New Policy Statement That Appeals Is Not to Raise New Issues (7/23/13)

The IRS released a Memorandum for Appeals Employees, here, on the subject of Implementation of the Appeals Judicial Approach and Culture (AJAC) Project.  "The AJAC Project is returning Appeals to a quasi-judicial approach in the way it handles cases, with the goal of enhancing internal and external customer perceptions of a fair, impartial and independent Office of Appeals."  For purposes of this blog entry, the approach should limit Appeals to deciding the controversies that the parties put before it, rather than raise new issues not previously spotted by Exam or re-visit issues settled or dropped by Exam.  In furtherance of that objective, the Memorandum advises of a new IRS Policy Statement as follows:

Policy Statement 8-2 (Formerly P-8-49) 

(1) New issues not to be raised by Appeals. 

(2) Appeals will not raise new issues. Appeals also will not reopen an issue on which the taxpayer and the Service are in agreement.

The memorandum implements this policy with new IRM provisions in various contexts -- Collection Due Process, Offers in Compromise, Collection Appeals Program, and Examination Cases.  I focus here on Examination Cases.  The effect of the new approach on Examination cases is set forth in Attachment 5 to the Memorandum.  Key points in attachment 5 are:

• The prohibition on raising new issues also applies in Appeals consideration of docketed cases.  (IRM 8.4.1.15.3).
• Guidance is given when the taxpayer raises new issues.  Id.
• Guidance is given when an issue not before Appeals is identified; although the Appeals  Officer cannot raise it on appeal, if it is a systemic issue, a process for the issue to be reported is provided.  "A systemic issue is an issue that requires a change or modification to an established procedure, process or operation (e.g., training issues, computer program, campus procedure for processing claims). These are issues that potentially impact more than one taxpayer."  IRM 8.6.1.6(1).
• "Reopening a previously agreed issue or raising a new issue has the same implications, and is, for all practical purposes, one and the same. Therefore, for purposes of this section, treat reopening an agreed issue the same as raising a new issue."
• "A new issue is a matter not raised during Compliance's consideration. (3) A new theory or alternative argument is not a new issue."
• "(1) Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process."  IRM 8.6.1.6.2(1).  "In resolving disputes, Appeals may consider new theories and/or alternative legal arguments that support the parties' positions when evaluating the hazards of litigation in a case. However, the Appeals hearing officer will not develop evidence that is not in the case file to support the new theory or argument."
• "In docketed cases, the Appeals hearing officer will consider a new issue affirmatively raised by the government in pleadings and may consider any new evidence developed by Compliance or Counsel to support the government's position on the new issue. The Appeals hearing officer's consideration of a new issue in a docketed case will take into account that the government has the burden of proof."

 The old version (currently on the web as of 7/23/13), here, is:

1.2.17.1.2  (Approved 01-05-2007)
Policy Statement 8-2 (Formerly P–8–49) 

1. New issues not to be raised unless material 

2. An issue, on which the taxpayer and the Service are in agreement, should neither be reopened by Appeals nor should a new issue be raised, unless the ground for such action is a substantial one and the potential effect upon the tax liability is material. The existence of unreported income, deductions, credits, gains, losses, etc. stemming from a tax shelter which is a listed transaction constitutes such a substantial ground with a material effect upon the tax liability.

Appeals raising of new issues was extremely rare under this old rule.  I have been practicing for over 35 years and have never had a new issue raised on Appeal.  But it was a possibility and a risk.

At least in some cases, the old policy gave incentives to avoid an appeal at the conclusion of which is probably the most efficient timing from an administrative perspective.  Some taxpayers would get to appeals after filing the petition in the Tax Court, with the thought that the press of the expected docket call would limit the time Appeals would be substantively involved and likely to spot new issues.  Other taxpayers pursued their refund remedies with careful attention to timing so that, if new issues were raised, the statute of limitations would foreclose any adjustment other than by offset.

This is a welcome clarification of Appeals' role.

Of course, the fact that Appeals will not raise new issues does not mean that, should litigation ensue in the Tax Court or a refund forum, the Government will not be permitted to raise new issues.  Then, the ability of the Government to raise and pursue new issues will be governed by the respective court's control of its docket.

Interview of Swiss Bank Whistleblower (7/17/13)

Der Spiegal has a great interview of Swiss Bank whistleblower, Herve Falciani.  Swiss Bank Leaker: 'Money Is Easy to Hide' (Spiegel Online International 7/16/13), here.  Some interesting excerpts are:

At the end of 2008, Hervé Falciani committed what is believed to have been the most portentous theft of banking data in history. The systems engineer and former employee at the Geneva offices of HSBC left Switzerland for France and took data from around 130,000 customers at the Anglo-Asian bank along with him. 

* * * * 

Falciani, 41, has also cooperated with the American authorities. Indeed, on the strength of the information he provided, HBSC was forced to pay a $1.9 billion settlement with the United States after a Senate committee found that failures in HSBC's money-laundering controls had enabled terrorists and drug cartels to gain access to the US financial system. 

* *  * * 

Falciani: Banks such as HSBC have created a system for making themselves rich at the expense of society, by assisting in tax evasion and money laundering. 

* * * * 

SPIEGEL: Many Swiss banks now profess to engage only in legal practices, kicking out any clients who don't disclose whether they have paid taxes. Do you find this shift credible? 

Falciani: No, I don't. Just the fact that they face international competition ensures that banks will continue to offer wealthy clients ways to evade tax authorities. 

SPIEGEL: The European Commission wants to create a comprehensive automatic system for exchanging information throughout Europe. How effective would such regulations be in putting a stop to shady practices engaged in by banks and tax evaders? 

Falciani: Banks have a strong self-preservation instinct and are quick to adapt to new regulations. Money is easy to hide. HSBC has a strategy division that takes care of such things. For example, a bank might bring in intermediary companies, sometimes at multiple levels, and make sure business isn't conducted through the bank's own accounts. They offer clients non-banking products, life insurance policies that exist for the sole purpose of tax evasion for example, or gold, which the bank stores in its safety deposit boxes for a fee. 

* * * *

SPIEGEL: The United States has taken tougher action against Swiss banks. Should the EU follow that lead? 

Falciani: At first glance, that appears to be true -- the US, for example, imposed a heavy fine against HSBC for money laundering. But I was surprised that the American authorities decided HSBC was "too big to jail" -- in other words, they shied away from imposing prison sentences on bank managers, although it's hard to imagine that top-level managers knew nothing of the bank's systemic participation in money laundering. 

Pay Attention to Court Filings Not Qualifying for the Timely Mailing-Timely Filing Rule (7/10/13)

Every tax controversy practitioner and student is aware of the time-mailing, timely-filing rule in Section 7502, here. The general concept is easily stated -- a document timely mailed to the IRS or a petition to the Tax Court will be deemed timely filed even if it arrives after the due date.  The rule is subject to some nuance and risks.  I won't get into the nuances and risks now.

But, I do want to remind readers that there is no such timely mailing-timely filing rule for other filings.  Perhaps the other most common filing that tax practitioners will deal with is the filing of the suit for refund, necessarily in a court other than the Tax Court.  There is a statute of limitations for a suit for refund -- 2 years from the date the refund claim is denied.  There is no timely-filing, timely-mailing rule for such suits.

I guess I could leave it at that, but I do call readers' attention to a recent case, Langan v. United States, 2013 U.S. Claims LEXIS 740 (Fed. Cl. June 28, 2013), here.  In this case, the claim disallowance was mailed on 12/16/09.  The taxpayer's lawyer delivered the envelope containing the Court of Federal Claims complaint to the USPS in Massachusetts late on 12/15/11, just one day before the statute closed.  The Court of Federal Claims received the envelope and stamped the complaint on 12/19/11.  Too late.

The taxpayer tried to save the day on some older authority from the court that could be read to say that a filing timely delivered to the USPS in time to be timely received by the court will be deemed to have been timely delivered even if was not timely delivered.  In effect, there would be some type of equitable relief if the timely mailing was prudent because of the expectation of timely delivery. This authority even if it were still good, did not apply because the late delivery in Langan to the USPS on the day before the complaint was required to be filed was not filed in time that, in due course, it would be timely delivered the next day.  (The taxpayer's counsel actually used a type of USPS service that would have promised timely next-day delivery had it been deposited with the USPS earlier in the day, but the late delivery (around 11pm) did not qualify for USPS assurance of next day delivery and thus taxpayer's counsel did not act prudently, a necessary condition for the special relief if it even continued to exist.)

This is a cautionary tale.  Just based on the bare facts, the taxpayer's lawyer appears to have botched this and, if so, the tax dollars paid are gone forever.  (As I read the rules, the IRS is  now forbidden to make a refund even if it were to discover that it was due.)

Cancellation of APA for Failure to Meet Terms and Conditions Reviewed on Abuse of Discretion Standard (7/10/13)

One of the major IRS initiatives for a number of years is to enter Advance Pricing Agreements ("APAs) with taxpayers to determine, in advance, transfer pricing methodologies.  APAs require taxpayer representations as to underlying facts and conditions and taxpayer economic studies justifying the methodology requested.  The IRS reviews the presentations, performs such testing and economic studies as it deems appropriate, and then attempts to reach an agreement with the taxpayer.  Those agreements are contracts, but do incorporate the terms of the relevant Revenue Procedure (currently Rev. Proc. 2006-9, 2006 IRB 1).  Among the provisions of the Rev. Proc. is the IRS authority to terminate the APA is the terms and conditions are not met.

In Eaton Corp. v. Commissioner, 140 T.C. No. 18 (2013), here, the IRS revoked the taxpayer's Advance Pricing Agreement.  Tax Court was presented the following arguments:

Taxpayer argument:  The APA is a contract and, if the IRS terminates for failure to meet the terms and conditions, the IRS bears the burden of establishing that the taxpayer failed to meet the terms and conditions.

IRS argument:  The taxpayer must show abuse of discretion for the IRS decision to terminate the APA.

Holding:  For the IRS.  Taxpayer must establish abuse of discretion.

Here are the key excerpts that show the line of reasoning (some footnotes omitted):

On Writing: Strunk & White's Elements of Style (7/1/13)

This writing is on Today's Writer's Almanac, here.  Since I recommend Struck and White's Elements of Style (4th Edition 1999), here (Wikipedia entry here) to my students, I thought I would pass the Writer's Almanac Entry on:

It's the birthday of American grammarian William Strunk Jr. (books by this author). (1869), born in Cincinnati, Ohio. He was an English teacher at Cornell for 46 years, and edited works of Shakespeare and James Fenimore Cooper. In 1918, he self-published a little book for the use of his students, called The Elements of Style. It was a 45-page volume intended, according to Strunk's introduction, "to lighten the task of instructor and student by concentrating attention ... on a few essentials, the rules of usage and principles of composition most commonly violated." He revised it in 1935; and in the late 1950s, one of his former students, the writer and New Yorker editor E.B. White, revised and reissued the 1935 edition. It's now colloquially known as "Strunk and White." 

The Elements of Style is full of helpful advice to aspiring writers and students everywhere. In it, one may find such wisdom as, "Instead of announcing what you are about to tell is interesting, make it so," and "Never call a stomach a tummy without good reason." 

American author Dorothy Parker once wrote: "If you have any young friends who aspire to become writers, the second-greatest favor you can do them is to present them with copies of The Elements of Style. The first-greatest, of course, is to shoot them now, while they're happy."

Allocation of Employment Taxes Between Trust Fund and NonTrust Fund Portions (6/28/13)

In Westerman v. United States, 718 F.3d 743 (8th Cir. 2013), here, the Eighth Circuit affirmed the district court's grant of summary judgment in a trust fund recovery penalty ("TFRP") case.  Although the decision blazes no new trails, it does offer a reasonable, if flowery, discussion of the importance of designating how payments of employment taxes are to be applied.  

The pattern was typical.  The corporate employer started experiencing cash flow problems and only sporadically forwarded checks for its accumulating employment taxes.  When forwarding the checks, the corporation did not designate how the IRS should apply the payments among the components of the employment taxes.  The components are the trust fund portion (consisting of the taxes withheld from the employees -- i.e., the employees' income tax withheld and the employees' share of FICA, and Medicare tax) and the nontrust fund portion (consisting of the employer's share of FICA and Medicare tax).  This division between the trust fund portion and the nontrust fund portion is important, because the responsible person(s) in the corporation can be assessed the TFRP for the unpaid trust fund portion.  As is typically the case, in the absence of designation, the IRS applied the payments to the nontrust fund portion for delinquent employment taxes.  The IRS assessed the unpaid trust fund tax liability against Mr. Westerman, the president and owner of the corporation.  He paid the amount in full, apparently $35,824.45.  In the litigation, He agreed that he was liable for $28,955.15 of that amount but urged that the IRS should have allocated the payments mentioned above to the trust fund tax liability so that he was not liable for the balance.

The Court opens the discussion with a discussion of his liability for the TFRP.  I find portions of that discussion confusing, so I forgo reviewing that discussion.  I understand it enough to know that there is nothing new or particularly elucidating in the discussion.  In broad strokes, a person is liable for the TFRP is that person had the practical authority and ability to insure the TFRP is paid and, in practical terms, caused other creditors to be paid when the TFRP  was not paid.  I do wonder why the Court felt it necessary to engage in the liability discussion since Mr. Westerman appears to have conceded his liability (he was, after all, the president and sole owner) and was only concerned about the IRS's allocation of the corporate payments of employment taxes.

So, I turn to that allocation issue, which involves only approximately $7,000.  The Court first confirms that, in the absence of the employer's designation of how to allocate the employment tax payments, the IRS may "apply the payment first toward the employer's non-trust fund liabilities for the quarter and, only once that obligation is fully satisfied, toward the quarter's trust fund liabilities."  Mr. Westerman argued that, even in the absence of a designation, the payment of employment taxes should be applied ratably to the various components of both the trust fund and nontrust fund portions of the employment taxes.  Here is the Court's discussion of that issue (footnotes omitted):

Tax Procedure Aspects of SEC Disgorgements For Taxes Underpaid (6/17/13)

Yesterday, I discussed on my Federal Tax Crimes Blog a case holding that the SEC can seek disgorgement of federal tax underpaid if it relates to securities fraud.  The case is  SEC v. Wyly, 2013 U.S. Dist. LEXIS 83897 (SD NY 6/13/13), here.  My blog on the case SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (6/16/13), here.

Today, I want to follow through on the tax procedure side if the court were ultimately to order disgorgement which, presumably, would be paid to the IRS.  What would the IRS do to the money.  Well, the IRS could apply it to the tax the Wylys underpaid (the basis for the disgorgement).  But, the IRS will first have to determine that it has an open statute of limitations to make the assessment.  Why, because Section 6401(a), here, treats as an overpayment any amount "assessed" after the statute of limitations.  Overpayments are refundable to the taxpayer.  So, unless the IRS has an open statute of limitations, any disgorgement attributable to the Wylys tax would have to be returned to them.  So, does the IRS have an open statute of limitations?  Only if the Wylys fraudulently underreported their taxes in question.  Perhaps that is the underlying theory of the SEC suit, although it is not clear from the case.  Indeed, the Court notes at the end that the parties could not make any definitive statement on that issue.  (Please refer to the case opinion and my Federal Tax Crimes blog discussion.)

Now, this does raise some collateral issues that the true afficionado of tax procedure would relish.  What if fraud were not involved so that the IRS could not assess but the IRS wanted to keep the money anyway?.  The clear import of Section 6401(a) seems to be that the IRS should not be able to retain any tax assessed or collected after the assessment statute of limitations.  Assuming the predicate (no fraud), this disgorgement treated as recovery of a tax when the IRS receives it would fall squarely within the scope of Section 6401(a).  What if the IRS does not assess and just holds on to the money, not wanting to return the money to the Wylys?  I am not sure what authority the IRS would have to do that, but as they say the golden rule may apply (he who has the gold makes the rules).  I suppose that the taxpayer would have to perhaps file a Tucker Act case in the Court of Federal Claims, perhaps combined with a refund suit (alternative pleadings, with the argument on the refund suit that the monies came from the SEC to the IRS as payment for -- or recompense for -- a tax and would have to be treated as a tax which would be refundable, even if the IRS did not book it as a tax collected).

Ninth Circuit Rejects Government Argument for a Federal Common Law for Nominee and Alter Ego Liens (6/15/13)

In Fourth Investments LP v. United States, ___ F.3d ___, 2013 U.S. App. LEXIS 11905 (9th Cir. 2013), here, the Ninth Circuit provides some helpful general discussion of the law regarding nominee liability, including a key holding that some Federal common law does not apply to the determination.  The issue arises in many contexts, but (as noted in a footnote), this is a variation of the typical context in which it arises (citing Teresa Dondlinger Trissel, A Uniform Standard for Alter Ego and Nominee Tax Litigation, 58 Fed. Law. 38, 38 (2011).):

Typical nominee . . . scenarios start with people falling behind on their taxes. Facing the loss of their homes or businesses to the federal government [for the taxes owed] some taxpayers take steps to try to separate themselves from their valuable assets. The taxpayer's house may be deeded to a friend, although the taxpayer continues to reside there. Or perhaps all the taxpayer's cash disappears, yet the taxpayer's personal bills are being paid by a closely-held and controlled corporation. The factual scenarios are as creative and varied as are taxpayers themselves. However, the tax collector's reaction is usually consistent: upon discovering that a third party is being used to thwart the IRS's collection efforts, the government will file a notice of a federal tax lien identifying the third-party target as the taxpayer's nominee or alter ego and will attempt to satisfy the tax liability from assets held by the third party.

Here are some key excerpts that I think are helpful students in understanding the nominee or alter ego concept:  These are quotes from the case, but I strip out the case citations except for the Supreme Court decision in Drye] and most of the quotation marks in order to provide a more readable narrative version:

A nominee is one who holds bare legal title to property for the benefit of another. Although the Supreme Court has clearly indicated that the IRS may impose nominee tax liens, it has provided only limited guidance concerning how such nominee determinations are to be made. However, the Court has explained that application of the federal tax lien statutes involves questions of both state and federal law. The federal tax lien statute itself creates no property rights but merely attaches consequences, federally defined, to rights created under state law. Consequently, in making nominee determinations in a tax lien context, we must look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach. After determining that the taxpayer has a property interest under state law, we then look to federal law to determine whether the taxpayer's state-delineated rights qualify as property or rights to property within the compass of the federal tax lien legislation. 

The Government contends that nominee doctrine should be governed by federal common law rather than state law. We reject this position, just as it has been uniformly rejected by our sister circuits and by nearly every federal court that has examined the issue.  [The cases are assembled and discussed in footnote 4 which I omit but which can be viewed at the link.] 

Statutes of Limitations on Refund Claims - Complexities (6/9/13)

The statutes of limitations on refunds are complex.  The key Code section is 6511, here.  The subsections implicated are (a) and (b)(2).  The rules are -- as I tried to simplify them in my Tax Procedure book -- as follows:

Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules.

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the time the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn.\ 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).

In my book, I use various examples to illustrate the application and interface of these limitations periods.  I won't go through all of them now, but will address some that relate to a recent IRS internal guidance, ECC 201321022 (5/2/13), here.  I provide the first four examples without the footnotes and then provide the fourth example with the footnote discussing ECC 201321022.

Example 1: The taxpayer files his Year 01 tax return on 4/15/02 and pays the indicated tax of $100.  In January of Year 05, the taxpayer discovers he overpaid the Year 01 tax by $50.  He may file a timely claim for refund any time on or prior to 4/15/05 and receive a full refund.  He satisfies both rules. 

Example 2: Assume the same facts, except for some reason, the taxpayer does not file the claim for refund until 6/01/05.  Both of the rules would prohibit the IRS from granting the claim.  First, he has not filed a claim for refund within the period provided in the first rule.  Second, the amount he seeks to have refunded was paid beyond the three year period before the filing of the claim, as provided in the second rule.

The Mirror Code Concept; Some Thoughts and Ruminations (5/27/13)

The United States has a "mirror code" system with certain of its territories -- including U.S. Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands (CNMI).  The mirror code concept treats the U.S. tax code as the tax law of each jurisdiction -- U.S.,on the one hand, and the other jurisdiction,on the other.  In effect, the two jurisdictions are treated as separate countries for purposes of the mirrored Code applied by each.  Double taxation is generally avoided by requiring a single filing to the jurisdiction in which the taxpayer resides.  If the U.S. citizen is a "bona fide resident." of the U.S. V.I., the U.S. resident reports and pays tax to the U.S. V.I. and not to the U.S.; If the U.S. taxpayer is resident anywhere else, he reports and pays his tax to the U.S.  By contrast, if the U.S. V.I. citizen is resident in the U.S., he reports and pays tax to the U.S.; if he is resident anywhere else,he reports and pays tax to the U.S. V.I.  In each of these cases, if the citizen pays tax in the noncitizenship country of residence -- i.e., U.S. citizens reports and pays tax in U.S. V.I. or U.S. V.I. citizen reports and pays tax in the U.S. -- the country receiving the tax will remit -- a process called "cover" -- the portion tax received that relates to income in the other country.

A pure mirror code system will result in the same tax regardless of where the return is filed and the tax paid.  The territories are, however, allowed to give tax breaks with respect to taxes paid on income source in the territories under the system.  Thus, if the reporting of U.S. V.I. sourced income is to U.S. V.I., the U.S. V.I. is permitted to give a tax break with respect to that tax.  If the reporting of U.S. V.I. sourced income is to the U.S., then the U.S. should cover that portion of the tax to the U.S. V.I., whereupon, from the tax thus remitted, it can given any break it otherwise allows.  Thus, at least in theory, wherever the return is filed, the same ultimate result should obtain.

The problem comes when, after the taxpayer has filed in good faith with the mirror code territory (e.g., the U.S. V.I.), the U.S. attempts to force the U.S. taxpayer to file in the U.S., despite being required under the treaty to make the single filing in U.S. V.I. The circumstances for double taxation are present if the U.S., through making a different sourcing determination, has no plan to cover the amount to the other country.

This battle was fought out in Appleton v. Commissioner, 140 T.C. ___, No. 14 (2013), here.  The IRS took the position that the taxpayer was required to file in the U.S., he had filed in U.S. V.I. rather than the U.S., and that, as a result, the IRS had an unlimited statute of limitations to send a notice of deficiency with respect to the tax.  The Court held that the single filing with the U.S. V.I. required under the mirror code scheme was a return filed under the Code and therefore the unlimited statute of limitations did not apply.