District Court Holds Indicatively While Case on Appeal That Remand of FBAR Willful Penalty to IRS Did Not Vacate the Timely Assessments (2/27/24)

  In United States v. Kerr (D. AZ Dkt O. 2:19-CV-05432 Order dtd 2/23/24), TN here and CL here, the district court ruled indicatively clarifying the intended effect of the district court termination of the case after remand to the IRS of willful FBAR penalties for certain years. The intended effect was not to vacate those penalties but to provide a procedure to reconsider and modify the amount of the penalties for future district court judgment. In other words, the remand did not require a new assessment of FBAR willful penalties (for which the assessment statute of limitations had run). Rather, any IRS action would adjust the previously timely assessed FBAR penalties. After this indicative ruling, the appeal of the case can proceed in the Ninth Circuit.

Links to items related to this blog are:

• FRCP 62,1, titled Indicative Ruling on a Motion for Relief That is Barred by a Pending Appeal, here,
• FRAP 12.1, Remand After an Indicative Ruling by the District Court on a Motion for Relief That Is Barred by a Pending Appeal, here,
• Kerr docket entries for this civil case (FBAR penalty enforcement case): CL, here.
• Ninth Circuit Order staying Ninth Circuit proceedings pending the district court’s indicative ruling, here.

Prior blogs involving Mr. Kerr are (reverse chronological order):

Grossly Overvalued Conservation Easement Disallowed in Full and Gross Valuation Misstatement Penalty Applied (2/24/24)

In Oconee Landing Property, LLC v. Commissioner, T.C. Memo. 2024-25 (2/21/24), GS here, the Court (Judge Lauber) denied the charitable contribution deduction because

• the allegedly relied upon appraisers were not “qualified appraisers” because the petitioners knew the property was worth only a fraction of the appraisers’ opined values (Slip Op. 39-48; and
• the property was “ordinary income property” in the hands of the promoters and that character carried over to the partnership, thus limiting the charitable deduction to the promoters basis. Petitioner supplied “no evidence” of that basis. (Slip Op. 48-57.)

Further, the Court held that, although entitled to no deduction, the Court still had to determine the value of the contributed easement to determine whether the valuation misstatement penalties applied. § 6662(a), (b)(3). The penalties are 20% if the valuation is substantial—i.e., 150% or more of the correct value--and 40% if the valuation is gross—200% or more of the correct value. (Slip Op. 74, citing § 6662(h) and § 6662(h)(2)(A)(i), respectively.) The value of the easement claimed on the return was $20.67 million but the value determined “was no greater than $4,972,002, thus the claimed value “exceeded the correct value by 416%.” (Slip Op. 74-75.)

In support of the first holding (not qualified appraisers), the Court said (Slip Op. pp. 45-46):

A person who achieves an advance agreement with an appraiser that property will be overvalued—knowing that it is being overvalued—cannot establish good faith reliance on professional advice that the appraisal is acceptable. n14

But there is more in the indicated footnote, the Court said (Slip Op. 46):

   n14 In its opening post-trial brief petitioner asserted that the regulations governing qualified appraisals and qualified appraisers “did not go through a proper notice-and-comment process and are, therefore, invalid.” That assertion occupied a single sentence; petitioner supplied no argument in support of that assertion, stating that “the Court need not reach that issue in this case.” And in its post-trial Answering Brief petitioner did not mention any challenge to the validity of Treasury Regulation § 1.170A-13(c)(5)(ii), or any other provision of the regulations, based on the Administrative Procedure Act (APA). Under these circumstances, petitioner has not properly presented or preserved an APA challenge to any regulation discussed in this Opinion.

Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

Oral Argument in Corner Post on Whether Procedural Challenges to Regulations Are Subject to § 2401(a)’s Six-Year Statute of Limitations (2/21/24; 4/6/24)

I previously included in another blog an introduction to Corner Post v. Board of Governors of the Federal Reserve System (Sup. Ct. Case No. 22-1008), here, See Update on Supreme Court Deference Case (with Speculation) and New Supreme Court case on General 6-year Statute for Challenging Regulations Interpretations (Without Speculation) (Federal Tax Procedure Blog 10/1/23), here. The question presented in Corner Post is addressed to § 2401(a)’s general fallback statute of limitations of six years :

Does a plaintiffs APA claim "first accrue[]" under 28 U.S.C. §2401(a) when an agency issues a rule-regardless of whether that rule injures the plaintiff on that date (as the Eighth Circuit and five other circuits have held)-or when the rule first causes a plaintiff to "suffer[] legal wrong" or be "adversely affected or aggrieved" (as the Sixth Circuit has held)? 

The Solicitor General (“SG”) worded the question presented slightly differently (appellate fans will understand the subtle difference):

Whether the court of appeals correctly held that petitioner’s freestanding challenge to a rule adopted by the Board of Governors of the Federal Reserve System in 2011 was untimely under the six-year statute of limitations in 28 U.S.C. 2401(a) because petitioner had brought that challenge more than six years after the rule was adopted.

I noted that the resolution of Corner Post could affect many cases, including tax cases. E.g., Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), GS here (where the Court invalidated an interpretive tax regulation promulgated in the 1980s for procedural irregularity (failing to consider and respond to meaningful comments during the notice and comment process).

Oral argument in Corner Post was held Tuesday, February 20, 2024. See the transcript here and the recording here. I won’t cover oral argument except as it might affect an issue I have discussed before—the difference between arbitrary and capricious procedural review and interpretation review through Chevron deference. The context for the following excerpts is whether procedural challenges (such as failure to consider and respond to comments in the notice and comment process) are subject to § 2401(a)’s six-year statute of limitations. Other nonprocedural challenges, referred to as substantive but, I think, meaning interpretive challenges of whether the regulation properly interprets the statute may be made on an as-applied basis during enforcement many years after the regulation was promulgated. [Added 4/6/24 1pm - see * at end of this blog entry] I quote the entire portions of the transcript (Tr. 33-24; & 73-74; note that Mr. Weir is counsel for Corner Post. and Mr. Snyder is Assistant Solicitor General, counsel for the Government):

Court Holds that Untimely Refund Claim by Amended Return Stating a Different Legal Basis Does Not Relate Back to Timely Refund Claim by Amended Return (2/20/24)

In American Guardian Holdings, Inc. v. United States (N.D. Ill. Case 23 C 1482 Memo Op. & Order 2/7/24), GS here and CL here, the district court held that that it had no jurisdiction over an untimely refund claim (by untimely amended return, Form 1120X) requesting a refund in the same amount as a prior timely refund claim (by timely amended return, Form 1120X) but stating a different legal basis than the timely refund claim. In the untimely refund claim, the taxpayer asked the court to “discard” the timely filed amended return. (The latter fact was not relevant to the holding.)

For clarity, the taxpayer filed the following documents: the original return; a timely refund claim  (by Form 1120X) seeking most of the tax paid; a timely refund claim (by Form 1120X) seeking all of the tax paid; and an untimely third amended return (by Form 1120X) seeking all of the tax paid. For analysis of the issue of whether the court had jurisdiction over the untimely amended return, the court compared the untimely third amended return to the timely second amended return. The issue was whether the claim in the untimely third amended return was a clarification of the claim made in the timely second amended return or stated a different basis.  I simplified in the original paragraph by mentioning only a timely filed refund claim and a subsequent untimely filed refund claim.

I discuss the general issue in the most recent edition of the Federal Tax Procedure (Practitioner Edition p. 236; Student Edition (without footnote p. 165)) as follows:

(d) Germaneness Doctrine.

          The germaneness doctrine may apply where the taxpayer:

          (1) files a formal claim within the limitations period making a specific claim; and (2) after the limitations period but, while the IRS still has jurisdiction over the claim, files a formal amendment raising a new legal theory -- not specifically raised in the original claim -- that is “germane” to the original claim, that is, it depends upon facts that the IRS examined or should have examined within the statutory period while determining the merits of the original claim. Unlike the waiver doctrine, the inquiry here is not whether the particular legal theory for recovery has been considered by the IRS during the limitations period but whether the underlying facts supporting that legal theory were discovered or should have been discovered by the IRS in considering the original claim during the limitations period. n1049

n1049  Computervision Corp. v. United States, 445 F.3d 1355, 1370 (Fed. Cir. 2006) (citing  Bemis Brothers Bag Co. v. United States, 289 U.S. 28, 53 S. Ct. 454 (1933) and United States v. Andrews, 302 U.S. 517, 524 (1938).  In Computervision, the Federal Circuit rejected the holding of two other courts that the more specific formal claim could be filed after the IRS has completed consideration of the inadequate original claim by granting the original claim, by denying the original claim, or by the taxpayer having filed a suit for refund without IRS formal action on the claim. The cases rejected in Computervision are:   Mutual Assurance Inc. v. United States, 56 F.3d 1353 (11th Cir. 1995); St. Joseph's Lead Co. v. United States, 299 F.2d 348 (2d Cir. 1962).

 In American Guardian, the Court discusses the germaneness doctrine as follows:

Sixth Circuit Affirms Summary Judgment on FBAR Willful Penalty on Conduct Objectively Reckless (2/14/24)

I report this morning on United States v. Kelly, 92 F.4th 598 (6th Cir. 8/8/24), CA6 here and GS here. Kelly affirms the district court's approval of the FBAR willful penalty on motion for summary judgment.

I first offer the MS CoPilot (MS’s version of AI) explanation of the case:

Case Title: United States v. James J. Kelly, Jr.

Background:

• James J. Kelly, Jr., a U.S. citizen, opened an interest-bearing account at Finter Bank in Zurich, Switzerland in 2008.

• He designated the account as “numbered” to keep his name off the statements and requested that Finter retain account-related correspondence instead of mailing it to him.

Legal Context:

• Under the Bank Secrecy Act, individuals with foreign bank accounts containing $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Department of the Treasury.

• Failure to file an FBAR by the deadline can result in civil penalties. The penalty amount depends on whether the failure was accidental or willful.

Case Details:

• The government sued James Kelly, alleging that he willfully failed to timely file FBARs for the years 2013, 2014, and 2015.

• The district court granted summary judgment in favor of the government.

• Kelly’s failure to file was deemed a willful violation of the Bank Secrecy Act.

Outcome:

• The court affirmed the judgment, emphasizing that Kelly’s actions constituted a willful violation of the law.

• In summary, James Kelly’s failure to file FBARs for his foreign bank account led to civil penalties due to willful non-compliance with the Bank Secrecy Act.

Experts in Technical Area (FDA) Caution Supreme Court About Problems in Overruling Chevron Deference (1/12/24)

I recently wrote a blog on the bad effects of eliminating Chevron deference in a specific context—the § 6751(b) regulations bringing clarity to the legal mess created by the courts. Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (Federal Tax Procedure Blog 1/8/24; 1/15/24), here. A team of multi-disciplinary authors has published a similar blog relating to the Federal Drug Administration (“FDA”). Nikhil Chaudhry, Reshma Ramachandran, & Joseph Ross, Overruling Chevron and FDA Decision-Making (Yale J. on Reg.: Notice & Comment 2/9/24), here. The authors credentials are:

Nikhil Chaudhry is a Postgraduate Associate at the Yale Collaboration for Regulatory Rigor, Integrity, and Transparency. Dr. Reshma Ramachandran is an Assistant Professor of Medicine at the Yale School of Medicine and Co-Director of the Yale Collaboration for Regulatory Rigor, Integrity, and Transparency. Dr. Joseph Ross is a Professor of Medicine at the Yale School of Medicine, Professor of Public Health at the Yale School of Public Health, and Co-Director of the Yale Collaboration for Regulatory Rigor, Integrity, and Transparency.

The authors make essentially the same point I made—abandoning Chevron in technical areas, like tax and the FDA, so that judges rather than experts make key interpretations will (quoting the Conclusion):

Overruling Chevron would drastically increase uncertainty and make public health agencies like the FDA less predictable and less effective. There is a high likelihood that decades of precedent would be undone by individual challenges to regulatory decisions, leading to great disorder—for Congress, for the agency, and for physicians and patients across the United States. The highest court should at the very least create a carve out for deference to scientific agencies, although it’s unclear how this would be operationalized. Regardless of how this court decides, with an array of complex public health and medical decisions arising in the 21st century, we need an effective government and more regulatory oversight, not less.

Among these authors’ arguments is the following:

ATL Article on Tax Structuring on Sale of MLB Team (2/8/24)

I picked this up today involving the type of planning that may keep well-paid tax controversy specialists busy in the future. Steven Chung, The Upcoming Baltimore Orioles Sale Is Structured To Avoid Capital Gains Taxes (Above the Law 2/7/24), here. The sale is described:

But it is not a straightforward sale. Rubenstein and his group will initially purchase 40% of the team. The remaining 60% will be sold, reportedly for tax reasons, after 94-year-old Angelos passes away. Angelos purchased the team in 1993 for $173 million. If the sale were to take place now, Angelos would face an estimated $250 million capital gains tax on the approximately $1.5 billion profit. But by waiting until after his passing, the basis step-up rule would increase his cost basis to current market value instead of his original purchase price. If the team is sold immediately thereafter, there will be little to no capital gains tax on the sale.

Rubenstein and his group [the buyers] would also enjoy some tax benefits as the new owners. According to Forbes, if the buyers are able to structure this as an asset sale, they will be able to take advantage of any losses incurred to offset other income. However, investors who do not materially participate in the team management can only use their losses to offset passive income such as real estate rental income.

 What is not clear is who will control the Orioles after Rubenstein’s initial 40% purchase. On one hand, the Angelos family could still control the team through its majority ownership. On the other hand, the Angelos family could allow Rubenstein to control the team after the initial purchase. If this happens, the IRS may try to reclassify the transaction as if 100% of the team was sold while Peter Angelos was still alive and thus trigger the capital gains tax. The IRS could argue that this two-step transaction was purely tax motivated, specifically to avoid the capital gains tax.

 The article goes on to discuss the tax issues familiar to and loved by all tax controversy afficionados-- “substance over form,” “codified economic substance doctrine,” and “step transaction doctrine.”  And the article notes:

Even if the sale avoids capital gains tax, Peter Angelos’s estate will be subject to federal estate taxes which is as high as 40% at the top bracket. Also, Maryland also has its own estate tax.

So, the IRS will certainly share in the success of this venture, with the only issue being how large its overall share will be.

Tax Court Denies Petitioner Summary Judgment on Transferee Liability (2/6/24)

In Meyer, Transferee v. Commissioner, T.C. Memo. 2024-15 (2/5/24), TC Dkt Entry # 44, here, TN here, and GS here, the Court denied the petitioner’s motion for summary judgment in a transferee liability case. The petitioner argued that (i) the statute of limitations for the IRS’s transferee liability claim was not timely under the statute of limitations, (ii) collateral estoppel precluded the IRS claim, and (iii) judicial estoppel precluded the IRS claim. The estoppel claims denials are straightforward. I focus here on the first claim about the statute of limitations.

The underlying transaction at issue was a typical Midco abusive tax shelter transaction (I have often called abusive tax shelter transactions bullshit tax shelters). I assume readers are familiar with Midco transactions. An example with a good discussion is in Tax Court (Judge Lauber) Rejects Shareholders' Attempts to Reduce Transferee Liability (Federal Tax Procedure 2/10/22). I will offer a high level overview of the Midco transactions (which have variants but with common result of an empty corporation with a very large tax liability). A Midco transaction involves a third party purchasing, directly or indirectly, stock of a corporation with very large built-in gain from shareholders for a price exceeding what they would obtain if the corporation sold the assets and distributed the cash. After the purchase, the buyer sells the assets and enters an abusive tax shelter transaction (such as the Son-of-Boss involved in this case) to supposedly offset the gain, and then strips out to assets (mostly cash) to leave the corporation empty when the IRS audits and disallows the tax shelter transaction. The supposed tax “savings” is shared by the shareholders (through the purchase price) and the promoters, leaving the IRS (and the country’s taxpayers) holding the bag in the empty corporation. Remember for the balance of this discussion that all of this hinges on the fraudulent Son-of-Boss transaction. In other words, the initial corporate transferor with the unpaid tax liability engaged in fraudulent reporting.

In Meyer, Transferee, the IRS asserted transferee liability under § 6901 by treating the corporate-level transactions as including a deemed transfer to the petitioner as transferee (rather than as a seller of the stock to a third party). For an initial transferee, such as the petitioner, the statute of limitations for transferee liability does not expire until one year “after the expiration of the period of limitation for assessment against the transferor.” § 6901(c)(1).

As posited by the Court, the first step is to establish when the statute of limitations expired on the deemed transferor—the sold corporation engaging in the Son-of-Boss transaction and fraudulently reporting the transaction to zero out the gain on the return. Normally, the limitations period is 3 years. And, the Court worked on the assumption that the 3-year period would have applied and counted certain other extensions or suspensions that extended the corporate transferor’s limitations period. The Court’s analysis is fairly straightforward, so I won’t rehash that here.

Tax Lawyer of Some Notoriety Is Again in the News (2/3/24)

I previously blogged on a tax lawyer, John Anthony Castro, a tax lawyer of some notoriety in the tax community. Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (Federal Tax Procedure Blog 12/24/25), here. I noted in the blog that Castro was a Republican candidate for President; I reported on a Fifth Circuit disposition of a claim he made against the IRS and his candidacy for President.

I have two developments to report:

1. Newsweek recently reported that Castro is suing Clarence Thomas under the Virginia Fraud Against Taxpayers Act, Code of Virginia, Article 19.1 (“VFATA”), here.  I am not familiar with the VFATA, but it appears to be a state parallel to a federal qui tam action, a suit to recover for the government. Excerpts from the article are:

           The complaint, which was shared with Newsweek, alleges that in violation of VFATA, "Clarence Thomas knowingly presented or caused to be presented a false and fraudulent claim (i.e., his 2005 Virginia State Income Tax Return) to the Virginia Department of Taxation on or about April 15, 2016, that failed to report income from discharge of indebtedness."

           Thomas has faced immense scrutiny and calls for his resignation after it was reported that he failed to disclose several transactions, including a $267,230 loan that he received from wealthy friend Anthony Welters. Last year, an investigation from the Senate Finance Committee revealed that Thomas never repaid a "substantial portion" of that loan, raising concerns about whether the justice properly reported it in his tax filings.

          "Under Section 108 of the Internal Revenue Code, he would have had a legal obligation to report [the loan] as taxable income and the tax alone would have been, probably $40,000 or $50,000. That's a third of his annual salary," Castro said on Friday. "And that's when I was like, 'There's no way he reported that because that'd be financially disastrous for him.'"

          Castro is suing Thomas under VFATA, which allows private citizens anywhere in the country to bring a claim against a Virginia resident for making a knowingly false or fraudulent claim to the commonwealth for money or property, essentially empowering regular Americans to take on the role of a de factor agent of the Virginia attorney general.

          "It basically allows you to bring a tax enforcement action against a taxpayer," Castro said of the law.

          Castro said he had planned to file the suit last year but claims that Trump coordinated with the Internal Revenue Service in retaliation against his activities "undermining the political objectives of the Trump Administration."

          "Right when I'm going to level these accusations against Clarence Thomas for filing false and fraudulent returns, what happens to me? I get accused of false and fraudulent returns," Castro said.

          "They intentionally devised this plan of, 'Let's accuse him of what he's about to accuse Clarence Thomas of, it's going to completely discredit him. And if he brings this claim, nobody's going to believe him," he continued. "But, of course, I still want to go forward with it."

          Asked about whether he thinks his lawsuits against Thomas and Trump will fuel speculations about whether or not he was a conservative, Castro insisted he was still a Republican.

          "I'm a very, very stubbornly principled person and if I feel that somebody broke the law, I'm going to hold them accountable," he said. "Just like Trump for January 6 and Clarence Thomas for this sham loan." 

Note that Castro claims that Trump and the IRS coordinated this alleged retaliatory indictment. That is an interesting pairing.