D.C. Circuit Affirms Tax Court's Holdings on Written Supervisor Approval, Qualified Amended Return, and Statute of Limitations on UBS JDS (4/25/24)

In Lamprecht v. Commissioner, ___ F.4th ___ (D.C. Cir. 4/23/24), D.C. Cir. here and GS here [to come], the Court affirmed the Tax Court in Lamprecht v. Commissioner, T.C. Memo. 2022-91, here. See Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (Federal Tax Procedure Blog 9/1/22), here. In so doing, the Court (Judge Walker) steps through the arguments and the resolution in a crisp straightforward opinion.

The background discussed in the opinion is that the IRS issued a John Doe Summons to UBS in 2008 (which essentially set off the IRS and DOJ foreign account initiative). UBS did not immediately reply with full and complete response. As a result, the civil statute of limitations for persons within the scope of the summons (U.S. person account holders) was suspended and did not pick up until the summons was resolved. Suspension of Statute of Limitations From the UBS John Doe Summons (Federal Tax Crimes Blog 1/26/14), here.

The opinion holds in the Court’s outline format:

I. The IRS Complied with 26 U.S.C. § 6751(b)(1)

A. It Doesn’t Matter When (or Whether) a Supervised
Tax Examiner Signs the Approval Required by
§ 6751(b)(1)’

B. The IRS May Use a Form 5345-D to Comply with
§ 6751(b)(1)

C. The Tax Court’s Refusal to Exclude the Forms 5345-D
from Evidence Was Not an Abuse of Discretion

II. The Lamprechts’ Corrected Returns Did Not Protect
Them from Penalties [QAR Issue]

A. The [UBS] Summons Was Legal

B. The Summons Relates to a Benefit Claimed on the
Lamprechts’ Original Tax Returns

III. The Penalty Assessments Were Not Too Late

A. The [UBS] Summons Was Not Resolved in August 2009

B. The [UBS] Summons Was Legal (Again)

 JAT Notes:

Seventh Circuit Rejects Strict Irreparable Injury Requirement for § 7402(a) Injunctive Relief for Government (4/25/24)

In United States v. Olson, ___ F.4th ___ (7th Cir. 4/11/24), CA7 here and GS here, the Court discussed the “irreparable injury” requirement for equitable injunctive relief for the Government under § 7402(a). The opinion is short and crisply states the analysis, so I will just copy and paste the core discussion:

          The United States filed this suit seeking both a money judgment and an injunction compelling the Olsons to deposit withholding taxes into a bank using an approved payroll service. See 26 U.S.C. §§6302, 6157; 26 C.F.R. §§31.6302-1, 31.6302(c)-3. The proposed injunction also would require the Olsons to pay their taxes ahead of private creditors, permit the IRS to inspect their books. and records, and notify the IRS if they start another business.

          The district court ordered the Olsons to pay more than $300,000. But the court denied the motion for an injunction, relying on language in United States v. Benson, 561 F.3d 718, 724 (7th Cir. 2009). See 2023 U.S. Dist. LEXIS 8472 (N.D. Ind. Jan. 17, 2023). The United States sought reconsideration, observing that this portion of Benson interpreted 26 U.S.C. §7408(b), which deals with tax shelters, while the request in this case rests on 26 U.S.C. §7402(a), which reads:

          The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.

          Under this statute an injunction may issue if “necessary or appropriate for the enforcement of the internal revenue laws.”

          The district court understood §7402(a) to call for consideration of the traditional factors, under which a plaintiff seeking a permanent injunction “must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). Cf. Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008) (similar factors for preliminary injunction). As the district judge saw matters, the United States has not established irreparable harm because it will not become insolvent if the Olsons do not pay their taxes. 2023 U.S. Dist. LEXIS 40549 *7 (N.D. Ind. Mar. 9, 2023). The court added that the United States does not face irreparable injury, because it can get future money judgments against the Olsons if they persist in not paying taxes.

          By the district court's lights, no court ever would order relief under §7402(a), because the national government's solvency does not depend on tax payments from any one person or business, even the largest. Yet judges should not interpret statutes in a way that makes them ineffectual. Nor should a court be sanguine that the IRS can collect from the Olsons just because it has a money judgment. They have not paid in the past and assert inability to pay in the future. The sort of relief the United States seeks in this case creates a mechanism for payment: the use of a payroll service that will turn over with-holding taxes (at least) whether or not the Olsons cooperate. Ability to audit the Olsons' books without the need for subpoena-enforcement proceedings also will assist in tax assessment and collection.

          Application of the traditional factors is straightforward. (1) The United States suffers irreparable harm in the sense that it is unlikely to collect future taxes unless some intermediary such as a payroll processor superintends how the business's income is distributed. (2) Money damages are inadequate because the Olsons assert both inability and unwillingness to pay. (3) The balance of hardships favors relief (the Olsons' belief that they are entitled to prefer other uses of money amounts to little more than disagreement with the tax laws). And (4) the public interest calls for ensuring that the Olsons have the same costs (taxes as well as wages) as their competitors. The district court's contrary decision on these factors is an abuse of discretion.

Court Affirms FBAR Willful Penalty Despite Apparently Accepting NonFiler's Claim of Innocent Ignorance in the Face of Damning Facts (4/24/24; 4/25/24)

In United States v. Vettel, ___ F. Supp. 3d ___ (D. Neb. 4/11/24), CL here and GS here [to come], the Court held, after bench trial, that David Vettel was liable for the willful FBAR penalty. The Court reasoned that, although the Court apparently accepted Vettel’s testimony that he did not know of any tax liability related to the offshore accounts or of the FBAR filing requirement, he had enough objective indications that he was reckless and, therefore, willful for purposes of the FBAR penalty.

I say that the Court “apparently accepted Vettel’s testimony,” Given that reckless conduct alone would suffice for liability, the Court did not have to accept his testimony of ignorance. Indeed, that is the way the Government couched its post-trial brief. See brief here.

The Government’s recitation (brief pp. 13-34) of the objective indications of at least recklessness are damning indeed and certainly permit an inference that Vettel knew of at least his tax reporting obligation and likely also FBAR reporting obligation and intended to evade them. Thus, the brief says (p. 18) “Vettel admits that it is ‘not logical’ to believe that foreign income he earned is not taxable anywhere.” Further, the brief says (p. 18) in preparing his 2012 return, Vettel’s accountant asked questions about foreign income, causing Vettel to disclose a Turkish account but not the Swiss BSI account, resulting in an incomplete FBAR being filed. Also, David Vettel hid the BSI account from his wife, Crystal. (Opinion pp. 8-9.) There are many more facts at least objectively showing Vettel was willful under the FBAR standard and certainly capable of casting doubt on Vettel's claims of innocent ignorance.

I note that David Vettel, with his wife Crystal Vettel, had a Tax Court case, Docket Number 16988-19 (Dawson here). That case was resolved by stipulated decision on 11/12/20, although Dawson does not have a link to any document (even the stipulated decision that I thought should have a link).

Tax Court Rejects Another 2000 era Bullshit Tax Shelter and Imposes Accuracy Related Penalty (4/22/24)

In PICCIRC, LLC v. Commissioner, T.C. Memo. 2024-50, GS Dkt 4308-12, here, at #75 4/22/24 and GS here, the Court (Judge Gale) rejected the petitioner’s claim for artificial tax benefits (fantasy exorbitant basis) in a contrived sale of distressed Brazilian trade receivables. In other words, yet another variant of a bullshit tax shelter common in the early 2000s; the underlying transaction here was in 2002 and reported on the 2002 partnership return. The facts found make the result inevitable. The Court found a basis of “at the most, $300,164,” whereas the reporting position was that the basis was “$23,075,495.” (Slip Op. 12.)

I note this case because the partnership used the standard shield of the tax professional opinion letters that incentivized taxpayers blessed with significant income to play the audit lottery, which they hoped was cost-free with liability if caught only for tax and interest but no penalty (civil or criminal). Under the scenario without a penalty if caught, it still made sense to play the audit lottery because the upside if not caught was the avoided/evaded tax less the transaction costs (including legal opinions).

One opinion from Proskauer Rose, LLP, a player in the tax shelter arena at the time, opined “that the transaction had the requisite economic substance and business purposes to be respected under the authorities discussed in the opinion letter.” (Slip Op. 5.) Proskauer Rose charged $100,000 for issuing the opinion. (Id.)

The other opinion was from BDO, opining “that no penalty should apply to the transaction pursuant to section 6662(b)(2) or (3).” (Slip op. 5.) The opinion does not state what BDO charged for the opinion. The Code sections cited are for “substantial understatement” penalty at §§ 6662(b) and (d) and the “substantial valuation understatement penalty at §§ 6662(b)(3) and (f) and (h).

Both opinion letters, in the final analysis, were worth nothing despite the market at the time pricing them at substantial amounts (e.g., $100,000 to Proskauer Rose). Even so, the opinion letters arguably prevented a potential criminal charge or civil fraud penalty, so maybe in the final analysis, this partnership and its flow-through partners got something for their money.

Out-of-Time Deficiency Case Declaring NOD Invalid but with ASED Statute Still Open (4/17/24)

In my Federal Tax Procedure book, I note that there may be some procedural foot-fault in the IRS issuance of a notice of deficiency (“NOD”), such as failure to send to the last known address. If the NOD is invalid, any resulting assessment is invalid. I note that a traditional way to challenge the NOD for failure to send to the last known address is by filing an out-of-time petition for redetermination with the Tax Court. If the Tax Court then dismisses for lack of jurisdiction of an untimely petition it may base the decision on the invalidity of the NOD which invalidates the assessment requiring a valid NOD; that will invalidate the assessment. I caution that this gambit might be a pyrrhic victory if the IRS can still issue a new deficiency for which the statute of limitations is still open when the Tax Court dismisses.  (See the Federal Tax Procedure book 2023.2 Practitioner Edition pp. 515-516.)

Phillips v. Commissioner, T.C. Memo 2024-44, TA here & GS here [to come], is such a case. In Phillips which the Court says is a deficiency case (see p. 1; for more explanation see my note # 1 below explaining how a CDP case morphed into a separate deficiency case), the petition for redetermination of the deficiency was out of time. The Court found the NOD and resulting assessment to have been invalid for failing the last known address requirement. In getting to the holding of invalidity, the Court offers good discussion of the application of the Regulations on last known address including the IRS access to USPS change of address information as a licensee, the IRS’s processes for insuring last known address, and the IRS’s failure to meet the Regulations’ requirements in this case. I will not further address the merits of the Tax Court’s last known address resolution.

I focus instead on the Phillips opinion’s closing shot (p. 15 n. 10):

Nothing in this Opinion should be construed as limiting respondent’s ability to issue petitioner a new notice of deficiency for 2014 that is properly mailed to petitioner’s last known address.

Tax Court Judge Lauber Denies Petitioner Motion for Summary Judgment Rejecting Fraud Penalties in Allegedly Abusive SCE Case; Some Background (4/14/24)

In North Donald LA Property LLC et al. v. Commissioner (Order T.C. Dkt. 24703-21 #140 4/10/24), TA here and TC Dkt here*, a syndicated conservation easement (“SCE”) case, the Court (Judge Lauber) denied the petitioner’s motion for partial summary judgment. 

* This is an order and not an opinion of the Court. Hence there is no direct access to the Court’s order. Access through the Court (as opposed to a third party provider) is by using the Court website to access the docket entries for Case # 24703-21 and going to the particular docket entry (in this case entry 140 dated 4/10/24). Here there is a third party provider, Tax Analysts on its public site sponsored by Deloitte. I take this opportunity to state my appreciation to Tax Analysts and Deloitte for providing this service.

Judge Lauber opens (slip op. 1):

On February 16, 2024, petitioner filed a Motion for Partial Summary Judgment seeking a ruling that the civil fraud penalty, as a matter of law, does not apply because respondent has not alleged facts showing that NDLA “intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” Memorandum in Support of Motion for Partial Summary Judgment at 7 (quoting Parks v. Commissioner, 94 T.C. 654, 661 (1990)). In essence, petitioner contends that respondent cannot carry his burden of proving fraud by clear and convincing evidence because NDLA disclosed on its tax return the facts relating to the conservation easement transaction. Finding that there exist genuine disputes of material fact regarding the possible application of the fraud penalty, we will deny the Motion.

Judge Lauber starts the discussion of the facts as follows:

Sixty West, LLC (Sixty West), was a promoter of syndicated conservation easement transactions.n3 In March 2016 Reserve at Welsh, LLC (Welsh), an entity controlled by Sixty West, purchased 3,324 acres of land in Jefferson Davis Parish, Louisiana (Parent Tract). Sixty West allegedly purchased the Parent Tract for use in multiple syndicated transactions that would generate large charitable contribution tax deductions for investors. The total purchase price for the Parent Tract was $9,888,008, or $2,975 per acre.
   n3 “Promoter” is a loaded term in the syndicated conservation easement space because of the penalty imposed on “promoters” by section 6700(a). In this Order we use the term “promoter” in its ordinary sense, making no determination as to whether Sixty West was a “promoter” within the meaning of section 6700(a), a question that is not before us.

Judge Lauber’s recitation of the rest of the relevant facts then follows a recognizable pattern for those who have watched abusive SCE cases. Setting aside technical foot-faults, the core common pattern is the substantial overvaluations of the donated easements. Based upon the appraisal  of a frequent appraiser in abusive SCE cases (Claud Clark III), NDLA claimed a donation of $115,391,000 for a portion of the property originally purchased. (Order slip op. 2.) That contribution claim was based upon a “’before value’ of the property of $116,303,000, or $471,4561 per acre. Subtracting from the sum an “after value” of $912,000, Mr. Clark asserted that the easement was worth $115,391,000.’” (Slip op. 2-8.)

Timely disclosure Forms were filed as follows (Slip op. 30):

Litigation is About Persuasion Which Requires Credibility (4/12/24; 4/23/24)

I write on the tax saga of Burt Kroner. The underlying saga goes back many years and has played out in three tax cases.

• Kroner v. Commissioner (Kroner I), T.C. Memo.  2020-73, here, sustaining the substantial penalty but denying the substantial penalty because of failure to obtain written supervisor approval required by § 6751(b)(1).
• Kroner v. Commissioner (Kroner II), 48 F.4th 1272 (11th Cir. 2022), here, reversing Kroner I on the § 6751(b) penalty issue (the Tax Court’s sustaining of the deficiency was not appealed); I previously wrote on Kroner II. Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (Federal Tax Procedure Blog 9/20/22), here. 
• Kroner v. Commissioner (Kroner III), T.C. Memo. 2024-41, TA here and GS here, applying the penalty on the merits on remand and rejecting Kroner’s reasonable cause defense. 

The holding in these cases that will likely be cited most in the future is the holding in Kroner II regarding the proper timing of the written supervisor approval requirement as courts further calibrate precisely what the requirement is (perhaps based in part on the Treasury proposed regulations when finalized).

I write today on the merits of the tax deficiency which the recitation of facts in the recent opinion in Kroner III suggested I should take a further look.

The deficiency issue was whether a series of transfers into Kroner’s accounts were gifts from a business associate (also an alleged friend), a David Haring, or taxable income. Kroner claimed the transfers were gifts which IRC § 102 excludes from taxable income; the IRS claimed that they were not gifts (or at least that Kroner had not shown on audit or at trial that they were gifts). The concept is that the Code taxes all income (generally all accretions to wealth presently subject to a realization requirement) unless the income is excluded by some Code section, in this case § 102. The taxpayer bears the burden of persuading the trier of fact that the transfers were gifts.

As an aside, the gift v. income issue can arise in many settings. See e.g., my trial and appellate war stories in Justice Thomas and Tax -- The Plot Sickens (Federal Tax Procedure Blog 10/29/23; 10/31/23), here.

Judge Marvel explains the Code’s gift meaning (Kroner I, slip op. 8):

District Court Rejects State End-Run of Federal Tax SALT Limitations with State Creditable "Charitable" Contribution (4/8/24)

In New Jersey v. Mnuchin, ___ F.Supp. 3d ___,  2024 WL 1386080, 2024 U.S. Dist. LEXIS 59122  (S.D. N.Y. 3/30/24), CL here and GS here, the Court rejected now familiar attacks, including APA and Chevron. This time the attacks come from the states rather than those who fear the administrative fear (either in reality or to stir the base). The complaint of the states (including New York and Connecticut components as named plaintiffs) is that Treasury failed both substantively (improper interpretation a la Chevron) and procedurally in promulgating the Final Rule interpreting § 170 (the charitable deduction provision). The Final Rule denies a charitable contribution deduction where the state gives a quid pro quo in the form of a state and local tax credit. The state tax credit was simply a state end-run around the 2017 Tax Act “SALT” (state and local tax) deduction limitation. 

The Court described the Treasury response to the state legislation (Slip Op. 2-3, footnotes omitted and cleaned up):

On June 13, 2019, the Treasury Department and the Internal Revenue Service ("IRS") promulgated a new regulation (the "2019 Final Rule") governing the availability of charitable contribution deductions for payments made to state and local governmental units where the taxpayer receives or expects to receive a state or local tax credit in return. The new regulation involves an interpretation § 170, which in part governs the deduction of charitable contributions on federal income tax returns.

The 2019 Final Rule provides that "the amount of the taxpayer's charitable contribution deduction under [S]ection 170(a) is reduced by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer's payment or transfer." 26 C.F.R. § 1.170A-1(h)(3)(i).

In this action, Plaintiffs seek a declaration that the 2019 Final Rule is invalid under the Administrative Procedure Act, 5 U.S.C. § 706. Plaintiffs contend that Defendants — Treasury, the IRS, and their officers (the "Government") — exceeded their statutory authority in promulgating the 2019 Final Rule, and that the issuance of the Rule was arbitrary and capricious.

The Court dispensed with threshold issues such as 

• Standing (Slip Op. 16-29), 
• Anti-Injunction Act (Slip Op. 29-32) , and 
• Violation of the Regulatory Flexibility Act (Slip Op. 32-36).

Moving to the Merits of the Claim under the APA (Slip Op. 35-59), The Court first holds that the Regulation easily passes Chevron’s two-step analysis.  Key points:

George Mason Law Review Symposium Articles on Chevron; My Discussion of Professor Bamzai's Article (4/4/24)

Readers of this blog interested in Chevron deference should consider the Chevron on Trial Symposium Law Review edition of the George Mason Law Review. See Megan Dill, The George Mason Law Review’s Chevron on Trial Symposium Issue (Yale J. on Reg.: Notice & Comment 4/2/24), here. The N&C article lists and links a number of articles in the Symposium Issue.

In the N&C list, I focused principally on Professor Aditya Bamzai’s On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024), html here and pdf here. I previously blogged on a draft of Professor Bamzai’s article. See Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (Federal Tax Procedure Blog 1/23/24; 1/24/24), here. I have now made a few short amendments to that earlier blog (indicated in red font) to address the Final Article; hence, the final date in blog title’s parenthesis has changed to 4/4/24, which is how I flag the latest change). Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (Federal Tax Procedure Blog 1/23/24; 4/4/24). Suffice it to say here that I continue to disagree with Professor Bamzai.

3rd Circuit Holds Tax Court Has Jurisdiction to Determine Overpayments in CDP Proceedings (3/29/24; 3/30/24)

In Zuch v. Commissioner, ___ F.4th ___, 2024 U.S. App. LEXIS 6827, 2024 WL 1224410 (3rd Cir. 3/22/24), CA3 here and GS temporary * here, the Court starts the opinion of the Court as follows:

When Congress grants taxpayers the right to challenge what the Internal Revenue Service says is owed to the government, Congress's will prevails. The IRS cannot say that such a right exists only under the circumstances it prescribes. That ought to go without saying, but this case requires us to say it.

This signals that the rest of the opinion is not favorable to the IRS.

I infer from Judge Jordan’s Wikipedia page here and even this opinion with some hyperbole that Judge Jordan is not an IRS skeptic like some other judges; Judge Jordan’s appointment to the Court of Appeals was unanimous (91 for, 0 against, and 9 not voting (including then Senator Biden). See Senate Vote Summary, here.

So what is Judge Jordan’s disaffection with the IRS? The Court summarizes in the next two paragraphs:

The IRS sent Jennifer Zuch a notice informing her that it intended to levy on her property to collect unpaid tax. She challenged the levy, arguing that she had prepaid the tax. The IRS Independent Office of Appeals (the "IRS Office of Appeals") sustained the levy, and Zuch petitioned the United States Tax Court for review of that decision. While the issue was being litigated in that Court over several years, the IRS withheld tax refunds owed to Zuch and applied them to what it said was her unpaid balance, satisfying it in full. When, according to the IRS's accounting, there was no more tax to be paid, the IRS filed a motion to dismiss the Tax Court proceeding for mootness, and the Court granted the motion.

Because Zuch's claim is not moot, we will vacate the dismissal and remand this matter to the Tax Court to determine whether Zuch's petition is meritorious.