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Summary Opinions for 05/30/14

Posted on June 3, 2014

Before getting to the summary of tax procedure items from last week, we have to thank Professor Scott Schumacher for his wonderful guest post on the Roberts case.  We hope Scott will grace our pages with his presence again sometime in the near future.

To the tax procedure:

  • The District Court for the District of Columbia in Z Street v Koskinen considered the applicability of the Anti-Injunction Act and the Declaratory Judgment Act in allowing a lawsuit challenging the IRS’s “Israel Special Policy” that IRS employed when reviewing the organization’s application for Section 501(c)(3) status. The underlying suit considers whether the IRS policy  violated the organization’s First Amendment rights. The district court, relying in large part on the DC Court of Appeals analysis in the Cohen telephone excise refund cases, allowed the case to proceed, finding that the suit did not seek to restrain the assessment or collection of taxes and thus was not barred by either the AIA or DJA. We have written before on the cracks appearing in the AIA and DJA and will likely speak to this issue again soon.   For more on this case, check out the coverage by NonProfit Law Blog here.
  • Here is one we missed from Mid-May (we won’t let it happen again), the Tax Court in The Markell Co., Inc. v. Comm’r, held that the Treasury Regulation 1.752-6, which applied retroactively to transactions beginning in 1999, was valid.  The Court noted that courts have split on the retroactivity issue referring to the 7th Cir. in Cemco v. US in favor of retroactivity, and Court of Federal Claims and ED of Texas against.  For those readers unfamiliar with these regulations, they were promulgated in response to Son-of-BOSS transactions, and provide that if a partnership in a Section 721 transaction assumes a liability of a partner, the partner’s basis may be reduced by the amount of the liability determine on the date of the exchange.  As you can imagine, since this is part of subchapter K, what I have just stated is substantially less complex than the actual provision.
  • The Tax Court had a fairly important holding last week in Julia R. Swords Trust v. Comm’r, declining to apply the federal substance over form doctrine to recast a transaction being reviewed under Section 6901 for transferee liability.  The Court noted that it had never specifically held that federal law did not apply, but that the First (Frank Sawyer Trust), Second (Diebold Foundation), and Fourth (Starnes) had all rejected the Service position that the last requirement of the Section 6901 test was in fact a two prong test.   Section 6901 requires 1) one party to owe the tax, 2) another party to be a transferee under Section 6901, and then 3) an independent state law/equity principal holding the other party liable for the tax.  The Service has argued (unsuccessfully) that the third requirement necessitates first a federal “substance over form” determination-or other federal analysis-, followed by the application of the state’s fraudulent transfer analysis.  Often, the state law on substance over form will not be as robust, allowing the pesky form to thwart the liability review under state law.
  • $#!!, don’t mess with Whistleblower 11332-13W, he/she won’t back down.  The Tax Court has agreed to allow this case to move forward anonymously.  Although my voyeuristic tendencies make me wish I knew what company was evading taxes (and possibly connected to terrorists), the facts do seem to lean towards keeping this one buttoned up.  Apparently, Mr. or Mrs. Whistleblower had already been threatened with death, and armed guards had broken into his or her office.  S/He was also able to show specific recognizable events would allow the employer and other targets to identify the Whistleblower, and there could be considerable social and professional stigma if his or her identity were to be disclosed.  Perhaps I am too anxious, but working somewhere that was involved in tax evasion and terroristic organizations would really add a level of stress to my life that I could do without.
  • From Jack Townsend’s Federal Tax Crimes Blog, a good discussion on the Zwerner verdict upholding a 150% FBAR penalty, which links to another great discussion on the Tax Controversy Report.  I have no objection, overall, to the US going after folks who stash money overseas and fail to report it to the Service, but this does seem fairly harsh—I should add the caveat that I do not know the underlying facts, and perhaps those would sway me to believe Mr. Zwerner received his just deserts.
  • SCOTUS will not review Nakano v. United States, which we covered previously in SumOp here, where the 9th Cir. held that a levy notice constituted notice and demand for Section 6303 purposes.  Keith should have another post on Nakano in the near future.
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