Correction to Books on Trust Fund Recovery / Responsible Person Penalty (10/22/15)

The IRS Policy Statement formerly P-5-60, quoted at p. 493 of the student edition and p. and p. 711 of the Practitioner edition, on the TFRP / Responsible Person penalty under § 6672 has been restated as Policy Statement 5-14 and the paragraphs renumbered.  Policy Statement 5-14 appears in relevant part in the IRM, here, as follows:

1.2.14.1.3  (06-09-2003)Policy Statement 5-14 (Formerly P-5-60) 

* * * * 

4. Determination of Responsible Persons 

5. Responsibility is a matter of status, duty, and authority. Those performing ministerial acts without exercising independent judgment will not be deemed responsible.\ 

6. In general, non-owner employees of the business entity, who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. * * * * 

* * * *

Correction to Books on Discussion of Transferee Liability (10/22/15)

Please note the following correction for p. 487 Student Edition (in paragraph opening Transferee liability requires two facets* * * * " and in the Practitioner edition p. 701 (carryover paragraph).  The following sentence needs correcting:

As in the pdf texts:

The courts that have addressed the issue, however, determine that the prongs are independent and that the state law prong is the same as applied to creditors generally under state law, unaffected by the transferee status determination under state law.

The bold-faced word "state" should be changed to "federal."  As thus corrected, the sentence should read:

The courts that have addressed the issue, however, determine that the prongs are independent and that the state law prong is the same as applied to creditors generally under state law, unaffected by the transferee status determination under federal law.

The correction has been made in the draft for the next edition of the books.

Missing Graphic from p. 424 of Student Edition (10/15/15)

There is a graphic mission from p. 424 of the student edition.  The graphic is here.  The graphic is in the practitioner edition.

You Lie, You Lose -- Another Midco Transaction Fails (10/15/15)

I have discussed so-called Midco transactions in this blog before where a seller and buyer of a C Corporation with a built-in liability use a bullshit tax shelter to claim to eliminate the tax and share in the tax thus "eliminated." Yesterday, the Tax Court issued a new opinion in a Midco transaction where the parties tried to scam the fisc.  Tricharichi v. Commissioner, T.C. Memo. 2015-201, here:

The Tax Court offers this succinct explanation of the Midco transaction:

Although Midco transactions took various forms, they shared several key features, well summarized by the Court of Appeals for the Second Circuit in Diebold Found. Inc. v. Commissioner, 736 F.3d 172, 175-176 (2d Cir. 2013), vacating and remanding T.C. Memo. 2010-238. These transactions were chiefly promoted to shareholders of closely held C corporations that had large built-in gains. These shareholders, while happy about the gains, were typically unhappy about the tax consequences. They faced the prospect of paying two levels of income tax on these gains: the usual corporate-level tax, followed by a shareholder-level tax when the gains were distributed to them as dividends or liquidating distributions. And this problem could not be avoided by selling the shares. Any rational buyer would normally insist on a discount to the purchase price equal to the built-in tax liability that he would be acquiring. 

Promoters of Midco transactions offered a purported solution to this problem. An "intermediary company" affiliated with the promoter -- typically, a shell company, often organized offshore -- would buy the shares of the target company. The target's cash would transit through the "intermediary company" to the selling shareholders. After acquiring the target's embedded tax liability, the "intermediary company" would plan to engage in a tax-motivated transaction that would offset the target's realized gains and eliminate the corporate-level tax. The promoter and the target's shareholders would agree to split the dollar value of the corporate tax thus avoided. The promoter would keep as its fee a negotiated percentage of the avoided corporate tax. The target's shareholders would keep the balance of the avoided corporate tax as a premium above the target's true net asset value (i.e., assets net of accrued tax liability). 

In due course the IRS would audit the Midco, disallow the fictional losses, and assess the corporate-level tax. But "[i]n many instances, the Midco is a newly formed entity created for the sole purpose of facilitating such a transaction, without other income or assets and thus likely to be judgment-proof. The IRS must then seek payment from other parties involved in the transaction in order to satisfy the tax liability the transaction was created to avoid." Id. at 176. 

In a nutshell, that is what happened here. Petitioner engaged in a Midco transaction with a Fortrend shell company; the shell company merged into West Side and engaged in a sham transaction to eliminate West Side's corporate tax; the IRS disallowed those fictional losses and assessed the corporate-level tax against West Side; but West Side, as was planned all along, is judgment proof. The IRS accordingly seeks to collect West Side's tax from petitioner as the transferee of West Side's cash. We hold that petitioner is liable for West Side's tax under the Ohio Uniform Fraudulent Transfer Act and that the IRS may collect West Side's tax liabilities in full from petitioner under section 6901(a)(1) as a direct or indirect transferee of West Side. We accordingly rule for respondent on all issues.

The opinion is longer, but that is the opinion in a "nutshell."

Second Circuit Opinion Affirming Denial of Motion to Quash Summons (10/1/15)

We have studied IRS summonses and summons enforcement in the class.  See Student edition pp. 271 - 282.  A recent nonprecedential opinion from the Second Circuit provides a useful review.  Highland Capital Management LP v. United States, 2015 U.S. App. LEXIS _____ (2d. Cir. 2015), here.

The Court provides a helpful introduction (footnote omitted):

Petitioner-Appellant Highland Capital Management, L.P. ("Highland Capital") challenges a decision and order of the District Court denying its motion to quash a third-party summons served by the Internal Revenue Service ("IRS") on Barclays Bank PLC ("Barclays") and granting the IRS's cross-motion for enforcement. The IRS had issued the summons seeking documents related to its audit of Highland Capital (the "2008 audit"), and particularly regarding losses claimed for 2008 related to two transactions with Barclays. On appeal, Highland Capital argues that the District Court erred in refusing to quash the summons because (1) the IRS failed to provide reasonable notice in advance of issuing the summons, as required by 26 U.S.C. § 7602(c)(1);1 (2) the summons seeks privileged and irrelevant documents; and (3) the summons was issued in bad faith or for an improper purpose. Finally, Highland Capital argues that the District Court erred by refusing to grant an evidentiary hearing on the question of the IRS's bad faith. "We review the district court's factual findings for clear error and its interpretation of the Internal Revenue Code de novo." Adamowicz v. United States, 531 F.3d 151, 156 (2d Cir. 2008). We assume the parties' familiarity with the underlying facts and the procedural history of the case.

Summons Relevance

As in some many of the endless stream of summons enforcement and quashing cases, the Court cites the Powell standard:

The standard set forth in United States v. Powell, 379 U.S. 48 (1964), governs motions to quash an IRS summons. Under Powell, "[t]he IRS must make a prima facie showing that: (1) the investigation will be conducted pursuant to a legitimate purpose, (2) 'the inquiry may be relevant to the purpose,' (3) 'the information sought is not already within the Commissioner's possession,' and (4) 'the administrative steps required by the [Internal Revenue] Code have been followed.'"

The Court then moves to the second Powell requirement -- relevance.  The Court reasoned:

Highland Capital contends that the summons seeks irrelevant information insofar as it requests documents related to transactions other than the two being investigated in connection with the 2008 audit. In determining relevancy, "[t]his court has consistently held that the threshold the Commissioner must surmount is very low, namely, 'whether the inspection sought might have thrown light upon' the correctness of the taxpayer's returns." Adamowicz, 531 F.3d at 158 (quoting United States v. Noall, 587 F.2d 123, 125 (2d Cir. 1978)). A court properly "defer[s] to the agency's appraisal of relevancy . . . so long as it is not obviously wrong." Mollison, 481 F.3d at 124 (internal quotation marks omitted). 

Here, the IRS agent conducting the 2008 audit has submitted a declaration explaining that information about the other transactions was necessary to determine how payments made in connection with a settlement agreement relate to the two transactions being investigated in the audit. Highland Capital has provided no reason for us to conclude that the IRS's appraisal of relevancy was "obviously wrong," and we accordingly find that Highland Capital has not satisfied its "heavy" burden to disprove this Powell factor. Mollison, 481 F.3d at 122-23, 124.

JAT Comment:  Basically, the agent said it was relevant to the tax investigation and the taxpayer did not show otherwise.  Obviously in a discovery context where the proponent of the discovery may not know the actual relevance of the documents requested, a broad standard of potential for relevance is required.

Reasonable Notice Pursuant to § 7602(c)(1)