IRS Proposes New Practitioner Rules for Opinions and Advice (9/20/12)

The IRS has proposed new regulations for Circular 230, 31 CFR Part 10, regarding tax practitioner opinions and advice.  See REG-138367-00, 77 FR 57055 (9/17/12),here.  Here is a good summary of certain key aspects of the proposed new regulations (excerpted from Michael Cohn, IRS Proposes New Rules for Covered Opinions and Tax Advice (Accounting Today 9/14/12), here):

The proposed regulations will streamline the existing rules for written tax advice by removing the current Section 10.35 and applying one standard for all written tax advice under a proposed Section 10.37. The proposed Section 10.37 provides that the practitioner must base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or should know.  The proposed removal of Section 10.35 will eliminate the requirement that practitioners fully describe the relevant facts (including the factual and legal assumptions relied upon) and the application of the law to the facts in the written advice itself, and the use of Circular 230 disclaimers in documents and transmissions, including e-mails. 

Other provisions, including Sections 10.31, 10.36, and 10.82, are also being updated at this time to reflect the current practice environment, the IRS noted.  In addition, a general competence standard is being proposed in the new Section 10.35. “The proposed regulations also clarify that the Office of Professional Responsibility has exclusive responsibility for matters related to practitioner discipline, including disciplinary proceedings and sanctions,” said the IRS.

Caveat:  These are proposed regs only.  The do not have effect until promulgated and, based on the comments received, may be modified.  Since they are proposed only, they do not affect the current Federal Tax Procedure book.

The Role of the DOJ Tax Division (9/18/12)

I have just published a blog entry on the Tax Division.  See The Role of the DOJ Tax Division in Criminal Tax Enforcement (Federal Tax Crimes Blog 9/18/12), here.  The blog consists of excerpts and links to a Tax Notes article, Shamik Trivedi, For DOJ Tax Division, Consistency and Deterrence Are Key, 136 Tax Notes 1231 (Sept. 10, 2012), here, which is published with the permission of Tax Analysts.  The article principally covers criminal tax enforcement matters, which are a relatively minor part of my course on Tax Procedure.  Readers might still find the article interesting.

DOJ Tax Authority to Settle Tax Cases in Joint Committee Cases (9/18/12)

In United States v. United States District Court for the Northern Mariana Islands, ___ F.3d ___, 2012 U.S. App. LEXIS 19134 (9th Cir. 2012), here, the Ninth Circuit held that, under the facts, the district court had abused its discretion in ordering, in a large tax refund suit, that a Government official with authority to settle the case be present at a compulsory settlement conference.  At the district court, in opposing that order at the trial letter, the Government stated:

because of the size of Baldwin's claim, the lowest-ranking official authorized to settle this case was the officer in charge of the Tax Division of the Department of Justice, the Assistant Attorney General of the Tax Division ("Assistant Attorney General"), fn3 and her authority is limited by the requirement that the Congressional Joint Committee on Taxation ("Joint Committee") reviews and has no adverse criticism to the proposed refund or settlement. fn4 See 28 C.F.R. §§ 0.160-.0162; see also Rules and Regulations, 76 Fed. 1Reg. 15212-02 (Mar. 21, 2011). The government argued that the personal participation of the Assistant Attorney General should not be required and proposed instead that the settlement conference be personally attended by the trial attorneys with primary responsibility for the handling of the case, with the Section Chief of the Tax Division's Office of Review ("Section Chief") available for consultation by telephone during the settlement conference. The Section Chief is authorized to accept offers in compromise in cases against the United States in which the amount of the government's concession, exclusive of statutory interest, does not exceed $1.5 million. See Rules and Regulations, 76 Fed. Reg. 15212-02 (Mar. 21, 2011).

The Scalia-Posner Spat Over Statutory Interpretation (9/18/12)

The Scalia-Posner spat is ratcheting up, with Justice Scalia allegedly accusing Judge Posner of the big lie -- Posner's assertion that Scalia used legislative history.  Fanning furor, Justice Scalia says appeals court judge lied (Reuters 9/17/12), here.  I suppose that, in Justice Scalia's different universe, such an accusation is as low as one can go.

At any rate, I previously blogged on Justice Scalia's new book, in collaboration with Bryan Garner, on Statutory Interpretation which is an important part of my Federal Tax Procedure class and book.   Review of Scalia Book on Statutory Interpretation (7/17/12), here.

I have nothing substantive to offer over this spat, but I think it does illustrate that there is something important -- if neither right nor wrong -- about the role of legislative history in statutory interpretation.

Addendum:

This is a good article by a scholar.  Eric Segall, The Scalia-Posner War and Why it Matters, here.  Excerpts:

Whistleblowers, Carried Interests, Fee Waivers and Swiss Banks (9/15/12)

I previously blogged as to the claim that Revenue Procedures was a legal basis for claiming capital gains for carried interests and the more aggressive fee waivers (the latter of which being the more aggressive strategy to turn ordinary income into capital gains).  See Are Revenue Procedures Influential In Interpreting the Law: Of Profits / Carried Interests and Administrative Billion Dollar Largess (9/7/12), here.  It appears that whistleblowers are busy for the more aggressive of these alchemies.

The Wall Street Journal reports that the recently well publicized investigation by the New York State Attorney General is based on whistleblower information.  The WSJ also reports that whistleblower claims have been made to the IRS and that those claims are "active."

The WSJ article is Reed Albergotti and Laura Saunders, Informer Sparked New York Probe (WSJ 9/12/12), here.  Here are a few of the introductory paragraphs to whet your appetites.

New York state Attorney General Eric Schneiderman's probe of tax practices at private-equity firms is based on information from a whistleblower, according to a person familiar with the matter.

The investigation by Eric Schneiderman, pictured in March, has sent subpoenas to 13 private-equity firms. 

The information came from someone who approached Mr. Schneiderman's office between roughly nine months and a year ago, this person said. Under the state's False Claims Act, the attorney general can investigate alleged fraud against the state based on a whistleblower's allegations.

Adequacy of IRS Notices & Variance in Refund Claims (9/15/12)

In Bush v. United States, 2012 U.S. Claims LEXIS 1083 (2012), here, the Court of Federal Claims held in a tax refund suit that a computational adjustment based on a partnership adjustment was subject to the Scar analysis of validity of an IRS determination and that the taxpayer had a fatal variance between an argument first advanced in briefing in the case.  I'll look at both of these issues.

THE SCAR ISSUE

In Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), the Ninth Circuit held that a facially invalid basis for an adjustment in the notice of deficiency meant that the IRS had not made the required determination for a notice of deficiency and thereby invalidated the notice of deficiency.  Bush involves a computational adjustment from a partnership audit rather than a notice of deficiency, but it will be helpful to put Scar in its context.  I offer the  background for the Scar holding (cut and pasted from my Federal Tax Procedure book is (footnotes omitted):

2. The Notice of Deficiency. 

a. The Determination and Explanation. 

The IRS is authorized to issue a deficiency notice “If the Secretary determines that there is a deficiency.”  § 6212(a).  The notice of deficiency should “describe the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and  assessable penalties included in such notice,” § 7522(a).  Frequently, the notice of deficiency will be somewhat sparse in its explanation, but usually the taxpayer will have been given an agent’s report that explains the IRS position.  And, in any event, the same statute provides: “An inadequate description under the preceding sentence shall not invalidate such notice.”   [Note § 7522(a) was not in the law when Scar was decided; and does not apply to computational adjustments in any event.]

The Danielson Rule: Holding a Taxpayer to his Bargain (9/15/12)

In Hartman v. United States, 694 F. 3d 96 (Fed. Cir. 2012), here, the Federal Circuit applied the constructive receipt rule to tax a service partner when he received shares in a corporation in return for services.  I use a simple example based on the Hartmann facts to illustrate the setting.

Example: Service partner A (Partner A) received 1,000 shares in Corporation X (a spin-off from the partnership).  The shares have a value of $1,000,000.  Under the contract signed at the time, partner A agreed that (i) the value of his shares is $1,000,000, (ii) he will report $1,000,000 ordinary income for tax purposes, (iii) 25% of the shares, 250 shares in this example, would be sold immediately to permit the partner to pay the resulting income tax obligation, (iv) the remaining 75% of the shares (750 shares in this example) would be subject to forfeiture as "liquidated damages," but the amount of the shares subject to such forfeiture would decline over a 5 year period in the event Partner A left the employment of Corporation X or was terminated for cause; and (v) from day one, Partner A received any dividends with respect to the stock and could vote the stock -- i.e., Partner A had all the accouterments of ownership of the stock except that it was subject to the forfeiture provisions.  Partner A reported ordinary income in the year as agreed of $1,000,000 and paid a resulting tax of $250,000 which was funded from the 25% of the shares sold.  Shortly after the next year commenced, Corporation A had a reversal of its fortunes and its stock declined in value by 50%.  This meant that Partner A had paid tax on the 750 remaining shares at a value of $750,000 but now they were worth only $375,000.  So, Partner A wanted to claim that the 750 shares were not constructively received for tax purposes and therefore that the only tax consequences were with respect to the 250 shares sold in the year and that taxation of the remaining shares must be in a future year as the restrictions on his stock lapsed.

From a substantive tax perspective, the reason for the shape of the agreement in the first place was to lock in the ordinary income from receipt of the shares at the inception -- in Partner A's case, $1,000,000 of ordinary income -- so that the expected future major accretions in value would be taxed as capital gain.  These expectations were upset because the value of the stock went down, which, if the phenomenon continued, would mean that Partner A got ordinary income taxed in full at the inception with a subsequent capital loss of limited tax benefit.  This basic phenomenon occurred in many cases after the internet bubble in the late 1990s burst.

Mootness and Tax Court Proceedings (9/14/12)

OK, I know the reaction of most readers for this blog is going to be "So What."  That is probably a good reaction, but I persist in wanting to evoke that reaction.  Here goes.

In Media Space Inc. v. Commissioner, 2010 U.S. App. LEXIS _____ (2d Cir. 2012), here, the Second Circuit remands to the Tax Court "with instructions to dismiss the petition."   The IRS appealed because it thought the decision document did not determine enough of a tax liability for Media Space.  On appeal, , Media Space, advised the 2d Circuit that, notwithstanding the Tax Court decision, it had paid all of the amounts in issue.  If that is true, and the Government apparently did not contest it the representation, the Government has seemingly won the case despite the Tax Court decision which at least partially favored the taxpayer (which is, of course, why the Government appealed).  So, with the Government having practically won, despite the Tax Court decision, the Court of Appeals dismissed on grounds of mootness over the Government's objection.

I think there is something going on that is not evident from the Second Circuit's cryptic opinion.  I think the appropriate resolution of the case would be to remand for entry of decision in the full amount for the IRS.  Maybe there is something I am missing there, so hopefully readers will let me know if I am missing something.

Moreover, despite the payment, the Government still wanted the Second Circuit to decide an issue it felt important.  The Second Circuit punted on the case or controversy dodge, citing as "'established practice' of federal courts is to 'vacate the judgment below and remand with a direction to dismiss.'  Oh well, 

If It's A Tax, What About the Origination Clause? (9/14/12)

One of our first topics in my Federal Tax Procedure class is the roles of the various players -- Congress, the Executive Branch and the Courts (OK, the grand jury as well).  And, one of the first topics it the Origination Clause.  The Origination Clause is Section 7, Clause 1, of the Constitution which says:

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

Wikipedia, here,  provides this background on the Origination Clause (footnotes omitted):

This establishes the method for making Acts of Congress. Accordingly, any bill may originate in either House of Congress, except for a revenue bill, which may originate only in the House of Representatives. In practice, the Senate can simply circumvent this requirement by substituting the text of any bill previously passed by the House with the text of a revenue bill.  When the Senate sends an appropriation bill to the House, the House may return it to the Senate with a blue slip, thereby settling the question in practice. Either House may amend any bill, including revenue and appropriation bills. 

The Origination Clause stemmed from an English parliamentary convention that all money bills must have their first reading in the House of Commons. It was intended to ensure that the "power of the purse" lies with the legislative body responsible to the people. The clause was also part of a compromise between small and large states. The latter were unhappy with equal representation in the Senate.

The Volokh Conspiracy has this discussion of the Origination Clause as a new line of attack on the "tax" as pronounced by the Supreme Court for the individual mandate in the Affordable Care Act.  Randy Barnett, New Obamacare Challenge: The Origination Clause (The Volokh Conspiracy 9/13/12), here.  Here are excerpts of the press release related to the new attack.

Tax Court Applies Chevron Analysis to Validate Regulation (9/14/12)

In Gaughf Properties, LP v. Commissioner, 139 T.C. No. 7 (2012), here, the Tax Court (Judge Goeke) held that the taxpayers were subject to an extended period of time for a TEFRA partnership adjustment because they, as indirect partners not listed on the partnership return, had failed to "furnish" the IRS proper notice of their status as indirect partners.  See Section 6229(e), here. The Regulations stated that the taxpayer "furnish" the information by filing.  The taxpayer did not file the required information.  However, the taxpayer argued that taxpayers' status as indirect partners was otherwise known to the IRS from other sources and therefore that the IRS should not be allowed the extended period to assess.  The Tax Court rejected the taxpayers' claims, holding that the indirect partner (taxpayers here) must "furnish" the information in the manner prescribed in the Regulations.  Regs. Section 301.6223(c)-1T provides that the information is "furnished" by filing the information in a prescribed manner.  The Tax Court held that equating "furnishing" with "filing" was a proper exercise of the authority to interpret an ambiguous statutory term under Chevron.  The Court's Chevron analysis follows (some footnotes omitted):

Petitioner's final argument regarding section 6229(e) is that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, which incorporates section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., supra, regarding the procedure for furnishing additional information for purposes of section 6229(e), is invalid. Petitioner argues that while section 6229(e) merely requires information identifying a partner to be "furnished" to the Commissioner, section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., supra, restricts the plain meaning of section 6229(e) by requiring that identifying information be "filed" with the Commissioner. Petitioner also points out that section 6229(e) contains no "regulation-enabling language". We find that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, is a valid regulation. 

We first address petitioner's point regarding the lack of "regulation-enabling language" in section 6229(e). As the Supreme Court has noted, section 7805(a) provides the Commissioner with "explicit authorization to 'prescribe all needful rules and regulations for the enforcement' of the Internal Revenue Code." Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. ___, ___, 131 S. Ct. 704, 714 (2011). Section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, was issued pursuant to the authority section 7805 provides to the Commissioner. 52 Fed. Reg. 6779, 6780 (Mar. 5, 1987). Secondary authority for issuance of the regulation is found in section 6230(k), which provides: "The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subchapter"; i.e., subchapter C of chapter 63, which contains sections 6221 through 6234. Id. We thus find petitioner's argument on this point has no merit.