California Journal of Tax Litigation, 2013 4th Quarter

In This Edition

Message from the Chair
LaVonne D. Lawson, Law Office of LaVonne Lawson

Special Announcements

Minutes of the August 30, 2013 Tax Procedure & Litigation Committee
Joseph P. Wilson, Law Offices of A. Lavar Taylor, APC


Recent Cases of Interest
Selected andedited by Robert Horwitz, Law Offices of A. Lavar Taylor, APC

Cal Tax Network Submission Deadlines and Committee


Message From the Chair

Greetings, everyone!

It is an honor to be able to chair theTax Procedure and LitigationCommittee for the 2013-2014 year. Iam a small part of a great teamconsisting of the following officers:Joe Wilson — Chair Elect; CourtneyHopley — Secretary; and Carolyn Lee — NewsletterEditor. And, of course, our Committee receiveswonderful guidance from our liaison to theExecutive Committee, Robert Horwitz, whosesupport we greatly appreciate. This comes on theheels of an excellent term. My thanks go out tolast year’s officers (David Klasing, Jane Becker,Patrick Crawford, and Joe Wilson) for a greatyear. They set a high bar for us to meet.

For instance, the August 30, 2013 meeting, kindlyhosted at Greenberg Traurig, LLP, in San Francisco,was an exemplary event. The meeting includeddiscussion with speakers from the United StatesAttorney’s Office in San Francisco, who, joined byour own Jay Weill, presented on tax litigation inU.S. District Court. The “Hot Topics” discussionwas, as always, not to be missed. And, in a nod tothe needs of our Committee members as well as tothe future, we discussed other ways in which we caninform and support one another. At the urging ofour own Greg Harper, we considered how we canshare information on the tools of our trade.Accordingly, in this newsletter we include theinaugural edition of a new column called “PracticePointers.” Those who have a tip to share, or whowant to write an article for the column, let us know.This is a forum of and for our membership.

We are looking forward to another great year,and we are on the move. Members of ourCommittee have already submitted proposals forthe Sacramento Delegation papers. And at ourCommittee luncheon during the Taxation SectionAnnual meeting, we will take paper topicproposals for the Washington Delegation trip. Atthat meeting, we also will be requestingCommittee topics for next year’s Annualmeeting. So, please put on your thinking caps.

If you are interested in writing for one ourpublications, please consider submitting anarticle, or even a Quick Point, for the CaliforniaTax Lawyer (a Taxation Section publication). Orconsider writing for our own newsletter, the CalTax Network, which is an incredible resourceand further showcases our contributors.

The members of the Tax Procedure andLitigation Committee are writing articles andpapers, speaking at the California Bar Annualmeetings, participating in the annual Income TaxSeminars, joining Sacramento and WashingtonDelegations, and planning webinars. Again, weare on the move. Thank you for helping to makethis happen.

With much gratitude,

LaVonne Lawson
Law Office of LaVonne Lawson
(A tax controversy firm located in Los Angeles,California)

Special Announcements

Upcoming TPL Committee Meeting

The next TPL Committee Meeting will be heldduring the 2013 California Tax PolicyConference & Annual Meeting of the CaliforniaTax Bar on Friday, November 8.

2014 Washington Delegation — Act Now

Bring 2014 Washington Delegation proposalideas to the Tax Procedure & LitigationCommittee Q4 meeting at the Taxation Annualmeeting. Or, contact Chair LaVonne Lawsonabout your idea ASAP. Washington Delegationproposals are due by November 18, 2013. TheDelegation travels to Washington May 5-7, 2014.Ask anyone who has participated — developingand presenting a Delegation proposal is time verywell spent. Find the details on the TaxationSection’s webpage: dnn-tax.

2014 Taxation Annual Meeting Topics — Now

Annual meeting preparation is like theholidays…it is never too early to start planning.Bring session topic ideas to the Committeemeeting during the Annual meeting, or contactLavonne Lawson. Help improve an alreadytremendous conference with sessions you areinterested in attending.

Publish, Publish, Publish

Indulge in the luxury of legal writing about ideasor observations. Writing for publication focusesthe mind. Better yet, being published is good forbusiness and for developing our tax community.Law firm partners, why not mentor an associatethrough article development? Send Cal Tax Network newsletter articles or other content atany time to Carolyn Lee, Abkin Law, LLP, Check the California Tax Lawyer for submission information.

Minutes of the Meeting of the Tax Procedure & Litigation Committee

Joseph P. Wilson

Joseph P. Wilson1

The third quarter 2013 meeting ofthe Tax Procedure & LitigationCommittee (TPL) was heldAugust 30, 2013 at the offices ofGreenberg Traurig, LLP, in SanFrancisco, California. The meetingwas called to order by the Committee’s outgoingChair, David Klasing. Mr. Klasing announcedthe minutes of the second quarter 2013 TPLmeeting, which the Committee members voted toapprove.

The next meeting of the Tax Procedure andLitigation Committee will be held during the2013 California Tax Policy Conference &Annual Meeting of the California Tax Bar(Taxation Annual meeting). The TaxationAnnual meeting will be held November 7-9,2013, at the Fairmont Hotel — San Jose. TheTPL meeting will be conducted over lunch onFriday, November 8; all TPL members areencouraged to attend.

Guest Speakers: Tax Litigation in US DistrictCourt

Guest speakers presenting at the August 30 TPLmeeting were Special Assistant US AttorneyCharles Parker, Assistant US Attorney MichaelPitman, and Jay Weill, Sideman & Bancroft andTPL member. The panel discussed tax litigationin US District Court.

Mr. Parker and Mr. Pitman represent the UnitedStates in tax litigation in District Court, workingin Tax Division of the US Attorney’s Office inSan Francisco. Mr. Pitman is a full-timeAssistant US Attorney. Mr. Parker is a “special”Assistant US Attorney, on a work detail for afixed term from the IRS Office of Chief Counsel.

Mr. Weill has a storied history as a tax attorney.He was a trial attorney with the Tax Division ofthe U.S. Department of Justice, and an AssistantU.S. Attorney in the Tax Division of the U.S.Attorney’s Office in San Francisco. Mr. Weillserved as Chief of the San Francisco TaxDivision for 25 years. In his role as Chief,Mr. Weill supervised criminal and civil tax casesfiled in courts within the Northern District ofCalifornia Judicial
District and personallymaintained a full caseload of criminal and civilcases. Mr. Weill then transitioned to privatepractice, and currently is a partner at Sideman &Bancroft, LLP, in San Francisco.

Mr. Parker led the discussion which profiled thevarious types of tax cases handled in US DistrictCourt. The panel members reviewed summonsenforcement cases, trust fund recovery penaltycases, and suits to reduce federal tax assessmentsto judgment and foreclose on tax liens.Mr. Parker noted that the law is favorable to thegovernment in summons enforcement cases andtrust fund recovery penalty cases, which means itcan be challenging for a taxpayer to prevail inthese types of actions. The panel also discusseda few types of tax cases sometimes handled inState Superior Court, including interpleaderactions, quit title actions, and other types of lienpriority cases. The speakers answered questionsduring the presentation and generously remainedwith the group during lunch, further respondingto the members’ inquiries. All in all, the panelwas well received.

Hot Topics

Hot tax topics, a favorite tradition of the TPLCommittee, were entertained following lunch.

Among other hot topics, the group discussed therecent Revenue Ruling of the US Department ofthe Treasury and the IRS that same-sex couples,legally married in jurisdictions that recognizetheir marriages, will be treated as married forfederal tax purposes. (See Revenue Ruling2013-17, along with updated Frequently AskedQuestions for same-sex couples and updatedFAQs for registered domestic partners andindividuals in civil unions, available The ruling implements the federal taxaspects of the June 26, 2013 US Supreme CourtWindsor decision invalidating a key provision ofthe 1996 Defense of Marriage Act (DOMA).The ruling applies regardless of whether thecouple lives in a jurisdiction that recognizessame-sex marriage or a jurisdiction that does notrecognize same-sex marriage. Under the ruling,same-sex couples will be treated as married forall federal tax purposes, including income taxand gift and estate taxes. The ruling applies toall federal tax provisions where marriage is afactor, including filing status, claiming personaland dependency exemptions, taking the standarddeduction, employee benefits, contributing to anIRA, and claiming the earned income tax creditor child tax credit.

Also of note, during the Hot Topic round, GregHarper proposed the idea of sharing practicepointers during TPL meetings. He thought itwould be useful for the members to not onlydiscuss substantive tax topics, but also shareideas on how to run a successful tax legalpractice. The response was overwhelmingpositive, and the incoming officer group agreedto support Mr. Harper’s proposal.

Closing & Recognition of Outgoing Officers

In closing, the TPL members thanked outgoingChair David Klasing and the other officers fortheir service during their 2012-2013 term. Aftera reminder to plan to attend the NovemberTaxation Annual meeting, the meeting of the TaxProcedure and Litigation Committee adjourned.

Practice Pointers:Technology — Affirmatively Embrace It

Gregory Harper2

Welcome to the inaugural Practice Pointers column, aspace dedicated to sharing ways to improve our practice.The column kicks off with the observations of Greg Harper,an active Tax Procedure & Litigation Committee memberwith a solo practice focusing on tax and criminal law.

Note that the observations and opinions in the PracticePointers column are solely those of the contributor and notof the California Bar Association or the Tax Procedure &Litigation Committee. No endorsement or promotion ofany products or services is intended.

This column is a place where we can exchangeideas on the practicalities of practicing tax law.For example, what kind of hardware andsoftware to use. Or, how we can develop moreeffective ways to practice. It would bewonderful if we can say: “[T]his is what I do oruse and this is my experience.”

In this inaugural column, we focus ontechnology. My advice to you, at minimum, isdo the following:

  1. Visit, a site that focuses on legal technology and practice management issues, products, and services. Sign up for the free email messages with tips and articles on everything you can think of, written by real solo or small firm lawyers. I have published in on how to buy a computer. (Haggle. Money is for sale!)
  2. Visit the American Bar Association Technology Resources page: es/legal_technology_resources.htmlw. I have used the ABA site for years and it gets better, adding courses and products. It is truly a clearinghouse where you can shop for your legal technology needs. The ABA site has webpages where it compares software. You can also receive discounts on hardware and software, or try software for a month. ABA membership is not required for many of the resources found through this page.’
  3. Participate. Join technology testing groups. I am always looking for something that will function as a calendar, handle client case information as well as all file documents, and do my billing. I tested the MyCase system. In exchange, I was given a discount, and I receive new additions to the software before the rest of the market. I also am able to make functionality suggestions, which the MyCase developers have used to improve the product. I like MyCase because I can use it on my iPad. Recently I tested the MyCase website template. The company asked my opinion as to what lawyers would pay for the service; they gave me a 33% discount for the feedback. Other technology vendors may have similar deals. Check the sites of the products that interest you.
  4. Talk to others. A federal judge once told me that when he was a prosecutor he asked judges for critiques of his trial performance. For several years I did so, and it helped. When I can, I also always ask other lawyers what they use for office and practice equipment. Almost everyone is happy to show you what they use. When I was a rookie, I asked a veteran lawyer what technology she used to support her practice. She pulled out a bottle of gin and proceeded to talk with me for a couple of hours, walking me through the hardware and software her firm used, including the products’ evolution. Her lesson shaped how I look at the technology today.
  5. Resist the temptation to overbuy. In my opinion, top-of-the-line hardware and software systems may not be the best value for a lawyer. They are complex, have you beholden to tech support, and probably do more than you need.
  6. Be creative and don’t rush to spend money. Computers are out of date in two years. New processors make the machines faster. Shop around before selecting a system. I have bought computers ranging from the bottom-of-the-line model fitted out with all of the extras to the topof- the-line model with all of the bells and whistles. I have tried whatever the IRS or most corporations were using as their fleet computer for their workforce. Here is what I have found:A. Whatever most consumers buy will work for you. However, something with a little more power will not wear out as fast.B. Consider a PC over Apple, because more software is written for PCs.
  7. Don’t be afraid of the cloud. My building where my firm is officed has nine tenants; six are criminal lawyers who generate lots of paper. They have all gone to the cloud. I store paper documents at a secure location, but the cloud saves on storage and I can access any document from MyCase.

California is the Best

I believe the California tax lawyers whoregularly deal with iss
ues involving taxprocedures and litigation are the best in thecountry.

Hopefully our networking makes us much moreeffective. This first Practice Pointers column isone more way for us to share with one another. Iam not a technology wonk. I just want toimprove how I perform and make better use ofmy time. Let me leave you with thisencouragement: Be smart with your use oftechnology. Think about how technology canmake you more productive and demonstrate youradded value to your clients.

YTL Corner (All Readers Welcome)

YTL Corner (All Readers Welcome) is a new columnspotlighting professional development for lawyers new tothe tax community and for all tax attorneys. The inauguralcolumn was written by Jon D. Feldhammer who recentlyjoined Feurzeig, Mark & Chavin, LLP, in San Franciscoafter serving as a senior trial attorney for the IRS Office ofChief Counsel.

Reputation and Credibility: A Note to Myself

Jon D. Feldhammer3

Jon D. Feldhammer

On the first day that I crossedthe bridge from being an IRStrial attorney to being anattorney in private practice, Iwrote myself the followingletter:

Dear Jon,

As a future practitioner in front of the IRS,one of my most valuable assets will be myreputation and credibility. With a goodreputation, I will be able to get reasonablesettlement offers, more flexibility from theIRS, and satisfy examiners easier. Everydivision of the IRS responds favorably toprivate practitioners with a good reputation.

Do not forget how my old colleagues at the IRS,revenue agents, appeals officers, and attorneysin Counsel alike, all speak to each other andoften share stories about attorneys in the privatebar. Those who earned poor reputations did notfare as well as those who maintained good ones.

To build a good reputation, I will need to bediligent, responsive, prepared, credible, andeven better — proactive. The IRS isunderstaffed; this means its employees areoverworked. The less pain and aggravation Icause, the less the flaws in my cases will benoticed. For example, when I write a protestto Appeals, I need to identify all of Exam’sissues, provide detailed and completearguments to each, and attach, in an easy tofollow way, all of the exhibits necessary tosupport those arguments. Just think back tohow the revenue agents would often dump abunch of workpapers in a box mixed in withthousands of other pages and ship it off toAppeals. By being diligent, responsive, andprepared, I will give Appeals perhaps theonly thing they will look at: my arguments.

If I am unresponsive, Appeals will utilize itsnew approach: it will simply close my case fortrial preparation. This means I will have just lostmy best chance to settle my client’s case withfavorable terms without a trial. Remember thatCounsel will rarely give a better offer thanAppeals, and generally has more stringent rulesgoverning the settlements it can offer.

If I earn a reputation for being unresponsive, Iknow that the amount of time the IRS willgive me to respond the next time will be evenshorter. Even worse, if I earn a reputation forlying, I will be left wondering why thatAppeals officer is requiring a receipt for everycost of goods sold, even though I alreadyturned over a random three-month sampling.

If I earn a good reputation, penalties may bewaived, issues conceded, and close callscalled my way. If not, I may be leftwondering why Appeals offered to settlenothing and Counsel increased the deficiency.

Now, Jon, all you have to do is take yourown advice.

No Country For Corporate Taxes:G20 Nations Coordinate Action Plan, IRS ToPursue “Stateless Income” Tax

Alexandra C. Eaker4

Alexandra C. Eaker

Statements from the U.S. TreasurySecretary, IRS Deputy ChiefCounsel, and the July 2013 G20conference indicate taxingmultinational corporations is a toppriority in tax enforcement.Finance ministers representing theworld’s major economies have released acoordinated action plan taking aim at assessingtaxes owed. The Action Plan, supported bynotorious tax havens like Switzerland, Ireland, andthe Netherlands, intends to coordinatemultinational tax enforcement. The Action Plan,developed in large part by members of both theG20 nations and the Organization of EconomicCooperation and Development, identifies15 specific actions that will give governments thedomestic and international instruments to preventcorporations from paying little or no taxes.According to OECD Secretary-General AngelGurría, the Action Plan, which will be rolled outover the next two years, “marks a turning point inthe history of international tax co-operation.” Itwill allow countries to draw up the coordinated,comprehensive and transparent standards they needto prevent tax base erosion and profit shifting.

In response to the release of the OECD Action Plan,U.S. Treasury Secretary Jack Lew showed hissupport by stating: “We must address the persistentissue of ‘stateless income,’ which underminesconfidence in our tax system at all levels.” IRSDeputy Chief Counsel, Erik Corwin, commentedwhile speaking to a group of lawyers at the D.C. BarAssociation’s Summer Luncheon that the IRS ispursing enforcement action against companiesutilizing “complex restructuring designed either tocreate stateless income or to affect a tax efficientrepatriation.” Mr. Corwin noted “a family of cases[…is] in the pipeline and being looked at.” Thesecomments point to compliance action forcorporations with ‘stateless income’ and the IRSutilizing new tools in international enforcement.’

Demonstrating that there is action associatedwith the speechifying, at the September 2013G20 meetings, members focused on developingan automatic exchange of information structuremodeled after the European Union system ofinformation sharing. Members of the G20 arepushing to implement the automatic exchange oftax information as soon as 2015.

Practical Considerations When Dealing With IRSExaminations

Wendy Abkin and Steven L. Walker 5


Steven L. Walker
Wendy Abkin

The first step toward success in an IRSexamination, or audit, is to manage yourexpectations. This involves understanding theIRS’s Examination Division’s (Exam) limitedability to “settle” exams. While most taxattorneys talk about “settling” cases with Exam,in practical fact there is a difference between”settlement” and “resolution” of cases.

As a general rule, revenue agents (agents)handling audits do not have the authority to”settle” cases; however, they DO have limitedability to “resolve” issues and cases. Agents candecide whether to raise or pursue issuesdepending on legal interpretations and, mostimportantly, factual determinations, effectivelygiving them a limited ability to resolve issues.(Internal Revenue Manual (I.R.M.) to4. Successful resolution at the Examlevel is directly related to effectively presentingfacts and information to the auditor. Agents mayhave the ability to “settle” cases under certainspecific IRS programs, such as:

  • Fast Track6
  • Early Referral7
  • Delegation Order8
  • Accelerated Issue Resolution Agreement9
  • Industry Issue Resolution Program10
  • Comprehensive Case Resolution Program11

Positioning Your Client’s Case for Resolutionat Exam

In an audit situation, your goal is to accuratelypresent your client’s facts and supportingevidence as persuasively as possible. If an agentis satisfied with the information presented, theagent is more likely to drop the issue.

Before the first meeting with the agent, considerthis checklist:

  • Research your client’s publicly available information (Google, website, etc.). IRS agents typically do so, along with other “precontact” analysis. Your client should understand that by the time the “exam” letter is sent out, the IRS agent already has a fair amount of information.
  • It may be helpful to review relevant parts of the Internal Revenue Manual that apply to the Examination Process. This can be found in Part 4 of the I.R.M., online at 002r.html.
  • Conduct your own review of the tax returns under examination.
  • Interview your client. Ask if the client has any concerns. If there is any hint of potential criminal exposure (or even civil fraud), tread extremely carefully. Explore whether there are any recent events that might have caused an audit (e.g., bitter business dispute, firing of a trusted employee, bitter divorce, etc.).
  • Emphasize that your client has ONLY two options for responding to IRS inquiries: Tell the complete truth; or remain silent and assert the 5th Amendment privilege against selfincrimination.
  • Many tax fraud cases are developed AFTER the taxpayer lies to the agent. False statements in the course of an IRS exam are in themselves considered to be indications of fraud on the return under exam.
  • If a criminal case is already under investigation, the client’s initial contact will typically be an in-person visit from two Special Agents of the IRS Criminal Investigation Division, rather than a telephone call or letter contact from a Revenue Agent.
  • Contact the return preparer to determine whether the preparer has been contacted by the IRS, and, if so, de-brief the return preparer.
  • Define and prioritize your client’s goals as early as possible: Narrow the scope of issues under audit? Limit the years of exposure? Limit exposure to penalties?
  • Review any available published guidance that may apply to your client’s issues, such as the Audit Technique Guidelines in the Internal Revenue Manual. These are guides prepared for revenue agents to educate them about particular businesses and the tax issues that may arise in such businesses, such as:
    • Architects and Landscape Architects
    • Attorneys
    • Cash-intensive businesses (e.g., beauty salons, convenience stores)
    • Construction industry
    • Lawsuits, awards & settlements
    • Retail industry
    • Veterinary medicine
    • Wine industry

At the Initial Meeting with the Revenue Agent:

Constructive, cooperative rapport between thetax attorney and the examining agent goes a longway for a multitude of reasons, not least beingthe potential of less stress during theexamination. Try to develop a good relationshipwith the revenue agent or exam team. Encouragedialogue with the agent and Exam teammembers. Understand their point of view inorder to address their concerns and interests.

It is perfectly acceptable to ask what triggeredthe audit. Typically, the agent will identify aparticular “large, unusual or questionable” item.Or the audit may have been triggered by therelationship between reported income anddeductions claimed (e.g., mortgage interestdeductions exceed reported income).

Be sure to agree on general timelines forresponses; if you have particular issues in thisregard, notify the agent at the initial meeting(e.g., a scheduled trial, vacation, etc.). Makeevery effort to meet the agreed-upon timelines.

Responding to IRS Requests for Information:

Generally the IRS agent will provide a writtenrequest for information (called an “InformationDocument Request” or IDR). The agent mayissue a number of sequential IDRs. The agentalso may seek to obtain records directly fromthird parties, such as banks or vendors. Ataxpayer is required by law to maintain recordsof income and expenses (Internal Revenue Code§6001), and the IRS has broad authority toreview those records. The Service has theauthority to issue an administrative summons ifnecessary to obtain information (InternalRevenue Code §7602). Failure to maintaintypical books and records may be a basis forimposition of penalties.

Typical requests will include: copies of taxreturns for the immediately preceding andsubsequent tax year, books and records ofbusiness income and expenses (and work paperstying those records to items on the tax return),tax returns of related taxpayers (e.g., corporatetax return if taxpayer is the sole or majorshareholder). It is also common now for agentsto request electronic copies of the accountingrecords. Be aware that such electronicinformation may include “meta data” that mayreflect details about when the records werecreated or modified.

Many audits now routinely involve a “bankdeposits analysis” by which the agent seeks tocompare the income reported on the tax return tothe net deposits into all of the taxpayer’s bankaccounts over the course of the audited year.The agent will request bank records (usually juststatements) from December of the prior yearthrough January of the subsequent year. Theagent will add up all deposits and then back outany inter-account transfers and non-taxable items(such as loan proceeds, gifts, or other nontaxabledeposits). The taxpayer may need toobtain copies of the specific items deposited (i.e.,deposit slips and front and back of checksdeposited) in order to establish that certaindeposited items are not taxable income.

If an agent’s written request for information isnot clear, or is burdensome, it is acceptable totalk to the agent about the request. It may bepossible to agree on a more limited scope ofinformation (at least initially).

A few specific tips:

  • Be proactive: don’t just respond to the agent’s inquiries. Think about how you can build support for your client’s view of the facts, and what evidence exists or can reasonably be developed to establish facts (e.g., supporting declarations or affidavits). This is particularly important if contemporaneous records do not exist. If you need to prove a negative, figure out how you can do that with affirmative evidence.
  • Present records and information in an organized fashion.
  • Keep a record and copies of the information and documents you provide to the agent. If the agent wants to review originals of your client’s records, be sure you make the copies of anything requested so you know what the agent focused on. Also, retain a record of transmittal and list of documents that were provided for review (even those documents that were no
    t copied by the agent) so you can establish that the information was, in fact, provided to the agent.

Place of Audit & Requests to Interview Clientand Tour of Place of Business:

IRS field agents expect to go to the taxpayer’splace of business to conduct the audit.Taxpayers generally do not want auditors at theirplace of business for several days at a timereviewing records. It is possible to arrange forthe agent to review the books and records at therepresentative’s office instead, particularly if theagent still will have an opportunity to view thebusiness site.

What about a client interview? Such requests arecompletely normal and routine. It is difficult, butnot impossible, to avoid the client interview.Generally the agent will want to interview theclient at the start of the audit. If possible, waituntil you are better informed about the scope andissues in the audit, your client’s records andunderstanding of the business practices. (Someclients actually are not that involved in, orfamiliar with, the bookkeeping and recordkeepingpractices of their businesses.) Be sureyour client is fully prepared for such aninterview. Prepare the client as you would for adeposition.

A tour of your client’s business is standardoperating procedure. Clients are not enthusiasticabout such tours. However, if you are preparedand have done your homework about the issuesin the audit, the tour of the business can be anopportunity to present favorable evidence.

Navigating Exams of “Coordinated” Issues:

First, what is a “coordinated” exam? Check forinformation on IRS website, which often willidentify the IRS executive or “champion” leadingthe issue for the Service.

After you research the Service’s positionregarding the coordinated issue, develop the factsto demonstrate that the taxpayer’s case isdifferent from the typical coordinated issue caseand therefore should be treated differently. Beaware that once the issue has been identified as acoordinated issue, it will be difficult to persuadean agent that your client’s situation is unique.

Some representatives may feel over their headswhen confronted with a coordinated issue case.Many members of the Tax Procedure &Litigation Committee have experience with thesetypes of matters, and may be available as abehind-the-scenes guide or as an associated-inattorney working with you on the case.

Educating the Agent about Factual or LegalIssues:

An agent may not be familiar with legal orfactual issues unique to your taxpayer. In suchcircumstances, consider whether to provide legalmemoranda, access to taxpayer’s experts, or toencourage the agent to consult internal IRSexperts.

A request for technical advice from the IRS maybe appropriate. Either the taxpayer or therevenue agent may request guidance from theIRS National Office with a Request for TechnicalAdvice, and the National Office will issue aTechnical Advice Memorandum (TAM) orTechnical Expedited Advice Memorandum(TEAM). See Rev. Proc. 2012-2 for moreinformation.

When to Involve the Revenue Agent’s Manager:

Always ask for the name and contact informationof the agent’s manager at the first meeting (i.e.,before any problems arise).

It is perfectly acceptable to ask that the managerbe included in discussions or meetings. Keep therequest respectful and understand that the agenthas presumably been acting with the consent ofhis or her manager; try to present your case andarguments in a way that does not appear to bewhining about the agent. Consider ways topresent your arguments that will allow themanager to agree with you in a way that savesface for the agent.

Impact of Taxpayer’s Ability to Pay uponSettlement:

It surprises many taxpayers to learn that theirability to pay a tax liability has no bearing on theexamination outcome. The Exam Division’sobligation is to determine the correct amount oftax due. It is not the agent’s job to actuallycollect that amount. Efforts to negotiate at theaudit stage based on the taxpayer’s ability to pay,or timing of payment, are rarely successful.

Document, Document, Document:

The examination or audit usually is only the firststep in addressing IRS tax matters. Throughoutthe exam, build a comprehensive record ofinteractions with the Exam agent or team, as wellas all documents and information exchanged. Ifthe taxpayer moves through Appeals or on to theTax Court, this record will be an invaluableservice to your client.

The Offshore Voluntary Disclosure Program: ABrief History And Overview Of The ComplexitiesInvolved In Disclosing Foreign Asses

Farzaneh Savoji

Farzaneh Savoji12

The IRS and the Justice Departmenthave increased their effortsregarding criminal investigation ofinternational tax evasion. Globaltax enforcement has become a toppriority at the IRS and as a result, the agency initiated a series of offshore voluntarydisclosure programs (OVD). The goal of theseOVDs is to settle with taxpayers who hadpreviously failed to report offshore income andfile any related information return.13

he law assumes that nearly every U.S. citizenknows about the obligation to file an income taxreturn.14 Unfortunately, the IRS Foreign BankAccount Report (FBAR) filing requirement wasrelatively unknown until recently and there are asignificant number of taxpayers who violated thelaw inadvertently.15Nonetheless, such taxpayersare subject to the FBAR penalties. Althoughthere are some options available for benignactors, the complexities of the programs maymake it difficult for taxpayers to come forwardand distinguish themselves from intentional taxevaders.

Foreign Bank Account Report FilingRequirements and Penalties

The Bank Secrecy Act (BSA) requires U.S.citizens and residents to report foreign accountson Form TD F 90-22.1 Report of Foreign Bankand Financial Accounts (FBAR) in order for thegovernment to prevent money laundering and taxevasion.16 According to the instructionspromulgated by the IRS, a person must file anFBAR return if all of the following conditionsare met: 1) a “U.S. person,” 2) had a “financialinterest” in or “signature authority” over, or”other authority” over 3) one or more “financialaccounts” 4) located in a “foreign country,”5) and the aggregate value of such account(s)exceeded $10,000, 6) at any time during the calendar year.17 Understanding the requirementto file an FBAR is a task on its own but to makematters more complicated, the information returnhas a different deadline from the federalindividual income tax return; the FBAR is due(and must be received) by June 30th; not onApril 15th.

Thus, amongst the tax evaders and non-filers arealso those who do not realize that they have aduty to disclose their interest in foreign accountson an FBAR but are still violators and liable forpotentially hefty FBAR penalties.

The maximum civil penalty applicable for awillful failure to report foreign accounts on anFBAR is rather severe. It is the greater of 50percent (50%) of the account or $100,000 peryear.18 The penalty for non-willful failure to filemay be up to $10,000 per violation if 1) theviolation was due to “reasonable cause,” and2) the amount of the transaction or the balance inthe account at the time of the transaction wasproperly reported.19 In addition to civil penalties,possible criminal charges include tax evasion,filing a false return, and failure to file an incometax return.20

Thus, with a reduced penalty structure andlowered risk of criminal prosecution, theOffshore Voluntary Disclosure Programs haveproven to be effective in bringing taxpayers intocompliance (and in gathering data to furtherinvestigate willful tax evaders).

Brief Background of the Program

Beginning in 2003, the IRS has operated fouroffshore programs which provide incentives for taxpayers to disclose their offshore accounts andpay delinquent taxes, interest, and penalties.21According to a report issued by the GovernmentAccountability Office, as of December 2012, theIRS has collected over $5.5 billion in revenuefrom taxpayers who participated in its offshorevoluntary disclosure programs.22 The programsattracted 39,000 disclosures by generally offeringreduced penalties and lowered risk of criminalprosecution.23

The first of the four initiatives was offered in2003 and was related to an offshore credit cardproject the IRS pursued starting in 2000.24TheIRS served “John Doe” summonses on majorcredit card companies seeking records on foreignbank accounts, but by the time the Servicegathered enough data to place files in the handsof its revenue agents, most cases had approachedthe 3-year statute of limitation for assessment.25It was around the time of this project, in 2003,when the IRS announced its “Offshore VoluntaryCompliance Initiative” (OVCI) in order toencourage taxpayers to come forward and “clearup their tax liabilities.”26 The 2003 OVCIresulted in $75 million dollars in taxes paid byparticipating taxpayers.27

The next offshore bank account reportingprogram was launched in 2009 in conjunctionwith a crackdown on offshore tax evasioninvolving Swiss bank accounts, specifically,those held at Union Bank of Switzerland(UBS).28 The United States governmentcompelled UBS to name its US clients and endedup charging the bank with “conspiring to defraudthe United States by assisting accountholders inevading the IRS.”29 Following this suit, the IRSannounced its 2009 Voluntary DisclosureProgram and collected $3.4 billion from 15,000disclosures.30 The window of opportunity thattaxpayers had to come forward was from03/23/2009 to 10/15/2009.31 After the close ofthe 2009 OVDP, taxpayers continued to requestprotection from the 2009 OVDP in regard toreporting their offshore accounts. As a result, onFebruary 8, 2011, the IRS announced its 2011Offshore Voluntary Disclosure Initiative(OVDI).32The Service reported that almost12,000 disclosures were made under the 2011OVDI.33

The 2012 Offshore Voluntary DisclosureProgram

The IRS announced that it would continue itsprogram into 2012 but, this time, the programwould be open indefinitely. For each of theprevious programs, the Service provided a specified timeframe during which taxpayerscould come forward. Moreover, the IRS hasstated that the terms of the program can changeat any time, including disqualifying certaingroups of taxpayers from participating.34

Under the 2012 OVDP, individuals voluntarilydisclosing offshore bank accounts owe a 27.5percent (27.5%) penalty on the highest aggregateaccount or asset balance from the last eightyears; i.e., 2003-2010 (the “look-back period”).35By contrast, the 2009 OVDP imposed a 20percent (20%) penalty with a six-year look-backperiod, and the 2011 OVDI imposed a 25 percent(25%) penalty with an eight-year look-backperiod.36 But not every change to the OVDinitiatives has been more punitive forparticipating taxpayers. For example, under thecurrent OVDP announced in 2012, taxpayerswho have offshore accounts totaling less than$75,000 in deposits may have a reduced penaltyof 12.5 percent (12.5%).37Furthermore, sometaxpayers may qualify for a 5 percent (5%)reduced penalty if 1) they did not open theforeign bank account, 2) had minimal contactwith the foreign bank account, 3) did notwithdraw more than $1,000 in any year coveredby the program, and 4) could establish that taxeswere paid on the amounts they deposited.38

Making a Voluntary Disclosure

For taxpayers interested in participating in theprogram, a pre-clearance request must berequested.39 The IRS Criminal Investigation unitwill then notify taxpayers or their representativeswhether or not they have been cleared to make avoluntary disclosure, issuing the Offshore Voluntary Disclosure Letter.40 However, preclearancedoes not guarantee taxpayer acceptanceinto the OVDP.41 Once the letter has beensubmitted, Criminal Investigation will review theOVD letter and, within 45 days, notify thetaxpayers or their representatives whether theiroffshore voluntary disclosure has beenpreliminarily accepted or declined.42 Preliminaryacceptance into the program is conditioned uponthe information provided by the taxpayer being,and remaining, truthful, timely, and complete.43Should this requirement not be met, the taxpayerwill become ineligible and the IRS will open anexamination of the taxpayer, exposing thetaxpayer to civil and criminal penalties.44 It isimperative that taxpayers or their representativesfollow the instructions and requirements of theOVDP once taxpayers decide to disclose theirforeign assets.

Taxpayer Advocate Assistance

The National Taxpayer Advocate (TAS) isproviding assistance to taxpayers who arethinking about opting in or out of the program.In fact, Nina Olson encourages taxpayers tocontact TAS before making a final decision.45Taxpayers who decide to reach out to TAS willbe put in touch with attorney-advisers in the TASoffice who are working on OVDP/FBAR cases.Considering the uncertainties surrounding theOVDP, Olson stated that “every case you bringus helps us to make the case for getting betterguidance going forward.”46

Risk of “Quiet Disclosures”

Generally, taxpayers who failed to report incomecould avoid accuracy-related penalties by filing “qualified amended returns” before beingcontacted by the IRS.47 However, with theimplementation of the OVDP, should the IRSreview the taxpayer’s amended return and openan examination, the taxpayer will not be eligibleto participate in the program.48 Instead, the IRSmay apply a series of civil penalties and mayeven recommend criminal investigation.49


The complexities of the OVDP along with thefew alternate options (not discussed in thisarticle) require careful analysis of the facts andcircumstances of each taxpayer’s case. The rulesare still evolving as the IRS gathers more dataand draws a clear line between those taxpayerswho voluntarily come forward to becomecompliant with their foreign bank accountreporting and those who continue to fail to meettheir tax obligations. The IRS is aware of benignactors and those who willfully hide their assets,and have made it the Service’s goal to get bothgroups back into the US tax system, in order to”turn the tide against offshore tax evasion.”50

Recent Cases of Interest

Robert S. Horwitz, Esq.51

BASR Partnership v. United States (Sept. 30, 2013)

A recent issue of The Tax Network featured anarticle by Steve Tosher on the ramifications of the Tax Court’s decision in Allen v.Commissioner and its progeny, “Surprise-TheFraud of Your Tax Preparer May Extend theStatute of Limitations on Tax Assessments.”The Court of Federal Claims recently issued adecision that rejects the holding in Allen. InBASR Partnership v. United States, (Sept. 30,2013), the Court held that the statute oflimitations was not extended to assess adeficiency against a partnership due to the fraudof a tax advisor. The tax advisor was ErwinMayer, a former partner in Jenkins & Gilcristwho pled guilty to conspiracy and tax evasioncharges prior to trial in the Daugerdas criminalcase.52

In 1999, Taxpayers William Pettinati and hiswife and their CPA sought advice from Mayer asto the tax consequences of a pending sale ofstock in their closely held corporation, PagePrinting. Mayer set up a Son of BOSStransaction, with BASR Partnership 1 as thepartner to which the offsetting short options werecontributed by the single member LLCs of thePettinatis. There was a slight twist to this Son ofBOSS transaction. The Pettinatis eachcontributed 99% of their interest in BASR to anS corporation. This resulted in a new partnershipfor tax purposes, BASR Partnership 2. Theycontributed their stock in Page Printing toBASR 2. Shortly afterwards, all of the stock ofPage Printing was sold for a substantial profit.The Pettinatis, the partnerships and the Scorporations all filed timely returns for 1999 inOctober, 2000.

The IRS began a partnership proceeding forBASR in August, 2006 and issued an FPAA onJanuary 20, 2010. Eighty-six days later, Mr. Pettinati, as tax matters partner for BASR,filed a complaint with the United States Court ofFederal Claims challenging the FPAA andseeking a refund of $735,533. Due to thependency of litigation about whether anoverstatement in basis of sold property is anomission from gross income, the case wasstayed. As you may recall, United States v.Home Concrete & Supply LLC, 132 S. Ct. 1836(2012) held that an overstatement of basis wasnot an omission from gross income. The stay inthe BASR case was lifted in June, 2012. Theparties thereafter filed motions for summaryjudgment on the question of whether the FPAAwas time-barred.

The first issue addressed by the Court wasjurisdiction. Since the complaint was filedwithin 86 days after issuance of the FPAA, theCourt held that it had jurisdiction to adjudicatethe claims alleged in the complaint. The Courtthen next addressed standing and held that sinceBASR alleged that is suffered an injury in factthat was “concrete and particularized” due to theFPAA, BASR had standing to bring the action.These issues were not in dispute.

The Court then moved to the heart of the matter:did the fraud exceptions to the normal three-yearperiod of limitation in 26 USC §6229(c)(1) and26 USC §6501(c)(1) apply to the instant case? The fraud exception in §6501 reads:

False return.–In the case of a false orfraudulent return with the intent to evade tax,the tax may be assessed, or a proceeding incourt for collection of such tax may be begunwithout assessment, at any time.

The fraud exception in §6229 reads:

(c) Special rule in case of fraud, etc.–(1) False return.–If any partnerhas, with the intent to evade tax,signed or participated directly orindirectly in the preparation of apartnership return which includesa false or fraudulent item —

(A) in the case of partners sosigning or participating in thepreparation of the return, anytax imposed by subtitle Awhich is attributable to anypartnership item (or affecteditem) for the partnershiptaxable year to which thereturn relates may be assessedat any time, and(B) in the case of all otherpartn
ers, subsection (a) shallbe applied with respect to suchreturn by substituting “6years” for “3 years”.

The Government did not contend that thetaxpayers had an intent to evade tax. BASRargued that §6229 fraud exception did not applybecause no partner signed or participated in thepreparation of the BASR return with the intent toevade tax. It also argued that the fraud exceptionof §6501 did not apply. First, it contended thatthe fraud exception contained in §6229 is theonly statute that allows the fraud exception toapply in partnership cases. In response to theGovernment’s contention that §6501(c)(1)governs, BASR responded that §6501 and §6229cannot be read in isolation; as a result, theGovernment could not rely on §6501 withoutconsidering §6229, which limits the fraudexception in partnership cases to instances wherea partner who signed or participated in returnpreparation had fraudulent intent.

The Government countered that §6229 mayextend — but not reduce — the limitations periodunder §6501. As a result, according to theGovernment, the starting point for determiningthe appropriate limitations period was §6501. Asthe Court noted: “The Government selects thiscase to test the proposition that the fraudulentintent required to extend the statute of limitationsunder § 6501(c)(1) is not limited to thetaxpayer.” Pointing to the Tax Court’s decisionin Allen, the Government argued that by itsterms, §6501(c)(1) is not limited to cases inwhich the taxpayer had fraudulent intent and, ifCongress wanted to so limit it, it would havewritten that requirement into the statute. TheGovernment contended that the taxpayer isresponsible for the fraud of its agent especiallywhere, as in the case before the Court, thetaxpayers did nothing to verify the accuracy ofthe facts contained in Mayer’s opinion letter.Finally, the Government urged the Court to adoptthe reasoning of Allen because of the taxsystem’s reliance on self-reporting. According tothe Government, use of the fraud exception wasespecially justified because the taxpayers usedlimited liability companies (LLCs) to engage inthe short-sale transactions, thus allowing thetaxpayers not to report on their individual returnthat they had received and contributed short saleproceeds to a partnership, which could havetriggered an IRS audit and, further, that thetransaction was structured so that they did notreport the gain from the sale of their company ontheir individual tax returns.

To resolve the case, the Court looked first toprecedent of the Federal Circuit. In Prati v.United States, 603 F.3d 1301 (Fed. Cir. 2010)and AD Global Fund, LLC v. United States, 481F.3d 1351 (Fed. Cir. 2007), the Federal Circuitheld that §6229 establishes a minimum period oflimitations for assessing tax due to partnershipitems, i.e., it can extend the normal period oflimitations under §6501 for partnership items.The Court therefore looked to §6501 todetermine whether the fraud exception applied.

The Court noted that under §6501(a), a “return””means the return required to be filed by thetaxpayer (and does not include a return of anyperson from whom the taxpayer has received anitem of income, gain, loss, deduction, or credit).”According to the Court, this implied that thefraudulent intent must be that of the taxpayer.As a result, the IRS is bound by the normal threeyearperiod of limitations unless the taxpayer hasfraudulent intent. While the returns in the casebefore it contained false and fraudulent items, thefraud was that of Mayer of Jenkins & Gilcrist,and not the taxpayers. The Court stated:

Therefore, the court has determined that themeaning of “intent to evade tax,” as that textis used in I.R.C. §6501(c), is limited toinstances in which the taxpayer has therequisite intent to commit fraud. Because theGovernment conceded that the taxpayers inthis case did not have that intent, I.R.C.§6501(a) governs the time period in whichthe IRS may assess federal tax by a FPAA inthis instance; that assessment must havetaken place within three years, i.e., by 2003.Notwithstanding concerns articulated by theGovernment, the references in I.R.C. §6501to fraudulent intent are solely those of the”taxpayer,” and as such, the court mustinterpret the plain and unambiguous meaningof the statute.

The Court acknowledged that the Second Circuitin City Wide Transit, Inc. v. Commissioner, 709F.3d 102 (2nd Cir. 2013), held that the fraud of areturn preparer is attributed to the taxpayerunless the return preparer’s fraud was “secondaryor remote” to the fraudulent returns. It noted thatthe taxpayer conceded during argument in theCity Wide case that the fraud of the returnpreparer can trigger the fraud exception. TheSecond Circuit’s decision was not binding andthere was no Federal Circuit precedent. As aresult, the Court was writing on a clean slate.

While the Court noted that the Government hadadvanced some persuasive policy arguments, theCourt held that it cannot rewrite the law, onlyinterpret it. Since the statute did not allow thefraud of a third party to be attributed to thetaxpayers, the Court ordered that judgment beentered in favor of the taxpayers.

United States v. Sedaghaty,728 F.3d 885 (9th Cir. 2013)

Criminal Investigation’s current Business Planstates that one of its priorities is “pursuingfinancial leads, both domestic and international,related to terrorist financing and [it] will continueto contribute financial investigative expertise andresources to the FBI’s Joint Terrorism TaskForces (JTTF) and the USAO Anti-TerrorismTask Forces.” On August 23, 2013, the NinthCircuit issued its opinion in United States v.Sedaghaty, 728 F.3d 885 (9th Cir. 2013).

Due to Brady violations, the Ninth Circuitaffirmed in part and reversed in part theconviction of the defendant, Pirouz Sedaghaty,who is also known as Pete Seda.

According to the Ninth Circuit “This is a taxfraud case that was transformed into a trial onterrorism.” Seda was charged and convicted ofsigning a false Form 990 for an Islamic charity,Al-Haramian-US. The Form 990 was allegedlyfalse in order to conceal its support for Chechenrebels.

Seda was an Iranian-American who had lived inAshland, Oregon, since the 1970s. He helpedestablish a group in Ashland to make peoplemore aware of Islam. In the 1990s, heestablished the U.S. branch of Al-Haramian,which was at one time a major Saudi Arabianbased Islamic charity with ties to the Saudigovernment. In response to evidence that somebranches of Al-Haramian were funding terroristorganizations, it was dissolved by the Saudigovernment in 2004.

In late 1999, Al-Haramian and its United Statesbranch began soliciting funds for humanitarianaid to the people of Chechnya. In 2000, a Britishcitizen wired $150,000 to Al-Haramian’s accountin Ashland, of which Seda was the signatory.One of Al-Haramian’s principals, Al-Buthe,came to Ashland. He and Seda went to the bank,met with the manager, and withdrew $130,000 intraveler’s checks. The next day, Seda withdrewa $21,000 cashier’s check made out to Al-Buthe.Al-Buthe returned to Saudi Arabia, where hecashed the checks. At trial, the Governmentcharacterized the use of traveler’s checks andcashier’s checks as an attempt to make it moredifficult to trace the funds, even though Al-Buthenormally reported traveler’s and cashier’s checksto U.S. Customs when he entered the country.Later that year, Al-Buthe returned to the U.S.with $300,000 in cashier’s checks, which hereported to Customs. These funds were used topurchase a prayer house in Springfield, Missouri.

Following the September 11, 2001 attacks, FBIagents interviewed Seda about the purchase ofthe Springfield building. Seda told the agentsthat the building cost between $300,000 and$325,000. Tom Wilcox, a former IRS agent, wasthe accountant who prepared the Al-Haramian-U.S. Form 990 for 2000. The Form 990 wasfalse in several respects: a) it overstated thepurchase price of the Springfield buildingbecause the $130,000 withdrawal that went toAl-Buthe was marke
d as being for the prayerhouse; b) it understated donations because the$21,000 check to Al-Buthe was treated as areturned donation; and c) it failed to include theportion of the $150,000 that went to Al-Haramian as an outgoing donation. Seda signedthe Form 990 as an officer of Al-Haramian-U.S.

In 2004, the Government executed a searchwarrant for Seda’s home and seized ninecomputers plus books, videos and religiousmaterials. A grand jury subsequently indictedSeda, Al-Buthe, and Al-Haramian fora) conspiracy to defraud the U.S. (18 USC §371)and b) signing and filing a false Form 990 (26USC §7206(1)); and c) Al-Buthe with failing tofile a Currency and Monetary Report (CMR)with Customs when he left the US with $150,000(31 USC §5316(a)(1)(A). The charges againstAl-Haramian were eventually dismissed because,by the time of trial, it was no more than a shellentity.

The main focus at trial was whether Seda”willfully” signed the false Form 990. TheGovernment’s theory was that Seda intentionallygave false information to Wilcox in order to hidethe fact that he wanted to fund Chechen rebelswhile the defense theory was that Seda wasforthcoming with Wilcox and that any errors onthe Form 990 were due to Wilcox’s mistakes. Attrial, Wilcox testified that he was the one whocoded the $130,000 in checks to Al-Buthe as forthe prayer house, but claimed that it was basedon information from Seda.

A key Government witness was Barbara Cabral,who was a member of the Ashland prayer housethat Seda headed. Cabal testified that Sedawanted to help the Chechen rebels and activelysolicited funds for mujahedeen in Chechnya.The Government also introduced a number ofitems seized from Seda’s house. A Government”expert” sprinkled his testimony heavily withreferences to Osama Bin Laden and connectionsbetween Osama and Al-Haramian officials, eventhough the expert had no direct knowledge of thefacts in the case. The Government introducedinto evidence an edition of the Qur’an with anappendix, “Call to Jihad,” that was distributed inthe US, even though Seda objected to this editionand eventually had Al-Haramian publish anedition of the same translation but without theinflammatory appendix.

The defense called witnesses to testify aboutSeda’s good character, his efforts to foster interfaithunderstanding between Muslims,Christians, and Jews, and his work with theIsraeli Counsel General to gather support for acharitable relief effort to help Israelis andPalestinians. Seda was found guilty by a jury ofsigning a false Form 990. He was sentenced to33 months in prison, three years of supervisedrelease, and ordered to pay restitution of$80,980.00.

Before trial, the Government had provided thedefense team with summaries of interviews ofMs. Cabral and her late husband. The originalnotes were not provided on the ground that theywere classified information, the disclosure ofwhich could jeopardize national security. Underthe Classified Information Procedures Act, 18U.S.C. app. 3 §6(c)(1), the prosecution does nothave to turn over interview notes that areclassified information as long as it providessummaries that provide the defendant “withsubstantially the same ability to make hisdefense” as he would have had with the originalclassified information.

After trial, the Government revealed for the firsttime to the defense that it had notes of twelvepreviously undisclosed interviews of Ms. Cabraland that the FBI had paid $14,500 to Ms.Cabral’s husband, including making severalpayments in her presence, and that it had offeredto make additional payments to her before trial.Seda’s attorneys moved for a new trial due toa) the prosecution’s appeal to prejudice andb) Brady violations concerning the failure todisclose before trial the payments to the Cabrals.The motions were denied. The district courtfound that Ms. Cabral’s evidence was notmaterial to the question of whether Seda knewthat the Form 990 was false and, thus, it did notgo to his guilt on the §7206(1) count. Sedaappealed.

The Ninth Circuit turned first to the Brady claim.Ms. Cabral was the only witness who offereddirect evidence that Seda desired to fundmujahedeen. The Government withheldinformation about Ms. Cabral which wasmaterial, significant, and non-cumulativeimpeachment evidence, including evidence aboutthe payments and the undisclosed interviewnotes.

Under Brady v. Maryland, 373 US 83 (1963), theprosecution has an obligation to turn to over tothe defense, upon request, all evidence favorableto the accused. To establish a Brady violation,the defense must show:

1) That the evidence is favorable to theaccused because it is either exculpatoryor impeaching;

2) The evidence was suppressed by theGovernment, regardless of whether thesuppression was willful or inadvertent;and

3) The evidence is material to the guilt orinnocence of the accused.

The Government on appeal conceded that thewithheld material should have been turned overbefore trial, but argued that it was not material.Whether evidence is material is a legal questionthat is reviewed de novo. In determiningmateriality “we focus on whether thewithholding of the evidence undermines our trustin the fairness of the trial and the resultingverdict” based on the “reasonable probability of adifferent result” had the suppressed evidencebeen presented to the jury.

For the Ninth Circuit, the key question indetermining the materiality of the Cabralmaterial was whether it would have provided aneffective means of impeachment. The Courtfound that, due to the suppression of theevidence, “the defense was empty-handed attrial” when it came to Ms. Cabral. Ms. Cabralhad worked all her life at J.C. Penny’s, had nocriminal background, was of modest means, andher husband of 35 years died two years beforetrial. She had attended Seda’s prayer house butrenounced the Muslim faith prior to trial. Sedaconsistently denied that he solicited funds formujahedeen, and had moved to exclude Ms.Cabral’s testimony. The Government had arguedthat Ms. Cabral’s evidence was critical to Seda’sstate of mind, motive, and opportunity. Thedistrict court admitted her testimony because itwent to state of mind, knowledge, and the lack ofa mistake. Without the withheld evidence, thedefense had no means to question her neutrality.

Besides showing payments to the Cabral family,the withheld notes showed that Ms. Cabral toldFBI agents that, due to serious medical problems,she had thousands of dollars in unpaid expenses.The withheld notes also showed that the FBIresponded that they might be able to help Ms.Cabral financially after trial. According to theNinth Circuit, evidence of the payments mayhave allowed the defense to highlightdiscrepancies between Ms. Cabral’s testimonyand statements her late husband had made,including that Seda had on several occasions saidfunds were to help the Chechen refugees andnever mentioned Chechen mujahedeen.

While the Government was not required to provethe destination of the funds given to Al-Buthe inorder to convict Seda, it had to prove willfulmisreporting beyond a reasonable doubt. TheGovernment had contended that Seda had thefalse return prepared to hide the true nature of thefunds and his knowledge of their intended use.In pre-trial and trial proceedings, theGovernment had stressed the critical nature ofMs. Cabral’s testimony, while on appeal itclaimed she was a peripheral witness. The Courtfound that the “opposite is true: given the limitedscope of her testimony, the only reason to callBarbara Cabral was because her testimony wascritical to the crucial point of willfulness.” Thiswas especially true because she was a witness thejury could sympathize with and the Governmenthighlighted her testimony in closing argument.The Court thus found that the withheld evidencewas material. Thus, the Brady violation meriteda new trial.

The next issue involved the ClassifiedInformation Procedures Act (“CIPA”) claims.The Government had filed six pre-trial motionsto protect classified information, all of whichwere opposed by Seda. The district
court grantedthe motions. To decide the CIPA claims, theNinth Circuit initially discussed in detail theprovisions of CIPA, which are at 18 USC app. 3.Among other things, CIPA authorizes theGovernment to provide unclassified summariesof classified information to the defense.

Seda asserted that he was entitled to eitheruneditorialized summaries or the underlyingdocuments rather than the summaries provided.Having reviewed the underlying documents, theNinth Circuit agreed, stating that the summarieswere “statutorily inadequate because it did notprovide Seda with substantially the same abilityto make his defense as would disclosure of thespecific classified information.” (Internal quotemarks deleted.) Among other things, the Courtfound that while the summaries containedinculpatory and exculpatory information, and thewording of the summaries bolstered theinculpatory information while discrediting theexculpatory information. The summaries alsoexcluded information that could have helped thedefense. The Court termed the summaries theproduct of “tunnel vision” rather than “badfaith.”

Seda also challenged the in camera and ex parteproceedings that the district court held on issuesconcerning classified information. The NinthCircuit rejected this challenge, noting that courtshave consistently upheld the use of suchproceedings, which are authorized by both CIPAand F.R.Crim.Pro. R. 16(d)(1). The NinthCircuit also found that the district court did notimproperly withhold helpful information fromdiscovery, that the district court did not err inordering Seda’s attorney not to disclose thecontents of a classified document that hadinadvertently been turned over to him and that hevoluntarily returned to the Government, and thatthe search warrant was not the result of priorunlawful surveillance that would have beenrevealed by classified materials.

The Court then turned to Seda’s FourthAmendment claims concerning informationseized when the Government executed the searchwarrant. The warrant limited seizure to financialrecords relating to the alleged tax and currencyreporting violations. The warrant also authorizedthe Government to determine whether it waspractical to copy information from computers onsite or to remove the computers in order toextract data that came within the categoriesauthorized to be seized. The agents removed thecomputers and copied numerous items includingitems not authorized by the warrants includingAl-Haramian-US organizational documents,photos, webpages sent by various listserves andother documents. Seda moved to suppress thisevidence, but the district court denied the motion,holding that the crimes charged requiredevidence of intent and “thus records beyondsimple financial records were appropriatelyseized….”

The Ninth Circuit found that the additionalevidence seized went beyond the limited scope ofthe warrant. In so doing it rejected aGovernment argument that the search warrantaffidavit was incorporated into the searchwarrant. The warrant did not authorize agents”to comb through Seda’s computers pluckingnew forms of evidence that the investigatingagents have decided may be useful….” Since theexclusionary rule generally bars the admission ofseized evidence that was beyond the scope of asearch warrant, the Ninth Circuit held that thedistrict court erroneously concluded that theseized items in question were within the scope ofthe search warrant. The Court remanded theFourth Amendment issue to the district court todetermine whether the good faith exception ofHerring v. United States, 555 US 135 (2009)applies.

The Ninth Circuit addressed several otherevidentiary issues raised by Seda and found thatthe district court did not err in its rulings. As toSeda’s claim that the prosecution unfairlyappealed to religious prejudice and fear, thusdepriving him of a fair trial, the Court declined toreach this issue because the case was beingremanded for a new trial. The Court ended itsopinion noting:

It suffices to say that the charge here relatesto a false tax return filed on behalf of a taxexemptorganization, and does not allegematerial support to terrorism. We areconfident that the district court will recognizethe fine line separating necessary andprobative evidence of willful falsity fromevidence that would cast Seda in the role of aterrorist based on appeals to fear and guilt byassociation and thereby unduly prejudice theproceedings.

Judge Tallman dissented, finding that any errorswere not prejudicial and, thus, the case should beaffirmed.

Sugarloaf Fund, LLC v Commissioner,141 T.C. No. 4 (Sept. 5, 2013)

Under the TEFRA partnership rules, where theIRS issues a Final Partnership AdministrativeAdjustment letter (FPAA) to a partnership, thetax matters partner can institute a proceeding inTax Court, district court or the Court of FederalClaims to challenge the IRS adjustments.26 USC §6226(a). If the tax matters partner failsto file a timely partnership proceeding, anypartner can institute a partnership proceeding.26 USC §6226(b). Any person who was apartner during the year for which the FPAA wasissued is entitled to participate in the proceeding.26 USC §6226(c)(2). “Partner” is defined in26 USC 6231(a)(2)(B) to include “any otherperson whose income tax liability under subtitleA is determined in whole or in part by taking intoaccount directly or indirectly partnership items ofthe partnership” “Partnership item” is definedas:

[A]ny item required to be taken into accountfor the partnership’s taxable year under anyprovision of subtitle A to the extentregulations prescribed by the Secretaryprovide that, for purposes of this subtitle,such item is more appropriately determinedat the partnership level than at the partnerlevel.

26 USC §6226(a)(3).

The Tax Court recently addressed the issue ofwhether a taxpayer was a partner entitled toparticipate in a partnership proceeding where histax liability was related to a partnership item in Sugarloaf Fund, LLC v. Commissioner, 141 T.C.No. 4 (Sept. 5, 2013). The Service had issued anFPAA to Sugarloaf for its 2004 and 2005 taxyears. The tax matters partner (JetstreamLimited, LLC) had filed a partnership proceedingwith the Tax Court.

Timothy Elmes filed an election to participateunder §6226(c). He then filed motions i) to stayconsolidation of the case with transactionallyrelated cases, and ii) to determine that he was apartner in Sugarloaf. Both motions were deniedwithout prejudice. Noting that it had beenconcerned with whether certain classes ofindividuals who were partners for purposes of theTEFRA rules, the Tax Court subsequentlyaddressed Elmes’s motion to determine that hewas a partner and denied the motion.

The facts, as outlined by the Tax Court, were asfollows. Sugarloaf was an Illinois limitedliability (LLC) company that filed its returns as apartnership. Its members were several Braziliancompanies who purportedly contributeduncollected and overdue receivables to Sugarloafin exchange for a 98% membership interest. Theremaining 2% was held by Jetstream andWarwick Trading.

Sugarloaf set up a series of Master Trusts. Ittransferred receivables to each of the MasterTrusts. The Master Trusts, in turn, set up Sub-Trusts to which they transferred part of theirreceivables. Investors like Elmes wouldpurchase an interest in a Master Trust and theentire beneficial interest in one of the Sub-Trusts.They would then claim a bad debt loss forreceivables held by the Sub-Trust. In Elmes’scase, he paid $75,000 for an interest in a trustnamed “2005 Elmes Trust” and all of thebeneficial interest in a sub-trust named “2005Elmes Sub-Trust.” On his 2005 income taxreturn, Elmes claimed a bad debt loss of$1,455,000 on the ground that part of theBrazilian receivables had become worthless inthat year. Elmes defaulted on a notice ofdeficiency for 2005 that disallowed the claimedbad debt loss. He then sought to participate inthe partnership proceeding to litigate the lossindirectly.

The Court addressed the issue of whetherinvestors holding interests in the
Trust and inSub-Trusts were partners of Sugarloaf. Both theGovernment and Sugarloaf asserted that Elmesand similarly situated investors were notpartners, while Elmes asserted that he was apartner. Elmes provided documents indicatingthat he arguably was a partner in 2007 and 2008,but none establishing that he was a partner in anyyear at issue in the partnership proceeding.Elmes also did not contend that either the Trustor the Sub-Trust he invested in had joined withthe Brazilian companies, Jetstream and Warwick,to conduct a common undertaking throughSugarloaf.

The TEFRA partnership rules allow certainclasses of persons to be deemed partners due to arelationship with a partner, such as a spouse whofiles a joint return with a partner or a parent of aconsolidated group in which one of the membersis a partner. The TEFRA rules also treats as apartner a person who holds an interest in a passthroughentity that is partner (i.e., a “passthroughpartner”), which includes a trust throughwhich other persons hold a partnership interest.The problem in Elmes case, however, was thatneither the Trust nor the Sub-Trust held apartnership interest in Sugarloaf.

Elmes argued that he was a partner in Sugarloafunder §6231(a)(2) because his tax liability for2005 depended in part on the Sub-Trust’s basisin the receivables which, in turn, depended onSugarloaf’s basis in the receivables. Elmesclaimed that as transferee of receivables fromSugarloaf, the Trust had the same basis in thereceivables as Sugarloaf and that, as transfereefrom the Trust, the Sub-Trust had the same basis.According to Elmes, his tax liability for 2005was “determined in whole or in part by takinginto account directly or indirectly partnershipitems of the partnership,” thus making him apartner under §6231(a)(2).

The Tax Court rejected Elmes’s argument on theground that the claimed basis in the receivablesresulted from the fact that the Trust and Sub-Trust were transferees and not from any legalrelationship between Elmes, the Trusts, andSugarloaf. According to the Tax Court, a persondoes not become a partner merely because he isthe transferee of assets of a partnership.

Elmes cited Superior Trading, LLC vCommissioner, 137 T.C. 70 (2011), to supporthis position. In that case, Warwick Tradingdistributed distressed Brazilian receivables to aseries of trading companies. It then set upholding companies and transferred its interests inthe trading companies to holding companies andsold supermajority interests in the holdingcompanies to investors. The trading companieswrote down the distressed receivables and theinvestors claimed flow-through bad debt losseson their individual returns. The Service issuedFPAAs to both Warwick and the tradingcompanies. Warwick and the trading companiesfiled petitions with the Tax Court. The Courtfound for the Service on each of its alternatetheories of why the losses did not occur. TheCourt also expressly found that the investors inthe holding companies were indirect partners inthe trading companies.

According to Elmes, he was in the same positionas the investors in Superior Trading. Not so,replied the Tax Court. In Superior Trading theinvestors held interests in pass-through entities(the holding companies) that were partners in thetrading companies to which FPAAs had beenissued. Here, neither Elmes nor the trusts weredirect or indirect partners in Sugarloaf. The onlyrelationship that the trusts had to Sugarloaf wasthat of transferor-transferee, which was notsufficient to make either the trusts or Elmes apartner in Sugarloaf.

The Court turned to a recent Seventh Circuitcase, Cemco Investors v. Commissioner, 515 F.3rd 749 (7th Cir. 2008), for additional support. InCemco, a partnership was formed for a two-weekperiod and to engage in a Son of BOSS typesham options transaction. The partnership thenliquidated and distributed cash and euros to atrust, which contributed them to Cemco, whichclaimed an inflated basis in the euros. Cemcosold the euros for their face value and claimed aloss. The IRS issued a FPAA to Cemco, whichpetitioned the Tax Court. After losing in TaxCourt, Cemco appealed to the Seventh Circuit,asserting that the FPAA was invalid since noFPAA was issued to the partnership that engagedin the options transaction. According to Cemco,since its claimed basis in euros was derived fromthe partnership (via the trust), it was a partner inthe partnership and an FPAA had to be issued tothe partnership before the IRS could adjustCemco’s basis in the euros. The Seventh Circuitrejected this argument, finding that Cemco wasnot a partner in either the trust or the partnership,but only the transferee of partnership assets.

Analogizing the case before it to CemcoInvestors, the Tax Court held that Elmes wasnever a partner in Sugarloaf. TEFRA does notrequire the tax treatment of the receivables inElmes’s hands to match the tax treatment of thereceivables in Sugarloaf. Since Elmes wasneither a direct nor an indirect partner inSugarloaf, he was without standing to participatein the proceeding.

Duquesne Light Holdings, Inc. v. Commissioner,T.C. Memo. 2013-216 (Sept. 11, 2013)

The Supreme Court in Charles Ilfeld Co. v.Hernandez, 292 U.S. 62 (1934), held that acorporate group filing a consolidated return maynot twice deduct the same loss. According to theCourt, “There is nothing in the Act that purportsto authorize double deduction of losses or in theregulations to suggest that the commissionerconstrued any of its provisions to empower himto prescribe a regulation that would permitconsolidated returns to be made on the basis nowclaimed by petitioner.” 292 U.S. at 68. Theissue of double deductions for the sameeconomic loss confronted the Tax Court recentlyin Duquesne Light Holdings, Inc. v.Commissioner, T.C. Memo 2013-216 (Sept. 11,2013). You would, however, have to read fifteenpages of a fifty-eight page decision before youfind that out.

The Court began by noting at the outset whatmost interested the parties: that the Court hadbefore it cross motions for summary judgment,and that the Court was denying petitioner’smotion and granting respondent’s motion. TheCourt then dived into the facts.

The taxpayer is a holding company that files aconsolidated return with its subsidiaries. Itstraditional line of business was electrical power.One of its subsidiaries was AquaSource, whichwas formed for the purpose of acquiring andowning small and medium sized water,wastewater, and water service companies. In1997, AquaSource began acquiring water andwastewater companies. It actively pursuedacquisitions of water and wastewater companiesin 1998, 1999, and 2000, after which it ceasedmaking acquisitions.

Between April 1997 and February 2001,Duquesne contributed $223,337,687 toAquaSource. It allocated these contributions toits basis in 50,000 shares of AquaSource thatwere outstanding as of December 1998. In April2001, Duquesne contributed $193,533,727 cashto AquaSource. It allocated these contributionsto its basis in 950,000 shares issued in November2001. Duquesne contributed an additional$36,197,000 in cash between April andDecember 2001. It allocated these contributionsto its basis in 200,000 shares of AquaSourcestock issued on December 20, 2001.

On December 31, 2001, Duquesne transferredthe 50,000 shares it held as of December 1998 toLehman Brothers in exchange for $4 million. Itclaimed a loss under IRC §165 of $202 millionon its 2001 consolidated return. During an audit,the IRS and Duquesne agreed that the amount ofthe loss was $199 million. As a result of the loss,it claimed a loss carry back to 2000 and wasissued a tentative refund for that year of$35,219,000.

In 2002 and 2003, Duquesne contributed$18,132,000 cash to AquaSource, but no morestock was issued. After 2003, no morecontributions were made. In 2002, AquaSourcesold several of its subsidiaries and claimed a lossof $59,584,000 from the sales, which loss wasreported on Duquesne’s 2002 consolidatedreturn. It carried back a capital loss of$63,349,000 to 2000 and was issued a tentati
verefund of $12,669,000.

In 2003, AquaSource sold all of its remainingassets to unrelated third parties. Duquesneclaimed a loss of $176,952,975 with respect tothose sales on its 2003 consolidated return. Afteradjustments, the IRS determined that the losswas $192,835,000. Duquesne carried back over$200 million in losses from 2003 to 2000 andwas issued another tentative refund, this one for$40,281,000.

AquaSource had generated over $55 million inoperating losses and over $450 million in capitallosses from the sale of AquaSource stock and thesale by AquaSource of its subsidiaries. The IRSissued a notice of deficiency to Duquesne for$36,996,999 for 2000, based on thedetermination that $199 million in losses carriedback to 2000 resulted in a double deduction. Thenotice of deficiency was based on severalalternate theories, including that the loss on thesale to Lehman Brothers of approximately 4% ofAquaSource stock lacked economic substance,since a disproportionate amount of Duquesne’scontributions (almost 50%) were allocated tobasis in the 50,000 shares of stock transferred toLehman.

The motions for summary judgment addressedthe primary theory in the deficiency notice: thatthe loss taken on the sale of the stock, before thesale of AquaSource’s assets that had built-inlosses, resulted in a double deduction of the sameeconomic loss.

The motions were filed at a time when the Courthad pending before it another case involving theissue of double deductions for the sameeconomic loss: Thrifty Oil Co. v. Commissioner,139 T.C. 198 (2012). In Thrifty Oil, the Courtheld that the taxpayer was not entitled to deductlosses that represented or duplicated the sameeconomic loss it deducted in another taxableyear. On the day the Thrifty Oil decision wasentered, the Court ordered the parties in theDuquesne case to file briefs on whether theThrifty Oil decision should control resolution ofthe duplicate deduction issue in the case beforeit.

The first argument addressed by Duquesne wasthat neither Charles Ilfeld Co. nor Thrifty Oil,which relied on the Supreme Court’s decisionand Ninth Circuit case law, were controlling, andthat the IRS determinations “could only beobtained by issuing regulations.” In CharlesIlfeld Co., the Supreme Court held that the parentof a consolidated group of companies could notdeduct losses connected to the dissolution ofsubsidiaries when it had deducted the samelosses as operating losses of the subsidiaries in aprior taxable year. The Supreme Court statedthat allowing the double deduction, absent aprovision of the Code definitely requiring it,would be “so opposed to precedent and equalityof treatment of taxpayers, it will not be attributedto lawmakers.”

In Thrifty Oil, the taxpayer was parent of aconsolidated group that claimed a loss from saleof stock in a subsidiary. The loss generated aloss carry-forward. In a later year, the taxpayerdeducted environmental remediation costs thatrepresented the same economic loss. The TaxCourt rejected the taxpayer’s arguments a) thatthe capital loss from sale of the stock and theremediation expense did not represent the sameeconomic loss, and b) that §162 specificallyallowed the double deduction. Addressing thefirst argument, the Thrifty Oil Court stated:

Both the capital loss and the environmentalremediation expense deductions representcosts associated with the cleanup of the * * *[refinery property]. The capital lossrepresents the unpaid liability, and theenvironmental remediation expensedeductions represent the actual cost whenpaid. This — deducting the unpaid liability inthe form of a capital loss and then deductingit again when paid — is the core problem ofthis case.

Addressing the second argument, the Court heldthat §162 was a general deduction provision thatdoes not clearly express a Congressional intent toallow a double deduction.

Duquesne asserted that the Third Circuit, towhich its case was appealable, interpretedCharles Ilfeld Co. differently than the NinthCircuit. According to Duquesne, in Estate ofMiller v. Commissioner, 400 F.2d 407 (3d Cir.1968), the Third Circuit held that a husband’sestate was entitled to a charitable contributiondeduction that had previously been claimed bythe wife’s estate. In so holding, the Third Circuitrejected the argument that Charles Ilfeld Co. applied, noting that the case before it involvedtwo separate taxpayers and that Congress hadexplicitly prevented double deductions in certainsituations in the context of estate taxes in 26USC §642(g), but not with respect to the type ofdeduction at issue.

The Tax Court rejected Duquesne’s argumentthat the Third Circuit interpreted Charles IlfeldCo. differently than the Ninth Circuit. First, inEstate of Miller, the Third Circuit expressly heldthat it was dealing with two separate taxpayersclaiming a deduction rather than one taxpayerdeducting the same economic loss twice.Second, in several cases involving consolidatedgroups, the Third Circuit had applied CharlesIlfeld Co. to disallow double deductions.According to the Tax Court, these cases showed:

The Third Circuit will apply Charles IlfeldCo. in any Federal income tax case involvinga consolidated return group where the groupclaims a deduction for a taxable year for aneconomic loss that duplicates anotherdeduction already taken by the group for thesame economic loss.

Duquesne next argued that there was a materialissue of fact precluding summary judgment:whether the loss on the sale of AquaSource stockand the loss on the sale of AquaSource’s assetsrepresented the same economic loss. The TaxCourt rejected this argument, finding that thedecline in value of the stock represented thesame loss as the decline in value of theunderlying assets.

Duquesne’s next argument was that §165 was aspecific Code provision allowing the doublededuction. This was similar to the argument inThrifty Oil that §162 was a specific provisionauthorizing double deduction. Because both§165 and §162 are general provisions, the Courtrejected this argument.

The Tax Court then turned to an argument basedon the Federal Circuit’s decision in Rite-Aid Corp.v. U.S., 255 F.3d 1357 (2001), which invalidated aconsolidated return regulation dealing with doubledeductions on the ground that it exceeded theIRS’s authority. The IRS subsequently withdrewthe regulation in question and promulgated atemporary regulation that did not go into effectuntil after the years in issue in Duquesne’s case.Duquesne claimed that this established that,absent an express regulation, it was entitled toboth the stock loss and the §165 loss. The TaxCourt rejected this argument, since nothing inRite-Aid or the IRS notices withdrawing theregulation prevented the IRS from relying onCharles Ilfeld Co. to disallow double deductions.

As a result, the Tax Court disallowed $199million of losses claimed by Duquesne on thesale of AquaSource assets in 2002 and 2003. Itthen turned to the final argument advanced byDuquesne: that 26 USC §6501(k) did not extendthe statute of limitations for the 2000 taxableyear and, thus, the IRS could not assert anydeficiency for that year. Sec. 6501(k) states:

Tentative carryback adjustment assessmentperiod In a case where an amount has beenapplied, credited, or refunded under section6411 (relating to tentative carryback andrefund adjustments) by reason of a netoperating loss carryback, a capital losscarryback, or a credit carryback (as definedin section 6511(d)(4)(C)) to a prior taxableyear, the period described in subsection (a) ofthis section for assessing a deficiency forsuch prior taxable year shall be extended toinclude the period described in subsection (h)or (j), whichever is applicable; except that theamount which may be assessed solely byreason of this subsection shall not exceed theamount so applied, credited, or refundedunder section 6411, reduced by any amountwhich may be assessed s
olely by reason ofsubsection (h) or (j), as the case may be.

Sec. 6501(h), which creates an exception to thegeneral rule set forth in §6501(a), provides: “Inthe case of a deficiency attributable to theapplication to the taxpayer of * * * a capital losscarryback * * *, such deficiency may be assessedat any time before the expiration of the periodwithin which a deficiency for the taxable year ofthe * * * net capital loss which results in suchcarryback may be assessed.” Duquesne made thefollowing convoluted argument that neither theTax Court nor this writer can understand:

Even Assuming Arguendo that a DeficiencyExists with Respect to the 2003 Asset LossesCarryback, the Courts and the Service WouldPermit Adjustments to the * * * 2002 AssetLosses [in question] for the Purpose ofDetermining a Deficiency for Petitioner’s2000 Tax Year Only if the * * * 2002 AssetLosses Impact the Amount of the Carrybackof the 2003 Asset Losses.

Sec. 6501(h), which creates an exception to thegeneral rule set forth in §6501(a), provides: “Inthe case of a deficiency attributable to theapplication to the taxpayer of * * * a capital losscarryback * * *, such deficiency may be assessedat any time before the expiration of the periodwithin which a deficiency for the taxable year ofthe * * * net capital loss which results in suchcarryback may be assessed.” Duquesne made thefollowing convoluted argument that neither theTax Court nor this writer can understand:

Even Assuming Arguendo that a DeficiencyExists with Respect to the 2003 Asset LossesCarryback, the Courts and the Service WouldPermit Adjustments to the * * * 2002 AssetLosses [in question] for the Purpose ofDetermining a Deficiency for Petitioner’s2000 Tax Year Only if the * * * 2002 AssetLosses Impact the Amount of the Carrybackof the 2003 Asset Losses.

The Court held that as it interprets 6501(k), sincethe notice of deficiency was issued prior toexpiration of the statute of limitations for 2002and 2003, the IRS could assert a deficiency for2000 to the extent of the amount of tentativerefund issued based on the loss carrybacks from2002 and 2003. The Court ended by stating thatan appropriate order and decision under Rule 155would be entered.

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1 Joseph P. Wilson practices tax controversy, withparticular expertise in criminal tax matters, in the LawOffices of A. Lavar Taylor, APC, located in Santa Ana,California. Back

2 Gregory Harper has a solo legal practice in PointRichmond, California, specializing in tax and criminal law.A graduate of the Hastings School of Law, before settlinginto his practice Mr. Harper held an appellate courtclerkship, was a public defender, and served as a pro temjudge for the California Superior Court. Mr. Harper livesin Berkeley, California, with his wife of twenty years.During the Tax Procedure & Litigation Committee’sAugust 30, 2013 meeting, Mr. Harper proposed a moreactive sharing of information pertaining to the practice oflaw, e.g., use of technology, client development, which leddirectly to the introduction of this column. Back

3 Mr. Feldhammer served as a senior trial attorney in theInternal Revenue Service Office of Chief Counsel fornearly six years. He joined Feurzeig, Mark & Chavin,LLP, in August 2013 and practices in the areas of taxcontroversy, taxation, and estate planning. In light ofMr. Feldhammer’s recent association with the IRS, westress that the views in this article are Mr. Feldhammer’salone and do not reflect the official policy or position ofany agency of the U.S. government. Back

4 Alexandra C. Eaker is a tax attorney with RichardCarpenter, Tax Attorney, in San Diego. Ms. Eager holdsan M.S. in Personal Finance and an LL.M. in Taxation. Back

5 Wendy Abkin specializes in civil and criminal taxcontroversy matters. Ms. Abkin’s firm, Abkin Law, LLP, islocated in San Francisco, California. Steven L. Walker alsoconcentrates on civil and criminal tax controversy andlitigation before federal and state taxing agencies. The LawOffice of Steven L. Walker, APC, is located in San Jose,California. Both Ms. Abkin and Mr. Walker have extensiveexperience representing taxpayers before the IRS and theCalifornia taxing authorities, including litigating in theUnited States Tax Court and the United States DistrictCourt. Back

6 Fast Track Dispute Resolution Process (Rev. Proc. 2003-40). Initially established as a pilot program in 200
2, theIRS made the program permanent for large and mid-sizedbusiness taxpayers on April 4, 2003. IRS News ReleaseIR-2003-44. The program has been expanded to taxexempt and governmental entities taxpayers and smallbusiness/self-employed taxpayers. IRS Announcement2008-105; IRS Announcement 2011-5. Back

7 Coordinate Industry Case (CIC) taxpayers can ask Exam torefer developed, unagreed issues to Appeals, while therevenue agents continue to audit other issues. Code §7123(a);Rev. Proc. 99-28; I.R.M. and 8.26.4. See also,,id=180746,00.html. Back

8 In a Large Business & International examination, if anissue previously was settled by IRS Appeals, revenueagents are authorized to settle the issue in the examinationon the same basis. Delegation Order 4-24; I.R.M. For CIC issues for IRS Appeals has establishedwritten settlement guidelines, revenue agents areauthorized to settle the issue in the examination accordingto the guidelines. Delegation Order 4-25; I.R.M. Back

9 Under the Accelerated issue Resolution (AIR) agreement,the parties agree to apply the resolution of issues in the audit years to other affected tax years ending prior to thedate of the AIR agreement. Rev. Proc. 94-67; I.R.M. Some issues cannot be addressed in an AIRagreement (see Rev. Proc. 94-67). See also,,id=180752,00.html. Back

10 The goal of the Industry Issue Resolution program is toresolve issues that are the subject of repeated examinationsaffecting substantial numbers of taxpayers. Notice 2000-65; Notice 2002-20; Rev. Proc. 2003-36. Guidancetypically is issued in the form of a revenue ruling orprocedure. IRS website information is available atIRR:,,id=210773,00.html. Back

11 The program allows a taxpayer to request resolution of allissues for all open years in Exam, Appeals, and even indocketed Tax Court cases. See,,id=180736,00.html. Back

12 Farzaneh Savoji is an attorney practicing tax controversyin the offices of Tax Law Associates, Woodland Hills,California. Back

13 See Internal Revenue Service, IRS Fact Sheet FS-2012-6, IRS Releases 2006 Tax Gap Estimates (2012) at 3-4,available at Back

14 See, e.g., United States v. Boyle, 469 U.S. 241 (1985). Back

15 See generally National Taxpayer Advocate AnnualReport (2013). Back

16 See generally 31 U.S.C. §5321(a)(5); 31 C.F.R.§1010.350; Internal Revenue Manual (I.R.M.) 4.26.16(July 1, 2008); National Taxpayer Advocate Report 2013at 134. Back

17 Stephen M. Moskowitz & Anthony V. Diosdi, A CloserLook at the Non-Willful FBAR Penalty, California Tax Lawyer at 5-6, (Winter 2012) citing U.S. Department ofthe Treasury, TD F 90-22.1, Report of Foreign Bank andFinancial Accounts (OMB No. 1545-2038) (January 2012)(General Instructions) 31 C.F.R. §103.24. Back

18 31 U.S.C. §5321(a)(5)(C). Back

19 Id. Back

20 Internal Revenue Service, Voluntary Disclosure:Questions and Answers, Back

21 See Internal Revenue Service, IRS News Release IR-2012-5 (Jan. 9, 2012), available at Back

22 United States Government Accountability Office Reportto Congressional Requesters, Offshore Tax Evasion: IRSHas Collected Billions of Dollars, but May be MissingContinued Evasion at 2. Back

23 Id. Back

24 See Treasury Inspector Gen. for Tax Admin., 2003-30-160, The Offshore Credit Card Project Shows Promise, butImprovements Are Needed to Ensure That ComplianceObjectives Are Achieved (2003), available at, See also Leandra Lederman, The Use ofVoluntary Disclosure Initiatives In the Battle AgainstOffshore Tax Evasion, 57 Vill. L. Rev. 498 (2012) at 504. Back

25 Id. See also Keith Fogg, Go West: How The IRS ShouldFoster Innovation in Its Agents, 57 Vill. L.. Rev. 441, 463(2012). Back

26 Id. Back

27 See IRS News Release IR-2003-95 (July 30, 2003),available at also Lederman, supra, at 507. Back

28 Lederman, supra, at 508, citing Jared Seff, CrackingDown on Tax Evaders — Swiss Banking: Secrets, Lies, andDeception, 38 S.U. L. Rev. 159, 160 (2010). Back

29 Lederman, supra, at 509, citing DOJ AnnouncesDeferred Prosecution Agreement with UBS, Tax NotesToday, Feb. 19, 2009, at 31-32. Back

30 Lederman, supra, at 510, citing Shulman AddressesIRS’s Strategic Priorities for the Future, Tax Notes Today,May 19, 2011, at 97-11. Back

31 Internal Revenue Service, Voluntary Disclosure:Questions and Answers, Back

32 Lederman, supra, at 514, citing Marie Sapirie, NewOffshore Voluntary Disclosure Initiative Features 25Percent Penalty, Greater Clarity, Tax Notes Today, Feb. 9,2011, at 27-1. Back

33 Internal Revenue Service News Release IR-2012-5(Jan. 9. 2012), available at Back

34 Internal Revenue Service, Voluntary Disclosure, supra,note 19. Back

35 See Internal Revenue Service News Release IR-2012-5(Jan. 9, 2012). Back

36 Id. Back

37 Id. Back

38 Id. Back

39 See Internal Revenue Service, Voluntary Disclosure:Questions and Answers, supra, note 19. Back

40 IdBack

41 IdBack

42 IdBack

43 IdBack

44 IdBack

45 Parillo, Kristen A., ABA Meeting: Taxpayer AdvocateUrges Taxpayers to Use Caution on Voluntary Disclosure,Tax Analysts (September 25, 2013). Back

46 IdBack

47 See Treas. Reg. §1.6664-2; Treas. Reg. §§1.874-1,1.882-4. Back

48 See Internal Revenue Service, Voluntary Disclosure:Questions and Answers, supra note 19. Back

49 IdBack

50 National Taxpayer Advocate Annual Report, InternalRevenue Service comments. Back

51 Robert Horwitz is a tenured and generous contributor toCal Tax Network, including providing summaries of recentopinions of particular interest to tax practitioners — forwhich Cal Tax Network newsletter editors are mostgrateful. Mr. Horwitz practices civil and criminal taxmatters, including audits, appeals and criminalinvestigations before the Internal Revenue Service andstate taxing authorities, and in trials in both federal andstate courts. Mr. Horwitz is a member of the Law Officesof A. Lavar Taylor, APC, located in Santa Ana, California. Back

52 A guilty verdict against Paul Daugerdas and others wasset aside due to egregious juror misconduct following alengthy trial. A link to the Memorandum Opinion is at,d.cGE. Unlike his codefendants,Daugerdas refused to plead guilty. His retrial began inSeptember 2013, in the Southern District of New York. Back

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