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).