $50,000 is in dispute for each taxable period, the Small Tax Case procedure (S procedure – so named because of the S that appears after the Tax Court docket number of these cases.)  To qualify for the S procedure the taxpayer must make an election to use this procedure and the Tax Court must concur.  The election usually occurs at the time the petition is filed but may be made at any time prior to the trial of the case pursuant to the statute and Tax Court Rule 171(b).  If the taxpayer elects the S procedure and if neither the taxpayer nor the Government requests the discontinuation of such procedure prior to the entry of the case as permitted by IRC 7463(d), then the decision of the Tax Court is the final decision of the case pursuant to IRC 7463(b) and is not subject to appeal. There are two excellent articles exploring the issue of the Golson rule and the S procedure.  Carl Smith, Does the Tax Court’s Use of its Golsen rule in Unappealable Small Tax Cases Hurt the Poor?, 11 J. Tax Prac. & Proc. 35 (2009-2010) and Saul Mezei and Joseph Judkins, “A Square Peg in a Round Hole: The Golsen Rule in S Cases” Tax Notes Today, January 8, 2012.  While it is unclear why the Tax Court decided to apply the Golson rule to cases that cannot receive appellate review, it is clear that it does so and has consistently done so for over 40 years.

Prefessor Fogg has a second installment on the subject, Current status of Rand cases and Praise for Tax Court Search Feature (Procedurally Taxing 1/15/14), here.

Incidentally, Professor Fogg advises of the Tax Court's new web search feature:

Today, I write to praise a really nice feature of the Tax Court’s electronic system, which is the ability to search for orders.  This is a remarkable feature of the Tax Court electronic system unlike search capabilities in other electronic court databases and deserves high praise.  It can be accessed from the home page of the Tax Court web site.  

For readers not familiar with the Golsen rule, here is the discussion in my Federal Tax Procedure book (footnotes omitted except for the final footnote):

c. The Golsen Rule.

The Tax Court follows the law of the Court of Appeals to which an appeal would be taken.  This is referred to in tax litigator jargon as the Golsen rule, named after the Tax Court case establishing the rule.  Accordingly, in determining whether the Tax Court is a favorable or unfavorable forum, you look not only to the precedent of the Tax Court but also the precedent of the Court of Appeals to which an appeal may be taken.  Unfavorable Tax Court precedent but favorable appellate court precedent will produce a winner in the Tax Court; favorable Tax Court precedent but unfavorable appellate court precedent will produce a loser in the Tax Court, in which case relief will come only if you can convince the Court of Appeals that it messed up in its earlier precedent (usually unlikely).

Continuous Levies May Apply to Continuing Payments for Remuneration (1/6/13)

I was reading a district court case this morning that assumed but did not discuss the validity of a continuous levy on LLC distributions.  United States v. 911 Management LLC et al.; No. 3:10-cv-01367 (D OR 2014) (I will  post a LEXIS citation later),  I thought this would be a good time to remind readers that statutory authority for such continuous levies is Section 6331(e), which provides:

(e) Continuing levy on salary and wages 

The effect of a levy on salary or wages payable to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released under section 6343.

The statute expressly limits the levy to "salary or wages."  But, at least in this case, the statutory terms are expanded to include other times of recurring remuneration for personal services.  As revised, here is the text from the current draft of my Tax Procedure Book (footnotes omitted):

Normally an administrative levy on a third party reaches only the property of the taxpayer that the third party has on the date that the levy is made. For example, if the IRS levies a bank account, the bank must turn over the balance on the date of the levy.  If the taxpayer makes a deposit the next day, that amount of the new deposit need not be turned over by the bank.  Notwithstanding this general moment in time nature of a levy, a levy on recurring “salary or wages” and personal service compensation (often called garnishments in other contexts) are continuing from the date of levy until the levy is released. § 6331(e).  The Regulations define the statutory terms “salary or wages” very broadly to include “compensation for services paid in the form of fees, commissions, bonuses, and similar items.” The courts have blessed this broader reading, sustaining, for example, continuous levies on payments (i) to independent contractors, such as commissioned agents, (ii) to partners as distributions, and (iii) to members of an LLC as distributions.  

I should note that, in the case cited, the lawyer apparently read the statutory language to include only "salary or wages" as those terms are usually defined and had the manager of the LLC advised the IRS:  [M]y attorney advised me to notify you that [the LLC] does not pay wages or salary to the [Taxpayer who received the distributions]."  Based on the lawyer's confusion as to the form used and some of the background facts and circumstances, the court foud:

[I]t was objectively reasonable for [the manager of the LLC] to rely on [the attorney's] advice to "report [to the IRS] that 911 Management does not pay wages or salary to [the Taxpayers" over [the IRS agent's] contemporaneous but contrary instructions.

So, the court relieved the manager from the penalty for failure to comply with the levy. The manager was lucky.  Here is my discussion of the penalty provision and reasonable cause escape (footnotes omitted):

The person receiving the notice of levy takes substantial risks in not responding to the levy.  The person receiving a levy is liable for the value of the property levied upon and not turned over, plus a penalty of 50%.  § 6332(d).  The defenses available to the party levied to avoid the levy are quite limited.  Nonpossession of the taxpayer’s property is a defense.  However, the “validity of the levy and competing claims to the ownership of the funds are not valid reasons for refusing to honor a levy.” The person can be relieved from the 50% penalty for reasonable cause, which would be something beyond the person's control that prevents compliance.  The IRM advises the agent to be judicious in assertion of the penalty.  In order to protect the levied party, the levied party responding to the levy by delivering the property to the IRS is “discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.”  § 6332(e).  As a result, practically speaking, the levied party “has two, and only two, possible defenses for failure to comply with the demand: that it is not in possession of property of the taxpayer, or that the property is subject to a prior judicial attachment or execution.”