New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (11/29/18)

A vital part of the tax practitioners' toolkit is awareness of the IRS voluntary disclosure procedure and knowing when and how to invoke it (as well as the alternatives to it).  I have just posted on the IRS's changes to its voluntary disclosure practice.  See New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (Federal Tax Crimes Blog 11/29/18), here.

Federal Tax Procedure Supplement Published (11/28/18)

I have posted the first supplement to the Federal Tax Procedure Books, here.

Readers should be aware that I provide the supplement only to provide key updates or corrections that I think will be helpful to tax procedure students using the Student Edition of the book (although I do include the footnotes for the items I include).

The actual working draft of the Editions contain hundreds of revisions (for updating, better wording or corrections).  I only include a few in the supplement.  All will be included in the 2019 editions which I will release in August 2019.

A Strong Defense of Auer Deference (10/30/18)

A lot of judicial and commentator angst has surfaced in recent years about so-called Auer deference.  Auer deference is accorded to sub-regulatory interpretations of ambiguous regulations text.  It is analogous to Chevron deference regulations interpretations of ambiguous statutory text.  It basically says that reasonable agency subregulatory interpretations of ambiguous regulations will be respected.  Auer deference is named for the case, Auer v. Robbins, 519 U.S. 452 (1997), but it is also referred to as Seminole Rock deference named for an earlier case, Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).  In a nutshell, arguments against Auer deference are that (i) conservatives don't like agencies to have much power (I am not sure this is a legal argument rather than an ideological one to limit the big state); (ii) Chevron deference is one thing, but allowing the agency the power to promulgate ambiguous regulations that it can then manipulate by subregulatory power is just too much, and (iii) some subthemes within these themes.

In United States v. Havis, ___ F.3d ___, 2018 U.S. App. LEXIS 29628 (6th Cir. 2018), here, Judge Stranch in concurrence has a short and robust argument for Auer deference.  Since I am an Auer (and Chevron) fan (because I believe that Auer like Chevron is reasonably constrained), I offer here Judge Stranch's argument (cleaned up):

I write separately to explain why Auer deference presents no constitutional problem. See Auer v. Robbins, 519 U.S. 452, 461 (1997). As we note here (Lead Op. at 4, 5), Mistretta made clear that the Sentencing Commission is not at odds with the principle of separation of powers because Congress may delegate complex matters to coordinate Branches as long as it clearly delineates the general policy, the agency to apply it, and sets the boundaries of this delegated authority" Mistretta v. United States, 488 U.S. 361 (1989). We also reference Stinson v. United States, 508 U.S. 36 (1993), which established that commentary promulgated by the Sentencing Commission is authoritative unless it violates the Constitution or a federal statute, or is inconsistent with, or a plainly erroneous reading of, that guideline. Supreme Court authority thus established the boundaries of deference. Violation of these boundaries resulted in our acknowledgement that the Sentencing Commission may not escape its statutory mandate, which requires that new Guidelines be adopted through notice and comment rulemaking, subject to Congressional review.  

It is true that the Government asked us to defer to Commission commentary instead, but its request is not evidence that Auer, Mistretta, and Stinson create some irreparable problem. We can hardly fault the Government for advancing an argument that seeks to enhance its position. That is the job of attorneys who represent parties in litigation. Instead of creating a constitutional problem, the Government's argument mobilized a constitutional principle that Auer deference anticipates: regardless of what interpretation the Government proposes, it is the court that ultimately decides whether a given regulation means what the agency says. 

Nor does it appear to me that immense power has been granted to agencies pursuant to Auer. Agencies do not get to decide within a vacuum: they operate within a complex system of checks and balances. To begin with, agency power is derivative of the statutory grant that creates the entity and defines the scope of its power. Our deference doctrines are thus an application of the authority that the legislature chose to grant in particular circumstances. And while the scope of the granted authority may be broad, it operates within specified limits. An agency's rulemaking must comply with the statute, and the agency's interpretation must comply with the rule. It is the courts that ultimately determine whether the agency has acted within the scope of its statutory grant. Perez also reminds us that not only do agency statutes often contain their own safe-harbor or other limiting provisions, but the APA itself contains a variety of constraints on agency decisionmaking—the arbitrary and capricious standard being among the most notable. 

Finally, I am perplexed by the argument that Auer has led agencies to regulate in a way that is broad and vague with, apparently, the goal of creating maximum leeway to define the meaning of a regulation somewhere down the road. That claim assumes a world of political continuity and agency longevity that we would be hard pressed to find today. It also ignores multiple incentives and constraints. Consider the internal pressures within the agency and throughout the governing executive branch to implement the agency's program and the external pressures from those regulated and their lobbyists to obtain predictability, both of which encourage clear regulations. These stakeholders are focused on bringing their own expertise to bear on highly complex, policy-driven issues that play out on a very practical level. This argument relies on one more dubious assumption—that agency action is driven by the views of the courts on Auer deference. It seems to me that the immediate pressures listed above are far more salient. Research supports this conclusion. One recent study showed that barely half of agency drafters responding to a survey even knew what Auer was, and even fewer considered it when drafting rules.  

Since the 1930s, courts have recognized that in our increasingly complex society, replete with ever changing and more technical problems, Congress must be able to delegate power according to common sense and the inherent necessities of the government co-ordination. The Supreme Court has long recognized the need for some level of judicial deference to the agencies that, guided by empirical research and experience, focus on mastery of a particular set of complex issues. The current arguments for curtailing agency deference risk dismissing a system that Congress created out of a need to employ the significant expertise held by agencies and their stakeholders in complex areas of the law and instead substituting courts that are ill-equipped for the task. Our carefully developed doctrines of deference strike the proper balance among our three branches by respecting both the exercise of legislative authority and the judiciary's right to make the ultimate decision whether a given regulation means what the agency says.

By the way, the argument is also an argument for Chevron deference.

Judge Stranch is an Obama nominee.  See Wikipedia, here.

GAO Report on IRS Whistleblower Processing and Improvement of Data Controls (10/30/18)

The GAO issued a report titled "Whistleblower Program: IRS Needs to Improve Data Controls for Some Award Determinations (GAO-18-698 published 9/28/18 and publicly released 10/29/18).  The fast facts, highlights and recommendations are here.  The full report is here.

I cut and paste the highlights below:

What GAO Found 

Prior to February 9, 2018, when Congress enacted a statutory change requiring the Internal Revenue Service (IRS) to include penalties for Report of Foreign Bank and Financial Accounts (FBAR) violations in calculating whistleblower awards, IRS interpreted the whistleblower law to exclude these penalties from awards. However, GAO found that some whistleblowers provided information about FBAR noncompliance to IRS. In a sample of 132 whistleblower claims closed between January 2012 and July 2017, GAO found that IRS assessed FBAR penalties in 28 cases. It is unknown whether the whistleblower's information led IRS to take action in all of these cases. These penalties totaled approximately $10.7 million. Had they been included in whistleblower awards, total awards could have increased up to $3.2 million. Over 97 percent of the FBAR penalties collected from these 28 claims came from 10 cases with willful FBAR noncompliance, for which higher penalties apply.

Report of Foreign Bank and Financial Accounts (FBAR) Penalties and Potential Whistleblower Awards for Selected IRS Whistleblower Claims Closed between January 1, 2012, and July 24, 2017

FBAR penalty type	Number of claims	FBAR penalty amount (dollars)	Maximum potential whistleblower awarda(dollars)
Willful penalty	10	10,485,847	3,145,754
Non-willful & negligent penalty	18	263,039	78,912
Total	28	10,748,886	3,224,666

Source: GAO analysis of IRS data. | GAO-18-698
a Maximum potential award is defined as 30 percent of the FBAR penalty amount.

IRS forwards whistleblower allegations of FBAR noncompliance to its operating divisions for further examination. However, IRS Form 11369, a key form used for making award determinations, does not require examiners to include information about the usefulness of a whistleblower's information FBAR and other non-tax issues. After Congress enacted the statutory change, IRS suspended award determinations for 1 week, but resumed the program before updating the form or its instructions, or issuing internal guidance on new information required on the Form. As of June 28, 2018, IRS had not begun updating the Form 11369 or its instructions. The lack of clear instructions on the form for examiners to include information on FBAR and other non-tax enforcement collections may result in relevant information being excluded from whistleblower award decisions.

IRS maintains FBAR penalty data in a standalone database. It uses these data for internal and external reporting and to make management decisions. Because of the change in statute, IRS will need these data for determining whistleblower awards. GAO found that IRS does not have sufficient quality controls to ensure the reliability of FBAR penalty data. For example, IRS staff enter data into the database manually but there are no secondary checks to make sure the data entered are accurate. Without additional controls for data reliability, IRS risks making decisions, including award determinations, with incomplete or inaccurate data. 

This is a public version of a sensitive report issued in August 2018. Information on the FBAR Database that IRS deemed to be sensitive has been omitted. 

Why GAO Did This Study 

Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007, according to IRS. IRS pays qualifying whistleblowers between 15 and 30 percent of the proceeds it collects as a result of their information. However, until February 9, 2018, IRS did not pay whistleblowers for information that led to the collection of FBAR penalties. 

GAO was asked to review how often and to what extent whistleblower claims involve cases where FBAR penalties were also assessed. Among other objectives, this report (1) describes the extent to which FBAR penalties were included in whistleblower awards prior to the statutory change in definition of proceeds; (2) examines how IRS used whistleblower information on FBAR noncompliance, and how IRS responded to the statutory change in definition of proceeds; and (3) describes the purposes for which IRS collects and uses FBAR penalty data, and assesses controls for ensuring data reliability. GAO reviewed the files of 132 claims closed between January 1, 2012, and July 24, 2017, that likely included FBAR allegations; analyzed IRS data; reviewed relevant laws and regulations, and IRS policies, procedures and publications; and interviewed IRS officials. 

What GAO Recommends 

GAO recommends IRS update IRS Form 11369 and improve controls for the reliability of FBAR penalty data. IRS agreed with all of GAO's recommendations.

JAT Comments:

Attorney Fraud Resulting in Tax Court Decision; Can It Be Corrected? How? (10/16/18; 10/17/18)

This article caught my attention today:  Bruce Vielmetti, Former Foley & Lardner partner suspended for falsifying documents in IRS audit of Carmex family (Journal Sentinel 10/16/18), here.  The opening paragraph says:

A former Foley & Lardner partner was suspended two years Tuesday by the state Supreme Court for lying to the IRS during an audit of two wealthy estates connected to a major area business.  

So, I went to the Wisconsin Supreme Court opinion which is here.  I offer the the pertinent portions relevant to the issue I address here as to whether and how the IRS can correct a tax under-assessed because of a Tax Court decision induced by fraud.

¶6 While working at the Foley firm, Attorney Wiensch provided estate planning services to a husband and wife who were owners of a privately owned business corporation. Attorney Wiensch prepared a trust under the terms of which the husband and wife were the trust donors and their children were the trustees and beneficiaries. Attorney Wiensch drafted an  Installment Sale Agreement, pursuant to which the husband sold most of his stock in the company to the trust in exchange for a promissory note in an amount in excess of $50 million based on the appraised value of the stock sold. The purpose of the stock sale was to transfer wealth to the clients' children, via the trust, free of gift and estate taxes and to ensure that any future appreciation of the stock held by the trust would not become part of the husband's estate. 

¶7 Transactions structured like the stock sale are reviewed by the Internal Revenue Service (IRS) to determine if the promissory note is a bona fide debt, or if the transaction should be treated as a taxable gift, or if transferred assets should be included in the seller's gross estate for purposes of determining the estate tax liability. Strategies used by estate planning professionals to minimize the risk of an IRS challenge to transactions such as the stock sale have included the use of personal guarantees by trust beneficiaries of a certain percentage of the sale price, often ten percent, or of a defined value formula clause that automatically adjusts valuation of the transferred assets based on a final determination by the IRS or a court. 

¶8 The husband died first, and pursuant to his estate plan, ownership of his remaining shares in the company passed to his wife as the surviving spouse. Attorney Wiensch was retained to represent the husband's estate. Attorney Wiensch prepared the estate tax return for the husband's estate and filed it with the IRS. The IRS audited the husband's estate tax return, as well as other gift tax returns filed on behalf of the clients for years prior to the husband's death.  

¶9 An IRS estate tax attorney served as the examiner for the IRS in conducting the audit. The IRS attorney corresponded with Attorney Wiensch in an effort to obtain information material to the audit. In September 2012, in response to requests from the IRS attorney, Attorney Wiensch sent the IRS copies of an Installment Sale Agreement, a Collateral Pledge Agreement, and a Guaranty of Specific Transaction. Attorney Wiensch represented to the IRS that the Installment Sale Agreement memorialized the terms of the stock sale and that the Collateral Pledge and Guaranty related to the stock sale. The copy of the Installment Sale Agreement Attorney Wiensch sent to the IRS in September 2012 contained a defined value formula clause. Attorney Wiensch altered and misdated the Installment Sale Agreement he sent to the IRS in September 2012. He did not prepare this document contemporaneously with the stock sale. The Installment Sale Agreement the husband actually executed on an earlier date did not contain the defined value formula clause.

Justice Kavanaugh in the Federal Tax Procedure Book (10/6/18)

I thought in view of the elevation of Judge Brett Kavanaugh to Justice of the Supreme Court, I would include some of my many citations to him in the Federal Tax Procedure book.  The following are from the working draft for the 2019 editions (Student and Practitioner) which may be somewhat different from the 2018 editions.

[On Calling Balls and Strikes]

Consider Justice Roberts' famous statement in his confirmation hearings that “Judges are like umpires. Umpires don’t make the rules, they apply them;” his job, he proclaimed, as a judge and prospective Supreme Court Justice was to call “balls and strikes.” Continuing the baseball metaphor, however, a leading jurist, Justice Brett Kavanaugh, says:

[T]he current situation in statutory interpretation, as I see it, is more akin to a situation where umpires can, at least on some pitches, largely define their own strike zones. My solution is to define the strike zone in advance much more precisely so that each umpire is operating within the same guidelines. If we do that, we will need to worry less about who the umpire is when the next pitch is thrown.” fn

fn Brett M. Kavanaugh, Book Review: Fixing Statutory Interpretation, 119 Harv. L. Rev. 2118, 2121 (2016).

* * * *

[Kavanaugh on Justice Scalia's impact on statutory interpretation]

Justice Scalia’s impact on statutory interpretation by focus on the text of the statute, to the exclusion of external sources, has been described as effecting a “a massive and enduring change in American law.” Brett M. Kavanaugh, Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118 (2016) (the article is a book review of Robert Katzmann, Judging Statutes (Oxford Univ. Press 2014) (which advocates a broader approach to interpretation, including specific use of legislative history); Justice Kavanaugh strongly defends Scalia’s approach to statutory interpretation).

* * * *

[Discussing textualism and its constitutional counterpart "orginalism"; this is in a footnote]

Judge Kavanaugh, Supreme Court Nominee, on Constitutional and Statutory Interpretation (Including Chevron) (9/8/18)

This week's confirmation hearings for Judge Kavanaugh, Trump's nominee to the Supreme Court, covered some issues that are near and dear to tax procedure enthusiasts.  Two are:

1.  Originalism.  

Judge Kavanaugh pronounced that originalism is “constitutional textualism, meaning the original public meaning of the constitutional text.”  So, as articulated, that would be the public meaning at the time the constitutional provision in issue was included in the constitution.  That is a stark statement of originalism.  In fact, originalism has many shades, some of which permit other considerations in interpreting the constitutional text.  For example, Judge Kavanaugh himself qualified his definition by saying that the original public meaning is “informed by history, tradition and precedent.” I think he means that he is willing to consider something that may not be exactly the original public meaning.  I think that, with that caveat, all justices and perhaps all judges are originalists.

I transcribed the quotes in the above paragraph from the video clip Will Baude, The Best Parts of the Kavanaugh Hearing (The Volokh Conspiracy 9/5/18), here.

Since the analog for originalism is textualism, I have revised my discussion in the working draft for the next edition of the Federal Tax Procedure Book.  Most of the revisions are to some footnotes, so I include the text and some of the footnotes at the end of this blog.

2.  Chevron.

Judge Kavanaugh is not a fan of Chevron deference to agency interpretations.  I generously quoted and cited from Judge Kavanaugh's article, Brett M. Kavanaugh, Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118 (2016) ,in my paper IRS Guidance – Rulemaking and Deference to IRS Statutory Interpretation, here,, so I won't get into that right except to note that, at the end of the article, I discussed the political / ideological winds against Chevron, concluding that ridding statutory interpretation of Chevron deference may be a bad idea whose time has come.  If Chevron meets its end or substantial retreat, I am sure Judge (presumably then Justice Kavanaugh) will make his contribution.

I also recommend to readers this informative commentary posted during the hearings:  Cary Coglianese, The Ambiguity in Judge Kavanaugh's Chevron Critique (The Regulatory Review 9/6/18), here.  A key excerpt:

Despite his overarching criticism of Chevron, Judge Kavanaugh does acknowledge that actually “Chevron makes a lot of sense in certain circumstances”: 

It affords agencies discretion over how to exercise authority delegated to them by Congress. For example, Congress might assign an agency to issue rules to prevent companies from dumping “unreasonable” levels of certain pollutants. In such a case, what rises to the level of “unreasonable” is a policy decision. So courts should be leery of second-guessing that decision. The theory is that Congress delegates the decision to an executive branch agency that makes the policy decision, and that the courts should stay out of it for the most part. That all makes a great deal of sense. 

Perhaps senators and the rest of us will be forgiven for thinking that what makes great sense to Judge Kavanaugh sounds an awful lot like the Chevron doctrine.

EXCERPTS FROM WORKING DRAFT OF THE NEXT FTPB EDITION (EXPECTED SUMMER 2019):