Estate Seeks Panel Rehearing in Foreign Trust Penalty Case

DAPHNE JEANETTE ROST, EXECUTOR OF THE ESTATE OF JOHN H. REBOLD,
PLAINTIFF–APPELLANT
v.
UNITED STATES OF AMERICA, THE INTERNAL REVENUE SERVICE,
DEFENDANT–APPELLEE

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

Appeal from the United States District Court for the Western District of Texas
(No. 1:19-cv-00607-RP)
Honorable Robert Pitman, District Judge

PETITION FOR PANEL REHEARING

Joseph M. Erwin
Texas Bar No. 00797831
ERWIN LAW FIRM
100 Crescent Court, Suite 700
Dallas, Texas 75201
(214) 969-6890
joe@erwintaxlaw.com

Counsel for Appellant

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TABLE OF CONTENTS

Table of Authorities

Introduction

Argument

Conclusion

Signature of Counsel

Certificate of Service 

Certificate of Compliance

Addendum

TABLE OF AUTHORITIES

U.S. CONSTITUTION

Amendment 5

CASES

Aguirre v. Armstrong World, Inc., 901 F.2d 1256, 1258 (5th Cir. 1990)

Bombardier Aerospace Corporation v. United States, 831 F.3d 268 (5th Cir. 2016), cert. denied, 2017 U.S. LEXIS 4217, 137 S. Ct. 2293 (2017), aff'g, 94 F.Supp.3d 816 (N.D. Tex. 2015)

Brown v. Ames, 201 F.3d 654 (5th Cir. 2000)

Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)

Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978)

Crown v. Commissioner, 585 F.2d 234 (7th Cir. 1978)

Doe v. MySpace, Inc., 528 F.3d 413 (5th Cir. 2008)

Essinger v. Liberty Mutual Fire Ins. Co., 534 F.3d 450, 453 (5th Cir. 2008)

Estate of Swan, 24 T.C. 829 (1955), aff'd in part and rev'd in part on other grounds, 247 F.2d 144 (2d Cir. 1957)

General Elevator Corp. v. United States, 20 Cl. Ct. 345 (1990)

Kintner v. Commissioner, 216 F.2d 418 (9th Cir. 1954)

Morrissey v. Commissioner, 296 U.S. 344 (1935)

NetJets Large Aircraft, Inc. v. United States, 2015 U.S. Dist. LEXIS 155354, 2015 WL 7784925 (S.D. Ohio 2015)

Newberry v. Commissioner, 76 T.C. 441 (1981)

Pegues v. Morehouse Par. Sch. Bd., 706 F.2d 735 (5th Cir. 1983)

Pennzoil Co. v. U.S. Dept. of Energy, 680 F.2d 156 (Temp. Emer. Ct. App. 1982)

Radio Athens, Inc. v. Federal Communications Commission, 401 F.2d 398 (D.C. Cir. 1968)

Rollins v. Home Depot USA, Inc., 8 F.4th 393 (5th Cir. 2021)

United States v. Ford Motor Co., 463 Fd.3d 1267 (D.C. Cir. 1998)

United States v. Hitachi America, Ltd., 172 F.3d 1319 (Fed. Cir. 1999)

Wisconsin Resources Protection Council v. Flambeau Mining Co., 727 F.3d 700, 708 (7th Cir. 2013)

STATUTES

Internal Revenue Code of 1986, as amended

TREASURY REGULATIONS (Title 26, C.F.R.)

RULES

AGENCY PUBLICATIONS

OTHER SOURCES

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INTRODUCTION

This is a petition for rehearing by the panel which issued the decision in this case on August 11, 2022 (the “Decision”), see ADDENDUM A, affirming the District Court's denial of Plaintiff-Appellant's motion for summary judgment. In counsel's judgment, panel rehearing is necessary because material points of fact were overlooked and material points of law were misapprehended in the Decision. Specifically:

What is more disappointing for counsel than the result of the Decision is the impression it gives to casual readers. The Decision does not even acknowledge the serious questions presented by Plaintiff-Appellant, superficially dismissing them with misstatements and mischaracterizations. Casual readers and researchers will not have read Appellant Rost's briefs so as to understand that the issues raised were better described and analysed than as set out in the Decision. The Decision ignores the relevant case law and applies after-the-fact authority to reach its conclusion.

All of the issues raised here were argued in Plaintiff-Appellant's Principal Brief and Reply Brief — and the court below.

ARGUMENT

I. IT WAS ERROR FOR THE COURT TO APPLY A FACTS-AND-CIRCUMSTANCES TEST TO DECIDE QUESTIONS OF LAW.

It was error for the Court to rely on a facts-and-circumstances test of the Enelre Foundation to decide whether the legal challenge to sections 6048 and 6677 of the Internal Revenue Code of 1986, as amended (“Code” or “I.R.C.”) was valid. The Decision uses the conclusion that the Enelre Foundation was a foreign trust for purposes of Code sections 6048 and 6677, and, therefore, it logically follows that the statutes and other regulations were sufficient notice for the penalties to apply.

Simply explained, the Decision uses a circular argument, also known as begging the question: the statutes were sufficient notice to Mr. Rebold that the Enelre Foundation was a foreign trust because a facts-and-circumstances test shows that it is a foreign trust. However, that anti-logical sequence does not explain the legal gap of logic between the penalty statutes, mandating an information return relative to a foreign trust and a foreign, civil law legal entity. See the duty of clarity and due process arguments, below.

All of the facts recited in the Decision, except for the basic ones of the existence of Enelre Foundation and that it was formed under the laws of a foreign country, were necessary in the District Court to show that Plaintiff Rost's father could not establish the reasonable cause defence to the penalties. United States Motion for Summary Judgment, ROA.358. Only the existence of the foundation was necessary for this Court to address the purely legal questions Plaintiff Rost presented for appeal:

The first of these questions was answered by the fallacious, after-the-fact logic. The Decision refused to address the second question.

The inclusion of the history of the foundation and Mr. Rebold's life, work, and banking history was a successful effort by the IRS to picture Mr. Rebold as a nefarious offshore bank account user. The inclusion of such facts in the Decision suggests it was influenced by the IRS' irrelevant and derogatory description as few of the facts recited were relevant to the issues appealed by Appellant Rost. The IRS could not answer the due process questions so it reiterated the description of Mr. Rebold's life history, implying he was not worthy of the Court's serious consideration.

II. THE DECISION ERRONEOUSLY STATES THAT THE EFFECT OF I.R.C. § 6048(b) PRIOR TO ITS AMENDMENT IN 2010 WAS NOT RAISED IN THE DISTRICT COURT.

In a footnote the Decision states: “Rost also claims there was no statutory authority to penalize Rebold for failing to file Form 3520-A before the 2010 amendment to section 6677. We decline to consider this argument because Rost did not raise it below.” Slip op. p. 15 n. 9. This is a mischaracterization of the statements in Plaintiff's motion for summary judgment and ignores the fact that the statute, Code section 6048, was in issue by virtue of the fact that some of the penalties challenged were imposed by it. Complaint, ROA.7–13; Motion for Summary Judgment, pp. 5-6, ¶¶ 16-17, ROA.219-220.

The application of those penalties and the interpretation of subsection 6048(b) are the basis for the original claim for refund and the case in district court. Furthermore, the particular nuances of the language of subsection 6048(b) before the 2010 amendment was put in question in the District Court. This was explained in Appellant's Reply Brief. Appellant's Reply Br. pp. 2-3. Indeed, the entirety of Code section 6048 was in issue in every paper and pleading filed in the District Court and this Court.

The interpretation of subsection 6048(b) before the 2010 Amendment is not a new issue but further explicates how the application of these penalties violates due process. And, being an inherent and integral part of the main issue, the effect of the actual language of the statute cannot be said to be a new issue.

The cases cited by the Decision in its footnote do not support disregarding the issue. In Doe v. MySpace, Inc., 528 F.3d 413 (5th Cir. 2008), the court did not state whether the issue was ever mentioned in the court below, merely stating that “the Does failed to present this argument to the district court. . . .” 528 F.3d at 413. Doe cites Brown v. Ames, 201 F.3d 654 (5th Cir. 2000), which does give a hint as to the amount of attention which must be given to the issue in the court below. The Brown v. Ames court states: “To avoid being waived, an argument must be raised to such a degree that the trial court may rule on it.” 201 F.3d at 663. That is exactly what was done here when it was presented in Plaintiff's Motion for Summary Judgment. Motion for Summary Judgment, pp. 5-6, ¶¶ 16-17, ROA.219-220. The Decision also cites Rollins v. Home Depot USA, Inc., 8 F.4th 393 (5th Cir. 2021), which is less clear but appears that the appellant did nothing in the court below to draw attention to the issue. In Rollins, the appellant filed a motion under Fed. R. Civ. P. 59(e) (motion to alter or amend judgment) but he did not address the merits of the district court's denial of his motion for summary judgment; his Rule 59(e) motion asserted the need to show facts about whether Home Depot breached its duty to him and what was the cause of his injuries. 8 F.4th at 397. The Rollins court, this Court, recognized that there are exceptions to a court refusing to hear an argument not raised below and one of those exceptions is a “purely legal matter and failure to consider the issue will result in miscarriage of justice.” 8 F.4th at 398. This has been referred to as the general rule. Essinger v. Liberty Mutual Fire Ins. Co., 534 F.3d 450, 453 (5th Cir. 2008), citing Aguirre v. Armstrong World, Inc., 901 F.2d 1256, 1258 (5th Cir. 1990). To the extent that the Court deems challenging Code subsection 6048(b) in its entirety insufficient to challenge the actual words of that statue, it must be considered a purely legal issue and failure to consider it would be a miscarriage of justice. The Rollins court refers to Essinger v. Liberty Mutual Fire Ins. Co., 534 F.3d 450 (5th Cir. 2008), and Pegues v. Morehouse Par. Sch. Bd., 706 F.2d 735 (5th Cir. 1983). In Essinger, this Court refused a petition for rehearing to consider the matter of attorneys' fees and other expenses as lesser damages when only punitive damages were argued in the court below and on appeal. The Essinger court held that the general rule does not apply because the Court raised the issue sua sponte. 534 F.3d at 453. In Aguirre v. Armstrong World, Inc., above, the did found that the liability of a company based on what assets it had purchased was not a purely legal issue. Aguirre v. Armstrong World, Inc., 901 F.2d at 1258. However, in Pegues v. Morehouse Par. Sch. Bd., above, this Court exercised its discretion to examine the law of the case and res judicata questions because they present pure legal questions. Pegues v. Morehouse Par. Sch. Bd., 706 F.2d at 738. Interpretation of the language of a statute is a purely legal question, solely within the domain of the Court, needing no fact finding. E.g., Settoon Towing, L.L.C. v. Marquette Transportation Co., L.L.C. (In re Complaint of Settoon Towing, L.L.C.), 859 F.3d 340 (5th Cir. 2017)(“We often resolve statutory interpretation questions based solely on the language of the statute. . . .”). 859 F.3d at 351.

The merits of the inoperability of Code section 6048(b) prior to the 2010 Amendment are simple to understand and perhaps counsel overestimated the Court's appreciation of the obviousness of the inadequacy in the statute. The language of the statute does not impose any duty on anyone to file anything but rather mandates an amorphous, indistinct task: “such person shall be responsible to ensure that. . . .” As pointed out, the IRS finally admitted the ineffectiveness of Code subsection 6048(b) in requiring the owner of a grantor trust to do anything. Appellant's Principal Br., p. 38.

If the Decision is not reversed on this point, the Fifth Circuit will have adopted a new standard for raising an issue in the court below: it must be more than alleged in the complaint and, notwithstanding that the application of a statute itself is challenged, address all possible issues deriving from that statute with great specificity.

The statement in the Decision that Plaintiff-Appellant Rost did not raise the issue of the inadequacy of Code subsection 6048(b) to impose an enforceable duty was incorrect. The panel should revisit this question and find that that statute is unenforceable by its terms for the filing requirements for 2005, 2006, and 2007.

III. THE DECISION USES A FALSE AUTHORITY AS PRECEDENT WHEN IT RELIES ON THE IRS 2009 MEMORANDUM.

The Decision incredulously cites Associate Chief Counsel Advice, AM2009-012 (Oct. 7, 2009)(the “2009 IRS Memorandum”), as supporting the statement that “[t]he IRS has consistently recognized that each Stiftung must be analyzed on its own facts and circumstances.” Slip op. p. 13. But in the paragraph immediately preceding, the Decision disparages the only two cases that show the tax consequences of a Stiftung — and one of those cases, Estate of Swan, 24 T.C. 829 (1955), aff'd in part and rev'd in part on other grounds, 247 F.2d 144 (2d Cir. 1957), is the sole authority for the 2009 IRS Memorandum. This after-the-fact authority is inadequate to assert that the IRS has been consistent in any aspect of its imposition of penalties for failure to file information returns with respect to a foreign civil law foundation. More precisely, the IRS said nothing on the subject before the 2009 Memorandum or since — but the Decision asserts that a one-time, post event, internal memorandum shows that the IRS has “consistently recognized” what is now its litigating position. This is farcical. The Decision has adopted the IRS position without any plausible rationale.

IV. DUTY OF CLARITY NOT LIMITED TO DEPUTY COLLECTOR CASES.

The Decision states that the duty of clarity principle of Central Illinois only applies to so-called “deputy tax collector” cases. Not so. Other courts of appeal have recognized that the principle stated there is universal in American jurisprudence. In Pennzoil Co. v. U.S. Dept. of Energy, 680 F.2d 156 (Temp. Emer. Ct. App. 1982), the court interpreted the effect of a 1975 ruling on the definition of mineral “properties” as of 1972 for purposes of determining the “base production control level” and the amount of “new” versus “old” oil. 680 F.2d at 158. In determining the validity of the 1975 ruling, the court looked to cases arising under the Internal Revenue Code and other sets of laws, not merely mineral law cases. Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978), was cited regarding the retroactive effect of a regulation for which there was no prior regulation or ruling by which an “employer could reasonably have suspected” that specified action was required. Pennzoil, 680 F.2d at 176 n. 34. And in Newberry v. Commissioner, 76 T.C. 441 (1981), the Tax Court cited Central Illinois, not for the deputy tax collector issue, but to make the point of distinguishing between two concepts. In Newberry, the question was whether insurance proceeds were income for self-employment tax purposes or only regular income tax purposes. As Newberry points out, the language of Central Illinois did not limit itself to withholding cases when it stated, “Decided cases have made the distinction between wages and income and have refused to equate the two in withholding or similar controversies.” Newberry, 76 T.C. at 446 (emphasis supplied by Tax Court). In Crown v. Commissioner, 585 F.2d 234 (7th Cir. 1978), a case involving application of the gift tax to intra-family loans, Central Illinois is relied on for the concurring opinion of Justice Brennan, who disagreed with the Commissioner that taxpayers had ample notice of their obligations, where notice of the Government's position was not given until four years after the year in issue. Central Illinois, 435 U.S. at 37-37 (Brennan, J., concurring), cited by Crown v. Commissioner, 585 F.2d at 241. This is quite like the Decision and the IRS' position here, that the 2009 IRS Memorandum was sufficient notice for the filing years of 2005, 2006, and 2007.

NetJets Large Aircraft, Inc. v. United States, 2015 U.S. Dist. LEXIS 155354, 2015 WL 7784925 (S.D. Ohio 2015), which the Decision ignores, involved excise taxes, not withholding taxes, and found that six revenue rulings were not precise enough guidance. And most puzzling, the Decision also ignores this Court's own decision in Bombardier Aero. Corp. v. United States, 831 F.3d 268 (5th Cir. 2016), cert. denied, 2017 U.S. LEXIS 4217, 137 S. Ct. 2293 (2017), aff'g, 94 F.Supp.3d 816 (N.D. Tex. 2015), where the Court explicitly looked at the duty of clarity from Central Illinois and NetJets but rejected the application of the doctrine because Bombardier had a letter ruling from the IRS directed explicitly to it. Bombardier, 831 F.3d at 281-282. From the foregoing, it is clear that the statement in the Decision that Central Illinois only applies to deputy tax collector cases is inaccurate.

V. DECISION IGNORES THE OPERATION OF THE ENTITY CLASSIFICATION REGULATIONS FOR CORPORATIONS.

In another logical faux pas, the Decision, taking its lead from the IRS Brief, and without acknowledgement of how Plaintiff's briefs address the question, states:

Rost claims there is “no indication which foreign entities” the government “might deem to be a foreign trust.” But the IRS is not obligated to promulgate a regulation listing all foreign entities that are or may be classified as a foreign trust. As Morrissey acknowledged, “it is impossible in the nature of things to translate the statutory concept of 'association' into a particularity of detail that would fix the status of every sort of enterprise or organization which ingenuity may create.”¹ 296 U.S. at 356. So too for trusts.

Slip op. 14. Yes, the IRS is not obligated to issue regulations describing what foreign entities are deemed trusts for purposes of Code section 6048 penalties. But that statute begs for guidance as pointed out in Appellant's Reply Brief. Appellant's Reply Br. pp. 8-10. And the reference to Morrissey v. Commissioner, 296 U.S. 344 (1935), indicates a lack of awareness of the extensive regulations for what are deemed corporations, foreign or domestic, namely, the entity classification regulations which were intended to eliminate the need to resort to the tedious analysis described in Morrissey and Kintner v. Commissioner, 216 F.2d 418 (9th Cir. 1954).² So, it is cynically ironic that Morrissey should be cited as authority for not issuing regulations explaining to which foreign entities the foreign trust information reporting penalties apply. And though the Decision blithely ignores this distinction, Morrissey involved income tax, not penalties.

VI. THE DECISION FAILS TO ADDRESS PLAINTIFF-APPELLANT'S DUE PROCESS ARGUMENT, DISMISSING IT WITHOUT CITATION TO ANY AUTHORITY OTHER THAN ITS OWN CONCLUSORY STATEMENT.

The Decision devoted a mere two sentences to the application of the U.S. Constitution, stating:

Finally, Rost argues that the penalties violate due process because there is no “clear, written rule of law” that Stiftungen qualify as foreign trusts. As shown above, the IRC, regulations, and case law provide ample notice that the classification of an arrangement as a trust, and whether it is foreign or domestic, are case-specific inquiries based on the facts and circumstances.

Slip op. p. 14-15. There is no mention of United States v. Hitachi America, Ltd., 172 F.3d 1319 (Fed. Cir. 1999), United States v. Ford Motor Co., 463 Fd.3d 1267 (D.C. Cir. 1998), Radio Athens, Inc. v. FCC, 401 F.2d 398 (D.C. Cir. 1968), or General Electric Company v. United States Environmental Protection Agency, 53 F.3d 1324, 1328-29 (D.C. Cir. 1995). In each of these cases, the government mandated a reporting requirement but each court held that the notice given was inadequate. In Hitachi, the statute required importers to report prices so duties could be accurately calculated, but the statute did not mention any requirement for reporting Economic Price Adjustment clauses and the only guidance extant did not mention it; the court held that the lower court properly refused to impose a penalty. Hitachi, 172 F.3d at 1331. Similarly, in Ford Motor Co., the court held that due process was violated because the government had not promulgated a regulation specifically addressing price changes required to be reported. Ford Motor Co., 463 F.3d at 1275-1276. The Decision also ignores Radio Athens, Inc. v. FCC, 401 F.2d 398 (D.C. Cir. 1968). That case is particularly informative because it shows how the government arbitrarily applied an unpublished policy to deny certain radio station licenses. The D.C. Circuit Court of Appeals said:

If the Commission wished to adopt a strict cut-off policy, it should have taken into account that it was dealing with a matter where full and explicit notice is the heart of administrative fairness. Instead of the kind of interpretations cited to us, expanding the definition of disqualifying cross-interest, and silent modification of technique for coping with disqualification problems by shifting from correction-before-grant to dismissal-without-hearing, the agency could and should have proceeded to accomplish its result by exercising its broad rule-making powers. Problems of a different sort might arise but the path would be clear.

Radio Athens, 401 F.2d at 404 (footnote omitted); accord, Wisconsin Resources Protection Council v. Flambeau Mining Co., 727 F.3d 700, 708 (7th Cir. 2013), quoting, General Electric Company v. United States Environmental Protection Agency, 53 F.3d 1324, 1328-29 (D.C. Cir. 1995).

The shorthand dismissal of Plaintiff-Appellant's constitutional arguments is inadequate. It requires a much greater degree of legal prescience than that required for large multinational companies like Ford and Hitachi. Plaintiff Rost deserves a better explanation.

CONCLUSION

It is time for courts to stop allowing the Internal Revenue Service and the Treasury Department to ignore due process when imposing penalties without promulgating regulations or offering some form of minimal guidance. The Decision ignores the legal issues presented by Appellant Rost and applies an after-the-fact logic to find that notice was adequate because the court below performed a facts-and-circumstances test and a 2009 internal IRS memorandum was sufficient notice for filing for 2005, 2006, and 2007 information returns. The Decision supports the IRS' impunity and its arbitrary actions.

Appellants-Plaintiff Executor Rost is entitled to a panel rehearing.

Joseph M. Erwin
ERWIN LAW FIRM
100 Crescent Court, Suite 700
Dallas, Texas 75201
(214) 969-6890
joe@erwintaxlaw.com

Counsel for Plaintiff-Appellant, Daphne Jeanette Rost, Executor of the Estate of John H. Rebold, Deceased

Date: September 26, 2022.