California Journal of Tax Litigation, 2012 4th Quarter

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Newsletter of the Tax Procedure and Litigation CommitteeTaxation Section of the State Bar of California

In This Edition

Message from the Chair regarding the upcoming Tax Procedure and Litigation Committee meeting on November 2, 2012
David Klasing, Esq.

Chair Elect provides the minutes of the September 7, 2012 Committee Meeting
Jane Becker, Esq.

CPA, CTFA, provides a short announcement entitled “Obtaining a Copy of ID Theft Tax Returns
James Counts


Editor’s Note

Committee Roster and Past Chairs

Submission Deadlines

Message from the Chair

Greetings to the Tax Procedure and Litigation (“TPL”) Committee from your new chair, David Klasing.

I would like to thank Michel Stein for his tremendous contributions to the TPL Committee over his term as chair. I have come to know Michel as a very accomplished tax professional and view him as a personal friend and mentor.

During the TPL Committee’s last meeting on September 7, 2012, in San Francisco at the Law Offices of Winston & Strawn LLP, we heard informative and timely presentations from Joseph P. Wilson Esq. (moderator), FTB Counsel Michael Cornez, IRS Supervisory Special Agent Greg Robins, and IRS LB&I Revenue Agent Barbara Peterson regarding criminal and civil enforcement action for promoting abusive tax shelters, aiding and abetting understatement of tax liability, the tax enforcement system; and various civil and criminal statutes involving return preparers. We thank those members of the IRS and the FTB staff who made this possible, Winston and Strawn’s graciousness in hosting us and Joseph P. Wilson’s efforts in arranging and moderating the panel and for sharing his expertise in these areas while moderating the panel.

Election of Joesph P. Wilson as Second Vice Chair & Editor

At the meeting, we elected Joseph P. Wilson as Second Vice Chair & Editor. Two other very qualified candidates also ran for the position. I encourage them and anyone else with an interest in this position to run again next year.

TPL Sponsered Topics for the 2012 Annual Tax Bar Meeting (November 1-3, 2012, San Diego)

We hope that everyone is planning to attend the Annual Meeting in San Diego. If you have not already done so, please register for the meeting as soon as possible. Our Committee is sponsoring and co-sponsoring many programs at the 2012 Annual Meeting including the following: (1) Strategies and Outcomes for Distressed Companies; (2) Preparing and Trying Tax Court Cases in Superior Court and Tax Court; (3) Due Diligence in Tax Matters; (4) Resolving Tax Debt in a Struggling Economy; (5) Federal Procedural Roundtable; (6) Overview of the Federal and California Taxpayer Advocate Programs; (7) Penalties – Reasonable Cause and Otherwise; and (8) Civil Examination to a Criminal Tax Investigation. Many are working very hard to make this program a success. We hope to see you there.

TPL Committee Lunch Meeting During the 2012 Annual Tax Bar Event

On Friday, November 2, 2012, we will have our quarterly committee meeting during the lunch hour, which begins at 11:40 AM. During that meeting, we will discuss the following:

  • Topic and author selection ideas for the 2013 Washington Delegation, due on November 5th
  • Discussion of the Executive Tax Committee’s new project – the Sacramento Delegation, which will involve interested committee members (and other subcommittees) preparing papers that propose and explain a legislative, regulatory or administrative change at the California level, and then presenting that paper in Sacramento on February 7, 2013
  • Article and Quick Point submission opportunities in the Committee Newsletter and the California Tax Lawyer
  • Suggestions on 10 to 13 educational programs that the members are interested in seeing presented, for the 2013 Annual Tax Bar Meeting, including topics and speakers
  • Topic ideas for educational webinars

Upcoming TPL Committee Member Meetings

The TPL Committee Officers have agreed, very tentatively, on the following dates for upcoming meetings: February 1, 2013, May 3, 2013, and August 2, 2013. Specific topics and speakers are still to be determined. The Committee welcomes topic and speaker suggestions.

California Tax Lawyer

If you would like to have a “Quick Point” included in the upcoming issue of the California Tax Lawyer, please email a 400 to 600 word technical updates, procedural updates, observations on practice or policy matters, and commentaries to

Tax Network Newsletter

We continue to solicit articles for upcoming editions of the Newsletter. Please contact Joseph P. Wilson if you would like more information or a helpful style manual for submitting articles for our next edition at The Newsletter continues to solicit relevant updates, articles, and announcements that are innovative and of immense value to our members.

Bring Your Camera to the Annual Tax Bar Meeting and Quarterly Committee Meetings

The editors of the California Tax Lawyer would like to include pictures of our activities. Please send me via e-mail any JPEGS you may have from our meetings. Please identify each person and the event at which the photo was taken.

Hot Topics

Thanks to all those who have helped make Committee meetings successful and fun. Please come armed with “Hot Topics” for our upcoming lunch during the Annual Tax Bar Event. Our members continue to lead, teach and provide insight in our field, so there is much to share.

I hope to see you in San Diego!

David Klasing Esq. M.S.-Tax CPA Chair

Minutes of the September 7, 2012 Committee Meeting

Submitted by Jane Becker, Esq.

The September 7, 2012, meeting of the TPL Committee was held at the San Francisco offices of Winston & Strawn LLP. Present were the Chair, Michel Stein, the Chair Elect, David Klasing, the First Vice Chair, Jane Becker and the Second Vice Chair & Newsletter Editor, Patrick Crawford. Also present were thirty-four committee members and other attendees.

Welcome and Introductions

The Chair welcomed members to the meeting and thanked David Klasing, Joseph P. Wilson and all of those who worked so diligently in arranging the meeting.

The Chair reviewed efforts being made to maintain an accurate and updated email list of committee members. He urged those who have not done so to provide their email and other contact information.

The Chair noted that articles are being solicited for the upcoming TPL Newsletters, and asked those who would like to write an article to contact Patrick Crawford or himself.

The Chair thanked Patrick Crawford for editing the quarterly newsletter during the last year and remarked on what an exceptionally good job he had done.

Approval of Minutes

The first order of business was the approval of the minutes of the last meeting. The Chair indicated that the minutes of the last meeting were e-mailed to members in the last newsletter. The minutes were then approved.

Panel Presentation

Michael Cornez, Esq.

The panel was moderated by committee member Joseph P. Wilson. The moderator introduced Michael Cornez, the first of three speakers who spoke on a panel regarding civil tax enforcement measures taken against abusive tax shelter participants and promoters.

Mr. Cornez is a Tax Counsel IV (the highest level of Tax Counsel) with the Franchise Tax Board’s Legal Division in Rancho Cordova. He works on tax shelter cases and spoke on how the FTB combats abusive tax transactions.

In 2004, California enacted laws, which substantially increased penalties on investors and promoters of abusive tax transactions, thus arming the FTB with a heightened and severe statutory program with which to pursue those investing in and promoting abusive tax transactions. It enacted seven investor penalties and four promoter and material advisor penalties, all of which carry substantial penalties. Penalties are based on the revenue to be obtained by the promoter and are “unmoored” from tax shown on a return. Mr. Cornez noted that there is an issue as to whether 2004 statutes are retroactive and that this issue has not been decided.

The FTB was currently pursuing investigations under R&TC § 19173 – Failure to Maintain List of Advisees Penalty. This section requires that those promoting tax shelters must provide lists of advisees at the request of the FTB. Some promoters are taking the position that they do not do business in California and are not required to provide this information.

Mr. Cornez noted that there is no statute of limitations with respect to these statutes because they are based upon conduct and not a return. The FTB does have the burden of proof in court and there is a due process argument that can be made if the agency waits too long to assess a penalty.

There is no notice of proposed assessment/protest procedure for any of the investor/promoter and material adviser penalties. The FTB can simply send a notice of demand to collect the penalty. However, in practice the FTB sends a letter saying, “here’s what we think you’re up to, please respond”. The promoter can respond by presenting information in rebuttal. If matters are not resolved, a bill is sent. After paying 15% of the amount billed, the promoter/material adviser can file a claim for refund and subsequently file suit.

Mr. Cornez noted that it is possible to get Chief Counsel review before a claim for refund and/or suit is filed. He also noted that penalties are assessed against promoters and those aiding and abetting, i.e. banks, CPAs, and other material advisers. These penalties are not assessed against taxpayers. Abusive transactions are discovered through audits, voluntary compliance initiatives and when reviewing returns which consistently report the same information and are from the same preparer.

Mr. Cornez stated that there is no voluntary disclosure program similar to that of the Service because the FTB takes the position that it does not have statutory authority to establish one.

Barbara Peterson

The moderator then introduced Barbara Peterson, a Revenue Agent with the Internal Revenue Service’s Large Business and International Division in Sacramento, California. She was previously in the Service’s Abusive Tax Avoidance Transaction Group. Ms. Peterson spoke regarding the Service’s civil enforcement remedies regarding abusive tax transactions.

Ms. Peterson said that most referrals come from the field and that leads are written up and sent to a return preparer/promoter coordinator who then initiates an injunctive investigation.

Ms. Peterson discussed the permanent injunction against William Chapman and Alexander Capital Markets in 2011. It is a good example of how injunctive relief is obtained against an abusive promoter. In Alexander, the defendants devised a plan in which the holders of appreciated stock could “loan” the stock for 90% of its value. The Service argued that these transactions were sales and not loans, and resulted in taxable income once the stock was “loaned”. In this case, they told the promoters upfront that they were under investigation and pursued relief against the stockbrokers as well.

If a promoter does not voluntarily cooperate, a summons is issued. If there is no response the Service will pursue summons enforcement. The IRS will interview all major participants with a court reporter present. It then drafts a referral the Department of Justice for injunctive relief; DOJ files the complaint seeking injunctive relief. Often the promoter will agree and it will become a consent injunction.

There was a spirited discussion among the committee members and the panel with regard to whether losses incurred by investors in the stock “loan” transactions would qualify as theft losses. Ms. Peterson pointed out that if somebody has 100 shares which cost a dollar each; “loaned” them for $90; and watched as the stock appreciated in value to $1 million, there is no loss because the investor has suffered no real economic damage. They did not have “skin in the gain”.

Ms. Peterson was asked how a decision is made to pursue a promoter civilly as opposed to criminally. She noted that the Service does not have unlimited resources and these decisions are often based on policy. The government looks to whether there is harm to the government and not harm to the taxpayers so what may seem to be criminal activity can remain civil when a matter is reviewed through that particular lens.

Greg Robbins

The moderator then introduced Greg Robbins. Mr. Robbins is a Supervisory Special Agent, Criminal Investigation Division in Oakland, California. Mr. Robbins area of operations is from Bakersfield to the Oregon border. He has been with the Service for 25 years, the last 18 with Criminal Investigation. Mr. Robbins discussed the Service’s criminal investigations applicable to fraudulent tax preparers.

Mr. Robbins reviewed how the Service identifies fraudulent return preparers and how it conducts an investigation. If a preparer systematically claims the same credit or deduction for all of his clients, this may trigger an inquiry, i.e., when every return prepared shows a homebuyer’s credit, for example. CI will then “shop a preparer” by sending in an undercover agent (with an undercover wire) who asks for a return to be prepared. Even though the return should show tax due, it shows a refund. The IRS obtains probable cause based upon the false tax return, at which point it can obtain a search warrant. After the warrant is executed, it drafts a Special Agent report which eventually gets to the U.S. Attorney’s Office which prosecutes the case. A typical investigation can take 12 months and the approval process for prosecution can take four to five months. Due to the lengthy approval process, their prosecution rate is very high.

There is a Scheme Detection Center at the Fresno Service Center which will do reports showing patterns of consistent deductions or credits which are not warranted statistically. They also get leads from audits.

According to Mr. Robbins, they rarely prosecute taxpayers because of the “reliance factor”. The Service would need to show collusive behavior and that is hard to do when taxpayers simply do not understand the intricacies of tax law.

Election of Second Vice Chair

Three committee members placed their names into contention for the position of Second Vice Chair/Editor of the quarterly newsletter. Joseph P. Wilson was elected and was welcomed by those present.

Hot Topics

Bill Taggart discussed the June 20, 2012, decision of the First Circuit in Dalton v. Commissioner. The court ruled on the standard of review which should be used when examining conclusions reached by the Service following a Collection Due Process Hearing pursuant to IRC § 6330(b). The court ruled that a court’s role in the CDP process is “simply to confirm that the IRS did not abuse its wide discretion and – as part and parcel of that inquiry – to ensure that the agency’s subsidiary factual and legal d
eterminations were reasonable.”

Essentially the court said that the Tax Court had been using the wrong standard for review of CDP Appeals. Bill Taggart felt this would have a substantial negative impact on CDP litigation and, in particular, cases decided under IRC 6015(e) in which the Service is permitted to grant equitable innocent spouse relief based on its determination of the facts and circumstances. Bill Taggart felt that the Dalton decision makes Robinette moot. (Note: The Dalton case is reviewed in depth in the August 2012 newsletter in Robert Horwitz’s “Recent Cases of Interest”).

Steven Walker discussed the recent decision in United States v. Williams in which, on July 20, 2012, the Fourth Circuit held that the District Court had erred in finding that government did not prove that the taxpayer had willfully failed to file an FBAR.

Per the committee members, the Williams case is unhelpful, if not detrimental. For example, taxpayers will not be able to argue that simply failing to indicate on Schedule B that they owned an account in a foreign country is not in and of itself fraudulent. The court further noted that the taxpayer had signed the returns under penalty of perjury and thus had constructive knowledge of its contents. (Note: The Williams decision is discussed in detail in the August 2012 newsletter in Robert Horwitz’s “Recent Cases of Interest”).

Joseph P. Wilson and other committee members discussed the status of the Service’s Voluntary Disclosure Program for offshore assets. The Chair stated that whether the ownership of a condominium within 50 miles of the coast of Mexico requires the reporting of Form 3520 – Foreign Trust still remains an “open issue”. Mr. Wilson noted that more and more people are being denied as pre-cleared. There was a spirited discussion on when clients should be placed in a voluntary disclosure program and, once in, when they should opt out. Bill Taggert said that the voluntary disclosure programs should be used if there is a risk of criminal prosecution but otherwise, as the representative, one must weigh the pros and cons with the taxpayer and don’t just make a recommendation to the client that he or she has to participate. Michel Stein thought opting out of the voluntary disclosure program could be a favorable result and could avoid the chance of audit.


The committee adjourned. The next meeting of the committee will be at the November Tax Bar conference in San Diego.

Special Announcement: “Obtaining a Copy of ID Theft Tax Returns”

Submitted by James Counts, CPA CTFA

One of the issues in ID Theft is people filing returns using the social security numbers of others. The IRS has stated that taxpayers have the right to obtain all tax returns filed using their SSN. Thus, a taxpayer has the right to obtain at fraudulent return filed using his or her social security number.

To obtain a copy of any fraudulent return(s) filed under your SSN submit a Form 4506 to the IRS and ask for all returns filed under your SSN. Right to obtain copy of ID Theft returns is per IRS memo dated Jan 12 2012 at

Jim Counts CPA CTFA
Hemet CA


Ninth Circuit Addresses Whether Affected Items Notice of Deficiency was “Premature” Under the TEFRA Partnership Provisions

Submitted by A. Lavar Taylor1

In Meruelo v. Commissioner, 2012 U.S. App. LEXIS 17208; 2012-2 U.S. T. C. (CCH) P50,522; 110 A.F.T.R.2d (RIA) 5614, April 20, 2012, the Ninth Circuit addressed the question of whether a notice of deficiency issued to an individual who was a partner in a TEFRA partnership was a “premature” affected items notice of deficiency under the TEFRA partnership provisions.

Pre-existing case law makes clear that an affected items notice of deficiency issued to a partner in a TEFRA partnership, while there is an ongoing partnership level proceeding, is legally void and of no effect. Any Tax Court petition filed in response to such a notice of deficiency must be dismissed. See Napoliello v. CIR, 655 F.3rd 1060 (9th Cir. 2011), Adkison v. CIR, 592 F.3rd 1050 (9th Cir. 2010), Roberts v. Commissioner, 94 T.C. 853, 859 (1990). The issuance of an affected items notice of deficiency to partners of a TEFRA partnership must wait until all partnership level proceedings have concluded. Id.

Where no partnership level proceeding was ever commenced, the Tax Court has held that the “end” of partnership level proceedings which triggers the right of the IRS to issue an affected items notice of deficiency is the “acceptance as filed” of the partnership return. Per the Tax Court, the question of when the partnership return was “accepted as filed” is a question of fact. Roberts, supra.

In Gustin v. Commissioner, 83 T.C.M. (CCH) 1341 (2002), the IRS had issued an affected items notice of deficiency near the end of the TEFRA three year statute of limitations on assessment under I.R.C section 6229 and, after the taxpayer filed a timely Tax Court petition, advised the Tax Court that the IRS was not challenging the partnership return for the year at issue. The Tax Court found on those facts that the IRS had “accepted as filed” the partnership return for the year in question as of the date of the notice of deficiency issued to the taxpayer and that the affected items notice of deficiency was valid.

In Meruelo, the IRS issued a notice of deficiency to the Meruelos near the end of the three-year statute of limitations under Section 6229, proposing to disallow a loss which in fact had originated with a TEFRA partnership. (The IRS claimed to be unaware of the source of the claimed loss at the time they issued the notice of deficiency for reasons that are mentioned in the opinion.) In response, the Meruelos filed a Tax Court petition. The Meruelos then filed a moton to dismiss the petition as a premature affected items notice of deficiency.

The IRS then filed a Motion to Stay the Meruelos’ case. The Motion to Stay (successfully) sought to place the Meruelos’ case on “hold” pending the resolution of a criminal grand jury investigation in New York, namely the KPMG criminal case. This investigation eventually resulted in a prosecution in which the person linked by the IRS to the TEFRA partnership’s 1999 return was acquitted. The criminal investigation did not involve the Meruelos’ 1999 return.

The IRS attorneys handling the Meruelos’ case made certain representations to the Tax Court in their Motion to Stay the case pending the criminal investigation. Specifically, they told the Tax Court that “the period of limitations for assessing tax attributable to partnership items [of the TEFRA partnership] would remain open for purposes of conducting a partnership level proceeding,” under one of two cited exceptions to the 3 year statute of limitations under Section 6229, both of which involved the filing of a fraudulent partnership return.

The IRS further stated that any future formal proposed partnership adjustment (“FPAA”) to the partnership in the future “would have an impact on the Court’s jurisdiction in the case currently before the court because the notice of deficiency would have to be dismissed in its entirety as a prematurely issued affected item notice of deficiency. See GAF Corp. v. Commissioner, 114 T.C. 519 (2000).”

Finally, the IRS stated that “[i]t has long been respondent’s policy to defer civil assessment and collection until the completion of criminal proceedings. Policy Statement P-1-84, IRM (1991).”

Several years later, the stay was lifted to permit the Motion to Dismiss to be heard. The IRS did not come forward with a
ny evidence from its files regarding its actions regarding the partnership return. Following the acquittal of the individual who the IRS linked to the partnership return in question, the IRS never did examine or seek to adjust the partnership return in question.

Judge Vasquez found as a factual matter that the IRS had “accepted as filed” the partnership return as of the date on which the IRS issued the notice of deficiency to the Meruelos and thus held that the affected items notice of deficiency issued to the Meruelos was not legally premature. 132 T.C. 355 (2009). His opinion did not address in any way the statements made by the IRS attorneys but instead relied upon the fact that the notice of deficiency was issued near the end of the normal three year TEFRA statute of limitations under Section 6229, along with the failure of the IRS to commence a partnership level audit or proceeding prior to the expiration of the three year statute of limitations.

The Meruelos, in a Motion for Reconsideration, asked for leave to conduct discovery on the question of whether the IRS had “accepted as filed” the partnership return. This request was denied.

The Meruelos, on appeal, challenged the Tax Court’s factual finding that the IRS had “accepted as filed” the partnership return as of the date of the notice of deficiency issued to them. The Meruelos pointed to the statements made by the IRS attorneys in the IRS Motion to Stay the Tax Court case as the only evidence in the record regarding whether or not the IRS had “accepted as filed” the partnership return. Per the Meruelos, this evidence supported a finding that the IRS had not “accepted as filed” the partnership return.

The Meruelos also argued that the failure of the IRS to come forward with other evidence on this issue, evidence that was in the sole possession of the IRS, should have resulted in the court drawing adverse inferences against the IRS on this issue. The Meruelos argued, in the alternative, that they should have been permitted discovery on the question of whether the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to them, if the Court did not conclude that the record before the Tax Court compelled the conclusion that the IRS had not “accepted as filed” the partnership return as of the date of the affected items notice of deficiency.

The Meruelos also argued that it was improper for the Tax Court to have concluded that the IRS had “accepted as filed” the partnership return merely because the date on which the IRS had issued the notice of deficiency was “close” to the end of the TEFRA three year statute of limitations under Section 6229. The Meruelos pointed out that there was no way for a court to “draw the line” on the issue of whether the date of an affected items notice of deficiency was “close enough” to the end of the three year statute of limitations for a court to conclude that the IRS had “accepted as filed” a partnership return as of the date of that notice of deficiency. Is 90 days “closeenough”? How about 180 days? The Meruelos argued that, if courts are going to draw this line, the only way courts can do so is by concluding that, in the absence of any evidence which is relevant to the issue of whether the IRS has “accepted as filed” a partnership return, an affected items notice of deficiency is valid only if it is issued on the last day of the three year statute of limitations. If issued before that date, the affected items notice of deficiency should be considered premature.

The Meruelos noted, however, that the record was not devoid of evidence on the question of whether the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to the Meruelos. The record supported only one finding – that the IRS had not “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to the Meruelos – because of the statements made by IRS attorneys regarding the pending criminal investigation in New York. Furthermore, the IRS had failed to come forward with evidence in its exclusive possession on this issue.

The Department of Justice made a very interesting argument in defending the appeal. They argued that Section 6225 does not prohibit the IRS from issuing an affected items notice of deficiency prior to the end of partnership proceedings. This argument runs contrary to every single court that has considered this issue, including prior Ninth Circuit opinions, and, if accepted by the courts, would create administrative nightmares for the courts, taxpayers, and the IRS itself. It is not known whether the Department of Justice Tax Division took this position with the blessing of the IRS Office of Chief Counsel.

The Ninth Circuit’s opinion in Meruelo is quite confusing. I call it the opinion that cannot make up its mind. Portions of the opinion support the conclusion that the IRS can issue an affected items notice of deficiency at any time, as long as there is no partnership level audit or proceeding pending as of the date of the affected items notice of deficiency. Under this reading of the Code, the question of whether the three-year statute of limitations under Section 6229 is close to expiring as of the date of the affected items notice of deficiency is irrelevant. The IRS can, if it desires, issue an affected items notice of deficiency six months after the partnership and individual returns have been filed, as long as there is no partnership level audit or proceeding as of the date of the affected items notice of deficiency.

Other parts of the opinion support the conclusion that it is the passing of the three-year statute of limitations under Section 6229, without the commencement of a partnership level audit or proceeding, that is the key inquiry. This is perhaps the most confusing part of the Court’s opinion. Logically, if the IRS is allowed to issue an affected items notice of deficiency under Section 6225 at any time, as long as there is no partnership level audit or proceeding pending as of the date of the affected items notice of deficiency, then the discussion of the three year statute of limitations under Section 6229 is irrelevant for purposes of deciding whether the affected items notice of deficiency is legally premature.

The Ninth Circuit stated that it agrees with cases such as Robertsand Gustin. But Roberts and Gustin hold that the key inquiry, i.e., whether the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency, is a question of fact. The Ninth Circuit, like the Tax Court, did not explain why the statements made by the IRS attorneys regarding the criminal case in New York and regarding the possibility that the IRS might issue an FPAA to the partnership in the future are irrelevant to the question of whether the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to the Meruelos.

The Ninth Circuit failed to address in its opinion the Meruelos’ argument that it is not proper for a court to “deem” a partnership return as having been “accepted as filed” merely because an affected items notice of deficiency is issued “close” to the end of the three-year statute of limitations.

The Ninth Circuit also failed to address the Meruelos’ argument that the Tax Court should have drawn adverse inferences against the IRS for its failure to come forward with evidence in its exclusive possession on the question of whether the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to the Meruelos. The Ninth Circuit likewise failed to address the Meruelos’ alternative argument that they should have been permitted to do discovery on the question of whether the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to the Meruelos.

These failures are striking in ligh
t of the Ninth Circuit’s final, alternative, holding. In the alternative, the Ninth Circuit held that the Tax Court’s factual finding that the IRS had “accepted as filed” the partnership return as of the date of the affected items notice of deficiency issued to the Meruelos was not clearly erroneous. The Ninth Circuit, in this portion of its opinion, did not discuss: a) the statements made by the IRS attorneys in their Motion to Stay the Tax Court case, b) the fact that the Meruelos were denied their request for discovery on this issue, and c) the fact that the IRS failed to come forward with evidence in its exclusive possession on this issue.

The Meruelos have filed a Petition for Rehearing with Suggestion for Rehearing En Banc.

First, it may be that the IRS is free to issue an affected items notice of deficiency at any time, as long as there is no pending partnership audit or proceeding as of the date of the affected items notice of deficiency.

Second, it is possible that the Ninth Circuit has adopted the rule set forth in Roberts and Gustin, even though the Ninth Circuit ignored relevant facts in the record which arguably compelled a factual result contrary to the Tax Court’s factual finding on this issue.

Third, it is possible that the Ninth Circuit has adopted a modified form of the rule set forth in Roberts and Gustin, under which the only facts that are relevant to determining whether an affected items notice of deficiency is legally premature are 1) whether a partnership level audit or proceeding is pending on the date of the affected items notice of deficiency, 2) whether the affected items notice of deficiency was issued “close” to the expiration of the three year statute of limitations under Section 6229, and 3) whether the IRS opened a partnership level audit or proceeding after the issuance of the affected items notice of deficiency but before the expiration of the three year statute of limitations under Section 6229. If the answers to these questions are 1) No, 2) Yes and 3) No, then the affected items notice of deficiency is valid. Otherwise the affected items notice of deficiency is premature.

It is this (admittedly biased) author’s view that this opinion represents a new low in intellectual dishonesty by the Ninth Circuit in a published opinion involving taxes. Whether The Tax Court and future litigants have no idea how to apply the Ninth Circuit’s opinion in future cases. There are three possible ways to interpret the opinion, all of them mutually exclusive.

One agrees or disagrees with the result, the logic employed by the Ninth Circuit leaves much to be desired.

Clarifying the Tax Court’s Jurisdiction in Innocent Spouse Cases

Submitted by Christina Ortega, Esq.

The jurisdiction of the Tax Court is based on statute.2 The most common case adjudicated by the Tax Court is founded on the issuance of a statutory notice of deficiency. A taxpayer receiving such a notice petitions the Tax Court for redetermination.3

Another common type of case to come before the Tax Court is the question of relief pursuant to section 6015.4 Section 6015(e) confers jurisdiction on the Tax Court to “determine the appropriate relief available to the individual” if a petition implicating Section 6015 is duly filed. The statute is simple and straightforward but disputes relating to relief under Section 6015 are neither. Innocent spouse cases may come before the Tax Court through a variety of avenues. The statutory statement of jurisdiction of the Tax Court over section 6015 cases fails to address the differences in the circumstances in which an innocent spouse case comes before the Court.

In a recent Tax Court case, Young v. Commissioner,5 Judge Wherry discusses some of the jurisdictional and procedural questions that arise in innocent spouse cases – questions that are not addressed by the statute.

In Young the IRS issued a notice of deficiency to Andrew J. and Sondra R. Young. The Commissioner asserted income tax deficiencies and accruals for tax years 2004 and 2005. . On August 26, 2008, Mr. Young timely petitioned the U.S. Tax Court on behalf of himself and his wife for redetermination of deficiencies asserted by the Commissioner. Mrs. Young did not sign the petition.

On February 22, 2010, Mr. Young signed a stipulation of settlement of the pending case. Mrs. Young did not sign the stipulation. Mrs. Young instead filed an amendment to the original petition on the same day in which she ratified and affirmed the petition filed August 26, 2008, and claimed entitlement to innocent spouse relief pursuant to section 6015(c).

Judge Wherry begins his analysis in this case by stating, “In cases involving requests for innocent spouse relief, our jurisdiction is typically founded on the filing of a petition following the Commissioner’s determination that the requesting spouse is not entitled to relief.”6 This “typical” situation is the situation contemplated by the statute. In such a “typical” case arising under section 6015, the Tax Court clearly has jurisdiction pursuant to section 6015(e)(1)(A) and Rule 13(a).7

Judge Wherry distinguishes the case before him from the typical innocent spouse case because Mrs. Young’s claim for innocent spouse relief under section 6015(c) was raised in an amended petition as an affirmative defense to the asserted deficiencies.

Judge Wherry points out the Tax Court has jurisdiction in Youngbecause a valid notice of deficiency was issued and a petition was timely filed.8 Judge Wherry concludes the Tax Court has jurisdiction over the innocent spouse claim because the claim was raised as an affirmative defense in a deficiency proceeding over which the Court has jurisdiction. No additional basis of jurisdiction is regained.9

Judge Wherry’s analysis in Young is impeccable. The situation in Young is not a situation contemplated by section 6015(e), but it would be unreasonable to conclude the grant of jurisdiction under section 6015(e) limited the traditional deficiency jurisdiction of the Court.

There are three different types of relief available under section 6015. A taxpayer who requests relief pursuant to section 6015(c), as in Young, must be separated or divorced from the non-requesting spouse, and have no actual knowledge of the items giving rise to the understatement of tax.

A taxpayer who requests relief pursuant to section 6015(b) must prove that at the time he or she signed the joint tax return, he or she did not know, and had no reason to know there was an understatement of tax, and it would be inequitable to hold the taxpayer liable for the deficiency attributed to the understatement of tax.

In both section 6015(b) and section 6015(c) cases, a requesting spouse is entitled to relief
if the conditions specified in the subsection are met. Relief under subsections (b) and (c) is limited to deficiency cases. Section 6015(f) provides equitable relief to a requesting taxpayer if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); and relief is not available to such an individual under subsection (b) or (c). A taxpayer has no entitlement to relief under subsection (f).

Judge Wherry was confronted with a procedural problem as a consequence of the unusual facts of the case. Because the case was a deficiency case and relief under section 6015(c) was an affirmative defense to the deficiency assertion, Mr. Young was entitled to dispute his ex-wife’s claim for relief. Even though the Commissioner agreed that Mrs. Young was entitled to relief under section (c), Mr. Young was entitled to dispute Mrs. Young’s entitlement to relief by virtue of the express language of section 6015(e)(4).

Section 6015(e)(4) expressly provides that the non-electing spouse in a deficiency proceeding in which one spouse has elected to claim entitlement to relief under section 6015 is entitled to notice and an opportunity to participate in the proceeding. Mr. Young decided to dispute Mrs. Young’s entitlement to relief that the Commissioner wanted to grant. Judge Wherry very deftly resolved the procedural problem. Judge Wherry concluded he should weigh all of the evidence presented by the three parties utilizing a preponderance of the evidence standard.

No party, including the Commissioner, was given the benefit of a presumption of correctness. Similarly, no special burden was placed on any party.

Christina Ortega

William E. Taggart, Jr., PC
300 Frank H. Ogawa Plaza
Suite 370
Oakland, CA 94612
(510) 893-9999

Recent Cases of Interest

Robert S. Horwitz, Esq.

There are two lessons contained in Reynoso v. United States, 2012 U.S. App. LEXIS 18208 (9th Cir. 2012): first, if you don’t file a claim for refund within the statutory period you are out of luck; second, paying your taxes by the due date won’t immunize you from prosecution if you fail to file your returns.

The taxpayer in Reynoso paid $245,000 toward his 1999 tax liability by April 15, 2000, $200,000 toward his 2000 tax liability by April 15, 2001, and $200,000 toward his 2001 tax liability by April 15, 2002. He failed to file tax returns for those years. He was charged with and pled guilty to the misdemeanor of willfully failing to file tax returns. During the criminal prosecution, Reynoso posted a cash bond of $585,329 in anticipation of his tax liability. On December 31, 2005, the IRS applied $406,102 of the cash bond towards his projected liabilities for 1999, 2000, and 2001.

In 2007 and 2008, Reynoso filed his returns for 1999, 2000, and 2001. His reported liabilities were $127,473 for 1999, $238,328 for 2000 and $231,042 for 2001; 1999’s pre-due date payments exceeded his liability by $117,527. At Reynoso’s written request, the IRS applied the overpayment for 1999 towards his 2000 tax liability. On April 23, 2009, Reynoso requested a refund of the overpayments caused by application of the cash bond to his liabilities, the unapplied portion of the cash bond and the $117,527. When the IRS did not pay these amounts within 6 months, he filed a refund suit in district court. The district court held that the refund claim was time-barred as to the $117,527, but granted the refund claim as to the other amounts sought by Reynoso. Reynoso appealed and the Ninth Circuit affirmed.

The issue confronting the Court was whether the refund claim was timely under IRC 6511 as to the $117,527. Sec. 6511(a) provides that “a claim for credit or refund of an overpayment of any tax … shall be filed by the taxpayer within 3 years from the time the return is filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” As the Court noted, Reynoso’s returns, which reported the overpayments, were claims for refund and thus he complied with the language of 6511(a).

He did not, however, comply with IRC 6511(b) (2) (A). That subsection states that the “amount of the credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.” Since under IRC 6513(b), an estimated tax payment is deemed paid on the original due date of the return, Reynoso’s $245,000 in payments for 1999 were deemed paid on April 15, 2000. Since Reynoso’s return which claimed the overpayment was filed more than 7 years after the original due date, it fell outside the look-back period of IRC 6511(b)(2)(A).

The Court next addressed Reynoso’s argument that since the IRS initially credited the overpayment for 1999 to the liability for 2000, his claim for refund was timely since it was made within 3 years of the date that the IRS credited the overpayment to 2000, i.e., in 2007. Under IRC 6502(b) and Treas. Reg. 301.6402-2(a)(1), the IRS can only move an overpayment for one year to a liability for another year if the taxpayer has filed a claim within the statutory period of limitations. Here, the period of limitation for claiming a credit for the overpayment for 1999 expired in 2003. Since neither the return reporting the overpayment nor the refund claim was filed within 3 years of 2003, the Court rejected this argument.

Reynoso was no luckier with his argument that under IRC 7422(d) his claim was timely. Sec. 7422 governs the filing of refund suits. Subsection (d) provides that the “credit of an overpayment of any tax in satisfaction of any tax liability shall, for the purpose of any suit for refund of such tax liability so satisfied, be deemed to be a payment in respect of such tax liability at the time such credit is allowed.” According to Reynoso, since the IRS credited the overpayment for 1999 to the tax liability for 2000 in 2007, his 2009 refund claim was timely. The Court ruled otherwise.

The Court started by noting that under Flora, 357 US 63 (1958), before a taxpayer can maintain a refund suit he must pay in full all tax owed for the year (including penalties and interest). Sec. 7422 deals only with the question of when a credit of an overpayment will be treated as a payment for purposes of bringing a refund suit. In this regard, the Court noted:

Under §7422(d), if a taxpayer requests a credit of an overpayment, but brings suit before that credit is allowed, that credit is not considered a payment and thus the suit is barred; it is only after the credit is allowed that the credit is considered a payment, and the taxpayer considered to have paid his taxes in full, and the suit allowed to go forward. This reading of §7422(d) is supported by the subsection heading, “Credit treated as payment.”

The difference in the text of §§6513(b)(2) and 7422(d) supports this interpretation. Section 7422(d) uses the language, “be deemed to be a payment,” while §6513(b)(2) uses the language, “be deemed to have been paid on.” Section 6513(b)(2) establishes a “deemed paid date” for purposes of §6511, while §7422(d) simply establishes that an allowed credit is deemed to be a payment of the tax liability for purposes of a suit for a refund.

Reynoso’s estimated tax payment for 1999 was “deemed paid” on April 15, 2000, so that he had three years from that date to claim a credit or overpayment. Since he failed to do so, he was time-barred from getting a refund of the $177,527.

Reynoso’s final argument was that by moving the overpayment from 1999 to 2000 in 2007, the IRS waived the period of limitations for filing a refund claim for the $117,527. This limitations period in IRC 6511 is jurisdictional and cannot be waived. Under Brockamp, 519 US 347 (1997), courts may not create equitable exceptions t
o the limitations period. The Court concluded that since Reynoso “overpaid his 1999 taxes well outside of §6511(b)(2)(A)’s look-back period, his claim for credit was barred” and thus his subsequent claim for refund based on that credit was invalid.

The Tax Court recently addressed whether having several tiers to a partnership can affect the period of limitation. It can, as the taxpayers learned to their chagrin in Gaughf Properties v. Commissioner, 139 T.C. No. 7 (9/10/2012). This is especially true if the taxpayers engaged in an abusive transaction.

In late 1999, the taxpayers planned to sell stock in Quanta for a substantial taxable gain. KPMG “persuaded” them to engage in a series of transactions structured by Jenkins & Gilcrist (J&G) involving digital currency options and stock – you guessed it, a Son of BOSS transaction. As part of this transaction, the taxpayers set up two single member LLCs, which were disregarded entities, and transferred cash to the LLCs. They also set up a limited partnership, in which the LLCs were partners. The LLCs entered into offsetting digital currency options, which they transferred to the limited partnership, together with $90,000 cash. The taxpayers also formed an S corporation, to which the taxpayers transferred approximately 145,000 shares of Quanta stock. The S corporation sold the Quanta stock while the taxpayers transferred 7,500 shares of Quanta stock to the limited partnership. The LLCs assigned their interests in the limited partnership, which immediately thereafter liquidated and distributed the 7,500 shares of Quanta stock to the S corporation, which then sold the Quanta stock.

Pursuant to the J&G opinion, the LLCs treated their outside basis in the limited partnership as equal to the amount paid for the long option without offsetting it by the short option. This gave a supposed basis of $4.7 million in the limited partnership. As the assignee of the LLCs’ interests in the limited partnership, the S corporation claimed that its basis in the 7,500 shares of Quanta stock received in liquidation was $4.7 million. The S corporation netted the gain from sale of the 145,000 Quanta share with the purported loss from the sale of the 7,500 Quanta shares, for a net long-term capital loss of $117,000. This loss was reported on the Gaughf’s 1999 tax return. The Gaughfs, the limited partnership and the S corporation filed their 1999 returns by the original due date. The partnership return listed the LLCs and the S corporation as partners, but not the Gaughfs. The SS-4s filed by the LLCs, the partnership and the S corporation all used the Gaughfs’ home address as the entity’s address, and listed Mr. Gaughf as the “principal officer, general partner, grantor, owner or trustor.”

In June 2003, the IRS issued a John Doe summons to J&G seeking the identities of all present or former clients of J&G who had entered into transactions the IRS had identified as “abusive.” When J&G refused to provide the information, the IRS filed a petition to enforce the summons. In May 2004, the district court enforced the summons and, shortly afterwards, J&G produced the list, which included the taxpayers. Several months later, J&G provided the IRS with 1,300 CDs of records related to the transactions its clients had entered into, including 480 pages relating to the Gaughfs and their entities. The revenue agent who was conducting the investigation of J&G did not disseminate any of the information within the IRS, although other agents within the IRS learned that he had such information.

In January 2006, a different agent in a different city was assigned to audit the taxpayers and their entities. That agent requested information from the agent who was keeper of the CDs. Upon receipt of the information relating to the J&G transaction, the agent notified a) the taxpayers that he was opening up an audit of their 1999 tax year and b) the limited partnership that he was initiating a partnership administrative proceeding. Neither the taxpayers nor the partnership responded to IDRs. The taxpayers, however, did sign a Form 872-I, which extended the statute of limitations for the assessment of tax based on partnership items.

In May 2007, the IRS issued an FPAA to the partnership, which filed a petition with the Tax Court. In the petition, the partnership alleged that the statute of limitations barred the FPAA. The IRS answered, initially claiming that there was a substantial omission of gross income. Ultimately, the IRS conceded this issue. In 2010, however, the IRS asserted, for the first time, that statute was open under IRC 6229(e). The Tax Court in its decision addressed two issues: a) was the statute open under IRC 6229(e) and b) was the IRS estopped to assert that 6229(e) applied. Sec. 6229(e) provides as follows:

(1) the name, address, and taxpayer identification number of a partner are not furnished on the partnership return for a partnership taxable year, and

(A) the Secretary, before the expiration of the period otherwise provided under this section with respect to such partner, mails to the tax matters partner the notice specified in paragraph (2) of section 6223(a) with respect to such taxable year, or

(B) the partner has failed to comply with subsection (b) of section 6222 (relating to notification of inconsistent treatment) with respect to any partnership item for such taxable year, the period for assessing any tax imposed by subtitle A which is attributable to any partnership item (or affected item) for such taxable year shall not expire with respect to such partner before the date which is 1 year after the date on which the name, address, and taxpayer identification number of such partner are furnished to the Secretary.

The IRS argued that the return of the partnership failed to identify the taxpayers as partners, that the taxpayers failed to comply with sec. 6222(b) and that the taxpayers’ information was not furnished in accordance with the applicable regulations.

Under Temp. Reg. 301.6229(e)-1T, a partner, including an indirect partner, “who is not properly identified on the partnership return,” remains an unidentified partner under 6229(e) until identifying information is furnished to the IRS in accordance with 6222(b). Since the partnership return did not list the taxpayers’ names, address and social security number, they were unidentified partners under 6229(e). the Tax Court then turned to whether 6222(b) applied. Under that section, a taxpayer who files a return treating items inconsistently with their treatment on the partnership return is required to file a statement (on Form 8082) with the IRS identifying the inconsistency.

To determine whether 6222(b) applied, the Tax Court had to look at whether the taxpayers treated any item inconsistently with its treatment on the partnership return. It found an inconsistency in the treatment of the offsetting long and short options. The partnership netted the long and short options to determine the value of capital contributions. The S corporation, whose information flowed through to the taxpayers’ return, did not. The S corporation took into account only the long option to determine its basis in the Quanta stock that was distributed to it in liquidation of the partnership. The taxpayers similarly took into account only the long option to determine the amount of their contribution (through the LLCs). Since the taxpayers did not file a Form 8082 notifying the IRS of the inconsistent treatment of this item, the Tax Court held that 6222(b) was not complied with.

Under Temp. Reg. 301.6229(e)-1T, the taxpayers had to show that they furnished identifying information to the IRS in accordance with Temp. Reg. 301.6223(c)-1T. That regulation requires that identifying information be provided as either supplemental or amending information concerning a partner to the IRS service center where the partnership return was filed. The IRS can also use information in its possession to identify partners, but is not required to search its records for such information. The Tax Court re
jected three arguments made by the taxpayers: a) that the IRS failed to prove that KPMG did not provide identifying information to the IRS; b) that the IRS used information in its possession to identify the taxpayers as indirect partners and c) the regulation is invalid.

As to the first argument, the Tax Court noted that the KPMG return preparer and several IRS employees testified at trial, but no testimony was elicited that KPMG or any party filed the requisite notice and there was evidence that the IRS never received any such notice. The information provided by J&G was not the required notice, since J&G did not provide any statement explaining that it was correcting or supplementing earlier information about partners of the partnership.

That the IRS used other information to identify the taxpayers as indirect partners did not trigger the 1-year statute. The Court held that it would be impractical to impose upon the IRS the duty to rely on other available information about partners to trigger the 1 year statute, since during partnership audits, especially those involving abusive transactions, the IRS often receives confusing and contradictory information about who are partners.

As to the argument that the regulation was invalid, the Tax Court applied the two-part Chevron test. The taxpayers’ argument turned on the word “furnish,” which is used in the statute, while the regulation required the taxpayer to “file” identifying information with the service center. The Code uses the term “file” frequently, but furnish infrequently. Thus, Congress intended that the information be provided by some means other than through “filing” a statement with the IRS. The Tax Court rejected this argument. First, the term “furnish” used in the statute was ambiguous. Second, one definition of “furnish” overlaps the definition of “file.” Thus, the regulation was held to be a valid and permissible construction of the statute.

Finally, the Tax Court rejected each of a series of estoppel arguments advanced by the taxpayers, including a) that the IRS had not issued a notice that it was improper to disregard short options when they filed their returns, b) that the IRS delayed unreasonably in issuing a John Doe summons to J&G, c) that the IRS had destroyed the original SS4s that identified the taxpayers as involved in the partnership and the entities that were partners in the partnerships, and d) that the IRS delayed in raising 6229 until several years into litigation. The Tax Court noted that while estoppel applies to the Government, its use must be “rigid and sparing.” The taxpayers failed to meet all of the elements to prove estoppel for any of the arguments advanced by them. Thus, the IRS was not estopped to assert that the statute was open when the FPAA was issued.

The next recent case, Anderson v. Commissioner, 2012 U.S. App. LEXIS 18831 (3rd Cir. 2012), involved Walter Anderson, who had been a successful telecommunications entrepreneur and venture capitalist. He was initially charged with tax evasion for 1995 through 1999 under 26 USC 7201. The government alleged that a British Virgin Islands corporation, G&A, was a controlled foreign corporation and that Anderson was required to recognize a share of the corporation’s income on his tax returns. The government further alleged that Anderson fraudulently underpaid tax during those years by $184 million. Anderson ultimately pled guilty to tax evasion for 1998 and 1999 and the counts for 1995, 1996 and 1997 were dismissed. In 2006, Anderson was sentenced to 108 months in prison.

While he was incarcerated, the IRS issued a notice of deficiency for 1995 through 1999 for $184 million in tax plus a 75% fraud penalty (an additional $138 million). Anderson petitioned the Tax Court. The IRS moved for summary judgment on the issue of fraud. The Tax Court granted the motion as to 1998 and 1999 and denied it as to the other years. According to the Third Circuit, this had three main effects:

First, it established that Anderson had underpaid his income taxes in 1998 and 1999. Second, because a fraud penalty can only be assessed where a tax underpayment is due to fraud, it relieved the IRS of its burden of proving this penalty was applicable to Anderson for those two years.

See 26 U.S.C. § 6663(a). Finally, because the three-year statute of limitations on the assessment of a tax does not apply where a tax return has been filed falsely or fraudulently with the intent of evading tax, 26 U.S.C. § 6501(c)(1), it prevented Anderson from arguing that the IRS’s attempts to collect taxes for 1998 and 1999 were untimely.

The IRS thereafter filed a motion to concede the 1995, 1996 and 1997 years on the grounds that 80% of the amounts in issue were due to 1998 and 1999 and that trying 1995, 1996 and 1997 would needlessly complicate and lengthen trial proceedings. The Tax Court issued an order that it would take this concession into account in its final decision.

This order led to a second round of summary judgment motions. Anderson moved for summary judgment as to 1998 and 1999, arguing that the IRS’s concession established that the income from G&A was not taxable to him and the IRS argued that the criminal conviction barred Anderson from arguing that G&A’s income was not taxable to him. The Tax Court ruled for the IRS. The parties then stipulated to a decision as to the amount of tax and fraud penalties. Anderson appealed. The Third Circuit affirmed.

The Third Circuit began its analysis by noting that the elements of evasion under IRC 7201 and fraud under IRC 6663 are identical and that “under the doctrine of collateral estoppel, a conviction for criminal tax evasion conclusively establishes the defendant’s civil liability for tax fraud for the same year.” Anderson argued, however, that the Tax Court erred in determining that the criminal conviction estopped him from litigating whether the income of G&A in 1998 and 1999 was taxable to him. Since the criminal conviction was the result of a guilty plea, the plea’s “preclusive effect extends to all issues that are necessarily admitted in the plea.”

As part of the plea agreement, Anderson had admitted that he failed to report $126 million of income from G&A in 1998 and $238 million in 1999. Since a conviction under IRC 7201 hinges on proving that the defendant had a tax deficiency, the Third Circuit held that there could not have been a conviction without establishing that G&A’s income was taxable to Anderson and “that Anderson admitted in his plea that the income of G&A was taxable to him in 1998 and 1999, and that this admission was necessary to his conviction.” As a result, the plea “precludes him from contesting that issue in his civil tax fraud case.” The express stipulations of fact in the plea agreement resolved all issues regarding Anderson’s tax deficiencies for 1998 and 1999.

The Court then turned to Anderson’s argument that the IRS concession of 1995, 1996 and 1997 mandated the Tax Court to rule in his favor on the 1998 and 1999 years. It rejected Anderson’s argument. Since an issue is conclusively established only when it is determined by a final judgment, the Tax Court’s order that it would take the IRS concession into account in its final judgment did not have any preclusive effect. Additionally, Anderson could not point to any final judgment that precluded the IRS from seeking to hold him liable for tax for 1998 and 1999.

The Court also rejected Anderson’s argument that the Tax Court’s “notice” of the IRS concession was “law of the case” as to the taxability of G&A’s income to him in 1998 and 1999. First, the Tax Court’s order was not a decision. Second, even if it were a decision, it could be based on “any number of rationales” that did not implicate the IRS’s claim as to 1998 and 1999.

The Court finally turned to Anderson’s claim that the IRS concession was a “judicial admission” as to his tax liability for 1998 and 1999. A judicial admission is a factual admission in pleadings, stipulations, etc. that otherwise would need evidentiary proof. A jud
icial admission must be unequivocal. Even if the IRS conceded that G&A’s income in 1995, 1996 and 1997 was not taxable to Anderson, this would be a legal proposition and not a statement of evidentiary fact. Thus, Anderson’s final argument failed.

In Hinerfeld v. Commissioner, 139 TC No. 10 (9/27/2012), the Tax Court filed a petition challenging the Appeals Office’s upholding a Final Notice/Notice of Intent to Levy under IRC 6330 with respect to a $471,696 trust fund penalty. The Appeals Office had rejected an offer in compromise. The issues facing the Tax Court were: 1) could the taxpayer in his post-trial brief raise for the first time the issue of whether there were improper ex parte communications between the Appeals Office and IRS Counsel; 2) if the issue could be raised, were the communications prohibited ex parte communications; and 3) if the communications were not prohibited, did the IRS abuse its discretion in rejecting an offer in compromise and sustaining the levy notice.

During the collection due process hearing before the Appeals Office, the taxpayer had submitted an offer in compromise. The Appeals Officer (“AO”) recommended that the offer be accepted. IRS Counsel reviewed the offer and discovered that the taxpayer was a defendant in a lawsuit by one of the corporation’s creditors. The complaint alleged that the taxpayer and his wife “sold” the assets of the corporation to their children in a fraudulent transaction, leaving the corporation unable to satisfy its creditors. The AO then submitted written questions to the taxpayer regarding his relationship to the corporation. His answers to the questions conflicted with admissions he made in the lawsuit. This lead IRS Counsel to conclude that acceptance of the offer would be premature pending resolution of the lawsuit. The AO informed the taxpayer’s representative that IRS Counsel recommended rejection but that she was willing to place the taxpayer in uncollectible status. The taxpayer rejected this offer.

Based on a review of the file in the case, the AO’s manager determined that the offer was not in the best interest of the IRS and should be rejected. The manager therefore issued a Notice of Determination upholding the notice of intent to levy. The taxpayer timely petitioned the Tax Court.

After outlining the CDP procedures and the abuse of discretion in CDP cases, the Tax Court addressed the first issue, whether the taxpayer could question the legality of ex parte communications for the first time in their post-trial brief. Whether to allow an issue to be raised for the first time post-trial “is founded upon the exercise of judicial discretion and frequently turns on a determination whether the opposing party will be prejudiced….” Since the issue of improper ex parte communications was not inconsistent with the pleadings, evidence relating to the issue was in the record, and the IRS did not claim prejudice, the Court determined that it would address the issue.

The Court noted that the prohibition on ex parte communications between the Appeals Office and other IRS employees was contained in sec. 1001 of the 1998 IRS Restructuring Act, which prohibited ex parte communications “to the extent that such communications appear to compromise the independence of the appeals officer.” The only formal guidance on prohibited ex parte communications as of the period under consideration was Rev. Proc. 2000-43 (which was superseded by Rev. Proc. 2012-18, applicable to communications after May 2012). The taxpayer argued that IRS Counsel’s alerting the AO to the lawsuit, to a possible fraudulent transfer and recommending rejection of the offer were prohibited ex parte communications that compromised the AO’s independence. The Tax Court rejected this claim.

The Tax Court noted that under Rev. Proc. 2000-43, communications between IRS Counsel and the Appeals Office is not prohibited as long as the communication 1) is not with an attorney who advised the IRS regarding the determination being considered by Appeals; 2) is not a request for legal advice where the answer is uncertain and should be the subject of a request for field service advice; and 3) Appeals remains responsible for making independent evaluations and judgments. Here there was no evidence that the attorney who communicated with Appeals had previously advised the IRS regarding the taxpayer. The issue was not one that required a request for an FSA. Appeals’ determination was an independent exercise of its judgment, since while the AO disagreed with IRS Counsel’s recommendation, the ultimate decision was made by her manager based on all the evidence gathered and there was no evidence that the manager did not exercise his independent judgment in deciding to reject the offer. This satisfied the Tax Court that the communication was not prohibited by Rev. Proc. 2000-43.

The Court then turned to another reason why the communication between IRS counsel and Appeals was not prohibited. Under IRC 7122(b), any compromise by the IRS of a liability in excess of $50,000 in tax needed a written opinion from IRS Counsel. In reviewing the offer, the IRS Counsel had to determine whether the legal requirements for acceptance were met, including whether there were fraudulent transfers or potential transferee liability.

The Tax Court applied the principle of statutory construction requiring that two potentially conflicting statutes be read in such a way to give effect to each while preserving their sense and purpose. Nothing in the 1998 IRS Restructuring Act indicated that Congress intended the ex parte communication provisions to circumscribe the long-standing mandate that IRS Counsel review offers in cases pending before Appeals. Counsel’s review was statutorily mandated and required Counsel to determine whether there were possible fraudulent transfers. Counsel’s written opinion was required to be transmitted to Appeals. Appeals was, however, free to accept or reject Counsel’s opinion.

Having found that the ex parte communication with Counsel was not a prohibited, the IRS turned to the question of whether Appeals abused its discretion in rejecting the offer. Given evidence that there was a possible fraudulent conveyance, the Tax Court held that Appeals did not abuse its discretion.

The score is now DOJ Tax 3, Fifth Amendment 0. Having convinced the 9th and 2nd Circuits that the Required Records Doctrine trumps a 5th Amendment claim where a grand jury subpoena seeking records of foreign accounts is issued to the target, DOJ recently convinced the 5th Circuit to fall in line with its two sister circuits in In re Grand Jury Subpoena, (5th Cir. 9/21/2012).

The facts are indistinguishable from those in all of these cases. The government learned that a U.S. citizen (hereafter “the target”) had an undisclosed bank account at UBS, which turned in its client after it entered into a deferred prosecution agreement with DOJ. This resulted in a grand jury investigation of the target. As part of the investigation, a grand jury subpoena was issued to the target seeking the production of records of the foreign bank accounts that are required to be maintained under 31 USC 1010. The target informed the government that he would not comply with the subpoena on Fifth Amendment grounds, since doing so would compel him to 1) admit the existence of offshore accounts, 2) admit his control over the accounts and 3) authenticate the records. Alternately, he claimed that if he did not maintain the records, complying with the subpoena would require him to admit that he violated the Bank Secrecy Act (“BSA”), 31 USC 5311-5315. The government moved to enforce the subpoena, but the district court ruled in favor of the target. The Fifth Circuit reversed.

The Fifth Circuit started with an analysis of the BSA, which was enacted in 1970. The Court noted that the BSA, including its record-keeping requirements, had several purposes, including “criminal, tax or regulatory investigations or proceedings. Pursuant to the BSA, the Treasury had issued regulations requiring U.S. citizens and residents w
ho maintain offshore accounts to keep records of those accounts for at least 5 years. According to the Court, the BSA record-keeping requirement “is essentially regulatory” and the records sought by the subpoena were of the type that holders of bank accounts customarily keep and that the records had assumed “public aspects.” This meant that the Required Records Doctrine applied and the witness was required to comply with the subpoena. This was the beginning of the Court’s discussion. It then got into its reasoning for why the Required Records Act exception applied.

Under Shapiro, 335 US 1, the Fifth Amendment does not bar the government from imposing record-keeping requirements on persons voluntarily engaged in an activity within its power to regulate and from compelling the production of records maintained in that activity as part of a valid regulatory scheme. Grasso, 390 US 62, identified three “premises” for determining whether the Required Record Doctrine applies:

First, the purpose of the United States’ inquiry must be essentially regulatory; second, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and third, the records themselves must have assumed “public aspects” which render them at least analogous to public documents.

The Court then addressed to the target’s arguments concerning why the Required Record Doctrine did not apply. As to whether the inquiry was essentially regulatory, the target argued that the purpose of the BSA was primarily criminal law enforcement. The Court noted that the target acknowledged that the BSA had more than one purpose, including criminal law enforcement, tax and regulatory investigations. The Treasury makes available information obtained under the record-keeping requirements of the BSA with a number of other agencies, several of which have no power to institute criminal prosecutions. Additionally, the BSA’s record keeping requirements do not apply exclusively to persons involved in criminal activities, since having a foreign bank account is not inherently criminal.

As to the “customarily maintained” premise, the target did not contest that the records were not of the type customarily maintained. The Court noted that the records are the type that a “reasonable account holder” would keep to access his account and they are the type that are required to be kept under the BSA. Thus, the records sought are of the type “customarily kept” by the target.

As to the “public aspects” premise, the target asserted that the records were private records that did not necessarily relate to a business in which a person publicly engages; thus, he argued that the records were private and did not have a public aspect. The Court summarily rejected this argument, stating that the fact that the records are “private” “does not bar them from possessing the requisite public aspects.” According to the Court, since Treasury shares the information it acquires under the BSA’s record-keeping and inspection requirements with a number of other agencies and the data-sharing is meant to serve an important public purpose, this was “sufficient to imbue otherwise private foreign bank account records with a public aspect that is not difficult to imagine.”

Having determined that each of the premises under the Required Records Doctrine applies to foreign bank records, the Court reversed the district court’s denial of the government’s motion to compel the target to comply with the subpoena.

In a case of first impression, the Ninth Circuit held that a district court abused its discretion in ordering that the Assistant Attorney General of the Tax Division attend a mandatory settlement conference. United States v. United States District Court, Northern Mariana Islands, (9th Cir. Sept. 12, 2012). Before discussing the case, it is useful to know about who has authority to settle tax refund suits. As a suit in district court, the Department of Justice has full responsibility over the case. The trial attorney (or Assistant U.S. Attorney in those districts where the U.S. Attorney handles tax cases) has no settlement authority. Their authority is limited to recommending whether DOJ should accept a settlement offer. The recommendation is reviewed by the Tax Division Civil Trial Section Chief who oversees civil tax litigation in the region of the country where the judicial district is located. Civil Trial Section Chiefs are authorized to accept offers where the amount of refund of tax does not exceed $500,000. For settlements in which the amount to be refunded is between $500,000 and $1.5 million, the Chief of the Office of Review is authorized to accept. For amounts of tax in excess of $1.5 million, the Assistant Attorney General has settlement authority. For refunds in excess of $2 million in tax, the offer must be submitted to the Joint Committee on Taxation before it can be acted upon. IRC 6405.

The real party in interest, John Baldwin, brought an action in district court for the refund of over $5 million in tax, penalties and interest. On September 2, 2011, the district court scheduled a mandatory settlement conference. The local rules required each party to have a representative with full settlement authority attend the conference.

On September 7, 2011, the Government filed a motion for relief from the requirement to have someone with full settlement authority attend on the ground that the only official with settlement authority was the AAG Tax, and that authority was limited because any settlement had to be reviewed by the Joint Committee on Taxation. The Government argued that the AAG should not be required to attend and that only the trial attorney assigned to the case would attend with his section chief from the Tax Division available by phone. On September 8, the settlement judge denied the motion. On September 9, the Government filed an emergency motion, which was denied. On September 13, the settlement judge issued an order requiring the person with authority to recommend settlement to the Joint Committee to attend.

On September 14, the Government filed an emergency motion addressed to the trial judge, which was denied. On October 3, the Government filed a petition for writ of mandamus with the Ninth Circuit and a motion for emergency stay. It also moved for a stay in district court, which took the settlement conference off calendar. On January 6, however, the district court denied the stay motion and rescheduled the settlement conference for February 29 and ordered the attendance of the person with authority to recommend settlement to the Joint Committee. The Ninth Circuit issued an order staying the settlement conference.

The Ninth Circuit began its analysis by setting out the five that guide decisions in mandamus cases: 1) whether the party seeking mandamus has not other adequate means to obtain the requested relief; 2) whether the party would be damaged in a way not correctable on appeal; 3) whether the district court’s order was clearly erroneous as a matter of law; 4) whether the district court order is an oft-repeated error or manifests a persistent disregard of the federal rules; and 5) whether the district court order raises a new and important problem or issue of first impression.

The Court noted that there was no dispute that the Government has no other means of review or relief except mandamus, thus the first two factors were satisfied. Given the number of multi-million dollar tax refund suits and that many district courts have rules similar to the one in issue, the Ninth Circuit held that there was a potential problem significant enough to warrant mandamus review. This satisfied the fourth factor. Since the question was one of first impression, the fifth factor was satisfied. This left only the third factor, whether the district court’s order was clearly erroneous as a matter of law.

The Ninth Circuit viewed the question of whether the district court’s order was clearly erroneous as involving two separate issues: 1) did
the district court have the authority to order the Government or one of its agencies to attend a settlement conference through a high-level official with full settlement authority and 2) if it did, did the district court abuse its discretion in this case.

Turning to the question of whether the district court had the requisite authority, the Ninth Circuit found that district courts have broad authority to compel participation in mandatory settlement conferences. First, under F.R.C.P., R. 16(c)(1), district courts are empowered to require parties and their representatives to be present or reasonably available to discuss settlement. Second, 28 USC 473(b)(5) empowers district courts to require a person with authority to bind a party to be present or available by telephone at a settlement conference. Third, district courts have inherent powers to control the disposition of cases, including the power to hold settlement conferences and have present or reasonably available persons with full settlement authority.

In holding that the district court can order a person with full settlement authority to attend a settlement conference on behalf of the Government, the Ninth Circuit rejected the argument that 28 USC 510, 516, 517 and 519 and IRC 7122 (which gives the Attorney General exclusive settlement authority in civil and criminal tax cases handled by DOJ) limited the district court’s authority The Ninth Circuit noted that Congress did not exempt the Government from the rules regarding settlement conferences and the authority given the Attorney General concerned who within the Government has responsibility to represent the Government in refund suits. The DOJ is not above the law that applied to other parties and “the Attorney General is not independent of the court’s authority, including its authority over settlement conferences.”

As to the question of whether the district court abused its discretion, the Ninth Circuit held that it did. The federal government is not like other litigants. The DOJ “in general and its Tax Division in particular are responsible for a very large number of cases.” As of January 9, 2012, the Tax Division was handling 549 civil cases where the amount in controversy exceeded $2 million and a new case involving over $2 million was filed every three days. The AAG Tax was the lowest-ranking Government official authorized to settle these cases. The Ninth Circuit realized that it was impossible for the AAG to prepare for and attend settlement conferences in all of these cases. It also realized the importance of having decision-making centralized in “substantial cases,” including settlement decisions.

The Ninth Circuit than looked to the Advisory Committee Notes on F.R.Civ. Pro. 16, which reflected concern for the fact that in cases involving the Government there may not be anyone with final settlement authority available at a settlement conference and that district courts should expect someone with a major role in recommending settlement to attend. The Ninth Circuit felt that this was especially true in the case before it, where it was the initial settlement conference. While there may be times when it was vital to have a person with final settlement authority present, it was not the case here. The Ninth Circuit noted that the Tax Division settles thousands of cases without a high-ranking official at settlement conferences.

The Ninth Circuit stated that the district court should consider a practical approach in determining whether to require the participation of government officials with full settlement authority in settlement conferences and whether there were less drastic measures available than personal attendance. As a last resort the court could require the official’s presence if reasonable settlement efforts were being thwarted by the failure of the official with full settlement authority to communicate with the trial attorney or the court. However, given the stage of proceedings in the case before it, where there was no evidence of evasive or dilatory tactics by either party the court’s order was not justified. Thus, the district court abused its discretion and mandamus was granted.

Robert S. Horwitz, Esq.

Law Offices of A. Lavar Taylor
6 Hutton Center Dr., Ste. 880
Santa Ana, CA 92707

Note From The Editor

Tax Network is published quarterly.

Editor: Joseph P. Wilson Esq.

Editor’s Note

I would like to thank the authors, first and foremost, for writing such informative and well-researched articles. These authors represent the best of our profession and we are indeed privileged to have them contributing at such a high level to our committee’s newsletter. I would also like to thank the members of this tax community for allowing me the privilege to be the editor of this Newsletter. Special thanks to David Klasing, Patrick Crawford, Robert Horwitz, and A. Lavar Taylor. Their encouragement, positive attitude, and collegiality inspired me to follow their example and to assume a role at the committee level. I look forward to serving our members.

This publication is designed as a discussion vehicle for professionals. The ideas presented herein should be researched independently and adequately, and not relied upon. This publication is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the service of a competent professional should be sought.

Committee Roster

David Warren Klasing
Attorney at Law & CPA
The Tax Law Offices of David W. Klasing
2372 Morse Avenue
Irvine, CA 92614
Tel: 949-681-3502
Fax: 949-681-3504

Chair Elect
Jane Becker
Attorney at Law
The Law Offices of Jane Becker
1537 Pacific Avenue
Santa Cruz, CA 95060

First Vice Chair & Secretary
Attorney at Law
Law Offices of Patrick Crawford
1801 Century Park East
24th Floor, Suite 2400
Los Angeles, CA 90067
Tel: 310-488-5514
Fax: 424-288-4012

Second Vice Chair & Editor
Joseph P. Wilson
Attorney at Law
Law Offices of A. Lavar Taylor
6 Hutton Center, Suite 880
Santa Ana, CA 92627
Tel: 714-546-0445
Fax: 714-546-2604

Past Committee Chairpersons:

2012 Michel R. Stein
2011 Robert Horwitz
2010 Michael R.E. Sanders
2009 Kornelia Davidson
2008 LaVonne D. Lawson
2007 Cathy Stahler
2006 Joseph A. Broyles
2005 David B. Porter
2004 Steve Blanc
2003 Edward T. Perry
2002 Abraham Brown
2001 Dennis Perez
2000 Dennis Brager
1999 Woody Rowland
1998 Judy Hamilton
1997 Charlene Woodward
1996 David Lee Rice
1995 R. Todd Luoma
1994 A. Lavar Taylor
1993 Jennifer Miller Moss
1992 Evan Smith
1991 Mark Ericsson
1990 Jennifer Miller Moss

Submission Deadlines

Send Your Tax Network Submissions To:

Joseph P. Wilson
Attorney at Law
Law Offices of A. Lavar Taylor
6 Hutton Center, Suite 880
Santa Ana, CA 92627
Tel: 714-546-0445
Fax: 714-546-2604

Submission Due Dates:

  • February Issue: January 18, 2013
  • May Issue: April 17, 2013
  • August Issue: July 18, 2013
  • November Issue: October 18, 2013


1 Mr. Taylor’s firm has represented and continues to represent the Meruelos in their litigation against the IRS. This summary contains some materials set f
orth in the record and in the briefs, which are not discussed in the Ninth Circuit’s opinion.Back

2 Ewing v. Commissioner, 439 F. 3d 1009, 1012 (9th Cir. 2006). Back

3 U.S. Tax Court Rules of Practice and Procedure 13(a). Back

4 All code section references herein pertain to the Internal Revenue Code, unless otherwise specified. Back

5 Young v. Commissioner, T.C. Memo. 2012-255. Back

6 26 U.S.C. § 6015(e) (1) (A); Young at 8. Back

7 All “Rule” references herein pertain to the U.S. Tax Court Rules of Practice and Procedure. Back

8 Young at 8, citing Rule 13(a); Monge v. Commissioner, 93 T.C. 22, 27 (1989); Abeles v. Commissioner, 91 T.C. 1019, 1025 (1988).Back

9 Young at 9, citing Butler v. Commissioner, 114 T.C. 276, 288 (2000). Back

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