Another Bullshit Shelter Bites the Dust Even with Variations (5/15/14)

I write today on the defeat of another bullshit tax shelter of the Son-of-Boss ("SOB") variety.  The Markell Company, Inc. v. Commissioner, T.C. Memo. 2014-86, here, decided yesterday.  If it were just another ho-hum SOB, it would be worth noting only in passing.  But, it has a twist -- both the twist and the outcome is projected in the opening two short paragraphs:

This case began when the Commissioner found the remains of a corporation on an Indian reservation in an extremely remote corner of Utah. The tribe claimed not to know how the corporation's stock had ended up in its hands. And there was little or no money or valuable property left inside the corporate shell. 

All signs pointed to the corporation's manager, a sophisticated East Coast moneyman, as the key person of interest. And his method was a series of complex transactions that bore a striking resemblance to Son-of-BOSS deals already examined many times before by this Court -- but with a corporate-partner twist.

The last sentence of the first paragraph resonates with the equally bullshit intermediary transactions.  One of the strategies in shelters is to push tax consequences to an empty shell of a company, so that the IRS is left without anyone to collect tax clearly due.

The Son-of-Boss transactions in their pure bullshit form seemed to promise to the gullible or complicit that the taxable income disappearing from the taxpayer's tax ledger would just go away.  But, every one I know that gave a hard and knowledgeable look knew that, even if the imagined scheme worked to push the income from the original taxpayer (always a doubtful proposition), some taxpayer down the line would be liable for the tax.  Enter the intermediary gambit to make sure that taxpayer down the line had no assets to pay the tax because the taxpayer and the promoters would have sucked all the value out of the company.  Thus, this intermediary was designed to deal with an inherent and blatant flaw in the SOB transactions.  (Of course, SOB transactions had flaws in them before reaching this stage, but the intermediary was a fine artistic touch to put on the bullshit.)

The Merits

The Chevron Two-Step (5/6/14)

Tax Procedure enthusiasts know -- or should know -- that Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), here, empowered the administrative state whereby agencies' interpretations of statutes entrusted by Congress to their administration are given deference.  The Chevron analysis involves two key steps, explained as follows from my Federal Tax Procedure book (footnotes omitted):

The Court established a “two-step” inquiry.  The First Step inquires whether the meaning of the statute is plain and unambiguous?  An alternative way to say this is whether the meaning of the statute is “clear” and needs no interpretation either by the courts or the agency.  If so, the regulation is irrelevant because the plain or clear meaning of the statute itself pre-empts the interpretive field.  A regulation inconsistent with the clear (or plain or unambiguous) meaning is invalid.  The Second Step, reached only if the text is determined to be not clear (or not plain or not unambiguous) in the First Step, is whether the agency interpretation is unreasonable? Under this Second Step, the agency’s interpretation in the regulations is given deference so long as it is not arbitrary, capricious or manifestly contrary to the statute it seeks to interpret (I generally just truncate this litany to “unreasonable”). This gives the IRS authority to interpret and determine the law where in the conceptual space between clear statutory text and an interpretation that is unreasonable under the statutory text.  This two-step inquiry is very important; students, practitioners and scholars must know the steps instinctively; I encourage readers of this text to commit them to memory – at least the formulation of the steps.

With that introduction, here are creative NYU Law students demonstrating the Chevron two-step.

Hat tip to the Tax Prof Blog for bringing the video to my attention.

Role and Culpability of Taxpayers Participating in Bullshit Tax Shelters (4/4/14)

I write today to collect and update some thoughts I have expressed before on this blog.  The background is the bullshit tax shelters on which I have written and even fulminated, if not eloquently, at least often.  I start with my own definition from my Tax Procedure Book (footnotes omitted).

  Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present 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, (i) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) 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, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters 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 shift potential penalty risks 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.”

The bullshit tax shelter with which I am most familiar is the Son-of-Boss shelter.  That shelter purported to generate offsets to taxable income.  The offsets were wrapped in commotion but ultimately simply created from thin air -- very thin, indeed a perfect vacuum.  Bullshit shelters appear in many guises other than Son-of-Boss.  The commotion they are wrapped in serve two purposes:  (i) creating the illusion of some basis for the magical tax benefits and (ii) hiding the fact that the illusion is an illusion.  Bottom-line, several courts have characterized the imagined benefits as "too good to be true" and indeed recognizably "too good to be true."

As readers of this blog know, many bullshit tax shelter promoters have been convicted for their participation in the bullshit tax shelters.  Taxpayers themselves have not been prosecuted or convicted.  I do understand that some taxpayers have been named targets or subjects of grand jury investigations for their participation but those investigations ended in only promoter prosecutions.

Discovery from IRS Files and Employees About Fair Notice of Liability and Treatment of Other Taxpayers (5/2/14)

In NetJets Large Aircraft, Inc. v. United States, 2014 U.S. Dist. LEXIS 58677 (SD OH 2014), here, Magistrate Judge Terence P. Kemp, here, resolved discovery disputes in this tax refund and abatement action relating to transportation tax under Section 4261, here.  Magistrate Judge Kemp does a very good job addressing discovery issues related to the IRS's alleged inconsistent application of the Section 4261 tax.  I am not sure the opinion will survive unscathed on appeal to the district judge, but it is a good opinion.  So I offer it to readers of this blog.

The taxpayers "provide aircraft management and aviation support services to aircraft owners and leaseholders (with whole and/or fractional interests in the aircrafts)."  I think the question in terms of the substantive application of the law is whether the taxpayers' role in providing ownership or leasing and all related services to fractional owners/leaseholders is serving in an analogous role to airline companies who must collect the tax from their customers (who, after all, can viewed as leasing the space on the plane for the time of the trip).

In a prior case, Executive Jet Aviation, Inc. v. United States, 125 F.3d 1463 (Fed. Cir. 1998), here, the Court held "the occupied hourly fees that fractional management companies received from fractional owners were subject to the tax imposed by section 4261(a)."  The taxpayers in NetJets apparently try to differentiate that case on the basis that the Executive Jet decision was premised on the arrangement not being "a bona fide economic arrangement."

Subsequently, the IRS promulgated regulations that, according to the taxpayers, make such arrangements bona fide when agreements of the type that the taxpayers used with their customers.

Notwithstanding the alleged distinction of the Executive Jet Aviation decision, the IRS asserted the tax against the taxpayers.

The litigation and the discovery disputes ensued.

The basic rule of discovery is that it be relevant to a legitimate dispute in the case.  To determine that, the Court reviewed the relief the taxpayers sought as follows:

(1) Plaintiffs do not provide "taxable transportation" under 26 U.S.C. §4261, and thus the payments Plaintiffs receive from aircraft owners are not subject to the section 4261 excise tax;
(2) The IRS failed to provide clear guidance to Plaintiffs that they were required to collect and remit the section 4261 excise tax on the monthly management and fuel variable surcharge fees they received from aircraft owners;
(3) The IRS violated its duty to treat similar taxpayers in a consistent manner because it has assessed the section 4261 excise tax against certain of the fees that Plaintiffs charge fractional aircraft owners while not assessing the tax against those same fees with respect to certain of Plaintiffs' competitors; and
(4) The IRS is legally bound by a Technical Advice Memorandum ("TAM") it issued to Plaintiffs' predecessor, Executive Jet Aviation, in 1992, which provides that only the occupied hourly fees paid by fractional aircraft owners, and not monthly management or fuel variable surcharge fees, constitute payments for "taxable transportation" under 26 U.S.C. §4261. Under applicable Treasury regulations, as well as the IRS's own internal guidelines, the IRS is bound by the 1992 TAM until such time as the IRS issues Plaintiffs another TAM modifying or replacing the one from 1992. The IRS has never issued such a subsequent TAM, and thus its assessment of the section 4261 tax against Plaintiffs' monthly management and fuel variable surcharge fees, in violation of Treasury regulations and IRS guidelines, was unlawful.

What Does Shall Mean? Herein of Slippery Mandatory Language and Summons Enforcement (5/1/14)

In Jewell v. United States, 2014 U.S. App. LEXIS 7899 (10th Cir. 2014), here, the Court held that shall means shall.  So stated, not a surprising holding.  The context -- ah yes, context is important -- was the statutory textual requirement in Section 7609(a)(1), here, that the taxpayer being investigated "shall be given" notice of the summons "within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined."  Now for further background.

The summons authority is in Section 7602, here.  Section 7609 is titled "Special procedures for third-party summonses."  The critical "shall" is in Section 7609(a)(1).

Summonses generally must meet the four part Powell test established in United States v. Powell, 379 U.S. 48 (1964), here (brackets added to highlight the four parts]:

[i] that the investigation will be conducted pursuant to a legitimate purpose, [ii] that the inquiry may be relevant to the purpose, [iii] that the information sought is not already within the Commissioner's possession, and [iv] that the administrative steps required by the Code have been followed * * * .

The issue in Jewell was whether, given the command of the Section 7609(a)(1) that notice "shall be given," the IRS's failure to give Jewell notice in the time period required prevents the IRS from having issued a valid summons and therefore prevents the IRS from petitioning the district court to enforce the summons.

Essentially, the Court held that shall means shall and denied enforcement of the petition.  And, to complete the reasoning, the Court said that the giving of timely notice was an administrative step required by Powell.

The Court engages in a lawyerly discussion over the meaning of shall.  When is the use of shall mandatory or simply precatory, a guide but not a straightjacket?  The court discusses the contrary authority in other circuits where a no harm no foul approach was adopted -- i.e., the summons would be enforced unless the taxpayer shows prejudice (or perhaps the IRS shows lack of prejudice), so that the requirement was merely a technicality that can be dispensed with or ignored.  Not so, says the Court.  The use of shall, properly and plainly interpreted, established an administrative step that Powell requires to be met.

Consider the implications.  One that comes readily to mind is the use of shall in statutory requirements for a notice of deficiency.  For example, uncodified Section 3463 of the Internal Revenue Restructuring and Reform Act of 1998 ("Act") states that the IRS "shall include on each notice of deficiency . . . the date determined by [the IRS] as the last day on which the taxpayer may file a petition with the Tax Court." Courts have not invalidate the notice of deficiency for failure to meet this "shall" requirement. A number of cases have so held, and the Tax Court made this holding less than a year ago.  John C. Hom & Assocs. v. Comm'r, 2013 U.S. Tax Ct. LEXIS 12 (T.C. 2013), here. Here is the Tax Court's reasoning:

Crossing the Line in Tax Planning (4/22/14)

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case.  In Moreland v. Koskinen, 2014 U.S. Dist. LEXIS 53308 (ND AL 2014), here, the taxpayers, husband and wife, complained that the IRS had denied their first time homebuyer credit.  (The precise procedural posture of the case is unclear, but I assume it was a refund suit; the taxpayers appeared pro se.)  Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the credit, but the facts outside the paperwork showed that they did not qualify.

The law requires that property acquired from a related person does not qualify.  The Morelands and Mollie Holland, another otherwise unrelated taxpayer  (unrelated in the sense of the statutory disqualification), wanted to qualify otherwise unqualified properties.  In order to give the appearance that the properties qualified, they created a paperwork façade to make it appear that the Morelands temporarily owned property disqualified as to Ms. Holland so that she could "purchase" the property from the Morelands and vice-versa.

The key part of the decision is (bold-facing by JAT):

In the present case, the paperwork related to all of the real estate conveyances at issue appears to indicate, on its face, that Kevin Moreland purchased the Killen property from Noble and Donna Holland, who are not related to him in any way. If the technical form of that transaction were the only relevant consideration, Kevin and Melissa Moreland might be entitled to the receive the FTHBC. However, when viewed as a whole and in the light of all of the credible evidence, it is clear that the substance of the transaction was very different from its form. In substance, Noble and Donna Holland engaged in a property swap with Janie Moreland for the purpose of making it appear that their respective children qualified for the First Time Home Buyer Credit. There was no actual transfer of the subject properties. Noble and Donna Holland never took possession of the Killen property, and Kevin and Melissa Moreland never vacated it. Kevin and Melissa Moreland paid Noble and Donna Holland only a very small percentage of the money they purportedly owe for the property, and the Hollands never tried to collect from the Morelands. Similarly, Janie Moreland never took possession of the Leighton property, and Mollie Holland did not even move into that property after it had purportedly been transferred to her. Mollie Holland never paid Janie Moreland anything for the Leighton property, and Janie Moreland has never tried to collect anything from Mollie Holland. 

Stated in terms that are most favorable to the parties involved, the only substantive transactions that took place were the transfer of the Killen property from mother (Janie Moreland) to son (Kevin Moreland), and the transfer of the Leighton property from parents (Noble and Donna Holland) to daughter (Mollie Holland). Stated less charitably, each family, in exchange for the sum of $8,000, concocted a scheme to defraud the United States government via the Internal Revenue Service. Under either construction, plaintiffs are not entitled to the First Time Home Buyer Credit.

The case involved only one set of the taxpayers involved, the Morelands.  The other set also claimed the credit.  The Court described their situation as follows:

Mollie Holland claimed a First-Time Home Buyer Credit ("FTHBC") on her Form 1040EZ Income Tax Return for 2010.29 The IRS granted her the credit, but she decided in early 2014 to return all the money she received because, after further consultation with the IRS, she determined she was not entitled to the credit and that "it wasn't right" for her to retain the money.

GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (4/17/14)

I have previously written on GE's bullshit tax shelter twice blessed by the district court and twice swatted down by the Court of Appeals..  See Second Circuit Strikes Down Another BS Tax Shelter (Federal Tax Crimes Blog 1/24/12); here, and Thoughts on the the Corporate Audit Lottery (Federal Tax Crimes 2/11/12), here.  The irrepressible district court, smarting over two failed attempts to approve a GE raid on the fisc, makes another go at it in TIFD-III-E Inc. v. United States, 2014 U.S. Dist. LEXIS 41472 (D. Conn. 2014), here.  (The judgment entered shortly thereafter is here.)

The Second Circuit had already approved the application of the 20% substantial understatement penalty, but, as it turns out, when pushed to the taxpayer, the tax involved, though large, would not meet the threshold requirement that the understatement be "substantial" -- defined as exceeding "(i) 10 percent of the tax required to be shown on the return for the taxable year."  Section 6662(d)(1)(A)(i), here.

Readers will recall that the 20% accuracy related penalty has another basis -- if the position is due to negligence, which has no threshold limitation.  Section 6662(c), here.  So, the Government made another run to extract from GE some penalty for having played the audit lottery and lost for its bullshit tax shelter.  Again, this time, the district court tilted for GE, thus insulating GE from any cost or penalty for playing the audit lottery.  Why?

The Court opens its opinion as follows:

Defendant, the United States, moves for an order imposing a negligence penalty on plaintiff TIFD III-E Inc. ("TIFD") for tax years 1997 and 1998. During the 1990s, TIFD's parent company, General Electric Capital Corporation ("GECC"), joined with a pair of Dutch banks ("the Dutch Banks" or "the Banks") to form an aircraft leasing company. TIFD considered the Dutch Banks to be its partners in the venture, and did not report any income allocated to the Banks on its own tax returns. During the course of this litigation, I twice found that decision to be more than reasonable; indeed, I found that the company correctly deemed the Banks to be equity stakeholders rather than lenders. TIFD III-E v. United States, 342 F. Supp. 2d 94 (D. Conn. 2004)  [*4] ("Castle Harbour I"); TIFD III-E v. United States, 660 F. Supp. 2d 367 (D. Conn. 2009) ("Castle Harbour III"). The Second Circuit twice disagreed. TIFD III-E v. United States, 459 F.3d 220 (2d Cir. 2006) ("Castle Harbour II"); TIFD III-E v. United States, 666 F.3d 836 (2d Cir. 2012) ("Castle Harbour IV"). So, after more than a decade of litigation, TIFD ultimately lost this case. In addition, the Second Circuit held that the IRS could impose a 20% accuracy penalty against TIFD for substantial understatement of its income taxes in 1997 and 1998.

Despite having "twice found that [GE's] decision to be more than reasonable," the judge candidly acknowledges that the Second Circuit disagreed.  The court then proceeds to find GE reasonable again.

I won't review the facts, for the court itself that "I assume the parties' familiarity with the facts underlying this case."  I will note that, as is common in these bullshit corporate tax shelters, a foreign bank was the linchpin to make it have the superficial appearance of working.  (Foreign banks also played an essential role in the bullshit individual Son-of-Boss tax shelters; in this regard, see my postings Credit Suisse DOJ Investigation Status and New NY Investigation (Federal Tax Crimes Blog 4/7/14), here; and NY State Agency Makes New Moves in Investigation of Credit Suisse (Federal Tax Crimes Blog 4/17/14), here.)

The Mitigation Provisions of the Code - An Example of How They Work to Open an Otherwise Closed Year (4/3/14)

All taxpayers facing a tax liability hope that the IRS will fail to assess within the applicable period of limitations.  For example, the IRS often requests a Form 870, Waiver of the Restrictions on Assessment, which, because it waives the notice of deficiency which, in turn, would have suspended the statute of limitations, hope that the IRS will not get around to assessing in time.  (That is vain hope in the overwhelming number of cases.)  There are a myriad of other circumstances where a similar situation occurs.

One such circumstance applied in El Paso CGP Company, L.L.C. v. United States of America, 748 F.3d 225 (5th Cir. 2014), here.  In this case, the facts are complex, but I think I can distill them for purposes of the point I want to make in this blog entry. Normally, when a year is closed, it is just closed.  If the taxpayer got a benefit he was not entitled to, that is just the IRS's tough luck; and vice versa.  However, various Code provisions and judicial doctrines may apply to mitigate the effect of the improper benefit in the closed year.  Indeed, the most beautiful such provisions are called the mitigation provisions of the Code -- Sections 1311-1314.  Essentially, the effect of those mitigation provisions in most of  the circumstances of adjustment to which they apply is to take away a double benefit to a taxpayer from achieving a tax benefit for the treatment of an item in a correct open year when the taxpayer has previously achieved a benefit in an incorrect otherwise closed year.

Without getting into the facts in too great a detail (read the opinion), the taxpayer claimed credits in 1986 which because of limits were carried forward to some later years.  After some audit activity, the parties agreed that the taxpayer had overstated the credits in question but was entitled to other credits so that, for the year 1986, the taxpayer was still entitled to a refund.  However, because the credits in question had been overstated in 1986, the carry forward of those credits to post-1986 years was wiped out, meaning that the taxpayer had deficiencies in those post-1986 years which were then closed.  This apparently was a circumstance of adjustment under the mitigation provisions.  (I have not chased down that issue, but the Court and the parties seemed to assume it.)  Under the mitigation provisions of the Code, the IRS has a one-year window from the time of the determination to assess, collect, refund or credit the tax, as appropriate for the type of adjustment.  See Section 1314(b), here.

The IRS netted the agreed upon deficiencies for the post-1986 years in the aggregate against the refund due for 1986 and refunded the difference (with appropriate interest).  But, as best I understand the opinion, the IRS did not assess the netted amount to the particular post-1986 years within the one-year period.  In other words, the IRS had collected the tax by offset but had not made the assessments for the particular years involved in that one-year period.  The taxpayer argued that, therefore, the IRS had not met the procedures required for mitigation and therefore, must treat the collection via netting as an overpayment for the post-1986 years that must be refunded.

A taxpayer making that argument or any argument that the IRS has not timely assessed does not want to launch the argument when the IRS still has time to assess.  Therefore, for example, it is common practice -- albeit perhaps not the best form -- to file a claim for refund for a year when there are not previously adjustments that would increase the tax liability near the end or after the assessment period of limitations.  (I say that is perhaps not the best form, because it may be difficult to sign a claim for refund under oath when the taxpayer knows that the unspotted adjustments wipe out the claim for refund; but that's a subject for another day.)

At any rate, this taxpayer did a mitigation variant of this timing strategy.  "A year after the Closing Agreement was executed, in August 2006, El Paso sent a precisely timed memorandum to the IRS claiming that the deficiencies for 1987-1990 must be refunded to El Paso because the IRS had failed properly to assess those deficiencies before the just-expired one-year statute of limitations."  (Bold-face supplied by JAT.) That memorandum was treated as a claim for refund.

The IRS Levy Power (4/4/14)

I have recently had email discussions with Leslie Book and Keith Fogg, authors of the Procedurally Taxing Blog, here, regarding some aspects of the levy power, particularly levy on right to receive future payments.  As a result of that discussion, I have been better educated about the levy and have made some revisions to my text.  I thank Les and Keith for their contributions to my education.

I cut and paste below the section revised and note in red-line the revised portions.  I do not include the footnotes.

VIII. Administrative Levy and Judicial Enforcement. 

A. Administrative Levy and Sale. 

  1. General Rules of Levies.

Levy includes the power to seize and sell the taxpayer's property (including interests in property and personal service compensation, such as wages).  § 6331(b) (levy); § 6335 (rules for sale).  A levy – often referred to as a seizure – is a “summary, non-judicial process, a method of self- help authorized by statute which provides the Commissioner with a prompt and convenient method for satisfying delinquent tax claims.”  The Supreme Court has said: “The IRS need never go into court to assess and collect the amount owed; it is empowered to collect the tax by non-judicial means . . . without having to prove to a court the validity of the underlying tax liability.”   

The IRS levy can involve a direct seizure of the property but more often the levy is accomplished by notice of levy to the taxpayer or third parties requiring them to turn over the taxpayer’s property in their possession.  Thus, the IRS can serve notice of levy a bank to obtain the funds in the taxpayer's bank account or can levy a brokerage firm to obtain the investments in the taxpayer's bank account.  The IRS can also levy persons or entities who appear to be third parties, asserting that they are nominees or alter egos of the taxpayer.  (I cover nominee and alter ego liability later in the text.) 

As noted, the IRS often levies on third parties by issuing “notice of levy,” which, like the IRS summons studied earlier, is simply a form that the IRS collection officer fills out and delivers to the person upon whom levy is made.  Once the person is given the notice of levy, the United States has the right to the property levied.  As to the property, the person receiving the notice of levy holds the property in a form of custodial relationship to the United States. 

The person receiving the notice of levy takes substantial risks in not responding to the levy.  The person receiving a levy is liable for the value of the property levied upon and not turned over, plus a penalty of 50%.  § 6332(d).  The defenses available to the party levied to avoid the levy are quite limited.  Nonpossession of the taxpayer’s property is a defense.  However, the “validity of the levy and competing claims to the ownership of the funds are not valid reasons for refusing to honor a levy.” The person can be relieved from the 50% penalty for reasonable cause, which would be something beyond the person's control that prevents compliance.  The IRM advises the agent to be judicious in assertion of the penalty, and courts also may give a liberal application of reasonable cause where the taxpayer is already penalize by liability for the value of the property that he may have turned over to the taxpayer. In order to protect the levied party, the levied party responding to the levy by delivering the property to the IRS is “discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.”  § 6332(e).  As a result, practically speaking, the levied party “has two, and only two, possible defenses for failure to comply with the demand: that it is not in possession of property of the taxpayer, or that the property is subject to a prior judicial attachment or execution.” 

Writ Ne Exeat Republica to Restrain from Foreign Travel as Tax Collection Tool (2/11/14)

Readers might like to read two good discussions of the writ ne exeat republica, which courts may issue in tax cases under 7402(a), here.  The writ, if issued  in a tax case, will restrain the defendant from leaving the jurisdiction (or some subset thereof) pending payment of some or all of a tax debt.  The two excellent discussions were prompted by a case, United States v. Barrett, 2014 U.S. Dist. LEXIS 10888 (D. CO. 2014), where the writ was granted.  The two discussions are:

• Keith Fogg, Holding People Hostage for the Payment of Tax – Writ Ne Exeat Republica (Procedurally Taxing Blog 2/11/14), here.
• Jay Adkisson, A Wedding And The Writ Of Ne Exeat Republica (Forbes 2/7/14), here.

I have done a prior parallel blogs on the issue in which I quoted from my text.  See Restraining Taxpayers for Tax Debts (Federal Tax Crimes Blog 8/19/13), here; and Restraining Taxpayers for Tax Debts (Federal Tax Procedure Blog 8/19/13), here.  I offer the following of my text as I have revised it (footnotes omitted):

The United States does not generally allow imprisonment – or, more broadly, constraining a person’s liberty -- for the nonpayment of debt.  The exception for purposes of tax matters is the statutory approval in § 7402(a) for the writ of ne exeat republica.  The Latin is “let him not go out of the republic,” and was developed in England as a chancery writ.  The exercise of the writ implicates constitutional protections, including the “right to travel” which is “a constitutional liberty closely related to rights of free speech and association, * * *.”  Notwithstanding this implication of constitutional rights, in extraordinary cases it can be granted.  

The writ is sometimes used in domestic relations contexts to restrain someone from leaving the jurisdiction.  In tax collection contexts: 

The writ ne exeat republica is an extraordinary remedy and should only be considered when all other administrative and judicial remedies would be ineffective. In appropriate cases, the writ ne exeat may be used as a collection device against a United States taxpayer who is about to depart from the territorial jurisdiction of the United States, or who no longer resides but is temporarily present in the United States and who has transferred his assets outside of the United States in order to avoid payment of his federal tax liabilities. The writ ne exeat is a court order which generally commands a marshal to commit to jail a defendant who fails to post bail or other security in a specified amount. The authority for the United States District Courts to issue writs ne exeat in tax cases is found in I.R.C. section 7402(a) and 28 U.S.C. section 1651.  

The debt relied on to support the writ must be enforceable against the defendant, be of a pecuniary nature and be presently payable. Thus, in tax cases, an assessment should be outstanding against the taxpayer.  

The purpose of the writ in tax cases is to prevent taxpayers from defeating the collection of tax liabilities by removing themselves and their assets from the territorial jurisdiction of the United States. As a practical matter collection by administrative means is ineffective where the taxpayer has either secreted his assets or removed them from the United States. If the taxpayer leaves the United States, judicial remedies may be likewise defeated since the court would then be powerless in most cases to enforce its orders or judgments against the taxpayer or his property, if located outside of the United States. Thus, the writ ne exeat ensures the continuing submission of the taxpayer to the jurisdiction of the court.