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).

Professor Yin Article on the Tax Legislation Process and Legislative History (12/17/22)

George Yin, a retired UVA law professor (bio here) has published an article that takes on some of the conventional wisdom of jurists and scholars who reject or are at least suspicious of legislative history as useful for statutory interpretation. Those jurists (including most prominently the late Justice Scalia) and scholars often are considered textualists, although that is a broader category than those who reject or are suspicious of legislative history. Yin calls the subcategory “new textualists” or sometimes just textualists.  Yin’s article is George K. Yin, Textualism, Textualism, the Role and Authoritativeness of Tax Legislative History, and Stanley Surrey (December 4, 2022). Law and Contemporary Problems, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4286174.

Here is the SSRN Abstract description of the article:

When Stanley Surrey died in 1984, the school of thought sometimes known as the “new textualism” that has gained such influence in the United States over the last three decades had not yet emerged. Surrey would have been very interested in this development. As revealed in his recently published memoirs, he had extensive first-hand experience with the tax legislative process and recognized early on the connection between that process and statutory interpretation. He would have been surprised by some of the assumptions about the process underlying the new textualist claims as well as recent empirical findings about the process reported by scholars.

This essay aims to fill in some of Surrey’s missed engagement. Drawing on his memoirs and other sources, the essay describes aspects of the tax legislative process—the preparation of tax statutes and legislative history—of significance to statutory interpretation and the positions of the new textualists. Importantly, the description is at the granular level at which Surrey experienced it, material not generally included in standard political science or legal scholarship on the topic. After considering the on-the-ground realities of the tax legislative process, this essay contends that in interpreting tax statutes, courts should rely upon both textual canons and other common tools of judicial interpretation (questioned by recent scholar-empiricists) and legislative history (questioned by textualists). The essay also explains why, contrary to the claims of textualists, committee reports are authoritative evidence of statutory meaning.

Yin’s article is particularly directed to interpretation of federal tax statutes (i.e., principally the Codes in 1939, 1954 and 1986 iterations). Yin is former Chief of Staff of the Joint Committee on Taxation, which is heavily involved in the tax legislative process and in producing legislative history. He knows the process and knows that the claims these textualists make about legislative history are not true for tax legislation.

The process Yin describes for tax legislation--but apparently perhaps to a lesser degree for other legislation-- involves both tax legislation experts (the JCT) and each House’s legislative counsel who bring statutory drafting expertise to the table that the tax Committees and their members usually lack.

I have written on the use of legislative history before. See the following that I think relate to the topics in Yin’s new article:

Is the JCT Blue Book More Persuasive than a Law Review Article? (4/27/21)

Tax procedure fans will know the key role played by the Joint Committee on Taxation, here and Wikipedia here.  It is a nonpartisan committee with deep staff to serve the important role of advising Congress, principally through its tax writing committees (House Ways and Means and Senate Finance) on tax legislation.  It is fair to say that the JCT is deeply involved in the nooks and crannies of major tax legislation.  After major tax legislation, the JCT will often prepare a report, referred to as the Blue Book, summarizing the tax legislation, often adding some nuance not addressed directly in the text of the legislation.  In the past, the Blue Book was frequently used by the IRS, the public and the courts as a guide for interpretation of the legislation.  Although the Blue Book is not legislative history because published after the legislation, it is about as close as it gets to legislative history.  Nevertheless, Justice Scalia claimed the Blue Book was no more relevant and persuasive than a law review article.  United States v. Woods, 571 U.S. 31,47-48 (2013).  The Tax Court adopted the key language from this quote.  Rafizadeh v. Commissioner, 150 T.C. 1, 6. n4 (2018) (“the Blue Book is not legislative history but, ‘like a law review article, may be relevant to the extent it is persuasive, ’"quoting United States v. Woods, 571 U.S. 31, 47 2013)).  Deference fans will note that, as Justice Scalia explained it, that sounds like Skidmore deference.  Skidmore v. Swift & Co., 323 U.S. 134 (1944).  Skidmore may be no deference at all.  See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 6/3/20), here.

Yesterday, I was rooting around in the Attorney General’s Manual on the Administrative Procedure Act (1947), web format here and pdf format here.  The APA was enacted in 1946.  On further research, I found that the Supreme Court had often “deferred” to the Manual.  E.g., Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400, 2420 (2019) (plurality opinion, “some deference because of the role played by the Department of Justice in drafting the legislation.”; citing Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U. S. 519, 546 (1978)); Steadman v. SEC, 450 U.S. 91, 102 n. 22 (1981) (also citing Vermont Yankee); and see also Robin J. Arzt, Recommendations for a New Independent Adjudication Agency to Make the Final Administrative Adjudications of Social Security Act Benefits Claims, 23 J. Nat'l Ass'n  Admin. L. Judges 267, 330-31 (2003) (citing Vermont Yankee and Steadman and stating that the Manual is part of the legislative history of the APA;” the statement of its status as legislative history is perhaps hyperbole in today’s refined notions of legislative history, but it does come close).

So here are my questions:

Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (12/3/13)

In United States v. Woods, ___ U.S. ___ , 134 S. Ct. 557 (12/3/13), here, the Court rejected procedural arguments and applied the special 40% accuracy related penalty for valuation and basis overstatements.  §§6662(a), (b)(3), (e)(1)(A), (h).  The unanimous opinion is written  by Justice Scalia, the plain language justice, who not surprisingly concludes:  "The penalty’s plain language makes it applicable here."

I am sure others and even I will have a lot to say about the opinion and its ramifications later. (Here is my follow through post, More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

For now, this caught my eye as Justice Scalia jabs at the use of the Blue Book (what else could he do with such a tempting target):

Woods contends, however, that a document known as the “Blue Book” compels a different result. See General Explanation of the Economic Recovery Tax Act of 1981 (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.Comm. Print 1980). Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” Flood v. United States, 33 F. 3d 1174, 1178 (CA9 1994). We have held that such “[p]ost-enactment legislative history (a contradiction in terms) is not a legitimatetool of statutory interpretation.” Bruesewitz v. Wyeth LLC, 562 U. S. ___, ___ (2011) (slip op., at 17–18); accord, Federal Nat. Mortgage Assn. v. United States, 379 F. 3d 1303, 1309 (CA Fed. 2004) (dismissing Blue Book as “a post-enactment explanation”). While we have relied on similar documents in the past, see FPC v. Memphis Light, Gas & Water Div., 411 U. S. 458, 471–472 (1973), our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive. But the passage at issue here does not persuade. It concerns a situation quite different from the one we confront: two separate, non­overlapping underpayments, only one of which is attributable to a valuation misstatement. 

In my Federal Tax Procedure book (not yet revised for the above, which, I doubt, is the last word on the issue), I discuss the Blue Book as follows (footnotes omitted):

Tax Court Adopts Majority View to Impose Gross Valuation Misstatement Penalty Despite Concessions on Other Grounds (3/14/13)

I recently posted a discussion of a case, Crispin v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 3852 (3d Cir. 2013), here, that had a good discussion of the current trend -- representing a majority view -- in the Circuits to impose the gross valuation misstatement penalty in Section 6662(h) despite a taxpayer's concession to disallow the claimed tax benefits on other bases than valuation misstatement.  See Yet Another Bullshit Tax Shelter Bites the Dust (2/26/13), here.  Yesterday, reversing its prior precedent, the Tax Court fell in line with the majority view in AHG Investments LLC et al. v. Commissioner, 140 T.C. No. 7 (2013), here.  Of course, in all decided cases, under its Golsen precedent, the Tax Court must follow the precedent of the Circuit Court of Appeals to which an appeal would be taken, so its holding technically only affects cases in which the applicable Circuit Court of Appeals has not spoken.  In this regard, the Tax Court noted in footnote 5 of the opinion:

The Supreme Court has not ruled on the issue * * * , but the U.S. Government has recently filed a petition for a writ of certiorari as a result of the Court of Appeals for the Fifth Circuit's ruling for the taxpayer on a closely related issue in Woods v. United States, 471 Fed. Appx. 320 (5th Cir. 2012). The Supreme Court has not yet granted or denied the Government's petition.

There is a good discussion of the use of the Blue Book to help courts in interpreting a statute.  The Blue Book requires its own interpretation.  The minority view seems to have been based on a misinterpretation of the Blue Book which resulted in a misinterpretation of the statute.

Substantial / Gross Valuation or Basis Misstatement Majority Rule Case (9/29/12)

I write this blog to advise readers of an important decision -- Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), here, which continues the majority trend holding that the significant / gross valuation or basis misstatement penalty can apply even if there is some basis other than valuation misstatement for knocking out the shelter -- such as lack economic substance or, in lay terms, just bullshit.

The taxpayer, of course, got into a bullshit tax shelter.  I won't go into it, but suffice it to say that it was bad at many levels and, of course, lacked economic substance (and was therefore bullshit in lay terms).  Bullshit shelters usually go by acronyms or initialisms; this was was called CARDS (I won't tell you what that stands for).  Here is the guts of the holding (footnotes omitted):

A. Gross Valuation Misstatement Penalty in I.R.C. § 6662

Gustashaw argues that the Tax Court erred in upholding the IRS's imposition of the 40% gross valuation misstatement penalties for 2000 through 2002. See I.R.C. § 6662(a)—(h). Specifically, Gustashaw contends that because the CARDS transaction lacked economic substance, there was no value or basis to misstate as to trigger the valuation misstatement penalties, and the penalties should not apply as a matter of law. Gustashaw also argues that Congress has penalized lack-of-economic-substance transactions by enacting I.R.C. §§ 6662A and 6663, and therefore, he should not be subject to gross valuation misstatement penalties under § 6662. 

The Internal Revenue Code establishes penalties for underpayment of tax. Section 6662(a) of the Code imposes an accuracy-related penalty of 20% of the portion of an underpayment of tax "attributable to," inter alia, negligence, any substantial understatement of income tax, or any substantial valuation misstatement. I.R.C. § 6662(a), (b)(1)—(3). Under the applicable regulations, only one penalty may apply to a particular underpayment of tax, even if the IRS determines accuracy-related penalties on multiple grounds. Treas. Reg. § 1.6662-2(c).

Second Circuit's Statutory Interpretation for Taxpayer Victory on Retrospective Interest Netting (8/9/12)

In  Exxon Mobil Corp. v. Commissioner, 689 F.3d 191 (2d Cir. 2012), here, the Second Circuit held that Exxon Mobil is entitled to retrospective interest netting which is now required under Section 6621(d) prospectively since the enactment of global interest netting in 1998.  The opinion was written by Judge Jose A. Cabranes.  His Wikipedia entry is here.

The Court introduced the concept as follows (footnotes omitted):

Under section 6621 of the Internal Revenue Code ("I.R.C."), interest is calculated at a higher rate for corporate tax underpayments than it is for corporate tax overpayments. In principle, therefore, a corporate taxpayer could owe the Treasury underpayment interest even if the amount by which the taxpayer had underpaid its taxes in one tax year (or set of tax years) was entirely offset by the amount by which it had overpaid in another tax year (or set of tax years). To remedy this apparent inequity, Congress amended section 6621 in 1998 to include a provision for "global interest netting," by which the interest rate differential is adjusted to yield a net interest rate of zero for periods of reciprocal indebtedness — that is, periods during which the taxpayer's overpayments in one set of tax years overlap and offset its equivalent underpayments in another set. See I.R.C. § 6621(d), 26 U.S.C. § 6621(d).

By noncodified contemporaneous legislation (called the "special rule"), Congress allowed the retrospective application of global interest netting.  The issue in Exxon Mobil was whether the taxpayer qualified for the special retrospective relief provision.

The narrow question the Court resolved was "whether retrospective global interest netting is permitted when the limitations period for either of the 'legs' of the period of overlapping indebtedness has not expired, or only when the period of limitations for both legs is open."  Since this is an issue that arises only under the retrospective relief provision that has no continuing significance, I will not get into the substantive issues.

I will develop in this blog entry the Court's process of statutory interpretation because the Court made some interesting analyses.  Here are the points I think worthy of development in this blog: