Government Files Collection Suit in Liberty Global Raising Procedural Issues (10/8/22; 10/12/22)

I  previously reported on a refund suit in which the court held invalid the IRS’s temporary regulation that, if valid, would have taxed a complex structured transaction designed to avoid tax.  See Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here, discussing Liberty Global, Inc. v. United States (D. Colo. Dkt. 1:20-cv-03501-RBJ #46 Order dtd. 4/4/22), CL here and GS here,  The holding in the case was not a holding that disposed of the entire case, so it remains pending.

On October 7. 2022, the Government filed a complaint and then an amended complaint in a new case seeking to collect additional tax for the same year as involved in the prior case noted in the above paragraph.  See United States v. Liberty Global Inc. (D. Colo. Civ. # 1:22-cv-02622), CL dkt entries here (with the original complaint at dkt entry 1 and the amended complaint at docket entry 4) (I have not compared the original and amended complaints, but focus on the amended complaint here.) The amended complaint seeks judgment in amount (final amount to be determined) of $283,965,223 (including 20% accuracy-related penalty).

I don’t claim to understand the complexity and steps of the transactions at issue, but just note that, according to the amended complaint, it was a structure with 4 steps involving foreign entities related to Liberty Global, with 3 steps being without substance but necessary to facially qualify Liberty Global for the tax benefit claimed at step 4.  The 3 steps, the amended complaint claims, were without substance. should be disregarded for federal tax purposes, and thus the claimed benefit at step 4 should be denied.

The United States asserts in the amended complaint (par. 31) that it will seek to consolidate the case with the earlier refund case.

JAT Comments:

1. This tax strategy--more properly bullshit tax shelter if the Government’s claims are true --appears to have been a promoted shelter by Deloitte rather than something Liberty Global cooked up.  (See Amended Complaint par. 7.)  And, if the Government’s claims are true, the claimed tax benefits of the structure are a gaping loophole to what Congress meant to cover in the statute.  In other words, too good to be true but may be true anyway. (Presumably, as with past such shenanigans, Deloitte got paid based on some “value-added” basis rather than reasonable fees related to the work done.) 

2. As best I understand it, the temporary regulations invalidated in the refund case and also involved in the new collection suit were designed to address the gambit Liberty Global and Deloitte attempted to exploit. According to the complaint (par. 26), Liberty Global reported on its initial 2018 return consistent with the temporary regulations.  Just over 2 months after filing the original return, Liberty Global filed an amended return claiming a refund of $95,783,237 based on the invalidity of the temporary regulation.  As noted above, the court held in that refund suit that the temporary regulation was invalid, but the matter is still pending in the district court apparently to address other issues as to whether Liberty Global is entitled to a refund. I presume that the disclosures on the amended return were adequate to put the IRS on notice of the game being played, although disclosure does .  (I discuss below in paragraph 4 the § 6676 Erroneous claim for refund or credit penalty, which has no relief for adequate disclosure as allowed in some § 6662 accuracy-related penalties, including the economic substance accuracy-related penalty.)

Supreme Court Grants Cert to Determine Whether Dual-Purpose Communications Involving Legal and Non-Legal Advice (in Tax Return Preparation Setting) is Protected by Attorney-Client Privilege (10/3/22; 10/6/22)

The Supreme Court accepted certiorari in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The acceptance does not state or refine the issue presented; presumably, the issue presented that the parties will brief is the one in the petition for cert as follows:

            Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

Added 10/6/22 11:44am:  The foregoing is the question presented that appears on the Supreme Court's docket entries questions presented link, here.

The Solicitor General in its brief in opposition states the issue slightly differently (with some spin) as follows:

             Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted.

 The amended opinion below is In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here. The Ninth Circuit’s Summary (not included in GS opinion) is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.

Grand Jury Subpoenas

            The panel affirmed the district court’s orders holding appellants, a company and a law firm, in contempt for failure to comply with grand jury subpoenas related to a criminal investigation, in a case in which the district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice.

Brockman Jeopardy Assessment of $1.4+ Billion Sustained (10/2/22)

On 9/30/22, the district court sustained the IRS’s $1.4+ Billion jeopardy assessment for taxes, fraud penalties, and interest.  United States v. Brockman (S.D. TX No. 4:22-CV-202 Dkt. # 71 Memo Opinion and Order 9/30/22), here (as retrieved from PACER); see also CL Dkt entries here (the pdf does not yet show up on the CL docket entries but should shortly).  The IRS asserted that the assessment “represents the largest jeopardy assessment/levy case in the history of the United States and features tax fraud on an unprecedented” scale.” (internal quotation marks omitted).

I won’t get into the details since the opinion is short (13 pages) and easily readable (with some nice graphics).  The opinion plows no new ground in jeopardy assessment law.  It is noteworthy (if at all) only because of the size of the assessments and the facts leading to the assessments.

I note that FBAR assessments (which certainly have been made or will be made, depending upon the statute of limitations) are not included.  There is no jeopardy assessment authority for FBARs, but the IRS does not need jeopardy assessment authority for FBARs because it can assess the FBAR penalties without predicate requirements for income tax assessments.  Of course, with FBAR assessments, the IRS will not have the substantial collection tools available for tax assessments and will have to proceed by suit to reduce the FBAR assessments to judgment.

I don’t know what type of estate Brockman had at death and the assets the IRS can get through various third-party liability remedies (such as transferee and similar state law remedies, alter ego, etc.), but I speculate that, with the probable size of the FBAR assessments and third-party liabilities, the IRS will be able ultimately to substantially wipe out his net worth (with third-party liabilities).  Of course, he lived large during his lifetime. And his death permitted him to escape criminal responsibility and liability.

This blog entry is cross-posted to my Federal Tax Crimes Blog.  Until this blog entry, I have not posted on the Brockman trajectory on the Federal Tax Procedure Blog.  For other postings on Brockman on the Federal Tax Crimes Blog, see here.

11th Circuit Holds that a Taxpayer Motion for Injunctive-Type Relief in a Closed Case Is Not Subject to § 7421(a), the AIA (9/27/22)

In United States v. Meyer, 50 F.4th 23  (11th Cir. 9/26/22), CA11 here and GS here, the Court outlines the issue in its opening paragraph:

    The Anti-Injunction Act, 26 U.S.C. § 7421(a), provides in relevant part that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person[.]” The question before us is whether the Act bars a defendant from moving—in an action initiated by the government—for a protective order to restrain the government from using his responses to requests for admission when assessing a tax penalty in a separate administrative proceeding. Because moving for a protective order in an action filed by the government does not amount to maintenance of a “suit,” we hold that the Act does not apply.

The Court then offers some more factual detail (Slip Op. 2-4):

             In 2018, the government filed a complaint against Michael L. Meyer, alleging that he promoted a tax evasion scheme in which he advised his clients to claim unwarranted federal income tax deductions for bogus charitable donations. The government sought to enjoin him from operating his business, as well as disgorgement of all of the proceeds from his scheme. Over the course of the next year, the parties engaged in extensive discovery. As relevant here, the government served over 1,500 requests for admissions upon Mr. Meyer under Federal Rule of Civil Procedure 36. Mr. Meyer answered the requests with the assistance of counsel.

            Mr. Meyer eventually settled with the government and agreed to a permanent injunction prohibiting him from, among other things, representing anyone other than himself before the IRS; preparing federal tax returns for others; or furnishing tax advice regarding charitable contributions. On April 26, 2019, the district court entered a final permanent injunction against Mr. Meyer and closed the case. The order did not include any language regarding the confidentiality or future use of discovery-related materials.

            On July 24, 2020, Mr. Meyer received a notice from the IRS informing him that he owed millions of dollars in penalties in connection with his promotion of an abusive tax shelter. See 26 U.S.C. § 6700. The notice included an attached Form 866-A, Explanation of Items, which detailed the basis of the IRS’ decision. The Explanation of Items specifically relied on Mr. Meyer’s Rule 36 admissions, obtained in the 2018 tax case that had been filed by the government. Those admissions were also attached as a composite exhibit.

Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (9/20/22)

In Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 9/13/22), CA11 here and GS here, the Eleventh Circuit has become the second Circuit to push against the machinations courts, principally the Tax Court, in trying to apply the written supervisor requirement of § 6751(b). In my Federal Tax Procedure book 370 (2022 Practitioner Edition) (available on SSRN here), I introduce the problem in the nonsensical statutory text (footnotes omitted):

Second, § 6751(b)(1) prohibits the assessment of a penalty “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” Although not stated in the statute, the purpose of the requirement is to prevent agents from improperly using the threat of a penalty as inappropriate leverage–a “bargaining chip”–to extract concessions when the IRS institutionally had not made a determination to  assert a penalty. The wording of the statute, however, is facially nonsensical because there is no such thing in the tax law as the determination of an assessment and, in any event, the assessment comes long after the threat of penalties could have been made to bully taxpayers. In statutory interpretation lingo, if not nonsensical, the statutory text is “ambiguous,” a characterization which has spawned many opinions as the courts try to deal with the deficiencies in the statutory text through purposive interpretation strategies to apply the text as the courts think or speculate Congress intended but did not say in the statutory text. Section 6751(b) is a quintessential case illustrating this struggle to interpret and apply “ambiguous” statutory text on an ad hoc, case-by-case basis to interpret the “law” that can then be applied in future cases.

I then provide in the following pages (371-377) wanderings through the maze of opinions trying to make sense of this landscape. Basically, the wanderings show courts’ attempts to construct policy (or law) on an ad hoc basis around a statute with facially nonsensical text. These opinions behind these wanderings focus on IRS communications to the taxpayer rather than “the initial determination of such assessment,” as if communications were a proxy for that statutorily required initial determination.

The Eleventh Circuit decided that it could, and should, decide the case before it on the basis of the statutory text rather than the meanderings of courts crafting solutions, based principally on a purpose stated in the legislative history.

Second Circuit NonTax Opinion on Glitches in the Appellate Process with JAT War Story (9/11/22)

Most readers of this Federal Tax Procedure Blog do not have such tunnel vision that developments outside the tax procedure area are ignored. Many readers will have read or heard about a major bank, Citibank, mistakenly making payments to hedge funds aggregating almost $1 billion on not yet due amounts. Some of the hedge funds tried to keep the mistaken payments (about $500 million) because, they claimed, they were eventually entitled to them anyway. Citibank sued those hedge funds to recover. The district court (SDNY) held that the hedge funds were entitled to retain the mistaken payments based on some arcane creditor concepts in New York law and in the Restatement of Restitution. The Second Circuit reversed and held that the funds must be returned to Citibank. Citibank, N.A. v. Brigade Capital Management, 49 F.4th 42, 58 (2d Cir. 2022) (2d Cir. 9/28/22), CA2 here and GS here.  I won’t get into the merits of that resolution. I focus instead on the procedural trajectory of the case in the Court of Appeals.

I pick up this procedural trajectory from David Lat’s Judicial Notice (09.10.22): Weird, Wild Stuff (Original Jurisdiction Notice 9/10/22), here. I excerpt the following:

[T]he intricacies of the discharge-for-value doctrine, ably explored in 131 pages of opinions-a majority opinion by Judge Pierre Leval for himself and Judge Robert Sack, and a concurrence in the judgment by Judge Michael Park-are far less interesting than all the meta-commentary about the judicial process and the breaking of the fourth wall.

            In his concurrence, Judge Park complained that "this is a straightforward case that many smart people have grossly overcomplicated and that we should have decided many months ago." In response, Judge Leval added an addendum to his opinion in which he acknowledged that the judgment "has taken a long time to produce," for which he accepted "sole responsibility."

            Pulling back the curtain on the judicial decision-making process, Judge Leval explained that one reason for the delay was a change in disposition: he and Judge Sack originally decided to certify the question to the New York Court of Appeals, prepared a draft opinion to that effect, but then decided against certification-mainly because it would add another year of delay, and also because they "became increasingly persuaded, despite initial uncertainties," that Citibank deserved to win.

             Judge Leval then went on to discuss the nature of appellate judging:

            A decision of a court of appeals must satisfy two requirements, which pull it in different directions. It should, as rapidly as reasonably possible, tell the parties who wins. At the same time, recognition that the decision serves as precedential law requires that it rest on, and clearly explain, sound legal principles. In a money dispute, the parties ordinarily care little for the precedential effect of the decision; their interest is to get a rapid answer to who gets the money. A court, however, must pay careful attention to the decision's precedential function…. Finding the best accommodation between the objectives of speed and legal soundness is not always easy.

Freeman International Tax Law Symposium October 20 & 21 (9/5/22)

The following international tax program may be of interest to FTPB readers:  Freeman Law International Tax Symposium (link for information and registration here).  The Symposium has some great participants, some well-known to tax procedure and tax controversy enthusiasts, and covers topics such as international tax topics, including civil and criminal penalty enforcement, cryptocurrency enforcement trends, and global tax reform.  The program qualifies for CLE, CPE and CE.

Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (9/1/22)

 This blog will alert readers of a new Tax Court opinion, Lamprecht v. Commissioner, T.C. Memo. 2022-91, involving the accuracy-related penalty for failure to report income from foreign accounts. (The opinion may be retrieved at docket entry 181 from the docket entries, here; or GS here.) I will set up my discussion from the syllabus for the key points decided (on the value of the syllabus see point 6 at the end of this blog):

            Ps are citizens of Switzerland who lawfully resided in the United States, where P–H worked as an investment consultant managing investments for himself and his clients. Ps filed U.S. income tax returns for 2006 and 2007 which understated their income in both years by omitting income that Ps treated as foreign sourced.

            In 2008 the IRS issued to Swiss Bank a John Doe summons which sought to discover the identities of U.S. taxpayers using foreign entities and Swiss bank accounts to avoid reporting income on their U.S. tax returns.

            In 2010 Ps filed amended returns for 2006 and 2007 on which they reported the previously omitted income. Upon examination of Ps’ 2006 and 2007 returns, R determined an accuracy-related penalty under I.R.C. § 6662 against Ps for each year on the basis of the tax attributable to the income omitted from the original returns, and issued to Ps a notice of deficiency. Ps timely filed a petition to challenge the penalty determinations in the notice of deficiency, arguing (1) that the IRS failed to comply with I.R.C. § 6751(b)(1) requiring written supervisory approval of penalties, (2) that their amended returns for 2006 and 2007 are “qualified amended returns” within the meaning of Treas. Reg. § 1.6664-2(c)(3), [*2] precluding penalty liability, and (3) that assessment of the accuracy-related penalties for 2006 and 2007 is barred by the statute of limitations under I.R.C. § 6501.

            Held: The amended returns are not “qualified amended returns” under Treas. Reg. § 1.6664-2(c)(3)(i)(D) because they were filed after the service of a John Doe summons.

            Held, further, assessment of the accuracy-related penalties is not barred by the statute of limitations under I.R.C. § 6501 because the limitations period was suspended by the service of the John Doe summons pursuant to I.R.C. § 7609(e)(2).

            Held, further, the IRS complied with the written supervisory approval requirement of I.R.C. § 6751(b)(1).

            Held, further, Ps are liable for the I.R.C. § 6662 accuracy-related penalties as determined by R for the 2006 and 2007 years.

Eaton Wins Big on Appeal in Long-Running Contentious Litigation Over APAs (8/27/22)

In Eaton Corp. v. United States, 47 F.4th 434 (6th Cir 8/25/22), here and GS here, the Court gave Eaton a victory on all points of contention in long-running and highly contentious litigation over the Advance Pricing Agreement (APA). The APA is an advance agreement as to how the taxpayer will report its covered transfer pricing products or intangibles in future years so that, provided the taxpayer reports pursuant to the agreement, the IRS will not audit except to confirm reporting consistent with the agreement. (At least in earlier audits I handled, the APA methodology could be spread to past open years, if appropriate, but past years were not in issue in Eaton.)  The Court signals its holdings in its opening short paragraph:

            Taxes may well be “what we pay for civilized society,” Compania Gen. de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting), but that doesn’t mean the tax collector is above the law. This case arises from the IRS’s efforts to circumvent basic contract law.

Not an auspicious start for the IRS.

In holding for Eaton, the Court resolved the following issues.

1. In a section captioned “Wrongful Cancellation: Burden of Proof,” the Court resolved a burden of proof issue. (Slip Op. 8-12.) The IRS argued that, since it made the § 482 adjustments in the notice of deficiency because Eaton violated the APA agreement, the standard was “arbitrary and capricious.”  The Court held that, because the predicate issue was whether Eaton violated the APA, the issue is one of contract interpretation as to whether Eaton breached the contract. (Under that notion, only If Eaton breached the contract, would Eaton then have the burden to prove that the IRS’s § 482 adjustments were arbitrary and capricious.)  As to the contract interpretation issue, the IRS bore the burden of proving that Eaton had breached the contract.

2. On the issue of whether Eaton violated the contract, the Court held (Slip Op. 12), applying contract law, that Eaton had not breached the agreement and therefore the IRS did not have the right to cancel the contract and issue the notice of deficiency with § 482 adjustments.

Transfer Pricing: Finite Valuation and Ranges (8/20/22)

        I have just started reading a tax, more or less, history, at least anecdotal history. Michael Keen, & Joel Slemrod, Rebellion, Rascals, and Revenue, (Princeton University Press 2021), here.   Early in my reading, something caught my eye because of a case I perused earlier in the day, Medtronic, Inc. v. Commissioner, T.C. Memo. 2022-84 (Decided 8/18/22), T.C. docket entry 74 at docket entries for the case here and GS here). I say I perused because the opinion is 75 pages (with three-page appendix of the experts’ brief biographies). I read closely only certain parts, including the part I discuss here. Medtronic involves transfer pricing for intangibles, which most commonly involve transactions between a U.S. taxpayer and a foreign affiliate offering opportunities to manipulate (lower) the U.S. tax base and thus achieve major U.S. tax “savings.”  The drill in these cases for the taxpayer is to lower the U.S. tax base and for the IRS to increase the U.S. tax base. That’s an oversimplification, but not much of one. The theoretical mechanism for achieving that is to peg the tax results of the related party transaction to a standard of an uncontrolled transaction between unrelated parties. This standard is notoriously difficult for intangible assets.

           Professors Keen and Slemrod offer a good tongue-in-cheek description (pp. xvi-xvii):

Many of the tax episodes we look at may at first seem far-fetched or ridiculous. Some are stories of disastrous missteps and cruelty. Some, we admit, teach no useful lesson that we can discern, but are just pleasingly gaudy and preposterous. But along with the follies there are also episodes of remarkable wisdom. For it is a theme of the book that, when it comes to designing and implementing taxes, our ancestors were addressing fundamentally the same problems that we struggle with today. And they were no less ingenious—not just in creating taxes, but also in avoiding and evading them—than we are. We should not feel too superior to our forebears, given the taxes we have nowadays. The idea of taxing chimneys may seem quaint to us. But we suspect our descendants will find some of the things that we do today more than a little peculiar, such as taxing multinationals by trying to figure out what some entirely different and hypothetical set of companies would have done in the unlikely (possibly inconceivable) event that they found themselves in the same circumstances. And they would be right.

        My observation of transfer pricing over the years is that these transfer pricing cases are just valuation cases, with a lot of zeroes to justify litigation with a lot of commotion to prompt a lot of legal and expert fees. My anecdotal observation of this type of case over the years is that many unnecessary legal and expert fees are generated in litigating them. But that is another story. 

        For now, I want to focus on Medtronic (this opinion rather than the earlier Tax Court and Eighth Circuit opinions, Medtronic, Inc. v. Commissioner, T.C. Memo. 2016-112 (sometimes Medtronics I), vacated and remanded, T.C. Memo. 2016-112, 900 F.3d 610 (8^th Cir. 2018) (sometimes Medtronic II). As an aside, the petition in the Medtronic case was filed in 2011, Medtronic I was decided in 2016, Medtronic II was decided on August 18, 2018, and Medtronic III was decided 8/16/18, and Medtronic III was decided on remand is dated 8/18/22. Interesting.