January 23, 2013
Texas Heirs Bring Estate Planning Malpractice Action
Texas Lawyer: Oilman's Family Sues Lawyers, Firms, Accountants:
The beneficiaries of a multimillion-dollar trust have sued an estate-planning attorney, his firm and an accounting firm, alleging professional malpractice related to a tax plan that led to litigation with the IRS.
But in an unusual twist, the beneficiaries also sued the firm and lawyers to whom their estate-planning attorney referred them for representation in that litigation before the U.S. Tax Court against the IRS. That Tax Court litigation [Hurford v. Commissioner, T.C. Memo. 2008-278] allegedly cost the plaintiffs more than $1 million in legal fees.
"As a result of the Defendants' representations, negligence and misconduct, Plaintiffs have incurred exorbitant fees and costs in the tax transactions, legal fees in pursuing litigation before the Tax Court, other expenses, and taxes, penalties and interest that otherwise would not have been owed," according to the petition in G. Michael Hurford, et al. v. Joseph B. Garza, et al.
January 22, 2013
IRS Suspends Regulation of Tax Return Preparers After Friday's Court Defeat
Following up on my post, Court Says IRS Lacks Authority to Regulate Tax Preparers:
As of Friday, Jan. 18, 2013, the U.S. District Court for the District of Columbia has enjoined the IRS from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order, tax return preparers covered by this program are not currently required to register with the IRS, to complete competency testing or secure continuing education. The ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries.
The IRS, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly. Please continue to check this site as additional information becomes available.
- Accounting Today, IRS Plots Next Move after Court Invalidates Tax Preparer Regulation
- Bloomberg, IRS Stops Return Preparer Regulations After Court Loss
- Forbes, Attorney Who Bested IRS In Tax Preparer Regulation Case Speaks Out
- Fox News, Intuit 'Disappointed' in Decision Preventing IRS From Regulating Nonprofessional Preparers
- Thomson Reuters, IRS Rescinds Tax Preparer Rules After Court Ruling
December 8, 2012
Supreme Court Grants Cert to Decide Whether Estate Tax Marital Deduction Applies to Same-Sex Couple
The Supreme Court yesterday granted certiorari to decide whether the denial of an estate tax marital deduction to the surviving spouse of a lesbian couple under the Defense of Marriage Act violates the equal protection clause.
November 30, 2012
2d Circuit Reverses Tax Shelter Convictions of Two Former Ernst & Young Partners
United States v. Coplan, No. 10-583 (2d Cir. Nov. 29, 2012):
We consider here the fate of four partners and employees of Ernst & Young, LLP (“E&Y”), one of the largest accounting firms in the world, who appeal their convictions in connection with the development and defense of five “tax shelters” that were sold or implemented by E&Y between 1999 and 2001. At issue, among other things, is the scope of criminal liability in a conspiracy to defraud the United States under 18 U.S.C. § 371 and the sufficiency of the evidence with respect to the criminal intent of certain defendants.
The defendants in these consolidated actions are three tax attorneys, Robert Coplan, Martin Nissenbaum, and Richard Shapiro, and one accountant, Brian Vaughn, formerly employed by E&Y. A fifth defendant, Charles Bolton, was an investment advisor who owned and operated various asset-management companies. Coplan, Nissenbaum, Shapiro, and Vaughn (jointly, the “trial defendants”) appeal from separate judgments of conviction entered by the United States District Court for the Southern District of New York (Sidney H. Stein, Judge) on February 17, 2010, following a 10-week jury trial on charges of conspiracy to defraud the Government, tax evasion, obstruction of the Internal Revenue Service (“IRS”), and false statements to the IRS. Bolton appeals from a judgment of conviction entered by the District Court on April 14, 2010, following his plea of guilty to a single conspiracy charge.
For the reasons that follow, we reverse the convictions of Shapiro and Nissenbaum on Counts One, Two, and Three, and the conviction of Nissenbaum on Count Four, and we affirm the convictions of Coplan and Vaughn in their entirety. We affirm the District Court’s order sentencing Bolton principally to 15 months of imprisonment, but we vacate and remand the portion of the judgment that imposed a fine of $3 million. ....
Dissent: I respectfully dissent from so much of the Majority Opinion as finds the evidence insufficient to support (1) the convictions of defendants Richard Shapiro and Martin Nissenbaum of conspiracy, in violation of 18 U.S.C. § 371, to (a) defraud the United States by impairing the lawful functions of an agency of the United States government, to wit, the Internal Revenue Service ("IRS"), (b) commit tax evasion, see 26 U.S.C. § 7201, and (c) make false statements to the IRS, see 18 U.S.C. § 1001 (Count One); and (2) those two defendants' convictions of attempted tax evasion in violation of 26 U.S.C. § 7201 (Counts Two and Three).
- ABA Journal, 2nd Circuit Reverses Tax-Shelter Convictions of 2 Former Ernst & Young Lawyers
- Bloomberg, Ex-Ernst & Young Lawyers Get Tax Convictions Reversed
- Federal Tax Crimes Blog, Major CA2 Decision on E&Y Tax Shelter Convictions
- Reuters, Two Ex-Ernst Partners' Convictions Reversed in Tax Case
- New York Law Journal, Circuit Reverses 2 Lawyer Convictions in Tax Shelter Cases
- Wall Street Journal, Two Convictions Tossed Out in Ernst Tax-Shelter Case
September 27, 2012
Gerzog: Another Turn with Turner
In its latest Estate of Turner opinion [138 T.C. No. 14 (Mar. 29, 2012)], the Tax Court decided whether a pecuniary formula marital deduction clause could shield the inclusion of family limited partnership assets in the decedent’s estate.
All Tax Analysts content is available through the LexisNexis® services.
September 25, 2012
Forbes: Judge Shoots Down Another Forbes 400 Member's Tax Shelter
Forbes: Judge Shoots Down Another Forbes 400 Member's Tax Shelter, by Janet Novack:
A California federal district court judge on Friday rejected, on summary judgment, a bid by billionaire Broadcom co-founder Henry Nicholas, III, to claim hundreds of millions in tax losses from a shelter marketed more than a decade ago by myCFO, Inc. the wealth advisory firm started by Forbes 400 member James Clark, co-founder of Netscape, and backed by venture capitalist John Doerr. [Broadwood Investment Fund LLC v. United States, No. 08-0295 (C.D. CA Sept. 21, 2012).] An attorney for Nicholas, BakerHostetler partner Jeffrey H. Paravano, said Monday that Friday’s ruling will be appealed.
The Nicholas case involves what the IRS has branded the distressed asset/debt or “DAD” shelter. In this ploy, a U.S. taxpayer purchases (through a partnership) junk foreign debt for pennies on the dollar and then claims big paper tax losses—losses that are real, but that were sustained by a foreign lender, not the U.S. taxpayer. DAD was marketed to the ultra-wealthy in 2001 and 2002 after the IRS began cracking down on even more brazen tax gambits, such as the notorious Son of Boss shelter. New 400 member Shahid Khan, owner of the NFL’s Jacksonville Jaguars, is currently suing BDO Seidman for, among other things, selling him DAD shelters for both 2002 and 2003. In October 2004, Congress changed the tax code to bar partnerships from being used to transfer foreign losses to U.S. taxpayers, thus clearly outlawing DAD after that point.
February 29, 2012
Federal Circuit Denies Patent Protection for § 1031 Like-Kind Exchange Strategy
Fort Properties, Inc. v. American Master Lease, LLC (No. 2009-1242) (Fed. Cir. Feb. 27, 2012):
The investment tool disclosed in the '788 patent is designed to invoke the benefits of § 1031. In particular, the claims require the aggregation of a number of properties into a "real estate portfolio." The property interests in this portfolio are then divided into shares and sold to investors much in the same way that a company sells stock. These divided property interests are called "deedshares." Each deedshare can be encumbered by its own mortgage debt, which provides flexibility to real estate investors attempting to structure their debts in a way that complies with § 1031.
We view the present case as similar to Bilski. Specifically, like the invention in Bilski, claims 1-31 of the '788 patent disclose an investment tool, particularly a real estate investment tool designed to enable tax-free exchanges of property. This is an abstract concept. Under Bilski, this abstract concept cannot be transformed into patentable subject matter merely because of connections to the physical world through deeds, contracts, and real property.
February 22, 2012
8th Circuit Denies Accountant's Use of 'John Edwards Sub S Tax Shelter' -- Is Warren Buffett Next?
The Eighth Circuit yesterday affirmed the district court's denial of an accountant's attempted use of the 'John Edwards Sub S tax shelter' and required him to treat $91,044 per year as his compensation (and thus subject to the 15.3% Social Security and Medicare taxes), rather than the $24,000 he claimed as wages. (During the years in question, the accountant treated $175,470 and $203,651 as Sub S distributions.) David E. Watson, P.C. v. United States, No. 11-1589 (8th Cir. Feb. 21, 2012):
(1) Watson was an exceedingly qualified accountant with an advanced degree and nearly 20 years experience in accounting and taxation; (2) he worked 35-45 hours per week as one of the primary earners in a reputable firm, which had earnings much greater than comparable firms; (3) LWBJ had gross earnings over $2 million in 2002 and nearly $3 million in 2003; (4) $24,000 is unreasonably low compared to other similarly situated accountants; (5) given the financial position of LWBJ, Watson's experience, and his contributions to LWBJ, a $24,000 salary was exceedingly low when compared to the roughly $200,000 LWBJ distributed to DEWPC in 2002 and 2003; and (6) the fair market value of Watson's services was $91,044. Based on the record, the district court did not clearly err.
Warren Buffett famously draws only a $100,000 salary from Berkshire Hathaway -- although he does not avoid the 12.4% Social Security tax because this is roughly the amount of the FICA wage base ($110,000 in 2012), Buffett is avoiding the 2.9% Medicare tax on the value of his services in excess of $100,000. (Hat Tip: Monty Meyer.) Prior TaxProf Blog coverage:
- Court Gives IRS Rare Win in 'John Edwards Sub S Tax Shelter' Case (Jan. 24, 2011)
- More on the 'John Edwards Sub S Tax Shelter' (Feb. 6, 2011)
- Schwidetzky: Musings on Watson and the John Edwards Sub S Tax Shelter (June 5, 2011)
- Newt Gingrich Used 'John Edwards Sub S Tax Shelter' to Save $50k in Medicare Taxes (Jan. 23, 2012)
February 3, 2012
Tax Prof Amicus Brief in Affordable Care Act Litigation
Jordan Barry (San Diego), Patricia Cain (Santa Clara), Bryan Camp (Texas Tech) & Keith Fogg (Villanova) have filed Amicus Curiae Brief in Health and Human Services v. Florida (Affordable Care Act Litigation) on Behalf of Tax Law Professors in Support of Vacatur:
This amicus brief, filed in HHS v. Florida (the Affordable Care Act litigation), has two principal goals.
First, it seeks to aid the Court by giving it an overview of the tax determination and tax collection processes. This background is intended to help the Court understand the relationship between new Internal Revenue Code Section 5000A (which contains both the individual mandate itself and the penalty that enforces it) and the rest of the Internal Revenue Code.
Second, it seeks to correct what we see as an error in the lower courts' analysis of Section 5000A. Section 7421, also known as the Anti-Injunction Act, prohibits lawsuits that restrain the assessment or collection of taxes. Accordingly, whether the 5000A penalty is a tax for purposes of Section 7421 is of great importance for this case. Several judges who concluded that the 5000A penalty is not a tax for purposes of Section 7421, including the majority in the DC Circuit, reached that conclusion, in part, because they thought it significant that Congress limited the IRS‘s ability to collect the 5000A penalty. We think that approach is misguided in this particular case for three reasons. First, these limitations strongly imply that Congress thought the 5000A penalty constitutes a tax for purposes of key tax administrative provisions. Second, 5000A is structured to avoid every procedure that a taxpayer could use to challenge a liability before paying it. Third, in light of the specific limitations that Congress imposed on its collection, the 5000A penalty looks increasingly like a true tax measure, regardless of its label.
This brief assumes that Section 7421 is jurisdictional, as the Court has previously held. This brief does not address arguments that the 5000A penalty is a tax for purposes of Section 7421 by virtue of other Code sections, such as Section 6671 or Section 6201. These arguments are ably presented in the brief filed by the court-appointed amicus curiae and the brief filed on behalf of former IRS commissioners Mortimer Caplin and Sheldon Cohen. Special thanks to Michael de Leeuw and the rest of the Fried Frank team.
DOJ Indicts Swiss Bank for Hiding $1.2 Billion from the IRS
January 30, 2012
Hickman: Impressions From the Home Concrete Oral Argument
In this article, Hickman, who filed an amicus brief in Home Concrete, discusses the case, the history of litigation leading up to it, and the oral argument; she believes the case is too close to call for either party.
All Tax Analysts content is available through the LexisNexis® services.
- Tax Appellate Blog, Home Concrete Argument Preview
- Tax Appellate Blog, Lively Oral Argument in Home Concrete Leaves Outcome in Doubt.
January 24, 2012
2d Circuit Rejects GE's $62 Million Castle Harbour Tax Shelter
TIFD III-E Inc. v. United States, No. 10-70-CV (S.D.N.Y. Jan. 24, 2012):
The United States appeals from a judgment of the United States District Court for the District of Connecticut (Underhill, J.) invalidating two notices of Final Partnership Administrative Adjustments issued by the Internal Revenue Service. The district court so ruled because it concluded that the taxpayer-plaintiff’s characterization of two tax-exempt Dutch banks as its partners in Castle Harbour LLC was proper under Internal Revenue Code § 704(e)(1). The district court also concluded that, even if the banks did not qualify as partners under § 704(e)(1), the government was not entitled to impose a penalty pursuant to § 6662. The Court of Appeals (Leval, J.) holds that the evidence compels the conclusion that the banks do not qualify as partners under § 704(e)(1), and that the government is entitled to impose a penalty on the taxpayer for substantial understatement of income. The judgment of the district court is REVERSED....
We appreciate and have benefitted from the District Court’s conscientious, thoughtful and comprehensive analysis on remand. Ultimately, however, the issue whether the term “capital interest” in § 704(e)(1) includes an interest that is overwhelmingly in the nature of debt is one of law, which of course we review de novo. We respectfully disagree with the district court’s analysis. As we now review the question arising under § 704(e)(1), we conclude that the same evidence which, on our last review, compelled the conclusion that the banks’ interest was so markedly in the nature of debt that it does not qualify as bona fide equity participation also compels the conclusion that the banks’ interest was not a capital interest under § 704(e)(1)....
The taxpayer has failed to point to substantial authority supporting its treatment of the banks as partners. We find that a penalty for substantial understatement of income was therefore properly assessed.
January 18, 2012
Tax Court Rejects Buy.com Founder's $45 Million OPIS Tax Shelter
Blum v. Commissioner, T.C. Memo. 2012-16 (Jan. 17, 2012):
This Court has not previously considered an Offshore Portfolio Investment Strategy (OPIS) transaction. The question before us is whether petitioners are entitled to deduct certain capital losses claimed from their participation in the OPIS transaction. We hold that they are not because the transaction lacks economic substance. We must also decide whether petitioners are liable for gross valuation misstatement penalties and negligence penalties under § 6662(a). We hold they are liable for the penalties.Petitioners claimed an artificial loss of over $45 million. This is exactly the type of “too good to be true” transaction that should cause a savvy, experienced businessman to seek independent advice. See Neonatology Associates, P.A. v. Commissioner, 299 F.3d at 234 (“When, as here, a taxpayer is presented with what would appear to be a fabulous opportunity to avoid tax obligations, he should recognize that he proceeds at his own peril.”). ... Petitioners’ decision to rely exclusively on KPMG in structuring, facilitating and reporting their OPIS transaction was therefore not reasonable. Petitioners did not take their position in good faith and thus lacked reasonable cause for that position. Accordingly, we sustain respondent’s determination that petitioners are liable for accuracy-related penalties for 1998 and 1999.
January 4, 2012
Three Swiss Bankers Indicted for Helping U.S. Taxpayers Hide $1.2 Billion From the IRS in Offshore Accounts
The U.S. Attorney for the Southern District of New York yesterday announced the indictment of three Swiss bankers with Wegelin & Co. for conspiring with U.S. taxpayers to hide more than $1.2 billion in assets from the IRS.
- U.S. Attorney press release
- Financial Times
- New York Post (headline: "Swiss Bankers Had Fondue For Brains")
- New York Times
- Wall Street Journal
(Hat Tip: Ann Murphy.)
December 28, 2011
DOJ Sues Hal Steinbrenner for Return of 'Erroneous' $670k Tax Refund
New York Yankees co-owner and managing partner Harold Steinbrenner was sued by the U.S. Justice Department over an “erroneous” $670,494 tax refund he received in 2009. The complaint, filed Dec. 27 in Tampa, Florida federal court, seeks to reclaim the funds issued to Steinbrenner on Dec. 28, 2009. The refund stemmed from disputes between Steinbrenner and the IRS over the 2001 tax year and audits of the Major League Baseball team’s parent company for 2001 and 2002, according to court papers.
According to the complaint, Hal Steinbrenner paid his taxes in 2008, and then filed an amended 2001 tax return in 2009 seeking a refund because of a $6.8 million net operating loss carried back from 2002. The IRS paid the refund -- and then said that the refund claim should have been filed by March 1, 2009, more than five months before Hal Steinbrenner sought the refund.
10th Circuit Rejects Billionaire Philip Anschutz's Tax Shelter
The Tenth Circuit yesterday affirmed the Tax Court's disallowance of billionaire Philip Anschutz's use of variable prepaid forward contracts with Donaldson, Lufkin & Jenrette to avoid $144 million in capital gains taxes. Anschutz Co. v. Commissioner, No 11-9001 (Dec, 27, 2011).
Prior TaxProf Blog coverage:
- WSJ: IRS Targets Billionaire's Variable Prepaid Forward Contract Tax Strategy (June 9, 2008)
- Johnston: Anschutz and a 21st Century Tax System (May 10, 2010)
- Tax Court Rejects Billionaire Anschutz's Use of Variable Prepaid Forward Contracts to Avoid $144m Capital Gain (July 23, 2010)
- More on the Crackdown on the Anschutz Tax Shelter (Aug. 2, 2010)
- Johnston: Anschutz Will Cost Taxpayers More Than the Billionaire (Aug. 2, 2010)
December 23, 2011
Supreme Court Briefing in Home Concrete (6-Year SOL and Overstatement of Basis)
The briefing is now completed in United States v. Home Concrete & Supply, LLC, No. 11-139, which is scheduled for oral argument in the U.S. Supreme Court on Jan. 17, 2012.
- Opinion below (4th Cir. Feb. 7, 2011)
- Issue: (1) Whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from gross income that can trigger the extended six-year assessment period; and (2) whether a final regulation promulgated by the Department of the Treasury, which reflects the IRS's view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference.
- Brief for the United States
- Brief for Home Concrete & Supply, LLC
- Amicus brief of Bausch & Lomb, Inc.
- Amicus brief of Daniel S. Burks and Reynolds Properties
- Amicus brief of Grapevine Imports, LTD
- Amicus brief of Kristin E. Hickman (University of Minnesota Law School)
December 19, 2011
Federal Judge Allows IRS to Troll Through State Records for Unreported Gifts of Real Estate
Forbes, Federal Judge Green Lights IRS Search For California Gift Tax Cheats, by Janet Novack:
A federal district court judge has given the IRS permission to serve a “John Doe” summons on the California State Board of Equalization demanding the names of residents who transferred property to their children or grandchildren for little or no money, from 2005 to 2010. [In the Matter of the Tax Liabilities of John Does, No. 2:10-mc-00130 (E.D. CA Dec. 15, 2011)] The IRS wants those names as part of a crackdown on what it believes is the widespread failure to file required tax returns when real property is passed between family members.
The IRS has already received information about intra-family property transfers from county or state officials in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin. But officials of California’s BOE said state law prohibited them from disclosing the information without a court approved summons.
In an affidavit filed in the California case in October, Josephine Bonaffini, the Federal/State Coordinator for the IRS’ Estate and Gift Tax Program, said the agency has so far examined 658 taxpayers identified as transferring property to relatives and concluded that 238 of them should have, but didn’t, file [gift tax returns].
Prior TaxProf Blog posts:
December 16, 2011
Western Union, IRS Settle $2 Billion Transfer Pricing Case
November 27, 2011
Tax Court: Glam Metal, Hair Bands, Ecdysiasts, and Deciduous CalisthenicsWillson v. Commissioner, T.C. Summ. Op. 2011-132 (Nov. 23, 2011):
Robert Willson opened a bar in 1986, and it gave him nothing but trouble. He’s seen lawsuits, endless repairs, and even a catastrophic fire. One might say the City of Des Moines did him a favor when it finally condemned the land in 2000 to expand its airport--right around the time Willson began serving a federal prison term. But the Commissioner wouldn’t let things be and says that the condemnation triggered a large capital gain that Willson didn’t correctly report. This meant the bar would give him one more headache--because, though Willson represented himself at trial, the facts as he described them would be worthy of an advanced exam problem in tax accounting....
Willson did his best to explain in as plain a way as possible the history of the property and what he spent on it. We will try to return the favor by minimizing taxspeak. . . .
[T]he bar became a local mecca for a type of “rock and roll” called “glam metal.” While the Court took no expert testimony on the nature of such groups, it did allow into the record Willson’s own explanation of this genre of musical entertainment. We also took judicial notice that “hair bands” had lost much of their popularity with the coming of something called “grunge rock” (another type of “rock and roll” music) in the early nineties. This was important to Willson’s business because “hair bands,” with such unlikely names as Head East, Great White, and Saturn Cats could still draw large crowds to a bar on the outskirts of Des Moines but had become affordable providers of live entertainment. Willson even invited one of these “hair bands” to be a sort of artist-in-residence. One night in 1994, a few band members did something to a smoke machine that sparked an enormous fire. This fire engulfed everything except the parking lots, the shed, and the property’s original house. It also forced Willson to make a choice--sell to the City as part of its airport expansion, or rebuild. Willson was unable to sell, so he had to rebuild. He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously--and paronomastically--called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression. . . .
Des Moines began moving to condemn the bar and the land sometime in 1999. Willson closed the bar doors by May 5, when he transferred the property to his lawyer for safekeeping until the matter with the City was resolved. His criminal troubles-- something to do with money and drugs and possibly the bar--were reaching the point where Willson was about to begin serving a federal prison term, and he authorized his lawyer to act for him in dealing with the City while he was imprisoned. ...
Despite his legal problems, however, Willson did manage to file his 2000 tax return. The Commissioner determined that he had underreported his income. Willson timely filed a petition to contest the Commissioner’s determination, but trial was postponed for several years while he served out his sentence. The one remaining issue is Willson’s adjusted basis in the property at the time of the condemnation. ...
The Commissioner, however, doesn’t divide the $160,000 cost of the real estate between the land and the buildings. This is a critical mistake. ...
(Hat Tip: Bob Kamman.)
November 25, 2011
For First Time, Tax Court Approves Use of Geithner/Turbo Tax DefenseThe Tax Court on Wednesday for perhaps the first time accepted a taxpayer's use of the Geithner/TurboTax defense in allowing a patent attorney to blame mistakes in his use of tax preparation software to excuse him for penalties for failing to report income on his return. Olsen v. Commissioner, T.C. Summ. Op. 2011-131 (Nov. 233, 2011):
Petitioner works as a patent attorney for the Department of Energy at a national laboratory, holds a Government security clearance, and is subject to detailed and periodic background investigations.
In 2007, petitioner's wife received interest income from a trust created by her mother's estate. The funds were attributable to litigation resolved in favor of the estate. As a beneficiary of the trust, petitioner's wife received a Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc., reporting the interest income. Prior to this instance, the couple had never received a Schedule K-1 and were unfamiliar with the form.
Petitioner usually takes the lead in preparing the couple's joint Federal income tax returns. He prepared the couple's joint income tax return for 2007 using tax return preparation software. Because he had never dealt with a Schedule K-1 in the past, petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.
Using the upgraded software's interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his Federal tax return. Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error. ...
This Court has observed that "Tax preparation software is only as good as the information one inputs into it." Bunney v. Commissioner, 114 T.C. 259, 267 (2000). An isolated transcription error, however, is not inconsistent with a finding of reasonable cause and good faith. Reg. § 1.6664-4(b)(1).
We found petitioner to be forthright and credible, and we credit his testimony at trial. We conclude that he made an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax return preparation software. [Fn.4] It is clear that his mistake was isolated as he correctly reported the source of the income, and he did not repeat any similar error in preparing his tax return.
Fn.4: We note that petitioner holds a Government security clearance and is subject to periodic background investigations, which, as he is well aware, provide substantial motivation for him to properly report income on his tax return.
The most important factor in deciding whether a taxpayer acted with reasonable cause and in good faith is the extent of the taxpayer's effort to assess the proper tax liability. ... Under the unique facts and circumstances of this case, we hold that petitioner acted with reasonable cause and in good faith within the meaning of § 6664(c)(1). Accordingly, petitioner is not liable for the accuracy-related penalty under § 6662(a) as determined by respondent in the notice of deficiency.
Prior TaxProf Blog coverage:
- Geithner Blames Turbo Tax For His Tax Troubles (Jan. 22, 2009)
- TurboTax, Geithner Edition (June 30, 2009)
- Tax Court Rejects Taxpayer's Attempt to Use Geithner's TurboTax Defense (Aug. 26, 2009)
- Tax Court Rejects "Geithner Defense," Says Reliance on TurboTax Does Not Excuse Taxpayer From Penalty for Errors on Tax Return (Apr. 20, 2010)
- Tax Court Rejects Geithner/TurboTax Defense (June 23, 2010)
- Tax Court Again Rejects Geithner/TurboTax Defense (Nov. 12, 2010)
November 15, 2011
Judge Grants Daugerdas Hearing on Juror Misconduct in Tax Shelter ConvictionFollowing up on my prior post, Daugerdas Seeks New Trial in Tax Shelter Case Based on Juror Misconduct: Bloomberg, Daugerdas Judge Grants Hearing on Juror Conduct in Tax Case:
A judge will hold a hearing to determine whether to grant a new trial to Paul Daugerdas, a former lawyer at the defunct firm Jenkens & Gilchrist, and three others convicted in a 10-year tax-shelter scheme.
U.S. District Judge William Pauley in Manhattan said today he will hold an evidentiary hearing on the conduct of Catherine Conrad, Juror No. 1 in the 10-week trial. He didn’t set a date. The defendants claim Conrad hid details of her background from the court, including a law degree, at least four arrests and the fact that she was serving a sentence of probation for shoplifting.
- ABA Journal, Hearing OK’d re Convicted Tax Lawyer’s Claim That Juror’s Hidden Legal Past Prevented Fair Trial
Supreme Court Grants Cert in Equal Protection Tax CaseThe Supreme Court yesterday granted certiorari in Armour v. Indianapolis, No. 11-161:
Issue: Whether the Equal Protection Clause precludes a local taxing authority from refusing to refund payments made by those who have paid their assessments in full, while forgiving the obligations of identically situated taxpayers who chose to pay over a multi-year installment plan.
- Jack Bogdanski (Lewis & Clark), Supreme Court Takes Local Sewer Tax Case
- Calvin Massey (New Hampshire), Taxes and Equal Protection
November 9, 2011
D.C. Circuit ObamaCare Case: 'The Tax Code Is Never a Walk in the Park'
Orin Kerr (George Washington), The Case for Not Deciding the Constitutionality of the Mandate:
Judge Kavanaugh wrote a separate opinion in the DC Circuit’s mandate case that many readers will overlook: It’s based on the tax code, and the opinion itself acknowledges that its analysis is dense and difficult. (“The Tax Code is never a walk in the park. . . . I caution the reader that some of the following is not for the faint of heart.”) At the same time, Kavanaugh’s opinion closes with a very interesting prudential case for not deciding the merits of the mandate, and instead deciding the case on Anti-Injunctive Act grounds (see starting at page 51). Among them, Kavanaugh argues that if the Court doesn’t decide the issue now, it may never have to decide the issue because the statute could be easily amended to make the mandate easily constitutional under the taxing power.
(Hat Tip: Greg McNeal.)
November 7, 2011
Principal, Wells Fargo Lose $100 Million Tax Shelter CasesDes Moines Register, Principal, Wells Fargo Lose High-Stakes Court Battles:
Two companies with strong ties to Des Moines have lost their fights to avoid paying more than $100 million in taxes to the federal government.
Principal Life Insurance and Wells Fargo were part of two separate but similar efforts to claim unearned tax credits through an elaborate series of cash transactions disguised as investments, a Des Moines Register review of thousands of pages of court transcripts, exhibits and other records shows.
- Principal Life Insurance Co. v. United States, No. 4.08-cv-00082 (S.D. Iowa Sept. 30, 2011)
- Des Moines Register, Ruling Costs Principal $21 Million
- Wells Fargo Corp. v. Unites States, No. 07-3320 (D. Minn. Sept. 30, 2011)
- Des Moines Register, Wells Fargo Loses $80 Million Case
- Tax Update Blog, IRS Defeats Principal, Wells-Fargo Tax Shelters
November 3, 2011
IRS Acquiesces in O’Donnabhain: Gender Reassignment Surgery Is a Deductible Medical ExpenseAction on Decision, 2011-03 (O’Donnabhain v. Commissioner, 134 T.C. 34 (2010)), 2011-47 I.R.B. 1 (Nov. 21, 2011):
Issue: Whether hormone therapy and sex reassignment surgery constitute medical care within the meaning of §§ 213(d)(1)(A) and (9)(B).
Discussion: Section 213 of the Internal Revenue Code allows a deduction for the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer. Medical care, as defined in § 213(d)(1)(A), includes amounts paid for the treatment of disease. Section 213(d)(9)(B) excludes from the definition of medical care any procedure that is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.
Ms. O’Donnabhain paid expenses for hormone therapy and sex reassignment surgery to treat her gender identity disorder disease and deducted the costs of the treatment as medical expenses. The IRS disallowed her deduction based on the view that hormone therapy and sex reassignment surgery did not treat a medically recognized disease or promote the proper function of the body. See CCA 200603025. Ms. O’Donnabhain petitioned the Tax Court to reverse the IRS administrative determination and allow her deduction for the expenses of hormone therapy and sex reassignment surgery.
The Tax Court agreed with Ms. O’Donnabhain that her gender identity disorder is a disease within the meaning of §§ 213(d)(1)(A) and (9)(B). The court cited four bases for its conclusion: 1) the disorder is widely recognized in diagnostic and psychiatric reference texts; 2) the texts and all three experts testifying in the case consider the disorder a serious medical condition; 3) the mental health professionals who examined Ms. O’Donnabhain found that her disorder was a severe impairment; and, 4) the Courts of Appeal generally consider gender identity disorder a serious medical condition. The court held that because hormone therapy and sex reassignment surgery treat the taxpayer’s disease they are medical care, and the expenses for that medical care are deductible under § 213.
The Tax Court rejected the IRS administrative position reflected in CCA 200603025. The Service will follow the O’Donnabhain decision. The Service will no longer take the position reflected in CCA 200603025.
In O’Donnabhain, the Tax Court agreed wuth the IRS that the taxpayer's breast augmentation surgery was directed at improving her appearance and did not meaningfully promote the proper function of her body or treat disease within the meaning of § 213(d)(9)(B), and thus was “cosmetic surgery” excluded from the definition of deductible “medical care” by § 213(d)(9)(A). For more, see:
- Infanti: Dissecting O'Donnabhain (Mar. 10, 2010)
- The Tax Treatment of Gender Reassignment Surgery (June 18, 2011)
October 25, 2011
Tax Court: 'Student Incentive Expenses' Are Not DeductibleFarias v. Commissioner, T.C. Memo. 2011-248 (Oct. 24, 2011):
Petitioner claimed that as a teacher she occasionally used "candy and sugar" as student incentives. A number of the receipts she offered to substantiate these expenses also include other food items and household goods. Petitioner also testified that she purchased a U.S. savings bond that was presented to a student in recognition of community service provided to the school.
There is no evidence that the school required the purchase of the candy or the savings bond for petitioner's students. These expenses were not necessary to petitioner's job; and no matter how well intentioned, gifts to students are not deductible as business expenses.
October 5, 2011
DOJ Wins Three Tax Shelter Cases on Same DayDepartment of Justice Press Release, Justice Department Prevails in Three Tax Shelter Cases on Same Day: Federal Courts Deny Hundreds of Millions in Tax Breaks to Billionaire Dallas Banker, Principal Life Insurance Co. and Wells Fargo & Co. (Oct. 4, 2011):
Three federal courts have issued decisions in favor of the United States in three separate cases involving abusive tax shelters, the Justice Department announced today. All of the court opinions were issued on Sept. 30, 2011.
- In Southgate Master Fund LLC v. United States, the U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, affirmed a lower court ruling that a company formed by billionaire Dallas banker D. Andrew Beal and others was a sham partnership that must be disregarded for federal income tax purposes. ...
- In Pritired 1 LLC v. United States, Judge John A. Jarvey of the U.S. District Court for the Southern District of Iowa prohibited Principal Life Insurance Co. from claiming more than $20 million in foreign tax credits that the company had sought based on a complex transaction involving a $300 million payment to two French banks. ...
- Finally, in WFC Holdings Corporation v. United States, Judge John R. Tunheim of the U.S. District Court for the District of Minnesota disallowed a tax refund claim for more than $80 million filed by a subsidiary of Wells Fargo & Co.
October 4, 2011
Forbes: 5th Circuit Nixes Billionaire Beal's $1.1 Billion Tax ShelterFollowing up on Saturday's post, 5th Circuit Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter: Forbes, Appeals Court Nixes Billionaire Beal's $1.1 Billion Tax Shelter, by Janet Novack:
The 5th Circuit Federal Court of Appeals Friday nixed billionaire Texas banker Andrew Beal’s attempt to claim $1.1 billion in tax losses based on an investment of just $19 million in distressed Chinese debt. But in unanimously upholding a 2009 district court decision disallowing the losses, the three-member appeals panel agreed with the lower court that Beal isn’t liable for penalties since he had “good cause” to believe his ploy might work. The appeals decision described the penalty issue as a “close one.”
Friday’s decision is the first from an appeals court involving what the government calls the “distressed asset debt” or “DAD” shelter. The government has asserted in court papers that Beal, who is worth an estimated $7 billion, used DAD multiple times to “stockpile over $4 billion in artificial losses to shelter future income.” Beal’s lawyers did not respond Sunday to a request for comment, but he has consistently contended his tax moves were proper. (The full decision, Southgate Master Fund Limited, is available here through TaxProf blog, which first reported it yesterday.) ...
Last month, U.S. Tax Court Judge Robert A. Wherry Jr. gave thumbs down to another group of DAD tax shelters—these marketed by Harvard trained tax lawyer John E. Rogers to less wealthy investors (primarily small businessmen and doctors) in 2003 and 2004. In a ruling here deciding 15 cases, the judge also upheld the IRS’ imposition of penalties on those taxpayers. ...
Son-of-BOSS has been consistently disallowed by the courts. In his recent decision giving thumbs down to the DAD deals Rogers had structured, U.S. Tax Court Judge Wherry put the relationship of Son-of-BOSS and DAD in some perspective. He wrote:
“It seems only fitting that after devoting countless hours in the last decade to adjudicating Son-of-BOSS transactions, we have now progressed to deciding the fate of DAD deals. And true to the poet’s sentiment that `The Child is father of the Man’, the DAD deal seems to be considerably more attenuated in its scope, and far less brazen in its reach, than the Son-of-BOSS transaction.”
Less brazen, perhaps. But Wherry still imposed penalties on those who bought into DAD.
October 1, 2011
5th Circuit Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax ShelterThe Fifth Circuit yesterday affirmed the district court's rejection of $1.1 billion in losses claimed by D. Andrew Beal, #39 on Forbes list of the 400 Richest Americans. Southgate Master Fund LLC v. United States, No. 09-11166 (5th Cir. Sept. 30, 2011):
We affirm in all respects the district court’s judgment disposing of this petition for a readjustment of partnership tax items under § 6226. The plaintiff, Southgate Master Fund, L.L.C., was formed for the purpose of facilitating the acquisition of a portfolio of Chinese nonperforming loans (“NPLs”). A partnership for tax purposes, Southgate’s disposition of its portfolio of NPLs generated more than $1 billion in paper losses, about $200 million of which were claimed as a deduction by one of its partners in tax year 2002. The Internal Revenue Service determined that Southgate was a sham partnership that need not be respected for tax purposes and that Southgate’s allocation of the $200 million loss to the deducting partner should be disallowed. The district court upheld these determinations. After laying out the pertinent factual background in Part I, we explain in Part II why the district court was correct to do so. The Service further determined that the accuracy-related penalties in §§ 6662(b)(1)–(3) applied to the underpayments of tax resulting from Southgate’s treatment of its losses. On this point, the district court disagreed, disallowing the accuracy-related penalties on the ground that Southgate had reasonable cause for, and acted in good faith with respect to, the tax positions that resulted in the underpayments of tax. Although this issue is a close one, we affirm the district court’s decision to disallow the penalties.
(Hat Tip: Richard Jacobus.)
September 27, 2011
Supreme Court Grants Certiorari on 6-Year SOL and Overstatement of BasisTax Appellate Blog, Supreme Court Agrees to Hear Home Concrete Case to Address Six-Year Statute Issues:
The Court this morning granted certiorari in the Home Concrete case from the Fourth Circuit [Home Concrete & Supply LLC v. United States, No. 09-2353 (4th Cir. Feb. 7, 2011)], thus paving the way for a definitive, nationwide resolution of the issues presented in the Intermountain cases. ... The government’s opening brief in Home Concrete is due November 14. The case will likely be argued in January, or possibly February, and the Court will issue its decision before the end of June 2012.
(Hat Tip: Kristin Hickman.)
September 18, 2011
WSJ: 9th Circuit Approves Charitable Freeze to Hedge Against IRS Valuation FightWall Street Journal Tax Report, IRS Loses a Gift-Tax Battle, by Laura Saunders:
Wealthy taxpayers who want to make large gifts to family members recently got good news: A federal appeals court affirmed a popular technique to sidestep gift taxes.
The decision, Estate of Petter v. Commissioner, was published in August by the Ninth Circuit in San Francisco. It joins earlier rulings on related issues by the Eighth and Fifth circuits. All the cases originated in Tax Court, but appeals go to the federal circuit court in which the taxpayer lives.
"These decisions make it easier for senior family members to transfer hard-to-value assets to heirs and charity with reduced gift-tax risk," says John Porter of Baker Botts in Houston, who argued all the cases. These and other victories have made him a rock star in the staid trust-and-estates bar. ...
[Valuation is] always an issue with large gifts, especially with real estate or a business. What if the IRS challenges an estimate and wants more gift taxes? Many taxpayers are loath to write a check, and some don't have ready cash. Petter offers a solution. ...
Estate planners advised Ms. Petter to transfer all the [$22 million of] UPS stock to a limited-liability company. Then she both gave and sold units of the LLC to two of her children in 2002. Ms. Petter claimed that putting the stock in the LLC entitled her to a 51% discount from its market value on the transfers made to her children. The IRS challenged that, and the two parties ultimately settled on a 36% discount.
The crux of the case: Was gift tax due once the discount dropped to 36% from 51%? ... But she had specified that in such a case they would bounce to her IRS-registered charity—with no gift tax due. The IRS didn't like that one bit, because it meant the penalty for an exaggerated discount was simply a donation to a charity, not a check to Uncle Sam.
"The government said if Ms. Petter prevailed, it had no incentive to audit," says Carlyn McCaffrey, an attorney at McDermott, Will & Emery in New York. The IRS's real fear, says retired tax expert Tom Ochsenschlager, is that without audits, taxpayers could "get away with murder on valuations."
The courts sided with Ms. Petter, giving a lift to taxpayers and charities, if not the IRS.
September 6, 2011
11th Circuit Rejects Wesley Snipes' Tax AppealThe U.S. Court of Appeals for the Eleventh Circuit today filed this 7-page opinion denying Wesley Snipe's motions for a new trial and to interview jurors who convicted him on Feb. 1, 2008 of three counts of willfully failing to file tax returns. United States v. Snipes, No. 5:06-cr-00022 (11th Cir. Sept. 6, 2011). Mr. Snipes began serving his three year sentence on December 9, 2010. (Hat Tip: Ann Murphy.)
September 3, 2011
Tax Court Rejects DAT/DAD Tax ShelterThe Tax Court on Thursday became the second court to reject the Distressed Asset Trust (DAT)/Distressed Asset Debt (DAD) tax shelter pioneered by John E. Rogers, a former tax partner at Seyfarth Shaw (Chicago). Superior Trading LLC v. Commissioner, 137 T.C. No. 6 (Sept. 1, 2011).
(Hat Tip: Richard Jacobus.) Prior TaxProf Blog coverage:
- Court Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter (Aug. 20, 2009)
- Andrew Beal Appeals Denial of $1.1b DAD Tax Shelter Losses (May 31, 2010)
- 5th Circuit to Hear Andrew Beal's Appeal of $1.1b DAD Tax Shelter Loss (Aug. 1, 2010)
- DOJ Sues Former Seyfarth Shaw Partner Over DAT/DAD Tax Shelters (Nov. 4, 2010)
September 2, 2011
More on Adjunct Faculty as Employees, Not Independent ContractorsFollowing up on Wednesday's post, Tax Court: Adjunct Prof Is Employee, Cannot Deduct Expenses on Schedule C: Jim Maule (Villanova), Employee or Independent Contractor? For Taxes, It Matters:
Whether a person who is performing services ends up characterized as an employee or as an independent contractor affects a variety of tax issues. For example, the payor’s withholding responsibilities differ, employees being subject to withholding but most independent contractors not being subject to withholding. As another example, if the person is an independent contractor, the person is subject to self-employment taxes barring the application of an exception, whereas the person’s status as an employee means that the social security and Medicare tax responsibility is split between the employee and the employer. A very recent case indicates yet another significance, namely, whether deductible expenses incurred in the performance of the services are deductible in computing adjusted gross income, on Schedule C, or are deductible as employee business expenses, on Schedule A, subject to the 2-percent-of-adjusted-gross-income floor. This recent case caught my eye because the taxpayer was performing services as an adjunct professor. ...
The taxpayer’s situation in Schramm is very similar to that of adjunct faculty generally. It certainly is very similar to the manner in which my Law School treats adjuncts. The major difference is that adjuncts are permitted to select textbooks rather than being told what textbook to use, though they do receive advice and recommendations on that point. It is possible that some of our adjunct faculty do not maintain home offices for their teaching activities, but I’ve never asked and I don’t think anyone has ever asked. Newly-hired adjunct faculty, of course, lack the permanency of relationship that existed in Schramm, though that factor alone will not change the outcome. Next time I speak with one of our adjuncts, I need to remember to ask if they receive a Form W-2 or a Form 1099. Strange that I’ve never had this conversation, but I’ve never been involved in the payroll side of things. Perhaps I’ll also ask if they have any deductible expenses related to their teaching, because the school does make available to adjuncts computers and similar equipment. My guess is that, like me, they do have computers used for teaching and other business purposes, and pay for an internet connection through which they connect to the on-line classrooms and exchange emails with students, other faculty, and law school administration.
August 31, 2011
Tax Court: Adjunct Prof Is Employee, Cannot Deduct Expenses on Schedule CThe Tax Court decided yesterday that an adjunct professor (who was paid $20,000) was an employee of Nova Southeastern University. As a result, he could not deduct the claimed $2,785.63 of business expenses on Schedule C and instead had to report them as employee expenses on Schedule A subject to the 2% floor on miscellaneous itemized deductions. Schramm v. Commissioner, T.C. Memo. 2011-212 (Aug. 30, 2011).
August 29, 2011
Enron's Ken Lay Wins Posthumous $3.9 Million Tax Court VictoryThe late former Enron CEO Kenneth Lay won a posthumous $3.9 million victory over the IRS today in the Tax Court in a case argued by ABA Tax Section Chair President Charles H. Egerton (Dean Mead, Orlando). Estate of Lay v. Commissioner, T.C. Memo. 2011-208 (Aug. 29, 2011):
This case involves a deficiency of $3,910,000 determined by respondent in the 2001 Federal income tax of Kenneth L. Lay and Linda P. Lay (the Lays). The deficiency is based upon respondent’s determination that the Lays received income as a result of the sale of two annuity contracts to Enron Corp. (Enron). For the reasons stated herein, we find that they did not receive the income determined by respondent and are not liable for the deficiency. ...
Enron paid Mr. and Mrs. Lay $10 million in exchange for the annuity contracts. Enron intended for the full amount of its payment to be consideration for the annuity contracts. The annuities transaction is well documented, and all actions of the parties to the transaction reflect that Enron purchased the annuity contracts for $10 million. The Lays properly reported the transaction on their 2001 tax return as a sale of their annuity contracts.
(Hat Tip: Bob Kamman.)
Update: Bloomberg, Enron CEO Kenneth Lay Bests IRS in Tax Court
August 27, 2011
Texas Supreme Court Upholds Constitutionality of $5 'Pole Tax'The Texas Supreme Court on Friday overruled the Texas trial and appellate courts and unanimously upheld the constitutionality of a $5 "pole tax' on strip club patrons. Combs v. Texas Entertainment Ass'n, No. 09-0481 (Tex. Aug. 26, 2011):
A Texas statute requires a business that offers live nude entertainment and allows the consumption of alcohol on its premises to remit to the Comptroller a $5 fee for each customer admitted. We are asked to decide whether the statute violates the right to freedom of speech guaranteed by the First Amendment to the United States Constitution. We hold it does not.
Prior TaxProf Blog coverage:
- Texas Imposes "Pole Tax" on Strip Club Patrons (Dec. 22, 2007)
- Texas "Pole Tax" on Strip Club Patrons Ruled Unconstitutional (Apr. 1, 2008)
- Texas Legislator Files Amicus Brief in Support of 'Pole Tax' (Dec. 11, 2009)
- Texas Supreme Court to Decide Constitutionality of 'Pole Tax' (Feb. 15, 2010)
August 18, 2011
Tax Court: Accountant Cannot Deduct Bathroom as Home OfficeBulas v. Commissioner, T.C. Memo. 2011-201 (Aug. 17, 2011):
Petitioner has a master’s degree in accounting from Florida International University. He worked for the Internal Revenue Service for 7 years, working as a tax technician, revenue agent, Appeals auditor, and Appeals officer. In 1985 petitioner started the accounting business he continues to operate today. This business provides tax return preparation services and has helped prepare approximately 180-220 returns per year.
Petitioner has two daughters. In 2007 his daughters were 17 and 20 years old, respectively. His older daughter was a fulltime student at Rutgers University from September 1, 2005, through May 9, 2007. His younger daughter was a high school student in 2007. Petitioner’s daughters provided administrative assistance in his accounting business, but the business did not issue either a Form W-2, Wage and Tax Statement, or a Form 1099- MISC, Miscellaneous Income, to report any wages to either daughter. Petitioner paid his daughters’ credit card bills....
Petitioner used one of the bedrooms of his residence exclusively as his office for his accounting business. Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes. ...
Petitioner argues that both his daughters were paid wages for administrative work performed for his accounting business in 2007. However, neither daughter was issued a paycheck, Form 1099-MISC, or Form W-2. Further, neither had tax withheld. Petitioner testified that he paid his daughters for their work by paying their credit card bills but has not provided any evidence to substantiate amounts paid. Accordingly, we sustain respondent’s determinations with respect to the wages paid to petitioner’s daughters.(Hat Tip: Bob Kamman.)
August 16, 2011
Daugerdas Seeks New Trial in Tax Shelter Case Based on Juror MisconductFollowing up on my prior post, Daugerdas, Three Others Convicted in Criminal Tax Shelter Case: New York Law Journal, Tax Shelter Defense Seeks New Trial Over Juror's Hidden Identity:
Counsel for former Jenkens & Gilchrist partners Paul Daugerdas [right, featured in The American Lawyer December 2003 cover story, Helter Shelter] and Donna Guerin and their co-defendants have charged that a juror at their trial for a massive illegal tax shelter scheme hid the fact that she had practiced law, had been suspended from practice for alcohol dependency and professional misconduct, that an appellate court had refused to reinstate her because of mental illness and that there was an outstanding warrant for her arrest.
July 26, 2011
Court: Accountant Can't Deduct Value of His Services in Developing Web SiteMondello v. Commissioner, T.C. Summ. Op. 2011-97 (July 25, 2011):
Petitioner operated his Web site business using the accrual method of accounting. In 2007 petitioner worked 1,000 hours developing the Web site. Petitioner charges unrelated parties between $45 and $55 an hour for performing work similar to that which he performed on his Web site development. Petitioner's proprietorship, the Web site, did not pay him for any services he performed for himself. Petitioner's proprietorship accrued $50,000 as a liability for payment to petitioner for his work to set up his Web site, and the accrued expense was deducted on Schedule C of the return. ...
On the issue of his accrual, petitioner testified that he is an accountant. As an accountant petitioner should be familiar with the concept of imputed or implicit expenses or costs (imputed expenses). Imputed expenses are the opportunity costs of time and capital that the manager of a business has invested in producing "the given quantity of production and the opportunity cost of making a particular choice" among alternatives. Siegel & Shim, Dictionary of Accounting Terms (Barron's Business Guides) 234 (5th ed. 2010). An imputed expense is one that is not actually incurred but is used to compare with an actual cost. Oxford Dictionary of Accounting 227 (Gary Owen & Jonathan Law eds., 4th ed. 2010); Tracy, Accounting for Dummies 237 (3d ed. 2005). An imputed cost is not recorded in the books of account and is not accurately measurable but is a hypothetical cost used in making comparisons; an example is "salaries of owner-directors of sole proprietorship firms." Rajasekaran & Lalitha, Cost Accounting 12 (2011).
From an accounting standpoint, the time petitioner spent on his own Web site instead of earning $45 to $55 an hour from unrelated parties is an opportunity cost, an imputed expense to petitioner and his business. It is not an incurred expense, is not reflected in the financial statements, and is not an actual cost. ....
Respondent cited several cases for petitioners' and the Court's consideration on this issue. In Maniscalco v. Commissioner, T.C. Memo. 1978-274, the Court observed that "Whatever may be said in behalf of taking into account the value of one's own services in lieu of paid labor, such services are not considered an element of the deduction under sec.162(a). ... Petitioner argues that all these cases involve cash basis taxpayers, and he agrees that a cash basis taxpayer cannot deduct a payment to himself in the same year. However, he argues inexplicably that because his business was on the accrual method the cases respondent cites not only are inapposite but also support his position. [Fn.2]
[Fn.2: Petitioner cited Remy v. Commissioner, T.C. Memo. 1997-72, as supporting his position. The Court in that case held that a cash basis taxpayer could not deduct the value of his labor under sec. 162 because it was not paid or incurred. Petitioner interprets the case to mean that an accrual basis taxpayer can deduct the value of his labor, a logical fallacy.]
Perhaps petitioner did not read Rink or he failed to read it carefully. The Court pointed out in that case that the taxpayer took the position, as petitioner does, that "he should be permitted to accrue currently, as a liability, amounts owed by him to himself on account of his labors, but include the value of such labor in income only when and if such labor gives rise" to income in the future. The Court found the argument to be without any merit; "For one thing, we have found that the petitioner incurred no liability, in favor of himself or anyone else, to pay for the value of his services." Id. at 753-754 (emphasis added). ...Neither accounting principles, tax law, nor common sense supports a deduction by petitioners for contract labor as a result of an accrual of an amount "owed" by petitioner to himself for his own labor.
- Jim Maule (Villanova), The Value of Tax Education
- Tax Lawyer's Blog, Accountant Tries to Deduct Value of His Own Services
- Tax Update Blog, If Time Is Money, Why Can't I Deduct It?
July 13, 2011
Hickman: Dissecting Cohen v. United StatesKristin E. Hickman (Minnesota) offers her thoughts on Cohen v. United States, No. 08-5808 (D.C. Cir. July 1, 2011) (en banc) (blogged here):
The D.C. Circuit’s recent en banc decision in Cohen v. United States, No. 08-5088, in some ways represents a significant statement regarding the availability of judicial review for Administrative Procedure Act (APA) procedural challenges in the tax context. At a minimum, the court’s decision embraces the Supreme Court’s recent rejection of tax exceptionalism in Mayo Foundation for Medical Educ. & Research v. United States, 131 S.Ct. 704 (2011). Nevertheless, the decision’s practical implications for APA procedural challenges against Treasury and IRS actions are substantially less clear and potentially minimal.
By way of background, the appellants’ claim at this stage of litigation is that the IRS violated the APA when it promulgated refund procedures for the old telephone excise tax in Notice 2006-50 without notice and comment. (The appellants consider the refund procedure provided by Notice 2006-50 to be inadequate; they contend that the notice and comment process is the appropriate mechanism for addressing the alleged inadequacies.) The merits of the appellants’ APA procedural claim were not before the D.C. Circuit, however, as the district court had dismissed the case for lack of jurisdiction. In addressing that issue, the D.C. Circuit majority reached several conclusions regarding the proper interpretation of the APA and the Internal Revenue Code (IRC).
First, the court held that APA § 702 waives sovereign immunity for APA procedural challenges in the tax context, just as it does in other regulatory areas; there is no tax exception from the APA. “The IRS is not special in this regard; no exception exists shielding it—unlike the rest of the Federal Government—from suit under the APA.” (Slip at 10.) This conclusion is not so surprising given the Supreme Court’s admonition in Mayo that, absent clear justification, judicial review in tax cases should not deviate from administrative law norms.
Next, the court held that Internal Revenue Code § 7421(a), also known as the Anti-Injunction Act, does not bar judicial review of the appellants’ APA procedural claim. Citing and quoting extensively from Hibbs v. Winn, 542 U.S. 88 (2004), the court rejected the IRS’s broad construction of § 7421(a) in favor of a narrower and more textualist approach. Section 7421(a) generally bars suits (other than statutory refund and deficiency actions) that seek to restrain “the assessment or collection of any tax.” According to the court, this phrase does not refer to a “’single mechanism’ that ultimately determines the amount of revenue the Treasury retains” and is not “synonymous with the entire plan of taxation.” Instead, “assessment” and “collection” are defined terms in the Internal Revenue Code; “assessment” represents “the trigger for levy and collection efforts” and that “collection” is “the actual imposition of tax against a plaintiff.” The appellants’ APA procedural claim does not concern the assessment or collection of taxes because “[t]he IRS previously assessed and collected the excise tax at issue.” Rather, the court perceived this suit as concerning the procedures under which the IRS will refund taxes that it has already collected. The Supreme Court has never addressed the relationship between § 7421(a) and APA procedural challenges but for several decades has interpreted the limitation on judicial review posed by § 7421(a) quite broadly. The Court’s decision in Hibbs, on which the D.C. Circuit in Cohen relied heavily, concerned a different statute concerning state taxation, 28 U.S.C. § 1341, although the language of that provision strongly resembles that of IRC § 7421(a). Hence, the D.C. Circuit’s interpretation of § 7421(a) narrowly to allow even some APA procedural claims is arguably quite bold.
The Declaratory Judgment Act, 28 U.S.C. § 2201(a), contains additional, arguably broader, language limiting the courts’ jurisdiction in tax cases. The panel in Cohen was divided over whether and to what extent the Declaratory Judgment Act ought to be construed as a separate and broader limitation on judicial review of tax cases. Consistent with the panel majority and with other circuit courts, however, the en banc court in Cohen held that the Declaratory Judgment Act is to be interpreted coterminously with the Anti-Injunction Act and not as a separate limitation on judicial review.
While the government argued that interpreting § 7421(a) and the Declaratory Judgment Act in this way would open the floodgates for APA challenges against Treasury and IRS actions, those provisions are not the only potential limitations on judicial review of agency action, whether in the tax context or otherwise. The majority and dissenting opinions considered several. Particularly where (as here) a specific statute provides its own legal mechanisms for seeking judicial review, APA §§ 703 and 704 limit the availability of judicial review under the APA to cases in which the challenging parties otherwise lack an adequate legal remedy. The dissenting judges in Cohen contended that IRC § 7422 statutory refund actions offered the appellants an adequate legal remedy. The majority disagreed on the ground the appellants’ APA procedural challenge seeks equitable relief rather than a tax refund (even if a refund is their ultimate goal), and § 7422 does not offer that remedy. Both opinions additionally discuss the doctrines of ripeness and exhaustion at some length, while standing and finality limitations make brief appearances as well. In analyzing these different barriers to judicial review, the Cohen majority drew its conclusions very narrowly. Indeed, the court labeled the case before it as sui generis and either assumed or stated outright that judicial review of many if not most APA procedural challenges to Treasury and IRS actions will be limited by one or more of these other statutory and doctrinal obstacles. Hence, while the appellants’ APA claim may not be wholly unique in its justiciability, it is not at all clear just how many others will be able to run this gauntlet of judicial review limitations. The vast majority of APA procedural challenges will be confined to statutory refund and deficiency actions.
One last point of interest, however, concerns the court’s statement regarding the finality of Notice 2006-50. In discussing the justiciability of the appellants’ APA claim, the court reinforced the panel’s determination that Notice 2006-50 represents final agency action. The IRS does not employ APA notice and comment rulemaking in issuing notices (or revenue rulings or revenue procedures), presumably taking the position that these pronouncements are exempt from such requirements as interpretative rules, policy statements, or procedural rules. General administrative law doctrine surrounding these exemptions from notice and comment is notoriously murky but overlaps substantially with the jurisprudence surrounding the finality requirement. The holding that Notice 2006-50 is final does not automatically mean that the IRS should have used notice and comment in developing that pronouncement, but a contrary conclusion may be difficult under current doctrine. If such is the case for Notice 2006-50, then the same is likely true of other notices, revenue rulings, and revenue procedures, meaning that many such documents may be susceptible to invalidation on APA procedural grounds. Given that the Cohen case really concerns the timing of and mechanisms for seeking judicial review rather than its availability under any circumstances, the court’s conclusion that Notice 2006-50 represents final agency action may ultimately be the most significant aspect of this case vis a vis future litigation.
Of course, Cohen represents the opinion of only one circuit court. Nevertheless, many circuits follow the D.C. Circuit’s lead on administrative law matters. Cohen was decided en banc in a lengthy and considered opinion after full vetting of the issues, potentially enhancing its persuasiveness. The government may ask the Supreme Court to consider the matter, but a grant of certiorari seems less certain in this case than in, for example, the Intermountain/overstated basis line of tax cases.
No Deduction for $1.2m Claim for Services by Tax Attorney Son for Infirm ParentsEstate of Olivo v. Commissioner, T.C. Memo. 2011-163 (July 11, 2011):
[T]he issues we must decide are: (1) Whether the estate is entitled to deduct [$1,240,000] as an expense the claim on the estate tax return for services rendered by Anthony M. Olivo (Mr. Olivo), the son of Emilia W. Olivo (decedent) to decedent before her death; (2) whether the estate is entitled to deduct the [$44,200] administrator’s commission paid to Mr. Olivo; and (3) whether the estate is entitled to deduct the [$55,000] accountant’s and attorney’s fees claimed by Mr. Olivo.
Mr. Olivo, the administrator of the estate, resided with decedent at the time of her death and had provided care for her for many years before her death. Mr. Olivo began providing nearly full-time care for decedent and her late husband, Matthew W. Olivo, his parents (we sometimes refer to Matthew W. Olivo as his father), around September 18, 1994. ...
[D]uring September 1994, Mr. Olivo began to find it increasingly difficult to maintain his practice as an attorney. He had received his J.D. from Rutgers University School of Law (Camden) in 1976 and his LL.M. in taxation from New York University School of Law in 1979. Mr. Olivo practiced law at private firms in Cherry Hill, New Jersey, from 1976 until 1988, when he began his own practice. However, his solo practice began to disintegrate during the mid-1990s, in part because of the amount of time he devoted to his parents’ health problems. He earned no significant income from his law practice during the period when he was caring for his parents, from 1994 through 2003....
Mr. Olivo’s care for decedent during the last years of her life was extraordinary, and the efforts he expended on her behalf are commendable. However, we conclude that the estate has not established that Mr. Olivo is entitled to recover for that care....
Applying the statutory formula to the estate value of $1,711,163.81 reported on the return yields an administrator’s commission of $52,223.28. ...
The record shows that Mr. Olivo did perform some legal services for the estate, in addition to his services as administrator. For instance, he filed the estate’s tax return,handled the IRS examination on behalf of the estate, and filedthe estate’s original petition with this Court. However, the record does not establish the value of his legal services. Mr. Olivo kept no records of the time he spent performing legal services for the estate. Instead, he merely estimated the numberof hours and used a billing rate of $150 per hour. On account of the lack of corroborating evidence in the record concerning theattorney’s fees issue, we decline to accept Mr. Olivo’s estimates of the amount of time he spent performing legal services for the estate.
(Hat Tip: Bob Kamman.)
July 6, 2011
Court: Taxpayer Can't Force IRS to Audit Him -- 'There Is No Right to Pay Taxes'Blog of the Legal Times, Guess? Co-Founder Loses Suit for IRS Investigation:
Marciano had argued that the audit could reveal money owed to the government that he believes former employees mishandled. In dismissing the suit on Friday, U.S. District Court Judge Henry Kennedy Jr. noted that the property rights protected under the Fifth Amendment don't guarantee anyone's right to pay taxes.
In his complaint, Marciano claimed that he uncovered evidence of “substantial financial irregularities” in his personal and business affairs around 2005. He believed he was the victim of identity theft, fraud, embezzlement and a host of other financial crimes.
As part of his investigation into these irregularities, Marciano alleges that he repeatedly asked the IRS for copies of previous years’ tax returns, but was told that they were unavailable. He claims he also asked the IRS to do an audit of his previous returns, but they refused. ...
The IRS moved to dismiss the suit, claiming Marciano had failed to state a viable claim and that the court lacked jurisdiction.
In his opinion,Kennedy sided with the IRS, finding that Marciano had failed to exhaust administrative remedies and that Marciano could not sue the IRS through statutes designed to give individuals legal remedies in cases where the IRS is demanding payment. ...
“The extraction by the government of money or property via taxation implicates a constitutionally protected property interest, but, as noted above, Marciano has asserted repeatedly that he owes the government money, rather than the reverse,” Kennedy wrote. “The Court is aware of no precedent establishing a protected property interest in the ability to pay taxes.”
July 2, 2011
D.C. Cir.: IRS Can't Make Taxpayers Run 'Obstacle Course' to Get RefundBlog of the Legal Times, Divided Appeals Court Rules Against IRS In Tax Refund Dispute:
A divided federal appeals court in Washington said a group of taxpayers will be allowed to challenge the procedure the IRS set up to refund billions of dollars collected through an unlawful tax on telephone calls. [Cohen v. United States, No. 08-5808) (D.C. Cir. July 1, 2011) (en banc)]
The full U.S. Court of Appeals for the D.C. Circuit voted 6-3 to send back to the trial court a dispute over whether the IRS refund procedure is unconstitutional. The 10 plaintiffs want an injunction ordering the IRS to craft a new refund method.
The appeals court did not take a stance on the merits of the IRS’s refund scheme, instead addressing only whether the court has oversight. The court ordered additional proceedings in the U.S. District Court for the District of Columbia. ...
At issue is whether the plaintiffs must first file refund claims with the IRS and then litigate their dispute in tax suits or whether the group of taxpayers can sue under the Administrate Procedure Act without taking any of the earlier steps. A report issued by the Treasury Inspector General for Tax Administration said the IRS illegally collected $8 billion between February 2003 and August 2006.
The six judges in the majority, including Janice Rogers Brown, who wrote the opinion for the court, rejected the IRS claim that the suit is barred because it seeks restraint of the assessment and collection of taxes. The IRS, the majority said, sees a world in which “no challenge to its actions is ever outside the closed loop of its taxing authority.”
“This suit is not about the excise tax, its assessment or its illegal collection. Nor is it about the money owed the taxpayers,” Brown said. “This suit is about the obstacle course, and the decisions made by the IRS while setting it up.”
Brown said the suit is permitted under the Administrative Procedure Act because it “questions the administrative procedures by which the IRS allows taxpayers to request refunds for the wrongfully collected excise tax.” ...
The IRS, Brown wrote, is no victim. The taxpayer plaintiffs “are not raiders in pursuit of an unwarranted windfall.” The plaintiffs, the court said, “are aggrieved citizens in search of accountability.”
June 22, 2011
Hickman on D.C. Circuit's Intermountain DecisionKristin E. Hickman (Minnesota) offers her thoughts on yesterday's decision in Intermountain Insurance Service of Vail LLC v. Commissioner, No. 10-1204 (D.C. Cir. June 21, 2011):
Much like the Federal Circuit, the D.C. Circuit applied Chevron analysis to conclude that § 6501 is ambiguous and that Treasury's interpretation of that provision is reasonable. Because the statute is ambiguous, the Supreme Court's decision in Colony does not foreclose Treasury's interpretation. Whether or not the temporary regulations were procedurally flawed for APA purposes, Treasury finalized them using notice and comment. Treasury's “searching consideration” of the sole comment received in that process, as expressed in the preamble to the final regulations, demonstrated a sufficiently “open mind” to “cure” any procedural problem posed by the use of temporary regulations. (The court did not address at all whether or not the use of temporary regulations without notice and comment complies with the APA. Instead, the court only addressed the argument that the final regulations were procedurally flawed because they had been initially adopted as temporary regulations without notice and comment and the agency failed to keep an open mind in promulgating the final regulations.)
Update: For more, see Miller & Chevalier's Tax Appellate Blog.
Prior TaxProf Blog coverage:
- Johnson: Intermountain, Interpretive Regulations, and Brand X (May 20, 2010)
- Johnson: Intermountain and the Importance of Administrative Law in Tax Law (Aug. 25, 2010)
- Federal Circuit Exacerbates Split on Overstatement of Basis and 6-Year SOL (Mar. 12, 2011)
- Harvard Law Review on Intermountain (Mar. 24, 2011)
June 20, 2011
3d Cir. Rejects Tax Shelter, Blasts Schering-Plough's 'Chutzpah'The Third Circuit today upheld the district court's rejection of a $690m assignment of future income tax shelter claimed by Schering-Plough. Merck v. United States, No. 10-2775 (3d Cir. June 20, 2011). At the end of its opinion, the Third Circuit blasted Schering-Plough's "chutzpah":
Schering-Plough further complains that the IRS had inappropriate motives for pursuing its audits and requests discovery to explore this allegation further. The language from IRS documents that Schering-Plough quotes indicates that at least one IRS agent thought that Schering-Plough’s approach to determining its tax liabilities was less than conscientious, given prior findings of evasion (which were upheld by this circuit, as the District Court noted, see Schering-Plough Corp.). The chutzpah of this argument is notable. To the extent that the IRS pursued Schering-Plough more vigorously because Schering-Plough had a history of failing to comply with the tax laws, this represents commendable agency diligence in the light of past experience, not some kind of impermissible bias against Schering-Plough. Schering-Plough offers no persuasive basis for us to order further discovery.
(Hat Tip: Richard Jacobus.) For more, see Subpart F and Schering-Plough, 60 Emory L.J. 503 (2010).
June 16, 2011
Forbes: The IRS's War Against Charitable Donations of Facade EasementsForbes: Feds Sue Trust Over Historic Easement Tax Breaks, by Janet Novack:
The IRS's seven year campaign against questionable charitable deductions for the donation of historic building facade easements has ratcheted up another notch. On Tuesday, the Department of Justice filed a lawsuit seeking to enjoin the non-profit Trust for Architectural Easements from practices that allegedly promote improper and inflated easement deductions.
The suit, filed in Federal District Court in Washington, D.C., also demands the names of 800 property owners in New York City, Boston and Baltimore who have claimed charitable deductions totaling more than $1.2 billion for the donation of easements to the Trust. ...
The government’s 38-page lawsuit alleges, among other things, that the Trust made “false and fraudulent” statements to prospective donors about the tax benefits available for donating facades; steered donors to appraisers who had been “coached” by it to go along with its questionable practices; helped donors to claim deductions before donations were final; and allowed donors to terminate easements they had already granted. ...
The IRS itself has come under criticism from some tax practitioners for its aggressive stance on historic easement donations, which it included in its “Dirty Dozen” list of tax scams for 2005 and 2006. In a 2009 report, the IRS Advisory Council said that the agency’s “strict view” was “diluting” the tax incentive Congress created in 1976 for the donation of easements that protect a historic property by restricting facade changes or development in perpetuity. The IRS’ aggressive audits, the report added, “have added to the perception that the IRS is overreaching on this issue.”
June 14, 2011
Tax Court Rejects Private Equity Manager's 'Blame the Accountant' DefenseThe Tax Court yesterday denied the request of Stephen G. Woodsum, founding managing director of Summit Partners, a private equity firm, to waive a $104,000 penalty assessed by the IRS for his failure to report on his return $3.4 million of income from the termination of a swap transaction by Deutsche Bank for which he received a Form 1099-MISC. The Tax Court forcefully rejected his attempt to escape the penalty by blaming his accountant for the underreporting. Woodsum v. Commissioner, 136 T.C. No. 29 (June 13, 2011):
Mr. Woodsum terminated the swap ahead of its set termination date because his watchful eye noted that it was not performing satisfactorily as an investment. That is, when his own receiving of income was in question, Mr. Woodsum was evidently alert and careful. But when he was signing his tax return and reporting his tax liability, his routine was so casual that a halfmillion- dollar understatement of that liability could slip between the cracks. We cannot hold that this understatement was attributable to reasonable cause and good faith.
(Hat Tip: Bob Kamman.)
June 13, 2011
L.A. Tax Lawyer Sentenced in Hollywood Kickback, Tax Evasion CaseFollowing up on my prior post, L.A. Tax Lawyer Pleads Guilty to Tax Evasion in Hollywood Kickback Scheme (Dec. 14, 2009): New York Times, $23 Million Payout to I.R.S. in Hollywood Plea Deal:
As the criminal case against the former Hollywood tax lawyer Matthew Krane heads to a conclusion — Mr. Krane is to be sentenced after pleading guilty to tax evasion and making a false statement on a passport application — the Treasury Department can breathe a little easier about the deficit.
According to a supplemental sentencing memorandum filed Wednesday with the United States District Court for the Western District of Washington in Seattle, Mr. Krane has entered an agreement with the IRS, his former client Haim Saban, and others under which the federal government is to receive $23 million of the approximately $46.6 million Mr. Krane and others were accused of siphoning from a Saban deal in 2002.
- ABA Journal, Suspended LA Lawyer Gets 32 Months, Must Repay $41M, in Quellos Tax-Shelter
- Accounting Today, Lawyer Sentenced in Quellos Tax Shelter Scheme
- Forbes, Show Biz Lawyer Finally Sentenced in Massive Fraud Case
- Sacramento Bee, CA Man Gets 2 1/2 Years in Prison for Tax Evasion
(Hat Tip: Bob Kamman.)