TaxProf Blog

NY: Widow Cannot Sue Husband's Attorney for Estate Planning Malpractice

New York Law Journal:  Widow Lacks Standing to Sue Husband's Lawyers Over Mishandled Will, Judge Finds, by Mark Fass:

A widow who claims that the mishandling of her husband's will by his attorneys will cost her $9 million may not pursue a malpractice claim against them, a Manhattan judge has ruled. Supreme Court Justice Marilyn Shafer ruled that there was neither privity nor even "near privity" between the widow, Jeanne Sorenson Leff, and the attorneys, William Bush and Richard J. Cunningham of Fulbright & Jaworski.

Shafer discounted Leff's argument that her occasional interactions with the attorneys, including their preparation of her own will, created an attorney-client relationship regarding her husband's estate planning. "[T]he mere fact that plaintiff might have had a 'subjective belief as to the existence of an attorney-client relationship' is not enough to create [one]," Shafer wrote in Leff v. Fulbright, 117424/06.

The decision raises the question of who, if anyone, may sue in New York for malpractice when attorneys make mistakes in planning estates.

"That's a very good question," said Sanford J. Schlesinger, the chair of the wills and estates department at Schlesinger Gannon & Lazetera. "In New York, we're one of the few states left with the privity doctrine. When the decedent died, he was the only one who had privity and he was the only one who could sue." Not even the administrator or executor of a decedent's estate may stand in his stead for a malpractice action, according to Schlesinger, whose firm is not involved in the Leff case. Nationally, the law is evolving away from that position, he added, as states move to abandon the doctrine.

Former BDO Seidman Partner Pleads Guilty in Criminal Tax Shelter Case

Robert Greisman, a CPA and tax lawyer, former partner in BDO Seidman's Chicago office, pleaded guilty yesterday to three counts of conspiracy to defraud the United States in connection with tax shelter transactions marketd by his firm and the Jenkens & Gilchrist law firm.   United States v. Daugerdas,  No. S109CR581 (S.D.N.Y. July 9, 2009).

• U.S. Attorney's Press Release
• Indictment
• Plea Agreement
• ataxingmatter
• Chicago Tribune
• New York Times
• Wall Street Journal

Tax Protesters Ed and Elaine Brown Are Convicted on All Counts

I previously blogged (here, here, here, here, and here) the case of tax protesters Ed and Elaine Brown who, after being convicted of evading $1.9 million in taxes on her dental practice, holed up in their New Hampshire mountaintop home for months, vowing to die fighting rather than surrender.  The Associated Press reports that they were convicted yesterday on weapons charges and of plotting to kill federal agents.  They face a minimum sentence of thirty years in prison.

Tax Court: LLCs Not Subject to Limited Partnership Passive Loss Disallowance Rule

Section 469(h)(2) treats a limited partnership interest as presumptively passive for purposes of the passive loss rules, with the result that partnership losses cannot offset the limited partner's salary or investment income.  In Garnett v. Commissioner, 132 T.C. No. 19 (June 30, 2009), the Tax Court held that LLC interests are not subject to § 469(h)(2), with the result that members of LLCs can deduct LLC losses if they can prove that they materially participated in the LLC under the general rule of § 469(h)(1),

The Wall Street Journal discusses the importance of the Garnett decision in Entrepreneurs Win Tax Case Versus IRS; Losses on Business Investments Can Be Deducted Against Salary, Other Income; An Appeal?, by Laura Sanders:

The IRS lost a key battle in its long-running fight to limit tax deductions that can be taken by investors in small businesses in a case that could have wide implications for entrepreneurs.

The Tax Court decision would allow investors in certain kinds of businesses to deduct losses against salary and investment income. Right now, investors often can only deduct losses in a business against future profits from that business, which in some cases prevents taxpayers from getting to use the deductions at all.

The case, which involved Nebraska farmers seeking to deduct losses from their chicken and pig operations, can still be appealed by the IRS, but makes loss deductions much easier to obtain for some investors. ...

The decision specifically applies to investors in limited-liability companies and limited-liability partnerships and benefits those who actively work in several businesses. One example would be a Microsoft engineer who owns a stake in a local restaurant and tends bar twice a week. His spouse, meanwhile, is a part owner of a money-losing gift shop, where she works a few hours a week. Under this decision, losses from the two businesses could offset salary or investment income earned by both.

The IRS has long taken the position that losses generated by businesses held within LLPs and LLCs can't generally be used to offset salary and investment income. The IRS position has had the effect of forcing investors in LLPs and LLCs to delay loss deductions, sometimes for years.

District Court: Failure to Retain Tax Expert Constitutes Ineffective Assistance of Counsel

The U.S. District Court for the Northern District of Illinois has vacated the two-year prison sentence given to a CPA who plead guilty to obstructing and impeding the administration of the federal tax laws on the ground of ineffective assistance of counsel because her lawyer did not retain a tax expert.  Baxter v. United States, No. 1:04-cr-00371 (N.D. Ill. June 25, 2009):

To meet the objective standard of reasonableness, it is essential for criminal defense counsel to recognize that certain criminal cases require the retention of an expert. Criminal tax cases involving seemingly legitimate, sophisticated tax schemes, like the Aegis Trust System in Baxter's criminal case, are among the types of cases where it is necessary that criminal defense counsel retain the assistance of a tax expert before any critical stages of the defendant's criminal case occur. Otherwise, the defense may be adversely affected, as occurred in Baxter's criminal case.

The performance of Baxter's criminal defense counsel, Mr. Keith Spielfogel and Mr. James Montgomery, fell below the Strickland objective standard of reasonableness because they did not analyze or present the mitigating facts and arguments a tax expert's testimony would have assisted them in doing to reduce the tax-loss figure the court used in sentencing Baxter. The evidence also establishes that Baxter was prejudiced by her criminal defense attorneys' constitutionally deficient performance. It undermined the court's confidence in the fairness of the plea negotiations, the sentencing proceeding, and the sentence imposed in Baxter's case. The court believes that had the facts and analysis that have now been presented by Baxter's tax expert, who was retained by her new counsel after her sentencing, been presented to the court prior to Baxter's 2006 sentencing, the court would have imposed a lower sentence.

Update on Former Florida Law Prof's Racial and Sexual Discrimination Lawsuit Against School

I previously blogged (here, here, and here) the racial and sexual discrimination lawsuit filed against the University of Florida Levin College of Law and its dean,lawsuit by Sherrie L. Russell-Brown, a law professor at UF from 2001-2007, who alleges that she was forced out of her faculty position and denied consideration for tenure in retaliation for complaining about unfair treatment.  TaxProf Bridget Crawford (Pace) provides this update on the case, including this 43-page amended complaint. 

   

11th Circuit Grants Wesley Snipes Oral Argument in Appeal of His Tax Fraud Conviction

Ellen Podgor (Stetson) of our sister White Collar Crime Blog reports that the 11th Circuit has granted actor Wesley Snipes oral argument in the appeal of his conviction on three misdemeanor tax fraud counts.  Oral argument is scheduled for November 2009, so Mr. Snipes should remain free on bail until well into 2010.  Ellen notes that the 11th Circuit last year granted oral argument in only 16% of criminal appeals, so this is a real coup for the Snipes defense team.

Tax Court Disallows Deductions for Unsubstantiated Expenses of Thomson-West Sales Rep

In Kyne v. Commissioner, T.C. Summ. Op. 2009-98 (June 25, 2009), the Tax Court upheld the IRS's disallowance of a Thomson-West sales rep's deductions for medical expenses, charitable contributions, and miscellaneous itemized deductions (including car expenses, parking fees and tolls, home office expenses, meals and entertainment expenses, and cell phone expenses) because he failed to provide substantiation for the expenses beyond those allowed by the IRS.

5th Circuit Upholds Civil Liability of Lawyer Who Wrote Tax Opinion in Jenkens & Gilchrist Tax Shelter

The Fifth Circuit has upheld a district court's finding that a Louisiana lawyer (William E. Bradley ) who wrote a tax opinion (for which he was paid $25,000) supporting a Jenkens & Gilchrist tax shelter was civilly liable to an investor in the tax shelter, but reversed the district court's RICO award of $6.43 million. Ducote Jax Holdings LLC v. Bradley, No. 08-30037 (5th Cir. Jun 19, 2009).  For more, see ataxingmatter.

First UBS Client Pleads Guilty to Offshore Tax Evasion

The Department of Justice and IRS announced that the first UBS client pleaded guilty today to tax evasion.  Steven Michael Rubinstein, a Boca Raton accountant, pleaded guilty to filing a false 2004 tax return by failing to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account.  United States v. Rubinstein, S.D. Fla., No. 09-6116).

• DOJ Press Release
• Indictment
• UBS Deferred Prosecution Agreement
• Bloomberg
• New York Times

NY Times: DOJ to Drop UBS Case; DOJ: No We're Not

New York Times:  Settlement Anticipated in UBS Case, by Lynnley Browning:

The Justice Department may drop a closely watched legal case aimed at forcing the Swiss bank UBS to divulge the names of 52,000 wealthy American clients suspected of offshore tax evasion, a United States official briefed on the matter said Monday. The move, which would halt an unusually aggressive effort to force Switzerland to lift its veil of banking secrecy, could happen by mid-July.

Department of Justice:

There is no basis for the report in the New York Times. While the Department is always willing to consider settlement in any case, the suggestion that the Department is planning to drop this suit is simply untrue. The Department is continuing with the case against UBS and will file its brief asking the court to enforce the summons on June 30.

• The Blog of Legal Times
• Reuters
• Wall Street Journal

Can States Force Out of State Border Businesses to Collect Sales Tax?

City Journal:  Interstate Confiscation Clause: Massachusetts Wants Even More Tax Revenue—From New Hampshire:

Should New Hampshire businesses have to collect Massachusetts sales taxes from border-crossing shoppers? That’s the issue in Town Fair Tire v. Massachusetts, a case before the Bay State’s Supreme Judicial Court with ramifications for commerce and constitutional law well beyond New England.

See also Overlawyered: Massachusetts’s Long Tax Arm, by Walter Olson.  Prior TaxProf Blog posts:

• Mass SJC Requests Amicus Briefs in Town Fair Tire Case (2/6/09)
• Swain & Hellerstein: The Silliness of the Physical Presence Rule for Use Tax Collection Nexus (11/19/08)

7th Circuit Affirms District Court in Valero Tax Workpapers Case

The 7th Circuit today resoundingly affirmed the district court in Valero Energy Corp. v. United States, No. 08-3473 (7th Cir. June 17, 2009):

In this appeal, Valero Energy Corporation asks us to take a close look at the tax practitioner-client privilege. Valero sought to protect several documents under this privilege, and the result was a mixed bag—some documents were shielded from the IRS, while others were not. Valero now contends that by reaching this decision, the district court misconstrued not only the privilege, but also an exception to the privilege, which grants the government access to certain documents when tax shelters are promoted. ...

We close by noting what this opinion does not do. At this early stage, we are not evaluating the propriety of Valero’s tax-reduction plan. The IRS only wants access to documents, it is not (in this appeal) asking Valero to pay anything. It is not pointing any fingers. The government’s burden to overcome the privilege is relatively light—it need only show that there is some foundation in fact that a particular document falls within the taxshelter exception. We affirm the district court’s holding that the IRS has met this burden and leave for another day any other issues which may percolate out of this squabble between Valero and the government.

Stanford Law Grad-Call Girl Lacks Resources to Satisfy Guilty Plea in Tax Evasion Case

I previously blogged (here and here) the case of 2001 Stanford Law Grad Cristina Schultz (now Cristina Warthen after her marriage to David Warthen, co-founder of the online search engine Ask Jeeves, now known as Ask.com), who pled guilty in January 2009 in California federal district court to failing to pay taxes on $133,717 she earned as a prostitute in 2003 (United States v. Warthen, No. CR-08-682). From the San Jose Mercury-News:

A Stanford law school graduate who pleaded guilty earlier this year to federal tax charges related to running an escort service is now unable to pay her full debt to the government because her estranged husband’s Internet wealth has dwindled so much he can no longer foot the bill.

A federal judge on Monday put off Cristina Warthen’s scheduled sentence in the case until she can resolve financial woes that have hit her since her plea deal was reached in January. At that time, Warthen pleaded guilty to tax evasion charges and agreed to pay at least $313,000 to the government to cover taxes on earnings from her days as an upscale prostitute who went by the name “Brazil.”

But in court papers filed last week, Warthen’s lawyers say her pending divorce from David Warthen, the co-founder of the online search engine Ask Jeeves, now known as Ask.com, has left her close to $100,000 short of being able to complete her plea deal. In court papers, Cristina Warthen’s lawyers say her estranged husband had agreed to cover $350,000 to pay for her legal troubles, including the plea amount, but has been reduced to “a mere shadow of his former financial self” because of the stock market plunge. As a result, Warthen’s lawyers told U.S. District Judge James Ware said she could get no more than about $230,000 from him in their pending divorce proceedings, leaving her well short of what she needs.

(Hat Tip: Law School Headlines.)

UCLA Body Parts Trafficker Sentenced to 10 Years for Tax Evasion

More fodder for the it always comes down to taxes file:  a former mortuary worker convicted of carving up and selling cadavers donated to the UCLA medical school was sentenced to 10 years in prison Thursday and ordered to pay more than $1.7 million. Jurors last month had found Ernest Nelson, 51, guilty of eight counts, including grand theft and tax evasion.

• Associated Press
• NBC News
• Roth & Co.
• The Tax Lawyer's Blog

Tax Court Follows Murphy, Denies § 104 Exclusion for Settlement Proceeds of Reverse Discrimination Claim

Kevin F. Hennessey, a white Air Force officer, lost his position in 1993 because of congressionally mandated personnel reductions in the Armed Forces.  He received a $27,900 settlement in a class action lawsuit claiming that the Armed Forces improperly favored minorities and women in implementing the personnel reductions.

Petitioners stipulated that the lump-sum payment Mr. Hennessey received was not compensation for physical injuries or physical sickness. Accordingly, under § 104(a)(2) petitioners may not exclude the lump-sum payment from gross income. However, petitioners raise several constitutional objections to § 104(a)(2).

Petitioners contend that the lump-sum payment is not income because there was no accession to wealth and, accordingly, no gain within the meaning of §61(a). Rather, they argue, the payment was intended to make Mr. Hennessey "whole" for his losses, which, in addition to the loss of wages, consisted of lost promotional opportunities, lost military pension, damage to reputation, and stigma of involuntary separation. A similar argument was raised by the taxpayer in Murphy v. IRS, 493 F.3d 170, 176-177 (D.C.Cir.2007). The Court of Appeals for the District of Columbia Circuit held that taxation of awards received for personal, nonphysical injuries was within the power of Congress. We agree with the Court of Appeals, and we reject petitioners' argument.

,Hennessey v. Commissioner, T.C. Memo. 2009-132 (June 9, 2009),

8th Cir.: Medical Residents Are Subject to FICA

The 8th Circuit today reversed two district court decisions and held that medical residents who work more than 40 hours per week at the Mayo Clinic and University of Minnesota are subject to employment taxes.  Mayo Foundation for Medical Education and Research v. United States, No. 07-3242 (8th Cir. June 12, 2009).

Tax Shelter Indictments

Three lawyers, two accountants, and two bankers were charged today with tax fraud related to tax shelters promoted by the Jenkens & Gilchrist law firm, BDO Seidman accounting firm, and a foreign bank with headquarters in New York. 

• Press Release
• Indictment
• Bloomberg
• New York Times
• Wall Street Journal

Tax Court Denies "Tax Doctor's" Deduction For His Hummer

The Tax Court yesterday denied a depreciation deduction for a Hummer used by "The Tax Doctor" in his tax preparation business.  Symonette v. Commissioner, T.C. Summ. Op. 2009-90 (June 8, 2009):

Brian operated a tax preparation business under the business name "Tax Doctor". The Tax Doctor business involved Brian's preparing tax returns and giving tax advice. ...   On the Schedule C for the Tax Doctor business petitioners claim a deduction of $15,085 for depreciation and section 179 expense. Apparently, $14,289 relates to a Hummer. ...

Brian's vague testimony, by itself, is insufficient to substantiate the claimed mileage. Indeed, his testimony serves to further support our conclusion that section 274(d) requires us to sustain respondent's disallowance of $14,289 of claimed expenses pertaining to the Hummer. ...

Respondent determined an accuracy-related penalty under section 6662(a) and (b)(1) for negligence or disregard of rules or regulations with respect to Brian's separate return ... Perhaps the most telling evidence on this penalty issue is the Hummer log ...

The necessity of keeping appropriate records -- and the understanding of the sort of records that would be appropriate-to support so substantial a claim should have been reasonably clear to someone like Brian. After all, he held himself out as knowledgeable about tax matters, people paid him to do tax work for them or give tax advice to them, and he testified at trial as to why it was appropriate for him to insist on being called "Doctor". Brian testified he has a Ph.D. in education administration, a master's degree in management information systems, and a bachelor's degree in business administration. Yet on this major matter of dispute the major books and records item he offered -- the Hummer log -- was so much in conflict with what petitioners showed on their tax return that we doubted not only its reliability but even its existence at the time when, Brian testified, it was updated weekly.

Former BDO Seidman Vice-Chairman Pleads Guilty in J&G Tax Shelter Case

Charles W. Bee, Jr., former Vice-Chairman of BDO Seidman, pled guilty yesterday to charges stemming from over $1 billion in Jenkens & Gilchrist tax shelters marketed by BDOS Seidman.

• Press Release
• Criminal Information
• Plea Agreement
• Bloomberg News
• Federal Tax Crimes
• Financial Times
• New York Post
• New York Times DealBook
• Roth & Co.

NLJ on Yesterday's 1st Circuit Oral Argument in Textron Tax Accrual Work Papers Case

Following up on yesterday's post, Today's En Banc 1st Circuit Oral Argument in Textron Tax Accrual Work Papers Case:  in today's National Law Journal: 1st Cir. Grills Both Sides in Hearing Over Protected Status of Tax Accrual Work Papers:

At an en banc hearing, the U.S. Court of Appeals for the 1st Circuit picked apart arguments by government and Textron Inc. lawyers in a contentious case about whether the work-product privilege protects companies' so-called tax accrual work papers. It was not clear from the questioning how the court will rule.

Today's En Banc 1st Circuit Oral Argument in Textron Tax Accrual Work Papers Case

The audio of today's oral argument before the en banc First Circuit in United States v. Textron, No. 07-2631, is available here.  For prior TaxProf Blog coverage, see:

• Ventry:  A Primer on Tax Work Product for Federal Courts (5/19/09)
• 1st Circuit Orders Rehearing En Banc in Textron Tax Accrual Work Papers Case (3/25/09)
• Commentary on Textron Tax Accrual Work Papers Case (1/23/09)
• Ventry:  Textron Deals Blow to IRS's Anti-Tax Shelter Efforts (1/22/09)
• NLJ:  Corporate Counsel Fight IRS in Key Work Product Protection Case (4/14/08)
• WSJ:  Textron Battles DOJ on Access to Work Papers in SILO Tax Shelter Case (6/20/06)

Supreme Court Grants Cert in Bilski, Implicating Tax Strategy Patents

The U.S. Supreme Court yesterday granted certiorari in Bilski v. Doll, No. 08-964, which will have implications for the validity of tax strategy patents.  Prior TaxProf Blog coverage:

• Symposium on Tax Patents (12/16/08)
• Aprill:  Bilski Means More Uncertainty for Tax Strategy Patents (10/30/08)
• Federal Circuit Overrules Tax Strategy Patent Linchpin (10/30/08)
• AICPA Asks CAFC to Deny Tax Strategy Patents (4/14/08)

Court Rejects G-I Holdings' Request to Reopen Case to Hear Congressional Staff Testimony on Meaning of Tax Transition Rule

I previously blogged the taxpayer's attempt to have the district court reconsider its decision in In re G-I Holdings, Inc., 369 B.R. 832 (D.N.J. 2007), based on affidavits to be supplied by Senate Finance Committee staffers on the meaning of a tax transition rule:

• Can Congressional Staff Testify on Meaning of Tax Law? (Apr. 20, 2009)
• Kysar: Transition Rules and Statutory Interpretation in G-I Holdings (Apr. 28, 2009)
• Government Files Brief in Opposition in G-I Holdings (Apr. 30, 2008)

The U.S. District Court for the District of New Jersey yesterday dismissed the taxpayer's motion for reconsideration.   In re G-I Holdings, Inc., No. 02-3082 (D. N.J. May 28, 2009)

Liberty University as Bob Jones University -- Can the IRS Strip Tax-Exempt Status for Revoking Recognition of Democratic Club?

Following up on my earlier post, Liberty University Revokes Recognition of Democratic Club (May 22, 2009):  could the IRS strip Liberty of its § 501(c)(3) tax-exempt status under the authority of Bob Jones University v. United States, 461 U.S. 574 (1983):

[T]o warrant exemption under § 501(c)(3), an institution must fall within a category specified in that section and must demonstrably serve and be in harmony with the public interest. The institution's purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred. ... [A] declaration that a given institution is not "charitable" should be made only where there can be no doubt that the activity involved is contrary to a fundamental public policy. ...

Petitioners contend that, even if the Commissioner's policy is valid as to nonreligious private schools, that policy cannot constitutionally be applied to schools that engage in racial discrimination on the basis of sincerely held religious beliefs. As to such schools, it is argued that the IRS construction of § 170 and § 501(c)(3) violates their free exercise rights under the Religion Clauses of the First Amendment. ... The governmental interest at stake here is compelling. ...   That governmental interest substantially outweighs whatever burden denial of tax benefits places on petitioners' exercise of their religious beliefs. The interests asserted by petitioners cannot be accommodated with that compelling governmental interest; ... and no "less restrictive means" ... are available to achieve the governmental interest.

Jonathan Singer notes the potential applicability of American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), in which the Tax Court stripped the tax-exempt status of an educational organization for acting in an excessively partisan fashion:

In that case, an academy was created to teach individuals the skills necessary to work in political campaigns. All of the graduates of the academy went on to work for Republican candidates, and the academy itself stemmed from a similar training program previously administered by the National Republican Congressional Committee.

It's worth noting that the facts of the Liberty University situation do not exactly comport with those in American Campaign Academy. Although the late Jerry Falwell played an important role in the Republican coalition and Liberty University itself has been used by Republicans for important addresses, the nexus between the institution and the GOP is considerably more attenuated than the connection between the American Campaign Academy and the NRCC.

That said, it appears that Liberty University is endorsing a Republican Party organization while barring a Democratic Party organization. Whether this action rises to the level of the type of excessively partisan action the Tax Court has already ruled to run afoul of laws regulating non-profit organizations remains to be seen.

For more on American Campaign Academy, see Darryll Jones (Stetson) of our sister Nonprofit Law Prof Blog.

For more on Liberty University's actions, see:

• Associated Press
• Newsweek
• NPR
• Washington Post

Here is Rachel Maddow's take:

Jerry Falwell, Jr., Chancellor and President of Liberty University, yesterday issued this press release explaining Liberty's actions:

The University has not banned Democrats from campus. Nor has the Democrat club been banned from meeting. And, never has the University or its' officials said that a person cannot be a Christian and a Democrat. Sorry for those who want to run with these titillating soundbites, but these are the facts.

The students who formed the Democrat club last October are good students. They are pro-life and believe in traditional marriage. They can continue to meet on campus. The only thing that has changed came about as part of a University-wide review of all student organizations for official recognition status. Official recognition carries with it the benefit of using the University name and funds. While this group will not be an officially recognized club, it may still meet on campus. ...

Parents and students support the University because they believe in its' distinctly Christian identity and mission. Liberty University is pro-life and believes that marriage between one man and one woman provides the best environment for children. Liberty University will not lend its' name or financial support to any student group that advances causes contrary to its mission.

While the students in the college Democrat club are pro-life and support traditional marriage, the constitution of the club pledged support to advance the Democratic platform and candidates. The 2008 Democratic platform has taken an extreme turn to the left on social issues. For the first time it supports federal funding of abortion and repeal of the federal Defense of Marriage Act, a law passed overwhelmingly by a bi-partisan Congress and signed by President Bill Clinton. Liberty University will not lend its' name or financial support to undermine marriage or to promote abortion.

While students are free to meet on campus, debate and discuss politics of every stripe, the University will remain true to its' core principles and not lend its' name or fund groups that work to undermine the principles that make Liberty attractive to so many people. Liberty brings many diverse speakers to campus.

Judge Refuses to Revoke Marion Barry's Probation for Continued Failure to File Tax Returns After U.S. Attorney Fails to Call Any Witnesses at Hearing

I previously blogged Marion Barry Owes $277k in Back Taxes; Government Seeks Revocation of His Probation (March 30, 2009):

In a scathing pretrial memorandum, U.S. Attorney Jeffrey A. Taylor alleges that former D.C. Mayor (and current D.C. Council member) Marion Barry owes more than $277,000 in unpaid federal taxes, penalties, and interest. In addition, the memorandum alleges that Barry did not file his 2007 tax return until February 17, 2009, four months after the due date (with the automatic four-month extension), and it showed additional taxes owed of $6,512. The U.S. Attorney is seeking revocation of Barry's three-year probation on his guilty plea to failing to file his federal and D.C. tax returns for 1999-2004.

In a bizarre twist, the U.S. Attorney failed to call a single witness at the hearing, and the district court on Friday rejected the request to revoke Barry's probation.  United States v. Barry, No. 05-0556M (D.C. D.C. May 22, 2009):

Defendant advised, as context for the violations alleged by the United States Attorney and the United States Probation Office, that issues regarding his health "left [him] unable to fully focus on the task of submitting his tax returns." ...

The United States Attorney also suggested that Defendants' health concerns did not prevent him from "vacation[ing] in Jamaica [in September, 2008]," running a "successful campaign ... for re-election [in November 2008,] or "work[ing] as a member of the Council of the District of Columbia." ...

In this district, probation revocation proceedings are almost invariably initiated by the United States Probation Office. ... The only exception to this general rule has been in this action, in which ... the United States Attorney -- in the absence of a request by the United States Probation Office -- has moved to revoke this Defendant's term of probation. ... 

[A]t the April 16 hearing, the United States Attorney elected not to call a single witness in an effort to prove the new criminal conduct....

Upon consideration of the evidence offered by the United States Attorney at the hearing, the court finds that the United States Attorney failed even to atempt to demonstrate, by the facile preponderance standard, that Defendant's failure to timely file his 2007 tax returns was willful. ...

Plainly, willfulness is an element of the alleged new criminal conduct.  The United States Attorney has, without explanation, failed to even attempt to prove it.  No authority supports the proposition that the United States Attorney may allege that a probationer violated his conditions of probation by new criminal conduct and reuest a hearing on that ground, and, at the hearing, call no witnesses and maintain that he need not offer any evidence at all with respect to an element of the offenses.

A spokesman for the U.S. Attorney's office "strongly disagreed with some of the court's characterizations and findings of fact."  Barry has called for an investigation into the U.S. Attorney's conduct of the case.

• Associated Press
• Suits & Sentences
• Washington Post
• Washington Times

Glaxo Battles IRS in $1.9 Billion Earnings Stripping Case

Wall Street Journal: GlaxoSmithKline, IRS Tangle in Tax Court, by Jesse Drucker:

GlaxoSmithKline PLC is embroiled in a potential $1.9 billion court battle with the Internal Revenue Service, which says the drug maker owes back taxes, interest and penalties stemming from tax deductions Glaxo generated essentially by making payments to itself.

The dispute centers on a practice known as earnings stripping, in which a multinational company reduces its taxes by claiming interest deductions for payments to a related unit overseas. The company claims deductions on its U.S. tax return, but no money ultimately leaves the parent company's coffers, and publicly reported profit is unchanged.

"The ability of U.S. subsidiaries of foreign multinationals to strip away earnings like this is a problem" because it significantly reduces the U.S. corporate-tax base, says Reuven Avi-Yonah, a former corporate tax attorney and now director of the international-tax program at the University of Michigan Law School.

 

See also Reuters: Glaxo in Potential $1.9 Billion Tax Battle With IRS.

Court of Appeals Reverses Lower Court: Pringles Are "Potato Chips" Subject to VAT

I previously blogged the July 4, 2008 decision by Britain's High Court (Chancery Division) that Pringles are not potato chips and thus are exempt from Britain's 17.5% VAT.  Procter & Gamble UK v. Revenue & Customs, [2008] EWHC 1558 (Ch) (July 4, 2008).  With Memorial Day approaching, Britain's Court of Appeals has reversed, holding that Pringles contain "more than enough potato content" to be considered a potato chip.  Revenue & Customs v. Procter & Gamble UK, [2009] EWCA Civ. 407 (Ct. App.) (May 20, 2009):

Are Pringles "similar to potato crisps and made from the potato?" That is the question. Upon it hangs the question of whether rather a lot of money, as much as £100m of tax for the past and about £20m a year for the future according to Mr Christopher Vajda QC for the Commissioners for Her Majesty's Revenue and Customs ("HMRC"), the appellants in this appeal. ...

In the course of his urbane submissions on the "made from" aspect of Regular Pringles Mr Cordara QC referred to "the potato as a fiscal contaminant", the "essential characteristics of the paradigm potato crisp", the absence of "findings of potatoness" and the "quantitative role of the potato." In contending that Pringles (42% potato, 33% fat) were not "made from" the potato he put forward this proposition:

"If a product has a number of significant ingredients it cannot be said to be 'made from' one of them."

So it is argued that Regular Pringles, which also contain fat and flour, cannot be said to be "made from the potato."

The response to these points is that it is vital to recall why the Tribunal was required in the first place to answer the question whether the goods in question are "made from" the potato. It was not in answer to a scientific or technical question about the composition of Regular Pringles, or in response to a request for a recipe. It was for the purpose of deciding whether the goods are entitled to zero rating. On this point the VAT legislation uses everyday English words, which ought to be interpreted in a sensible way according to their ordinary and natural meaning. The "made from" question would probably be answered in a more relevant and sensible way by a child consumer of crisps than by a food scientist or a culinary pedant. On another aspect of party food I think that most children, if asked whether jellies with raspberries in them were "made from" jelly, would have the good sense to say "Yes", despite the raspberries.

• Barron's
• Daily Mail
• Dayton Business Journal
• The Sun
• Telegraph
• UPI
• USA Today

Wal-Mart. Save Money Taxes. Live Better.

I previously blogged Wal-Mart's aggressive tax strategy that has saved it hundreds of millions in state taxes in recent years by transferring its stores to REITs owned by Wal-Mart subsidiaries in Delaware and then deducting rental payments to the REITS, which were not taxed on the rental receipts in Delaware. The North Carolina Court of Appeals on Tuesday rejected the Wal-Mart tax strategy in Wal-Mart Stores East, Inc. v. Hinton, No. 08-450 (N.C. Ct. App. May 19, 2009), affirming the trial court's conclusion:

[Wal-Mart does] not deny the facts demonstrating the circular journey taken by the "rents" paid by these plaintiffs, but contend[s] that on each leg of the journey [Wal-Mart was] only taking advantage of a lawful deduction afforded them by then-existing tax law. Such a piecemeal approach exalts form over substance, however.

• Associated Press
• Charlotte Business Journal
• Huffington Post
• Wall Street Journal

5th Circuit: BLIPS Tax Shelter Lacks Economic Substance

The Fifth Circuit yesterday decided the issue it had reserved in Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001) -- the contours of the economic substance doctrine -- in the contect of a BLIPS (Bond Linked Issue Premium Structure) tax shelter.  Klamath Strategic Investment Fund v. United States, No. 07-40861 (5th Cir. May 15, 2009):

The law regarding whether a transaction should be disregarded as lacking economic reality is somewhat unsettled in the Fifth Circuit, and a split exists among other Circuits. The Fourth Circuit applies a rigid two-prong test, where a transaction will only be invalidated if it lacks economic substance and the taxpayer’s sole motive is tax avoidance. See Rice’s Toyota World, Inc. v. Comm’r, 752 F.2d 89, 91-92 (4th Cir. 1985). The majority view, however, is that a lack of economic substance is sufficient to invalidate the transaction regardless of whether the taxpayer has motives other than tax avoidance. See, e.g., Coltec, 454 F.3d at 1355; United Parcel Serv. of Am., Inc. v. Comm’r, 254 F.3d 1014, 1018 (11th Cir. 2001); ACM Partnership v. Comm’r, 157 F.3d 231, 247 (3d Cir. 1998); James v. Comm’r, 899 F.2d 905, 908-09 (10th Cir. 1990). We have previously declined to explicitly adopt either approach. See Compaq, 277 F.3d at 781-82 (finding that the transaction in question had both economic substance and a legitimate business purpose, so it would be recognized for tax purposes under either the minority or majority approach).

We conclude that the majority view more accurately interprets the Supreme Court’s prescript in Frank Lyon. The Court essentially set up a multifactor test for when a transaction must be honored as legitimate for tax purposes, with factors including whether the transaction (1) has economic substance compelled by business or regulatory realities, (2) is imbued with taxindependent considerations, and (3) is not shaped totally by tax-avoidance features. See Frank Lyon, 435 U.S. at 583-84. Importantly, these factors are phrased in the conjunctive, meaning that the absence of any one of them will render the transaction void for tax purposes. Thus, if a transaction lacks economic substance compelled by business or regulatory realities, the transaction must be disregarded even if the taxpayers profess a genuine business purpose without tax-avoidance motivations. ...

Here, the evidence supports the district court’s conclusion that the loan transactions lacked economic substance. ...  The evidence clearly shows that Presidio and NatWest designed the loan transactions and the investment strategy so that no reasonable possibility of profit existed and so that the funding amount would create massive tax benefits but would never actually be at risk. Regardless of Patterson and Nix’s desire to make money, they entered into transactions controlled by Presidio and NatWest that were not structured or implemented to make a profit. This particular situation highlights the logic of following the majority approach to the economic substance doctrine, because the minority approach would allow tax benefits to flow from transactions totally lacking in economic substance as long as the taxpayers offered some conceivable profit motive. In cases such as the instant one, this approach would essentially reward a “head in the sand” defense where taxpayers can profess a profit motive but agree to a scheme structured and controlled by parties with the sole purpose of achieving tax benefits for them. We therefore agree with the district court that since the loan transactions lacked economic substance, they must be disregarded for tax purposes.

(Hat Tip: Richard Jacobus.)

9th Circuit Reverses Tax Court: TP Can Recover Attorneys' Fees Advanced by Third Party

In a 2006 case, the Tax Court denied a taxpayer's attorneys' fees request under § 7430 on the ground that the taxpayer had not "paid or incurred" the fees because they were advanced by his employer.  Morrison v. Commissioner, T.C. Memo. 2006-103.  The Ninth Circuit yesterday reversed in Morrison v. Commissioner, No. 06-75332 (9th Cir. May 13, 2009):

[W]e agree with those courts that have awarded attorneys’ fees to individuals and small business litigants even where a third party paid those fees and the litigant’s obligation to repay was contingent on his recovery under the statute. Such a rule encourages third parties to help taxpayers vindicate their rights and avoids creating an incentive for the IRS to deny meritorious claims. ...

We therefore hold that when a third party who has no direct interest in the litigation pays fees on behalf of a taxpayer, the taxpayer “incurs” the fees so long as he assumes: (1) an absolute obligation to repay the fees, regardless of whether he successfully moves for an award under § 7430; or (2) a contingent obligation to pay the fees in the event that he is able to recover them under § 7430.

Four E&Y Partners Convicted on All Counts in Tax Shelter Fraud

Former and current Ernst & Young tax partners Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn were convicted by a jury yesterday of all counts relating to the promotion of fraudulent tax shelters through E&Y's infamous Value Ideas Produce Extraordinary Results (Viper) group.

• Associated Press
• New York Times
• Reuters
• Wall Street Journal

9th Circuit Upholds Injunction Against CPA's Use of "Mariner's Deduction"

The Ninth Circuit today upheld a permanent injunction against a CPA preventing him from preparing or assisting in preparing federal tax returns that assert the position that mariners are entitled to an unreimbursed deduction for meal expenses while working on board a ship, when no meal expenses are actually incurred (the “mariner’s tax deduction”). United States v. Kapp, No. 07-56408 (9th Cir. May 4, 2009).

Israel Supreme Court Allows Deduction for Child Care Expenses

The Israel Supreme Court on Thursday reaffirmed a Tel Aviv District Court decision holding that payments for nannies, daycare, and preschools constituted deductible business expenses.

• haaretz.com
• Israel National News
• Jerusalem Post
• ynetnews.com

(Hat Tip: Alice Abreu.)

Taxpayer Submits Affidavits of Senate Staffers to Establish Meaning of Tax Transition Rule in K-I Holdings

Continuing my coverage of the taxpayer's attempt to have the district court reconsider its decision in In re G-I Holdings, 369 B.R. 832 (D.N.J. 2007), based on affidavits to be supplied by Senate Finance Committee staffers on the meaning of a tax transition rule:  the taxpayer yesterday withdrew its motion to seal and simultaneously filed the affidavits of Mark Prater (Minority Chief Tax Counsel, Senate Finance Committee) and Brigitta Guyla Paru (former assistant to Mr. Prater):

• Taxpayer's Letter to Judge Chesler
• Revised Exhibit B to Offer of Proof

Prior TaxProf Blog coverage:

• Can Congressional Staff Testify on Meaning of Tax Law? (Apr. 20, 2009)
• Kysar: Transition Rules and Statutory Interpretation in G-I Holdings (Apr. 28, 2009)
• Government Files Brief in Opposition in G-I Holdings (Apr. 30, 2009)
• Government Opposes Sealing Finance Committee Staff Statements in G-I Holdings (May 1, 2009)

Government Opposes Sealing Finance Committee Staff Statements in G-I Holdings

Continuing my coverage of the taxpayer's attempt to have the district court reconsider its decision in In re G-I Holdings, 369 B.R. 832 (D.N.J. 2007), based on affidavits to be supplied by Senate Finance Committee staffers on the meaning of a tax transition rule:  the Government yesterday filed its Brief in Opposition to Debtors' Motion to Seal Finance Committee Staff Statements, which includes this statement:

The public’s interest is manifest in Rebecca Kysar’s discussion of GAF’s attempt to cite its lobbyist as legislative history in Listening to Congress: Earmark Rules and Statutory Interpretation, 94 Cornell L. Rev. 519, 565-567 (2009). Kysar was also the author of Kysar: Transition Rules and Statutory Interpretation in G-I Holdings, available on TaxProf Blog on April 28, 2009 (http://taxprof.typepad.com/taxprof_blog/2009/04/kysar-.html#more).

Prior TaxProf Blog coverage:

• Can Congressional Staff Testify on Meaning of Tax Law? (Apr. 20, 2009)
• Kysar: Transition Rules and Statutory Interpretation in G-I Holdings (Apr. 28, 2009)
• Government Files Brief in Opposition in G-I Holdings (Apr. 30, 2009)

Government Files Brief in Opposition in G-I Holdings

Continuing my coverage of the taxpayer's attempt to have the district court reconsider its decision in In re G-I Holdings, 369 B.R. 832 (D.N.J. 2007), based on affidavits to be supplied by Senate Finance Committee staffers on the meaning of a tax transition rule:  the Government yesterday filed its Brief in Opposition. Attached to the motion are several remarkable documents, including:

• A three-page letter from Senate Finance Committee Deputy Counsel Patricia Mack Bryan strongly objecting to the taxpayer's attempt to introduce into evidence the affidavit from the committee staffer.
• Skadden's $13.4 million attorney fee application.
• McKee Nelson's $10.7 million attorney fee application. 

Prior TaxProf Blog coverage:

• Can Congressional Staff Testify on Meaning of Tax Law? (Apr. 20, 2009)
• Kysar: Transition Rules and Statutory Interpretation in G-I Holdings (Apr. 28, 2009)

Kysar: Transition Rules and Statutory Interpretation in G-I Holdings

Last week, I blogged important new developments in In re G-I Holdings, 369 B.R. 832 (D.N.J. 2007), in my post, Can Congressional Staff Testify on Meaning of Tax Law?.  Rebecca M. Kysar (Brooklyn), author of the important article on the subject, Listening to Congress: Earmark Rules and Statutory Interpretation, 94 Cornell L. Rev. 519 (2009), share her views on these developments:

A metaphor may be timeworn yet timeless. As blogged by Paul here, a recent court proceeding, involving the bankruptcy of G-I Holdings, confronts troublesome issues of statutory interpretation that arise from similarities of the tax legislative process to the making of sausage.

Specifically, the court was asked to interpret a provision Congress drafted to provide relief from a tax increase to certain taxpayers. These types of provisions are known generally as transition rules. Unsurprisingly, most taxpayers who obtain such relief employ lobbyists to advocate their position to members of Congress and their staffers. Thus, the transition rules are often targeted to benefit special interests.

Although common, individualized treatment due to lobbying efforts is nonetheless regarded by the public as unseemly. Hence, these deals carry heavy political and economic costs to the lawmakers who support them and to their beneficiaries as well. To reduce such costs, lawmakers not only enact transition rules “off-code” but hide them in obscure terms so that they are less visible to the wider constituency, as well as to competing interest groups. As a result, the tax laws are littered with elliptical provisions benefitting those lucky few who possess idiosyncratic characteristics, such as a specific sewage treatment facility operating under a service agreement approved on December 4, 1985 by a parish council. See Pub. L. No. 99-514, § 204(a)(10), (1986).

Lacking clearly worded beneficiaries, these transition rules are also often ensconced behind textual ambiguities and mis-drafting, rendering them susceptible to non-enforcement by courts that interpret these provisions against the special interests. When litigation arises over these provisions, beneficiaries often point to the details of their lobbying efforts to shed light on the meaning of the provision. The extent to which courts are institutionally equipped to and should consider these “gory” details in interpreting the sausage factory’s product, however, has perplexed judges, lawyers, and scholars alike.

In the instant matter, the court previously had held that a partnership agreement entered into by G-I Holdings did not qualify for targeted transition relief from a statutory amendment (the amendment is an exception to the nonrecognition rule of § 731 and would require gain recognition upon certain partnership distributions). This was due to the fact, the court explained, that the taxpayer’s partnership agreement did not provide for partnership distributions of “(i) a fixed value of marketable securities that are specified in the contract, or (ii) other property,” as is required by the transition rule. The court interpreted these distribution options as mutually exclusive and held that transition relief was not available to the taxpayer because the agreement entitled the partnership to vary the value of securities it distributed. In reaching that conclusion, the court ruled that it could not consider an affidavit from a lobbyist employed by G-I Holdings to secure such relief. G-I Holdings has now petitioned the court to reconsider its prior ruling in light of additional affidavits from congressional staffers, lobbyists, and others that could bear witness to the corporation’s lobbying activities.

At first glance, whether the court should rely on evidence of these activities in interpreting a Code section seems to implicate the classic debate between textualists and intentionalists. Textualists object to the use of extra-statutory devices in interpreting statutes. Such thinkers claim that consulting legislating history is inconsistent with democratic theory since it has not been voted upon and, furthermore, encourages congressional members or lobbyists to plant legislative history that does not represent majority will. In contrast, intentionalists contend that courts must discern legislative intent in interpreting ambiguous statutes. Intentionalists advocate for the use of tools external to the statutory text as a legitimate means of so doing.

The court, however, need not (and almost certainly will not) choose between these two theories of statutory interpretation. First, the court may simply uphold its prior ruling that the clause was unambiguous and, thus, evidence regarding the circumstances of its enactment should be ignored. Second, the court could strike the affidavits at issue since they constitute post-enactment statements and hence do not reliably inform contemporaneous congressional intent. Unlike other legislative history that may be implicitly approved by a floor vote, post-enactment statements carry no consequences and hence are cheap talk. Although this issue is not entirely resolved, the Supreme Court, in Western Air Lines v. Board of Equalization, 480 U.S. 123, 130 n.* (1987), refused to consider an affidavit from a lobbyist, relying in part on its “post hoc” nature. Additionally, in Consumer Product Safety Comm’n v. GTE Sylvania, 447 U.S. 102, 117-18 (1980), the Court expressed a reluctance to use subsequent legislative statements in statutory interpretation, identifying such a practice as “hazardous”. Accord Sullivan v. Finkelstein, 496 U.S. 617, 631-32 (1990) (Scalia, J., concurring) “[a]rguments based on subsequent legislative history, like arguments based on antecedent futurity, should not be taken seriously, not even in a footnote”). Finally, if the court generally adheres to the theory that deals between lawmakers and interest groups must be upheld by the judiciary, in the instant case, the hidden nature of the purported deal undermines this argument since the deal is invisible to non-participating lawmakers and their constituents. Even pure intentionalists regard legislative history as existing upon a spectrum of reliability and choose to rely upon those types that involve the enactment process. In this manner, there is a distinction between committee reports, which are collective statements known to the rest of Congress of a committee’s views on the law’s meaning, and affidavits from lobbyists and individual staffers, which perhaps reflect only empty promises whispered in the backroom. See Western Air Lines, 480 U.S. at 130 n.*.

Going forward, developments in the legislative process may ameliorate the difficulties in interpreting a special interest provision. Current “earmark rules” provide that lawmakers must expose hidden special interest deals by disclosing all beneficiaries of narrowly tailored tax and spending provisions. I have argued in an article, which discussed the G-I Holdings case, that courts should assume these earmark rules have functioned correctly: if no special interest beneficiary has been disclosed, judges should assume, I argue, that none was intended. This proposal is aimed at strengthening congressional adherence to the earmark rules, which is badly needed since the rules are self-enforcing. By refusing to uphold the undisclosed bargains of lawmakers and their special interest constituents, the proposal achieves this result through the imposition of costs upon these parties. Although this proposal would not apply in G-I Holdings since the earmark rules were enacted subsequent to the transition rule at issue, it may be the best way to navigate between competing theories of statutory interpretation in future cases involving narrowly tailored transition rules. It may even clean up the sausage factory.

Judge Denies Law Profs' Injunction Against West, But Signals They May Succeed on Merits of Claim That West Put Their Names on "Sham" Supplement

Earlier this month, I blogged Two Law Profs Sue West for Putting Their Names on a "Sham" Supplement to Their Treatise:

David Rudovsky (Penn) and Leonard N. Sosnov (Widener) are suing West, claiming that they were falsely identified as the authors of a poorly researched “sham” supplement to their treatise, Pennsylvania Practice:  Criminal Procedure Law, Commentary and Forms.  The authors stopped working on the treatise when West cut their annual pay from $5,000 to $2,500 each.

The professors sought an immediate injunction on the ground that the supplement "was so poorly researched it would harm their reputations if allowed to remain on library shelves."  The National Law Journal reports that Senior U.S. District Judge John P. Fullam last week denied the injunction on the ground that "the harm has already been done," but signaled great sympathy for the professors' case on the merits:

[T]he four-page decision by Fullam appeared to provide only a empty victory for West. Fullam seemed to strongly hint that the professors will likely succeed in proving their claims under the Lanham Act as well as state defamation claims, but cannot show that an injunction at this stage would do any good.

"Although plaintiffs had no role in authoring the pocket part, defendant West made it appear that they had indeed authored the pocket part, with aid from members of the publisher’s staff," Fullam wrote. "To make matters worse," Fullam wrote, "the quality of that particular pocket part was not up to standard." Fullam found that "few if any relevant court decisions were included in the publication," and that readers were "not informed that some cases cited in earlier volumes had since been reversed or modified." .

Fullam concluded that while the plaintiffs had proven they were harmed, they had failed to prove that they risked suffering any further irreparable harm. "It seems clear that plaintiffs have established a right to some form of remedy -- damages to reputation come to mind -- but it would seem that the harm has already been done, and that, if plaintiffs do require further injunctive relief I order to complete their remedy, such relief would be just as effective after final hearing," Fullam wrote.

Rudovsky v. West Publishing Co., No 09-cv-00727 (Apr 23, 2009).

Can Congressional Staff Testify on Meaning of Tax Law?

There is a fascinating new development in the case of In re G-I Holdings, 369 B.R. 832 (D.N.J. 2007), which involved the interpretation of a tax transition rule.  The taxpayer In that case redeemed its partnership interest under an amended partnership agreement in exchange for a deferred property distribution valued at $464 million. Subsequent to the signing of the contract, but prior to the distribution, Congress amended the § 731 nonrecognition rule to require that a taxpayer recognize taxable gain upon distributions of securities it receives from a partnership. Congress provided transition relief to those taxpayers who had entered into a binding contract for partnership distributions of “(i) a fixed value of marketable securities that are specified in the contract, or (ii) other property.”  The court interpreted these distribution options as mutually exclusive and held that transition relief was not available to the taxpayer because the agreement entitled the partnership to vary the value of securities it distributed. In interpreting the transition rule, the court refused to consider an affidavit from a lobbyist retained by the taxpayer to seek relief from the proposed change to § 731.

On Friday, the taxpayer (though its tax counsel Skadden, McKee Nelson, and Riker Danzig Scherer Hyland & Perretti) filed a 121-page motion asking the federal district court to reconsider its decision based on affidavits to be supplied by Senate Finance Committee staffers on the meaning of the transition rule.  The taxpayer also filed a 22-page motion to seal the record concerning the Senate Finance Committee staff's views on the meaning of the transition rule.  For a detailed discussion of the subject, see Rebecca M. Kysar (Brooklyn), Listening to Congress: Earmark Rules and Statutory Interpretation, 94 Cornell L. Rev. 519 (2009).

D.C. Circuit: IRS Need Not Disclose Settlement Strategies in Tax Shelter Cases

The D.C. Circuit on Friday ruled that IRS documents on settlement strategies in tax shelter cases are exempt from disclosure under the Freedom of Information Act.  Mayer Brown v. IRS, No. 08-5143 (D.C. Cir. Apr. 17, 2009). The D.C. Circuit affirmed the district court's ruling that IRS need not disclose information on the settlement of lease-in/lease-out (LILO) tax shelters.

• Blog of the Legal Times
• Legal Times

En Banc 3d Cir. Reverses Panel's Rejection of District Judge's Sentence of Probation in Tax Evasion Case

The Third Circuit today issued a divided en banc opinion in United States v. Tomko, No. 05-4997 (3d Cir. April 17, 2009).  A divided three-judge panel originally had reversed a sentence of probation in a tax evasion case. United States v. Tomko, No. 05-4997 (3d Cir. Aug. 20, 2007).

In Tomko, the defendant pled guilty to tax evasion on treating $228,557 of work done on his home as deductible expenses of his company. Although the Sentencing Guideline range was 12-18 months of incarceration, the district court imposed a sentence of probation (with a special condition of one year of house arrest) and imposed an above-Sentencing Guideline range fine of $250,000. The government appealed, and the divided panel reversed the sentence as unreasonable.  The divided en banc court affirmed the district judge's sentence.  (Hat Tip: Peter Hardy.)

Colorado Judge Rules Sheriff Improperly Seized Immigrants' Tax Returns

Following up on my prior posts:

• NY Times: Paying Taxes, and Fearing Deportation (2/12/09)
• Judge Rules Search of Immigrants' Tax Returns Violated 4th Amendment (3/10/09)

The Colorado judge has ruled that the sheriff's office lacked probable cause to seize the tax returns of over 1,000 illegal immigrants in an identity theft investigation.

• Associated Press
• Denver Post
• New York Times

(Hat Tip: Francine Lipman.)

Tax Court: Digital Option Spread Transaction Lacked Economic Substance

New Phoenix Corp. v. Commissioner, 132 T.C. No. 9 (Apr. 9, 2009).  (Hat Tip:  John Colvin, Richard Jacobus.)

Divided Tax Court Invalidates Innocent Spouse Reg

A divided Tax Court yesterday invalidated Reg. § 1.6015-5(b)(1), which required taxpayers seeking innocent spouse relief under I.R.C. § 6015(f) to request such relief within two years of the IRS's commencement of the collection action.  Lantz v. Commissioner, 132 T.C. No. 8 (Apr. 7, 2009).  The 33-page majority opinion was written by Judge Goeke and joined by eleven other judges.  Five judges dissented (Gale, Halpern, Holmes, Morrison, and Thornton).  (Hat Tip: Francine Lipman.) 

Group Challenges IRS's Use of Political Activities Test to Intrude on Charities' First Amendment Rights

The James Madison Center for Free Speech has filed two federal lawsuits claiming that the IRS has stifled the legitimate speech activities of many non-profit organizations.  From the press release:

For decades the IRS has applied an "all the facts and circumstances" test to the grass roots lobbying, issue advocacy and voter education activity of non-profits to determine if the non-profit has actually engaged in prohibited political activity. Furthermore, this vague IRS test has been exploited by some liberal groups to threaten and harass churches and other non-profits, causing many of them to be fearful of IRS retribution if they discussed moral or public policy issues. Non-profits have even shied away from legitimate grass roots lobbying activity in fear that it will be considered political intervention. As a result, the legitimate speech activities of many non-profits have been chilled and their free speech rights infringed.

In Catholic Answers and Karl Keating vs. USA, the IRS determined that two "E-letters" posted in 2004 by the President of Catholic Answers, Karl Keating, on his blog on the Catholic Answers website arguing that John Kerry should not receive Holy Communion, because of his pro-abortion position, were "political expenditures" that might influence the 2004 presidential election. The IRS assessed a tax on Catholic Answers, a 501(c)(3) charity, for these blog entries and required that Keating reimburse Catholic Answers $900 for the expenditures incurred for these E-letters. Catholic Answers is demanding that the courts find that a discussion by a Catholic group about who should receive Holy Communion is not properly considered "political intervention," allowing them to reimburse Keating his $900.

In Christian Coalition of Florida vs. USA, the Christian Coalition of Florida (CC-FL) was denied its 501(c)(4) status by the IRS because the IRS claimed that its newsletters, voter guides, and legislative scorecards constituted political intervention and that these activities meant that CC-FL’s "primary activity" was political intervention. CC-FL claims, however, that their newsletters, voter guides and legislative scorecards are educational in that they provide members with information about candidates and legislators on a variety of issues and do not expressly advocate the election or defeat of any candidate. Furthermore, CC-FL argues that these activities, even if considered political intervention, were not extensive enough to be the "primary activity" of CC-FL

In both cases, the Madison Center is also claiming that the IRS rules and regulations are vague and overbroad and, as a result, chill the First Amendment free speech rights of non-profits. The suits ask that the IRS’s rules and regulations on "political intervention," and its "facts and circumstances" test, be struck down or narrowly construed to only encompass speech which expressly advocates the election or defeat of a clearly identified candidate.

Wesley Snipes Responds to Government's Opposition to His Motion to Leave U.S. for 5 Months Pending Appeal of Tax Conviction

Last week, I blogged the Government's opposition to Wesley Snipes' motion seeking permission to travel to Nambia from April 5 to April 29 (to film the movie Gallowwalker) and to Italy from May 4 to August 15 (to film the movie Game of Death while the appeal of his conviction on three misdemeanor tax fraud counts is pending in the Eleventh Circuit.  On Friday, Snipes filed his 7-page response:

The government’s argument that this Honorable Court should deny Mr. Snipes’ most recent request to travel abroad to complete work on a film and to begin working on another, on the theory that he has previously abused this Court’s trust, however, is misguided and based on inaccurate claims gleaned solely from press reports. ...

Notwithstanding the questions raised by the government in its Opposition, the current requests for travel arise out of contractual obligations. Reshooting of scenes is not a discretionary decision that rests in the hands of any artist, including Mr. Snipes. These decisions are made by the producers, director and motion picture companies. The artist’s decision to commit to making a film gives rise to an obligation to comply -- in this case, Mr. Snipes’ agreement to appear in a leading role in Gallowwalker. Thus, his ongoing fulfillment of his contractual responsibilities is not a reason for rejecting the present request. Indeed, it is in the nature of the film business that decisions about shooting locations, schedules and the completion of filming and editing cannot be controlled by the artist. Allowing Mr. Snipes the ability to comply with those obligations by reshooting several scenes would be consistent with this Court’s exercise of discretion to permit him to appear in the film in the first place, and would facilitate his earning of income to assist in meeting his past obligations to the government.

Finally, the government has presented no reason to reject Mr. Snipes’ request to film his next project, The Game of Death, this spring and summer. ...

It hardly seems logical that the government would take the position that international travel for business reasons should be denied on the ground that, according to the prosecutors, bail pending appeal should not have been granted in the first place. ...  To ask this Court to pre-judge the appeal at this stage, as the government seems to attempt, is utterly inappropriate. More to the point, the government does not now contend there is any reason, based on new evidence or otherwise, to say that Mr. Snipes is a danger to the community, that his appeal has been interposed for the purpose of delay, or that he is likely to flee. In short, the material on pages 3-11 of the Response does not support the government's conclusion that the motion for travel should be denied, any more than its mistaken claim of prior violations.
                

10th Circuit Denies $300k Charitable Deduction Claimed by Timothy McVeigh's Lawyer for Donation of Work Papers to University of Texas

I previously blogged the Tax Court's denial of a $300,000 charitable deduction claimed by Leslie Stephen Jones, lead counsel for the defense of Timothy McVeigh in the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City, for the donation of his papers in the case to the University of Texas. Jones v. Commissioner, 129 T.C. 146 (2007).  The Tenth Circuit yesterday affirmed the Tax Court's decision.  Jones v. Commissioner, No.08-9001 (10th Cir. Mar. 27, 2009):

[T]he tax court held that Taxpayer was not entitled to claim a deduction on the donation of the discovery material for two reasons: (1) Taxpayer did not own the discovery material, and (2) the discovery material was not a capital asset [and thus Taxpayer's charitable deduction was limited to  his basis in the donated material -- zero]. Because we hold that the discovery material is not a capital asset, we need not decide whether Taxpayer owned the discovery material under Oklahoma law. As the following discussion demonstrates, however, our rationale for determining that the discovery material is not a capital asset differs from that of the tax court. ...

[T]he tax court ruled that if Taxpayer owned the discovery material, it was excluded under the IRC’s definition of capital asset pursuant to § 1221(a)(3)(A). Specifically, the tax court held that the discovery material qualified as “letters, memoranda, or similar property created by the taxpayer’s own efforts.”  The record, however, clearly demonstrates—and the Commissioner appears to concede—that the property which Taxpayer claimed as a charitable contribution was not created by his own personal efforts. Thus, we believe the tax court incorrectly applied § 1221(a)(3)(A) to the discovery material. Nevertheless, for the reasons articulated below, we hold that § 1221(a)(3)(B) encompasses the discovery material donated by Taxpayer, thereby excluding it from the IRC’s definition of capital asset. Accordingly, we affirm the tax court’s ruling, albeit on alternative grounds.

The items Taxpayer donated consisted of copies of FBI memoranda, lab reports, computer discs, and photographs—all containing information related to the investigation and prosecution of Timothy McVeigh. In addition, the discovery material included letters to Taxpayer from the FBI and the Department of Justice explaining the contents of the material. We have no trouble concluding, therefore, nor does Taxpayer seriously contest, that the discovery material is properly characterized as “letter[s], memorand[a], or similar property.”  § 1221(a)(3)(B) .

We next consider whether the material was “prepared or produced” for Taxpayer. ...  Taxpayer argues that the discovery material does not fall under § 1221(a)(3)(B) because it was not produced specifically for him. Admittedly, the discovery material was not originally created for Taxpayer’s benefit. Rather, the Government first compiled the material to assist in its investigation and prosecution of McVeigh. Nevertheless, we believe the discovery material falls under § 1221(a)(3)(B)’s plain language. The Government made numerous copies of memoranda, investigative reports, photographs, etc., specifically for Taxpayer. Subsequently, they organized and categorized all the material for the benefit of Taxpayer and his client. The Government then placed the discovery material in banker’s boxes and prepared letters for Taxpayer explaining the contents of each box. Clearly, the discovery material was “br[ought] into a suitable condition,” and “made ready” for Taxpayer’s future use. The Government then produced the discovery material for Taxpayer, i.e., the Government “offered,” or “present[ed]” the material to Taxpayer for his “view,” “consideration,” and “use” in representing McVeigh. ...

[W]e hold that the discovery material donated by Taxpayer falls within the plain language of § 1221(a)(3)(B)—thereby limiting the charitable deduction amount to Taxpayer’s basis in the property. See Morrison [v. Commissioner, 71 T.C. 683, 689 (1979)] (holding that a Congressman’s charitable contribution deduction for letters, memoranda, and similar property provided to him by third parties during the course of his legislative duties was limited to his basis in the property). Because Taxpayer had no basis in the discovery material, he is precluded from claiming any income tax deduction for his charitable donation.

(Hat Tip: How Appealing.)

1st Circuit Orders Rehearing En Banc in Textron Tax Accrual Work Papers Case

The First Circuit today granted the government's petition, and denied the taxpayer's petition, for rehearing en banc in United States v. Textron, No. 07-2631 (1st Cir. Jan. 21, 2009).  The sharply divided (2-1) First Circuit panel had held that Textron's tax accrual work papers were protected under the work product investigation and thus did not need to be turned over to the IRS in its tax shelter investigation.  The full First Circuit will hear oral argument on June 2, 2009.  (Hat Tip:  How Appealing.)  Prior TaxProf Blog coverage:

• Commentary on Textron Tax Accrual Work Papers Case (1/23/09)
• Ventry: Textron Deals Blow to IRS's Anti-Tax Shelter Efforts (1/22/09)
• NLJ: Corporate Counsel Fight IRS in Key Work Product Protection Case (4/14/08)
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11th Circuit Affirms Pastor's Tax Evasion Conviction

The 11th Circuit on Friday affirmed the tax evasion conviction and 21-month sentence of Gregory Clarke, former pastor of the 6,000-member New Hope Baptist Church in Birmingham, Alabama:

 On appeal, Clarke argues that: (1) the district court’s denial of his motion to strike the jury venire, on the grounds that only three of its thirty-eight members were African-American, violated his Sixth Amendment right to a jury selected from a fair cross-section of the community; (2) the evidence was insufficient to establish guilt beyond a reasonable doubt; and (3) the district court erred in determining the tax loss amount and in finding that he used sophisticated means to conceal the fraud. ...

We conclude that: (1) the district court properly denied Clarke’s motion to exclude the jury venire; (2) there was sufficient evidence from which a reasonable jury could have found Clarke guilty of the charged offenses; and (3) the district court correctly calculated the applicable guidelines range. Accordingly, Clarke’s convictions and sentences are AFFIRMED.

United States v. Clarke, No. 08-10038 (11th Cir. Mar. 20, 2009).