Tax Perjury, § 7206(1) Is a Different Crime than Perjury, 18 USC § 1621 (12/25/19)

The following is a copy of a post to my Federal Tax Crimes Blog:

Yesterday, I was updating the working draft of my Federal Tax Procedure Book, here, for the 2020 editions to make a point about § 7206(1) here, which I and others call “tax perjury.”  See e.g., DOJ CTM 12.03 Generally, here (“Section 7206(1) is referred to as the “tax perjury statute,” because it makes the falsehood itself a crime.”) I added the caveat that tax perjury in § 7206(1) is not the crime of perjury, 18 USC § 1621.  The CTM thus cautions that “Although referred to as the ‘tax perjury statute,’ Section 7206(1) prosecutions are not perjury prosecutions.”  CTM 12.09[2] Law Of Perjury Does Not Apply To Section 7206(1) Prosecutions.  Thus features critical to perjury prosecutions (such as the two-witness rule and no corporate criminal liability) do not apply to § 7206(1) prosecutions.

In addressing this point, I discuss in a footnote Siravo v. United States, 377 F.2d 469 (1st Cir. 1967), here.  In Siravo , the defendant argued that § 7206(1) was not a perjury statute, because perjury requires false affirmative statements and the omission of income is not a false affirmative statement.  The Court held that the language of the jurat did cover such omissions because the jurat states that it is signed under penalty of perjury and the taxpayer attests under penalty of perjury that the return is true and correct, so that omitted income was clearly within the scope of the statement made under penalty of perjury covers omissions from the return (the Court treated the word "complete" in the jurat as superfluous to “true and correct”).  “Therefore, the government has made out a violation of the section, whether it be labelled a perjury statute or similar in nature,”  (Pp. 762-473 (cleaned up).  See also United States v. Cohen, 544 F. 2d 781, 783 (5th Cir. 1977) (cleaned up) (“The omission of a material fact [assets from the OIC] renders such a statement just as much not ‘true and correct’ within the meaning of§ 7206(1), as the inclusion of a materially false fact, Siravo v. United States, 377 F.2d 469 (1st Cir. 1967)."

Eleventh Circuit Sustains IRS Summons Issued For French Tax Investigation (12/18/19)

In Redfern v. United States (11th Cir. Dkt. 19-12649 12/17/19) (unpublished), here, the Court affirmed the IRS’s issuance of summonses to various banks “at the request of the French government, pursuant to the United States–France Income Tax Treaty, to aid an ongoing investigation into Redfern’s [French] tax liability.” 

For background on the process, I cut and paste this (footnotes omitted) from a version of the working draft of my Federal Tax Procedure Book (basically same as in my Federal Tax Procedure 2019 editions):

In an increasingly globalized economy, records relevant to tax administration in one country may be possessed by someone in another country. Under many U.S. bilateral tax treaties, one treaty partner is obligated to assist the other in gathering information relevant to the latter's tax administration. For example, the Canadian tax authority (referred to as the “competent authority” in treaty parlance) under the U.S./Canada Double Tax Treaty may request the U.S. tax authority (i.e., the U.S. competent authority) to obtain information in the U.S. for Canadian tax administration. (This is commonly referred to as an “exchange of information” provision.) If the request is within the scope of the treaty, the U.S. competent authority will authorize the IRS to issue an administrative summons. The ultimate taxpayer involved may then bring a motion to quash if the summons is to a third party or, if the summons is to the taxpayer, may invoke any basis for noncompliance and await the IRS's pursuit of a summons enforcement proceeding.  

In United States v. Stuart, 109 S. Ct. 1183 (1989), Canada made such a request to the U.S., the U.S. issued summonses to third parties, and the taxpayer brought a motion to quash. The issue presented was whether the Code's limitation on the use of administrative summonses when a DOJ referral is in effect (§ 7602(d)) applies in the case of a summons issued under the Canadian treaty in relation to the Canadian tax. That Code limitation had been enacted after the U.S./Canadian double tax treaty in question had been negotiated and entered into force. Arguably, even if that limitation were not in the treaty, Congress's subsequent legislation may have created a treaty override. The taxpayer argued that the status of the Canadian tax investigation was the equivalent of a DOJ referral and thus the use of an IRS administrative summons was not proper. The Court held that, notwithstanding the subsequent enactment, the treaty itself controlled and had no such limitation, so that it need not inquire into the status of the Canadian investigation.  

In subsequent cases, courts have held that the propriety of the foreign country’s tax investigation is not relevant to whether the IRS can issue and enforce the summons (or avoid a petition to quash the summons); rather, the issue is whether the IRS has met the Powell requirements for the summons focusing on its actions and not that of the foreign treaty partner requesting the IRS to use its processes to obtain the requested information.  

 Similar processes are available under the OECD Convention on Mutual Assistance in Tax Matters, which is a multilateral treaty, and possibly other treaties as well, although most of the litigated cases appear to involve the bilateral double tax treaties.

The process employed in Redfern for the summons as follows (Slip Op. p. 2):

As required by Internal Revenue Code § 7609(a)(1), the IRS provided Redfern, as the holder of the accounts, with notice of the summons and an explanation of the recipient’s right to bring a proceeding to quash the summons. Specifically, it mailed the required notice to Redfern at (1) the address that appeared on his most recently filed and processed federal tax return and (2) the address identified by France as the address he reported to the government, as well as (3) to Leslie R. Kellogg, an attorney at Hodgson Russ LLP, from whom the IRS had received a power of attorney signed by Redfern authorizing her to receive confidential tax information on Redfern’s behalf.

Townsend Article on Burden of Proof and Valuation in Tax Cases (12/9/19)

Caveat:  The ABA Tax Lawyer publication has published my article:  John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020).  I have posted the article as published to SSRN where it can be reviewed or downloaded in pdf format.  The suggested citation on SSRN and the link for review or downloading is:  Townsend, John A., Burden of Proof in Tax Cases: Valuation and Ranges — An Update (2020). 73 Tax Lawyer 389, 2020. Available at SSRN: https://ssrn.com/abstract=3599481.  The final published article supersedes the draft and should be the one consulted going forward.

I have posted on SSRN a draft of an article, titled  Burden of Proof in Tax Cases: Valuation and Ranges - an Update, I have submitted to the ABA Tax Lawyer for publication.  The SSRN posting where the draft can be downloaded is here.

The SSRN Abstract is:

In this article, I update a previous article, John A. Townsend, Burden of Proof in Tax Cases: Valuations and Ranges, 2001 TNT 187-37 (2001). I discuss the difficulty in many valuation cases of determining a finite valuation point by the required degree of persuasion (more likely than not in most civil cases). This point was made cogently in a frequently cited opinion of by the Delaware Court of Chancery (which I quote in the next paragraph): 

It is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. Valuation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts' opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.

Sometimes where ranges are identified, arbitrary conventions (such as the midpoint as in the case of publicly traded stock) can be used to determine the issue in litigation. But where there is no such convention that should be applied, the burden of persuasion can resolve the case by identifying the range. The party bearing the burden of persuasion (or risk of nonpersuasion) then has persuaded only as to the end of the range that does not favor that party and the value, based on persuasion, is determined accordingly. 

The party bearing the burden of persuasion in tax cases is usually the taxpayer. In the article, I discuss interesting features of the burden and how, at least in the Tax Court, the burden of persuasion might shift to the Commissioner under Helvering v. Taylor, 293 U.S. 507 (1935), which I think is often misunderstood. 

Another benefit of identifying the range is that, if it is determined on appeal that the trier of fact misapplied the burden of persuasion but did identify the range, the court of appeals can resolve the case by picking the other end of the range (unless a successful attack is made on the choice of the ends of the range).

The purpose of the advance publication on SSRN is to advised the community of the article and solicit comments for those wishing to make them.  I find that comments will help me make final revisions that make the final publication better.  Thanks in advance.

The SSRN listing for all of my articles is here.

The Missing Witness Negative Inference and the Impeachment Proceedings (12/1/19)

This is a cut and paste from the same post on my Federal Tax Crimes Blog, here.

A couple of days ago, I wrote on the D.C. Circuit Court’s rejection of another Bullshit Tax Shelter.  D.C. Circuit Swats Down Bullshit Tax Shelter (Federal Tax Crimes Blog 11/29/19), here.  One of the issues discussed in the case (but only lightly discussed in the blog) is the negative inference that a trier of fact may draw from a missing witness.  I noted: “In its most common iteration, the missing witness negative inference is deployed when the witness is controlled by one of the party’s to the litigation.”  I use this separate blog entry to discuss the missing witness negative inference in this context because of its potential for its application where, in the impeachment proceedings or the resulting trial, President Trump has control or suasion over witnesses whom he directs or encourages not to testify.

A good statement of the missing witness rule--usually invoked in a jury instruction context to explain to the jury how to use the rule--is (United States v. St. Michael's Credit Union, 880 F.3d 579, 597 (1st Cir. 1989), here (cleaned up):

The rationale behind the missing witness instruction has been stated as follows: "the failure of a party to produce available evidence that would help decide an issue may justify an inference that the evidence would be unfavorable to the party to whom it is available or whom it would ordinarily be expected to favor." 2 C. Wright, Federal Practice and Procedure § 489 (1982). First Circuit precedent has established three circumstances that may warrant a missing witness instruction.  

The jury may draw an inference adverse to a party toward whom the missing witness is favorably disposed, because the party would normally be expected to produce such a witness. In addition, the jury may draw an adverse inference when a party fails to produce a material witness who is peculiarly available to that party. Finally, when a party having exclusive control over a witness who could provide relevant, noncumulative testimony fails to produce the witness, it is permissible to draw an adverse inference from that party's failure to do so, even in the absence of any showing of the witness's predisposition toward the party.

Readers will note that the negative inference from a missing witness is an evidentiary context for inferences that we use everyday in all sorts of contexts beyond a trial setting.  If it is important to establish the truth of a proposition and any party withholds potentially important evidence as to the truth or falsity of the proposition, then an inference can be and often is drawn that the evidence would be negative to that party.  The inference is deployed in a trial setting where it is critically important to establish the truth of facts which the trier of fact (judge or jury) is requested to find.  The party who suffers if the fact is or is not true and declines to produce evidence within that party's control can be subject to a negative inference as to the content of the withheld evidence.  Just that simple.

In the current context, President Trump has directed and clearly signaled to all persons within his control or suasion that they should not testify.  That is the classic case in which the missing witness negative inference can be made.  As I indicated, that rule is important in fact finding in every day life and in trials.

Court Denies Summary Judgment to Party with Burden of Persuasion Because that Party's Testimony Evidence May Not Be Believed (11/24/19)

In Martinelli v.Commissioner, (T.C. Dkt No. 4122-18 Designated Order 9/20/19), here, the IRS issued a deficiency against Martinelli and separately apparently assessed a penalty under § 6038D(d) for failure to report a foreign financial account on Form 8938, Statement of Specified Foreign Financial Assets.  Readers may recall that foreign financial accounts have, for some time now, been reportable to Treasury on the FBAR and, beginning for years after 2010, on an IRS form, now designated Form 8938.  The §6038D(d) penalty is an assessable penalty, meaning that a notice of deficiency is not required, so, bottom line the Tax Court order holds that the penalty is not within the Court’s deficiency jurisdiction.

I will discuss the Designated Order below, but first offer the following introduction from my Federal Tax Procedure Book (footnotes omitted):

Reporting Foreign Financial Assets on Form 8938.

  In 2010, Congress enacted a tax return reporting requirement for foreign financial assets that parallels, but is different from the FBAR. The reporting is on Form 8938 which is attached to the income tax return.  Form 8938 is required in the following circumstances with the reporting thresholds as indicated: (i) an unmarried taxpayer having specified foreign financial assets that have a value of more than $50,000 on the last day of the year or $75,000 at any time during the year; (ii) married taxpayers residing in the U.S. and filing a joint return having specified foreign financial assets of more than $100,000 on the last day of the year or $150,000 at any time during the year; (iii) married taxpayers filing separate returns and residing in the U.S. having specified foreign financial assets of $50,000 on the last day of the tax year or more than $75,000 at any time during the year; and (iv) taxpayers living abroad (either for the entire tax year or for 330 days during 12 consecutive months ending in the tax year) (a) not filing a joint return and having specified foreign assets of  $200,000 on the last day of the year or $300,000 at any time during the year and (b) filing a joint return and having specified assets of $400,000 on the last day of the year or $600,000 at any time during the year.  There are certain limited exceptions for reporting assets that are reported elsewhere on tax forms (not the FBAR).

Reportable “specified foreign financial assets” are (1) depository or custodial accounts at foreign financial institutions and (2) to the extent not held in an account at a financial institution, (i) stocks or securities issued by foreign persons, (ii) any other financial instrument or contract held for investment that is issued by or has a counter-party that is not a U.S. person, and (ii) any interest in a foreign entity.  The IRS interprets these terms broadly, so IRS pronouncements must be consulted each time the issue arises, particularly during the early years of implementation when the IRS’s interpretations may be in a period of flux.  The assets and foreign institutions and the maximum values during the year must be reported. 

RICO Claim Dismissed Against Bullshit Tax Shelter Promoters (11/22/19)

Note: This is posting to the Tax Procedure Blog of an earlier posting on my Federal Tax Crimes Blog, that I decided to copy and post here because relevant to tax procedure issue.

In Menzies v. Seyfarth Shaw LLP, __ F.3d ___ (7th Cir. 2019), here, the Court dismissed a RICO claim arising out of an alleged fraudulent tax shelter peddled to the taxpayer (Menzies) by a lawyer, law firm and two financial services firms.  The Court held that fraudulent tax shelters can be subject of RICO claims, but Menzies had failed to properly assert the claims in the pleadings.

The particular shelter involved was of the bullshit shelters, often a topic discussed on this blog.  Here is my definition from my Tax Procedure books (Practitioner Edition p. 905 (footnotes omitted); Student Edition p. 616):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask 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, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) 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, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) 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 potential penalty risks by shifting them 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.”  Others have described the abusive tax shelters as “too good to be true.” 

I could not ascertain precisely what the steps in the fraudulent tax shelter scheme were other than, like Son-of-Boss transactions, the scheme created artificial losses that, presumably, offset the gain on sale of AUI stock, although it is not clear whether that gain was ever reported in order to use artificial losses. (I perhaps just missed something there.)  Here is the best explanation from Judge Hamilton’s dissenting opinion (Slip Op. 33-35):

On Judge Richard Posner (11/18/19)

I recently posted the following entry.  The Notice of Deficiency (Federal Tax Procedure Blog 11/8/19), here.  In that post, I had the following concluding paragraph on the history of the seminal tax decision in Helvering v. Taylor, 293 U.S. 507 (1935), here:

Finally, if you really want a better--dare I say more holistic--understanding of Helvering v. Taylor, I recommend that you read Judge Learned Hand's decision in the Second Circuit that preceded the Supreme Court case.  Taylor v. Commissioner, 70 F.2d 619, 620-621 (2d Cir. 1934), here, aff’d Helvering v. Taylor, 293 U.S. 507 (1935). And, if you don't know who Judge Learned Hand was, you should.  See Wikipedia entry here.

I write today on another, later generation appellate judge, a giant in the law, Richard Posner, retired from the Seventh Circuit Court of Appeals.  (Wikipedia here.)  The inspiration for today’s blog entry is this blog: Eric Segall, Solum on Posner and the Descriptive/Normative Gap in Originalist Theory (Dorf on Law 11/15/19), here.

Starting at least by the late 1990s while teaching Tax Procedure and Tax Fraud and Money Laundering I always had my students read at least one Judge Posner opinion, not just because it was on topic but also because of the quality of the legal analysis that Judge Posner usually displayed.

Professor Segall quotes Professor Solum as follows:

I have only read a fraction of Posner's judicial decisions, but on the basis of that fraction, he is, in my opinion, one of the greatest judges in the history of the common law--and the greatest American judge of his time.

The discussion centers around originalism, but Judge Posner’s opinions in the tax law and other areas of the law are wonderful.  Here are some that I have used in teaching (I located these on quick searches of my Federal Tax Procedure book and the latest edition of my Federal Tax Crimes book):

Sixth Circuit Holds that Courts Cannot Enjoin IRS From Receiving or Using Alleged Confidential Info from Former Attorney (11/13/19)

Note:  I posted this earlier on the Federal Tax Crimes Blog here, but since it overlaps with Federal Tax Procedure, I post it here.

In Gaetano v. United States, 2019 U.S. App. LEXIS 33164 (6th Cir. 2019), here, the Gaetanos (husband and wife) sued the United States to enjoin the IRS from receiving and using attorney-client confidential information that their former attorney, Goodman, did or might share with the IRS.  The Court opens with this good succinct introduction of the factual background and holding.

Richard and Kimberly Gaetano trusted Gregory Goodman as their legal advisor and business partner in running a cannabis operation. That trust was spurned.  The Gaetanos ended the relationship after ethics violations undid Goodman's license to practice law. He retaliated by assisting the Internal Revenue Service in a tax audit against them. Concerned about what Goodman might reveal, the Gaetanos sued the government to prevent it from discussing attorney-client confidences with him. The Anti-Injunction Act bars the lawsuit, and the Williams Packing exception does not apply. See 26 U.S.C. § 7421(a); Enochs v. Williams Packing & Navig. Co., 370 U.S. 1, 82 S. Ct. 1125, 8 L. Ed. 2d 292 (1962).

The district court dismissed the complaint.  On appeal, the Sixth Circuit held that dismissal was proper on jurisdictional grounds because of the Anti-Injunction Act, § 7421(a).  In summary, the Court held:

1.  The claim of violation of the Sixth Amendment right to counsel was improper because that is a right that attaches when prosecution is commenced.  There was no prosecution (at least not yet).

2.  The claim of violation of due process was improper.  The Court reasoned (cleaned up):

The Gaetanos next seek refuge in the Due Process Clause of the Fifth Amendment. As a creation of the common law, not the Constitution, the attorney-client privilege cannot by itself provide the basis for a due process claim. Support for the Gaetanos' position thus must come from somewhere else, in this instance from cases holding that deliberate preindictment intrusions into the attorney-client relationship may prove so pervasive and prejudicial as to imperil the fairness of subsequent proceedings.  

Vanishingly few decisions have found a due process violation for government intrusion into the attorney client relationship. The few cases generally involved nefarious government conduct,  such as infiltrating a defense lawyer's office. And in the lion's share of cases, courts treat these due process claims with suspicion. For our part, we have never found a Fifth Amendment violation on this ground. And we recently expressed our skepticism about the continued vitality of the "outrageous government conduct" defense, of which these claims are thought to be a subspecies. 

Even if this deliberate-intrusion concept could form the basis of a due process claim, the Gaetanos still would not prevail. Such claims require an ongoing, personal attorney-client relationship. That's not something the Gaetanos and Goodman have. Such claims also require a deliberate intrusion. But that's not what happened. The government never requested privileged information from Goodman. Such claims also require actual and substantial prejudice. But the Gaetanos seek relief outside the context of any enforcement proceeding, and they offer no explanation why the ordinary remedy—suppressing privileged evidence—would fail to protect them. No Fifth Amendment danger lurks.

3.  The Court rejected a claim under § 7525, noting that the privilege could be raised only to prevent compelled production of privileged information, but cannot be used to stop extrajudicial communications unrelated to  proceedings before a court.

Altera Corp. Petition for Rehearing Denied (11/12/19)

I have written before about the cause célèbre that is the Altera case.  Altera Corp. v. Commissioner, 145 T.C. 91 (2015), here, rev'd 926 F.3d 1061 (2019), here.  Today, the Ninth Circuit denied the petition for rehearing en banc.  See here.

The denial of the petition for rehearing is cursory, as usually the case with denials of petitions for rehearing en banc.

My prediction is that Altera will seek certiorari.  There is no direct conflict.  Altera will urge, I presume, the importance of the issue and conflict in principle with Supreme Court authority regarding interpretation and application of the arbitrary and capricious/State Farm (Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) standard).

There is a significant dissent by Judge Milan Smith (see Wikipedia, here), joined by Judges Callahan and Bade.  Judge Smith does not offer much new there that had not been said by the Tax Court and the Ninth Circuit panel (panel opinion and dissenting opinion).  Basically, Judge Smith claims that the Treasury Regulations failed procedural regularity under the § 706(2)(A) arbitrary and capricious standard, also called the State Farm standard.  The key for Judge Smith is that, in his view, the IRS justified the regulations on the arm's length standard alone rather than the commensurate with income standard and failed to adequately consider the comments in making the final decisions.

I have dealt with this genre of argument in discussing the panel opinions, so I just point to those discussions:  Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19; 7/2/19), here.

The Notice of Deficiency (11/8/19)

Tax Procedure fans should follow Bryan Camp's weekly offerings on the Tax Prof Blog, here (the link is to the cover page for the blog).  Bryan's offering this week is titled Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD, here.  In the blog, Bryan reviews a recent case,  U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (review opinion), here.  In that case, the Tax Court judges get all worked up over a confusing notice of deficiency where the cover letter (that many of us think of as the actual notice of deficiency) is not consistent with the enclosures or attachments intended to explain the deficiency amounts asserted in the letter.

Before reading Bryan's offering, I had just completed a submission draft of an article in which I addressed in a footnote exactly what a notice of deficiency was and referred to the U.S. Auto Sales case.  For those wanting a detailed and thoughtful analysis, please go to Bryan's blog linked above.  But, for a less detailed analysis dealing with just a high level overview of what a notice of deficiency is, I offer the following:

In the article, I discuss the use of ranges in valuation and the interplay with the burden of persuasion.  One topic I address is the common Helvering v. Taylor, 293 U.S. 507 (1935), here, issue of what happens when a notice of deficiency is shown to be arbitrary and excessive.  In addressing that issue, I needed to establish exactly what the notice of deficiency is.  This is what I say in a footnote in the final draft I submitted:

When I use the term notice of deficiency, I mean the (i) cover letter itself which states the amount of deficiencies and tax years and (ii) the enclosures with the cover letter that provide the explanations.  § 7522(a); e.g., IRM 8.17.4.8.13 (09-27-2013), Including Enclosures in the Notice of Deficiency; IRM 8.17.4.10 (09-27-2013), Parts of the Notice of Deficiency Statement.  For an example, see U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (2019), Slip Op. at 2-3, 9 (saying that the “notice encompasses” the “ cover” letter which states the deficiency and years, and the enclosures:  Form 4089, Notice of Deficiency Waiver (permitting a taxpayer to waive the restrictions on assessment), Form 5278 Statement of Income Tax Changes; and Form 886-A Explanation of Adjustments).

Cert Petition Filed in Baldwin re Timely-Mailing, Timely Filing Regulations and Chevron (10/30/19)

Some conservative/libertarians who claim loudly to fear the administrative state are now worked up over a tax case.  In Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019), here, which I discuss in my Federal Tax Procedure 2019 Practitioner edition (p. 188 n. 832).  Baldwin applied the dreaded Chevron and Brand X, feared as tools of the dreaded administrative state.

The background is the timely mailing timely filing rule of Section 7502.  Baldwin held that, because of changes in the regulations (through the filters of Chevron and Brand X), the requirements of 7502 pre-empt the field of timely mailing-timely filing.  Here is the discussion in the text and footnote of the practitioner edition.

2. Common Law Mailbox Rules.
    a. General. 

The Supreme Court has summarized the common-law mailbox rule:  

The rule is well settled that if a letter properly directed is proved to have been either put into the post office or delivered to the postman, it is presumed, from the known course of business in the post office department, that it reached its destination at the regular time, and was received by the person to whom it was addressed.  

This rule may apply in tax cases, although the decisions are varied as to how and if it applies (i.e. some courts hold that § 7502 pre-empts the field, particularly in light of changes to the underlying regulations n832 ).
   n832 Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019). Regs. § 301.7502-1(e)(2) provides that, if there is no actual delivery (which would set the latest date), proof of proper use of the USPS methods or the designated PDS methods “are the exclusive means to establish prima facie evidence of delivery.” DOJ (and thus the IRS’s) position, accepted by the Court in Baldwin, is currently arguing that these regulations to limit mailing as delivery to the prescribed method are exclusive under the authority of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) on the basis that the statute itself is ambiguous as to the application of the mailbox rule. As such, not only is the regulation valid, it pre-empts earlier judicial authority to the contrary under Nat’l Cable & Telecomms.  ss’n v. Brand X Internet Servs., 545 U.S. 967 (2005) (which hold that Chevron qualified interpretive regulations can pre-empt judicial authority except where the judicial authority precludes the interpretation).

The Cato Institute, NFIB and some scholars have filed an amicus brief on the Baldwin petition for cert. See William Yeatman, Baldwin v. United States Is Ideal Vehicle to Revisit Reflexive Deference, 36 Yale J. on Reg.: Notice & Comment (10/29/19), here.  I recommend the article, although it uses APA-speak which may not be familiar to many tax procedure types who spend their time wallowing around in the IRC.  The linked article has further links to the amicus brief.  A key excerpt from the article:

Giants in Tax Law: Roger John Traynor (10/26/19; 8/26/23)

I am spending more time than perhaps I should reading some old law review articles by giants in the tax law.  I will do a series of posts introducing these giants to younger lawyers whose knowledge of them may be hazy or nonexistent and offering some of the nuggets I have found in my reading.

I start with Roger John Traynor.  Traynor's Wikipiedia entry is here.  Wikipedia reports that Traynor "is widely considered to be one of the most creative and influential judges as well as legal scholars of his time."  Some other items from Wikipedia:

• At Boalt Hall of UC Berkeley, Traynor wrote groundbreaking articles on taxation, while serving as editor-in-chief of the California Law Review, and became a full-time professor in 1936.
• Traynor took leave from Boalt Hall "in 1937 to help the Treasury Department draft the Revenue Act of 1938."

From their work on the 1938 act, and the mitigation provisions specifically, Traynor and two of his colleagues wrote what, in my mind, is one of the finest article ever written on a Code subject, specifically the mitigation provisions (now in §§ 1311-1314 of the 1986 Code).  John M. Maguire, Stanley S. Surrey and Roger John Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L. J. 509 (Part 1), here, and 719 (Part 2), here (1939). Fans of tax history should recognize the co-authors -- Maguire and Surrey, but perhaps more on them later.  If you want a good introduction to the mitigation provisions of the Code, I highly recommend the article.  For grins, I provide at the bottom of this blog entry an anecdote from my personal experience with the mitigation provisions involving yet another giant in the tax law, Harvard Law Dean Erwin Griswold, then Solicitor General of the United States.

Traynor wrote another law review article from his work on the 1938 Revenue Act:  Roger John Traynor, Administrative and Judicial Procedure for Federal Income, Estate, and Gift Taxes-A Criticism and a Proposal, 38 Colum. L. Rev. 1393 (1938).  Unfortunately, I do not have a link to the article.  I obtained a copy from HeinOnLine, here.  But retrieving the article requires subscriptions.  I obtained my copy from the UVA Law Library, but I don't think I am authorized to post it, so I just have to leave readers to their own resources to obtain a copy if they are interested.

Traynor surveys some big issues with tax administration and tax procedure, many of which are still with us today.  I will discuss and quote some of this article:

1.  Traynor laments the process of self-assessment, examination, notice of deficiency, litigation (Board of Tax Appeals (now Tax Court) and district and Claims Court and Courts of Appeals) and how inefficient it is when the taxpayer starts off with all of the relevant facts (certainly as compared with the IRS) which, if the IRS is to protect the revenue, the IRS must learn afresh and may not learn at all.  Traynor is armed with a lot of statistics to back up his arguments.  He proposes a procedure that would force the taxpayer to divulge facts earlier in the process (and be limited to the facts so divulged) so that the IRS can make decisions on the basis of those facts (unless the IRS contests them) and the taxpayer then limited to the record presented to the IRS rather than having de novo review.  (Of course, that happens in the refund suit via the required claim for refund and variance doctrine, but Tax Court litigation in deficiency cases is de novo.)

Some History on the Innocent Spouse Provisions (10/24/19)

I thought I would point readers to Bryan Camp's recent post Bryan Camp, 100th Lesson From The Tax Court: The Role Of Innocence In § 6015 Spousal Relief (Tax Prof Blog 10/21/19), here.

I offer the following bit of history regarding the original enactment in 1971.  This is from a footnote in my Federal Tax Procedure book:

A bit of history not essential for understanding the innocent spouse provisions.  The innocent spouse provisions were enacted in the early 1971.  Before that enactment, I was working at DOJ Tax Appellate Section and handled one of the more egregious cases in the context, involving separate property liability (Ramos v. Commissioner, T.C. Memo. 1969-157 (held spouse held liable, although “harsh”), rev’d 429 F.2d 487 (5th Cir. 1970)) and was aware of other cases in the office involving joint return liability in harsh contexts (e.g., Scudder v. Commissioner, 48 T.C. 36 (1967) (held spouse liable under joint liability provision), rev'd on other grounds, 405 F.2d 222 (6th Cir. 1968)).  From that work, I drafted proposed legislation that, if enacted, would grant innocent spouse relief.  The Assistant Attorney General for the Tax Division sent the proposal to the IRS with a recommendation that the IRS work on it and make a formal proposal to Congress.  The IRS resisted.  The AAG finally advised the IRS that, if the IRS would not make a proposal to Congress, DOJ Tax would.  At the point, the IRS worked on and made the proposal resulting in the initial innocent spouse provisions (§§ 6013(e) and 66).  The IRS proposal and resulting statute were much stricter than my proposal sent to the IRS by the AAG, but as the AAG said half a loaf is better than no loaf.  And, later, in 1998, the innocent spouse provisions were substantially liberalized.

I offer here a bit more that only real tax procedure geeks could possibly care about.

1.  When first assigned the Ramos case in DOJ Tax Appellate, I tried to get the IRS to give up the case.  There was almost no revenue involved.  But the IRS felt strongly about maintaining the integrity of the community property split even to "innocent spouses."  (Actually, in my mind, the Ramos case should have been prevented by the exercise of discretion at an earlier audit stage; by the time I was assigned the case, Tax Court Judge Featherston (a DOJ Tax alumnus) had already upheld its application to this hapless taxpayer and the IRS wanted to fiercely defend his holding; so I just had to defend the case on appeal.)

FTPB Update 04 - District Court Litigation Types (10/22/19)

I am doing the Updates differently, principally because I have learned how to do footnote links in the blog entry itself.  Accordingly, I have determined that printing the Updates as blog entries rather than separate pdfs will make it more useful to most readers.  I have created a page (to the right), titled FTPB Cumulative Update List with Links, here, that collects all updates in the context of the Table of Contents.

Caveat:  (i) Students using the Student Edition should ignore the footnotes here (just as I do not provide footnotes in the Student Edition; and (ii) the footnote number begin with 1 here rather than the footnote numbers in the text being revised.

Section Affected	Edition page numbers
Ch. 12.  Litigation    II.  Choices of Courts       B.  District Courts  2. Types of Tax Litigation In District Courts Replace the entire section (I highlight in red the revised wording)	Practitioner Ed. pp. 621-622 Student Ed. pp. 429-430

                        2.         Types of Tax Litigation In District Courts.

            District courts are courts of limited jurisdiction, meaning they can only hear cases authorized by the United States Constitution or federal statutes.  District courts have original jurisdiction for any case arising under federal statutes, the Constitution, or treaties,¹ and are specifically conferred jurisdiction for tax refund suits against the United States.  28 U.S.C. § 1346(a)(1) and § 7422(a).  Historical note: Prior to 1966, refund suits could also be brought against the Collector based on illegal exactions without invoking § 1346(a)(1) which was subject to some limitations in earlier periods;² hence a number of leading tax cases from the pre-1966 period are refund suits brought against the Collector. E.g., Lewis v. Reynolds, 284 U.S. 281 (1932).³

            I also note prominently the collection suit.⁴  The Government may bring a collection suit in the district court to reduce an assessment to judgment and to obtain judicial remedies with respect to the tax liability.  If the taxpayer has not by that time judicially contested the underlying tax liability, he or she can do so in that collection suit. ⁵ Sometimes a collection suit is combined with a refund suit.  The classic case is the so-called divisible tax case–best exemplified by the fairly common trust fund recovery penalty under § 6672.  As I  note elsewhere (pp.  ff.), this penalty is usually litigated by a refund suit.  The putative responsible person will pay a small amount to meet the jurisdictional prerequisite that there be a payment which could be refunded.  In the resulting refund suit, the Government will typically file a counterclaim for the balance of the amount that has been assessed.  That counterclaim is a collection suit that could have otherwise been brought independently by the Government to obtain a judgment for the unpaid tax.  The Government will pursue the matter as a counterclaim in order to get the putative responsible person's liability for all quarters concluded in one litigation.

            In addition, the district courts have a potpourri of other jurisdiction, examples of which include jurisdiction to quash an IRS formal document request (“FDR”),⁶ to order more disclosure of a written determination,⁷ to consider petitions for readjustment of partnership adjustments,⁸ jurisdiction to approve a levy on a principal residence,⁹ general jurisdiction to enter orders and judgments necessary or appropriate for the internal revenue laws,¹⁰ jurisdiction over summons enforcement proceedings,¹¹ actions to enforce a lien and declare a sale,¹² certain injunctions against persons abusing the tax system,¹³ wrongful levy suits where a third party claims his or her property was levied upon to pay another taxpayer’s taxes,¹⁴ declaratory judgments for § 501(c)(3) organizations,¹⁵ review of jeopardy assessments and levies,¹⁶ and so on and on.¹⁷  I discuss some of these in other sections of this book.

            For purposes of this course in this section, please focus your attention on the refund suit jurisdiction and its collection suit counterpart.

The Mitigation Provisions of the Code Are Hard (10/18/19)

In Whitesell v. Commissioner, T.C. Memo. 2019-126, here, the facts are somewhat complex but for present purposes are fairly presented in the Court's opening summary:

P-H owned a 100% interest in WIC, an S corporation. In 2008, a Michigan trial court entered a civil monetary judgment against WIC. For tax years 2008, 2009, and 2010, R allowed WIC $10,982,856 in deductions for the judgment and interest thereon. In 2011, the Michigan Court of Appeals reversed the trial court and remanded the case. In 2015, R determined deficiencies for 2010 and 2011. The deficiency for 2011 was premised in part on R’s determination that WIC must include $10,982,856 in income for tax year 2011 because 2011 was the year in which the Michigan Court of Appeals reversed the judgment. Ps filed a petition in this Court in October 2015 and filed an amended petition in December 2015. In neither pleading did Ps challenge R’s determination of the amount of income inclusion ($10,982,856) or the year of inclusion (2011). Three years later, in October 2018, Ps moved to file an amendment to the amended petition to assert that WIC had settled the Michigan lawsuit in 2013 and that the income inclusion had to be made for the 2013 tax year. By the time Ps filed their October 2018 motion, the three-year period for assessing tax for Ps’ 2013 tax year had expired. 

My simplified summary of key facts (with assumptions):

1.  In 2008, through WIC, taxpayers' S corporation, Whitesell deducted approximately $11 million (rounded down to the nearest million) based upon a judgment in a lawsuit.  The validity and timing of this claimed deduction was not in issue.

2.  In 2011, the deficiency year, the judgment was reversed.

3.  In 2013, the parties settled the suit.  I could not find what that settlement amount was, but let's assume for purposes of this discussion that WIC paid a net of $5 million.

Just on these bare facts, from an economic perspective, WIC (and thus the shareholders) are entitled to a net $5 million for their actual expenses.  But, because of the timing of the events and the annual accounting system, there are alternative possibilities in getting to the right net amount.

There are at least 3 ways to do it.

1.  Say that no deduction is allowable until 2013 (when the settlement occurred), then only $5 million would be deductible.  Under this choice, in the final analysis, "the pot is right."

2.  But, as happened, say $11 million is claimed as a deduction in the year of the judgment (2008), then we know that, by the end (2013), $6 million in deductions are excessive and, on a tax benefit theory, that $6 million has to come back into income.  That could happen in 2013 when the final settlement occurs.  Under this choice, in the final analysis, "the pot is right" (the net quantum of income inclusion is right).

3.  As a variation, the taxpayer (at the insistence of the IRS) must include the $11 million as income when the judgment is reversed in 2011.  If this choice happened, then when the liability was settled in 2013, the taxpayer would have a $5 million deduction in  2013 because there would then be no excess deductions taken in earlier years.  Under this choice, in the final analysis, "the pot is right" (the net quantum of income inclusion is right).

Make Tax Procedure Great Again Caps for Sale (10/14/19; 6/2/22)

I am offering for sale the "official" cap -- Make Tax Procedure Great Again (see image at right).

I offer them for a per unit cost that covers my costs of purchase, tax and mailing.  Here is the breakdown, with the costs depending upon the number purchased by me which I will then pass on.

Number Ordered	My Per Cap Cost	Tax	Total	Your Price
12	$25.73	$1.54	$27.27	$30.00
20	$20.23	$1.21	$21.44	$25.00

As you can see, I am not really looking to make money on the sale of caps.  I suspect that the difference between my purchase price and sales price is just a bit more than the cost to mail the caps, but not much.

Let me know if you are interested by emailing me at jack@tjtaxlaw.com. Please specify (i) whether you want Tax Crimes cap or the companion Tax Procedure cap (see here) or both caps and (ii) the quantity that you want.

After I determine the number interested, I will set the final Purchase Price and then advise where to send the check and provide the delivery address for the caps.  Keep in mind that the caps are not yet made.  I am told that the time to make and deliver the caps to me is about 2 weeks.

Added as of 6/2/22: I have taken down the image of the Make Tax Procedure Great Again cap from the column on the right.  Since the image is no longer a regular part of the blog, I include it here for future reference.

On Statutory Interpretation - Textualism / Originalism (10/11/19; 10/16/19)

Just this week, I was working on the issue of “original public meaning” to update my Federal Tax Procedure Book and earlier article that needs refreshing (soon) for posting on SSRN.  Original public meaning is a strategy for interpreting text – constitutional and statutory.  (I suppose, also, since it is text interpretation, we might apply it to religious texts, like the Bible, but that is a related but different subject.)

Just this week, the Supreme Court held oral arguments in Bostock v. Clayton County and Harris Funeral Homes v. EEOC (see SCOTUSBlog summary here).  The issue is whether Title VII of the Civil Rights Act of 1964, which bars employment discrimination “against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin,” bars sex discrimination based on sexual orientation (Bostock), or on transgender status (Harris).  The issue is one of statutory interpretation of the word sex in the statute.  What does sex mean?  (I suppose it is not like pornography, difficult to define but we know it when we see it.)  Does the statutory text mean what sex meant in the statutory context in 1964 or can its meaning evolve as the context for its application changes?  (One variant of the question involving textual interpretation, although not a Constitution or statute, is the Declaration of Independence declaring that "all men are created equal"; do we interpret that as the signers of the declaration or the public at the time would have interpreted it (it does not include blacks whether free or slave and likely not women as well) or in light of developed reason (really, all men and women are created equal).)

The general category of statutory interpretation that looks to the text and context as interpreted upon enactment (1964) for meaning is called “originalism.”  Originalism itself can break down into categories, including original public meaning.

So, I thought I would offer first my revisions to the Federal Tax Procedure discussion (keep in mind that these revisions will appear in the 2020 edition, and are likely to be further revised before formal publication).  In the text of this blog I offer just the text without the footnotes.  The text with the footnotes can be downloaded here (note I have revised this offering as of 10/16/19 to correct a reference in one of the footnotes from Judge Higginbotham to Judge Ho; note also that I have made some small changes since originally posted on 10/11/19).  I discuss originalism under the heading textualism (which I generally contrast to purposivism) because conservative textualists tend to fall in the originalist camp; I offer the whole section on statutory interpretation (which is an 10/16/19 expansion of the text originally covered on 10/11/19).

(2) Approaches to Statutory Interpretation. 

(a) Introduction. 

There are two broad categories of statutory interpretation encountered frequently in tax practice (as well as other areas of law).  They are: (i) textualism and (ii) purposivism.  I only introduce the general concepts and note their outer parameters.  These approaches play out in constitutional interpretation and in statutory interpretation. 

Before moving to these categories of statutory interpretation, I want just to offer a broad high level view of the process.  All theories of statutory interpretation, I think, are based on the notion that courts, in interpreting the statutes, are the faithful agents of Congress which enacted the statutes.  Although some view the faithful agent of Congress claim as facile in the hard context of statutory interpretation, it is still, I think, fair to say that, since Congress rather than the courts legislate, Congress is the one through the statutory text that says what the law is despite Justice Marshall’s famous sound bite in Marbury v. Madison, 5 U.S. 137 (1803) that the courts “say what the law is.”  Congress says what the law is, and Courts are supposed to say what Congress legislated.  So I think that faithful agency to the law Congress enacted is the heart of statutory interpretation.  The “faithful agency” claim may be more persistent with textualists, but in my view the claim is not more persuasive with textualism.  Perhaps a subtle nuance on the faithful agency is that, it is at least the strong starting point, although it must be filtered through controlling or persuasive interpretations after enactment. 

(b) Textualism. 

Textualism is an interpretive strategy that focuses principally or even exclusively on the statutory text enacted by Congress.  Justice Scalia was perhaps the most vocal advocate.  Focusing on the statutory text, the goal for textualists is to determine and apply the “original meaning” (sometimes called the “original public meaning”) at the time of adoption or enactment. subject perhaps only to the use of linguistic canons of interpretation.  With the rising prominence of Justice Scalia’s proclaimed textual brand of textualism, even Justice Kagan has proclaimed that “we’re all textualists now.” 

Chief Counsel Advice to IRS Attorneys on Treasury and IRS Policy Statement on Tax Regulatory Process (9/25/19)

I have written before on this blog and in a recent article on the subject of the continuing viability of IRS interpretive regulations under the Administrative Procedure Act ("APA").  See e.g., Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure Blog 6/21/19), here; and see generally all blog entries on the subject sorted by relevance (but can be sorted by date), here.

In one of the blog entries I discuss the Treasury and IRS Policy Statement on the Tax Regulatory Process.  See, Treasury and IRS Policy Statement on Tax Regulatory Process (Federal Tax Procedure Blog 3/17/19), here.  The Policy Statement is here.

IRS Chief Counsel has issued a memorandum on the Policy Statement:  CC-2019-006 (9/17/19) re Policy Statement on the Tax Regulatory Process, here.  The purpose of the memorandum is to inform Chief Counsel attorneys of the general requirements of the Policy Statement.

As relevant to the issue I have spent significant time on recently--the issue of the continuing viability of IRS interpretive regulations qua the interpretive regulations category under the APA, CC-2019-006 says:  "the policy statement provides that Treasury and the IRS will continue to adhere to their longstanding practice of using the notice-and-comment process for interpretative tax rules published in the Code of Federal Regulations."

JAT Comments:

1.  Exactly.  For those wanting my views on that subject, see the article:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400489.

2.  Also, CC-2019-006 repeats the commitment in the Policy Statement not to assert Auer deference for subregulatory advice.  The Policy Statement was issued before the Supreme Court sustained Auer in limited application in Kisor v. Wilkie, ___ F.3d ___, 139 S.Ct. 2400 (2019), here.  Hence, the Policy Statement apparently surrenders some Auer authority for subregulatory guidance, and CC-2019-006 confirms that.   In this regard, Auer involves deferring to agency subregulatory interpretations of ambiguous regulations' text.  But, the Policy Statement says that the IRS will not do assert Auer deference.  Presumably, DOJ Tax will not either, but I have seen no announcement to that effect.  I  have written on this issue:  Auer Deference and Treasury and IRS Policy Statement on the Tax Regulatory Process (7/6/19), here.

FTP2019 Update 03 - Minimum Payments and Voluntary Payments with OICs (9/25/19)

I have posted Update 03, here, dealing with minimum and voluntary payments required with OICs.  A listing of updates (with links) through today is here.

The update deals principally with Section 7122(c) dealing with minimum payments upon submission of OICs.

The page for the book editions and updates is at the right, titled 2019 Federal Tax Procedure Book & Updates, here.

Pfizer Suit for Overpayment Interest Transferred to CFC for Tucker Act Jurisdiction (9/12/19; 9/25/19)

I write today on the recent decision in Pfizer, Inc. v. United States, 939 F.3d 173 (2d Cir. 2019), here.  Pfizer involves overpayment interest, normally one of the more boring issues in the tax law.  It also involves some arcane rules, and finally involves taxpayer forum shopping, one of the arts of the tax litigator's trade (perhaps not exciting but certainly important).

I start with some basic background.  Section 6611(a), here, says unequivocally that "Interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax."  There is no question that a taxpayer with an overpayment is entitled to interest on the overpayment -- at least generally (that qualifier "generally" suggests exceptions that play prominently in this blog entry).

Other rules that come in play are:

1.  § 6611(b)(2) says that interest is due from the date of the overpayment "to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days, whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer."  This is called the "back-off" period and, as stated may be less than 30 days.  Most importantly, if the refund check is not accepted by the taxpayer upon tender, overpayment interest no longer accrues beyond the back-up date.  [JAT note:  This back-off period did not seem to apply in Pfizer, and I include it as a step to get to the applicable section discuss in paragraph 2.]

2.  § 6611(e)(1) says that no overpayment interest may be paid if the refund is made within 45 days of the due date (determined without regard to extensions), or, if later, the actual filed date of the return reporting the overpayment.

Pfizer filed a timely (on extension) 2008 return on 9/11/09 reporting a net overpayment of $499,528,499 (after application of an amount to its next year estimated tax).  The IRS prepared six checks for the overpayment aggregating to that amount.  The IRS apparently mailed the overpayment refund checks on or around October 19, 2009 (well within § 6611(e)(1)'s 45 day interest-free period from the date of filing, so the checks would have aggregated $499,528,499 without any overpayment interest), but the checks were never delivered to Pfizer.  Pfizer started contacting the IRS about the overpayment refund in December and continued thereafter, with the IRS canceling the checks and then depositing the amount of the overpayment refund claim ($499,528,499) directly into Pfizer's account on March 19, 2010 just over one year from the original overpayment (the due date of the return without extensions).

The interest on the period from the normal due date (March 15, 2009) to Pfizer's actual receipt of the overpayment funds was substantial ($8,298,048, even with the reduced rate for corporate overpayments), so Pfizer wanted to pursue the matter.  It did so by filing a claim for the overpayment interest "three years after receiving the refund."  (I note in the comments below some issues about how overpayment interest claims are made, but the Pfizer Second Circuit opinions do not address that issue, so I move on here; suffice it to say that, somehow, Pfizer made the claim for overpayment interest.  I will say that, at least potentially relevant to the concurring opinion, there is no explanation as to why Pfizer waited so long to present the formal claim, although the IRS apparently told Pfizer that the statute of limitations on the claim for overpayment interest was six years rather than the two year period for refund claims.)  The IRS denied the claim for overpayment interest based on the issuance of the overpayment checks in October 2009, which checks were apparently lost in the mail before delivery to Pfizer.  Pfizer then filed the suit for the overpayment interest.

There is no question that Pfizer could have filed the suit in the Court of Federal Claims (CFC) under Tucker Act jurisdiction.  (More on this later.)  Instead, Pfizer filed in the district court for SDNY.  The reason for that was to obtain favorable precedent in the Second Circuit, Doolin v. United States, 918 F.2d 15 (2d Cir. 1990), here, that held that a refund check not delivered to the taxpayer had not been tendered and thus did not suspend overpayment interest under § 6611(b)(2) (which stops interest after the refund check is tendered to the taxpayer whether or not the refund check is cashed by the taxpayer).  While Pfizer involved § 6611(e)(1), the same types of considerations as the Court invoked in Doolin would seemingly apply.  The CFC had no such favorable precedent, but also had no unfavorable precedent.  Still, if the taxpayer could find appropriate jurisdiction in the district court, then it had seemingly a winner under Doolin.  Pfizer is thus a classic example of taxpayer forum shopping.

Does Failure to Assert Graev 6751(b) Issue in Claim for Refund Foreclose Asserting in Refund Suit? (9/13/19)

For some reasons, although I had this case in my database, I had not reported on it.  Ginsburg v. United States, 123 A.F.T.R.2d 2019-553 (M.D. Fla. 3/11/2019), here, on appeal to the Eleventh Circuit (No. 19-11836-J).  The Procedurally Taxing Blog has a good write up, so I won't re-do the ground covered there.  See Keith Fogg, Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty (Procedurally Taxing Blog 5/6/19).  I do, however, offer some musings.

The issue relates to the requirement that the IRS meet a production burden under § 7491(c) with respect to the written manager approval under § 6751(b).  The issue is sometimes referred to as the Graev issue because of the cases that first prominently raised the issue is a very public way in the first opinion in Graev v. Commissioner, 147 T.C. 460 (2016).  Although the issue was rejected in that opinion, it was later reversed in Graev . Commissioner, 149 T.C. 485 (2017) (reviewed opinion), based on Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). There has been a lot of litigation about the Graev issue, usually in the Tax Court.  Sometimes, where the IRS can show the proper written approval but had not, consistent with prior Tax Court precedent, introduced the evidence at trial, the Tax Court will permit the IRS to open the record to introduce the approval, and that ends that.  Sometimes the Tax Court will not open the record and, because the IRS had the production burden it did not meet, that ends that as well.

The setting here for the issue is a refund claim.  We all know the general rule that the taxpayer must state the grounds for entitlement to a refund in the refund claim and failure to do so precludes the taxpayer from asserting the grounds in an ensuing refund suit.  Ginsburg did not include the Graev issue in his claim for refund.  The timing of the claim for refund with respect to the Graev issue timeline is not clear from the district court opinion, but I infer that the claim for refund was made and denied before the Chai decision which started the taxpayer wins on the Graev issue.  It might be helpful to look at the time line:

11/30/16	Graev v. Commissioner, 147 T.C. 460 (2016) (holding that the relevant § 6751(b) date is the assessment date not the assertion of the penalties in the notice of deficiency or some predicate act)
1/20/17	IRS denies Ginsburg claim for refund which did not raise the Graev issue.
3/20/17	Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (holding that the Tax Court was wrong in Graev and that the written approval must exist prior to the notice of deficiency or even some predicate action)
12/20/17	Graev . Commissioner, 149 T.C. 485 (2017) (Supplemental Opinion, reviewed, adopting Chai).

Altera Petition for Rehearing and DOJ Tax Response in opposition in Altera Case (8/31/19)

I previously discussed the decision in Altera Corp. & Subsidiaries v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), here, where the reconstituted Ninth Circuit panel held that the taxpayer must include stock option costs in its qualified cost sharing arrangement ("QCSA") calculations of costs.  See Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19; 7/2/19), here.

Altera filed a petition for rehearing en banc.  See Steve Dixon, Petition for Rehearing En Banc Filed in Altera (Miller & Chevalier Tax Appellate Blog 7/24/19), here (which has a link to obtain a copy of the petition).  As in the panel consideration, several amici curiae have submitted briefs.  The Court ordered the Government to respond, and DOJ Tax has now filed its response opposing rehearing en banc.  See DOJ Tax brief in opposition, here.

I do not link the amicus briefs which, I suppose, may not be all in yet.  I have not yet read them and, if I do, and think any are significant I will add to this blog entry.

The Government's Response Brief is quite good, in my opinion.  It clearly and succinctly steps through the bases touched in the majority panel opinion.  (See my blog above and, of course, the opinion linked above).  Basically, in summary:

1.  Applying the Chevron Framework (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), here), the regulation requiring inclusion of stock option costs is a reasonable interpretation under Chevron's Step Two within the scope of the statutory ambiguity getting the issue past Step One.

2.  The regulation was procedurally regular under the State Farm test.  Motor Vehicle Manufacturers Association of United States, Inc. v. State Farm, 463 U.S. 29, 41-45 (1983), here. The State Farm test is based on 5 USC 706(c)(2)(A), here, which, surprisingly, DOJ Tax does not cite in its Response.

That's it folks.  Except for the commotion in the case (prominent corporate taxpayer with lots of money at stake and other nonparty corporate taxpayers with lots of money at stake), lots of heat with some light (I think particularly in the majority panel opinion and the DOJ Response linked above, and the fact that the Tax Court in a unanimous reviewed opinion slipped off the rails), there does not appear to me to be enough real substance to the petition to warrant rehearing en banc or petition for certiorari in the case as it stands now.  Just my opinion (and nobody has paid me or would pay me to render it or cares that I have rendered it.)

CIC Servs Petition for Rehearing En Banc Petition Denied with Hyperbolic Concurring and Dissenting Opinions (8/29/19; 8/31/19)

I have written earlier about the constricted pre-enforcement litigation opportunities for IRS guidance.  See Pre-Enforcement Litigation of IRS Guidance (Federal Tax Crimes Blog 8/6/19), here.  In that posting, I cite CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), here, (holding pre-enforcement procedural challenge to an IRS Notice was barred).

In CIC Servs. v. IRS, ___ F.3d ___, 2019 U.S. App. LEXIS 26007 (6th Cir. 2019), here, the Sixth Circuit denied petition for rehearing en banc.  Denials for petitions for rehearing en banc are frequent and usually unexceptional, but, in my judgment, this denial is exceptional because of the concurring and dissenting opinions on the denial.  The principal concurring and dissenting opinions (by Judges Clay, concurring, and Thapar, dissenting) are noteworthy, not because they are particularly enlightening to those who have followed the issue but because they are populated with so much hyperbole.  I will leave it to readers to parse the opinions if they choose.

I am trying to imagine what exactly caused this burst of hyperbole.  I gather that Judge Thapar, who was on President Trump's list of possible Supreme Court nominees, started the ball rolling by writing a dissenting opinion using the narrow legal issue as an attack on the administrative state.  Hyperbole in attacks on the administrative state are much used by judges with strong conservative/libertarian bents.  Readers of Judge Thapar's dissent who have followed this area of the law will recognize his overture to Justice Gorsuch, in an equally hyperbolic opinion, citing an "elephant in the room" in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1149 (10th Cir. 2016), here (which was a concurring opinion to the panel opinion Justice Gorsuch wrote because he could not get another judge to agree with the hyperbole in the concurring opinion). Sixth Circuit Judge Nalbandian had already stated the case in his panel dissent with less hyperbole.  So, why did Judge Thapar enter the fray on a denial for petition for rehearing en banc?  Maybe he saw the denial as an opportunity to rail against the administrative state for his own personal satisfaction.  Maybe.  But, maybe also, he saw the dissent as an opportunity to further endear himself with the audience that could elevate him to the Supreme Court (most prominently, the Federalist Society through whom President Trump vets judicial nominations and those in sway of the Federalist Society, including President Trump and those who help him select judicial nominees).  See Fred Barnes, See Reshaping the Judiciary (Washington Examiner 5/31/19), here.  The opinion will certainly resonate with that audience.  And, assuming President Trump fails to obtain re-election, Thapar's only hope for a Supreme Court position will be an opening in the next year or so.  (Senate Leader McConnell has already said that, for a Trump nominee, he will reject the rule he created whole cloth to deny Merrick Garland a seat on the Supreme Court because nominated in the election cycle; and, of course, McConnell is a big supporter of Thapar.)  After next year, I suspect, there is no hope for Thapar to be a Supreme Court Justice.  So, its now or never, and he must remind that audience that he is their man (as if they did not already know that).

Judge Thapar's opinion drew the concurring opinion of Judge Clay, who opens with this zinger by calling Judge Thapar's dissent the "latest attempt to inflict death by distorted originalism on the modern administrative state."

Finally the concurring opinion by Judge Sutton, seems to be merely a plea or suggestion, without hyperbole, to the Supreme Court to take cert and smooth the rough edges in the law.

Addendum 8/31/19 11:45 am:

FTP2019 Update - Innocent Spouse Relief Judicial Review (8/26/19)

I offer the Second Federal Tax Procedure Editions Update.  The Second Update is here.  A separate pdf with a table of contents showing cumulative updates is here.  (The cumulative update as of the date of the blog is linked here.  For the most recent version of the cumulative update (including updates after the date of this blog), see the link on the page to the right, titled "2019 Federal Tax Procedure Book & Updates," here.)

For a blog search that picks up all Updates through the tag FTP 2019 Updates, click here.  This search will first be sorted by relevance, but a reverse chronological presentation can be linked at the top.  The results will show all Update blogs.  (As of today's posting, there will be only one, but as others are added, the search will pick them all up.)

This Update replaces the following section with discussion of the litigation forums for innocent spouse relief.

Ch. 14. Collection Procedures.
XVI. Innocent Spouse Relief.
B. Joint Liability Relief.
7. Judicial Review.

Practitioner Ed., pp 796-797

Student Ed., p. 543

FTP2019 Update - On Funds Movement Reports (CTR, CMIR and SAR) (8/26/19)

As I explain on the page (at the right) titled 2019 Federal Tax Procedure Book & Updates, here, I will post updates, corrections, changes to the FTP Book Editions by blog entry rather than via a cumulative supplement.

The first Update is linked here.  A separate pdf with a table of contents showing all updates is here.  (Please note that, since this posting is the first Update, the only Update on the pdf is this one; I will generate a new cumulative update pdf as new postings are made; the most recent pdf with cumulative updates will be posted on the page to the right, titled "2019 Federal Tax Procedure Book & Updates," here.)

For a blog search that picks up all Updates through the tag FTP 2019 Updates, click here.  This search will first be sorted by relevance, but a reverse chronological presentation can be linked at the top.  The results will show all Update blogs.  (As of today's posting, there will be only one, but as others are added, the search will pick them all up.)

This update replaces the following section with discussion of Currency Transaction Report ("CTR"), Currency or Monetary Instrument Report ("CMIR") and "Suspicious Activity Report ("SAR").

Ch. 5. Returns
II. The Return.
A. Return Filing Requirement
2. Information Returns or Reports.
b. Commonly Encountered Information Returns.
(4) Currency Transaction Reports.

Practitioner Ed., pp. 157-158
Student Ed., pp. 107--108