Good Review Case on Claims for Refund and Variance for Tax Procedure Students (9/14/13)

In Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013), here, the Federal Circuit (Judge Dyk) held that 

1.  "Cencast's liability for employment taxes under the Federal Unemployment Tax Act ('FUTA') and the Federal Insurance Contribution Act ('FICA') is determined by reference to the employees' "employment" relationships with the common law employers for which Cencast remits taxes (i.e., the production companies), and that the common law employers cannot decrease their liability by retaining entities such as Cencast to actually make the wage payments to the employees."

2.  Cencast is barred by the doctrine of variance from raising a theory in its refund suit not raised in its claim for refund.  The new argument was that some of the workers were independent contractors rather than employees.

First, it is useful to note the role served by Cencast and the other companies involved in the suit because it offers a small window into the movie production business.  Here is the background from the opinion:

The evolution of the motion picture and television industries over the past century has resulted in this tax case concerning FUTA and FICA tax liability. In the early part of the twentieth century, motion picture productions were primarily controlled by large, major motion picture and television studios, and production workers enjoyed long-term, continuous employment relationships with those studios. These studios paid wages to these employees, and, as the common law employers of these workers, were liable for employment taxes on those wages, and remitted those taxes directly to the Internal Revenue Service ("IRS"). 

Since the late 1970s, however, many smaller production companies have emerged and have created movies and television programs independently from the large studios. As a result of this trend, many production workers are now employed by several different production companies during the course of a year, rather than by a single large production studio. Thus, in any given year, a given production worker might earn wages from several production companies, all of whom (being common law employers) would be individually liable for employment taxes on those wages. The complex web of production companies and production workers that evolved made administration of payroll, benefits, collective bargaining agreements, and taxes increasingly difficult. 

Entities like Cencast, which are also known as payroll service companies ("Service Companies"), emerged to address these problems. Over the last twenty-five years, virtually all independent production companies have contracted with Service Companies for payroll and related services. Cencast and other Service Companies compute and pay compensation to production workers, report and pay compensation to multi-employer pension and benefit funds, provide post-production financial reporting, and pay employment taxes to the IRS. 

Although they contract with the Service Companies, production companies both hire and supervise the individual production workers—as they had done in the pre-Service Company era. In general, Cencast and other Service Companies have no role in selecting or supervising production workers. The only change is that entities like Cencast—and not the production companies—now pay the production workers and administer the production companies' payroll and employment tax obligations. It is undisputed in this case that Cencast is not the common law employer of production workers.

Appeals Judicial Approach and Culture Project (AJAC) (9/10/13)

Stephen Olsen blogs on the Procedurally Taxing blog on IRS's appeals new initiative / approach, called Appeals Judicial Approach and Culture Project (AJAC).  See Stephen Olsen, AJAC is here! (Procedurally Taxing 9/9/13), here.  I highly recommend that blog entry to tax procedure afficionados.  (Note that one advantage is that the authors of the Procedurally Taxing Blog has appropriate materials from and references to the Saltzman and Book treatise which is the most cited treatise on tax procedure.)

I had recently blogged on AJAC's new issues approach, New Policy Statement That Appeals Is Not to Raise New Issues (Federal Tax Procedure Blog 7/23/13), here.

Tax Court Blesses a Taxpayer Designation of Payment (9/6/13)

I had intended to do a blog on the Tax Court decision in Dixon v. Commissioner, 141 T.C.; No. 3 (2013), here.  The background is that a taxpayer may generally designate how "voluntary" payments to the IRS gets applied among its various outstanding tax liabilities, but when not voluntary (I mean to be somewhat fuzzy here), the IRS may apply the payment in the best interest of the fisc.  There, in a reviewed opinion, the Tax Court held that, in a somewhat convoluted fact pattern, a corporation owing large amount of tax could receive money from its shareholders and pay it against its withholding obligations for the shareholders, thereby give the shareholder credit against their tax liabilities.  The shareholders, of course, could have paid their own tax liabilities directly, but they hoped to achieve collateral benefits by shuffling the payment through the corporation (one would be, they hoped, to have the income tax credit as of the date it should have been originally withheld and paid over, thereby avoiding the interim interest on their personal tax liability which they could not avoid with a direct payment).  But, the Stephen Olsen of the Procedurally Taxing Blog beat me to the punch and, actually, has done an excellent job, so I refer readers to that blog entry for a great discussion.  Tax Court Holds IRS Must Follow Corporation’s Designation on Tax Payment. (Procedurally Taxing Blog 9/6/13), here.

I do cut and paste below the Tax Court's Syllabus of the decision (which summarizes the majority decision, but refer readers also to Judge Holmes' dissent discussed in the Procedurally Taxing Blog:

Ps were criminally prosecuted for failure to file individual income tax returns for 1992-95. At the time, Ps were owners, officers, and employees of Tryco Corp., which failed to file employment tax returns and corporate income tax returns during this period. As part of a plea agreement with the Department of Justice, Ps agreed that their wrongdoing had inflicted a "tax loss" on the IRS of $61,021 and acknowledged that they could be required to make restitution of this amount. On advice of their attorney they transferred funds to Tryco with instructions that Tryco remit the funds to the IRS. In December 1999 Tryco remitted $61,021 to the IRS with a cover letter from Ps' attorney designating the payment as "payment of [Form] 941 taxes of the corporation" that was "to be applied to the withheld income taxes" of Ps for specified calendar quarters of 1992-95. In early 2000 Ps' accountants determined that Ps actually owed $30,202 more in individual income tax for 1992-95 than Tryco had remitted to the IRS in December 1999. Accordingly, Ps transferred additional funds to Tryco, and in June 2000 Tryco remitted to the IRS an additional check for $30,202. The cover letter from Ps' attorney stated that the payment was "submitted as a pre-assessment designated payment of [Form] 941 taxes of the corporation" which "represents the withheld income taxes of * * * [Ps]" for the fourth quarter of 1995. Ps argued for a downward adjustment to their sentence and for a probated sentence on the ground that they had remitted taxes to the IRS in excess of the "tax loss" determined in the plea agreements. They were sentenced to probation and a small fine. 

Subsequently, R filed a notice of intent to levy on Ps' assets in satisfaction of their assertedly unpaid 1992-95 income tax liabilities. Ps were granted a collection due process (CDP) hearing in which they challenged the levy on the ground that Tryco's 1999-2000 remittances had discharged their 1992-95 income tax liabilities in full. The Appeals officer upheld the levy, concluding that Tryco's 1999-2000 payments "were not withheld at the source and * * * cannot be designated to the withholding of a specific employee." Ps timely petitioned under I.R.C. sec. 6330(d)(1) for review of this determination. 

Tax Controversy is a Hot Growth Area of the Practice (9/4/13)

From the estimable Tax Prof Blog - Tax Controversy and Litigation: One of the 12 Hot Practice Areas for 2020 and Beyond (Tax Prof Blog 9/4/13), here, which links to this article - David Ogul, What LEGAL Fields will be Hot?, National Jurist, p. 28, 30 (Sept. 2013), here.  Key excerpt:

Tax Controversy and Litigation 

Despite the recent scandal regarding the IRS' handling of conservative groups seeking nonprofit status, [Richard] Hermann expects tax controversy and litigation to become one of the hottest practice areas during the next decade or so.  

"The government is going to get more diligent about pursuing tax dollars, not only at the federal level, but at the state and local levels, too," he said. "This is an area that is growing, and it is always a good idea for someone who has been audited or wants to appeal their taxes to hire a tax controversy lawyer."

Ed Robbin's Excellent Blog on Section 6501(c)(8) Extending the Statute of Limitations for Certain International Reporting (8/31/13)

I encourage readers to study Ed Robbins most recent contribution to the Tax Crimes / Tax Procedure literature.  Edward Robbins, You Should Worry About Section 6501(c)(8) (Tax Controversy (Civil & Criminal) Report 8/31/13), here.  The author, a prominent tax controversy practitioner, here, discusses Section 6501(c)(8)'s special statute of limitations for certain international reporting, including Forms 8938, 5471, etc..  Section 6501 may be reviewed here.  Section (c)(8) is:

(8) Failure to notify Secretary of certain foreign transfers
(A) In general
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295 (b) or under section 1298 (f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.
(B) Application to failures due to reasonable cause
If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.

Note that the heading of the subsection does not indicate the sweep of the text of the provision.  To summarize the sweep of the provision, where the required information is not provided with the original return, the statute of limitations for the entire return stays open indefinitely until 3 years after the information is provided.  Ed's article is excellent.  Without taking away from the article, I just quote excerpts from the opening and the ending to encourage you to read the whole article (the bold face is mine):

Most tax practitioners understand the basic assessment statute of limitations rules in the Code: three years after the return is filed, six years after the return is filed for 25% omission of income, or forever in the case of fraud and/or failure to file. Practitioners may be less familiar with the raft of additional special assessment statutes of limitation rules found in the Code, but one of these additional rules demands special attention.  That rule is section 6501(c)(8) which provides that in the case of any information on foreign activities which is required under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for assessment of any tax shall not expire until three years after the date on which the IRS is furnished the information required to be reported.
Until recently, section 6501(c)(8) was  often overlooked both for assessment and financial statement tax provision purposes.  As stated above, section 6501(c)(8) set forth an exception to the general rule.  In March of 2010 the Hiring Incentives to Restore Employment Act (the “HIRE Act”), amended the section 6501(c)(8) exception to the general statute of limitations and it has been made applicable to the entire income tax return – not just the tax consequences related to the information required under the relevant foreign information reporting provision.  The new section 6501(c)(8) is applicable to any tax return filed after March 18, 2010 and any other return for which the assessment period specified in section 6501 had not yet expired as of that date.  As long as a failure to comply with one of the specified foreign information reporting requirements for a tax return exists, the limitations period for that tax return remains open indefinitely.  The statute will not commence to run until the time at which the information required under the reporting provision is filed with the IRS and will not expire before three years after the filing of the required information.

JCT Staff Review of $2 Million + Refunds (8/24/13)

I was reading today a letter to the editor of Tax Notes from Professor George K. Yin, here, formerly tax counsel to the Joint Committee on Taxation.  George K. Yin, Let's Get the Facts of the Couzens Investigation Right!, 2013 TNT 165-12 (8/26/13).  The subject is some esoterica about the requirement that, prior to making a $2 million refund, the IRS must submit a report to the Joint Committee on Taxation ("JCT").  Section 6405(a), here.  The staff reviews and comments on the refund.  Technically, the review is not a veto, but given JCT's role in the system it might practically have that effect.

Professor Yin reviews the history for the provision.  His concluding paragraph makes a good point about the requirement for JCT staff review of refunds but not of IRS decisions to forgo deficiencies, both of which have the same effect on the revenue and both of which could be means for effecting agency favoritism (which was the concern in enacting Section 6405).  Here is the paragraph:

Congress's fixation on refunds might be of mere historical curiosity but for the fact that it had clear policy consequences: Congress gave the Joint Committee authority to review all large tax refunds, a responsibility that continues to this day. The irony of this decision is quite evident. While it was true that the Board of Tax Appeals provided independent review of certain agency decisions prior to the assessment of taxes, the only ones considered by the Board were those unfavorable to taxpayers. Agency decisions improperly favorable to taxpayers were not appealed, and therefore never reached the Board or any other independent reviewer. Yet a taxpayer-favorable decision not to assert a deficiency was directly analogous to an unjustified refund that Congress was so suspicious about. Indeed, a failure to assert a deficiency was actually much more worrisome than a refund. Because a refund involved an affirmative act that went through several levels of agency review for approval, an illegal refund required the unlikely existence of widespread corruption throughout the agency. In contrast, a decision not to assert a deficiency conceivably could have begun and ended with the inaction of a single, rogue employee. Thus, if Congress was seriously concerned with possible, corrupt favoritism by the agency (rather than mere posturing to gain political advantage), it badly missed the mark.

For those desiring an introduction to the JCT refund revise process, I cut and paste below my discussion (footnotes omitted) of Section 6405 in my Tax Procedure book:

IV. Joint Committee Review of Large Refunds. 

Section 6405(a) prohibits refund of income or estate and gift taxes and most other refunds in excess of $2,000,000 until 30 days after the IRS has submitted a report to the Joint Committee on Taxation (“JCT”), where it is reviewed by the staff of the JCT.  The $2,000,000 threshold is determined based on net over-assessments for the audit cycle in a multi-year review.  The IRS report details the IRS's findings and conclusions with respect to the refund it proposes to make.  This gives the Joint Committee Staff an opportunity to review the proposed refund and comment thereon.  

6-Year Return Adequate Disclosure By Reference to Other Returns (8/23/13)

The normal statute of limitations in tax matters is 3 years from the date the return was filed.  There are exceptions.  One is the six-year statute that applies if there is 25% omission rule that figured most prominently in the recent Home Concrete case,  Section 6501(e)(1)(A)(i), here; see United States v. Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012).  Even where there is a 25% omission, the six-year statute does not apply if the taxpayer made adequate disclosure.

In CCA 201333008, here, the author discusses the disclosure requirements in the context of a flow-through entity return (partnership or S corporation).  To use the S-corporation context discussed in the CCA, if the shareholder reports income from the S-Corporation, it will usually be a number with no explanation other than identifying the S-Corporation.  The S-Corporation return (Form 1120-S) will have the detail and any disclosures about any income omissions.  The question is whether the Form 1120-S disclosures, if otherwise adequate to put the IRS on notice, will be deemed notice as to the shareholder's return which does not include the disclosures.  The answer is yes.  The CCA does a very good job of discussing the authority supporting that answer.

The caveat noted in the CCA is that the Form 1120-S must have been filed on or before date of the shareholder's return.  The reason for this spin on the incorporation by reference rule is that the law is "well-settled" that an amended return disclosure will not suffice to ex post facto supply an adequate disclosure if the original return did not make the disclosure.  See Houston v. Commissioner, 38 T.C. 486, 489 (1962). The CCA takes the position -- logically it seems to me -- that an 1120-S filed after the shareholder's return is filed is conceptually the equivalent for purposes of the notice requirement to an amended shareholder return.  In other words, the shareholder must make sure that, in filing his or her original return, the "disclosure by reference" is to a return that has been filed (rather than one that will be filed later).

I have just revised my Tax Procedure text discussion to include the following paragraph inspired by the CCA (footnotes omitted):\

The disclosure contemplated is one filed on or with the taxpayer’s own original return which contains the substantial omission.  For this reason, the filing of an amended return will not cure the original return failure to disclose that caused the extended statute of limitations.  (Students will recall that the same concept applies with respect to the filing of a nonfraudulent amended return where the original return was fraudulent; the amended return does not cure the fraud that triggers the unlimited statute of limitations.)  Where, however, the taxpayer’s original return provides a reference to another return that has been filed on or before the date the taxpayer’s return is filed, the references can constitute adequate notice. For example, where a taxpayer reports on his return items from a flow-through entity such as a partnership or an S-corporation, the information on the referenced entity return filed on or before the filing of the taxpayer’s return can be considered in assessing whether the taxpayer has made adequate disclosure.

Restraining Taxpayers for Tax Debts (8/19/13)

This morning, I read a recent case involving the writ ne exeat republica.  I suspect that many readers will not have heard of the writ.  While the case I read this morning was unexceptional, I thought it readers might find the introduction from my Tax Procedure book helpful as an introduction (footnotes omitted; footnotes can be reviewed the the downloadable text):

2. Writ of Ne Exeat Republica - Constraining the Person. 

The United States does not generally allow imprisonment – or, more broadly, constraining a person’s liberty -- for the nonpayment of debt.  The exception for purposes of tax matters is the statutory approval in § 7402(a) for the writ of ne exeat republica.  The Latin is “let him not go out of the republic,” and was developed in England as a chancery writ.  The writ is sometimes used in domestic relations contexts to restrain someone from leaving the jurisdiction.  In tax collection contexts: 

The writ ne exeat republica is an extraordinary remedy and should only be considered when all other administrative and judicial remedies would be ineffective. In appropriate cases, the writ ne exeat may be used as a collection device against a United States taxpayer who is about to depart from the territorial jurisdiction of the United States, or who no longer resides but is temporarily present in the United States and who has transferred his assets outside of the United States in order to avoid payment of his federal tax liabilities. The writ ne exeat is a court order which generally commands a marshal to commit to jail a defendant who fails to post bail or other security in a specified amount. The authority for the United States District Courts to issue writs ne exeat in tax cases is found in I.R.C. section 7402(a) and 28 U.S.C. section 1651.  

The debt relied on to support the writ must be enforceable against the defendant, be of a pecuniary nature and be presently payable. Thus, in tax cases, an assessment should be outstanding against the taxpayer.  

The purpose of the writ in tax cases is to prevent taxpayers from defeating the collection of tax liabilities by removing themselves and their assets from the territorial jurisdiction of the United States. As a practical matter collection by administrative means is ineffective where the taxpayer has either secreted his assets or removed them from the United States. If the taxpayer leaves the United States, judicial remedies may be likewise defeated since the court would then be powerless in most cases to enforce its orders or judgments against the taxpayer or his property, if located outside of the United States. Thus, the writ ne exeat ensures the continuing submission of the taxpayer to the jurisdiction of the court. 

The writ may be used in conjunction with the appointment of a receiver. 

The writ is very, very rarely used.  I have never encountered it in my practice nor, anecdotally, have I heard of other practitioners’ encountering it.  The cases are sparse.

Remittance to IRS -- Is it a Payment or a Deposit? (8/19/13)

Whether a remittance to the IRS is a payment of tax or a deposit can have significant consequences.  For example, if it is a payment of tax, there is a statute of limitations to obtain refund of the repayment; if it is a deposit, the refund statute of limitations does not apply.  Further, if it is a payment, the taxpayer can only get the remittance back by filing a claim for refund showing that he is entitled to the refund; if it is a deposit, the taxpayer can get it back simply by asking. There are complexities in this example, but in broad strokes that is the distinction.  The IRS has procedures whereby, in submitting a remittance, the taxpayer can designate whether the remittance is a payment or a deposit and the designation will (usually)  be honored by the IRS.

In Syring v. United States, 2013 U.S. Dist. LEXIS 111712 (D WI 8/15/13, amended order), here, a taxpayer, an estate, confronted this distinction.  The taxpayer had remitted tax of $170,000 to the IRS along with a timely request for extension of time to file the estate tax return.  The taxpayer did not designate the remittance as either payment of tax or deposit.  More than 3 years later (and just after the 3-year lookback limitations period for refunds), the taxpayer filed the estate tax return (then well over due), showing no tax due.  After audit the IRS determined that about $25,000 tax was due.  The taxpayer then requested return of the balance.  The IRS denied the request because, it determined, the original remittance was a payment and the return, effectively requesting the refund, was not filed within the required lookback period under Section 6511(b).

The court held that the original remittance was a payment rather than a deposit.

Despite having strong equities on its side, the court finds that the Estate has failed to meet its burden of putting forth sufficient evidence from which a reasonable trier of fact could find that the remittance was a deposit.  Plaintiff’s motion for summary judgment will, therefore, be denied and defendant’s motion for summary judgment will be granted.

The court looked at the facts and circumstances in making this test concluding:

Although the first factor articulated by the Seventh Circuit in Moran [there was no determination of tax due] weighs in favor of the plaintiff’s position, its intent to make a down payment on its tax liability and the fact that IRS treated the remittance as a tax payment tip the balance strongly to a finding of a tax payment. Based on this, the court finds that the Estate’s remittance does not constitute a deposit. This result may seem unfair -- after all the government is allowed to keep a payment that it concedes was not due -- but tax laws are “not normally characterized by case-specific exceptions reflecting individualized equities.” United States v. Brockamp, 519 U.S. 347, 352 (1997). Despite the equities, the court concludes that plaintiff is unable to meet its burden of demonstrating that the remittance was a deposit and, therefore, this court has no jurisdiction over its claim for refund. Dalm, 494 U.S. at 609

Practitioner Warns of IRS Letters and Notices to Not Ignore (8/17/13)

Edward M. Robbins, Jr., a prominent tax litigator (see bio page here), has posted a good series of articles on six IRS Letters and Notices You Must Not Ignore.  The articles present a good summary of the problems encountered in ignoring these letters and notices; or, to state it differently, the reasons you should pay attention to these letters and notices.  This articles are on a blog sponsored by the law firm of Hochman, Salkin, Rettig, Toscher & Perez, P.C, here, which has a strong team in tax controversy matters. Readers might also want to review that firm's publications web site, here.

Ed's list is:

1. Statutory Notice of Deficiency (Ninety Day Letter).
2. Final Partnership Administrative Adjustment (FPAA) under TEFRA.
3. The IRS Summons (including an IRS caused Grand Jury Subpoena).
4. The Final Notice Before Levy.
5. Statutory Notice of Denial of a Claim for Refund.
6. Notice of Computational Adjustment under TEFRA.

The series of articles is:

1. Six IRS Letters and Notices You Must Not Ignore (Tax Controversy (Civil & Criminal) Report 7/7/13), here, addressing items 1 and 2 on his list.
2. Part II – Six IRS Letters and Notices You Must Not Ignore (Tax Controversy (Civil & Criminal) Report 8/5/13), here, addressing items 3 and 4 on his list.
3. I will post the link to the final article when he posts it.