Wednesday, January 29, 2014

Revised Opinion in TFRP Case Involving Flora Full Payment Requirement (1/29/14; 2/21/14)

I recently blogged on the Court of Federal Claims' Kaplan case, Kaplan v. United States, 2013 U.S. Claims LEXIS 1530 (10/9/13) application of the Flora rule in the Section 6672, TFRP contextg.  See Litigating Trust Fund Recovery Penalties -- the Flora Rule, Divisible Taxes and Unfairness (Federal Tax Crimes Blog 10/11/13), here.  Readers unfamiliar with the contents of that blog entry might want to review it.  The essence of the concern discussed was a dismissal because of the taxpayer's inability to prove sufficient payment of the TFRP divisible tax for one employee per quarter and show that the amount he paid ($100) was sufficient.

Judge Wheeler has a revised the opinion, Kaplan v. United States, 2014 U.S. Claims LEXIS 24 (2014), here.

Here is the basis for the new opinion:
However, in order to establish the Court's subject matter jurisdiction, Mr. Kaplan must prove by a preponderance of the evidence that he has paid the assessed tax for at least one employee. Cencast Servs., L.P. v. United States, 94 Fed. Cl. 425, 435 n.7, 439 (2010), aff'd, 729 F.3d 1352 (Fed. Cir. 2013). More precisely, he must show that his payments of $100 were sufficient to cover the full assessment attributable to at least one employee in each quarter. This, of course, cannot be done without some record of the amount of payroll taxes assessed per employee per quarter. In his motion for reconsideration, Mr. Kaplan relates in detail his diligent but futile efforts at obtaining these records. Pl.'s Mot. for Recons. 6-11. He then explains that he is unable to provide this evidence for exactly the same reason he is not liable for the assessed taxes, that is, he is not a responsible person under § 6672. Id. at 12. 
Thus, assuming these representations are true, Mr. Kaplan is caught in an "evidentiary Catch-22." In order to prove the merits of his argument that he is not a "responsible person," he must first produce the evidence for which he is not responsible. This inequity is magnified by the fact that the Government is itself unable to state what minimum payment would be sufficient. See id. at 9-10; Def.'s Resp. to Pl.'s Mot. for Recons. 7.\ 
In the end, the merits of this case will turn on whether Mr. Kaplan is liable for the full $86,902.76 penalty, and the divisible amount at issue is merely representative of that full amount. Indeed, "[w]hen a taxpayer sues for a refund based on a divisible refund claim, it is meant to 'test the validity of the entire assessment. '" Cencast, 729 F.3d at 1366 (quoting Lucia v. United States, 474 F.2d 565, 576 (5th Cir. 1973)). Under the circumstances of this case, the Court is not inclined to prevent Mr. Kaplan from challenging that full assessment in this forum simply because the representative amount he paid might not be representative enough. Accordingly, the Court accepts the three $100 payments as sufficient to establish subject matter jurisdiction. See, e.g., Schultz v. United States, 918 F.2d 164, 165 (Fed. Cir. 1990) (accepting plaintiff's payment of $100 toward the $20,691.38 penalty assessed against him); Cook v. United States, 52 Fed. Cl. 62, 66 (2002) ($97,760.00 penalty).
I don't have time to develop the concept here, but I think this is a further holding in a line of cases that responsibly mitigate the full bore and inequitable application of the Flora rule.  Congratulations to Professor Rubinstein, counsel for the taxpayer, and kudos to Judge Wheeler.

Addendum 2/21/14 11:30 pm:

Professor Rubinstein has written two outstanding guest blogs for Procedurally Taxing.  They are:

  • Refund Suits, Divisible Taxes and Flora: When is a representative payment representative enough? Part 1 (2/17/14), here.
  • Refund Suits, Divisible Taxes and Flora: When is a representative payment representative enough? Part 2 (2/19/14), here.

Tuesday, January 28, 2014

Fifth Circuit Allows Tax Court Discretion in the Application of the Cohan Rule (1/28/14)

In Shami v. Commissioner, 741 F.3d 560 (5th Cir. 2014), here, the Fifth Circuit affirmed the Tax Court's denial R&D credits claimed by the taxpayer.  One of the taxpayer's arguments was that the Tax Court should have applied the Cohan rule, named for named for Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), here,  to allow some credits.  In rejecting the argument, the Fifth Circuit explained the "venerable" Cohan rule and its limitations, including the discretion allowed the trier of fact (bold facing supplied by JAT]:
Petitioners next assert that "[t]he use by [FSI] of [estimates of the amount of time Shami and McCall spent performing qualified services] was indisputably permissible" and that the type of documentation provided was adequately supportive. We disagree. 
First, Petitioners' claim is waived. In their initial brief, the extent of Petitioners' argument is the sentence quoted above and a citation to this court's precedent in United States v. McFerrin [570 F.3d 672 (5th Cir. 2009)], which, following the venerable Second Circuit case Cohan v. Commissioner, held that "[i]f the taxpayer can establish that qualified expenses occurred . . . , then the court should estimate the allowable tax credit." Aside from a parenthetical to the citation, Petitioners make no effort to explain the Cohan rule or how it would apply to their case. Petitioners make only the bare assertion that their use of estimates was appropriate. Petitioners therefore have waived this issue by failing to brief it adequately. 
In the alternative, Petitioners' claim fails on the merits. A line of case law—beginning with the Second Circuit's decision in Cohan—holds that if a taxpayer proves that he is entitled to a tax benefit but does not substantiate the amount of the tax benefit, the court "should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." The underlying logic of the rule is that allowing no benefit at all "appears . . . inconsistent with [the finding] that something was spent." In McFerrin, this court held that the Cohan rule applies in the context of the § 41 credit. 
Cohan did not compel the Tax Court to make an estimate in this case. As the preceding discussion makes clear, the Cohan rule is not implicated unless the taxpayer proves that he is entitled to some amount of tax benefit. In the context of the § 41 credit, a taxpayer would do so by proving that its employee performed some qualified services. In this case, a careful reading of the Tax Court's opinion reveals that the Tax Court made no such finding. 
Even if the Tax Court had determined that Petitioners proved that Shami and McCall performed some amount of qualified services, Cohan and McFerrin are not the only case law on this issue. As the Tax Court observed, another decision of this court issued between those two cases explains that the Tax Court has discretion to make an estimate under Cohan. In Williams v. United States [245 F.2d 559 (5th Cir. 1957)], this court made clear that, even though the Tax Court "might have considerable latitude in making  estimates of amounts probably spent," the Cohan rule "certainly does not require that such latitude be employed." Our decision in Williams explicitly held that the Tax Court "may not be compelled to estimate even though such an estimate, if made, might have been affirmed." This was so because "the basic requirement is that there be sufficient evidence to satisfy the trier that at least the amount allowed in the estimate was in fact spent or incurred for the stated purpose," and "[u]ntil the trier has that assurance from the record, relief to the taxpayer would be unguided largesse."

Tax Court Holds It Lacks Jurisdiction to Review Interest Suspension Under 6404(h) (1/28/14)

Professor Leslie Book has another great blog on a recent tax court case, Corbalis v. Commissioner, 142, T.C. ___, No. 2 (2014), here.  See Corbalis v Commissioner: Tax Court Holds it Has Jurisdiction to Review Interest Suspension Decisions (Procedurally Taxing Blog 1/28/14), here.

The Tax Court's summary of the decision is:
Petitioners seek judicial review of Letters 3477 denying their claim for interest suspension under I.R.C. sec. 6404(g) and stating that the determinations are not subject to judicial review under I.R.C. sec. 6404(h). Respondent has moved to dismiss for lack of jurisdiction. 
Held: The Court has jurisdiction under I.R.C. sec. 6404(h) to review denials of interest suspension under I.R.C. sec. 6404(g). 
Held, further, the Letters 3477 were final determinations for purposes of I.R.C. sec. 6404(h) even though petitioners' concurrent claims for abatement under I.R.C. sec. 6404(e) were still pending.
I refer readers to the Procedurally Taxing Blog entry for a further rounded discussion of the Corbalis decision.

I want to bore down on a subsidiary question addressed in the Corbalis decision -- the deference, if any, to be accorded Revenue Procedures.  The Revenue Procedure made a distinction between types of 6404 relief, stating that one type may be entitled to judicial review and not the other, but provided no reasoning.  The Court said:
In many cases, we have discussed the deference due to pronouncements of the IRS. See, e.g., Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 208-210 (2009) (dealing with a disputed revenue ruling), aff'd, 679 F.3d 1109 (9th Cir. 2012). Revenue rulings are "an official interpretation by the Service". Sec. 601.601(d)(2)(i)(a), Statement of Procedural Rules. By contrast, section 601.601(d)(2)(i)(b), Statement of Procedural Rules, states that "[a] 'Revenue Procedure' is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code and related statutes or information that, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge." A statement of procedure does not purport to be an official interpretation, and respondent does not argue here that the procedure is entitled to deference as an interpretation of section 6404. The revenue procedure, in respondent's terms, "provides guidance for circumstances" in which taxpayers may file a claim for abatement of interest that should have been suspended. Respondent argues only "an intuitive interpretation" of the procedural guidance. 
There is no reasoning in support of the conclusion stated in the revenue procedure, and we discern none for distinguishing between section 6404(e) requests and section 6404(g) requests. Thus, the revenue procedure is not entitled to deference. See Exxon Mobil Corp. v. Commissioner, 689 F.3d 191, 200 (2d Cir. 2012), aff'g 136 T.C. 99, 117 (2011). A procedural pronouncement cannot restrict or revise section 6404(h). See Commissioner v. Schleier, 515 U.S. 323, 336 n.8 (1995); Estate of Kunze v. Commissioner, 233 F.3d 948, 952 (7th Cir. 2000), aff'g T.C. Memo. 1999-344. The wording and context of the statute, supplemented by more general legal principles, control.

Saturday, January 25, 2014

Yet Another BullShit Tax Shelter Goes Down Flaming (1/25/14)

In NPR Investments, LLC v. United States, 740 F.3d 998 (5th Cir. 2014), here, following the Supreme Court's lead in United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Fifth Circuit applied the 40% gross valuation misstatement penalty to the partnership's bullshit tax shelter (the Son-of-Boss (SOB) type shelter).  For discussion of Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. The 40% penalty will, of course, be applied to the partners, which will then permit them to assert in a separate refund proceeding any partner level defenses they may be entitled to.

I could perhaps leave it at that, but there are some interesting features of the case.

Let's start with some the facts recounted by the Court:
Harold Nix, Charles Patterson, and Nelson Roach are partners in the law firm of Nix, Patterson & Roach, LLP. They represented the State of Texas in litigation against the tobacco industry and in 1998 were awarded a fee of approximately $600 million that is to be paid over a period of time. They also received fees totaling approximately $68 million in connection with tobacco litigation in Florida and Mississippi. Nix, Patterson, and Roach share the fees 40%, 40%, and 20%, respectively. 
Nix and Patterson have participated in at least two "Son-of-BOSS" tax shelters. BOSS stands for "Bond and Options Sales Strategy." Courts, including our court and the district court in this case, have described a Son-of-BOSS transaction as "a well-recognized 'abusive' tax shelter." Artificial losses are generated for tax deduction purposes. 
Before creating NPR and engaging in the transactions at issue in this appeal, Nix and Patterson invested in another Son-of-BOSS tax shelter, known as BLIPS. It involved sham bank loans, and our court considered various tax issues related to Nix's and Patterson's transactions with regard to that shelter in Klamath Strategic Investment Fund ex rel. St. Croix Ventures v. United States.
Further, here is a critical fact conceded apparently for strategic reasons:
The joint pre-trial order in the district court reflects that NPR, Nix, Patterson, and Roach conceded that NPR lacked a profit motive during 2001.
 All of the "investors" in SOB shelters claimed that their profit motive inhered in some long-shot investment razzle-dazzle which they called the "sweet spot," wherein the economic circumstances would line up to generate a profit from the adventure. Some of the taxpayers involved, although having large otherwise uncovered income, claimed that they did not consider the tax consequences at all but focused instead solely on the sweet spot opportunity.  However, the taxpayers in NPR (the ultimate taxpayers were involved by the attorney R.J. Ruble (since convicted of tax crimes for his participation in tax shelters, including SOB shelters) apparently did consider the tax consequences (duh!):

Saturday, January 18, 2014

DC Court Rejects Bankers Attack on FATCA Regs (1/18/14)

In Fla. Bankers Ass'n v. United States Dep't of Treasury, 2014 U.S. Dist. LEXIS 3521 (D.D.C. 2014), here, the court sustained the IRS regulations "the regulations requir[ing] U.S. banks to report the amount of interest earned by accountholders residing in foreign countries."

The Court says in its opening:
The Bankers Associations contend, in a Motion for Summary Judgment, that the IRS got the economics of its decision wrong and that the requirements will cause far more harm to banks than anticipated. Because the Service reasonably concluded that the regulations will improve U.S tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor — other than a tax evader — to withdraw his funds from U.S. accounts, the Court upholds the regulations and grants the Government's Cross-Motion for Summary Judgment.
In reaching this decision, the Court rejected various challenges to the regulations based on the Administrative Procedure Act, often referred to as APA, and the Regulatory Flexibility Act.  Interestingly, the Court did reject the Government's threshold argument that the suit was barred by the Anti-Injunction Act, Section 7421(a), concluding:
Although the Court owes some deference to the Government's opinion of whether or not the AIA applies, see Seven-Sky v. Holder, 661 F.3d 1, 13 (D.C. Cir. 2011), abrogated on other grounds by Nat'l Fed'n of Indep. Bus., 132 S. Ct. 2566, it must nevertheless heed the D.C. Circuit's admonition that the AIA does not bar suits like this one brought merely for "purpose of enjoining a regulatory command." Id. at 8. Indeed, the AIA "has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement," even if a tax-related penalty could follow. Id. at 9. And the regulations at issue here, like the Foodservice reporting requirement, fit that bill. As the DJA and AIA are coterminous, neither Act prevents the Bank Associations' suit.

Ninth Circuit Substantially Affirms Adjustments for Bullshit Tax Shelter (1/18/14)

In Candyce Martin 1999 Irrevocable Trust v. United States, 739 F.3d 1204 (9th Cir. 2014), here, the Ninth Circuit largely affirmed the IRS's partnership adjustments denying the benefits of a bullshit tax shelter.  For an earlier blog on another aspect of this case at the trial level, see The Role of the Taxpayer's Independent Lawyer in Tax Shelter Promotions with Promoter Opinions (10/8/11), here.

In the appeal case just decided, the Court (Judge Thomas) opens with
In this appeal, we examine some of the tax consequences arising from the sale of the Chronicle Publishing Company and, specifically, whether the Internal Revenue Service's proposed adjustment of certain partnership tax items was time barred. Although the ultimate issue is relatively straightforward, both the back story and the legal framework are somewhat complex, requiring us to delve deep in the heart of taxes.
I won't try to deleve deep in the heart of taxes, but will just state that the case, involving multi-tiered partnerships, ultimately turned on an interpretation of a restrictive consent to extend the statute of limitations.  The consent involved was the Form 872-I executed by the Martin Family Trusts, the ultimate partner.  The Form 872-I is titled:  Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. An unrestricted version of that form is here.  The restriction in the Form in the case was:
The amount of any deficiency assessment is to be limited to that resulting from any adjustment directly or indirectly (through one or more intermediate entities) attributable to partnership flow-through items of First Ship LLC, and/or to any adjustment attributable to costs incurred with respect to any transaction engaged in by First Ship LLC, any penalties and additions to tax attributable to any such adjustments, any affected items, and any consequential changes to other items based on any such adjustments.
Essentially, the Court held that, because of the wording of the restrictions, the consent applied to the bulk of the adjustments (some $318 million) in issue but did not apply to others (some $4 million).  So, it appears to be a substantial win for the Government.

See also Reminder on Sweep of Form 872-I, Partner Level Consent to Extend Statute of Limitations (Federal Tax Procedure Blog 11/23/12), here.

DC Circuit Decides Proper Venue for CDP Appeals Not Involving Challenge to Liability (1/18/14)

Professor Leslie Book has this great post on the DC Circuit's decision yesterday in Byers v. Commissioner, ___ F.3d ___, 2014 U.S. App. LEXIS 933 (DC Cir. 2014), here.  See DC Circuit Decides Byers: Venue in Appeal of CDP Cases Upended (Procedurally Taxing 1/17/14), here.  Professor Book aptly summarizes the holding as:
Byers essentially held that in CDP cases where there is no challenge to the underlying liability, venue for an appeal is the DC Circuit Court of Appeals, unless the parties stipulate otherwise. For CDP cases where there is a mixed question of liability and collection matters, or a CDP case where there is solely a question as to the amount or existence of an underlying liability, venue for individuals would likely be tied to the legal residence of the taxpayer at the time of filing the petition, or, if a corporation, the principal place of business or principal office or agency of the corporation.
I strongly recommend Professor Book's blog entry for much more nuanced discussion of the issues.

For related discussion, see Golsen and Small Cases -- S Cases -- in the Tax Court (Procedurally Taxing 1/15/14), here.

Court of Federal Claims Transfers to Tax Court Case Failing Flora Full Payment Rule (1/18/14)

Caution: the decision discussion immediately below has been reversed; the revised decision is discussed toward the end of this blog.

In Clark v. United States, 2014 U.S. Claims LEXIS 3 (Fed. Cl. 2014), here, the Court of Federal Claims, Chief Judge Campbell-Smith, found that the pro-se complaint the taxpayer filed failed to meet the Flora requirement for full payment but, since the complaint had been filed during the 90 days that the plaintiff could have petitioned the Tax Court, the case was ordered transferred to the Tax Court.

I had never seen this disposition before and just thought I would call it to readers' attention in case they ever needed it for their bag of tricks.
Plaintiff has not alleged that she has paid the tax at issue in her tax refund suit. This court does not have jurisdiction to entertain her claim unless the tax has been paid in full. See Flora, 357 U.S. at 75. Plaintiff recognizes that her claim should have been brought before the Tax Court. 
The court next considers whether the claim merits transfer. Plaintiff attached to the complaint the Notice of Deficiency letter from the  [*5] IRS, which contained instructions to file a petition with the Tax Court if plaintiff wished to contest the IRS determination before making any payment. See Notice of Deficiency Letter 1. Plaintiff's deadline to petition the tax court was November 4, 2013. See id. Plaintiff filed suit in this court on October 29, 2013. See generally Compl. According to plaintiff's letter from the IRS, plaintiff's attempt to protest the Notice of Deficiency would have been brought properly in the Tax Court on the date she filed here. The court therefore determines that the transfer of plaintiff's complaint to the United States Tax Court is "in the interest of justice." 28 U.S.C. § 1631. 
III. Conclusion 
For the foregoing reasons, the court finds that it lacks jurisdiction over plaintiff's claim. Plaintiff's motion to transfer is GRANTED. Pursuant to 28 U.S.C. § 1631, the complaint is TRANSFERRED to the United States Tax Court.
The authority cited, 28 USC, 1631 is here.   It short, so I cut and paste it:
Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

Supreme Court Grants Cert to Consider Summons Opponent's Right to Question IRS Personnel re Reason for Summons (1/18/14)

The Supreme Court granted certiorari in United States v. Clarke, 517 Fed. Appx. 689, 2013 U.S. App. LEXIS 7773 (11th Cir. 2013), here.  See the SCOTUS Blog on the case, here, which on an ongoing basis reports the Supreme Court developments in the case and has links to the briefs.  I previously reported on the Government's petition for writ of certiorari.  See Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (12/13/13), here.

The question presented, per the Government's petition, is:
Whether an unsupported allegation that the Internal Revenue Service (IRS) issue a summons for an improper purpose entitles an opponent of the summons to an evidentiary hearing to question IRS officials about their reasons for issuing the summons.
The Eleventh Circuit's opinion in Clarke and its predecessor opinions gave the opponent that right.  The other circuits do not give the opponent that right, but require that opponents develop their proof of improper purpose some other way.

Taxpayer Advocate Report on Efficacy of Accuracy-Related Penalties (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers?, here.  The following is the Executive Summary (one footnote omitted):
Executive Summary 
Accuracy-related penalties are supposed to promote voluntary compliance. Congress has directed the IRS to develop better information concerning the effects of penalties on voluntary compliance, and it is the IRS’s official policy to recommend changes when the Internal Revenue Code (IRC) or penalty administration does not effectively do so. The objective of this study was to estimate the effect of accuracy-related penalties on Schedule C filers (i.e., sole proprietors) whose examinations were closed in 2007. TAS compared their subsequent compliance to a group of otherwise similarly situated “matched pairs” of taxpayers who were not penalized. TAS used Discriminant Function (or “DIF”) scores — an IRS estimate of the likelihood that an audit of the taxpayer’s return would produce an adjustment — as a proxy for a taxpayer’s subsequent compliance. 
While all groups of Schedule C filers who were subject to an examination assessment improved their reporting compliance (as measured by reductions in their DIF scores), those subject to an accuracy-related penalty had no better subsequent reporting compliance than those who were not. Thus, accuracy-related penalties did not appear to improve reporting compliance among the Schedule C filers who were subject to them. Further, penalized taxpayers who were also subject to a default assessment or who appealed their assessment had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to similarly situated taxpayers who were not penalized. n2 Similarly, those whose penalty was abated had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to taxpayers whose penalty was not abated.
   n2 Except as otherwise indicated, all differences discussed in this report are statistically significant (with 95 percent confidence). We note, however, that the DIF is an approximate measure of reporting compliance, and small differences, although statistically significant, may not indicate a real difference in reporting compliance 
Prior research suggests that a taxpayer’s perception of the fairness of the tax law, the IRS and the government drive voluntary compliance decisions, and the findings of this study are consistent with that research. Taxpayers subject to default assessments may be more likely to feel the penalty assessment process was unfair, which may have caused lower levels of future compliance. Similarly, those who appeal may be more likely to feel that the actual result was unfair, which may have caused lower levels of future compliance. Finally, those subject to a penalty assessment that is later abated may also feel that the IRS initially sought to penalize them unfairly, potentially causing lower levels of future compliance. 

Wednesday, January 15, 2014

Golsen and Small Cases -- S Cases -- in the Tax Court (1/15/14)

Professor Keith Fogg of the Procedurally Taxing Blog has this excellent blog:  Forum Shopping in the Tax Court – Small Tax Case Procedure and the Rand Decision (Procedurally Taxing 1/14/14), here.  Here is an interesting blurb from  it that I hope encourage tax procedure enthusiasts to read and savor Keith's entire blog entry.
IRC 7463(a) creates a special procedure for cases in which less than $50,000 is in dispute for each taxable period, the Small Tax Case procedure (S procedure – so named because of the S that appears after the Tax Court docket number of these cases.)  To qualify for the S procedure the taxpayer must make an election to use this procedure and the Tax Court must concur.  The election usually occurs at the time the petition is filed but may be made at any time prior to the trial of the case pursuant to the statute and Tax Court Rule 171(b).  If the taxpayer elects the S procedure and if neither the taxpayer nor the Government requests the discontinuation of such procedure prior to the entry of the case as permitted by IRC 7463(d), then the decision of the Tax Court is the final decision of the case pursuant to IRC 7463(b) and is not subject to appeal. There are two excellent articles exploring the issue of the Golson rule and the S procedure.  Carl Smith, Does the Tax Court’s Use of its Golsen rule in Unappealable Small Tax Cases Hurt the Poor?, 11 J. Tax Prac. & Proc. 35 (2009-2010) and Saul Mezei and Joseph Judkins, “A Square Peg in a Round Hole: The Golsen Rule in S Cases” Tax Notes Today, January 8, 2012.  While it is unclear why the Tax Court decided to apply the Golson rule to cases that cannot receive appellate review, it is clear that it does so and has consistently done so for over 40 years.
Prefessor Fogg has a second installment on the subject, Current status of Rand cases and Praise for Tax Court Search Feature (Procedurally Taxing 1/15/14), here.

Incidentally, Professor Fogg advises of the Tax Court's new web search feature:
Today, I write to praise a really nice feature of the Tax Court’s electronic system, which is the ability to search for orders.  This is a remarkable feature of the Tax Court electronic system unlike search capabilities in other electronic court databases and deserves high praise.  It can be accessed from the home page of the Tax Court web site.  
For readers not familiar with the Golsen rule, here is the discussion in my Federal Tax Procedure book (footnotes omitted except for the final footnote):
c. The Golsen Rule.
The Tax Court follows the law of the Court of Appeals to which an appeal would be taken.  This is referred to in tax litigator jargon as the Golsen rule, named after the Tax Court case establishing the rule.  Accordingly, in determining whether the Tax Court is a favorable or unfavorable forum, you look not only to the precedent of the Tax Court but also the precedent of the Court of Appeals to which an appeal may be taken.  Unfavorable Tax Court precedent but favorable appellate court precedent will produce a winner in the Tax Court; favorable Tax Court precedent but unfavorable appellate court precedent will produce a loser in the Tax Court, in which case relief will come only if you can convince the Court of Appeals that it messed up in its earlier precedent (usually unlikely).

Monday, January 6, 2014

Continuous Levies May Apply to Continuing Payments for Remuneration (1/6/13)

I was reading a district court case this morning that assumed but did not discuss the validity of a continuous levy on LLC distributions.  United States v. 911 Management LLC et al.; No. 3:10-cv-01367 (D OR 2014) (I will  post a LEXIS citation later),  I thought this would be a good time to remind readers that statutory authority for such continuous levies is Section 6331(e), which provides:
(e) Continuing levy on salary and wages 
The effect of a levy on salary or wages payable to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released under section 6343.
The statute expressly limits the levy to "salary or wages."  But, at least in this case, the statutory terms are expanded to include other times of recurring remuneration for personal services.  As revised, here is the text from the current draft of my Tax Procedure Book (footnotes omitted):
Normally an administrative levy on a third party reaches only the property of the taxpayer that the third party has on the date that the levy is made. For example, if the IRS levies a bank account, the bank must turn over the balance on the date of the levy.  If the taxpayer makes a deposit the next day, that amount of the new deposit need not be turned over by the bank.  Notwithstanding this general moment in time nature of a levy, a levy on recurring “salary or wages” and personal service compensation (often called garnishments in other contexts) are continuing from the date of levy until the levy is released. § 6331(e).  The Regulations define the statutory terms “salary or wages” very broadly to include “compensation for services paid in the form of fees, commissions, bonuses, and similar items.” The courts have blessed this broader reading, sustaining, for example, continuous levies on payments (i) to independent contractors, such as commissioned agents, (ii) to partners as distributions, and (iii) to members of an LLC as distributions.  
I should note that, in the case cited, the lawyer apparently read the statutory language to include only "salary or wages" as those terms are usually defined and had the manager of the LLC advised the IRS:  [M]y attorney advised me to notify you that [the LLC] does not pay wages or salary to the [Taxpayer who received the distributions]."  Based on the lawyer's confusion as to the form used and some of the background facts and circumstances, the court foud:
[I]t was objectively reasonable for [the manager of the LLC] to rely on [the attorney's] advice to "report [to the IRS] that 911 Management does not pay wages or salary to [the Taxpayers" over [the IRS agent's] contemporaneous but contrary instructions.
So, the court relieved the manager from the penalty for failure to comply with the levy. The manager was lucky.  Here is my discussion of the penalty provision and reasonable cause escape (footnotes omitted):
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.  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.”

Friday, January 3, 2014

Carl Sagan on Spotting Baloney -- aka Bullshit (1/3/14)

I have written much -- at least in quantity -- on bullshit tax shelters.  I thought readers might like this offering from Brain Pickings:  Maria Popova, The Baloney Detection Kit: Carl Sagan’s Rules for Bullshit-Busting and Critical Thinking (Brain Pickings 1/3/14), here.  The rules are excerpted from Carl Sagan's The Demon Haunted World, here.  The key chapter in that book for the topic is titled "The Fine Art of Baloney Detection."  
Sagan approaches the subject from the most vulnerable of places — having just lost both of his parents, he reflects on the all too human allure of promises of supernatural reunions in the afterlife, reminding us that falling for such fictions doesn’t make us stupid or bad people, but simply means that we need to equip ourselves with the right tools against them.
Sort of reminiscent of investors in the bullshit tax shelters.  They sought the supernatural of the tax world -- as some courts have described it, too good to be true.  They weren't true.

Sagan's 10 rules as presented in the Brain Pickings Blog are:
  1. Wherever possible there must be independent confirmation of the “facts.”
  2. Encourage substantive debate on the evidence by knowledgeable proponents of all points of view.
  3. Arguments from authority carry little weight — “authorities” have made mistakes in the past. They will do so again in the future. Perhaps a better way to say it is that in science there are no authorities; at most, there are experts.
  4. Spin more than one hypothesis. If there’s something to be explained, think of all the different ways in which it could be explained. Then think of tests by which you might systematically disprove each of the alternatives. What survives, the hypothesis that resists disproof in this Darwinian selection among “multiple working hypotheses,” has a much better chance of being the right answer than if you had simply run with the first idea that caught your fancy.
  5. Try not to get overly attached to a hypothesis just because it’s yours. It’s only a way station in the pursuit of knowledge. Ask yourself why you like the idea. Compare it fairly with the alternatives. See if you can find reasons for rejecting it. If you don’t, others will.
  6. Quantify. If whatever it is you’re explaining has some measure, some numerical quantity attached to it, you’ll be much better able to discriminate among competing hypotheses. What is vague and qualitative is open to many explanations. Of course there are truths to be sought in the many qualitative issues we are obliged to confront, but finding them is more challenging.
  7. If there’s a chain of argument, every link in the chain must work (including the premise) — not just most of them.
  8. Occam’s Razor. This convenient rule-of-thumb urges us when faced with two hypotheses that explain the data equally well to choose the simpler.
  9. Always ask whether the hypothesis can be, at least in principle, falsified. Propositions that are untestable, unfalsifiable are not worth much. Consider the grand idea that our Universe and everything in it is just an elementary particle — an electron, say — in a much bigger Cosmos. But if we can never acquire information from outside our Universe, is not the idea incapable of disproof? You must be able to check assertions out. Inveterate skeptics must be given the chance to follow your reasoning, to duplicate your experiments and see if they get the same result.