A Publication of the Tax Procedure & Litigation Committee of theTaxation Section of the State Bar of California
Q1 2015 Edition
In This Edition
Message from the Chair:
By Joseph P. Wilson, Wilson Tax Law Group
Photos from the Annual Meeting
Minutes of the November Tax Procedure & Litigation Committee Meeting:
By Carolyn Lee, Abkin Law LLP
YTL Corner (All Readers Welcome): (Career Considerations for New Attorneys)
By Betty J. Williams, Law Office of Williams & Associates, PC
Practice Pointers: CPA’s and Tax Attorneys – A Complicated Relationship
By Brent L. Gastineau, CPA, Gatto, Pope & Walwick, LLP
Interview: U.S. Tax Court Judge
By Juan F. Vasquez
Recent Cases of Interest:
By Robert S. Horwitz, Law Offices of A. Lavar Taylor
Committee, Announcements and California Journal of Tax Litigation Submisssion Schedule
February 6, 2015, 10:30 a.m. – 3:00 p.m. – Quarterly Meeting of the Tax Procedure & Litigation Committee
Board of Equalization, Sacramento, CA
March 9, 2015 – Second Annual YTL Tax Conference
California State Bar, San Francisco, CA
April 15, 2015 – Q2 2015 California Journal of Tax Litigation Submission Due Date
May 3 – 5, 2015 – 2015 – Washington D.C. Delegation
Message from the Chair
Joseph P. Wilson, Wilson Tax Law Group
Welcome to 2015! I want to first mention New Year’s resolutions. The New Year is a time to reflect on the changes we want or need to make. This is true for both business and personal matters. I was thinking about my own resolution.
The other day I was putting Joe Jr. to bed. The regular routine: bath, milk, banana, three books, brush, floss, back to the bed and one more book. Finally he fell asleep and I quietly tucked him in, pushed the nightlight and sound machine on and I snuck away to the other room. Just when I sat back down to finally relax, Mrs. Wilson came over and asked how it went. “Just fine,” I stated. Then she asked, “What books did you read him.”
I thought for second and answered, “I do not know.” She said, “Really, you did read him books?” “Yes, of course,” I replied. Sadly I could not remember any of the four books I had just read to him. She asked me why I didn’t know. She said, “Didn’t you just read to him about two seconds ago.” All true but I had no idea what books I read. Why could I not remember? Then it hit me. My body was there, but my mind was elsewhere. Although I was right there reading the books to Joe Jr. my mind was racing miles away. Instead of focusing on the story I was thinking about a client who I needed to call the next day, work that needed attention, a motion I had just submitted to the Court. I could remember all these details, but I couldn’t remember the most important thing of all, what books I had just read to Joe Jr.
I felt awful about the whole experience, which leads me to my own New Year’s resolution. My resolution for 2015 is to be more aware and present in the moment. I plan to do this with my family, my clients, my telephone calls, and whatever else I am doing. I think it’s something my son and daughter will appreciate, my wife will too, and so will my clients and colleagues. Not to mention it should make these experiences more enjoyable for me. What is your New Year’s resolution and what is new with the TPL Committee? The TPL Committee has been busy and there are a number items I want to briefly mention.
The next TPL meeting will take place in Sacramento at the BOE Headquarters on February 6, 2014, from 10:30-3:00 pm. Anthony S. Espolite, Senior Counsel for the BOE Appeals Division, will be delivering a unique and informative presentation on tax appeals before the BOE. It should be an interesting and educational experience, so I hope to see you there. I want to thank Courtney Hopley (Greenberg Traurig, San Francisco) for helping to pull this exciting event together.
The planning for the third and fourth quarterly TPL meetings are in the works. The third meeting will be held in Los Angeles or Orange County in May. The proposed topic is negotiation of plea agreements in criminal tax cases. There will be speakers from the U.S. Attorney’s Office and private practice.
The fourth and final TPL meeting for the current Committee will be held in late August in San Francisco. The tentative plan is to have speakers from the settlement divisions of the BOE, EDD and FTB discuss settlement updates and practice procedures. If you have ideas or other topics you want to hear, please let me know.
On January 15, 2015, the TPL Committee hosted a very interesting webinar discussing the ethical responsibilities of tax attorneys regarding safeguarding protected client data when using wireless networks, tablets, notebook devices, cloud technology, etc. I want to thank Jon Feldhammer (Feurzeig, Mark & Chavin, LLC, San Francisco) for this excellent webinar, which was enlightening, informative and scary.
We also have another webinar in the works on how to litigate a case in U.S. Tax Court. The webinar is coming to your computers this summer. So be on the lookout. Special thanks to Carolyn M. Lee (Abkin Law LLP, San Francisco) who has been instrumental with the webinars.
As for Delegations, the TPL Committee has at least one presentation for the Sacramento Delegation and has submitted a proposal for the DC Delegation. Thank you to everyone who submitted a topic.
The Committee will publishing two more editions of the TPL Journal. I encourage members to submit an article or case update. Did you notice that the TPL Journal has an entirely new user friendly format? Kudos to Kevan McLaughlin (McLaughlin Legal, San Diego) for sparking this progress. Also, the TPL Journal is now available online to non-TPL members, as well as TPL members.
The goal is to have a Young Tax Lawyer speak at an upcoming TPL meeting to draw more interaction with senior tax lawyers and to provide speaking opportunities for the up-and-comers. If you are a Young Tax Lawyer (a tax lawyer with 5 o
r less years of legal tax experience) and want to participate at an upcoming TPL meeting, or if you want to volunteer a Young Tax Lawyer, please contact me about this excellent opportunity. Make it a terrific 2015.
Joseph P. Wilson, Wilson Tax Law Group
Chair Tax Procedure and Litigation Committee
Photos from the 2014 Annual Meeting
|2014 Annual Meeting of the California Tax Bar and California Tax Policy Conference (Joe Wilson, Courtney Hopley)
|2014 Annual Meeting of the California Tax Bar and California Tax Policy Conference (Alexandra Eaker, Lisa Nelson, Laura Buckley)
|2014 Annual Meeting of the California Tax Bar and California Tax Policy Conference (Alexis Binazir, Aubrey Hone)
|2014 Annual Meeting of the California Tax Bar and California Tax Policy Conference (Jody Swan, Ronson Shamoun, Richard Carpenter)
|2014 Annual Meeting of the California Tax Bar and California Tax Policy Conference (Robert Horwitz, Mark Bernsley)
|Carolyn’s practice at Abkin Law LLP focuses on federal and state tax controversies, including audits, administrative appeals, collection matters and both Tax Court and U. S. District Court litigation. In addition to the Tax Procedure & Litigation Committee, She is an officer of the California Young Tax Lawyers. Locally, Carolyn is active with The Bar Association of San Francisco where she is a frequent volunteer for the Low Income Tax Clinic and is active on various committees and boards. Carolyn is an adjunct professor in Golden Gate University School of Law LL.M Tax program, teaching Professional Responsibility for Tax Professionals and Federal Tax Procedure.
Minutes of the November Tax Procedure & Litigation Meeting
Carolyn Lee, Abkin Law LLP
Tax Procedure & Litigation Committee Secretary
The quarterly meeting of the Tax Procedure & Litigation Committee was conducted on November 7, 2014, concurrently with the Taxation Section 2014 Annual Meeting held in San Diego, California.
New Committee Chair Joe Wilson brought the meeting to order. Wilson introduced himself and the other officers present: Courtney Hopley, Vice-Chair; and Carolyn Lee, Secretary. Wilson also introduced Kevan McLaughlin, Editor, in absentia due to the birth of McLaughlin’s daughter Lily the previous week.
The minutes of the Committee’s August 29, 2014 meeting were approved unanimously by voice vote.
2015 Sacramento Delegation: Hopley led a discussion of the 2015 Sacramento Delegation, including the benefits of participating. Lavar Taylor provided a description of his own experiences as a member of the Sacramento Delegation. Committee members were encouraged to submit paper proposals.
2015 Washington DC Delegation: Wilson led a similar discussion of the 2015 Delegation to Washington DC, encouraging participation and proposals from the membership. Wilson noted that the delegations are good opportunities for tenured members to mentor newer tax attorneys, either by overseeing the junior member’s proposal or writing a joint paper.
Webinars: Lee reminded members of the opportunities and benefits of presenting via California Bar webinar to the statewide and national tax community. All topics should be forwarded to Lee for presentation during 2015.
Publication Opportunities: Wilson solicited articles and other content for the California Tax Lawyer as well as the Committee’s California Journal of Tax Litigation. In Editor McLaughlin’s place, Wilson spotlighted the new Journal format and other fresh features, including a spotlight on tax attorneys with a state or national reputation. California Tax Lawyer submissions should be forwarded to Wilson; Journal submissions should be forwarded to McLaughlin.
Committee Meetings: Hopley and Wilson reported to the members that the tradition of four quarterly meetings would continue; the next meeting will be held in Sacramento during January 2015. Hopley invited 2015 topic and speaker suggestions, emphasizing the Committee’s desire to deliver programs and interest and value.
Hot Topics: Wilson facilitated a discussion of hot topics presented by the members.
All business being completed, Wilson adjourned the meeting.
YTL Corner (All Readers Welcome): Career Considerations for New Attorneys
Betty J. Williams, Law Office of Williams & Associates, PC
I was asked recently what I like about having my own business as an attorney and for any advice I could offer to new attorneys trying to determine a career path. I understand that for many new attorneys, there is no meaningful choice – attorneys take the jobs offered. However, over time, personal and career goals can influence the course of one’s law career. Obviously, there are pros and cons to each scenario. The type of legal practice and personality of the practitioner also play an important role.
Large firms can offer a variety of areas of practice that are useful for new lawyers who are not yet sure which area of focus is of the greatest interest to him. Large firms can also afford exposure to seasoned attorneys available as resources and typically fantastic training programs, stateof- the-art legal research tools, support staff, and expense accounts. However, big firms can come with big obligations. Long hours, large billing requirements, and the never-ending antiquated notion of “firm retreats” in the event you don’t spend quite enough time with your coworkers.
Some people turn to the government as a career path which offer some of the benefits of large firms. Many government legal offices have seasoned attorneys for hands-on training and typically fantastic training programs; however, with budget cuts some tools and support staff may not be available. Billable hours aren’t a problem, but the paycheck from a firm that requires 2,500 hours per year is likely much greater than the one from the government office. In-house counsel is another option, if companies are hiring new associates. This is an attractive option to people who want regular hours, a focus on a particular area of law (health care, contracts, etc.) and ideally some of the benefits of working for an industry and not the government. The government may have furloughs, but there is also a risk that private companies may go out of business.
After working in a large firm for a few years, I opened my own firm (now with six attorneys). Work-life balance has always been important to me, which is why crickets may be heard in my office after 5 pm on weeknights and on weekends. Owning and operating a successful law practice takes a tremendous amount of organizationa
l skills, an understanding of budgets and business, sales, and people skills. A certain willingness to spend time on administrative matters is required, as is the ability to delegate and hire staff if one ever wants to actually practice law! However, the benefits associated with creating a business model that mirrors my goals has been tremendously rewarding.
Another option to many new lawyers is to work in small “boutique” firms, which can be very appealing because the attorneys often operate as a team with mutual goals for the clients, the firm, and the attorneys.
I would suggest that new attorneys consider short and long-term personal and career goals. Do they want to be a judge one day? Make a million dollars a year before turning 30? Raise kids and work as a part-time attorney? Travel a lot for work, or not at all? I do think a person can “have it all” with work life balance – it is just a matter of having clear goals, talking to other people who have achieved similar goals and working to reach the goal.
Practice Pointers: CPA’s and Tax Attorneys – A Complicated Relationship
Brent L. Gastineau, CPA
Gatto, Pope & Walwick, LLP
In the practice of public accountancy there are many instances where the services of a tax attorney are needed. Generally, the need for a tax attorney involves some sort of tax controversy, dispute or negotiation but can also extend to other situations where their particular skillset is necessary, such as legal opinions and possible criminal activity. This article discusses situations where we have referred a matter to tax attorneys and the reasons we believe it was necessary.
Gatto, Pope & Walwick, LLP consists of more than 25 Certified Public Accountants (CPAs), the majority of who focus their practice in the field of tax consulting and compliance services. We are on the front end of providing our clients with advice as to what actions they should take to help minimize their tax burden and then helping them comply with the reporting requirements based on the actions they have taken. We do not actively seek tax controversy engagements, but with the volume of work and the passage of time, we are inevitably drawn into situations where tax controversies exist. Whether we take on the controversy ourselves or call in reinforcements depends on the unique circumstances that applies to the particular client.
Examinations and Appeals
We generally take the first pass at representing our clients during an examination and are usually able to resolve the examination without any issues. However, there are situations where it may be in the best interest of the client to retain a tax attorney to represent them at the outset of an examination. For example, there have been cases where upon examination a client is severely deficient in providing adequate support for items claimed on the return, and it is clear there is significant risk that multiple tax years and/or other entities may be opened for examination. In these cases we may involve a tax attorney to present the case to the IRS Revenue Agent, provide an independent view of the facts, try to assist in limiting the issues under examination, and also to provide consistent representation should the examination move to Appeals or Tax Court.
Alternatively, there are situations where we will represent the client during the examination but it is clear the disputed items will not be resolved in a satisfactory manner for either party, and it is evident the examination will be referred to an Appeals Officer. In these cases we will usually refer the client to a tax attorney even though as a CPA we have the ability to represent our client in the appeals process. The reason is many times the issues involve an interpretation of the law and the attorney’s legal knowledge is essential in helping to frame the argument appropriately with the Appeals Officer. In addition, we have found that the attorneys usually have first-hand experience with many of the Appeals Officers, which can be very useful when preparing for the proceeding. Also, should the case go to Tax Court the tax attorney is ready and able to present the facts to the court.
Lastly, some clients feel more comfortable having a tax attorney represent them during an examination, which may include the tax attorney being the sole representative or joint representation between the CPA and the tax attorney. The reasons some clients request the presence of an attorney ranges from a fear of the taxing authorities, a desire to put their best foot forward, or having someone represent them from the beginning who can be there at every stage of the dispute, if necessary.
Statutory Notices of Deficiency
In general when clients receive a Statutory Notice of Deficiency we will notify them that a Tax Court Petition may need to be filed and that they may need to engage a tax attorney. Most of the time we are working to resolve the case during the 90-day period so we will put the attorney on notice that a petition may need to be filed. If it does not appear the issue will be resolved prior to the expiration of the 90 days we will have the client engage the attorney to file the petition on their behalf. After the petition is filed we will work with the attorney and provide them with the supporting documentation to present to the Appeals Officer or Tax Court.
Tax Debt Negotiations
Another area where we rely heavily on tax attorneys is in regards to tax debt negotiations. Generally, we refer our clients to tax attorneys who are skilled in this area because we have found they are much more efficient and effective when negotiating tax debt settlements, whether it be an offer in compromise, an installment agreement or an abatement request.
Legal Tax Opinions, Private Letter Rulings, and Interpretation
We refer our clients to tax attorneys in instances where the client would like a thorough legal analysis and tax opinion of a particular transaction the client is contemplating. In addition, in instances where the client would like to request a Private Letter Ruling, we will refer that engagement to a tax attorney. In addition we have used tax attorneys to assist in interpreting the language of documents and the related tax implications. For example, a corporate client of ours was acquired and a dispute arose between the client and the purchaser regarding the definition of a tax term in the purchase document. We enlisted the assistance of a tax attorney to research the interpretation of the term in statutory and case law that provided clarity to the document and ultimately helped to resolve the dispute and close the deal.
Possible Criminal Issues
Although rare, at times in our practice we become aware of possible criminal actions by a client. In these situations we immediately encourage the client to consult a tax attorney to assist in determining their best approach in resolving the issue. For example, sometimes in the interview process with a new client we will be made aware of a foreign bank account that has not been disclosed to the Treasury Department. Due to the potential penalties and criminal implications of not disclosing these accounts we recommend the client consult a tax attorney immediately (without disclosing additional details to us) to discuss the matter freely with the protection of attorney-client privilege.
As evident in the above examples the reasons to utilize the skill set of a tax attorney are many. We use our discretion to determine when it is appropriate to involve a tax attorney. In the end, maintaining trusting relationships with tax attorneys is essential in our practice to ensure our clients are well taken care of when the need arises.
Interview: U.S. Tax Court Judge Juan F. Vasquez
By Paul J. Dostart and Kevan P. McLaughlin
Q. Can you tell the Journal’s readers how you got into the field of tax law and about your journey onto the U.S. Tax Court bench?
A. Interestingly enough, a lot of my roots in tax law are in
California, for which I have deep feelings. As the story goes, in 1972 I graduated from the University of Texas in accounting, and went to work for one of the big eight accounting firms at the time as part of the audit staff. I ended up auditing a lot of California companies, but during the tax season the firm would ask for volunteers to prepare returns. I volunteered for two seasons, and loved it. When I then wanted to join the tax department, the firm required one of two things: getting a masters in taxation or a three-year law degree. So I went to law school with the idea that I would go back to work in the firm’s tax department. While at the University of Houston Law Center I met my mentor, Ira B. Shepard. We did work together for the Southern Federal Tax Institute, where I helped review papers as a research assistant for two summers. Professor Shepard propelled myself, among others, and encouraged me to go to NYU.
At NYU I received offers from the IRS Office of Chief Counsel and the Department of Justice Tax Division. I was torn between the two, but I wanted to go back to Texas. I worked from 1978 to 1982 with the IRS Office of Chief Counsel in Houston, Texas, and I really enjoyed my work. I hated to leave, but wanted to get back to my hometown of San Antonio, Texas. Once back in San Antonio I joined a small firm with only two partners, which we eventually grew to six lawyers, and later left to start my own firm where I practiced for the next eight years. In the latter part of my private practice years I used to attend the USC Tax Institute every year. I had already been through law school, several years with the IRS Office of Chief Counsel, and thirteen years of private practice, and was thinking about the next phase of my career. I approached my mentor, Professor Shepard, during an ABA Taxation Section meeting and he gave me guidance on how to seek a position on the U.S. Tax Court, and the rest is history.
Q. Do you have any tips for those representing taxpayers before the U.S. Tax Court and yourself?
A. Just like other judges, I do like certain things. It’s important to remember that the U.S. Tax Court is a unique court. We are comprised of traveling judges that can get 100-150 cases per calendar, in a city where we may not have trial on a regular basis. As a result I rely on the lawyers (both petitioner’s counsel and government attorneys) to educate me about their case in the Pretrial Memorandum. The Pretrial Memorandum is the ideal opportunity for each of the lawyers to educate me about the case. Unless there have been some discovery disputes, like a Motion for the Production of Documents, I will not be familiar with the case. So, for me, the Pretrial Memorandum is a crucially important part of representation before the U.S. Tax Court.
I also like the lawyers to prepare a good stipulation of facts, but more importantly, provide it to me timely. I prefer that practitioners give it to me as early as possible. In other words, if it is a one-week trial session, give me the stipulation of facts before the date of the trial. As the trier of fact I am there to assess credibility of witnesses, and if the lawyers give me the stipulation of facts right before the trial starts, I find myself reviewing the stipulation and exhibits at the expense of assessing the credibility of a witness. I don’t like to be taken away from focusing on the witness.
I am also there on the bench to determine credibility of witnesses. Lawyers should remember that what they say on the record is not testimony. I cannot make a finding of fact on what the lawyer said. I can only make a finding of fact out of what the witnesses says. What I like is hearing from the witness. Lawyers have to ask the right questions and elicit the right answers because I am listing to the witness and determining his or her creditably. If a lawyer asks a bunch of leading, “Yes” or “No,” questions on direct examination, assuming there is not an objection from the other side, that doesn’t come out so well in terms of credibility. I make very copious notes during the testimony, asking regularly, “Is this witness credible?” I wait also to see how they do on cross-examination too.
Q. When a witness becomes evasive on cross-examination, where they once were credible on direct examination, do you then assume you cannot trust the direct?
A. Some witnesses on direct, when being asked questions by their own attorney, are very forthcoming and open, but on cross-examination they clam up. It is rare they become evasive. It certainly puts down on the direct and the credibility of the witness, but then that is the purpose of a good cross-examination. Ultimately if a witness is being evasive and will not answer questions correctly, I may remind them that I am there to assess their credibility.
Q. Going to trial can raise the cost for the taxpayer. For some taxpayers trial is cost prohibitive and, although they have a theoretical right to trial, they may not have a practical right to trial. What is your feeling about this and your reaction to settling versus intransigence toward trying cases?
A. My view is that it works both ways. Even now, certain cities are known to be more litigious than others. I tend to like, and I believe most of the judges would agree, outcomes that are more realistic based on the hazards of litigation and the circumstances of the case. That being said, offices that litigate cases more frequently tend to start their discovery sooner and are generally better prepared.
Q. What was your most memorable case (either on the bench or in practice) and why?
A. When I was in private practice, I loved it when a client would came in with a new type of business because you always had an opportunity to learn about it from your client. Now that I’m on the bench, I enjoy learning about new, unique, different, and interesting areas from the lawyers. I get to deal with and learn about things such as conservation easements, Son-of-Boss transactions, and the areas seem to change all the time.
The Higbee v. Commissioner, 116 T.C. 438 (2001), case was memorable to me because it has now been cited so frequently. Higbee was the first case that dealt with IRC § 7491(a), (c). It was a seemingly simple substantiation case, but it was the first case that dealt with the two Code sections and has been cited many, many times since. The General Motors v. Commissioner, 112 T.C. 19 (1999), case also stands out in my memory because of the number of lawyers that each side had.
Some moments in the courtroom stand out to me too. When I was first on the bench I shadowed Judge Irene Scott during one particular calendar call. I was taking notes and trying to think about how I would do things when a pro se taxpayer stood up and asks for their third or fourth continuance. Judge Scott asked the petitioner why they wanted another continuance, to which the response was “I’m dying.” I asked myself what would I do as the judge if someone told me the same thing. Before I could think about it, Judge Scott threw her head back and said, “Oh my heavens. If you’re going to die, we need to get you to trial right away.” The case settled that week.
Q. Are there any threats or pressing issues for the U.S. Tax Court?
A. One big issue we always deal with is unrepresented taxpayers. The U.S. Tax Court travels to 74 cities each year, and a significant part of our dockets are pro se litigants. Seeing that they get a fair day in court is a big issue, and pro bono programs have become a great aid to the Court. When I joined the U.S. Tax Court in 1995, I recall only two pro bono programs in California. Now just about all of our trial sessions are covered by a pro bono programs or low-income taxpayer clinic. I’ve even had trial sessions in Alaska where a low-income taxpayer clinic came out from neighboring Washington to provide pro bono services to the unrepresented.
Q. Any advice for a new tax lawyer?
A. Experience and involvement in tax is important. I would suggest joining up with a low-income taxpayer or pro bono clinic if you’ve never tried a case before the U.S. Tax Court before. I’ve found those clinics do a wonderful job of training people who have never appeared before the U.S. Tax Court, on not only how to represent taxpayers before the Court but also how to represent them administratively before the IRS. As an added benefit, you get to know the IRS Chief Counsel attorneys in that office, so when you later have a paying client they will remember you. Developing your reputation in the community is also very important, not only with clients but also with IRS personnel. Your credibility as a lawyer is also key. You cannot underestimate the importance of, for you as a lawyer, remaining credible with the judge before you.
Collection Appeal Program Hearings (“CAP”): Are they Really an Effective Tool for Taxpayers?
Jody Swan, Law Offices of Richard Carpenter
A taxpayer has the opportunity to appeal several types of collections actions that the IRS takes against them. The two main options for a taxpayer to appeal a collection action taken against them are the Collection Appeals Program hearing (CAP) and the Collection Due Process hearing (CDP). There are various factors which may lead a taxpayer to choose one option over the other. For example, a taxpayer may only be able to choose one option depending on the type of collection action he or she is appealing or the timing of their appeal. However, when choosing the CAP, a taxpayer needs to be extremely careful because there is no opportunity for a challenge to the Appeals decision in Tax Court like in the CDP hearing process. Thus, are CAP’s really an effective tool for the taxpayer? Further, are CAP’s unfairly slanted to favor IRS rather than the taxpayer?
II. Collection Appeals Program Hearing (“CAP”) v. Collection Due Process Hearing (“CDP”)
The types of collection actions that may be appealed in a CAP are the following: (1) the filing of a Notice of Federal Tax Lien (either before or after the filing); (2) the levy or seizure of property (either before or after the levy or seizure); (3) the proposed or actual termination of an installment agreement; (4) the rejection of an installment agreement; and (5) the modification or proposed modification of an installment agreement.1
Conversely, the types of collection actions that may be appealed in a CDP hearing are the following: (1) Notice of Federal Tax Lien filing; (2) Final Notice of Intent to Levy; (3) Notice of Jeopardy Levy; (4) Notice of Levy on the State Income Tax Refund; and (5) Post Levy Collection Due Process Notice.2
As you can see, the issues that can be appealed in a CAP are broader than CDP hearing topics. More specifically, the proposed or actual termination of an installment agreement, rejection of an installment agreement, and proposed modification of an installment agreement are collection issues that are not listed as topics that can be appealed in CDP hearings. Instead they are only listed as collection actions that can be discussed in CAP hearings.
Another difference in the CAP and CDP is that unlike in the CDP hearing, a taxpayer cannot challenge the amount or existence of your tax liability in the CAP.3 Yet another difference in the CAP and CDP is the timing of the request. There is a strict time deadline with requesting a CDP hearing. A taxpayer must file the CDP hearing request within 30 days of receiving the notice of collection action from the IRS. If the taxpayer misses this deadline, the taxpayer can still file a CDP hearing request using the standard IRS Form 12153 Request for a Collection Due Process or Equivalent Hearing and “check the box” requesting an Equivalent Hearing. However, if the CDP request is not timely and an Equivalent Hearing occurs then the taxpayer does not have the opportunity for judicial review. Thus, a timely CDP hearing request is essential to preserving the taxpayer’s right to judicial review.
In a CAP request, there are various timing deadlines depending on the issue. For example, for a rejected installment agreement, proposed or modified installment agreement, or termination of an installment agreement, there is a 30 day deadline to request the CAP after receiving notice from the IRS office or revenue officer of the rejected, modified, or terminated installment agreement.4 Once a seizure collection action takes place, the taxpayer has 10 business days from the date the Notice of Seizure is received or left at the taxpayer’s home or business to request the CAP.5 In a levy collection action, the taxpayer must first request a group manager conference. Then, the taxpayer must file the CAP within 10 business days after the required managerial conference.6
Finally, the key difference in the CAP and CDP process is that in the CAP, there is no opportunity for the taxpayer to seek judicial review in the Tax court. In a CDP hearing, a taxpayer can appeal the decision of the Appeals Officer to the Tax Court. Without the opportunity for judicial review, the appeals decision in a CAP is final.
III. Is The CAP An Effective Tool for Taxpayers?
In many cases, the CAP is not an effective tool for taxpayers. It should only be used when the CDP is not an available option for the taxpayer. The CAP process allows the taxpayer the opportunity to appeal a wider variety of issues than the CDP. A CDP hearing is more limited in scope. For example, in a CDP, installment agreements are not listed as a topic that can be appealed in CDP hearings. Thus, a taxpayer must appeal a rejected installment agreement proposal in a CAP. Is this fair? Why can’t a taxpayer seek judicial review of a rejected proposed installment agreement? There are thousands of families, businesses, and individuals that are trying to seek reasonable installment agreements for federal taxes owed.
Installment agreements are often great sources of anxiety and fear for taxpayers. The threat of a bank levy or wage levy action if a reasonable installment agreement is not approved is a serious concern to many taxpayers. The taxpayer should be allowed to seek judicial review of an installment agreement issue because of the potential hardship created by a taxpayer having to accept an unreasonable installment agreement. A taxpayer may have no other option but to accept an unreasonable installment agreement because the other option given to them is a wage levy in the amount of the IRS’s choice or a bank levy.
Further, the CAP hearing is not recorded. It is not on the record. Thus, the appeals officer can state his or her version of the appeal’s hearing record as he or she pleases. And, there is no judicial oversight of the appeals officer. Additionally, the Appeals Officer is given the IRS collection or Revenue Officer’s record before the appeals conference. This also creates a potential bias towards the IRS because this is the IRS’ position of the events and history in the case, presented without interjection by the taxpayer.
Thus, when the taxpayer or taxpayer’s representative comes i
nto the CAP hearing, this hearing is most often conducted by phone, is conducted off the record, and with no opportunity for judicial review of the appeals officer’s decision. The Appeals Officer already reviewed the case record of the case–per the Service’s point of view. Thus, all of these factors contribute to the CAP being an appeals tool which has the strong possibility to create an extreme uphill battle for the taxpayer.
Is the CAP a fair appeals process for the taxpayer? Should the CAP ever be used if a taxpayer has the opportunity to appeal his/her issue in a CDP instead? Why isn’t the CDP process expanded to include all the issues that are able to be reviewed in the CAP? If this were the case, the taxpayer would be able to seek judicial review of more collection issues. If possible, the Taxpayer should appeal his/her collection issue in the CDP process rather than the CAP process. This will ensure that the Taxpayer has the opportunity for judicial review which is essential in making sure there is proper oversight to such important collection tax issues that many taxpayers face. Without the potential judicial review of an appeals conference decision, the taxpayer is placed in a serious disadvantage for his/her tax issue.
The IRS Substitute for Return: Sudden Death, or Hold Your Breath?
Morgan D. King, Law Office of Morgan D. King
Lawyers who handle consumer tax-discharge bankruptcy cases are presumably well acquainted with the five rules for income tax discharge.7 These remarks address just one of them: the rule that, to discharge the taxes, the taxpayer must have filed his or her 1040 tax return for the tax year at issue, more than two years before filing the bankruptcy.8
In the typical bankruptcy case with delinquent income taxes the tax history will follow the ordinary, expected sequence of events: the taxpayer first files his or her return showing taxes due. There may or may not be a check with the return. Subsequently, the IRS assesses the taxes based on information on the return.
But in some cases the sequence is different: the taxpayer fails to file the 1040 in a timely manner, and eventually the IRS files a substitute for return (“SFR”) for him or her. The SFR is always blank. It contains no information, and no actual dollar figure will appear with the SFR on a taxpayer’s IRS Account Transcript. It is filed simply to get the account going in the IRS system. Sometime after the SFR is filed, the IRS may proceed to assess the actual tax liability, followed by the taxpayer filing a tardy 1040, or the reverse, i.e., taxpayer files his or her 1040 before the IRS assesses the tax but after the SFR is filed. So, in those situations, you have a taxpayer’s return filed either pre-assessment or post-assessment.
Here is an important point: the SFR by itself is not an assessment. Ordinarily SFR’s do not contain tax liabilities. Technically, there is no such thing as an “SFR assessment.” And, in most jurisdictions, whether the account begins with an SFR or not has little to no bearing on whether the tax is dischargeable.9 In most jurisdictions, including the Ninth Circuit, it’s what happens after an SFR is filed that determines dischargeability.
We all know that you never rely on the client for exact recollections of the sequence of events in connection with his or her back taxes. Most debtors’ memories are seriously compromised by the time they see you in the office; they don’t know for sure if they filed a tax return, if the IRS filed an SFR, whether they filed a collection appeal, whether there was an audit assessing additional taxes, or where they left their head, etc.
The best way to determine the actual dates of relevant events is to obtain the taxpayer’s IRS Account Transcripts, and one for each tax year for which there are delinquent taxes. The account transcripts10 are typically obtained by calling the IRS Priority Hotline11 and requesting that they be faxed to the lawyer’s office.12
The IRS commences its formal record (or “account”) of each tax year with a 3-digit “transaction code,” sometimes called a “master file code,” in particular, code “150,” appearing on the account transcript. This is the code that appears first in line on the history of the account. It is typically followed by a series of other events, each with its respective transaction code. Below the SFR entry it is not unusual to see, for example, code “460” for an extension to file the return, code “420” meaning that an audit was started, code “290” or “300” for an additional assessment, etc. Each code is accompanied by a short explanation. Hence, for example, code “420” usually appears with ” … return has been referred to the Examination or Appeal Division.” In other words, an audit.
When the IRS files an SFR it shows up with code “150.” The words next to code 150 are often misleading. They typically say “Return Filed and Tax Assessed,” with a date and, if actual money is reported, the amount. Be aware that this is not the date the return was filed, and in many cases is not the date the tax liability was assessed. The date the return was filed will appear several lines above the code 150; look for “Return Due Date or Return Received Date (Whichever is Later).” The date shown there is either the date the taxpayer’s 1040 return was filed, or the date an SFR was filed.
The question then arises, if the account begins with an SFR, does it mean the taxes cannot be discharged? The answer is not necessarily. To satisfy the 2-year rule prescribed at 11 U.S.C. § 523(a)(1)(B)(ii), the taxpayer must have filed his or her 1040 tax return more than two years before the petition is filed. So, for this purpose two questions must be answered; (1) did the taxpayer file something that qualifies as a return, and (2) if so, when?
The weight of authority in the Ninth Circuit is that merely because the IRS kicked off the account by filing an SFR it does not mean the debtor failed to file a tax return13. Delinquent taxpayers often file their 1040 returns after SFRs have already been filed. If they did file them, dischargeability may be determined by the date the returns were filed14.
Did the taxpayer file a return? There are several clues to look for on the transcript. Several lines above the “Return Due Date …” find “Tax Per Return.” If there is a dollar amount shown, that is almost certainly derived from the taxpayer’s 1040 and demonstrates the taxpayer filed the return. If he or she filed a 1040 return, it will typically be evident by code 150 showing an actual dollar amount, as well.
If the taxpayer files the return after an SFR is filed, in most cases it shows up further down on the respective transcript as code “976” or “977.” These codes mean “Posted Duplicate Return.”15 But in almost all cases with an SFR filed, followed down the line by a 976 or 977, that code is the date the taxpayer filed his or her 1040 return; the IRS identifies it as an “amended” return for two reasons; they deem the 1040 to be an amendment of the SFR (by including actual information); and, they don’t have a separate 3-digit code for an original return where the 150 code is already taken up by the SFR. But, a 976 or 977 is a 1040 “return” within the meaning of the two-year rule.
Accordingly, just because you see an SFR on the transcript, don’t give up; instead, hold your breath … and hope you find evidence of the taxpayer’s return somewhere on the transcript. The key clues include:
- A dollar amount shown with “Tax Per Return.”
- A dollar amount shown with code “150.”
- A transaction code 976 or 977 appearing on the transcript.
- Transaction codes 599, 610, 806 (require a call to IRS Hotline to verify). 16
There are other clues to a taxpayer’s return. However, if it isn’t clearly determined by one or more of the above indicators, it’s probably prudent to call the IRS Priority Hotline and simply ask the Hotline person whether or not your client filed a tax return for that year, and write down what she sees on the transcript that identifies it as the taxpayer’s 1040 the Hotline person.
Let’s assume a hypothetical that the account begins with an SFR and a blank 150, but it is determined that the taxpayer eventually filed his or her 1040 tax return. So, the first question, did the taxpayer file a 1040 tax return, is answered in the affirmative. Now what?
There are several issues that arise in connection with when the taxpayer filed the return. The first question is: was the return filed more than two years before the petition was or will be filed? If not, the client should be advised to wait until the 2-year period from the date the return is filed expires. A tax for which the return was filed within 2 years preceding the petition date is excepted from discharge per 11 U.S.C. § 523(a)(1)(B)(ii).
Let’s assume, again hypothetically, the taxpayer filed or will file the 1040 more than two years before the petition date. The next question is, was the return filed before the tax was assessed, or after? The dischargeability of the tax may depend on whether the return was filed before, or after, the assessment.
Look on the transcript for code “290” or code “300.” In cases begun with an SFR, these are the codes indicating the dates the assessments were eventually made. If there is no dollar figure with the code, you can disregard that date. Look for a 290 or a 300 showing an actual dollar amount. That is the date those dollars were assessed,17 and the date for that assessment must be more than 240 days before the bankruptcy petition is filed for that assessment to be dischargeable.
In some jurisdictions a tax return filed late (after the due date), regardless of whether filed pre- or post-assessment, is not a valid tax return. This is the line of cases arising from a Fifth Circuit case, McCoy v. Mississippi State Tax Comm’n, 666 F.3d 924 (5th Cir. 2012), which I refer to as the “McCoy rule.” McCoy held that certain language inserted into the Bankruptcy Code by BAPCPA18 means that if the tax return is filed late, even for just one day, for that reason alone it is by definition not a valid return.19Under this interpretation, whether the return is filed by the due date is the litmus test.
Under this rule, if the return is filed after the due date,20 the date the tax was assessed, or the return was filed, is irrelevant. This rule has been adopted by a number of jurisdictions. But, the Ninth Circuit has not heretofore adopted the McCoy rule.
The IRS rejects the McCoy rule; IRS policy21 is that merely filing late, by itself, does not determine whether the return is valid or invalid for purposes of the 2-year rule. However, the IRS explicitly argues that a return filed not just late but after the tax is assessed is invalid for bankruptcy cases. Basically the IRS argues that a post-assessment return serves no purpose, because the taxes have already been determined. For this reason they argue it serves no purpose and hence is not a valid tax return.
This is the last question that must be addressed; if the return is filed after an SFR and after the tax is assessed, is it a valid return for purposes of the 2-year rule?
The two most recent California bankruptcy cases that have addressed the issue have rejected both the McCoy rule and the IRS position on post-assessment returns, and held that merely filing the return late and after the assessment does not, by itself, render the return invalid. McCoy mentioned and rejected. Martin v. Internal Revenue Serv. (Bankr. E.D. Cal., 2014); In re Smith (Bankr.N.D. Cal. 2014).
Instead, the courts have determined the validity of the tax return based on what is typically called the 4-part Beard Test. Beard v. Commissioner, 82 T.C. 766, 774-79 (1984), aff’d, 793 F.2d 139 (6th Cir.1986)).
The Beard opinion sets the following criteria:
- First, there must be sufficient data to calculate tax liability;
- Second, the document must purport to be a return;
- Third, the taxpayer must execute the return under penalties of perjury;
- Fourth, there must be an honest and reasonable attempt to satisfy the requirements of the tax law.
The main focus of the two opinions (and many cases in other jurisdictions addressing the same issues) is typically the fourth prong; under the particular facts in the case was the filing of the return “an honest and reasonable attempt to satisfy the requirements of the tax law”? This is a subjective test, not the bright-line McCoy rule.
In Martin, the IRS had assessed the taxes on March 16, 2009. The debtors filed the salient tax returns on June 2, 2009. The opinion observed that: “The IRS accepted the Martins’ three Form 1040s and adjusted its assessments to match the amounts stated therein.” In answering the question, were the returns honest and reasonable attempts to satisfy the requirements, the court cited the fact that the taxpayers had retained the services of an accountant to prepare their returns in August of 2008, and finally signed and filed them in June of 2009, less than three months after the assessments. Based on that fact pattern the Martin court found the tax returns to be valid for bankruptcy purposes, and the taxes were discharged.
In Smith, the bankruptcy court originally held the taxes to be dischargeable. But in this case the taxpayer’s conduct after the assessment was more problematical and based on those facts the District Court reversed the bankruptcy court’s ruling. Like Martin, the Smith District Court opinion rejected the McCoy litmus test, and based its ruling on the Beard criter
ia, in particular the fourth prong, honest and reasonable attempt. The tax transcript in question for tax year 2001 began with an SFR. Subsequently the court recited the facts that the IRS assessed the taxes on July 31, 2006, but the taxpayers did not file the returns until seven years after the due date and three years after the IRS assessed them and commenced collection. The court ruled that: “the ‘honest and reasonable attempt’ factor necessarily involves an individualized review of the equities.” The court went on to note, “the meaning of ‘return’ must take into account the late-filer’s evidence of a good faith attempt to comply…” In this case, based on these individualized facts, the court held it could not find the taxpayer’s conduct to meet that test. Hence, the taxes were held non-dischargeable.
In both cases, the taxpayers’ post-assessment returns resulted in IRS adjustments to the assessments. Hence, it could be argued that they both served a purpose and therefore should be deemed valid. In the case of Martin the assessments increased the liabilities for one year and decreased them for another.22 In the case of Smith, the taxpayer’s return resulted in an additional assessment of $40,095.23 In neither case did this fact appear to be significant to the court. However, cases in other jurisdictions have often cited the change in the liability, based on the tardy 1040, as indicating the return served a purpose and hence is deemed valid.24
Some courts deem a tax return filed after the filing of an SFR to be, by definition, invalid, for failing the Fifth Circuit McCoy litmus test. However, outside of the McCoyenvironment, whether an SFR was filed or not has little to no bearing on the validity of a subsequently filed tax return. The weight of authority is that a post-SFR, pre-assessment filed return is a valid return. On the other hand, a post-SFR, post-assessment return is more problematical, but is not dispositive.
Here in the Ninth Circuit the two most recent cases addressing the issue arrived at different conclusions, but both based their rulings on the individual facts of each case, and relied on the Beard Test to govern the issue. The fact that the returns were filed after both the SFR’s and the assessments were filed, was not dispositive.
The upshot of all this is that the fact that the returns were filed after the SFR was filed did not determine the outcome.
What was dispositive was the taxpayer’s overall conduct regarding the tax liabilities, and in particular, the extent to which it can be shown that the taxpayer acted with an “honest and reasonable attempt” to comply with the tax laws. Particular attention was paid to the taxpayers’ post-assessment behavior.
Recent Cases of Interest
Robert S. Horwitz, Law Offices of A. Lavar Taylor
When a taxpayer sells an asset with built in gain, he is subject to tax on the gain. Shareholders of a C corporation that has assets with built in gain can either sell the stock or the corporation can sell the assets and distribute the proceeds as a liquidating distribution. The corporation will pay tax on the gain and the shareholder will pay tax on the distribution. If the stock is sold, a purchaser who is interested in acquiring the assets will pay less than it would if it purchased the assets. For the seller, the issue becomes how to maximize the sale price and avoid tax at both the corporate and shareholder level. This was the problem that faced the Diebold family in Salus Mundi Foundation v. Commissioner, __ F.3d __ (9th Cir. 2014).
Richard Diebold was the founder of American Home Products Corporation. In 1980, Richard and his wife, Dorothy, formed Double D Ranch, Inc., a C corporation, to hold investment assets, including securities and real estate. Richard died in 1996 and all of the stock in Double D became the property of the Dorothy Diebold Marital Trust. In 1999, Dorothy was 94. She wanted to distribute cash to her three children, but lacked sufficient liquid assets. Her advisors told her that she would need to sell Double D stock to have sufficient cash. There was one major problem: Double D owned assets valued at approximately $319 million with minimal basis. An asset sale would have generated a corporate level tax of over $81 million. A sale of the stock would not trigger the $81 million corporate tax, but the assets would retain their nominal basis and a potential purchaser would pay a discounted amount for the stock.
To solve this problem, the Diebolds were advised to enter into a “Midco” transaction. In such a transaction a corporation buys the stock for a small discount and then sells the assets for fair market value. For the transaction to work, the Midco has to be tax insensitive either by not being subject to tax or by having large losses.
The Diebold Foundation was a charitable foundation that the Diebolds founded in 1963. Prior to entering into a Midco transaction, Dorothy Diebold transferred one-third of the stock in Double D to the Diebold Foundation. Each of the three Diebold children formed a separate foundation, one of which was the Salus Mundi Foundation. The trustees of the Diebold Foundation planned to sell the Double D stock and distribute the proceeds equally to the three children’s foundations.
A third party that specializes in Midco transactions formed a Nevada corporation, Shap Acquisition Corporation, to purchase the Double D stock and then sell the assets to Morgan Stanley. One of the Diebolds had an option to purchase Double D’s real estate for $6.3 million. To fund the acquisition, Shap obtained a five day loan from a bank. It purchased the stock for $309 million from the Double D shareholders. It then sold the assets of Double D for $319 million. The $10 million difference was Shap’s profit.
On their returns, the Diebold Foundation and Dorothy reported the sale of the Double D stock. Double D filed a short year return for the July 1-2, 1999, short year as a final return. It did not report the asset sale. Shap filed a consolidated return for the year ending June 30, 2000, Shao reported the asset sale and claimed losses from a Son of BOSS transaction to offset the gain from the asset sale. In January 2001, the Diebold Foundation distributed $33 million to each of the three children’s foundations.
The IRS determined that the transaction was really an asset sale by Double D followed by a liquidating distribution to its shareholders. This determination was not contested. The IRS assessed $81 million in tax plus interest against Double D. Because Double D had no assets, the IRS pursued transferee liability against Double D’s shareholders under IRC § 6901. The first person to whom the IRS issued a transferee notice of deficiency was Dorothy Diebold. She filed a petition with the Tax Court. In Diebold v Commissioner, 100 T.C. Memo. 370, the Court held that the transferee was the marital trust, not Dorothy. Since the IRS didn’t assert that she was the transferee of a transferee, the Court ruled in her favor. The IRS didn’t appeal.
The IRS next issued notices of deficiency to the three children’s foundations. Applying New York fraudulent conveyance law, the Tax Court held that the foundations had neither actual nor constructive knowledge of Shap’s tax avoidance scheme and, thus, were not liable. The IRS appealed.
In Commissioner v. Stern, 357 U.S. 39 (1958), the Supreme Court held that IRC § 6901 is a procedural statute and that the question of whether a transferee is liable is determined under substant
ive state law. Thus, to determine whether a person is liable under IRC § 6901 involves two prongs: first, is the person a transferee under federal law and second, is the person liable for the transferor’s liability under state law.
On appeal, the IRS argued that the two prongs of Stern are not independent and that as part of the first prong the court should recharacterize the transaction as an asset sale by Double D followed by a liquidating distribution. Salus Mundi argued that the Tax Court had correctly determined that any recharacterization of the transaction was part of the state law prong of the analysis that had to be conducted independently of the transferee prong of the analysis.
The Ninth Circuit noted that although the IRS’s argument was a plausible reading of Stern, three other circuits had rejected its position: Diebold Foundation v. Commissioner, 736 F. 3rd 172 (2nd Cir. 2013), Frank Sawyer Trust v. Commissioner, 712 F. 3rd 597 (1st Cir. 2013), and Starnes v. Commissioner, 680 F.3rd 417 (4th Cir. 2012). The Ninth Circuit agreed with the 2nd, 1st and 4th Circuits that Stern is “best interpreted as establishing that the state law inquiry is independent of the federal law procedural inquiry.” The Court noted that it would follow the tax decisions of other circuits and not create an intra-circuit conflict unless the other circuit’s decision was “demonstrably erroneous or there appear cogent reasons for rejecting them.”
The Second Circuit had addressed the same facts and law in the Diebold Foundationcase. The Ninth Circuit therefore looked to the Second Circuit’s decision. The Second Circuit had concluded that under substantive state law, the Double D shareholders had constructive knowledge of the tax avoidance scheme since 1) they knew an asset sale by the corporation would create a large tax liability from the built-in gain, 2) they had a sophisticated understanding of the structure of the transaction, and 3) they knew that Shap was formed to facilitate the transaction and did not have assets to meet its obligation to purchase the stock to sell to Morgan Stanley or to compensate Morgan Stanley if it could not meet its obligations. Since “absent a strong reason” the Ninth Circuit will not create a direct conflict with another circuit, and the Second Circuit addressed the same facts, issues and applicable law, the Ninth Circuit adopted the Second Circuit’s reasoning and held that the shareholders had constructive knowledge. The Ninth Circuit remanded the case to the Tax Court to determine Salus Mundi’s status as a transferee of a transferee under federal law and whether the IRS asserted transferee liability within the statutory period.
The TEFRA partnership provisions (IRC §§ 6221-6234) require the determination of partnership items to be made in unified partnership proceedings. Section 6223(e)(3)(B) of the TEFRA provisions, however, allow a partner to elect to have partnership items treated as if they were not partnership items. Specifically, IRC § 6223(e)(3)(B) provides:
In any case to which this subsection applies, if paragraph (2) does not apply, the partner shall be a party to the proceeding unless such partner elects–
(B) to have the partnership items of the partner for the partnership taxable year to which the proceeding relates treated as nonpartnership items.
A person who makes such an election opts out of participating in the TEFRA partnership proceedings. In JT USA, L.P. v. Commissioner, 771 F.3d 654 (9th Cir. 2014), the Court addressed an issue of first impression: whether a person who holds both a direct and an indirect interest in a TEFRA partnership can elect to opt out of partnership proceedings as to one, but not both interests. The Tax Court held that a partner who holds both direct and indirect interests can opt out of one, but not both. On appeal, the Ninth Circuit reversed.
The taxpayers had engaged in a son-of-BOSS variant in order to avoid tax on $28 million of capital gain from the sale of their closely held business. The IRS began an audit of the partnership that was the vehicle through which the losses were generated. It did not give proper notice of the institution of TEFRA proceedings to the taxpayers. When the taxpayers were finally notified, they filed an election to have the partnership items treated as non-partnership items as to their indirect interest. The IRS did not notify the taxpayers that, in its view, they could not elect to opt out as to their indirect interest unless they opted out as to their direct interest. The IRS failed to issue a statutory notice of deficiency to the taxpayers within the statutory period. As the Ninth Circuit pointed out, if the taxpayers were allowed to opt out as to their indirect, but not their direct, interest, they would avoid paying millions in taxes which they otherwise would owe.
The Court began its analysis by referring to Justice Scalia’s summary in United States v. Woods, 134 S. Ct. 557 (2013) as the best explanation of TEFRA’s statutory scheme. After quoting IRC § 6223(e)(3)(B), the Court observed that the section refers to a partner, “not an indirect partner or any subset of the term ‘partner’ as defined in section 6231(a)(2)” and refers to a partner’s “partnership items” not to some (but not all) of a partner’s partnership items. From this, the Court drew the conclusion that the statute is “clear and unambiguous that unless the partner elects to have all of his or her partnership items treated as nonpartnership items, the partner cannot elect out of the TEFRA proceedings.”
This conclusion seems at odds with the definition of “partner” in IRC § 6231(a)(2) as “(A) a partner in the partnership and (B) any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.” The natural conclusion from this language is that for purposes of TEFRA, a partner includes both a direct partner and an indirect partner.
The Ninth Circuit panel then rejected the Tax Court’s analysis of the issue in light of other sections of TEFRA (which it termed “excursions”) as irrelevant, since “the taxpayers tried to have their cake and eat it too.”
To support its conclusion, the Ninth Circuit cited to a House Conference report and stated that its interpretation was consistent with the purpose of TEFRA, as stated in Woods, which is “to prevent the waste of time, effort and resources such as would occur if the Tax Court’s construction of § 6223(e) was to prevail.” Since the Tax Court’s construction would be contrary to these goals, the Court determined that “under a proper reading of § 6223(e)(3)(B), that the taxpayers’ attempted election was ineffective.” The Court did not explain why, if that is the case, TEFRA contains provisions that allow a partner to opt out of unified partnership proceedings and have his or her partnership items treated as nonpartnership items.
The Ninth Circuit next looked to Treas. Reg. § 301.6223(e)-2T(c)(1), as in effect in the years in issue, which it held was entitled to Chevron deference. That regulation provided that an “election shall apply to all partnership items for the partnership’s taxable year to which the election relates.” The Court rejected the taxpayers’ alternate interpretation of the statute and the regulation as “missing the point of Chevron deference. If the agency’s reading of a statute is a ‘permissible construction of the statute’ that reading and interpretation stands and is entitled to respect.” Thus, the Tax Court’s determination was incorrect and the taxpayers could not opt out of partnership proceedings only as to their indirect interests.
Judge Callahan dissented, noting that the IRS a) failed to give proper notice to the taxpayers of the commencement of TEFRA proceedings, b) did nothing when the taxpayers elected to opt out as to their indirect (but not their direct) partn
ership interest and c) failed to bring timely proceedings against the taxpayers outside of TEFRA. Finding that the statute does not prohibit a “split” election by a taxpayer who holds both direct and indirect interests, Judge Callahan would have affirmed the Tax Court if for no other reason than because the IRS did not inform the taxpayers that they could not bifurcate their election.
Section 7212(a) makes it a felony, corruptly or through threat of force, to impede or obstruct the administration of the internal revenue laws. It provides, in pertinent part:
Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both.
The defendant in United States v. Miner, __ F.3d __ (6th Cir. 2014), promoted and marketed two schemes to assist people in avoiding taxes. One scheme, called “IRx Solutions,” offered to assist taxpayers to amend their Individual Master File (“IMF”) accounts to eliminate the tax owed. Under IRx Solutions, the defendant would show his clients how to write FOIA requests and threatening letters to the IRS in an effort to stall the IRS’s efforts to assess and collect taxes. The second, called “Blue Ridge Group,” helped taxpayers set up “common law business trusts” to hide their assets and avoid tax.
Miner was indicted on one count of corruptly endeavoring to obstruct the due administration of the internal revenue laws in violation of IRC § 7212(a) and two counts of failing to file his own individual income tax returns in violation of IRC § 7203. At the end of the government’s case in chief, Miner move for acquittal under F.R.Crim. Pro. Rule 29 on the grounds that his actions on behalf of his clients were protected by the First Amendment and that the Government failed to show that he acted “corruptly.” The district court denied the motion. Miner testified on his own behalf that he stopped filing returns because he believed that individuals did not have to pay tax on income. He further testified that at the time of the allegedly illegal actions he believed that setting up trusts to shield assets and writing to the IRS to alter IMF accounts were legal.
Miner requested that the district court instruct the jury that he could only be convicted of acting corruptly if he was aware of a pending IRS proceeding when he engaged in the conduct involved. He also renewed his motion under Rule 29. The district court denied the motion and declined to give the requested instruction. Miner was convicted by the jury on all three counts. He was sentenced to 18 months imprisonment for violating IRC § 7212(a) and 12 months on each of the IRC § 7203 counts, to run concurrently. He appealed only the conviction under IRC § 7212(a).
Miner raised three claims on appeal: a) the district court erred in failing to give an instruction that the jury could only convict him if it determined that he was aware of pending IRS proceedings at the time of the alleged violations; b) his actions were constitutionally protected by the First Amendment; and c) the district court erred in allowing the IRS special agent to summarize her investigation and opine on Miner’s state of mind. Although the court found that the district court erred both in failing to instruct the jury as Miner requested and in allowing the special agent to opine over objection, it held that these errors were harmless.
Miner’s principal argument was that an IRC § 7212(a) instruction requires proof that the defendant knew of a pending IRS proceeding and that he intentionally engaged in conduct to impede the IRS’s administration of the Internal Revenue Code. Before addressing Miner’s argument, the Sixth Circuit laid out the ground rules for reviewing his argument: (a) the failure of the district court to give a jury instruction is reviewed de novo, and (b) a failure to give a jury instruction is not reversible if the error is harmless, i.e., if it is beyond a reasonable doubt that, even without the error, the jury would have convicted the defendant
Miner’s argument centered on the Sixth Circuit’s prior decision in United States v. Kassouf, 144 F.3d 952 (1998), in which the court construed IRC § 7212(a) in light of the Supreme Court’s decision in Aguilar, 515 U.S. 593 (1995). In Aguilar, the Supreme Court interpreted similar “corruptly … endeavors to influence, intimidate, or impede” language to require that prosecution prove that the defendant knew of a pending proceeding, since a person “lacking knowledge … necessarily lacks the evil intent to obstruct” required for conviction. According to Miner, the district court erred in failing to give his proffered instruction.
The Government argued that Kassouf was narrowed by a subsequent decision, United States v. Bowman, 173 F.3d 595 (6th Cir. 1999), where the court did not apply Kassouf to a case in which the defendant filed forms with the IRS that falsely reported that his creditors received taxable income. According to the Government, Bowmanlimited Kassouf to its precise facts. Thus the district court did not err in not giving the requested instruction. The Sixth Circuit rejected the Government’s argument. It noted that the Bowman case cited Kassouf and stated that Kassouf did not mean that IRC § 7212(a) was never applicable to defendants who “anticipatorily try to impede the administration of the internal revenue laws before an IRS proceeding has yet been initiated.” Bowman held that IRC § 7212(a) applied because the defendant filing false forms with the IRS which is illegal when undertaken. Since Bowman was the later decision, it was narrower in scope than Kassouf:
The government’s error lies in its characterization of Kassouf as an exception to Bowman, rather than the other way around. To the extent that Kassouf and Bowman conflict, of course, the first-in-time (Kassouf) controls. See Ward v. Holder, 733 F.3d 601, 608 (6th Cir. 2013). And Kassouf and Bowman are less reconcilable than the government asserts. After all, Bowman, in rejecting Kassouf’sapplication to a defendant who was attempting to instigate a frivolous IRS proceeding rather than to impede a preexisting one, did so primarily because it believed that the indicia of intent to impede were patently obvious, even though there was no IRS proceeding pending at the time of the defendant’s conduct. See Bowman, 173 F.3d at 600 (stressing the defendant’s “deliberate filing of false forms with the IRS specifically for the purpose of causing the IRS to initiate action against a taxpayer”). Thus, Bowman rejected Kassouf as erecting an inflexible baseline proxy test for intent–awareness of a pending proceeding–that was under-inclusive as applied to the defendant in Bowman.
But that is exactly the same criticism that the dissents in Kassouf and Aguilar had made earlier, to no avail. See Aguilar, 515 U.S. at 613 (Scalia, J., dissenting); Kassouf, 144 F.3d at 960 (Daughtrey, J., dissenting). Bowman, therefore, is largely predicated upon a rationale that had already lost in this court a year before it was decided.
Thus, although Bowman purported to limit Kassouf to its facts, it would be more accurate to conclude th
at the opposite is true. Kassouf applies, at minimum, to a defendant who fails to keep “records necessary to determine the tax consequences” of personal transactions, “ma[kes] it more difficult to discover and trace his activities by transferring funds between bank accounts before making expenditures,” and “affirmatively misle[ads] the IRS” by filing tax forms that fail to disclose relevant financial transactions and assets. 144 F.3d at 953. Kassouf, in other words, applies to defendants whose conduct in failing to disclose or in peculiarly structuring their income and financial transactions generally makes it more difficult for the IRS to identify and collect taxable funds. Id. Bowman, by contrast, is reducible to a rule that a defendant who intentionally attempts to instigate a frivolous IRS proceeding cannot claim to have lacked the necessary intent to impede the IRS’s administration of its statutory duties with respect to that proceeding. 173 F.3d at 600. As is evident, Bowman is much the narrower of the two decisions.
Miner did not act to institute a frivolous IRS investigation. Thus, his actions were governed by Kassouf: the Government had to prove beyond a reasonable doubt that Miner knew of a pending IRS proceeding when he acted and the district court should have given the requested instruction. Nevertheless, the Sixth Circuit held that the failure to give the requested instruction was harmless since “it appears beyond a reasonable doubt that the error complained of did not contribute to the verdict obtained.” According to the Court, there was ample evidence that Miner was aware of one or more IRS proceedings when he took action on behalf of his clients, including preparing frivolous FOIA requests, preparing frivolous correspondence in response to notices of deficiency, directed third parties to disregard IRS levies and set up trusts to hide assets. This evidence was never disputed by Miner, and at trial he never claimed that he was unaware of IRS proceedings when he engaged in most of his conduct.
The Court next addressed Miner’s argument that as applied to his case IRC § 7212(a) is unconstitutionally vague and overbroad since it reaches conduct protected by the First Amendment. As a result, Miner argued that he could not be convicted because of threats to sue IRS officials or because of the FOIA and Privacy Act requests for information, since by law he is entitled to make these requests. The Sixth Circuit rejected his claim. First, according to the Court, Kassouf’s requirement that the defendant have knowledge of a pending proceeding limits IRC § 7212(a)’s sweep as does the mens rea requirement that the defendant act “corruptly.” Because conduct that is committed “corruptly” is committed for the purpose of obtaining an unlawful benefit or advantage, by limiting its reach to “corrupt” conduct IRC §7212(a) does not affect constitutionally protected conduct.
In rejecting Miner’s First Amendment argument, the Court noted that to the extent that the Government based its claims on Miner’s threats to sue IRS officials, it was incorrect. Had Miner acted to obtain information from the IRS or to set up trusts to secure his clients’ finances in a way he believed was legal, he would not have acted corruptly. Miner, however, acted instead “to keep the IRS away from funds to which he knew it was legally entitled.” Since he acted “corruptly,” his conviction was affirmed.
The final claim was the admission of the special agent’s testimony. This issue was reviewed under the abuse of discretion standard. An error in admitting the evidence could only be reversed if the ruling was not harmless. The Sixth Circuit found one part of the agent’s testimony “troubling”: she testified over objection that letters Miner prepared for clients to send to IRS officials appeared “as though they were sent to impede the IRS.” Over objection, the special agent was also allowed to testify as to why she believed the letters were sent to impede the IRS and not for any legitimate purpose. The Court stated that this testimony was argument and opinion. The Government “should not spoon-fed its theory of the case to the jury through a government agent with an aura of expertise and authority who might prompt the jury to uncritically substitute the agent’s view of the evidence with its own.” Internal quotation marks deleted.
The Court also was troubled because the agent was allowed to opine at length about a mental state that is an element of the offense. The agent should not have been allowed to testify about a mental state that constitutes an element of either the crime charged or a defense. “These matters are for the trier of fact alone.” Since the agent’s testimony violated these evidentiary rules, the district court erred in admitting it.
Nonetheless, the Sixth Circuit held that the district court’s erroneous evidentiary rulings were harmless. First, the testimony only went to Miner’s intent as to the letters he wrote for his clients; the agent did not testify about Miner’s intent in setting up trusts for his clients. Second, there was voluminous evidence properly admitted indicating that Miner was aware of IRS proceedings implicating his clients when he advised them to put assets into the trusts and when he wrote letters to the IRS threatening legal action. Third, Miner’s responses to the IRS were “transparently frivolous,” and there was evidence that Miner knew that they were frivolous. Based on these factors, the Sixth Circuit concluded beyond a reasonable doubt that the jury would have reached the same result on the question of Miner’s intent even without the improper portions of the special agent’s testimony.
The Tax Court has frequently enunciated several rules concerning expert valuation testimony: 1) it may consider expert testimony, but is not bound by any expert opinion; 2) it can accept or reject portions of an expert’s opinion in its sound discretion; and 3) since valuation involves an approximation, “the figure at which we arrive need not be directly traceable to specific testimony if it is within the range of values that may be properly derived from consideration of all the evidence.” Estate of Heck v. Commissioner, T.C. Memo. 2002-34. The Fifth Circuit held that the Tax Court had overstepped the bounds of judicial discretion and the mandate of IRC §7491 in rejecting the opinion of the taxpayer’s experts in Estate of Elkins v. Commissioner, 767 F.3d 443 (5th Cir. 2014).
The decedent was a former president and chairman of Houston’s First City National Bank. He and his late wife were prominent collectors of modern and contemporary art. He and his wife had gifted fractional interests in 3 works of art, which were put in a Grantor Retained Interest Trust. Upon his wife’s death, his children received her 50% interest in these three works of art and the decedent retained the remaining 50% until his death. After his wife’s death, he disclaimed a 26.945% interest in 61 other artworks. This interest was divided among his three children. He retained until his death a 73.055% interest in each of these 61 artworks. He and his children entered into various agreements concerning their respective rights in the artworks, including schedules for each one’s time of possession, and provisions concerning sale of the artworks. These agreements remained in effect at the date of death. The Estate Tax Return listed the decedent’s fractional interest in the artworks and in various other items of real and personal property. It claimed a discounted value in each item in which the decedent owned a fractional interest. The estate paid over $102 million in estate tax. The IRS examined the estate tax return and allowed the fractional interests claimed as to all assets except the 64 artworks. It determined that the estate could not claim any fractional interest discount for the artworks and asserted a deficiency in estate tax of over $9 million.
For purposes of trial, the IRS and the estate stipulated to the undiscounte
d value of the artworks. The estate called three experts: an expert on art markets who testified on the marketability and valuation of art; a lawyer who testified on the nature and costs of partition actions under Texas law; and an expert on the valuation of fractional interests in property. The IRS called no experts for its case in chief, since its theory was that the estate was not entitled to any fractional interest discount. It called two rebuttal experts, one of whom testified that there was no recognized market in fractional interests in art.
The Tax Court in its opinion, 140 T.C. 86 (2013), rejected the IRS’s contention that the estate was not entitled to a fractional-interest discount. The Tax Court did not make any credibility determinations concerning any of the experts. Instead, it found that none of the taxpayer’s experts had considered the effect of the decedent’s owning 79+% of 61 artworks and 50% of the other three artworks and that one of the decedent’s children testified that she would be willing to pay a fair price to keep the artworks. Based on these factors, the Tax Court held that the estate was only entitled to a 10% discount across the board.
Holding that the Tax Court’s decision was not entitled to any special deference, the Fifth Circuit affirmed the Tax Court’s holding that the estate was entitled to a fractional interest discount but reversed its holding that the estate was only entitled to a 10% discount.
In reaching its decision, the Fifth Circuit noted that under IRC § 7491(a), where a taxpayer “introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer … the Secretary shall have the burden of proof with respect to such issue.” Because the Estate had adduced “a plethora of credible and highly probative evidence” as to both the applicability of discounts and the amount of discount to be applied to each artwork, the IRS had the burden of presenting evidence to refute the estate’s evidence. Because it did not present any evidence on the quantum of discount to be applied, the IRS failed to meet its burden.
In its Opinion, the Tax Court announced that burden of proof was unimportant because it was basing its determination on “a preponderance of the evidence.” The Fifth Circuit noted that where both sides present evidence, a court has to weigh the evidence and decide based on the preponderance, but where only one side presents evidence “there is no preponderance.” Given the total absence of evidence to refute the testimony of the estate’s experts, the Fifth Circuit held that the Tax Court should have accepted and applied the discounts the estate proved.
According to the Fifth Circuit, just as there was no viable basis for the IRS’s position that the estate was not entitled to a fractional interest discount, there was no factual or legal basis supporting the Tax Court’s use a of 10% across-the-board discount. Because the estate produced “uncontradicted, unimpeached and inherently credible evidence” in support of its fractional discounts, there was no evidentiary basis upon which the Tax Court could base its conclusion that a 10% nominal discount was appropriate.
The Fifth Circuit found that the Tax Court’s error was “within the last few pages of its opinion … .” This is where the Tax Court found that the decedent’s children, who owned the remaining interests on the date of death, would have been more than willing to buy the decedent’s interest in the art. Given the subjective characteristics of the decedent’s children, it was probable that any willing buyer would have requested additional discounts because the heirs were “sophisticated, determined and financially independent,” making a quick profit by flipping the art to them virtually impossible without a deep discount.
The Fifth Circuit concluded its opinion as follows:
At bottom, we find nothing in this record or in the Tax Court’s opinion that would justify any conclusion other than that the Estate is entitled to a final determination of the estate tax owed that produces a tax refund calculated on the basis of the fractional-ownership discounts and net taxable FMVs set forth on Exhibit B to the court’s opinion. The record on appeal is sufficient for us to render a final judgment and dispose of the sole issue in this case without prolonging it by remand at the cost of more time and money to the parties. Accordingly, we (1) affirm the Tax Court’s rejection of the Commissioner’s insistence that no fractional-ownership discount may be applied in determining the taxable values of Decedent’s undivided interests in the subject art work; (2) affirm the Tax Court’s holding that the Estate is entitled to apply a fractional-ownership discount to the Decedent’s ratable share of the stipulated FMV of each of the 64 works of art; (3) reverse the Tax Court’s holding that the appropriate fractional-ownership discount is a nominal 10 percent, uniformly applied to each work of art, regardless of distinguishing features; (4) hold that the correct quantums of the fractional-ownership discounts applicable to the Decedent’s pro rata share of the stipulated FMVs of the various works of art are those determined by the Estate’s experts and itemized on Exhibit B to the Tax Court’s opinion; and (5) render judgment in favor of the Estate for a refund of taxes overpaid in the amount of $14,359,508.21, plus statutory interest in a sum to be agreed on by the parties, based on the timing of the payment of that refund to the Estate, all as jointly stipulated to us by the parties.
I personally find the Fifth Circuit’s opinion problematic. It ignores the fact that burden of proof consists of 1) the burden of going forward with the evidence and 2) the burden of persuasion. If a party produces evidence sufficient to meet its burden of going forward, then the burden of going forward shifts to the opposing party. The burden of persuasion does not change. The fact that the opposing party does not come forward with evidence does not mean it losses. If the court finds the evidence introduced by the party that has the burden of persuasion to be unpersuasive or not credible, then it can rule for the opposing party. A party who does not have the burden of persuasion can also meet its burden of going forward with the evidence through the other party’s witnesses and documentary evidence. Thus, the fact that the IRS did not produce any evidence in its case in chief did not compel the Tax Court to find for the estate.
The Fifth Circuit also overlooked the fact that the discount issue had two subparts: first, was the estate entitled to a fractional interest discount, and second, what was the appropriate discount? The question of the appropriate discount, like any opinion of value, is just that: an opinion. Like all opinions, it is highly subjective. And the Fifth Circuit rejected the Tax Court’s finding that the decedent’s children would have been willing to purchase the artworks.
Despite these problems, there are some things you should take away from this case: a party should never rest on the other side having the burden of proof, unless the other side has insufficient evidence to prove one or more elements of its case. In that situation, the party should consider filing a motion for summary judgment. If the party with the burden of proof has sufficient evidence to make out a prima facie case, you should have the ability to undermine the credibility of their evidence and be prepared to present evidence on your client’s behalf.
In 2010, Congress enacted the Firearms Excise Tax Improvement Act, which added IRC §§ 6201(a)(4) and 6213(b)(5) to the Code. Those sections allow the IRS to assess a restitution order based on a tax loss as if it was a tax and dispense with the requirement for a notice of deficiency prior to assessment. In Muncy v Commissioner, T.C. Memo 2014-251, the Tax Court addressed the interplay of these provisions with the deficiency provisions of the Code.
In 2001, the taxpayer pled guilty to tax evas
ion for 2004, in violation of IRC § 7201. The district court sentenced the taxpayer to probation, conditioned upon his filing tax returns, and initially deferred determining restitution. Several months after the taxpayer was sentenced, the Court entered its order requiring the taxpayer to pay restitution to the IRS of $43,275 for 2003, $57,878 for 2004, and $53,587 for 2005. The IRS thereafter issued a notice of deficiency to the taxpayer for 2000 through 2005. The proposed deficiencies were the amounts determined by the IRS to be his correct tax less the amounts ordered as restitution for 2003, 2004, and 2005. Three weeks after the notice of deficiency was issued, the IRS assessed the restitution amounts under IRC § 6201(a)(4).
The IRS answered the petition and subsequently filed an amended answer. The amended answer asserted that the amounts of deficiency for 2003, 2004 and 2005 were the amounts determined to be the correct amounts of tax without reduction for the restitution amounts. The taxpayer argued that the restitution amounts were in full settlement of his tax liabilities for 2003, 2004 and 2005. He also made frivolous arguments that the IRS did not have authority to assess tax against him since he was a sovereign person and not a citizen of the United States, amongst other tax protestor type arguments.
The taxpayer argued that the restitution order determined his liabilities for 2003 through 2005 and that the IRS was collaterally estopped from relitigating the amounts owed for those years. The Tax Court rejected this argument. The specific amounts of liability for 2003, 2004 and 2005 were not essential elements of the Government’s criminal case and the amount of the liability was not actually litigated. As a result, the IRS was not collaterally estopped. The taxpayer also argued that the IRS should not be allowed to increase the deficiencies for 2003 through 2005, but instead the amount of tax owed should be reduced by the amounts of restitution.
The Tax Court held that the IRS had met its burden of proof as to the increased deficiencies. The question was whether the IRS should be required to reduce the deficiencies by the amounts of restitution previously ordered by the district court. Before the enactment of IRC § 6201(a)(4), the Tax Court had held that amounts paid as restitutions are not amounts previously assessed as a deficiency; thus, they could not reduce a deficiency determination. I will quote at length from the Tax Court’s analysis of why an assessment under IRC § 6201(a)(4) does not reduce the amount of a subsequent deficiency determination:
The enactment of sections 6201(a)(4) and 6213(b)(5) follows the logic of both the restitution statute and the Court’s prior holding. Section 6201(a)(4) applies to restitution orders entered after August 16, 2010, and provides that the Service “shall assess and collect the amount of restitution under an order * * * for failure to pay any tax imposed under * * * [title 26] in the same manner as if such amount were such tax.”
The plain language of section 6201(a)(4) states that the IRS shall assess and collect restitution previously ordered by a District Court “in the same manner as if such amount were such tax.” (Emphasis added.) This language is almost identical to the language in section 6305(a), which provides that the IRS shall assess and collect amounts certified by the Secretary of Health and Human Services as delinquent spousal and child support payments “in the same manner * * * as if such amount were a tax imposed by subtitle C”. Section 6305(b) goes on to state that delinquent spousal and child support payments assessed and collected by the IRS “as if” they were a tax under that provision are not subject to judicial review by the Tax Court–or any other Federal Court, for that matter. In other words, delinquent spousal and child support payments assessed under section 6305 “as if” they were a tax are not assessed “as a deficiency”. See Murray v. Commissioner, 24 F.3d 901, 903 (7th Cir. 1994) (“Unlike a summary assessment, a deficiency assessment requires the IRS to follow a number of statutory steps before it may undertake to collect the deficiency.”); see also Prestwich v. IRS, 796 F.2d 582, 584 (1st Cir. 1986) (” Section 6305(b) therefore reflects the logical intent of Congress to keep the IRS from becoming embroiled in matters between states and individuals in which the federal agency has no direct involvement.”).
Another reference point for the analysis of the plain language in section 6201(a)(4) is section 6665(a)(1), which provides that additions to tax, additional amounts, and civil penalties “shall be assessed, collected, and paid in the same manner as taxes”. (Emphasis added.) We believe the distinction between “as if” and “as” is significant. Although this provision requires deficiency procedures for some additions to tax (e.g., for failure to report tips under section 6652(b)), section 6665(b) goes on to say that certain additions to tax are not assessed, collected, and paid in the same manner as taxes and the regular deficiency procedures for assessment and collection do not apply to them. See sec. 6665(b) (“For purposes of subchapter B of chapter 63 * * * subsection (a) [of section 6665] shall not apply to any addition to tax under section 6651, 6654, [or] 6655[.]”). Instead, these other additions to tax are summarily assessed. Meyer v. Commissioner, 97 T.C. 555, 559-560 (1991). Similarly, section 6213(b)(5), which applies to notices of assessments of restitution, states that regular deficiency procedures do not apply to amounts of restitution assessments. See sec. 6213(b)(5)(B) (“If the taxpayer is notified that an [*15] assessment has been or will be made pursuant to section 6201(a)(4) * * * subsection (a) [of section 6213, pertaining to the procedures to challenge a deficiency in Tax Court] shall not apply with respect to the amount of such assessment.”). Although neither section 6201(a)(4) nor section 6213(b)(5) explicitly states that assessed restitution amounts may not be considered in the definition of a deficiency under section 6211, we believe common sense dictates that they not be included as “amounts previously assessed * * * as a deficiency” for purposes of that section. Furthermore, the legislative history of section 6201(a)(4) follows this reasoning. Specifically, the legislative history states that section 6201(a)(4) will allow the IRS “to assess and collect, in the same manner as delinquent taxes * * *, mandatory orders of restitution”. 156 Cong. Rec. 12032 (2010) (emphasis added). That being said, we believe the “as if such amount were such tax” language of section 6201(a)(4) is significant and does not share the same meaning as “in the same manner as taxes.” Instead, the “as if” language was intended to empower the IRS to collect court-ordered restitution for criminal tax cases without following regular deficiency procedures.
The Joint Committee on Taxation’s general explanation, also known as the Blue Book, provides some guidance on the question as well. See Staff of J. Comm. on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, at 459-461 (J. Comm. Print 2011). The Joint Committee states that although an “amount of restitution ordered is computed by reference to the taxes that would have been owed but for the criminal offenses charged, restitution is not itself a determination of tax within the meaning of the Code and does not provide a basis on which tax may be assessed.” Id. at 461.
Thus, a taxpayer’s tax liability is assessed separately from restitution and in fact may exceed amounts of restitution ordered for the year or years in question. See Morse v. Commissioner, 419 F.3d at 834; Gillum v. Commissioner, T.C. Memo. 2010-280, aff’d, 676 F.3d 633 (8th Cir. 2012). This comports with the purpose of the statute, which is not intended to be a radical departure from the way restitution was previously collected for criminal tax cases for failure to pay tax imposed under title 26. See H.R. 5552, 111th Co
ng., Preamble (2010) (“to provide for the assessment by the Secretary of the Treasury of certain criminal restitution”). Rather, the statute is intended to enhance the IRS’ and the Treasury Department’s collection capabilities when restitution is ordered. 156 Cong. Rec. 12031 (“The bill would also allow the IRS to collect restitution debt that has been court ordered to be paid in criminal tax cases.”). Before the enactment of the statute, collection responsibilities were shared among the District Court that ordered restitution, the Financial Litigation Unit of the local U.S. Attorney’s Office, and the Service. See Staff of J. Comm. on Taxation, supra, at 460. Now, in addition to that collection mechanism, the statute allows the Service to immediately assess the restitution without issuing a statutory notice of deficiency and collect (as if it were a tax) the court-ordered restitution. See secs. 6201(a)(4), 6213(b)(5).
Petitioner was ordered to pay restitution for failure to pay tax imposed under title 26 for tax years 2003 through 2005. Because the order was entered after August 16, 2010, section 6201(a)(4) applies. Firearms Excise Tax Improvement Act of 2010, Pub. L. No. 111-237, sec. 3(c), 124 Stat. at 2498. Although respondent assessed the restitution before our decision–that is, the restitution was “previously assessed”, respondent did not assess the restitution “as a deficiency”. Instead, the restitution was summarily assessed. Therefore, we conclude and hold that petitioner’s criminal plea agreement and judgment ordering restitution did not discharge, and do not reduce, petitioner’s deficiencies for tax years 2003 through 2005. We sustain respondent’s deficiency determinations on the notice of deficiency for tax years 2000 through 2002 and sustain the increased deficiencies asserted in respondent’s amendment to answer for tax years 2003 through 2005.
The Tax Court also held that the taxpayer was liable for fraud, failure to file and failure to pay penalties and, due to the frivolous arguments he raised throughout the proceedings, for the frivolous position penalty of IRC § 6773(a)(1).
There are many things a taxpayer can do that can extend the statute of limitations on collection in addition to signing a consent to extend the time to collect tax. Besides filing a petition in bankruptcy and submitting an offer in compromise, a taxpayer can inadvertently extend the statute of limitations by leaving the United States for an extended period of time. Section 6503(c) provides:
The running of the period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period during which the taxpayer is outside the United States if such period of absence is for a continuous period of at least 6 months. If the preceding sentence applies and at the time of the taxpayer’s return to the United States the period of limitations on collection after assessment prescribed in section 6502 would expire before the expiration of 6 months from the date of his return, such period shall not expire before the expiration of such 6 months.
In Reinhart v. Commissioner, T.C. Memo 2014-218 (2014), the Court dealt with whether under IRC § 6503(c), the IRS’s filing of a notice of federal tax lien on March 15, 2011, for a trust fund recovery penalty assessed on July 15, 1993, was timely. The Tax Court held that it was not.
The taxpayer and her husband resided in Florida prior to June 2002. Her husband and an attorney, Mr. Uhrig, were partners in a business that provided trust formation and incorporation services. The taxpayer had a bookkeeping service in Florida. She performed bookkeeping services for the trust/incorporation business, for Mr. Uhrig and for other clients. In June 2002, her husband rented an apartment in the Bahamas and the taxpayer began to reside on a boat moored in Fort Pierce, Florida. After the boat was destroyed by a hurricane in 2004, she moved in with her in-laws in Florida. In May, 2005, she moved into a condominium, where she resided until 2006, when she took up residence in a recreational vehicle that was parked in a small town in Florida until 2011.
The taxpayer and her husband filed a late joint return for 2001 and joint returns for 2002, 2003, and 2004. The returns listed the husband’s apartment in the Bahamas as their address. The 2004 return had a Schedule C for the taxpayer that listed a Bahamian mailing address. Records from the Department of Homeland Security showed that the taxpayer had entered the United States over 90 times between January 2001, and July 2011.
On July 26, 1993, the IRS filed a notice of federal tax lien against the taxpayer. It did not timely re-file a lien notice. In February 2011, it filed a new tax lien notice against the taxpayer. It mailed the CDP notice to an address other than her last known address, which was a post office box in Florida. In March 2011, it mailed a second CDP notice to the taxpayer. After the taxpayer received the second CDP notice, she timely protested. The IRS Appeals Office sustained the filing of the notice of federal tax lien. The taxpayer petitioned the Tax Court.
After reciting the facts, the Tax Court began its discussion by noting that the bar of the statute of limitations is an affirmative defense. The party raising the defense must plead and prove it. Since the notice of federal tax lien was filed more than ten years after the assessment, the taxpayer had met her initial burden. Thus, the IRS had the burden of presenting evidence that the statute of limitations had not expired.
In Jordan v. Commissioner, 134 T.C. 1 (2010), the Tax Court held that a challenge to the ten-year period of limitation on collection is a challenge on the underlying liability. A taxpayer cannot challenge the underlying liability if she was sent a notice of deficiency or if she otherwise had an opportunity to dispute the underlying liability. Rejecting the IRS’s contention that any review had to be under the abuse of discretion standard, the Tax Court held that since the taxpayer did not have an opportunity to dispute the underlying liability based upon the expiration of the period of limitations on collection, it would review de novo whether collection was barred.
The IRS asserted that under Treas. Reg. § 301.6503(c)-1(b), a taxpayer is deemed to be continuously absent if she is “generally and substantially absent” despite “casual temporary visits” to the United States. The IRS asserted that based on the taxpayer’s frequent absences from the United States, plus the fact that she signed a deposition in a district court case in 2006 in which she stated that she lived with her husband in the Bahamas and that the condominium she purchased in 2005 was not meant to be her residence, under the Regulation she was continuously absent from the United States for the entire period from 2001 through 2011. Therefore, the statute of limitations on collection was tolled. The taxpayer contended that the statute was clear and unambiguous and, therefore, the regulation was invalid under Chevron. The Tax Court sidestepped the issue of the regulation’s validity since, based on its interpretation of the facts, the taxpayer was not continuously absent even under the regulation.
The Tax Court found credible the taxpayer’s testimony that she resided in Florida throughout the period in issue. It also found credible the taxpayer’s testimony that she frequently visited her husband in the Bahamas for several days at a time, and accepted her explanation that she testified as she did in the district court case because she understood the question to be where she lived with her husband, not where she resided. She further testified that the joint returns listed a Bahamas address because that was where her husband lived and he was the primary income-earner. The taxpayer’s credibility was bolstered by her producing documentary evidence showing her paying monthly rent for a boat slip until 2004 and for the place where her recreational vehicle was parked f
rom 2006 until 2011. It was further bolstered by testimony of Mr. Uhrig concerning her doing bookkeeping work for him in the United States.
Rejecting the IRS’s argument that the taxpayer was out of the United States continuously from 2002 until 2011, and finding the taxpayer’s testimony credible and supported by other evidence, the Tax Court held that statute of limitations barred the filing of the notice of federal tax lien.
Congress enacted §7436 to give the Tax Court jurisdiction over certain types of employment tax disputes. In American Airlines, Inc. v. Commissioner, 144 T.C. 2 (2015) the Tax Court addressed whether its jurisdiction was limited to cases in which worker classification was an issue.
American Airlines hires foreign flight attendants to staff its foreign routes, including flights between Miami and South American cities. The attendants are hired and paid by foreign branch offices of American Airlines. The attendants are paid on a “block to block” basis for their time from when the plane left the blocks at the departure gate to when it arrived at the blocks at the destination gate. They were in the United States only during flight time over the United States, pre and post flight time in Miami, rest time and for required FAA training. American Airlines never withheld U.S. income or FICA tax from wages paid the foreign flight attendants and never paid U.S. employment tax on wages paid to the foreign flight attendants.
The IRS audited American Airlines for 1992 – 1996 and determined that it was liable for employment and withholding tax on wages paid the foreign flight attendants. American Airlines protested. IRS Appeals determined that the company was entitled to relief from employment tax under § 530 of the 1978 Revenue Act and would continue to be entitled to such relief in the future.
The IRS audited the company for 2003 and 2004 and determined that it was liable for employment taxes on wages paid foreign flight attendants. Although American Airlines argued that it was entitled to relief under § 530, the IRS in a TAM and in the 30-day letter held that § 530 did not apply since it was not worker classification case. Appeals upheld the proposed assessment. The Appeals Case Memorandum addressed § 530 and held that it did not apply because the case was not a worker classification case. The IRS assessed $3.85 million in employment tax without issuing a notice of determination of worker classification. The company paid the tax and filed a refund claim, which was denied in August 2013. American Airlines has not filed a refund suit.
As an alternative position, the IRS issued a notice of deficiency to the company determining that it was liable for a 30% withholding tax on funds paid the foreign flight attendants under IRC § 1441. American Airlines petitioned the Tax Court, contesting both the notice of deficiency and its liability for employment taxes. It moved for partial summary judgment to hold that the Tax Court had jurisdiction under IRC § 7436 to determine the employment tax issue. The IRS moved for partial summary judgment that the Tax Court did not have jurisdiction over the employment tax issue, since the case did not involve a determination of worker classification.
The Tax Court focused on the language of IRC § 7436(a), which provides in part as follows:
If, in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination that–
(1) one or more individuals performing services for such person are employees of such person for purposes of subtitle C, or
(2) such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual, upon the filing of an appropriate pleading, the Tax Court may determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination.
According to the Tax Court, there were four requirements for it to have jurisdiction over a case under IRC § 7436(a)(2): a) there must be an examination in connection with the audit of “any person;” b) the IRS must determine that “such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual;” c) there must be an actual controversy involving the determination as part of the examination; and d) the appropriate pleading must be filed with the Tax Court. The parties agreed that the first and fourth requirements were met, but disagreed on whether the second and third requirements were met.
Turning to whether there was an actual controversy, the Court stated that it was clear from the record. The issue of the applicability of §530 was an issue in the audit of 1992 – 1996 and in the audit of 2003 and 2004. After the 30-day letter was issued, American Airlines protested and claimed relief under § 530. The Appeals Office considered the issue, as described in its Appeals Case Memorandum.
The IRS argued that for IRC § 7436(a)(2) to apply there must also be a controversy regarding employment status. The Court rejected this argument based on the plain language of the statute, which only requires an actual controversy regarding whether the taxpayer is entitled to Section 530 Relief.
The Tax Court next addressed the question of whether there was a determination. Under SECC Corp. v. Commissioner, 142 T.C. 2 (2014), the lack of a written notice of determination of worker classification does not bar Tax Court jurisdiction. Jurisdiction exists whenever there is a determination. There is no need for a particular format for the determination. “In this case, respondent’s assessment of employment taxes was obviously a memorialization of his determination.” In the 1992-1996 audit, Appeals determined that American Airlines was entitled to relief under § 530 and should be entitled to such relief in the future. During the audit of 2003-2004, the IRS at least three times (in the TAM, the 30-day letter and the Appeals Case Memorandum) “iterated his position that petitioner was not entitled to Revenue Act 1978 section 530 relief.” The decision to assess employment tax was preceded by a determination rejecting American Airlines §530 claim.
The Court then turned to the IRS’s argument that the lack of a worker classification determination bars jurisdiction. There is no need for a worker classification determination for jurisdiction under subsection (a)(2). The title of the section, “Proceedings for Determination of Employment Status,” is not determinative, since a statute’s title cannot limit the plain meaning of the text. The text of IRC § 7436(a)(2) does not limit the determination regarding § 530 to situations where worker classification is an issue. Because disjunctive “or” is used between subsections (a)(1) and (a)(2), it was clear to the Court that there is no need for a worker classification determination if § 530 is involved. According to the Court, if a worker classification determination was required for jurisdiction under subsection (a)(2), then the subsection would be rendered superfluous.
The Court found that nothing in section IRC § 7436 limits its jurisdiction to cases where the IRS made a determination of worker classification. It therefore granted American Airlines’ motion for partial summary judgment and denied the IRS’s motion.
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y A. Hopley
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|Past Committee Chairpersons:2014 LaVonne D. Lawson
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2010 Michael R. E. Sanders
2009 Kornelia Davidson
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2005 David B. Porter
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Q2 2015 Issue: April 15, 2015
1 IRS Publication 1660 (Rev. 10-2012), Catalog Number 14376Z
4 I.R.M. § 126.96.36.199.3
5 I.R.M. § 188.8.131.52.4
6 I.R.M. § 184.108.40.206
7 See King’s Discharging Taxes in Bankruptcy, Part 2, Discharging Taxes in Chapter 7, and Part 3, Discharging Taxes in Chapter 13.
8 11 U.S.C. § 523(a)(1)(B)(i) and (ii).
9 Except in those jurisdictions in the Fifth Circuit In re McCoy, 666 F.3d 924 (5th Cir. 2012), line of cases, discussed infra.
10 Not to be confused with the “Transcript of Return,” which the debtor is required to provide to the trustee if the return itself is not available. 11 U.S.C. § 521(e)(2)(A).
11 Although, the IRS now has a way to obtain the transcripts electronically. SeeIRS.gov for details. The author finds it too cumbersome to use.
12 They will usually fax them while you hold the phone.
13 Outside the Ninth Circuit the cases are split on this question. The most recent opinion addressing it is the Tenth Circuit case, In re Mallo, __F.3d __ (10th Cir. 2014), 2014 WL 7360130, adopting the McCoy rule.
14 This presumes that the returns were valid Form 1040 returns that contain the math necessary for the IRS to assess the taxes, are signed under penalty of perjury, etc. See the 4-pronged test found in Beard v. Commissioner, 793 F.2d 139 (6th Cir. 1986), followed by the majority of courts.
15 The information on the transaction codes is found in the IRS publication Document 6209 – ADP and IDRS Information, 2014.
16 Code “599” usually suggests a 1040, but in some cases it does not. Similarly, codes 806 and 610 with a dollar amount suggest a 1040. The 610 code indicates “Credits the tax module with a payment received with the return.” Any of these codes should prompt you to contact the Priority Hotline to verify.
17 Keep in mind to be dischargeable the assessment must be more than 240 days before the petition date in order to satisfy the 240-day rule prescribed by 11 U.S.C. § 507(a)(8)(A)(ii) (one of the five rules).
18 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
19 The text McCoy points to is “(including applicable filing requirements)” found in the hanging paragraph attached to 11 U.S.C. § 523(a)(19).
20 For IRS taxes this would be April 15, or October 15, of the following year.
21 See Notice of Office of Chief Counsel CC-2010-016, Litigating Position Regarding the Dischargeability of Tax Liabilities Reported on Late-Filed Returns and Returns Filed After Assessment, dated September 20, 2010.
22 Martin, fn. 6
23 Smith, fn.1
24 For example, Izzo v. United States, 287 B.R. 158, 162 (Bkrtcy.E. D.Mich. 2002) (“The IRS argues that if the debtor’s amended returns had resulted in an increase in his liability, they would have possibly served a tax purpose. However, there is simply no basis for the Court to conclude that returns which increase a taxpayer’s liability serve a purpose under the tax code while returns that have the effect of reducing a taxpayer’s liability do not.”). Same ruling, In re Colsen, 311 B.R. 765 (Bankr. N.D. Iowa, 2004).