California Journal of Tax Litigation, Second Quarter 2015

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A Publication of the Tax Procedure & Litigation Committee
Taxation Section of the State Bar of California

Q2 2015 Edition

In This Edition

Interested in learning more about the TPL Committee? Send an email message to Chair Joseph P. Wilson,

Message from the Chair

Joseph P. Wilson
Wilson Tax Law Group

Greetings to the Tax Procedure and Litigation Committee!

During our last meeting at the California Board of Equalization (“BOE”) Headquarters in Sacramento, we heard a wonderful presentation from BOE Senior Tax Counsel Anthony S. Epolite.

During the program, we gained valuable insight and practice pointers about handling income tax appeals before the BOE. We again want to thank the BOE staff and Mr. Epolite who made this possible, and for their graciousness in hosting us for the entire day.

Speakers at the Upcoming May 29th Meeting in Los Angeles

The next meeting of the Tax Procedure and Litigation Committee will be Friday, May 29, 2015, in Los Angeles at Greenberg Traurig LLP (address shown below) from 10:30 a.m. to 3:30 p.m.:

Greenberg Traurig LLP
1840 Century Park East
Suite 1900
Los Angeles, CA 90067

We plan to host a panel discussion on negotiation of plea agreements in criminal tax cases.

The speakers will include Paul Rochmes (Assistant US Attorney, Tax Division, US Attorney’s Office – LA), Sharyn M. Fisk (Law Office of Sharyn M. Fisk) and Robert S. Horwitz (Former DOJ Tax Attorney & Chair Elect, Executive Committee, Tax Section, CA State Bar). It should be a wonderful and unique program.

We want to extend a hearty thank you to Courtney Hopley, Esq. and the Greenberg Traurig law firm for allowing us to hold our meeting at their offices.

Reservations are necessary and must be received no later than 12:00 noon on May 22, 2015. Please RSVP to Joseph P. Wilson at If you cannot attend in-person, but still wish to participate, the call-in telephone number is 530-881-1212 and meeting ID is 545-104-063.

Election of New Officer

This will my second-to-last meeting as Chair, and I would like to take this opportunity to thank the standing officers of the Committee for their continued hard work and dedication. Without them the meetings, programs and California Journal of Tax Litigation of the past year would not have been so successful. Chair-Elect Courtney Hopley, 1st Vice-Chair and Secretary Carolyn M. Lee and 2nd Vice-Chair and Editor Kevan P. McLaughlin are all doing outstanding jobs, and we are fortunate that they will be continuing in new roles next year.

During the September meeting held in San Francisco, we plan to elect a new officer for 2nd Vice-Chair & Editor. Those interested in this position should let me know in advance, and plan to attend the meeting.

Topic for the 2015 Annual Meeting of the California Tax Bard and California Tax Policy Conference 
(November 4-6, 2015 Hilton Torrey Pines, La Jolla, CA)

We hope that everyone is planning to attend the Annual Meeting in La Jolla. Our Committee is sponsoring and cosponsoring the following programs at the 2015 Annual Meeting: (1) Criminal Tax Workshop; (2) Advanced Tax Court Litigation Boot Camp, Part 1: Qualifying and Effectively Using an Expert at Trial; (3) Transfer Pricing Hot Topics; (4) Partnership Liability Allocations; (5) Advanced Tax Court Litigation Boot Camp, Part 2: Advocating for Your Client at Trial; (6) Effective Resolution Strategies for Federal and State Audits and Appeals; (7) Federal Procedural Roundtable; (8) Life Insurance – Exchanges and Material Changes; (9) Like-Kind Exchanges – Updates/Hot Topics; and (10) International Tax Audit & Appeals Including Statute of Limitations in the International Context. Many are working very hard to make this program a success. We hope to see you there.

California Tax Lawyer

If you would like to have a “Quick Point” included in the upcoming issue of the California Tax Lawyer, send me any brief technical updates, procedural updates, observations on practice or policy matters, and commentaries you may want to include.

California Journal of Tax Litigation

We continue to solicit articles for upcoming editions of our California Journal of Tax Litigation. Please contact Kevan P. McLaughlin at if you would like more information about submitting articles for our next edition. The Journal continues to include wonderful information relevant to our members.

Bring Your Camera to The Quarterly Committee Meetings

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

Hot Topics

Thanks to all those who have helped make Committee meetings successful and fun. Please come armed and dangerous with “Hot Topics” for our upcoming meeting. Our members continue to lead, teach and provide insight in our field, so there is much to discuss.

I hope to see you in Los Angeles!

Joseph P. Wilson, Wilson Tax Law Group
Chair Tax Procedure and Litigation Committee

Minutes of the January Tax Procedure & Litigation Meeting

Carolyn Lee
Abkin Law LLP
Tax Procedure & Litigation Committee Secretary

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. Carolyn is also an adjunct professor in Golden Gate University School of Law LL.M Tax program, teaching Professional Responsibility for Tax Professionals and Federal Tax Procedure. Carolyn Lee, Abkin Law LLP, San Francisco, CA, 415-956-3280,

The first 2015 quarterly meeting of the Tax Procedure & Litigation Committee was conducted on January 23, 2015 at the offices of the California Board of Equalization in Sacramento, California.

Committee Chair Joe Wilson brought the meeting to order. Wilson called the members’ attention to the latest issue of the Committee’s California Journal of Tax Litigation. Members were encouraged to submit Journal articles to Editor Kevan McLaughlin.

Wilson introduced featured speaker Anthony S. Epolite, Tax Counsel, Board of Equalization (“BOE”). Mr. Epolite spoke about the FTB and BOE processes for appealing a decision by the FTB. The presentation included insight into the purpose of the appeals requirements and many practical tips for an efficient and effective appeal.

In other business, Wilson announced upcoming California Bar Taxation Secti
on conferences and meetings. Among the meetings he promoted was the Second Annual California Young Tax Lawyers Annual Meeting was scheduled for March 9, 2015.

Wilson led an extended and lively discussion of topics of interest and possible speakers for the 2015 California Bar Annual Meeting (all practice areas) and the Taxation Section Annual Meeting. This was followed by the traditional round of Hot Topics.

The minutes of the Committee’s November 7, 2014 meeting were approved unanimously by voice vote. There being no other business, Wilson adjourned the meeting.

Key Dates

Quarterly Meeting of the Tax Procedure & Litigation Committee
Greenberg Traurig LLP, Los Angeles, CA
May 29, 2015, 10:30 a.m. – 3 p.m.

2015 Annual Income Tax Seminar
San Diego, Costa Mesa, and San Francisco, CA 
June 25 and June 26, 2015

Q3 2015 California Journal of Tax Litigation Submission Due Date
July 15, 2015

2015 Annual Meeting of the California Tax Bar and California Tax Policy Conference
La Jolla, CA 
November 4-6, 2015

Tax Alerts: IRS Change Makes it Easier to Levy All Your Assets

Joseph P. Wilson
Wilson Tax Law Group, APLC

Joseph P. Wilson is a former Federal tax prosecutor, trial attorney for the IRS, and trial attorney for the FTB. Mr. Wilson has litigated a wide variety of civil and criminal tax cases in the United States Court of Appeals for the Ninth Circuit, U.S. Tax Court, California Board of Equalization, CUIAB and Property Tax Assessment Appeals Boards. Mr. Wilson currently serves as the Tax Procedure & Litigation Committee Chair. Josph P. Wilson, Wilson Tax Law Group, APLC, Newport Beach, CA, 949-397-2292,

There was an important recent change to the format of the IRS’s “final” Notice of Intent to Levy that all tax practitioners and clients should be aware of. Most of us tax geeks are well aware of the difference between a regular IRS collection notice and a “final” Notice of Intent to Levy that includes the right to a collection hearing under IRC § 6330. This is something that typically confuses the client, but not the tax practitioner. However, the IRS very recently changed the format of the “final” Notice of Intent to Levy and the new version of the “final” notice looks very much like a regular IRS collection notice. As a result, tax practitioners might, at first glance, be as confused as their clients.

It is unclear why the IRS made this non-publicized change to the “final” Notice of Intent to Levy, but it is definitely more difficult now to tell the difference between the “final” notice and a regular collection notice. As a result, it is recommended that tax practitioners and clients pay extra special attention to their IRS collection notices because the consequences can be dire. Tax practitioners can no longer advise their clients to lookout for the IRS collection notice that says “final” or “right to a hearing” on the front page of the letter because the newer version contains no such language on the front page.

It should be noted that the current revision of the “final” Notice of Intent to Levy appears to only apply for notices issued by the IRS Automated Collection Systems (ACS). ACS has stopped using Letter 1058-C “Final Notice of Intent to Levy,” and instead, is using Notice LT11. I understand that Revenue Officers may still be using Letter 1058. This will make it extra confusing because one division of the IRS will be issuing a “final” Notice of Intent to Levy that looks completely different than the same notice being issued by the other divisions of the IRS. Additionally, it is also unclear whether the IRS will change the format of the “final” Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC § 6330. Previously the “final” notice given for a federal tax lien under IRC § 6320 and the “final” notice given for federal tax levy under IRC § 6330 used a similar format, making it easier to spot the “final” notice regardless of whether the letter related to a tax lien or tax levy. This is no longer the case.

Obviously this is a rather important change as the “final” Notice of Intent to Levy is the letter that every tax practitioner is on the lookout for in order to freeze IRS collection enforcement by filing a Collection Due Process or Equivalent Hearing. IRS Notice LT11 looks fairly similar to the CP501, CP503, or a CP504 “Notice of Intent to Levy”. The IRS CP notices of course do not trigger collection due process appeal rights and if you fail to respond to these notices it will not generally result in an IRS levy aside from tax refunds and other very limited sources. However, if you fail to respond to LT11 the IRS can levy most assets after the waiting period.

It appears that the LT11 notice has been around for a while. I have never seen this notice in action until just recently when a client forwarded it to me. The IRS didn’t send me a copy of the Notice LT11 even though I am listed on the Power of Attorney (POA). Just another reason why I always make my clients forward me copies of any tax notices they receive even though the tax authorities are supposed to send the POA the same notices. Upon receipt of Notice LT11 from my client I pulled her tax account transcripts to check the activity on her account. Interestingly, there was nothing in the account transcript indicating that she was issued Notice LT11 or notified of any collection appeal rights. I went to the IRS website and ran a search of the Notice LT11. The webpage discussing Notice LT11 was recently updated on February 15, 2015. It appears to be a very recent change. Perhaps the IRS is having some hiccups with the initial roll out of this notice, which might explain, but certainly not justify, why the IRS did not send the POA a copy of the notice or why my client’s tax account transcript didn’t reflect that the IRS issued the notice.

The bottom line is that ACS is now using Notice LT11 instead of Letter 1058-C. The new Notice LT11 looks very much like a regular IRS collection notice so it can be misleading even to the tax practitioner. The regular notices do not contain collection appeal rights and if you don’t respond to the regular notice the IRS cannot levy all of your client’s assets. However, Notice LT11 is no regular IRS collection notice. If you fail to file a collection appeal the IRS can levy most assets. So be careful and do not miss the collection appeal deadline thinking the LT11 notice is just a regular IRS collection notice.

Letter 1058 makes clearer on its face that the notice is the “final” collection notice before the IRS will levy most assets and that the taxpayer has a right to file a collection appeal due process appeal. Notice LT11 does not. Unlike Letter 1058, Notice LT11 does not explicitly state on the front page that the taxpayer has “collection appeal rights under 6330” and, unlike Letter 1058, Notice LT11 does not state on the front page that it is the “final” collection notice. You have to read the fine print on the subsequent pages to figure this out. It sort of resembles a notice from a predatory lending company. Notice LT11 makes it very difficult to initially realize that it is the “final” Notice of Intent to Levy and that collection due process appeal ri
ghts follow. Because the IRS is shifting its practices and it is unclear how many people know about this extremely important change, tax practitioners and clients are advised to keep an even closer eye on any collection notices issued by the IRS.

Practice Pointers: Top 3 Mistakes Lawyers Make in Marketing Themselves

Katy Goshtasbi, JD
Puris Personal Brand Solutions

Katy Goshtasbi is a former securities lawyer, having practiced at the SEC, lobbied on The Hill, worked at a major law firm and practiced in-house as investment counsel. Since then she has run an international personal brand development company, and has written the best-seller, “Personal Branding In One-Hour For Lawyers” (ABA Publications, 2013). Katy Goshtasbi, JD, Puris Personal Brand Solutions, San Diego, CA, 949-274-6423,

As a former securities lawyer turned personal branding expert, I can tell you I get the pain of practicing law, juggling family and having to be seen and heard in an effort to market your practice. It’s not so easy being good at all things, all the time. Over the years, here’s what I’ve discovered are the top three mistakes lawyers make in marketing themselves.

1. We Don’t Think We Need to Market Ourselves

This is a very common problem. Often we feel that because we are professionals and rely on our intelligence, we don’t feel we should have to “sell” ourselves. How tacky, right? The hidden problem is that we often don’t know how to, or are uncomfortable to, market ourselves. Here’s how I distinguish the two concepts for lawyers. There is healthy self-promotion and then there is bragging.

Healthy self-promotion is always about the other person. How are you a stand for them being better?

Self-promotion is fine if it means you are explaining your uniqueness, raising awareness and thereby, explaining how you can help your target market. How else will you let people know what you do and how you can help them live a better life and run a better business?

Bragging is when you no longer care about helping others, but looking to gain praise and be better than others. Bragging is what makes us feel nauseous and uncomfortable when we are the victims of it.

If you have a strong personal branding strategy and selfpromote with the intent of helping others, then you can never be accused of bragging or boasting because you have kind, compassionate intent behind your self-promotion strategy. In other words, you are working towards a cause bigger than yourself.

2. We Don’t Spend Enough Money, or the Right Kind of Money, on Marketing

Oftentimes in law firms, we are given an annual marketing budget. We are also given free reign to spend it as we see fit. I often see lawyers taking their, say $5000, marketing budget and going to a conference with it. Sometimes it just so happens to be a conference with lots of golf involved.

Don’t get me wrong — I go to lots of conferences and I love playing golf. The two concepts work well together.

However, they only work well when they are part of a deliberate, marketing plan that is based on your well-developed personal brand. This means you know who you are, what your story is, how you will share your story and where your target audience is found. Maybe all this means that you go to a conference and play golf. Maybe it doesn’t.

3. We Give Up Too Soon

So here’s the saddest part of it all. This is the part that should never have to happen. What do you suppose happens when the marketing budget is gone, and we find that the conference and golf did not net any new clients year after year?

Or maybe you’ve seen situations where associates have spent eight years doing great billable substantive work. They have not spent much time on business or personal development. Then one day it happens — they are made partner. Oh happy day! Right? Not always. Oftentimes, they end up sitting in front of me in tears (men or women). They are panicking because they don’t know how to bring in revenue and clients, as is often encouraged and/or required of partners.

This is when many lawyers throw up their hands in the air and “give up”. They claim in exasperation that marketing themselves “just doesn’t work”. Or maybe they say that they will never be good at it because they are introverts.

I say that doesn’t have to be the case. Step back and spend time and effort on knowing yourself, your brand and what drives you to be a contribution as a lawyer.

To start, ask yourself:

a. Why did I become a lawyer?

b. At the end of the day what emotional value do I bring my clients?

c. What am I all about (hobbies, passions, and community service) as a PERSON, not as a lawyer?

I realize that time is a precious resource. However, this is one area you don’t want to short-change yourself by not giving it proper time. This is true whether you are an associate or a partner, solo or in a larger firm.

Until you can say that you have done so, then you won’t be able tosay with any degree of certainty that your marketing efforts did not work.

Interview: M. Carr Ferguson

By Kevan P. McLaughlin

Carr Ferguson is a professor of law at New York University and University of San Diego Schools of Law, and is Senior Counsel for the law firm of Davis Polk. He received a B.A. in 1952 and an LL.B. in 1954 from Cornell University, and an LL.M. from New York University in 1960. He is also the former Assistant Attorney General, Tax Division, US Department of Justice.

Q. For those who don’t know, you’ve had a career in tax law that is the envy of most – practicing as a trial attorney in the Tax Division at the Department of Justice, in private practice, serving as Assistant Attorney General, and teaching at NYU and USD’s LL.M programs. Can you tell the readers how you got into tax law and began your storied career?

A. Serendipity. I met my future wife Marian when we were 19. I had very little sense, but I recognized she was not just beautiful but smart – and, incredibly, seemed willing to take me on as a life project. We were married four years later after I graduated from Cornell Law School shortly after we turned 23. I had shunned tax and litigation courses in favor of international and comparative law, a relatively harmless interest I thought I might turn into a living if I could get a job in the State Department. My father, a former government lawyer, jump-started a round of interviews for me around Washington government offices which eventually yielded a job offer from the Department of Justice’s new honor graduate recruitment program to work either in its Civil Division or Tax Division. The State Department, however, told me I’d have to wait for an opening. I thought the Civil Division sounded less alien, but my new bride, Marian, saw that Tax, while posing a daunting learning curve, might better position me for private practice. Further, she said, how do you know you might not like tax? It turned out that I loved it: the law, civil trial in the federal district courts around the country and my new colleagues, many of whom became life-long friends – and even the tax law. When the State Department fin
ally did call, I’d already tried two cases and had an appetizing docket of other matters in progress I didn’t want to put aside. I stayed for five years, finally propelled out by the threat of promotion to a career supervisory job. Luckily, NYU offered us a fellowship, which made it possible for Marian and me to take our two little girls up to the city while I earned their LL.M (Tax) degree.

Q. Having worked both for and against the government, it’s probably no easy task, but what was the most memorable case you handled and why?

A. Kevan, you know the danger of inviting a fellow litigator to start bloviating about old cases. From Cicero on, selfsatisfied lawyers have loved embellishing on their old triumphs. Since you ask, I can’t just pick one. Let me mention three from practice days, which are easier to talk about than matters while I was in the government. As you know, tax litigation has an administrative context. So, my first two stories show how flexibly and professionally the IRS can respond when necessary and the third, unfortunately, shows how badly things can go wrong when the government fails to do what is right.

The first case started one Tuesday back in the ‘70’s when I had a call from the Comptroller of New York City, recently stung by the Ford administration’s refusal to extend emergency financial aid (immortalized in the News’ headline: “Ford To City: Drop Dead.”) He told me that cash was so short, the city might not be able to meet its Friday payroll, precipitating a bankruptcy that would have dwarfed Detroit’s recent troubles. His only hope, he said, was to borrow from the city employees’ pension funds. They were prepared to help, but only if a ruling could be obtained from the IRS before the banks opened Friday that such a loan would not constitute a “prohibited transaction” inconsistent with the funds’ tax exemptions. The city’s credit situation at the time made this a big “if,” but I thought the IRS might try hard to respond to the emergency, so I told him I’d give it a try. I immediately called Don Alexander, our flinty, dead honest IRS Commissioner at the time and an old friend. Explaining the emergency, I promised to have a ruling request with me on the first Washington shuttle the next morning, and he replied that he’d call an all-hands meeting of his team at 7:30 AM in his conference room. From then straight through until time to leave for the shuttle, a hastily assembled team of lawyers in my firm and from the New York Corporation’s Counsel’s office, devised, researched and drafted plausible theories which might enable a motivated IRS to justify the loans as “adequately secured and at a fair market rate,” despite the city’s credit straits. Our work in Washington continued all day and night, the IRS officials, technicians and secretaries with no overtime pay as adrenaline-driven as I was. I finished my triple all-nighter just in time Friday morning for the Commissioner to sign the precious letter to stick in a pocket of the Tuesday morning clothes I was still wearing, and make the first shuttle back to New York, arriving at a very relieved City Hall meeting just in time for the pension fund managers to pay over the first tranche of their loans to the city an hour before the banks opened and paychecks began to bepresented. I probably stretched the law again the following Monday when I sent those valiant IRS secretaries roses.

The second story shows both the IRS and the Tax Court at their best in another emergency. It involves the tax rulings AT&T requested us to obtain regarding its spin-off of seven “Baby Bell” regional holding companies in compliance with the consent decree the company had negotiated with the Department of Justice’s Anti-Trust Division. The onsent decree required separation of the regulated local telephone business from AT&T’s unregulated companies like Bell Labs and Western Electric. The breakup of the two lines of business was excruciatingly complex and the ruling application with exhibits was ponderous. While not as time-compressed as the New York City matter, we worked against the need to have answers before the millions of AT&T shareholders could receive their 1099-DIV information returns. Over several months of meetings with a superb team of IRS professionals and colleagues on my side of the table, we were able to resolve favorably all but one issue: the taxability of the distribution of one of the Baby Bell’s shares. On that one, we offered to withdraw our request, but the IRS insisted on a negative ruling – a result of which would have led to chaos, since AT&T had decided to rely on our opinion to the contrary. After mulling this over, I thought our best chance to resolve the impasse might be to ask the IRS to join in an accelerated, no-appeal test case in the Tax Court. So, I called another client, Julie Shea, head of the trust department of a very large bank, fiduciary for thousands of trusts, to see if her folks could locate a trust holding AT&T shares and filing on a fiscal year ending in February, when the spin-off occurred, ten months before the close of most taxpayers’ calendar year. She quickly found the ideal trust willing to volunteer for our test case. Next, I called Fred Goldberg, IRS Chief Counsel for his cooperation. Within days, he had obtained consensus within the IRS, and the two of us visited Chief Judge Howard Dawson and his veteran chief clerk to explain our needs. Judge Dawson agreed to find a judge not disqualified by holding Ma Bell’s ubiquitous stock who would press the case forward to decision within the few months we had. Fred arranged to have the New York district send their senior estate tax examiner to the trust company’s office the next day to meet Julie and me and set up the needed deficiency in the trust’s return. Wondering why he had been interrupted from his regular work, the examiner completed his audit in minutes, made the small adjustment and whipped off a 90-day letter for me, still scratching his head. That afternoon, we attached it to our waiting petition and hand-delivered it as instructed to the Tax Court’s Chief Clerk to avoid having it shunted to the Court’s small claims section. The next week, Judge Tannenwald, who had been assigned the case, arranged a conference call with Ken Jones, a senior IRS litigator in Washington, and myself. Ken agreed to get his answer out within days, to stipulate the facts in the ruling request and to an accelerated briefing schedule which put the matter in gremio curiae less than three months from filing. The court’s decision arrived about a month later, with time to spare for AT&T to print the millions of nontaxable 1099-DIV’s for its calendar-years shareholders.

The last case, conversely, shows what can happen when there is a failure of government officials to respond imaginatively to an emergency. It is a sad story, involving abuse of the criminal tax laws by IRS Special Agents seeking retribution against a prominent lawyer who’d successfully defended a newspaper against their summons to disclose the source for its story of illegal investigative strategies by their office. Embarrassed by the publicity and frustrated when their summons was quashed, the Special Agents turned to the lawyer’s own tax returns and threatened his accountant with criminal charges unless he isolated himself from the lawyer and agreed to testify falsely against him in a trumped-up tax evasion case. They admitted their interference with the accountant on cross-examination, but the court still allowed a jury to reach a guilty verdict. I was asked to see if the Tax Division of Justice would confess error on appeal and to prosecute it if they declined. To my surprise, the Division’s leaders turned their back on the obvious miscarriage of justice, leaving it up to the court of appeals to rectify matters. Collaborating with a gifted criminal defense litigator, John Nields, and some bril
liant associates, we were successful in securing a reversal of the conviction. The court of appeals opinion castigated both the IRS and Justice, and extended Sixth Amendment guarantees of a fair trial to pre-indictment interference by IRS agents with a taxpayer’s right to his tax preparer’s assistance and testimony. Predictably, the opinion prompted a chorus of other taxpayers to claim agency mistreatment in hopes of reopening their own tax convictions. The blow to criminal tax enforcement was exacerbated by the ensuing Bivens suit against the agents in which substantial monetary damages were awarded to the attorney-victim. Just how blind the government had been to the hazards they faced by exposing such misfeasance to appeal was illustrated by the assistant US attorney assigned to defend it. Just before oral argument, he crossed over to our counsel table, introduced himself and offered his consolation that there was so little of substance to be said in the taxpayer’s behalf. Minutes later, he was being pilloried with questions by our panel.

Q. With those types of experiences, from your perspective, are there noticeable differences in handling a case against the Department of Justice versus the IRS’s Office of Chief Counsel?

A. Oh, yes. Whether or not taxpayer’s choice of forum is good policy, it exists, and one of the first considerations for taxpayer’s counsel is where to file. Litigation in the Court of Claims, a federal district court (where either party can request a jury) and the Tax Court differs in potential precedent, appeal, methods of building the record, judicial expertise, subpoenas, discovery, government counsel and, frequently, the degree to which non-litigating ITS officials are consulted. I’ve tried cases in all three and have deep respect for all.

Q. Are there any special trial techniques or best practices that you’ve developed over the years in trying tax cases?

A. Well, our role in tax litigation varies depending on whether we are sitting at the government’s counsel table or the taxpayer’s. As government counsel, we need to focus more on clarifying issues and defending IRS positions. We don’t like to lose, but sometimes losing the “right way” is tolerable. Taxpayers, on the other hand, care less about precedent than the money involved. Sustaining a government position is essentially defensive, while taxpayer’s counsel must make an affirmative case. Government counsel must seek out the facts that are usually within the control of the taxpayer. I could go on, but the point here is that you really have to talk about two approaches to the trial of a tax case, depending on your client, how much time you can afford to give to a matter, and so forth. If you are defending the government, you have to be skeptical of the administrative file you are given, do your own factual investigation and construction of the legal issues you want to present. Discovery may be critical. How it is accomplished depends on the rules of your forum,but you really want to minimize surprises at settlement conference or trial. If you are representing the taxpayer in a large enough case, you may have prepared an appeals protest. If the case is large enough to justify the time, I like to footnote each sentence of a protest’s statement of facts (or a trial brief) with a reference to how it can be verified either by document or “testimony” in the form of a letter to me. In presenting a case, you may want to gauge whether your judge is likely to ask questions or opposing counsel might give openings on cross examination for your witness to take advantage of. As to courtroom manner, I always tried to be myself, to stay respectful of others by, for example, saving objections for important matters and to present points helpfully and open-mindedly.

Q. Do you see any pressing developments for our field of tax law in the near future?

A. To guess the future, I guess we have to look at the recent past. We’ve seen the IRS burdened by increasingly complex and prolix statutes to administer, while stifled by staff reductions and pay scales which drive many of their best into private sector employment. So, the Service has been forced to look for ways to shift part of their compliance burdens to taxpayers’ advisors – a dubious practice. We have seen a flow of new taxpayer and practitioner penalties, elaborate new disclosure rules and threatening announcements aimed at stopping aggressive practices before the Service has time to analyze them or articulate clear regulatory positions. This has led to confusion that engenders more litigation. It takes a true optimist to believe Congress will fund a larger, more professional IRS or enact a broad-based simplified tax law. Until that blessed day, controversies can only grow as part of a tax lawyer’s practice. Are there countervailing trends? We have seen the Service develop advanced pricing agreements and accelerated issue appeals, but progress is slow. Far too many non-precedential cases burden the courts. It would pay the Service to encourage appellate conferees and Service lawyers to be more innovative in using nontraditional alternatives to resolving disputes, including third-party mediation and even occasionally arbitration.

Q. What led you to teaching?

A. While I was still studying at NYU, the dean of the Iowa Law School invited me to join his faculty. Marian had been counting on moving me up the financial ladder when we finished the LL.M, but she encouraged me to try teaching, even though the salary was painfully below our old government pay. Teaching posed almost as steep a learning curve as the Tax Division had, and I was not very good at it at first, but I loved the experience. Practice is so much more enjoyable than studying law that I wanted to try to preview the fun of practice for law students who were coming along behind me. So I tried to teach through the use of problems. Gradually, as I got the hang of it, I got hooked. It’s a special privilege to teach and to try, in a small way, to advance the lives of new young friends each year.

Q. How important do you consider an LL.M in tax degree to be in today’s world?

A. Well, the degree signifies that the holder has spent a year wrestling with enough different parts of the tax law, probably under tutelage of enough different teachers, to have acquired two strengths: a fairly broad appreciation of the law’s content and operation, and the mental toughness to cope with a tax question other lawyers might miss or find bewildering. Are these worth the time and money they cost to acquire? It’s probably easier to answer that question after tasting enough tax law to know you can give yourself to it.

Q. Any last advice on how a young attorney can drive a successful career in tax law?

A. We are back where we stared the interview. Luck plays a part at the beginning of a career in finding a good mentor and interesting assignments. Those two ingredients of an apprenticeship outweigh money or location. If you are lucky enough to find them, you still have to ask yourself if you like the tax law. Hard as it is for me to believe, some perfectly rational lawyers don’t. I recall hearing Abe Fortas’ eulogy for his old partner, Louis Eisenstein, praising him for dedicating his brilliant mind to “plowing the arid, rocky field of taxation” as if his work had been a Sisyphean sacrifice. I guess Mr. Fortas, at least, just didn’t get it. Tax law never bores or repeats. It is intellectually challenging, and, as my three little war stories show, wonderfully collegial. We rarely work alone. Practicing as part of a team, working with, not against, tax lawyers across the table to find the best solution, is exhilarating and endlessly rewarding.

Starting the Race Against the IRS in the International Inco
me Tax World – Statute of Limitations and Lack of Filings

Eric D. Swenson
Procopio, Cory, Hargreaves & Savitch LLP

Elettra Menarini
Procopio Cory, Hargreaves & Savitch LLP

Eric D. Swenson is an attorney in Procopio, Cory, Hargreaves & Savitch LLP’s San Diego office. His practice encompasses both tax controversies and business transactions. Eric has represented businesses and individuals in all types of federal, state, and local tax disputes. Prior to joining Procopio, Cory, Hargreaves & Savitch LLP, Eric was a trial attorney for the IRS Office of Chief Counsel.Eric D. Swenson, Procopio Cory Hargreaves & Savitch LLP, San Diego, CA, (619) 515-3235,

Elettra Menarini is also an attorney in Procopio, Cory, Hargreaves & Savitch LLP’s San Diego office. Elettra’s practice includes assisting in international tax planning and related international matters, particularly in the US and Mexico. She assists in the development of business transactions, worldwide investment and financing structures and planning for worldwide income, estate and inheritance taxes. Elettra Menarini, Procopio Cory Hargreaves & Savitch LLP, San Diego, CA, (619) 906-5742,

It is well known that the Statue of Limitations (“SOL”) establishes the timeframe within which the Internal Revenue Service (“IRS”) may assess tax and penalties, as well as initiate a civil or criminal case against an individual. The Supreme Court has stated that the “SOL are designed to promote justice by preventing surprises through the revivial of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim, it is unjust not to put the adversary on notice to defend within the period of limitation and that the right to be free of stale claims in time comes to prevail over the right to prosecute them.”1

Thus, in the world of federal income tax, the policy rationale for the applicable SOL is one of fairness and administration of income tax laws.2 As discussed in this article, it is not entirely clear whether the failure to file a certain international information returns or forms with a taxpayer’s income tax return should fairly result in the SOL remaining open for the entire income tax return. Nevertheless, this is the current law.

The goal of this article is to:

(1) Provide a primer on the general SOL rules in the federal civil income tax context (which must be understood in order to better understand the SOL in the international tax context); and

(2) Address certain of the particular SOL rules related to the failure of a U.S. taxpayer file certain International Information Returns,3 as defined below, with their federal income tax return, and more particularly IRC § 6501(c)(8).

I. Statute of Limitations — Federal Civil Tax Matters

A. General Rule (“3-Year Statute of Limitations”)

Pursuant to IRC § 6501(c)(1), the IRS generally has three years from the date a tax return is filed to assess additional tax (the “General Rule”). Under what is often referred to as the “mailbox rule,” the time a tax return is mailed to the IRS (as evidenced by a proper postmark) is treated as the time the tax return is deemed filed.4

Not including the rules relating to late filed or unfiled certain international Information Returns, there are at least three exceptions to the 3-year General Rule.5

B. Exception #1 to General Rule – Gross Omission (6-Year Statute of Limitations)

Where a taxpayer omits or fails to report gross income which exceeds 25 percent of reported income, the IRS has six years from the filing of the tax return to assess any additional tax under IRC § 6501(e)(1)(A) (the “6-Year Limitations Period”). The filing of an amended tax return cannot shorten the 6-Year Limitations Period.6The burden of proving the omission, however, is on the IRS.7 If the 6-Year Limitations Period is open, the taxpayer’s entire tax liability for the particular tax year (i.e., entire tax return) is subject to the 6-Year Limitations Period (i.e., the IRS can assess tax as to any adjustment it finds in the tax return).8

C. Exception #2 to General Rule – Civil Fraud (Unlimited Statute of Limitations).

Where a taxpayer files “a false or fraudulent tax return with the intent to evade tax,” the tax may be assessed at any time after the tax return is filed.9 The definition of fraud for this purpose is the same as the definition of fraud for purposes of the seventy-five percent civil fraud penalty under IRC § 6663. Fraud requires the return to be knowingly false and must be proved by more than mere negligence. In other words, for fraud to exist, there must be an intentional wrongdoing with the specific purpose of evading a tax known or believed to be owing.10 The IRS bears the burden of proving fraud in a civil tax case by “clear and convincing evidence.”11

Also, the Supreme Court has held that a taxpayer who initially files a fraudulent income tax return cannot invoke a period of limitations by filing an honest amended return correcting the fraudulent aspects of the original return.12 The Supreme Court held in Badaracco that once a fraudulent return has been filed, there is no limitation on the time available to the Government to assess a tax deficiency and penalties for that year regardless of corrective action taken by the taxpayer or by anyone else.

D. Exception #3 to General Rule-Failure to File (Unlimited Statute of Limitations).

Where a taxpayer fails to file a tax return, the tax can be assessed at any time after the date prescribed for filing the tax return.13 A substitute for return (“SFR”) prepared by the IRS on behalf of the taxpayer who has failed to file a tax return for whatever reason does not start the statute of limitations.14

II. Statute of Limitations — Unfiled or Late Field International Information Returns — IRC § 6501(C)(8)

Most tax practitioners are now well aware of the seemingly voluminous forms and deadlines that apply to U.S. taxpayers with foreign financial accounts, foreign assets, or other types of relationships with foreign persons and entities. As discussed below, the failure to file certain International Information Returns (or forms) will result in the statute of limitations remaining open for the entire income tax return, not just the items omitted from the certain international information returns.

A. IRC Section 6501(c)(8) – The Failure to File Certain International Information Returns Will Extend the SOL Indefinitely for the Entire Federal Income Tax Return.

1. Code Section 6501(c)(8) – In General.

U.S. persons (as defined in Code Section 7701) are required to file certain information returns/forms depending on: (i) their interests in; (ii) control over; and (iii) and transfers to or distributions from — foreign corporations, partnerships, trusts, and other entities. In short, such International Information Returns provide the IRS information about certain cross-border transactions.

Code section 6501(c)(8) extends the time within which the IRS can assess tax until 3 years after the required information is reported on the following forms or returns (the “International Information Returns”).15 Such International Information Returns include the following:

  1. Form 8621 – “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” (Code Sections 1295(b) and 1298(f));
  2. Form 5471 – “Information Return of U.S. Persons With Respect To Certain Foreign Corporations” (Code Sections 6038 and 6046);
  3. Form 8865 – “Return of U.S. Persons With Respect to Certain Foreign Partnerships” (Code Sections 6038 and 6046A);
  4. Form 8858 – “Information Return of U.S. Persons With Respect To Foreign Disregarded Entities” (Code Section 6038);
  5. Form 5472 – “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business” (Code Section 6038A);
  6. Form 926 – “Filing Requirement for U. S. Transferors of Property to a Foreign Corporation” (Code Section 6038B, regarding certain transfers of property to foreign corporations);
  7. Form 8938 – “Statement of Specified Foreign Financial Assets” (Code Section 6038D, regarding certain specified foreign financial assets held by individuals);
  8. Form 3520 – “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”. Part I-III (Code Section 6048, regarding transaction with certain foreign trusts by U.S. person, certain foreign trusts with U.S. owners, U.S. beneficiary of foreign trusts);16 and
  9. Form 3520-A – “Annual Information Return of Foreign Trust with a U.S. Owner” (Code Section 6048).
2. Specific Changes Made to Code Section 6501(c)(8) by the HIRE Act.

Previously, the Hiring Incentives to Restore Employment Act (the “HIRE Act”) (P.L. 111-147, March 18, 2010) included a provision, IRC § 6501(c)(8), that expanded the statute of limitations with regard to incomplete foreign transaction reporting by taxpayers. In short, the HIRE Act amended IRC § 6501(c)(8) to:

a. Add additional foreign International Information Returns that will extend the statute of limitations if the information is not provided to the IRS (e.g., 1295(b), 1298(f), and 6038D) (“Change #1 to Section 6501(c)(8)”); and

b. Extend the statute of limitations to the taxpayer’s entire income tax return “Change #2 to Section 6501(c)(8)”).

The HIRE Act applies to all returns filed after March 18, 2010 and any return for the statute of limitations was otherwise open on March 18, 2010.17

3. Code Section 6501(c)(8) – Statutory Language As Amended by the HIRE Act.

Since the HIRE Act was enacted, Section 6501(c)(8) of the Code has read as follows:

6501(c)(8) Failure to Notify Secretary of Certain Foreign Transfers –

(A) In general – In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section (emphasis added).

(B) Application to Failures Due to Reasonable Cause – If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.

4. Change #1 to Section 6501(c)(8) – Code Sections (and Forms) Added.

One of the Code Sections added to the extended statute of limitations under IRC § 6501(c)(8) by the HIRE Act was IRC § 6038D, which requires that, since 2011, certain individuals and domestic entities disclose certain information with respect to “specified foreign financial assets,” (“SFFA”) if the aggregate value of such assets exceeds $50,000. Such information is reported on a Form 8938, statement of Specified Foreign Financial Assets, and filed with the taxpayer’s income tax return. SFFA’s are defined broadly and include interests in foreign corporations and partnerships, certain relationships to foreign trusts, and foreign real estate held in any type of structure.

Such Form 8938 is not a substitute for an FBAR (Report of Foreign Bank and Financial Accounts) that is required under Title 31 (Bank Secrecy Act) and filed by no later than June 30th separately from the taxpayer’s income tax return.18

Note: IRC § 6501(e)(1)(A)(ii) extends the 6-Year Limitations Period where a taxpayer omits more than $5,000 of income attributable to one or more assets required to be reported under IRC § 6038D (Form 8938) (i.e., SFFAs). Thus, even where a taxpayer does not have a substantial understatement of income (25 percent omission of gross income), the IRS still has six years in which to investigate and audit the taxpayer. This
is also the result even if the taxpayer was not required to file Form 8938 (i.e., because of less than $50,000 of SFFAs).

Additionally, IRC §§ 1295(b) (information related to passive foreign investment companies) and 1298(f) (information related to qualified electing funds) were also added to the list of items triggering the IRC § 6501(c)(8) statute of limitations extension.

5. Change #2 to Section 6501(c)(8) – Statute of Limitations for Entire Income Return Remains Open Until the Proper International Information Return is Filed With the IRS.

After the amendment of IRC § 6501(c)(8), the IRS now has additional time to both examine and assess tax with respect to: (i) cross-border transactions; and (ii) any other item on the tax return (related or unrelated to the cross-border International Information Returns. As noted above, prior to such amendment in the HIRE Act, the statute of limitations extension only applied to any tax deficiency related to the information not contained in the missing International Information Return(s).19

As stated above under 3, IRC § 6501(c)(8) – Statutory Language As Amended by the HIRE Act, if the failure to report such information is due to reasonable cause and not willful neglect, the extended statute of limitations will only apply to the unreported items, not the entire tax return.20 As with any other civil penalties, the burden of proving the failure to report such information is due to reasonable cause, and not willful neglect, is generally on the taxpayer.21

In short, failing to report information about a cross-border transaction, which information falls into the IRC § 6501(c)(8) list of code sections and forms, could conceivably result in the IRS being able to assess tax on a taxpayer’s failure to report $50 of unrelated dividend income on their tax return filed over a decade earlier. Such a result is probably a bit inconsistent with the purpose of the statute of limitations which is to prevent unfair surprise by “the revival of old claims.” Of course, if a taxpayer can prove that the taxpayer’s failure to report the required International Information Return was due to reasonable cause, never an easy feat, then the statute of limitations as to other unrelated items (e.g., $50 dividend income) is also closed.

III. Conclusion

Current IRC § 6501(c)(8), as amended by the HIRE Act, provides that the failure to file certain International Information Returns (or forms) to report certain cross-border transactions or information will result in the statute of limitations remaining open for the entire income tax return, not just the international or cross-border items omitted from the certain International Information Returns. As a result, in addition to monetary penalties for failing to file such International Information Returns (which is beyond the scope of this article), this can lead to some very unpleasant surprises for those taxpayers (and tax advisors) where the failure to file certain International Information Returns is due to mere negligence. More specifically, the failure to file such International Information Returns will result in the statute of limitations remaining open for the taxpayer’s entire tax return for three years after such returns are ultimately filed. Accordingly, taxpayers and their tax advisors must take the time to learn what International Information Returns must be filed by the particular taxpayer. Otherwise, unpleasant consequences, possibly many years in the future when “memories have faded and witnesses have disappeared,” may result to all of those involved in filing the taxpayer’s income tax return.


Order of RR Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342 (1944). Back

Rothensies v. Electric Storage Battery Co., 329 U.S. 296 (1946). Back

3 As discussed herein, the International Information Returns are those required by IRC § 6501(c)(8)(A). Back

4 IRC § 7502. Back

See IRC § 6501(c) for a complete list of exceptions to the general statute of limitations. Back

See Badaracco v. Commissioner, 464 U.S. 386 (1984); Benson v. Commissioner, T.C. Memo. 2006-55. Back

Price v. Commissioner, T.C. Memo. 1978-196. Back

See Colestock v. Commissioner, 102 T.C. 380 (1994). Back

9 IRC § 6501(c)(1). Back

10 See Neely v. Commissioner, 116 T.C. 79 (2001); see also Stolzfus v. United States, 398 F.2d 1002 (3rd Cir. 1968). Back

11 See IRC § 7454(a); Tax Court Rule 142(b). Back

12 See Badaracco v. Commissioner, 464 U.S. 386 (1984). Back

13 IRC § 6501(c)(3). Back

14 IRC § 6501(b)(3). Back

15 Code Sec. 6501(c)(8(A). Note: The three-year statute of limitations under IRC § 6501(c)(8)(A) was added by the Taxpayer Relief Act of 1997 and effective for information reporting due after August 5, 1997. As discussed herein, the HIRE Act in 2010 made certain changes to IRC § 6501(c)(8)(A), including adding elections under IRC §§ 1295(b) (QEF Elections), 1298(f) (PFIC requirement – Form 8621), and 6038D (Form 8938). Back

16 Form 3520 “Annual Return To Report Transactions With Foreign Trusts and Recei
pt of Certain Foreign Gifts” has 4 parts and it includes reporting requirements under two different sections of the Code, IRC §§ 6048 regarding foreign trusts (Parts I-III) and 6039F regarding the reception by a US person of certain foreign gifts or bequests (Part IV). Accordingly, the failure to complete Parts I, II, and III where required (which are governed by IRC § 6048 (and specifically listed in IRC § 6501(c)(8)) should extend the statute of limitations for the entire tax return. The failure to complete Part IV where required, however, should not extend the statute of limitations for the entire return as such Part IV is governed by IRC § 6039F which is not included in IRC § 6501(c)(8). Back

17 P.L. 111-47, Sec. 513(b). Back

18 Under the Currency and Foreign Transactions Reporting Act, also known as the Bank Secrecy Act, Title 31 of the Code and its implementing regulations under the Code of Federal Regulations (“CFR”), each U.S. person who has a financial interest or signature or other authority over any foreign financial account ( e.g., bank, securities or other type of financial accounts) in a foreign country must file an FBAR if, at any time during the calendar year, the aggregate value of such financial accounts exceeds $10,000. A complete discussion of FBARs is beyond the scope of this article. Back

19 See T.D. 8850, 2000-1 C.B. 265 (January 10, 2000). Back

20 IRC § 6501(c)(8)(B). Back

21 Higbee v. Commissioner, 116 T.C. 438 (2001); see also IRM para. 20.1.9 (March 21, 2013), International Penalties. Back

In the Ballpark: Burden of Proof, Admissibility, and Credibility of Evidence in Proving the Real Estate Professional Exception Under IRC § 469(c)(7)

Jeffrey M. Woo, Esq.

Jeffrey M. Woo is an estate planning and probate attorney, and currently obtaining an LL.M in Taxation from Golden Gate University. He has served judicial externships for the Superior Court of California for the County of San Francisco, and for the United States Bankruptcy Court for the Northern District of California in San JoseJeffrey M. Woo, San Francisco, CA, (415) 738-7723,

I. Introduction

Last year (2014) marked the first time that cases dealing with IRC § 469 and the passive activity loss (PAL) rules hit the Taxpayer Advocate’s Top Ten Most Litigated Cases. National Taxpayer Advocate 2014 Annual Report to Congress, at 520-527. Among the more litigious issues of IRC § 469 is the “real estate professional” exception of § 469(c)(7). If a taxpayer satisfies the requirements of IRC § 469(c)(7)(B), then its rental activities are removed from per se passive status, IRC §§ 469(c)(2) and (4), and treated as any other trade or business, that is, subject to passive treatment, unless the taxpayer materially participates in the activities. IRC §§ 469(c)(1) and (7)(A). To satisfy the exception, the taxpayer must prove that: (1) it materially participated in more than half of its personal services in that year in real property trades or businesses; and (2) it materially participated in over 750 hours in real property trades or businesses in that year. IRC§ 469(c)(7)(B). “Personal services” include “any work performed by an individual in connection with a trade or business,” except to the extent that such work consists of investor-type activities. Treas. Reg. §§ 1.469-5T(f)(2)(ii) and 1.469-9(b)(4); see Lapid v. CIR, T.C. Memo. 2004-222, 3-4. And “real property trades or businesses” include “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage” trade or business. IRC § 469(c)(7)(C).

“Participation” is defined as “any work done by an individual . . . in connection with an activity in which the individual owns an interest at the time the work is done.” Treas. Reg. § 1.469-5(f)(1). “Material participation” is participation on a regular, continuous, and substantial basis. IRC § 469(h). Though a taxpayer’s spouse’s participation may be included to determine material participation, IRC § 469(h)(5), for purposes of IRC § 469(c)(7)(B), only one spouse can prove the requisite participation and hours. See Oderio v. CIR, T.C. Memo. 2014-39, 2-3.

Treas. Reg. § 1.469-5T(f)(4) states how a taxpayer may prove material participation:

Methods of proof. The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.

The overwhelming majority of real estate professional cases rule in favor of the IRS, though the authors has found four cases, in which the taxpayer successfully proved the exception (discussed below). Most IRC § 469(c)(7) cases often turn on the evidence in record (or lack thereof) before the Tax Court, and whether the taxpayer has satisfied its burden of proof with regard to participation, for purposes of IRC § 469(c)(7)(B). See Rule 142(a) of the Tax Court Rules of Practice & Procedure. In Hofinga v. CIR, T.C. Summ.Op. 2013-43, 3,1 the Tax Court suggested the preferred method of proof:

Ideally, a taxpayer who claims to be described in section 469(c)(7) would maintain a contemporaneous log or record showing with particularity the amount of time devoted to the rental real estate activity on an event-by-event basis. See sec. 1.469–5T(f)(4), Temporary Income Tax Regs., 53 Fed.Reg. 5727 (Feb. 25, 1988). Ideally, the log would be detailed enough to allow for someone who reviewed it to make an informed judgment as to the accuracy of the information reported. The creation and availability of a detailed log is important, especially if that reviewing “someone” is an Internal Revenue Service employee considering the log in connection with an examination of the taxpayer’s return on which rental real estate losses are deducted.

Though the regulations allow for a broad range of methods of proving participation, Treas. Reg. § 1.469-5T(f)(4), the Tax Court will routinely disregard a taxpayer’s testimony or documentary evidence, if it is unverified or uncorroborated, and conclude it as nothing more than a “ballpark guesstimate” of a taxpayer’s purported participation in the activity. See Moss v. CIR, 135 T.C. 365, 369 (
2010); Goshorn v. CIR, T.C. Memo. 1993-578, 3; see also Hoskins v. CIR, T.C. Memo. 2013-36, 14 (referring to “ballpark guesstimate” as “the unverified, undocumented testimony of taxpayers”). As such, the piece of evidence is not a “reasonable method of proof,” and will not count toward proving IRC § 469(c)(7)(B). This paper reviews various real estate professional cases, and discusses how the role of admissibility and credibility of the evidence affects the disposition of the taxpayer’s case. First, the paper discusses the burden of proof, then the admissibility of evidence via relevance, hearsay, and authentication; then the credibility of the evidence, based on three components: the contemporaneity of the evidence, or how close and current to the activity was the documentation thereof; the corroboration of the evidence, through supporting documents and testimony; and the consistency of the evidence within itself and with the rest of the taxpayer’s evidence. (For the sake of clarity, this paper refers to the Federal Rules of Evidence in short form as “FRE”, and the Tax Court Rules of Practice and Procedure in short form as “Rule.”)

A. Burden of Proof

Generally speaking, the taxpayer bears the burden of proof, and the Commissioner’s determinations of deficiency are presumed correct. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Also, because deductions are a “matter of legislative grace,” the taxpayer also bears the burden of proof on claiming deductions. INDOPCO, Inc. v. CIR, 503 U.S. 79, 84 (1992). Nevertheless, the taxpayer may otherwise shift the burden of proof to the Commissioner, if the taxpayer presents credible evidence and complies with the Commissioner’s substantiation and record-keeping requirements. See Rule 142(b); Higbee v. CIR, 116 T.C. 438, 442-444 (2001); Harnett v. CIR, T.C. Memo. 2011-191; Est. of Stangeland v. CIR, T.C. Memo. 2010-185. “Credible evidence is evidence the Tax Court would find sufficient upon which to base a decision on the issue in the taxpayer’s favor, absent any contrary evidence.” Harnett, T.C. Memo. 2011-191 at 5 (citing Higbee, 116 T.C. at 442). Substantiation under IRC § 7491 also includes compliance with the IRS’s reasonable requests for witnesses, information, documents, meetings, and interviews. IRC §§ 7491(a)(2)(A) and (B).

To the best of the author’s knowledge, no taxpayer, who also sought to prove the real estate professional exception, has successfully shifted the burden of proof under IRC § 7491 and Rule 142(b). In Stangeland, supra, the Tax Court concluded that, because most of the issues were determined on a preponderance of the evidence, the burden of proof was not relevant. And in Harnett, supra, the Tax Court rejected the taxpayer’s argument, because the evidence was insufficient to prove that the taxpayer either had credible evidence or complied with the substantiation requirements. Either way, “the result is the same—the burden of proof remain[ed] with [the taxpayer].” Id.

It is usually the taxpayer’s failure to satisfy the burden of proof that often determines the case before the Tax Court. Because this failure turns on the evidence used by the taxpayer, let us see how rules of evidence may affect the taxpayer’s proof.

B. Admissibility – Relevance, Hearsay, and Authentication

Tax Court proceedings are conducted under the rules of evidence applicable for the U.S. District Court for the District of Columbia, and such rules include the Federal Rules of Evidence (“FRE”). Rule 143(a); IRC § 7453; Hill v. CIR, T.C. Memo. 2010-200. Regarding the admissibility of documentary evidence, courts primarily looks at three issues: relevance; hearsay; and authentication. For example, in Hill, the taxpayer attempted to admit three types of documents, as evidence of her participation in rental activities: narrative logs made after the IRS had initiated a lien action on her property; an incomplete copy of a real estate lien note; and the taxpayer’s mortgage rate and payment schedule.

The Hill court refused to admit the taxpayer’s mortgage schedule, based on relevance, that is, whether it had “any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” FRE 401. Although the taxpayer sought to show evidence of the purchase of a mortgage in 2007, the schedule stated that she purchased it in 2004. Also, the taxpayer referred to a specific line in the schedule, but that line was blackened out.

Under FRE 901, a document must be authenticated before admission into evidence; that is, there must be sufficient, supporting evidence to identify the document as what its proponent claims it to be. In Hill, the taxpayer provided the court only with two pages of a five-page note; and the taxpayer said that she merely gave the IRS agent what she had, without any idea what the document was. As such, the Tax Court sustained the authentication objection.

The Commissioner objected to the logs in Hill as inadmissible hearsay, i.e., as an out-of-court statement offered into evidence for the truth of the matter asserted. FRE 801 and 803. The narrative logs were not contemporaneous with the activities stated therein; and the taxpayer did not demonstrate an exception to the hearsay rule; so the Tax Court sustained the objection. See also Adeyemo v. CIR, T.C. Memo. 2014-1, at 17 fn. 8 (noting that taxpayer’s narrative log—which the court otherwise found credible—was “potential hearsay,” but that the Commissioner did not raise it).

Two exceptions to the hearsay rule may apply in other cases, though: the exception for recorded recollections, FRE 803(5); and the exception for regularly conducted activity under FRE 803(6). A recorded recollection is “a record that: (A) is on a matter the witness once knew about but now cannot recall well enough to testify fully and accurately; (B) was made or adopted by the witness when the matter was fresh in the witness’s memory; and (C) accurately reflects the witness’s knowledge.” FRE 803(5). Though it can be read into evidence, the recollection cannot be received as an exhibit unless introduced by an adverse party.

A record of regularly conducted activity under FRE 803(6) is not excluded from hearsay if “(A) the record was made at or near the time by—or from information transmitted by—someone with knowledge; (B) the record was kept in the course of a regularly conducted activity of a business, organization, occupation, or calling, whether or not for profit; (C) making the record was a regular practice of that activity; (D) all these conditions are shown by the testimony of the custodian or another qualified witness, or by a certification that complies with Rule 902(11) or (12) or with a statute permitting certification; and (E) the opponent does not show that the source of information or the method or circumstances of preparation indicate a lack of trustworthiness.”

However, these two exceptions imply that the documents were contemporaneous with the activities referred therein. Because the narrative logs in Hill had been written only after the taxpayer had filed her return, it was likely that they did not satisfy either hearsay exception. On the other hand, the mere fact that a taxpayer’s evidence is not contemporaneous with the referenced activities does not mean that it is never admissible as a matter of law. See Pohoski v. CIR, T.C. Memo. 1998-17 (admitting post-event narrative summary if suppor
ted by credible evidence); see also In re Shaw, 111 A.F.T.R.2d 2013-902 (Bankr. D.Mass. 2013) (“I do not dispute that the Shaws’ method involves a critical measure of estimation and reconstruction, but I cannot distinguish it from the method expressly sanctioned by [Treas. Reg. § 1.469-5T(f)(4)] and therefore do not rule their method impermissible.”). On the other hand, and as discussed below, a lack of contemporaneity may weigh against the credibility of that evidence.

Note also that, in small taxpayer cases under IRC § 7463, the Tax Court may admit a broader range of evidence into the record. Rule 174(b). Nevertheless, the Tax Court acts as the trier of fact, and must still weigh the credibility of the evidence before it. Nell v. CIR, T.C. Memo. 1986-246; see Hofinga, supra, at 4 (logs not found credible, though based on “calendars, bank statements, credit card records, property trip files, bills, receipts, and other records”)

C. Credibility

Even if the Tax Court admits a taxpayer’s evidence, its probative value is an utterly different issue than its persuasive value or credibility. As the bankruptcy court in In re Shaw, supra, stated, “permissible and persuasive are two different things, and much depends on the execution and credibility of the effort.” Here too the Tax Court is aware of its role as the trier of fact, and its duty to weigh the evidence before it for trustworthiness. Diaz v. CIR, 58 T.C. 560, 564 (1972), acq. 1972 WL 124330 (Dec. 31, 1972); see also J. Mary Ann Cohen, How to Read Tax Court Opinions, 1 Hou. Bus. & Tax L.J. 1, 8-10 (2001) (stressing “the importance of the trial court’s responsibilities to decide a case based on the evidence in the record” and listing special issues or evidentiary matters for the Tax Court to consider).

Treas. Reg. § 1.469-5T(f)(4) permits a variety of reasonable methods of proof, for purposes of participation, including “appointment books, calendars, or narrative summaries.” Although the Tax Court acknowledges the vagueness of the language in Treas. Reg. § 1.469-5T(f)(4), the regulation does not permit a “postevent ballpark guesstimate” as a reasonable method of proof. See Goshorn, supra. Such evidence is usually held to be “ballpark guesstimates” for lacking at least one of three aspects of credibility: contemporaneity with the participated activity; corroboration with supporting documents or testimony; or consistency with the taxpayer’s other components of evidence.

D. Contemporaneity

As the Tax Court in Hofinga, supra, suggested, the ideal method of proof of a taxpayer’s participation would be “a contemporaneous log or record showing with particularity the amount of time devoted to the rental real estate activity on an event-by-event basis.” See also Shaw v. CIR, T.C. Memo. 2002-35 (taxpayer’s flight logs, showing where he traveled to and from rentals). The Tax Court is also wary of testimony not based on contemporaneous evidence, and documentary evidence made several years after the fact. See Carlstedt v. CIR, T.C. Memo. 1997-331 (“Even if such uncorroborated estimates were made in good faith, memories can fade with time.”); accord, D’Avanzo v. U.S., 67 Fed.Cl. 39, 44 (2005).

However, the mere fact that one maintains contemporaneous records, or introduces them as evidence in court, is not enough to convince the Tax Court of their credibility. For example, in Carlstedt, though the taxpayer relied upon a contemporaneous diary of activities and other documentary evidence, such as phone records and receipts, he admitted that he had recalculated his hours in preparation for trial, he disposed of contemporaneous notes before trial, and he added 30-40 hours of cushion, in case he had forgotten something. Carlstedt, T.C. Memo. 1997-331, at 10. He was unable to account for the added hours, and the Tax Court rejected his narrative summary as a “postevent ballpark guesstimate.” Id. Similarly, in Fowler v. CIR, T.C. Memo. 2002-223, the taxpayer had recorded estimated time for his activities before they occurred, but failed to make adjustments for the actual duration, and his handwritten calendar notations were made after the fact, in preparation for trial. See also Jafarpour v. CIR, T.C. Memo. 2012-165 (notes of activities listed in pen and hours listed in pencil).

E. Corroboration

Though the Tax Court prefers contemporaneous records, see Schumann v. CIR, T.C. Memo. 2014-138 and Hofinga, supra, it recognizes that Treas. Reg. § 1.469 5T(f)(4) encompasses non-contemporaneous records; and post-event documentary evidence can be a reasonable method of proof “where it is supported by credible testimony and other objective evidence.” Pohoski, supra, at 6; see also Merino v. CIR, T.C. Memo. 2013-167.

However, the corroborating evidence itself must be credible, too. For example, in Schumann, the taxpayer introduced his testimony, the testimony of an associate, and a narrative summary, which was based on a daily logbook, bank records, copies of checks, and receipts. T.C. Memo. 2014-138. The associate’s testimony was rejected, for lack of “adequate documentary support.” Id. at 16. As for the documents supporting the summary, the logbook directly contradicted the taxpayer’s testimony, and the records, checks, and receipts did not provide hours for the activities. Id. at 17-18. Without adequate corroboration, the summary was treated as a “postevent ballpark guesstimate.” Id. at 19. See also D’Avanzo, 67 Fed.Cl. at 44 (taxpayer’s documentary evidence based on inadequate supporting evidence).

The need for corroborating evidence is also related to the well-established principle “that the failure of a party to introduce evidence within his or her possession which, if true, would be favorable, gives rise to the presumption that if produced, it would be unfavorable.” Tokarski v. CIR, 87 T.C. 74, 77 (1986); Wichita Terminal Elevator Co. v. CIR, 6 T.C. 1158, 1165 (1946), aff’d 162 F.2d 513 (10th Cir. 1947). Though the Tax Court has occasionally forgiven the taxpayer for not proffering underlying evidence, see Pohoski, at 6, it generally holds such omissions against the taxpayer, particularly if the evidence was reasonably accessible to the taxpayer); or if the evidence was discarded or disposed of before trial. See Scheiner v. CIR, T.C. Memo. 1996-554 (partnership records); Harmon v. CIR, T.C. Summ. Op. 2007-127 (print-outs from PalmPilot); Carlstedt, supra at 9.

With regard to testimonial evidence, it is well-established that the Tax Court is “not bound to accept the unverified, undocumented testimony of taxpayers.” Scheiner, supra; see also Almquist, T.C. Memo. 2014-40. Such testimony is often treated as nothing more than a “postevent ballpark guesstimate.” Hoskins, supra; Goshorn, supra. Even if the taxpayer’s testimony does not reach the level of a “ballpark guesstimate,” the Tax Court may nonetheless find against the taxpayer, for lack of supporting evidence. See Vandegrift v. CIR, T.C. Memo. 2012-14 (finding taxpayer “generally honest and forthright,” but “forced to find” that he failed burden of proof); see also D’Avanzo, 67 Fed.Cl. at 44 (citing taxpayer’s sincerity and good faith, but finding evidence as whole unreliable). It has even discounted others’ testimony, if used to corroborate the taxpayer’s testimony, if their testimony itself lacks corroboration. See Carlstedt, supra, at 10 (witnesses could not remark on taxpayer’s hours and “only gave vague statements as to the extent of his participation”); Barniskis
v. CIR
, T.C. Memo. 1999-258; Dean v. IRS, 99 A.F.T.R.2d 2007-988 (W.D.Wash. 2007). And often, if the taxpayer’s documentary evidence is not admitted, or not found credible, the taxpayer is left with nothing but its own “selfserving” testimony. Carlstedt, supra.

F. Consistency

Even if the taxpayer corroborates its evidence, the evidence must maintain consistency, in relation with other evidence, and within itself. If two pieces of evidence are consistent, the credibility of the evidence as a whole is bolstered. See Miller v. CIR, T.C. Memo. 2011-219 (compelling testimony of taxpayer, his wife and associates, and contemporaneous records); Lewis v. CIR, T.C. Summ. Op. 2014-112 (post-event summary log of activities bolstered by credible testimony). But if they conflict with each other, then overall credibility is diminished. See Merino, supra (taxpayer admitted to errors in making summary log, and forgot activities referenced therein). This is significant when the Tax Court considers the evidence to determine the number of hours spent on real property and rental activities, once the taxpayer has proven material participation. In Carlstedt, though the taxpayer relied upon contemporaneous documents, the whole of the evidence showed inconsistencies: the taxpayer had recalculated hours after the fact, and admitted that the recalculations were motivated by the scrutiny of trial. See Scheiner, supra (court “particularly troubled” how taxpayer’s uncorroborated testimony “neatly place[d] her over all of the hurdles necessary” to prove material participation); see also In re Shaw, supra (finding that taxpayer-debtor had sufficiently proven material participation, but concluding that she nonetheless padded her hours).

In Bailey v. CIR, T.C. Memo. 2001-296, the Tax Court reviewed a taxpayer’s narrative summary of rental activities, and cited it for numerous inconsistencies and “indicia of unreliability”:

  • The number of hours claimed appears excessive in relation to tasks described. See Jafarpour, supra at 9.
  • The taxpayer combined time on rental activities with other business activities or personal time. See Merino, supra at 4 (including “unrelated activities such as meals with friends and time spent sleeping”).
  • The rental properties were vacant during the year in dispute. See Hill, supra at 5; see also Treas. Reg. § 1.469-1T(e)(3) (short-term lease of 7 days or less treated as not a rental activity).
  • The rental properties were held out for sale during the year in dispute. But see Vandegrift, supra at 8 (taxpayer intended to hold property for rental but sold it in same year due to advantageous circumstances; taxpayer allowed to include gain from sale to determine net passive income).
  • The taxpayer retained third parties to manage rental properties. Harnett, supra at 6-7, 9-10.

Similarly, in Hassanipour v. CIR, T.C. Memo. 2013-88, the Tax Court refused to believe the taxpayer’s testimony, based on its “many indicia of unreliability”: the testimony conflicted both with the hours provided by the taxpayer’s employer, and with the taxpayer’s own calendar entries; estimates included duplicate entries from the calendar; the taxpayer could not explain why its allegedly contemporaneous calendar was copyrighted in 2009, when the years in dispute were 2007 and 2008; and much of the testimony was discounted as “vague and inherently improbable.”

Not only must the document or testimony remain consistent with the rest of a taxpayer’s evidence, that piece of evidence must also remain internally consistent. For example, in Jafarpour, T.C. Memo. 2012-165, the taxpayer introduced an appointment book of her other job (chiropractor), and “large ring binder” divided into seven sections, allegedly her contemporaneous logbook of activities. The appointment book did not provide adequate details and conflicted with the taxpayer’s own testimony. The logbook contained a list of activities in pen, but the allotted hours in pencil; the hours also were rounded up to full numbers; and several activities were repeated multiple times throughout the logbook. The taxpayer also could not explain why the IRS Appeals Officer received a different logbook (without pencil notations) prior to trial. Id. at 9, fn. 18. Several other cases also point out the inconsistency of using different versions of logs and summaries, for audit and for trial. See Almquist v. CIR,T.C. Memo. 2014-40; Goolsby v. CIR, T.C. Memo. 2010-64; Manalo v. CIR, T.C. Summ.Op. 2012-30. On the other hand, in Adeyemo, supra at 18, the Tax Court found the taxpayer’s post-event logbook to be credible, based on its “thoroughness and consistency.”

In Lee v. CIR, T.C. Memo. 2006-193, a consolidated case, taxpayer brothers (one of whom was an IRS agent prior to the years in dispute) relied upon their respective testimonies and two sets of logs—one prepared for audit, and the other prepared for trial. Upon comparing the two logs, the Tax Court found that the brothers had padded their times by over 1,000 hours each (for the two years in dispute) and exaggerated their hours on various routine rental activities. Id. at 3. The former IRS agent’s testimony, regarding sick leave and vacation hours, was also contradicted by the IRS’s own timesheets, leading to the “dubious position that he routinely filled in his own time-and-attendance records inaccurately.” Id. The other brother even admitted on cross-examination that he did not know anyone in the IRS, even though his brother was present in court. 4. The Tax Court concluded that the taxpayers’ evidence and estimates were so egregious and lacking in credibility, that they were “not even in the ballpark.” Id.

II. Successful Cases

Out of the several dozen cases dealing with the real estate professional exception, the author has only found four opinions, wherein the taxpayer successfully proved the exception (though they may have been penalized or found deficient on other matters). In Agarwal v. CIR, T.C. Summ.Op. 2009-29, the Tax Court concluded that the taxpayer’s participation in brokerage activities for her real estate agency counted as a real property trade or business under IRC § 469(c)(7)(C); the parties had stipulated to the factual record before trial.

In Miller v. CIR, supra, the taxpayer introduced corroborating testimony, as well as contemporaneous logs and records. The taxpayer’s witnesses, whose testimony the Tax Court found “compelling,” referred to the taxpayer as a “workaholic” with “one in a million” work ethic, and who was continually found on-site and working alongside construction crews. Id. at 3, 5. The Tax Court noted that the contemporaneous records “provided useful guidance when coupled with [the taxpayer’s] testimony.” Id. at 2, fn. 8.

In Fitch v. CIR, T.C. Memo. 2012-358, a taxpayer couple introduced testimonial evidence of their rental activities. (They each kept separate rental properties: Mr. Fitch had five properties; Mrs. Fitch had three. Id. at 6-7.) Though the IRS argued that the taxpayers’ testimony was self-serving, the Tax Court nonetheless found their testimony to be sincere and highly credible. Id. at 24. For example, Mrs. Fitch routinely worked early mornings and weekends solely on real estate activities, as a real estate agent and landlord, Id. at 20-21; and both Mr. and Mrs. Fitch also credibly testified to the numerous rental activities they performed on their respective rental properties. Id. at 23.

And in Lewis v. CIR, supra, the taxpayer was a retired veteran on 60% disability. He used his and his wife’s testimony, a narrative summary, and contemporaneous documents, including computer records and receipts. Id. at 4-6, 11-13. His wife credibly testified that it took him “significantly longer than might ordinarily be expected” to complete his rental activities. Id. at 11. They also testified that he followed the same weekly routine for the years in question, without taking a vacation. Id. at 4-5. Similarly to Miller, Mr. Lewis’s narrative summary (though post event) was bolstered by credible testimony and contemporaneous records.

III. Conclusion

The rules of evidence play a significant role in determining whether a taxpayer can qualify for the real estate professional exception. The Tax Court’s preference for contemporaneous records is related to the hearsay exceptions for business records and recorded recollections, but a lack of contemporaneity may not ultimately defeat the evidence’s admissibility, due to the wide range of permissible methods of proof contemplated by Treas. Reg. § 1.469-5T(f)(4). Even after the evidentiary hurdles of relevance, hearsay, and authentication, the taxpayer must still demonstrate provide credible and believable proof.

A taxpayer’s credibility is based on contemporaneous records, corroborating documents and testimony, and consistency with other evidence. Treas. Reg. § 1.469 5T(f)(4) does not require contemporaneous records, and post-event documents may still be credible, but they must be supported with credible evidence. In practice, tax attorneys should advise their clients to maintain contemporaneous records: the closer in time are the records to the events in question, the more likely they provide credible foundation and corroborate a taxpayer’s testimony and other documents, and the more likely that a taxpayer’s case keeps up the appearance of consistency from audit to trial.


1 This paper will cite to certain small taxpayer cases, not for their precedential value, see IRC § 7463, but as support for the author’s reasoning and analyses. Back

Recent Cases of Interest

Robert Horwitz

Robert S. Horwitz
Law Offices of A. Lavar Taylor

Robert S. Horwitz has over 35 years of experience as a tax attorney, having spent years with the Department of Justice Tax Division and in the U.S. Attorney’s Office, where he successfully prosecuted the leading real estate tax shelter promoter in the western United States. Since 1994 Mr. Horwitz has been part of the Law Offices of A. Lavar Taylor, where he represents clients in all types of civil and criminal tax matters. Robert S. Howwitz, Law Offices of A. Lavar Taylor, Santa Ana, CA, 714-396-4049,

The TEFRA partnership provisions (IRC sections 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 have partnership items treated as if they were not partnership items. Specifically, section 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 nonpartnership 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 section 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 IRC § 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 IRC § 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 taxab
le 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) partnership 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 to 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, 2014 U.S. App. LEXIS 23367 (6th Cir. 12/15/2014), 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 the First Amendment protected his actions on behalf of his clients 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 7212(a) and 12 months on each of the 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 a 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 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 inUnited States v. Kassouf, 144 F. 3rd 952 (1998), in which the court construed IRC § 7212(a) in light of the Supreme Court’s decision inAguilar, 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.3rd 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, Bowman, limited 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 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‘s application 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 Kassoufand 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 that 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. Miner never disputed this evidence, 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, becuase 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 spoonfeed 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 evaluation 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).

In Elkins 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 Inter
est 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 undiscounted 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 su
bparts: 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). 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.

The taxpayer had been employed as a salesman for a tire dealership in Arkansas. He convinced his employer to contract for his services with a corporation that he had set up and to pay his compensation and expense reimbursements to the corporation without issuing either W-2s or 1099s. Payments by the tire dealership to the corporation were either cashed by the taxpayer or deposited into a nominee account and used for his benefit. The corporation did not issue any W-2s or 1099s to the taxpayer and he did not file any income tax returns after 1994. He eventually became the target of a CI investigation. During the course of the investigation, he filed over 70 FOIA requests in order to impede the investigation.

In 2001, the taxpayer pled guilty to tax evasion 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 re-litigating 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 Cong., 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. IRC § 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, 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 ta
xpayer 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 taxpayers 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 from 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.


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2014 LaVonne D. Lawson
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1994 A. Lavar Taylor
1993 Jennifer Miller Moss
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1990 Jennifer Miller Moss

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