Court Denies Attorneys' Fees under § 7430 to Parties Winning § 6700 Penalty Case Because Government Position Substantially Justified (11/25/24)

In Ankner v. United States (M.D. FLA 2:21-cv-00330 Opinion & Order Dated 11/19/24), TN here and CL here, the IRS asserted § 6700 penalties for promoting abusive tax shelters against the plaintiffs from their promotion of a microcaptive insurance tax strategy. The plaintiffs paid the amount sufficient to permit refund suits and sued for refunds.  In a trial to a jury, the jury held by special interrogatories here that the Government had not proved the plaintiffs’ liabilities for such penalties by a preponderance of the evidence.

Side observation: It is not clear whether the jury’s answer meant that (i) it affirmatively found the facts not to establish liability or (ii) it was in equipoise as to those facts, thus requiring verdict against the Government. In any event, the Government loses.

As the at least nominally prevailing parties, the plaintiffs sought to recover attorneys’ fees and costs under § 7430. But, as the court held, § 7430 does not permit recovery of attorneys’ fees and costs simply because someone beats the Government in a tax suit. Rather, one of the requirements is that the party seeking recovery is that, in addition to prevailing, the Government’s position must not have been “substantially justified.” § 7430(c)(4)(B)(i). Here the Court found that the Government’s position that the plaintiffs were liable for the § 6700 penalties was substantially justified.

As I read the opinion discussion of substantially justified (Slip Op. 9-21), I have a sense that the judge believed that, had he been the decider on the liability issue, he may have imposed liability for the § 6700 penalties. In other words he may have disagreed with the jury verdict, but the jury verdict must stand. (For an example of where a judge may disagree with the jury, see Justice Thomas and Tax -- The Plot Sickens (10/29/23; 10/7/24), here, discussing Grinstead v. United States , 447 F. 2d 937 (7th Cir. 1971), here.)

Other points, some picky:

1. Plaintiffs should have made a qualified offer. See Court Awards Attorneys Fees Under § 7430 Based on $1 Qualified Offer (11/6/24), here; and Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17), here. A qualified offer will avoid the requirement that the Government’s position not have been substantially justified.

Substantial § 6700 Promoter Penalty Case Involving Refund Suit and Counterclaim Settled for $5,200,000 (5/25/24)

In Clark v. United States (S.D. Fla. 9:21-CV-82056), CL docket entries here, the taxpayer, Celia R. Clark, an attorney active in the promotion of microcaptive insurance companies for certain claimed tax advantages, brought a suit for refund of § 6700 penalties in the amount of $1,745,544. That amount represented 15% of the aggregate § 6700 penalties of $11,636,919 required in order to meet the jurisdictional requirement (special rule to avoid the Flora full payment requirement) for refund suits for the § 6700 penalties. See Complaint, here, paragraphs 65-67). (Actually, the aggregate amount paid was slightly in excess of 15% of the aggregate penalties.)

The 6700 penalty here for false or fraudulent misstatements as to a material matter is 50% of the gross income derived or to be derived from the penalized conduct. The penalized conduct is the organization or participation in a plan or arrangement in which the person furnishes or causes to be furnished a statement that the person “knows or has reason to know is false or fraudulent as to any material matter.”  being the organization or participation in the sale of a plan or arrangement that claims false tax benefits. I discuss the  § 6700 penalty and the § 6703(c) relief from Flora full payment requirement in my Federal Tax Procedure Book (Practitioner Ed. 2023.2), here, at pp. 853-856.

In the Government’s Answer and Counterclaim, here, the Government responded to the allegations in the complaint and sought judgment for $10,095.359 (Answer pp. 26-27, which seems to be the net amount after application of Clark’s payments with some add-ons.) Among the allegations in the Answer and Counterclaim are (i) a mélange of facts implying or proving (if proved) that Clark knew or had reason to know of the falsity of the scheme and documents implementing the scheme (Answer pp. 16-25, ¶¶ 16-85) and (ii) “From 2008 through 2016, Clark, through her law firm, earned over $23 million in fees from the microcaptive insurance programs.” (Answer p. 25 ¶ 87.) I infer that the alleged aggregate fee amount was the basis for the penalties exceeding $11 million.

Tax Procedure Book Errata - Special Flora Mitigation Procedures for Certain Assessable Penalties (9/11/16)

I will revise the book to insert the following with respect to certain assessable penalties -- the return preparer penalties under § 6694 and the penalties under 6700-6703.  These penalties are assessable without predicate notice of deficiency or other such procedures permitting litigation before assessment.  Those penalties can be litigated in a traditional refund suit which will be subject to Flora's full payment rule.  The Flora full payment rule is mitigated in many contexts (included this context) by the divisible tax rule that would apply if the penalties are divisible.  There is another special Flora full payment mitigation rule applying to these penalties.  That mitigation rule is as follows:

This mitigation rule requires that (i) within 30 days of the assessment’s notice and demand, the person assessed the penalty pay 15% of the penalty and file a claim for refund and (ii) then file the refund suit in district court by the earlier of (a) 30 days from the denial of the claim or (b) 6 months and 30 days from the date the refund claim was filed.  If the taxpayer pursues this special district remedy, collection procedures on the balance will be suspended and the statute of limitations on collection will also be suspended.  [See § 6694(c) as to the preparer penalties and §§ 6703(c) as to the §§ 6700-6702 penalties.]

In addition, to the special procedure for partial payment and suit for refund, penalties subject to this special mitigation rule may be litigated in CDP procedures.

I have not yet incorporated these into the current working draft for the next version in 2017, but it will be included in that version.

I picked up the need for this revision from Taylor v. Commissioner, 2016 U.S. Dist. LEXIS 122216 (ED WA 2016), applying the rule to the § 6694 penalty.  In Taylor, the preparer timely paid the 15% and filed the claim for refund.  The denial of the claim was almost two years later.  By the time of denial of the claim, the period for filing the suit for refund for the special procedure had expired. The time for filing that suit was 6 months and thirty days after the filing of the claim for refund.

On Qualified Amended Returns and Avoiding Amnesty Penalty Costs (10/16/13)

I picked up today a recent post on the Tax Appellate Blog, Miller & Chevalier's offering to the world on things tax (at least the appellate subset of things tax).  Miller & Chevalier is a premier tax firm (see website, here) and through the Tax Appellate Blog pundits in this area.  The particular blog to which I direct my attention is this one:  Oral Argument Scheduled in Bergmann (Tax Appellate Blog 10/15/13), here.

Now, what is Bergmann about such that anyone other than the Bergmanns and the Government should even care about oral argument in the case?  First the background.  From my Federal Tax Procedure book (with bold face emphases on the particularly relevant portions):

2. Penalty Base - Tax Understatement; Qualified Amended Return (“QAR”). 

The accuracy related penalties apply a penalty rate (20% or 40%) to a penalty base which is the tax underpayment.  If a taxpayer reports $100 of tax and upon audit is determined to have owed $150, the underpayment is $50.  Some portion or all of the underpayment may be subject to the accuracy related penalty. 

I mentioned earlier in discussing amended returns that there is a special category of amended return called a qualified amended return (“QAR”).  The QAR permits a taxpayer to treat the amount of tax reported on the QAR as the tax reported on an original return so that the accuracy related penalty will not apply.  In the example above, if the taxpayer files a QAR reporting the correct $150 tax liability after reporting only $100 on the original return, the reporting of the correct $150 liability will avoid the accuracy related penalty.  QAR relief does not apply, however, as to the amounts originally underreported attributable to fraud.\ 

What are the circumstances in which the taxpayer may achieve the benefit of the QAR?  A QAR is an amended return filed after the original due date of the return (determined with extensions) but before any of the following events: (i) the date the taxpayer is first contacted for examination of the return; (ii) the date any person is contacted for a tax shelter promoter examination under § 6700; (iii) as to a pass-through entity item, the date the entity is first contacted for examination; (iv) the date a John Doe Summons is issued to identify the name of the taxpayer; and (v) as to certain tax shelter items, the dates of certain IRS initiatives published in the Internal Revenue Bulletin.  Undisclosed listed transactions are excluded.   

The QAR is a formal procedure to achieve a result in the civil penalty arena that a “voluntary disclosure” – often effected by amended return(s) – does in the criminal tax enforcement arena in generally the same relevant equitable circumstance – i.e., the IRS has not yet started a criminal investigation against the taxpayer or a related proceeding (e.g., § 6700 investigation or John Doe Summons) likely to lead to the taxpayer.  These programs that permit taxpayers to avoid penalties – civil in the case of a qualified amended return and criminal in the case of the voluntary disclosure practice – are designed to encourage taxpayers to get right voluntarily with the IRS.  The programs produce significant additional revenue that might otherwise escape the IRS net; in the circumstances, foregoing the penalties is consistent with overall revenue enforcement policies.  I discussed the criminal voluntary disclosure policy earlier in this book.