Good Review of Points Previously Covered in Class (9/28/15)

Lua v. United States, 2015 U.S. Claims LEXIS 1235 (9/25/15), here, offers a good review of concepts we have studied in this case.

In Lua, upon completion of the audit, the unsophisticated taxpayers who did not have a representative signed a Form 4549 Income Tax Examination Changes.  This form has language "waiving their right to a notice of deficiency."  Section 6213(a), here, prohibits the IRS from assessing prior to issuing a notice of deficiency in income tax cases.  Section 6213(d) provides that a taxpayer may waive the right to receive a notice of deficiency, thus allowing an assessment without the notice of deficiency.  This waiver is often done on the Form 870, Waiver of Restrictions on Assessment, but also from the language quoted above, may be done on the Form 4549.  See Student Edition pp. 145-146 & 334-335.

Shortly after signing the waiver, the taxpayers engaged a tax professional.  The tax professional requested audit reconsideration in a telephone call to the agent and a day later confirmed the request in a letter to the group manager.

On November 26, 2007, the IRS assessed the deficiencies, but granted the request for audit reconsideration.  As a result of the audit reconsideration, the IRS ultimately reduced the amount of the deficiencies, but by that time the taxpayers had filed amended returns and, apparently protectively, payments substantially in excess of the amounts ultimately determined to be due.  It is a little fuzzy to me precisely what happened after the assessment, but it may not be critical for the points discussed below.  What appears to be in issue in this refund litigation is the amount paid up to the amount that was not abated in audit reconsideration -- in other words the amount determined due after audit reconsideration

1. Did the taxpayers waive the right to a notice of deficiency.

Yes.  The taxpayers did sign the Form 4549 which waives the notice of deficiency in clear language.  In this regard, the Court indicated in footnote 12 that the waiver had not been improperly induced.

2.  Did the taxpayers withdraw the waiver of the notice of deficiency.

No.  The taxpayers asked for audit reconsideration which is a separate procedure.  Audit reconsideration is addressed in the text.  See Student edition p. 452.

Writing Tips from a Master (9/26/15)

This is not about tax procedure.  It is about writing and persuading.  The goal of learning tax procedure is to persuade in a tax setting.  So, I encourage students to read this blog entry about the art of persuasion and the use of hyperbole.

“If you are a lawyer, don’t write this stuff. … If you hire lawyers, don’t let them write it.”  (The Volokh Conspiracy 9/24/15), here.  The actual author of the content is Gary Kinder at Wordrake, here.

Indeed, there is another good recent offering from Gary Kinder, Once Upon a Time I Fell, and It Has Made All the Difference (Wordrake), here, where Kinder recommends the best writers' reference books.

Both are pretty short reads, entertainingly written and, well, persuasive.

Enjoy!

Are Appeals Officers Equipped and Trained to Assess Accurately the Litigating Hazards of a Case? (9/25/15)

Appeals' standard for settlement is to reflect the litigating hazards of the case.  See IRM 8.6.4.1  (10-26-2007), Fair and Impartial Settlements per Appeals Mission, here ("A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation"). One of the concerns expressed with that standard is that Appeals Officers are not litigators nor are most of them even lawyers.  How then do they assess the litigating hazards of a case?

Keith Fogg of Procedurally Taxing has this blog on the subject where he expresses concern:  Judging Litigation Hazards without Seeing or Following Litigation (Procedurally Taxing Blog 7/6/15), here.  Keith is a law professor now but formerly was with Chief Counsel and had considerable opportunity to observe Appeals Officers' application of the standard.  He expresses concern that Appeals may be paying less attention to insuring that Appeals Officers at least observe litigation to sharpen their skills at determining the litigation hazards.  And, of course, the Appeals Officers have difficulty assessing evidentiary and procedural problems and how they may affect the outcome of the case if it proceeds to trial.  Among the problems is credibility of witnesses.  Many cases (including the anecdote I present at the end of this blog entry) really turn on credibility, and the Appeals Officer has no way of factoring credibility into a settlement.  It is true that many revenue agents may view the witnesses as not credible, often without even interviewing them and the Appeals Officer will usually be aware of the revenue agent's assessment of credibility.  But, the Appeals Officer has no way of assessing the revenue agent's determination of credibility or, more directly,  making an independent determination of credibility to properly assess the litigating hazards.

Sheldon ("Shelly") Kay, currently with a law firm but previously with district counsel and thereafter with Appeals where he served as National Director of Appeals, does not agree with Keith.  He has written his views in a blog on Procedurally Taxing:  “Judging Litigating Hazards – Another View” (Procedurally Taxing 9/24/15), here.  Shelly makes a strong rebuttal.

I encourage tax procedure fans and particularly students in my class to read these blogs.  They are relatively short and discuss a core function of Appeals.  We will cover Appeals on October 1, and I have provided a link to this blog (with the links to the Procedurally Taxing Blogs).

Revision to Texts on Tax Shelters and Case Assignment (9/24/15)

I have assigned in Unit/Class 10 the following case (trial and appellate level opinions):  Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002).   I have revised the text on p. 544 of the student edition and p. 783 of the practitioner edition as follows:

Eliminate the last four sentences (beginning The Compaq case) in the carryover paragraph to p. 544 of the student edition in the paragraph beginning "Tax shelters are" of the practitioner edition.  After that elimination add the following paragraph as a new paragraph:

A good example of a classic tax shelter is Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002).  Please read both the Tax Court and the Appellate opinions now.  In net, a classic abusive tax feature present in the case is that, except for the benefit of the foreign tax credit for foreign taxes paid that Compaq did not bear the economic burden, the deal was a money-loser.  The Tax Court viewed the transaction as abusive and imposed penalties; the Fifth Circuit blessed the transaction.  It was a tax shelter; it was just a tax shelter that, at least the appellate court, believed – or at least held, regardless of what it believed – was legal and not abusive.  Both the Tax Court and the Fifth Circuit are good courts, with good judges having radically different views of what is an abusive tax shelter and where to draw the line.  (Note the Fifth Circuit’s opinion, however, has not worn well with time.)

For practitioners, the only footnote in the paragraph is at the end to support the statement that the Fifth Circuit decision has not worn well with time.  The footnote is:

fn E.g., Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015) (“In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively));” Lee A. Sheppard, The Fun Goes Out of Foreign Tax Credit Planning, 148 Tax Notes 1283 (Sept. 21, 2015) (hyperbolically, as is her wont, “The Second Circuit essentially reversed the Compaq and IES decisions.”)

Flora Full Payment Rule and the Rough Edges (9/17/15)

In the class we discuss the rule -- called the Flora rule -- that, in order to maintain a tax refund suit, the taxpayer generally must fully pay the amount of the assessment.  See Flora v. United States, 362 U.S. 145 (1960), here.  There are some key nuances to that rule.  I discuss those nuances in the Student edition pp. 382-384 and in the practitioner edition pp.  545-549.

One of the key nuances is that, if the assessment in question is a "divisible tax," the taxpayer may pay only the divisible amount.  Flora v. United States, p. 175 n.38 (some taxes "may be divisible into a tax on each transaction or event, so that the full-payment rule would probably require no more than payment of a small amount.”)   For example, for trust fund recovery penalty ("TFRP") based on all employees for a particular quarter or quarters, because the underlying trust fund taxes are divisible, the taxpayer contesting assessment of the TFRP, need only pay for one taxpayer for one quarter.

The divisible tax rule mitigates the full bore application of Flora, and usually makes a refund remedy within the reach of a taxpayer subject to a divisible tax assessment.  The problem comes if the tax (or penalty treated as a tax for this purpose) is so large that paying the full assessment is beyond the reach of the taxpayer.

In Diversified Group Inc. v. United States, 123 Fed. Cl. 442, 2015 U.S. Claims LEXIS 1276 (2015), here [see note below at *], appeal docketed, No. 16-1014 (Fed. Cir. October 6, 2015), the promoter of an abusive shelter and his corporation involved with the promotion of the shelter was assessed a penalty under § 6707, here, for failing to register the shelter.   The penalty was over $24 million.  The promoter paid a small amount and sued for refund, hoping to fit within the divisible penalty exception to full payment.  The Court held that the penalty was not divisible, hence requiring the promoter to pay the full penalty before pursuing a refund suit.

I do not know the financial ability of the promoter or his corporation, but for most ordinary people, paying that amount would difficult, probably impossible.

So the question is when a taxpayer is financially unable to meet the Flora full payment rule and must do so for a refund suit remedy, does he have an alternative to obtain a judicial remedy?  Of course, for the types of tax that require a predicate notice of deficiency, the taxpayer can obtain a Tax Court remedy.  But sometimes the taxpayer may not have received the notice of deficiency (the last known address issue) or the type of tax or penalty does not require a notice of deficiency (§ 6707 is one).

In a case like that, the taxpayer or the person assessed a penalty may be able to get a CDP remedy that could lead to a Tax Court review of the liability.  Keith Fogg a contributor on the Procedurally Taxing Blog discusses this issue in Another Flora Decision – Bad News for Tax Shelter Promoters Highlights Possible CDP Jurisdictional Issue (Procedurally Taxing Blog 9/15/15), here.   Keith concludes:  "It appears that they can litigate the merits of this penalty using the CDP process though the path to that answer may not be as clear as one might like and the answer appears to turn on whether the taxpayer has administratively requested penalty abatement after the assessment."  Keith does a great job of discussing his reasoning and nuance, so I strongly encourage readers to read the blog.

CDP review is discussed in the text - student edition, pp. 457-463 and practitioner edition pp. 657-667.

* This blog entry was prepared on the basis of the original opinion.  The court subsequently reissued the opinion on 9/2/15.  I have changed the citation reference and the link.  Although I have not compared to see what might have changed in the reissued opinion, I don't believe anything was changed relevant to the discussion in this blog entry.

IRS Terminates Appeals Arbitration (9/12/15)

The IRS has terminated Appeals arbitration.  Rev. Proc. 2015-44, 2015-38 IRB 1, here

I have revised the text of the pdf text books.  In the text of the student edition on p. 346 and of the practitioner edition on p. 491, the following is substitued for the paragraph commencing "The IRS has Appeals mediation."

The IRS tested appeals arbitration for 14 years, but in 2015 decided to discontinue the program.  The IRS still has an Appeals mediation program.  The Appeals mediation process, referred to as the “Post Appeals Mediation,” can be invoked in appropriate cases after the taxpayer and the Appeals Officer have failed to reach agreement as to an issue or issues, but before the Appeals Office closes the case.  Issues eligible and ineligible for mediation are listed in the IRM; thus, for example, legal and factual issues are eligible for mediation.

The significant new citation in the footnotes is Rev. Proc. 2015-44, 2015-38 IRB 1.

Payment of "Tax" After the Assessment Limitations Period Expires - Refunds (9/11/15)

Apropos to our discussions in class of the statute of limitations on assessment, in ECC 201536020 (9/4/15), here, the IRS attorney addresses the refund of taxes paid after the assessment statute of limitations expired:

A tax payment made to the Service after the expiration of the period of limitation on assessment is considered an overpayment, even if there was no tax liability. Section 6401(a) & (c). The Service has authority to refund overpayments, but only within the applicable period of limitations. Section 6402(a); Rev. Rul. 74-580. The IRM in section 25.6.1.10.2.5.6.2 (10-11-2012) Claim for an Amount Paid After the ASED, (stating "If an amended return is filed after the expiration of the period of limitations on assessment, any amount paid with that return must be refunded to the taxpayer. The taxpayer does not need to file a claim for refund in order to receive a refund of the payment made with the late filed amended return for additional tax assessment.") is discussing the need for filing a claim, not the applicability of the period of limitations. Therefore, a payment made after the ASED may be refunded to the taxpayer, but only within the limitations set forth in section 6511.

ASED in the quote means:  assessment statute expiration date and is the usual IRM term for the date the statute on assessment expires.  In the above quote, the payment was made with no timely assessment.

As indicated, the IRS can refund the overpayment resulting from payment after expiration of the statute of limitations, but the taxpayer must file the claim for refund within the refund claim statute of limitations if the IRS does not refund voluntarily.