From October 3 to 5 Les, Christine and I attended the tax section meeting in San Francisco. We were each on different panels and we each enjoyed a delightful dinner cruise on the bay Friday night courtesy of tax procedure guru, Frank Agostino. During the cruise the three of us had an in depth discussion with Frank about his latest ground-breaking tax procedure initiatives which we hope to highlight in coming posts.
For this post I intend to provide some of the information passed out during the update sessions in the Administrative Practice and Court Procedure Committees. For anyone interested in more depth or more precision, it is possible to purchase audio tapes of the committee meetings from the tax section.
Administrative Practice Committee
The discussion initially focused on Appeals and the Taxpayer First legislation seeking to create a more independent Appeals. Apart from the legislation, Appeals issued a new conferencing initiative on September 19, 2019. A request for comments on the new process went out.
The presenter discussed the change to IRC 7803(e)(5)(A) and the right to a hearing in Appeals. This change resulted from the Facebook case discussed here. For those who do not remember the Facebook litigation, Chief Counsel denied Facebook the opportunity for a conference with Appeals after Facebook filed its Tax Court petition — even though Facebook had not met with Appeals prior to filing the petition. The new provision will make it more difficult to deny a taxpayer the opportunity to meet with Appeals in this circumstance.
Another provision of the Taxpayer First Act, IRC 7803(e)(7)(A), grants taxpayers the right to their file 10 days in advance of a meeting with Appeals. This provision has some income limitations but will generally benefit the vast majority of individual taxpayers. It seems like a good step forward, though I would like the file much earlier than 10 days before the meeting, and I have had trouble getting it from Appeals in the past. Some Appeals Officers (AOs) have denied my request for information in the administrative file, even though taxpayers have always had the right to this information. If the case is in Tax Court, a Branerton letter to the Chief Counsel attorney will almost always result in that attorney calling the AO to tell the AO to send the material. If you go to Appeals prior to Tax Court and have no Chief Counsel attorney to make this call, I wonder if the legislation will cause Appeals to take the position that a taxpayer cannot receive the material until 10 days prior to the meeting. This would be a shame, because meetings are much more productive when parties can properly prepare.
The Taxpayer First Act also made changes to the ex parte provisions, set out in 7803(e)(6)(B), first enacted in 1998 as a means of insulating Appeals from the corrupting influence of other parts of the IRS. The ex parte provisions were previously off-code but picked up by the IRS in a pair of Revenue Procedures describing how they would work. The new provision allows Appeals to communicate with Chief Counsel’s office in order to obtain a legal opinion as it considers a matter, as long as the Chief Counsel attorney providing the advice was not previously involved in the case. I don’t think this changes much. Rev. Proc. 201218 already allowed attorneys in Chief Counsel to provide legal advice to Appeals. Maybe this makes it clear that Appeals is not so independent that it cannot receive legal advice when it needs it, but it seemed that Chief Counsel and Appeals had already figured that out — even if some taxpayers criticized Appeals for obtaining legal advice. Of course, when obtaining advice Appeals needs to seek out someone other than the attorney who was providing advice to Examination, in order to avoid having the attorney be the Trojan horse improperly influencing Appeals.
The panel mentioned Amazon v. Commissioner, 2019 U.S. App. Lexis 24453 (9th Cir. 2019). This is an important transfer pricing case clarifying what constitutes an “intangible” that must be valued and included in a buy-in payment to a cost-sharing arrangement between a parent company and its foreign subsidiary entity. The 9th Circuit panel affirmed the Tax Court, declining to apply Auer deference and holding that certain of Amazon’s abstract assets, like its goodwill, innovative culture, and valuable workforce, are not intangibles.
The committee also discussed Chief Counsel Notice CC-2019-006 “Policy Statement on Tax Regulatory Process” (9-17-2019). A copy of the complete policy statement can be found here. Each of the four points is important in its own way. I find number three to be especially important. We discussed the notice previously in a post here.
A few recent cases were mentioned as especially important to administrative practice:
Mayo Clinic v. United States, 124 AFTR2d 2019-5448 (D. Minn. 2019) provides the most recent interpretation of Mayo and what it means, in the context of whether Mayo Clinic was entitled to an exemption as an “educational organization” under Treas. Reg. § 1.170A-9(c).
Baldwin v. Commissioner, 921 F.3d 836 (9th Cir. 2019) is a mailbox rule case in which the taxpayer seeks to overrule National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005).
Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019) is a pre-enforcement challenge to Rev. Proc. 2018-38 which relieves 501(c) organizations of the obligation to disclose the names and addresses of their donors.
Court Practice and Procedure Committee
Robin Greenhouse, who now heads Chief Counsel’s LB&I office, gave the report for Chief Counsel’s office. She read from her notes and provided no PowerPoint presentation or handout material, so this time I cannot FOIA the PowerPoint presentation to provide the data.
She discussed two financial disability decisions which seems like an interesting place to begin. First she mentioned Carter, as representative for Roper, v. United States, 2019 U.S. Dist. LEXIS 134035 at( N.D. Ala. 2019) in which the court determined that an estate cannot use 6511(h) to assert financial disability because an estate is not an individual. I wrote a post on this case earlier in the fall. Next she mentioned the case of Stauffer v. Internal Revenue Service, which I recently wrote about here. I failed to make notes on the other cases she discussed and I cannot remember why.
Judge Marvel talked about the new Tax Court announcement on limited scope representation and the Chief Counsel Notice, CC-2020-001 on that issue. During the first month of the fall Tax Court calendar four persons entered a limited appearance, including our own Christine Speidel. The limited appearance ends when the calendar ends, making it not entirely clear what to do with a decision document. Some suggested getting the decision document signed by the petitioner was the way to go.
So far the Tax Court has 18 pending passport cases. Judge Marvel indicated that we might see the first opinion in a passport case soon.
Effective on September 30, 2019 the Tax Court has begun accepting electronic filing of stipulated decisions. The practical effect of this is that because the IRS always signs the decision document last, it will be the party to submit the document. I doubt this change will have a profound impact on Tax Court practice but, in general, more electronic filing is better.
Development of the Tax Court’s new case management system is moving quickly. The court expects it to go online by Spring of 2020. When implemented, this system will allow parties to file petitions electronically. Judge Marvel expects that practitioners will like the new system. The new system may allow changes to the public’s access to documents; however, whether and how that might happen is unclear.
Gil Rothenberg, the head of the Department of Justice Tax Division’s Appellate Section gave an update on things happening at DOJ. He said there have been 75 FBAR cases filed since 2018 with over $85 million at issue. Several FBAR cases are now on appeal – Norman (No. 18-02408) (oral argument held on October 4th) and Kimble (No. 19-1590) (oral argument to be scheduled) both in the Federal Circuit; Horowitz (No. 19-1280) (reply brief filed on July 18th) in the 4th Circuit and Boyd (No. 19-55585) (opening brief not yet filed) in the 9th Circuit.
Over 40 bankers and financial advisors have been charged with criminal activity in recent years and the government has collected over $10 billion in the past decade. I credit a lot of the government’s success in this area to John McDougal discussed here but the Tax Division certainly deserves credit for this success as well.
DOJ has obtained numerous injunctions for unpaid employment taxes in the past decade. It has brought over 60 injunction cases against tax preparers and obtained over 40 injunctions. These cases take a fair amount of time and resource on the part of both the IRS and DOJ. They provide an important bulwark against taxpayers who run businesses and repeatedly fail to pay their employment taxes. Usually the IRS revenue officers turn to an injunction when the businesses have no assets from which to administratively collect. We have discussed these cases here. I applaud DOJ’s efforts to shut down the pyramiding of taxes. Congress should look to provide a more efficient remedy, however, for addressing taxpayers who engage in this behavior.
He said that while tax shelter litigation was generally down, the Midco cases continued. He mentioned Marshall v. Commissioner in the 9th Circuit (petition for rehearing en banc was denied on October 2nd) and Hawk v. Commissioner in the 6th Circuit (petition for certiorari was denied by the Supreme Court on October 7th). We have discussed Midco cases in several posts written by Marilyn Ames. These cases arise as transferee liability cases. See our discussion of some past decisions here and here. My hope is that the government will continue to prevail on these cases as the scheme generally serves as a way to avoid paying taxes in situations with large gains. I wonder how many of these cases the IRS misses.
In Fiscal 2019 there were 200 appeals. The government won 94% of the cases appealed by taxpayers and 56% of the cases appealed by the government. I was naturally disappointed that he only talked about cases in which the government prevailed and did not discuss some of the larger losses such as the one in Myers v. Commissioner discussed here.
He briefly discussed the Supreme Court’s decision in Taggart v. Lorenzen, a bankruptcy case, in which the court held that the proper standard for holding the government in contempt for violating the discharge injunction required mens rea. This followed the position of the amicus brief submitted by the Solicitor General. The Court declined to adopt the petitioner’s position, which would permit a finding of civil contempt against creditors who are aware of a discharge and intentionally take actions that violate the discharge order. The Court found this proposal to be administratively problematic for bankruptcy courts, distinguishing between the purpose and statutory language of bankruptcy discharge orders (which require mens rea) and automatic stays (which do not).
He ended by announcing that he will retire on November 1, 2019.