Tax Notes logo

Summary Opinions for 10/10/14

Posted on Oct. 23, 2014

Summary Opinions only touches on a few items this week, but they are all interesting and somewhat important.  More jurisdiction questions, both in the whistleblower context and on failure to exhaust administrative remedies.  Plus interest abatement, penalty abatement, and more on the Elkins case and the Yari case.

  • Whistleblower cases are sort of like the IRS’s version of the Beatles’ Ringo songs.  Sort of quirky and entertaining, but not their best work.  If you have frequently read the Whistleblower opinions over the last few years, I think it would be understandable if you thought the Service was intentionally trying to thwart the program (were the Beatles trying to stop Ringo’s continued singing by giving him garbage?), or perhaps just incompetent (see Ringo’s singing), or nowhere near sufficient assets are allocated to the program (seems like the Beatles mailed a few of those Ringo songs in).  A recent Tax Court jurisdiction case, Ringo v. Comm’r, can be added to those prior cases.  In Ringo, the Service’s Whistleblower Office sent the petitioner a letter stating he was ineligible for an award under Section 7623, and not much else.  Petitioner disagreed, and appealed the determination to the Tax Court.  A few months later, the IRS sent a second letter saying, “just kidding, we are considering your claim”.  The Service then responded to the petition by filing a motion to dismiss for lack of jurisdiction, which Ringo did not oppose.  The Court, however, relying on law related to stat notices found that its jurisdiction is based on the facts at the time of the petition, and jurisdiction continues “unimpaired” until a decision is entered. (contrast this with CDP cases, which as Keith discussed here the parties can dismiss without the need for a decision) The Court found that the letter constituted a determination under Section 7623(b)(4), providing it with jurisdiction.

I think this is the correct result, and a good policy.  There could be negative implications in the Whistleblower context, and perhaps others, if the Court held the Service could divest the Court of jurisdiction simply by stating it was actually still reviewing the matter.  First, the Service could use this to prolong matters.  Second, and more troubling, the Service could start issuing such letters in all close situations, or even more broadly, so it wouldn’t have to deal with the matter until the taxpayer proved it was willing to go to court, or to attempt to thwart valid claims, only to retract the letter once the matter goes to court. In Ringo, none of this seems to have mattered much, because the petitioner appears to not have objected to the dismissal of the case, but other’s may want to force the issue, and it is better to not have a holding stating the Tax Court lacks jurisdiction.  For a far more succinct recitation of the facts and holding, check out Prof. Tim Todd’s write up on the Tax Litigation Survey blog.  Lew Taishoff also has a good post on the case found here.

  • The Tax Court had an interesting interest abatement holding in Larkin v. Comm’r.  I found two aspects interesting, and the case a little challenging to work through.  The quick facts; an incorrect overpayment in a later year was due to an incorrectly carried forward NOL, which should have been carried back.  The taxpayer amended the returns, resulting in a liability in the later year, and a larger overpayment in the prior carryback NOL year. Initially, my mind jumped to interest netting, which gets to the first interesting aspect of the case.  One argument the taxpayer made was that the Service failed to credit the prior year overpayment against the later year liability, as requested, and instead issued a refund, which it thought would have negated interest on the later year’s underpayment.  The Court found this argument moot, although the Service did not.  The Court stated, “[i]t appears that both parties may have assumed that a credit…would, no matter when it was administratively credited against the [later] liability, have been treated as if it had been paid at least as early as the due date of the [later return] and would therefore have precluded the accrual of any interest…But that is not the case.”  The Court looked to Section 6601(f) relating to the satisfaction of tax by credit, which it found precluded the erroneous assumption.  I have not had time to review this, so I am not saying the Court was correct on this point.  The main text of the holding does not fully flesh the point out, but I think Footnote 8 helps to explain the Section 6601(f) issue, stating:

Under section 6611(f)(1), for interest purposes the overpayment of 2003 tax was “deemed not to have been made prior to the filing date for” the loss year (2005), i.e., not before April 2006; and under subsection (f)(4)(B)(i)(I), the 2003 overpayment was “treated as an overpayment for the loss year”, i.e., for 2005. However, under subsection (f)(4)(B)(i)(II), the return for the loss year (2005) was treated as if “not filed before claim for such overpayment is filed”, i.e., in May 2008. That is, the 2003 overpayment was deemed to arise in April 2006, when the 2005 return was due; but the 2005 return (due in April 2006) was treated as not filed before May 2008 (and therefore as late), and the refund was made less than 45 days thereafter on July 9, 2008.

The second major point I found interesting was the Court’s review of ministerial acts for abatement under Section 6404.  The taxpayers claimed that the IRS gave them erroneous advice regarding amending a different year, which was incorrect and the return was not processed.  The taxpayers claimed this caused delay in proper filing, resulting in interest.  The Court noted some evidentiary issues that made the taxpayers’ claim fail, but also stated that direction regarding amending prior returns, at least in this case, were “providing an interpretation of Federal tax law” which was not a ministerial or managerial act subject to Section 6404 abatement.

  • I’m not certain who is the “Chief Idea Guy” at Procedurally Taxing; probably Keith, maybe Les, definitely not me.  If we had such a position, our ideas would generally be tax related – at least the good ones.  In Suder v. Comm’r, that was not the case for Mr. Eric Suder who was CEO and CIG of his company Estech Systems.  His good ideas had something to do with telephones.  Not tax planning. Estech did some incorrect research credit tax planning, which resulted in an underpayment, which the Service assessed accuracy related penalties on.  The taxpayer argued reliance on a professional, and honest misunderstanding of law.  The reliance holding was fairly straightforward.  It is, however, less frequent that you see a misunderstanding of the law argument successfully made.  The Court held that the taxpayer had an honest misunderstanding of the tax law related to reasonable compensation under Section 174(e), which was reasonable under the facts and circumstances, and that this area was very complex.  It did seem like some of the pertinent facts and circumstances were that they relied on their longtime accountant to provide them with their misunderstanding, which makes it overlap with professional reliance.
  • In US v. Appelbaum the District Court for the Western District of North Carolina had the opportunity to review various procedural issues in a case involving Section 7433 damages claim following the Service attempting to claim Section 6672 penalties for not paying over a bankrupt company’s taxes.  Mr. Appelbaum, like almost all applicants for damages under this Section, failed to exhaust the administrative remedies under Section 7433, which allowed the District Court to provide its opinion on whether or not that requirement was jurisdictional.  Following Galvez and Hoogerheide, the Court found it was not a jurisdictional requirement, but failing to comply with the statute resulted in the taxpayer failing to state a claim upon which relief could be granted.  Regarding the counterclaim, it appears the taxpayer alleged latches, but not as some sort of equitable argument regarding the Section 7433.   I was initially excited to see “equitable” language following a determination that failure to exhaust administrative remedies was not jurisdictional (Courts don’t usually get to whether an equitable argument could prevail).  Unfortunately, it was a separate claim, which makes sense, since latches would not be the first equitable argument you would think should apply in that context.
  • Jack Townsend’s thoughts on the Elkins’ art valuation case can be found here.  We touched on that in the last SumOp, and this case is popping up everywhere.  Jack has a great discussion regarding burden of proof, which should be reviewed.  I’m thrilled that my family has a way to discount the value of our Star Trek commemorative plates.  The estate tax on those was going to be a bear when my folks died.
  • More on the Yari case, which considers the 6707A penalty in the context of an amended return; Les previously blogged on the case here.  This content is from David Neufeld, and was reproduced from the Leimberg Information Services, Inc. tax newsletter. In the post, Neufeld takes aim at the Tax Court holding in the case, and makes a spirited argument in favor of the taxpayer’s view that the penalty should be pegged to the amended return, and not the original filed return.
Copy RID