Missing Graphic from p. 424 of Student Edition (10/15/15)

There is a graphic mission from p. 424 of the student edition.  The graphic is here.  The graphic is in the practitioner edition.

Second Circuit Opinion Affirming Denial of Motion to Quash Summons (10/1/15)

We have studied IRS summonses and summons enforcement in the class.  See Student edition pp. 271 - 282.  A recent nonprecedential opinion from the Second Circuit provides a useful review.  Highland Capital Management LP v. United States, 2015 U.S. App. LEXIS _____ (2d. Cir. 2015), here.

The Court provides a helpful introduction (footnote omitted):

Petitioner-Appellant Highland Capital Management, L.P. ("Highland Capital") challenges a decision and order of the District Court denying its motion to quash a third-party summons served by the Internal Revenue Service ("IRS") on Barclays Bank PLC ("Barclays") and granting the IRS's cross-motion for enforcement. The IRS had issued the summons seeking documents related to its audit of Highland Capital (the "2008 audit"), and particularly regarding losses claimed for 2008 related to two transactions with Barclays. On appeal, Highland Capital argues that the District Court erred in refusing to quash the summons because (1) the IRS failed to provide reasonable notice in advance of issuing the summons, as required by 26 U.S.C. § 7602(c)(1);1 (2) the summons seeks privileged and irrelevant documents; and (3) the summons was issued in bad faith or for an improper purpose. Finally, Highland Capital argues that the District Court erred by refusing to grant an evidentiary hearing on the question of the IRS's bad faith. "We review the district court's factual findings for clear error and its interpretation of the Internal Revenue Code de novo." Adamowicz v. United States, 531 F.3d 151, 156 (2d Cir. 2008). We assume the parties' familiarity with the underlying facts and the procedural history of the case.

Summons Relevance

As in some many of the endless stream of summons enforcement and quashing cases, the Court cites the Powell standard:

The standard set forth in United States v. Powell, 379 U.S. 48 (1964), governs motions to quash an IRS summons. Under Powell, "[t]he IRS must make a prima facie showing that: (1) the investigation will be conducted pursuant to a legitimate purpose, (2) 'the inquiry may be relevant to the purpose,' (3) 'the information sought is not already within the Commissioner's possession,' and (4) 'the administrative steps required by the [Internal Revenue] Code have been followed.'"

The Court then moves to the second Powell requirement -- relevance.  The Court reasoned:

Highland Capital contends that the summons seeks irrelevant information insofar as it requests documents related to transactions other than the two being investigated in connection with the 2008 audit. In determining relevancy, "[t]his court has consistently held that the threshold the Commissioner must surmount is very low, namely, 'whether the inspection sought might have thrown light upon' the correctness of the taxpayer's returns." Adamowicz, 531 F.3d at 158 (quoting United States v. Noall, 587 F.2d 123, 125 (2d Cir. 1978)). A court properly "defer[s] to the agency's appraisal of relevancy . . . so long as it is not obviously wrong." Mollison, 481 F.3d at 124 (internal quotation marks omitted). 

Here, the IRS agent conducting the 2008 audit has submitted a declaration explaining that information about the other transactions was necessary to determine how payments made in connection with a settlement agreement relate to the two transactions being investigated in the audit. Highland Capital has provided no reason for us to conclude that the IRS's appraisal of relevancy was "obviously wrong," and we accordingly find that Highland Capital has not satisfied its "heavy" burden to disprove this Powell factor. Mollison, 481 F.3d at 122-23, 124.

JAT Comment:  Basically, the agent said it was relevant to the tax investigation and the taxpayer did not show otherwise.  Obviously in a discovery context where the proponent of the discovery may not know the actual relevance of the documents requested, a broad standard of potential for relevance is required.

Reasonable Notice Pursuant to § 7602(c)(1)

Are Appeals Officers Equipped and Trained to Assess Accurately the Litigating Hazards of a Case? (9/25/15)

Appeals' standard for settlement is to reflect the litigating hazards of the case.  See IRM 8.6.4.1  (10-26-2007), Fair and Impartial Settlements per Appeals Mission, here ("A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation"). One of the concerns expressed with that standard is that Appeals Officers are not litigators nor are most of them even lawyers.  How then do they assess the litigating hazards of a case?

Keith Fogg of Procedurally Taxing has this blog on the subject where he expresses concern:  Judging Litigation Hazards without Seeing or Following Litigation (Procedurally Taxing Blog 7/6/15), here.  Keith is a law professor now but formerly was with Chief Counsel and had considerable opportunity to observe Appeals Officers' application of the standard.  He expresses concern that Appeals may be paying less attention to insuring that Appeals Officers at least observe litigation to sharpen their skills at determining the litigation hazards.  And, of course, the Appeals Officers have difficulty assessing evidentiary and procedural problems and how they may affect the outcome of the case if it proceeds to trial.  Among the problems is credibility of witnesses.  Many cases (including the anecdote I present at the end of this blog entry) really turn on credibility, and the Appeals Officer has no way of factoring credibility into a settlement.  It is true that many revenue agents may view the witnesses as not credible, often without even interviewing them and the Appeals Officer will usually be aware of the revenue agent's assessment of credibility.  But, the Appeals Officer has no way of assessing the revenue agent's determination of credibility or, more directly,  making an independent determination of credibility to properly assess the litigating hazards.

Sheldon ("Shelly") Kay, currently with a law firm but previously with district counsel and thereafter with Appeals where he served as National Director of Appeals, does not agree with Keith.  He has written his views in a blog on Procedurally Taxing:  “Judging Litigating Hazards – Another View” (Procedurally Taxing 9/24/15), here.  Shelly makes a strong rebuttal.

I encourage tax procedure fans and particularly students in my class to read these blogs.  They are relatively short and discuss a core function of Appeals.  We will cover Appeals on October 1, and I have provided a link to this blog (with the links to the Procedurally Taxing Blogs).

Revision to Texts on Tax Shelters and Case Assignment (9/24/15)

I have assigned in Unit/Class 10 the following case (trial and appellate level opinions):  Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002).   I have revised the text on p. 544 of the student edition and p. 783 of the practitioner edition as follows:

Eliminate the last four sentences (beginning The Compaq case) in the carryover paragraph to p. 544 of the student edition in the paragraph beginning "Tax shelters are" of the practitioner edition.  After that elimination add the following paragraph as a new paragraph:

A good example of a classic tax shelter is Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002).  Please read both the Tax Court and the Appellate opinions now.  In net, a classic abusive tax feature present in the case is that, except for the benefit of the foreign tax credit for foreign taxes paid that Compaq did not bear the economic burden, the deal was a money-loser.  The Tax Court viewed the transaction as abusive and imposed penalties; the Fifth Circuit blessed the transaction.  It was a tax shelter; it was just a tax shelter that, at least the appellate court, believed – or at least held, regardless of what it believed – was legal and not abusive.  Both the Tax Court and the Fifth Circuit are good courts, with good judges having radically different views of what is an abusive tax shelter and where to draw the line.  (Note the Fifth Circuit’s opinion, however, has not worn well with time.)

For practitioners, the only footnote in the paragraph is at the end to support the statement that the Fifth Circuit decision has not worn well with time.  The footnote is:

fn E.g., Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015) (“In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively));” Lee A. Sheppard, The Fun Goes Out of Foreign Tax Credit Planning, 148 Tax Notes 1283 (Sept. 21, 2015) (hyperbolically, as is her wont, “The Second Circuit essentially reversed the Compaq and IES decisions.”)

IRS Terminates Appeals Arbitration (9/12/15)

The IRS has terminated Appeals arbitration.  Rev. Proc. 2015-44, 2015-38 IRB 1, here

I have revised the text of the pdf text books.  In the text of the student edition on p. 346 and of the practitioner edition on p. 491, the following is substitued for the paragraph commencing "The IRS has Appeals mediation."

The IRS tested appeals arbitration for 14 years, but in 2015 decided to discontinue the program.  The IRS still has an Appeals mediation program.  The Appeals mediation process, referred to as the “Post Appeals Mediation,” can be invoked in appropriate cases after the taxpayer and the Appeals Officer have failed to reach agreement as to an issue or issues, but before the Appeals Office closes the case.  Issues eligible and ineligible for mediation are listed in the IRM; thus, for example, legal and factual issues are eligible for mediation.

The significant new citation in the footnotes is Rev. Proc. 2015-44, 2015-38 IRB 1.

Payment of "Tax" After the Assessment Limitations Period Expires - Refunds (9/11/15)

Apropos to our discussions in class of the statute of limitations on assessment, in ECC 201536020 (9/4/15), here, the IRS attorney addresses the refund of taxes paid after the assessment statute of limitations expired:

A tax payment made to the Service after the expiration of the period of limitation on assessment is considered an overpayment, even if there was no tax liability. Section 6401(a) & (c). The Service has authority to refund overpayments, but only within the applicable period of limitations. Section 6402(a); Rev. Rul. 74-580. The IRM in section 25.6.1.10.2.5.6.2 (10-11-2012) Claim for an Amount Paid After the ASED, (stating "If an amended return is filed after the expiration of the period of limitations on assessment, any amount paid with that return must be refunded to the taxpayer. The taxpayer does not need to file a claim for refund in order to receive a refund of the payment made with the late filed amended return for additional tax assessment.") is discussing the need for filing a claim, not the applicability of the period of limitations. Therefore, a payment made after the ASED may be refunded to the taxpayer, but only within the limitations set forth in section 6511.

ASED in the quote means:  assessment statute expiration date and is the usual IRM term for the date the statute on assessment expires.  In the above quote, the payment was made with no timely assessment.

As indicated, the IRS can refund the overpayment resulting from payment after expiration of the statute of limitations, but the taxpayer must file the claim for refund within the refund claim statute of limitations if the IRS does not refund voluntarily.

Overstatement of Basis Included in Gross Income Omission for 6-Year Statute of Limitations (8/11/15)

In United States v. Home Concrete, ___ U.S. ___, 132 S.Ct. 1836 (2012), here, the Supreme Court held that an overstatement of basis that has the effect of reducing income is not an omission of income for purposes of § 6501(e)(1)(A).  The holding was based on the Supreme Court's prior interpretation of the statute in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), here.

In § 2005(a), the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41), Congress legislatively overrule Home Concrete.

I have revised Example 5 in the text (Student edition, p. 138; Practitioner edition, p. 199) to provide at the end of Example 5 (after the citation to Home Concrete) the following in the text:

However, Congress legislatively overruled Home Concrete by amending § 6501(e)(1)(B) to provide that “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.”  This means that, in the foregoing calculation, the $80,000 overstatement of basis is treated as an omission of gross income, so that the omitted income is $80,000 with a resulting gross income omission of 67% and a resulting 6-year statute of limitations. fn735.
   fn735 § 2005(a), the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41).  The effective date for the enactment is for “ the period specified in section 6501 of the Internal Revenue Code of 1986 (determined without regard to such amendments) for assessment of the taxes with respect to which such return relates has not expired as of such date.”

The Constitution's Command that Revenue Bills Originate in the House - What Does It Mean? (8/8/15)

The Constitution provides (Article I, § 7): “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.”  This provision is referred to as the Origination Clause.

The D.C. Circuit recently denied rehearing en banc in a case involving the Affordable Care Act which was drafted in the Senate and passed by the Senate as a substitute for a revenue raising bill that did originate in the House.  Sissel v. U.S. Dept. of Health and Human Services, ___ F.3d ___, 2015 U.S. App. LEXIS _____ (D.C. Cir. 2015), here, denying petition for rehearing en banc from the earlier panel decision in Sissel v. U.S. Deparatment of Health and Human Services, 760 F.3d 1 (D.C. Cir. 2015), here.

In denying rehearing, concurring and dissenting opinions discussed the application of the Origination Clause.  Both the concurring and dissenting opinions found that the Origination Clause was not violated.  The dissenting opinion just thought that the issue was worthy of en banc review.

I have revised my text in the Federal Tax Crimes book to add the following after quoting the Origination Clause (I omit the footnotes citing the Sissel rehearing decisions and original panel decision, and include only footnote at the end):

This command in the Constitution appears clear.  But, as we learn in this class, when words are involved, it is all about interpretation of the words.  What do the Origination Clause’s words mean?  The issue is not commonly presented seriously in mainstream tax legislation.  But, in some outlier – albeit very important – cases it is presented.  For example, it recently arose in litigation involved the attempts to defeat the Affordable Care Act (“ACA”) because some of its provisions do raise revenue.  The House passed a revenue bill that was not the ACA and sent it to the Senate.  The Senate substituted the ACA which was completely different from the revenue bill passed by – originated in, if you will – the House.  The ACA provided for large amounts of revenue to fund much of the cost of the ACA.  Did the ACA violate the Origination Clause?  Facially, in a literal sense, yes.  But by interpretation of the provision, it did not run afoul of the Origination Clause.  It is not necessary for this class to enter into an extended discussion because the Origination Clause is not presented in most mainstream tax legislation.  But, generally, the ACA was not deemed to violate the Origination Clause for one of the following reasons: 

1. Under a purposive approach, the bill's primary purpose was to regulate health insurance and not to raise revenue.  The revenue in question was to spur conduct (acquisition of health insurance) rather than raise revenue (although raising revenue was an incidental effect, the Origination Clause is not implicated by such incidental effects). 

2. The Senate amendment adding the ACA was a bill that originated in the House and thus met the requirements of the Origination Clause. 

3. The ACA raised revenue for specific program purposes and not for general revenue purposes and thus met the requirements of the Origination Clause. 

These explanations may or may not be satisfying, but in the end it would be the rare revenue raising measure that proceeded to final enactment would not meet the requirements of the Origination Clause. n14  

 n14 Since the Senate amendments must be passed by the House, the House can has a procedure – called “blue-slipping” to reject and return to the Senate revenue bills that were not originated in the House.  This process is described in the Wikipedia entry titled Blue slip at: https://en.wikipedia.org/wiki/Blue_slip.  Of course, for bills that did originate in the House and were simply amended in the Senate (as the ACA), even by full substitution, the blue-slip process would not apply.