Consents to Extend the Statute of Limitations Must Be Properly Executed During Open Period (9/12/12)

My partner, Larry Jones, called this IRS memorandum to my attention.  ILM 201235009, here, published also at 2012 TNT 171-27.   The bottom line is that, while the statute of limitations of limitations was still open a Form 872-I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, here, had been signed by the Revenue Agent who did not have authority to sign a consent.  A person authorized to sign the consent subsequently signed the consent over two years later, after the statute of limitations had expired.  Held, the consent was invalid because an authorized signature for the IRS had not occurred during the period of the statute of limitations.

The memo summarizes the requirements for a valid consent as follows:

To be valid, an agreement by the taxpayer to extend the statute of limitations on assessment must be (1) in writing; (2) entered into before the expiration of the original collection period or a previously agreed upon extension; and (3) executed by the taxpayer and an authorized delegate of the Commissioner. I.R.C. § 6502(a); Treas. Reg. § 301.6502-1(a)(2)(i). In an Action on Decision regarding Rohde v. United States, 415 F.2d 695 (9th Cir. 1969), the Service acceded that, under applicable Treasury Regulations, the Commissioner (or his delegate) must counter-sign a waiver form prior to the expiration of the period of limitations for the waiver to be effective. AOD-1973-442, 1973 WL 35098 (IRS AOD). Although Rohde only addressed the validity of a waiver of the six-year period of limitations on collection after assessment, the AOD states that the signature requirement also applies to extensions of time for the assessment of income tax (i.e. Form 872). Id.

This requirement of valid signatures by the taxpayer and the IRS within the open period of limitations applies to the types of consents tax controversy practitioners usually deal with - such as most prominently the regular Form 872, here.  We recommend that taxpayers check their consents to make sure that they are signed by a person with proper authority.

Birkenfeld Gets $104 Million Whistleblower Award (9/11/12)

Bradley Birkenfeld the Whistleblower who whistleblowing brought UBS to its knees and set in motion the IRS offensive against Swiss and other foreign banks has been awarded $104 million as a whistleblower award under Section 7623(b), here.  Birkenfeld was also convicted and sentenced for crimes related to his alleged reticence in coming fully clean.  Still, he was the man.  He was formerly named Tax Analysts "Person of the Year" for 2009.

This is a stunning development.  I am sure there will be a lot of buzz and hype.  But I do think this signals some significant movement in the Whistle Blower office.

Also, since the Swiss would say that his whistleblowing violated its law, we now know that the IRS admits having used the information in violation of other country law to collect revenue (which is what is required to grant an award).  So for all who thought that our Government might not used illegally obtained information, think again.  See also Payner v. United States, 447 U.S. 727 (1980), here, Government can use against a depositor information from a "flagrantly illegal search."

Resources:

Timely-Mailing, Timely-Filing - Tax Court Case Reminder of Requirements (9/11/12)

In my Tax Procedure class last Thursday, we covered return filings.  A key component of the discussion was the timely mailing, timely filing rule in Section 7502, here.  The Tax Court yesterday decided Scaggs v. Commissioner, T.C. Memo. 2012-258, here.  Scaggs offers an object lesson in how not to qualify for the timely mailing, timely filing rule.  So I will review the rules and then the decision in Scaggs.

I cut and paste my discussion from my Federal Tax Procedure book (no footnotes):

Section 7502 provides a “timely-mailing, timely-filing” rule, which treats the mailing date as the filing date for returns (and 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 timely-mailing, timely-filing rules (and risks) may be summarized as follows:

1.   The document filed must be a “return, claim, statement, or other document required to be filed.”  I focus here on the “required to be filed” element.  Original tax returns are the quintessential type of document that is required to be file and thus clearly meets this element of the statute.  Tax Court petitions are also required to be filed by the Code in order to meet the jurisdictional requirements for the Tax Court and, in that sense, are required to be filed and thus meet this element of the statute.  What about amended returns?  The standard conceptualization of the amended return is that the Code itself does not require amended returns to be filed.  So, do amended returns qualify?  The answer is that some clearly do and some may not.  Since, as we shall see later, the Code requires claims for refunds to be filed within a statute of limitations period, amended returns making refund claims qualify as returns required to be filed thus permitting the taxpayer to meet this element of the timely mailing, timely filing rule.  But, that analysis does not apply to amended returns reporting additional liability.  The IRS has ruled that amended returns reporting additional liability are not “required” and thus any tax reported on such returns actually filed after the assessment limitations period but otherwise mailed within the assessment period, do not qualify under § 7502.  What this means is that the IRS may not assess and must return any payment remitted with the amended return reporting a liability.

Case on Collateral Estoppel [Issue Preclusion] as to Civil Fraud (9/9/12)

I have just posted on my Federal Tax Crimes Blog a short discussion of the recent case of Anderson v. Commissioner, 2012 U.S. App. LEXIS 18831 (3d Cir. 2012), here.  The blog entry for that discussion is Walter Anderson Re-Appears But Unsuccessfully (9/9/12), here.  Anderson involves the collateral consequences of a conviction for tax evasion.

We study in Tax Procedure two key collateral civil tax consequences of a conviction of tax evasion.  These consequences both flow from the taxpayer convicted of tax evasion under Section 7201, here, being collaterally estopped [precluded by issue preclusion] as to civil fraud, an estoppel which invokes the 75% civil fraud penalty in Section 6663, here, and the unlimited statute of limitations in 6501(c)(1), here.   The statute of limitations consequence is straight-forward.  The application for the civil fraud penalty is a little more complex.

The amount subject to the civil fraud penalty must be quantified.  The conviction for tax evasion does not necessarily establish the amount subject to the 75% civil fraud penalty.  Unless the taxpayer stipulates the amount in the plea agreement, all a conviction will establish is the elements of the crime of tax evasion -- (i) willfulness, (ii) some amount of tax due and owning (most courts required it to be significant but not quantified), and an affirmative act of evasion.

Section 6663(b) provides a sequential burden of proof requirement in order to impose the civil fraud penalty.  First, the IRS must establish by clear and convincing evidence that the taxpayer committed fraud as to some portion of the underpayment.  The conviction will be collateral estoppel [issue preclusion] as to this IRS burden.  Second, once the first step is met, all of the underpayment is deemed attributable to fraud except for the portion that the taxpayer shows by a preponderance of the evidence is not due to fraud.

2d Circuit Defers to the IRS's Litigating Position (9/9/12)

In Union Carbide Corporation v. Commissioner, ___ F.3d ___, 2012 U.S. App. LEXIS 18876 (2012), here, sustains the IRS's interpretation on brief of an ambiguous IRS regulation of an ambiguous statute.  In Chevron, the Supreme Court held that an IRS regulation interpretation of an ambiguous statute is entitled to deference.  However, what if an ambiguous regulation interprets the ambiguous statute?  Well, the IRS can in its brief interpret the regulation and that interpretation of the ambiguous interpretation of the ambiguous statute is entitled to deference.  Here is the Second Circuit's analysis:

We agree with the Tax Court that the costs for which UCC seeks a research credit are "at best, indirect research costs excluded from the definition of [qualified research expenses] under section 1.41-2(b)(2) [of the Treasury Regulations]." Id. The Tax Court's reference to the Treasury Regulations is consistent with the principle that "if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843 (1984). The Treasury Regulations explain section 41(b) by stating that "[e]xpenditures for supplies or for the use of personal property that are indirect research expenditures or general and administrative expenses do not qualify as inhouse research expenses." Treas. Reg. § 1.41-2(b)(1) (as amended in 2004). This regulation, however, does not clearly resolve whether the supplies at issue here were "used in the conduct of qualified research" because it is not clear how one distinguishes between direct and indirect research expenses. 

Nevertheless, the Commissioner argues in his brief that "[s]upply costs are 'indirect research expenditures' if they would have been incurred regardless of any research activities." We ordinarily give deference to an agency's interpretation of its own ambiguous regulations, even if that interpretation appears in a legal brief. Auer v. Robbins, 519 U.S. 452, 461-62 (1997). The interpretation advanced here does not fall into any of the enunciated categories where we would withhold such deference as it is not "plainly erroneous or inconsistent with the regulation," does not "conflict with prior interpretation" of the same regulation, and is not merely a "convenient litigating position" or a "post hoc rationalization advanced by an agency seeking to defend past agency action against attack." Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2166 (2012) (internal quotation marks and citation omitted).

Are Revenue Procedures Influential In Interpreting the Law: Of Profits / Carried Interests and Administrative Billion Dollar Largess (9/7/12)

An issue that has surfaced in the Presidential campaign is whether the private equity and hedge fund industries have improperly benefited from "carried interests" that allow them to claim capital gains tax treatment for income that is, at its core, compensation for management services that, if characterized as such, would be taxed as ordinary income.  See e.g., Victor Fleischer, What’s at Issue in the Private Equity Tax Inquiry (NYT Deal Book 9/4/12), here, dealing with an extrapolation where fee waivers are transformed into carried interests.  The potential tax revenue is in the mega billions.  The industry benefiting from claiming capital gains treatment for carried interests claims from time to time that it is the law (an unsupported claim) and attempts to support the claim with the notion that the IRS has blessed the capital gains treatment in two Revenue Procedures.  The purpose of this blog entry is to address the role of Revenue Procedures and dispel any the notion that the IRS has blessed a particular substantive tax treatment in a Revenue Procedure.

The balance of this blog consists of a revision that I have just made to my Federal Tax Procedure book as a substitution for the discussion of Revenue Procedures at Ch. 2 II.B.6.d. (beginning on p. 52 of footnoted version and p. 35 of nonfootnoted version).  Please note that the footnote numbers are interim from the draft for the next edition.

(2) Revenue Procedures.

Revenue Procedures are IRS publications advising the public of internal management and procedural matters. They thus differ from Revenue Rulings which advise the public of IRS substantive law positions. n170 For example, the IRS uses Revenue Procedures to advise the public about detailed requirements for requests for private letter rulings (discussed immediately below).  In this sense, they act as “check lists” that taxpayers and practitioners follow in order to seek private letter rulings.  Like Revenue Rulings, Revenue Procedures are published in the Internal Revenue Bulletins and Cumulative Bulletins.

Ninth Circuit Denies an Untimely Claim for Refund (9/1/12)

In Reynoso v. United States, 692 F.3d 973, 2012 U.S. App. LEXIS 18208 (9th Cir. 2012), here, the Ninth Circuit applied the Section 6511, here, rules for statutes of limitations applying to refund to deny the taxpayer a claim for refund.  I don't think the Ninth Circuit broke new ground in the holdings.  See Oropallo v. United States, 994 F.2d 25, 30 (1st Cir. 1993).  I have,however, added the following examples to the examples in the text to show how the refund statute of limitations works:

Example 8.  Taxpayer prepays year 01 taxes in the amount of $100,000 by combination of estimated tax and withholding tax, but then fails to file the return timely on 4/15/02 and does not request an extension.  Those prepayments are deemed paid on 4/15/02.  The taxpayer thereafter files a delinquent year 01 original return on 7/15/05 on which he reports a tax liability of $50,000, claims credit for the prepaid tax of $100,000, and claims a resulting year 01 refund of $50,000.  The taxpayer meets the three year requirement of § 6511(a) because the claim for refund is filed contemporaneously with the return.  However, he flunks § 6511(b)(2)(A)’s look-back period requirement because the refund cannot exceed the taxes paid in the preceding three year period. Strangely, if the taxpayer had originally timely received an extension of the year 01 return which would have permitted him to file a timely year 01 return by 10/15/02, then the taxpayer will have met the § 6511(b)(2)(A) 3-year look-back requirement because extensions are counted even if not used. 

Example 9.  Same Example 8, except assume (i) the taxpayer does not apply for an extension, (ii) for some reason, the IRS treats the prepayment of $100,000 not as a payment of tax deemed paid on 4/15/02 but as a deposit or cash bond and (iii) the IRS applies the cash bond as a payment on 9/1/02.  The refund claim is then timely because the 7/15/05 filing is within 3 years of the date of payment.

Nonprecedential / Unpublished Appellate Decisions Morphing Into Precedent? (8/30/12)

The Circuit Splits Blog, here, has a new entry titled Copy-and-Paste: the Role of Judicial Clerks in Shaping Precedent (8/29/12), here.  The blog summarizes and points to an article in SSRN:  Soucek, Brian, Copy-Paste Precedent (July 19, 2012), here.  The concept is that nonprecedential decisions can morph into precedents through the stealth of the cut and paste world we live in.  Judicial clerks know how to cut and paste as well.  What are supposed to be nonprecedential decisions become precedent through the ease (and sloppiness) of cutting and pasting.  (I confess that I do a lot of cutting and pasting, so perhaps my blog entry here is an indictment of myself -- cutting and pasting can be quite sloppy.)

This is a stretch, but it can become like the phenomenon observed by many, including Lenin and Goebbels, that a lie told often enough becomes the truth.  See "Proof by assertion" (Wikipedia, accessed August 30, 2012), here. I am not saying that nonprecedential decisions are lies, so the analogy is hyperbole.  Perhaps the better analogy would be sloppy thinking (encouraged by the notion that nobody is listening or will care) if repeated often enough becomes the truth.  The point of the article is that that which was deliberately intended to be nonprecedential can morph without critical thought into the precedential.  Read the cited article.

This discussion is particularly appropriate for the Williams case where the Fourth Circuit recently overturned a trial court holding rejecting the FBAR willfulness penalty.  See Fourth Circuit Reverses Williams on Willfulness (7/20/12; revised 7/24/12), here.  (See also Tax Crimes Student Review and Exercise (2/29/09), here, for a related discussion of nonprecedential decisions.)

With respect to Williams in particular, the bar is much in arms about the direction it perceives is being pointed by the majority opinion in Williams.  The Fourth Circuit itself said that the Williams decision was nonprecedential.  I would think we could take the court at its word.  But, this new article perhaps should give us some concern and may fan the fears of many that the majority "nonprecedential" decision in Williams is heading other panels and other courts in the wrong direction.

Note:  This blog entry is a cut and paste from my Federal Tax Crimes Blog:  Nonprecedential / Unpublished Appellate Decisions Morphing Into Precedent? (8/29/12), here.  Re-publishing it here by cut and paste does not make the contents any more authoritative.

Fifth Circuit Gives IRS Priority in Lien and Levy Case (5/29/12)

In United States v. Boardwalk Motor Sports, Limited, ___ F.3d ___, 2012 U.S. App. LEXIS 17978 (5th Cir. 2012), here, the Court dealt with some nuances of the IRS collection process dealing with liens and levies. The majority and minority opinions are a bit obtuse in their holdings, but the opinions do offer an opportunity to step through the lien and levy process in a way that students should learn in a basic tax procedure course.  Hence, I provide a summary -- dealing with the big points and not getting into the details of some of the convoluted reasoning of the majority and the minority as to what the right result should be.

The facts:

1. The taxpayer had tax lien filings for over $3 million.  The IRS had filed the tax lien of public record.

JAT Comment:  Section 6321, here, creates a federal tax lien upon the assessment if the taxpayer fails to pay upon notice and demand.  Section 6322, here, makes the effective date of the lien the date of assessment.  The lien springs into operation by law, without any notice to the taxpayer or third party creditors.  Section 6326(a), here, says that the lien is not valid as to certain third party purchasers of the taxpayer's property before the lien is filed of public record (thus giving at least constructive notice, under familiar creditor's rights concept).  Certain third party purchasers during the period the lien is filed are not primed (e.g., purchasers of stock on a stock exchange, purchasers of merchandise from a regular retail vendor), but none of these exceptions apply here.  There is one exception, not applicable here, that should be mentioned.  Section 6323(b)(2) provides:

(2) Motor vehicles
With respect to a motor vehicle (as defined in subsection (h)(3)), as against a purchaser of such motor vehicle, if—
(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and
(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent.

Note that this exception for automobile purchases has two conjunctive components.  The bottom line is that any person who acquires an interest in the taxpayer's property while the lien is filed is loses to the IRS unless an exception applies.

Reasonable Cause to Avoid Failure to File Civil Penalties (8/25/12)

In my Tax Procedure class, we always study  United States v. Boyle, 469 U.S. 241 (1985), here, which rejected an executor's claim of reliance on an attorney as reasonable cause for late filing of the estate tax.  Most failure to file penalties have relief where the failure is due to reasonable cause and not willful neglect.  Since Boyle, the IRS is trigger happy to assert failure to file penalties upon the mere failure to file.  If reliance on the attorney is not reasonable cause, what is?  Well, at least a coma or other disability.  But, at least in the IRS's imagination, not much else.

Of course, Boyle did involve a commonly filed or at least commonly recognized return -- the estate tax return.  Hence, a reasonably prudent executor might be expected to know or at least inform himself of the filing date for an estate return.  There are any number of less common returns and forms with reasonable cause relief for penalties. Does Boyle command the penalties in those cases upon failure to file?

I have just posted on the Federal Tax Crimes Blog an entry titled Reasonable Cause Defense for Failure to File Form 3520 (8/25/12), here.  The entry discusses a recent decision in a case denying the Government summary judgment in a failure to file Form 3520 reporting transfers to a foreign trust.  The taxpayer in the case argued reasonable reliance on his accountant who allegedly knew all or enough of the facts to have advised the taxpayer and prepared the required Form for timely filing.  Boyle did not warrant summary judgment for for the Government in that case.  The case is proceeding to trial on the factual issue of reasonable cause.

The Federal Tax Crimes Blog entry and the case it discusses are not required reading for my students in the class, but readers of this blog interested in the topic might want to read it.