Monday, March 27, 2017

Schematic of IRS Civil Program for Referral of Fraud Cases to CI (3/27/17)

I have recently revised my discussion of Criminal Penalties in Chapter 8 of the Federal Tax Procedure Book.  In the revised discussion, I cover the IRS's civil division fraud referral program under which civil revenue agents and collection officers identify "firm indications of fraud" and refer cases to IRS's Criminal Investigation ("CI").  In a recent TIGTA report, A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes (Ref # 2017-IE-R004 3/21/17), here, TIGTA included a graphic (Appendix V) that shows how that program works.  I include that graphic below (click on it to enlarge it for easier readability) and will link to this graphic in the revised version of the book, currently scheduled to be published in pdf format in August 2017.

Sunday, February 26, 2017

Interpretive and Legislative Regulations and the Relationship to Chevron (2/26/17)

I have been struggling with the APA distinction between legislative and interpretive regulations and how that distinction might be impacted by the Chevron doctrine.  I link here my latest revision to my Federal Tax Procedure Book currently due to publish in August 2017 (and will be available for free download on my SSRN account, here, then).  (Note that the linked current status of the revision may not be final, but I think it is fairly close to final subject to comments from this blog entry.)

Basically, I conclude that the historic distinction between legislative and interpretive regulations remains even after Chevron and its progeny, although some loose thinking / language about Chevron has muddied the water as to the historic distinction.  I will state the historic distinction and refer readers to the linked documents for more details (both pro and con).

The historic distinction is (from Kenneth Culp Davis, Administrative Rules - Interpretative, Legislative, and Retroactive, 57 Yale L.J. 919, 928 (1948) (footnotes omitted)):
According to the theory, legislative rules are the product of a power to create new law, and interpretative rules are the product of interpretation of previously existing law.  Legislative rules may change the law but interpretative rules merely clarify the law they interpret.
Then I say in  my text (footnotes omitted):
To illustrate this discussion, I use examples at the extremes of a spectrum.  Such examples  can offer key insight even though much of the play in the real world is between the extremes where things become less certain.  Here are the extremes on the issue at hand.  Code § 162(a)(2) allows deductions for expenses incurred while “traveling ... away from home in the pursuit of a trade or business.”  The regulation, adopted under the general authority stated in § 7805(a), interpreted “traveling ... away from home” text to require that the taxpayer must sleep or rest, sometimes called the overnight rule.  The Supreme Court sustained the regulations’ interpretation of the statutory text. The regulation was an interpretive regulation.  By contrast, § 1502 delegates to the IRS the authority to adopt regulations that the IRS “may deem necessary” for consolidated reporting among an affiliated group of corporations.  The regulations do so in mind numbing detail, in regulation after regulation.  The consolidated return regulations are legislative regulations.
The Chevron doctrine may be summarized as a rule of interpretation of a statute that defers to an agency interpretation under this analysis:  Step One, if the text is plain (not ambiguous), that meaning applies, end of analysis; do not go past Step One; and Step Two, if the text is not plain (ambiguous), the agency interpretation applies unless unreasonable.  Under my analysis (perhaps not mainstream), Chevron only applies to agency regulations that are interpretive and does not apply to legislative regulations.

The linked text relates to the foregoing with more detail.

I address in this blog the current movement to eliminate or throttle back on Chevron deference.  There are speculations about at least judicial throttling back when Judge Neil Gorsuch is confirmed as a justice on the Supreme Court.  And, there is pending legislation that would eliminate Chevron deference.  The proposed legislation would take away the authority of the judiciary to apply Chevron.  Although not mentioning Chevron by name, the proposed legislation would require courts do the following with respect to agency rulemaking:  (i) "decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies" and (ii) take away from courts the authority to interpret a statutory "gap or ambiguity as an implicit delegation to the agency of legislative rule making authority and [to] rely on such gap or ambiguity as a justification either for interpreting agency authority expansively or for deferring to the agency’s interpretation on the question of law."

First, note that this speaks only as to interpretive issues related to Chevron, not legislative rulemaking authority.

Second, I just pose this practical question.  If the Supreme Court or the legislation would eliminate the Chevron doctrine, what would that mean for legislative regulations?  Under my interpretation (summarized above and detailed in the linked document), Chevron is a rule of interpretation applying only to statutory interpretations.  Chevron is not a rule that can apply to a legislative regulation under the traditional definition of legislative regulation (a regulation establishing the substantive rule).

If as some claim, Chevron applies to legislative regulations, what would happen to, for example, the consolidated return regulations under § 1502 after the demise of Chevron (either judicial demise or legislative demise)?

Tax Procedure Book Errata - FBAR Filing Date (2/26/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 19.  Foreign Bank Account Reports (FBARs) And Related.
III. Requirements for Filing the FBAR.
Update on FBAR Filing Date Requirements
Student Ed. p. 604 (substitute for first full paragraph on page)

Practitioner Ed. p.  890 (substitute for last paragraph on page)

A reader posted a reminder under another blog entry that the due date for the FBAR report, FinCEN 114, here, is now due April 15 for the prior year's report.  When the filing date falls on a weekend day or on a holiday, the filing date is the next succeeding business day (a weekday that is not a holiday).  Accordingly, the due date for the 2016 year is April 18, 2017 (per the IRS web site here).  And, FinCen is providing an automatic extension (no filing required to obtain the extension) until October 15 (which, for the 2016 report, will be October 16, 2017, because October 15 is a Sunday).

Here is my discussion in the current draft for the next revision (due August 2017) of my Federal Tax Procedure Book (note that the footnote numbers are not the ones that will be in the final text)):
The FBAR was historically required to be filed on June 30 for the prior year.  In 2015, Congress changed the filing date to April 15 (contemporaneously with the individual income tax return due date for calendar year taxpayers, which can be the next succeeding business day if April 15 falls on a weekend or holiday) with the ability to obtain a 6-month extension to October 15 (also contemporaneous with the extended due date for individual income tax returns and also extended to the next succeeding business day if October 15 falls on a weekend or holiday). n1 Under the current instructions, FinCEN grants an automatic extension from April 15 to October 15; the automatic extension applies without any action on the filer’s part other than not filing by the original due date.  n2
   n1 § 2006(b)(11), the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41).  The effective date of this FBAR filing provision is the filing year 2016 (i.e., the 2016 FBAR is due April 15, 2017 (actually, on the next succeeding business day), subject to the automatic extension to October 15, 2017 noted in the text).
   n2 FinCEN web page, titled New Due Date for FBARs (12/16/16), viewed 2/1/17, providing in relevant part after noting the statutory due date of April 15 (emphasis supplied):
To implement the statute with minimal burden to the public and FinCEN, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.  (Please note: The due date for FBAR filings for foreign financial accounts maintained during calendar year 2016 is April 18, 2017, consistent with the Federal income tax due date.)
One might even say that, as thus formulated, the real filing due date is October 15.
Some helpful web pages (including the one mentioned in fn. 2 above are:
  • New Due Date for Filing FinCEN Form 114 -- 12-JAN-2017, here.
  • Individuals Filing the Report of Foreign Bank and Financial Accounts (FBAR), here.
  • BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114), here.

Saturday, February 11, 2017

Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)

In BASR Partnership v. United States, [citation coming later] (2017), here, the  Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate.  There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.

BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied.  I previously blogged on these decisions, but link here to the one on the appeals decision:  Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.

Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees.  That leads to § 7430, here.  Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party."  The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million).  BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)

The prevailing party requirement is a bit more nuanced.  Certainly, in ordinary parlance, BASR was the prevailing party.  It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures.  But, prevailing party is defined to exclude positions as to which the government was "substantially justified."  Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.

But wait, there is an exception to the substantially justified exception.  If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  See § 7430(c)(4)(E).  The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered.  Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate.  The aggregate award was $314,710.49.

Tax Procedure Book Errata - Notice of Deficiency Determination (2/11/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 11 Notice of Deficiency
I.   The Notice of Deficiency and its Role in the System (A Reprise).
     A.  General.
     B.   What is a Notice of Deficiency?
            1.  A Deficiency.
             2.  The Notice of Deficiency.
                     a.   The Notice, Determination and Explanation.
                            (1)    The Determination Requirement.
Discussion of a recent case, Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion), here, holding that a notice of deficiency stating $0.00 deficiency but with attachments indicating that a claimed tax benefit had been denied was a valid notice of deficiency
Student Ed. P. 358 (after the 2d full paragraph)

Practitioner Ed. p.  504 (after the carryover paragraph at the top)

               The tolerance for some level of imperfection in notices of deficiency is understandable given the ability to resolve or moot the problems by filing a Tax Court petition for redetermination.  But, what about a document in the regular form of a notice of deficiency that states the amount of the deficiency as $0.00?  A taxpayer receiving such a document would know that it is described as a notice of deficiency and that he may file a petition for redetermination is he does not agree.  But the deficiency is stated to the $0.00, and he may agree with that number.  In a 2017 reviewed opinion of the Tax Court (with strong concurring and dissenting opinions), the Court held that the standard form letter for a notice of deficiency that stated that the deficiency amount was $0.00 but included attachments clearly indicating that a deficiency had been determined because a claimed credit was disallowed met the requirements for a notice of deficiency.  n1635a The majority formulated the questions presented as:
   n1635a   Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion).
  • “Whether the notice objectively put a reasonable taxpayer on notice that the Commissioner determined a deficiency in tax for a particular year and amount.  If the notice, viewed objectively, sets forth this information, then it is a valid notice”
  • If, however, that inquiry does not provide an answer (i.e., the notice is ambiguous as to the requirements for a deficiency, then, for the notice to be valid, the evidence “establish that the Commissioner made a determination and that the taxpayer was not misled by the ambiguous notice.”  The majority elsewhere in the opinion frames the latter inquiry as to whether the “taxpayer was prejudiced by an ambiguous notice.”  On the latter point, the majority concluded as follows:

The notice on its face is ambiguous, but the Commissioner has established that he made a determination and that Mr. Dees was not misled by the notice. Mr. Dees timely filed a petition to challenge the notice, and that petition makes clear that Mr. Dees understood that the Commissioner had disallowed his refundable credit: He stated in his petition both that the Commissioner had erred in denying his premium tax credit and that he had documents to substantiate his entitlement to the credit. This establishes that Mr. Dees was not misled by the notice.
 The tests thus enunciated may be described as an objective test and a subjective test. n1635b
   n1635b Judge Ashford’s concurring opinon says that “The opinion of the Court delineates a two-prong approach (with both objective and subjective elements) to determining our deficiency jurisdiction * * * *.”

               As with the last known address requirement for notices, a taxpayer desiring to present this issue should consider the statute of limitations on assessment.  If the taxpayer brings the issue to the IRS’s attention while the statute is still open (either in some administrative process or by petition to the Tax Court, the IRS may solve the problem by issuing a new notice.  If the taxpayer files a petition in the Tax Court while the statute is still open, the mere filing of the petition will suspend the statute of limitations until the Tax Court decision is final even if the notice is ultimately determined by the Tax Court to be invalid. n1635c
   n1653c  §§ 6213(a) (prohibition on assessment which Tax Court petition for redetermination is pending; and 6503(a)(1) (suspension during period of prohibition).  See Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012) (holding that the filing of a Tax Court petition invoked the suspension even if the notice of deficiency was invalid or the filing was not by the proper person; per § 6503(a)(1), the suspension occurs “if a proceeding in respect of the deficiency is placed on the docket of the Tax Court”).

Addendum:  Links to statutes cited:
  • § 6213(a), here.
  • § 6503(a)(1), here.

Thursday, February 9, 2017

Tax Procedure Book Errata - Correct Status of the Tax Court (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 2 III.B.2. Article I Courts
Correct the status of the Tax Court as an Article I court independent of the judicial system subject to Article III and independent of the executive branch.  Prior to this change, the text in the current version indicated that the Tax Court was within the executive branch of Government.  It is not.  An error that should have been corrected previously.
Student Ed. P. 70
Practitioner Ed. p. 101

Change the paragraph on the United States Tax Court to read as follows:
               The United States Tax Court is an Article I court independent of the Article III judicial system and independent of the executive branch.  § 7441.  n339 The Tax Court has jurisdiction over tax related claims only.  Generally, the Tax Court has jurisdiction to redetermine deficiencies proposed by the IRS and resolve certain other disputes with the IRS. The Tax Court is the principal court in which tax controversies are litigated.
   n339 See Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392, 395 (1971); and Freytag v. Commissioner, 501 U.S. 868, 890-892 (1991. In 2015, in response to the Kuretski case (cited below in the footnote), Congress added this sentence to § 7441: “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government;” that sentence codifies a clause from Freytag v. Commissioner, p. 891 “[t]he Tax Court remains independent of the Executive * * * Branch[es].” The President does have the power to power to remove Tax Court judges “for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.”  § 7443(f).  Two key cases have held that the President’s limited power to remove Tax Court judges does not violate separation of powers principles (although the two cases reach the conclusion for different reasons).  Battat v. Commissioner, 148 T.C. ___, No. 2 (2017) (holding that the interbranch removal power did not implicate Article III because the Tax Court does not exercise Article III judicial power; Battat also has a good discussion of the history of the Tax Court from its inception as the Board of Tax Appeals to its current status); and Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014) (holding before the amendment noted above, that the Tax Court was an executive branch court that could permissibly be subject to Presidential removal); see also Byers v. United States Tax Court, 2016 U.S. Dist. LEXIS 135596 (D. D.C. 2016) (holding that the Tax Court is a court exempt from FOIA and containing a good discussion of the status of the Tax Court).  See also Brant J. Hellwig, The Constitutional Nature of the United States Tax Court, 35 Va. Tax Rev. 269 (2015).

Tax Procedure Book Errata - Corporation Income Tax Return Filing Date (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 5 ¶ 4.A., Time for Filing Returns - General
State C Corporation filing date as a result of 2015.  For most C Corporations, the statute changes the return due date for most C Corporations from the 15th day of the third month to the 15th day of the fourth month (from March 15 to April 15 in the case of C Corporation calendar year taxpayers).  The first two sentences will be replaced with the text below.
Student Ed. P. 108-109
Practitioner Ed. p. 152

Insert as indicated
               Individual and most C Corporation income tax returns are due on the 15th day of the fourth month after the close of the tax year (i.e., April 15 for calendar year returns; virtually all individual returns are calendar year returns, but for taxpayers on a fiscal year, the return is due on the 15th day of the fourth month after the close of the fiscal year). 530a  This filing date rule does not apply until 2025 to C Corporation taxpayers with a fiscal year of June 30. 530b  Partnership and S Corporation returns are due on the 15th day of the third month after the end of the tax year (March 15 for calendar year returns).   530c   n530a § 6072(a).  The filing date of the 15th day of the fourth month (April 15 for calendar year reporters) for C Corporations is effective for 2016 returns filed in 2017.  Prior to that effective date, the due date for C Corporation returns was the 15th day of the third month (March 15 in the case of calendar year reporters).
   n530b Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, (P.L. 114-41) § 2006(a)(3).   I have no idea as to the reason for this exception to the general rule due date of the 15th day of the fourth month.  The net effect of the new rules is that for those Corporate taxpayers wanting to file by the pre-change date of 15th day of third month can still do so and can still file by the former extension date of 15th day of the ninth month because the extension date for the new rule will be October 15th.  So, I am not sure what was achieved by excepting fiscal year Juen 30 filers in the real world.
   n530c § 6072(b).
I will make consistent changes to the discussion of extension dates in the next section in both editions.  Essentially, returns now due on the 15th day of the fourth month (April 15 for calendar year individuals and most C Corporations) can be extended for  six months to the 15th day of the tenth month.

Monday, January 16, 2017

Statistics from the 2016 Whistleblower Office Report (1/16/17)

The IRS Whistleblower Program Fiscal Year 2016 Annual Report to Congress, here, reports the following statistics:

Table 1: Amounts Collected and Awards under Section 7623, Fiscal Years  2014 to 2016
Total Claims Related to Awards
Total Number of Awards fn4
Total IRC 7623(b) Awards
Collections over $2,000,000 fn5
Total Amount of Awards fn6
Amounts Collected  fn7
Awards as a Percentage of Amounts Collected
Average Awards
fn4  For Table 1, “Total Number of Awards” reflects the number of payments to whistleblowers. In some cases, awards can
include proceeds from multiple taxpayers, which are reflected in the “Total Claims Related to Awards.”
fn5  This row includes pre-enactment section 7623(a) claims that were greater than $2 million and section 7623(b) claims.
fn6 The “Total Amount of Awards” is prior to sequestration reductions.
fn7  The “Total Amount of Awards” [for FY2015] was overstated by $441.84 on the FY 2015 Annual Report, and Table 1 has been revised to
reflect the correct amount.

JAT Comments on the Statistics:

My own calculations the following averages per award from the numbers above:

Average Awards

These average award numbers are low because of the large number of § 7623(a) awards which generally tend to be significantly less than the § 7623(b) awards.  My inference is that the § 7623(b) awards – 0 in FY 2014, 19 in FY2015, and 18 in FY2016 - would average much more than the indicated average for all awards.  Indeed, I suspect that, although § 7623(b) awards made are a low percentage of total awards, the lion's share of the Total Amount of Awards is under § 7623(b).

These numbers for claims awarded under § 7623(b) may seem low, but § 7623(b) is still relatively new (enacted effective 2007) and processing whistleblower claims to fruition with collected proceeds (collections after the refund statute of limitations has expired) takes a long time.  So, the number of awards and the amounts awarded are probably not indicative of the future where awards may be in the pipeline for claims already made or will be received and processed in later years. 

Back to the Report:

The Report contains a discussion of "Other Issues of Interest."

Tax Procedure Book Errata - Nonexistent or Phantom Regulations (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 2
II. Executive Branch.
  B. IRS.
    6. IRS Rule Making Authority.
      (4) Nonexistent or Phantom Regulations.
Complete Revision of this section
Student Ed. P. 64
Practitioner Ed. p. 84-85

                                                            (4)          Nonexistent or Phantom Regulations.

              Congress will sometimes direct or authorize the IRS to issue regulations to flesh out the statutory scheme.  The direction or authorization may be for either interpretive regulations or legislative regulations.  For any number of reasons, the IRS may not get around to promulgating the required regulations for long periods and in some cases not at all. n195  The party – most often the taxpayer – suffering from the absence of regulations may seek in audits or litigation the result that would have obtained had the regulations been promulgated.  How do the IRS and the courts resolve cases which would be subject to such regulations if they existed?  Should the IRS or the courts create, in effect, a “phantom” regulation to resolve the case based on the policies and directions reflected in the statute (as discerned from the statute or legislative history that is persuasive as to the legislative intent)?

               The Tax Court has defined the problem thusly:
               This case thus requires us to address a question that has arisen with some frequency: How should a court respond when a taxpayer or the IRS desires to have a particular tax treatment apply in the absence of the regulations to which the statute refers? In some cases, the Secretary may have affirmatively declined to issue regulations, having concluded that they are unnecessary or inappropriate. In other cases, the Secretary may intend to issue regulations but may have encountered delays because of subject matter complexity or the press of other business. Courts have described the question presented here as whether the statute is “self-executing” in the absence of regulations. [Case citations omitted] 
               The courts have struggled to define the proper judicial response in these scenarios. In each case, Congress has delegated to an executive branch agency the task of using its expertise to craft appropriate regulations. Under the Administrative Procedure Act and familiar separation-of-powers principles, a court’s usual role is to review the regulations an agency has issued, not to conjure what regulations might look like had they been promulgated. On the other hand, if it is absolutely clear that Congress intended that a particular tax benefit or tax treatment should be available, a legitimate question arises as to whether the IRS may prevent that outcome by declining to engage in rulemaking. Commentators have described this scenario as one of “spurned delegations” and the resulting judicial dilemma as one of crafting “phantom regulations.” [Law review citations omitted] n196
The Tax Court concluded the task is to determine whether the statutory text, considered in light of the legislative history, can be applied without further explication in a regulation  n197 The analysis turns upon whether “Congress couched its delegation of rulemaking authority in mandatory or permissive terms.” I add that the mandatory terms inquiry means that Congress intended the regulations to allow the treatment requested by the taxpayer or the IRS.

               As to statutory text which, as interpreted, is mandatory in the delegation and Congress’ intent as to the result is clear:
               In sum, this Court and other courts have frequently, but not always, held to be self-executing taxpayer-friendly Code provisions that include a mandatory delegation to the Secretary. One commentator has described this as “the equity approach,” on the theory that “treating such delegations otherwise would inequitably deprive taxpayers of legislatively intended benefits.” In several of these cases, the IRS conceded (or did not seriously dispute) that the statute was self-executing in the absence of regulations.  The “whether/how” approach has been employed mainly “with respect to taxpayer-unfriendly delegations.” In many of those cases, the central question was whether the statute by its terms made the taxpayer liable for the tax. n198
                As to statutory text which, as interpreted, is permissive in the delegation, so that they are interpreted to delegate discretionary or policy choices to the IRS (whether taxpayer-friendly or not), the courts will generally not impose result. n199  Of course, as thus framed so that different results may obtain by characterizing the delegation as mandatory or permissive, one needs to distinguish between those two characterizations.  Without offering anything definitive, I suspect the answer to that may be like the definition of pornography – you know it when you see it.

               I wonder whether one analytical tool to determine when the court can supply the rule in the absence of regulations would be to use the Chevron analysis for testing the validity of regulations (I discuss Chevron below).  Chevron basically tests the validity of regulations using the tools of statutory construction in a two-step process.  The concept would be that, if there were a regulation that did not include the relief the party seeks, the regulation would be invalid.  This would be a notional regulation analysis.  This would simply say that, based on the Chevron analysis, Congress clearly intended the relief and therefore, even in the absence of the regulation, the Court can supply the relief.


  n195 A classic example is § 385, enacted in 1969.  Section 385 authorizes–but does not direct–the IRS to promulgate regulations to adopt a test for distinguishing between corporate debt and equity.  The courts had developed general rules which were so squishy in application that they were difficult for taxpayers, the IRS and the courts to apply.  Congress punted to the IRS the authority to make the rules.  The IRS tried but finally realized that it could not do that in a way that might not create more problems than it solved.   The IRS has yet to promulgate regulations.  Taxpayers, the IRS and the courts are left with the same squishy rules as before.  In 2016, the IRS issued proposed regulations.

   n196 15 West 17th Streeet LLC v. Commissioner, 147 T.C. ___, No. 19 (2016) (Reviewed opinion).

   n197 Id., citing Temsco Helicopters, Inc. v. United States, 409 F. App’x 64, 67 (9th Cir. 2010) (citing Francisco v. Commissioner, 119 T.C. 317, 322-323 (2002), aff’d on other grounds, 370 F.3d 1228 (D.C. Cir. 2004)).

   n198 Id. (Citations omitted.)

   n199 Id.

The Tax Court Jurisdictional Brouhaha that Should Never Have Been - Malpractice Alert (1/16/2017)

For many years through 2015, I taught Tax Procedure at the University of Houston Law School.  Some professors teach the subject at a more theoretical level, spending a lot of time, for example, on Chevron and its policy implications.  I do a combination of the theory and the every day rules required to work through the various aspects of tax procedure to benefit the client.  In conjunction with that course, I have published a free downloadable Tax Procedure text.  Actually, the text comes in two editions -- a student edition without footnotes and a practitioner edition with footnotes.  (These may be downloaded from the links to the right of the blog page; I update these two editions annually by mid-August for use by students and law professors.)  The design of the nonfootnoted student edition is for a tax procedure class.  My goal for the student edition is to provide summaries of the procedures, with only key Code sections and key cases cited in the text.  In the practitioner edition, I provide authority and digressions in the footnotes that I don't expect students to know for the class.

One of the important subjects I discuss is the timely mailing, timely filing statute, § 7502, here, for key documents required to be filed under the Code.  In a nutshell, as I state in my text:  the timely mailing, timely filing statute, often called a rule, "treats the mailing date as the filing date for a return (or certain other documents) received by the IRS after the due date (either the original due date where there is no extension or the extended due date if there is an extension) but mailed on or before that due date."  The discussion of the rule from the book may be viewed on line or downloaded, here.  This linked document is from the practitioner version with footnotes for more detail.  I do provide at the end of this blog entry, the cut and paste from the student edition without footnotes.

One of the points I hammered into my students in class when we covered this subject in class was that there is an easy way to absolutely assure that the conditions for application of the rule will be met and that easy way should be used in all -- ALL -- cases where mailing is close to the deadline (and even in other cases from an abundance of caution).  If that easy way is chosen (see the linked materials), the document will be treated as timely filed even if it never gets to the place of filing (the IRS or the Tax Court).  That easy way is to use an authorized USPS service or an authorized private postage service (such as FedEx or UPS).  (Must be careful to use the authorized service in each case).

Filing dates are critical to avoid penalties (e.g., for late filed returns).  Penalties are bad, but it could be worse.  In one key facet of the tax practice they are critical.  That is the filing of certain documents with the Tax Court, most commonly the petition for redetermination of a notice of deficiency.  Timely filing is required for a key remedy -- prepayment judicial review in the Tax Court for a deficiency redetermination.  Section 6213(a), here, requires filing within 90 days for Tax Court review to redetermine the deficiency.  Thus, given the importance of timely filing of the petition for redetermination (and some other filings with the Tax Court), as a practitioner, I always use one of the guaranteed methods.  (See the linked portions of my text above and the cut at paste at the end of this blog entry.)

In Tilden v. Commissioner, ___ F.3d ___, here, the Seventh Circuit addressed a situation where the tax practitioner failed to use a guaranteed easy way to assure application of the timely mailing, timely filing rule.  The practitioner used the the third party service that operates like a private postage meter.  The statute generally makes postmarks made by the USPS dispositive, but other non-USPS postmarks are dispositive only pursuant to regulations issued by the IRS.  § 7502(b). Those regulations appear at 26 CFR § 301.7502-1, here.

For application of the rule to a private post metering service (including postage the mailing must meet the conditions in the regulations.  I won't get into the details here of the various faints and starts encountered in the Tax Court's and then the Seventh Circuit's meandering through the applicable regulations.  The Tax Court held that the taxpayer did not meet the conditions.  The Seventh Circuit held that the taxpayer did, although it was a thin reed of a victory for the taxpayer.

Tuesday, January 3, 2017

SD NY District Court Rejects Partial Payment § 6707 Penalty Refund Suit (1/2/17)

This is a reposting of the same entry on my Federal Tax Crimes Blog.

In Larson v. United States, 2016 U.S. Dist. LEXIS 179314 (SD NY 2016), here, the Court rejected an attempt by a promoter assessed a very, very large § 6707 penalty to avoid the Flora full payment rule for refund litigation.  The principal holding is that the § 6707 penalty is not a divisible penalty that could benefit under divisible tax exception to Flora's full payment rule.  This aspect of the case is consistent with prior holdings such as Diversified Group Inc. v. United States, 841 F.3d 975, 981 (Fed. Cir. 2016), here.

The full bore application of the Flora full payment exception is troubling on these facts with very, very large § 6707 penalties.  The IRS assessed a $24,745,026 penalty for the FLIP/OPIS shelter and a $135,487,056 penalty for the BLIPS shelter.  The total was thus $160,232,026.  The IRS did reduce the penalty by amounts paid by other co-promoters.  The aggregate amount of that reduction was $96,820,667, leaving Larson liable for $63,411,359.  (Co-promoters also might be liable for the unpaid balance.)

Larson made a partial payment of $1,432,735, hence his refund suit alleging a divisible tax as a basis for not paying all.  The Court's basic analysis as to why the § 6707 penalty is not divisible is fairly straight-forward.  I think the following discussion relating to the claims of hardship because of the amount of the penalty is interesting.
Indeed, at oral argument, Larson did not dispute that the failure to register a tax shelter was "only one act," or "one act per shelter," Tr. at 17:22-23; rather, Larson seeks to limit the applicability of the full-payment rule to his particular circumstances. In a due process challenge to the application of the full-payment rule, Larson argues that the full-payment rule violates "the Fifth Amendment where there is no alternative forum having jurisdiction over pre-payment challenges to such penalties and where an individual does not have the financial means to pay the penalties in full." Opp. Br. at 7. Foreclosed from review in Tax Court, Larson argues that because he cannot pay the penalty, and he cannot seek review for his claim without paying the penalty, the imposition of the full-payment rule violates his Fifth Amendment right to due process. n9
   n9 Larson did not assert a Due Process claim in his Complaint, but he makes arguments based on the Due Process Clause in opposing the Government's motion to dismiss. 
Larson argues that the Supreme Court in Flora I and Flora II never intended for the full-payment rule to apply in circumstances in which Tax Court review is unavailable and the challenged penalty amount is unaffordable to the taxpayer. Larson's reading of Flora I and Flora II strains to find due process arguments where none exists. In reviewing the legislative history of 26 U.S. § 1346(a)(1) and the legislative history that led to the creation of Tax Court, the Supreme Court noted that Congress created the Tax Court as a prepayment forum to ameliorate "the hardship of prelitigation payment." Flora I, 357 U.S. at 74, 75; Flora II, 362 U.S. at 158. But it is clear that Congress created the Tax Court out of legislative grace, not because it was a constitutionally-required response to the full payment rule. See Flora I, 357 U.S. at 75; Flora II, 362 U.S. at 158. Flora I and Flora II held that, in district court, a taxpayer must "pay first and litigate later," and Larson points to no authority that supports his argument that the unavailability of the Tax Court vitiates the full-payment rule in district court. Carving a "when Tax Court is unavailable" exception into the full-payment rule would subvert the full-payment rule's purpose in "promot[ing] the smooth functioning of [the tax litigation] system." See Flora II, 362 U.S. at 647. Although this Court is sympathetic to Larson's circumstances, this Court declines to recognize such an exception to well-settled jurisdictional limits.

IRS Designates Syndications Exploiting Improper Valuations for Conservation Easement Deductions (1/3/17)

This is a reposting of the same entry on my Federal Tax Crimes Blog.

I note at a couple of places in the Federal Tax Procedure Book that some of the most abusive tax shelters do not fail because the legal positions are faulty.  Rather, they fail because the legal positions are all based false facts, often a false valuation of property.  For example, in discussing the substantial and gross valuation misstatement penalties in §§ 6662(e) and (h), here, I state:
Section 6662(e)’s substantial valuation misstatement penalty and § 6662(h)’s gross valuation misstatement penalty are directed to return reporting positions where the law is correctly applied but a critical valuation is grossly erroneous, resulting in the substantial understatement of the tax liability.  In many of the abusive tax shelters over the years, the Achilles heel has been and continues to be inflated valuations.  The legal superstructure had some facial merit, but it was built on a factual house of cards because of gross overvaluation.  A facet of this problem was that, since tax professionals were not valuation experts, they could render their opinions without taking responsibility for the key valuation facts that supported the whole purported tax shelter superstructure.  For example, as to property otherwise qualifying for the old investment tax credit (10 percent of qualifying investment in property), tax shelter promoters would sometimes inflate the value of property to 10 or 20 times its true value and sell it to investment partnerships (where the partners were tax shelter investors) for the inflated value.  Of course, only crazy people would pay the inflated value, so the tax shelter investors paid only a small amount down and “paid” the balance by nonrecourse indebtedness (before the rules related to nonrecourse indebtedness and passive losses).  Assuming that the value was correct, the taxpayers would be entitled to the credit; the problem was in the valuation.  Many, many tax issues, not just tax shelter issues, rely upon valuations.  Thus, for example, estate and gift tax returns rely upon reasonably correct valuations.  The purpose of this penalty is to put some sting in overly aggressive valuations.
I have posted on variations of this theme.  Court Sustains Use of Regular Summons to Appraiser Investigated Even Though Third Party Taxpayers May be Identified (Federal Tax Crimes Blog 1/14/16), here.  See also Prominent and Very Rich Investor Indicted in SDNY (Federal Tax Crimes Blog 5/24/16), here.

Such overvaluations carry risk of criminal prosecution and significant civil penalties.

The IRS strikes again at a valuation shelter in a different package, this one syndications -- promoted "investments" -- offering conservation easement deductions.  Notice 2017-10, 2017-04 IRB, here.  The Notice describes the problem:
The promoters (i) identify a pass-through entity that owns real property, or (ii) form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the passthrough entity that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment. The promoters obtain an appraisal that purports to be a qualified appraisal as defined in § 170(f)(11)(E)(i) but that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property. After an investor invests in the pass-through entity, either directly or through one or more tiers of pass-through entities,  the pass-through entity donates a conservation easement encumbering the property to a tax-exempt  entity. Investors who held their direct or indirect interests in the pass-through entity for one year or less may rely on the pass-through entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under § 170(e)(1). The promoter receives a fee or other consideration with respect to the promotion, which may be in the form of an interest in the pass-through entity. The IRS intends to challenge the purported tax benefits from this transaction based on the overvaluation of the conservation easement. The IRS may also challenge the purported tax benefits from this transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.

Monday, January 2, 2017

Tax Procedure Book Errata - Coordination of Return Reporting Civil Penalties; Stacking (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 8. Penalties
III. Civil Penalties.
   E. Accuracy Related Penalties
   11. Coordination of Return Reporting Civil Penalties; Stacking.
New discussion of coordination of the return reporting civil penalties so that there is no stacking or overlap of penalties
Student Ed. P. 248
Practitioner Ed. P. 352

11. Coordination of Return Reporting Civil Penalties; Stacking.

The return reporting penalties in § 6663 (civil fraud) and § 6662 (accuracy related) provide several different penalty rates to the portion of the understatement subject to the penalty.  For example, the civil fraud penalty is 75 percent of the understatement attributable to fraud.  The conduct subject to this penalty is almost always potentially subject to the accuracy related penalties, but only the 75 percent civil fraud penalty will apply. n1157a  Similarly, if a 40 percent accuracy related penalty applies to a portion of an understatement, another 20 percent accuracy related penalty will not apply to that portion.  In other words, if a higher rate applies to a portion of the understatement, the lesser rates will not apply to that portion. n1157b  These penalties are not “stacked” so as to subject any portion to multiple penalties. This means that as to an aggregate understatement (deficiency), some portion could be subject to no penalty, some portion could be subject to a 20 or 40 percent accuracy related penalty and some portion could be subject to the civil fraud penalty, but the penalties will not overlap as to a portion of the understatement.  n1157c

Although the penalties will not overlap, in the notice of deficiency, the IRS may assert penalties in the alternative – e.g., assert the civil fraud penalty with a lesser accuracy related penalty as an alternative position if the fraud penalty is not sustained or assert a higher accuracy related penalty with a lesser accuracy related penalty if the higher penalty is not sustained. n1157d In that case, the bottom line amount of deficiency determined in the notice of deficiency will only include the higher penalty and the lesser, alternative penalty, although asserted, will not be in the bottom-line deficiency determination. n1157e


   n1157a Regs. § 1.6662-2(a).

   n1157b Regs. § 1.6662-2(c).

   n1157c Graev v. Commissioner, 147 T.C. ___, No. 16 (2016) (reviewed opinion) (in the case of the 40 percent and 20 percent accuracy related penalties, “Only one of these penalties can apply to a given portion of a deficiency; they cannot be stacked.”).

   n1157d An illustration of how this works in conjunction with other Code requirements is Graev v. Commissioner, 147 T.C. ___, No. 16 (2016) (reviewed opinion).  In the case, the IRS asserted the 40 percent gross valuation misstatement penalty and, in the alternative, asserted the 20 percent accuracy related penalty.  Both of those penalties could not apply.  Accordingly, in the notice of deficiency, although asserting the 40 percent penalty and stating the 20 percent penalty as an alternative, the deficiency number for the deficiency included only the 40 percent penalty.  The IRS conceded the 40 percent penalty and the Court sustained the 20 percent penalty.  In doing so, the Tax Court rejected the taxpayer’s claim that stating the 20 percent penalty in the alternative without including the calculation of the 20 percent penalty (because the 40 percent penalty was calculated) violated § 6751(a)’s requirement that the penalty calculation be included in the notice.

   n1157e See Graev v. Commissioner, 147 T.C. ___, No. 16 (2016) (reviewed opinion).

Caveat, the footnote numbers above are based on  the footnote numbers in the current Practitioner Edition.  The footnote numbers will not be the same in the next Edition scheduled for publication in August 2017.

Also, in each case I have used the word percent rather than using the percent symbol because, for some reason, the blog will not save with percent symbols in the blog.  In the book texts, the percent symbols will be used.

Tax Procedure Book Errata - Tax Common Law Doctrines and Statutory Interpretation (1/2/17)

Book Outline Section
Nature of Update
Location for current editions
Ch. 2 ¶ 1.B., Statutes and their Meanings
Introduce common law doctrines of statutory interpretation - business purpose, form over substance and economic substance
Student Ed. P. 37
Practitioner Ed. p. 42
(immediately before C. Committees and Committee Reports)

Finally, tax statutory interpretation includes applying the text in the light of certain precepts that inhere in the scheme of taxation that Congress adopted.  Students of tax law will already have heard concepts, often called tax common law doctrines, such as the business purpose doctrine, form over substance, and economic substance, which inform the application of the statute even when the statutory text says nothing about those concepts. n. 33a

n. 33a In Santander Holdings United States v. United States, ___ F.3d ___, 2016 U.S. App. LEXIS 22400 (1st Cir. 2016), the Court said:
               The federal income tax is, and always has been, based on statute. The economic substance doctrine, like other common law tax doctrines, can thus perhaps best be thought of as a tool of statutory interpretation, n8 as then-Judge Breyer characterized it in his opinion for this court in Dewees v. Commissioner, 870 F.2d 21, 35-36 (1st Cir. 1989).
   n8 As one commentator says:
               A related . . . claim is that the legislature assumes that long-standing common law doctrines such as economic substance will be used to interpret the statutes it enacts. Under this claim, the doctrines have been implicitly adopted as part of the statute -- at least where the statute does not indicate otherwise.
               Joseph Bankman, The Economic Substance Doctrine, 74 S. Cal. L. Rev. 5, 11 (2000).

Caveat, the footnote numbers above are based on  the footnote numbers in the current Practitioner Edition.  The footnote numbers will not be the same in the next Edition scheduled for publication in August 2017.