Before jumping into the tax procedure, I wanted to highlight a blog post by another Professor Fogg, Dr. Kevin Fogg, of the University of Oxford. Kevin Fogg is to the History of Islam in Southeast Asia what our Keith Fogg is to tax procedure (not surprising, since Keith is Kevin’s father). On September 24th, Kevin wrote a post about the passing of Adnan Buyung Nasution. From the post, I learned that he gave much to Indonesian life, including the founding of a legal aid organization for those in Indonesian in need of legal assistance. The post is brief, and gives a glimpse into the life of a great man who I knew nothing about. Absolutely worth your time.
To the tax procedure (heavy on estate and gift this week):
- We’ll start with a heavily redacted FSA discussing what constitutes adequate disclosure to avoid the extended and unlimited statute of limitations under Section 6501(c)(9) for gift purposes. See LAFA 20152201F. Usually, a gift has to be disclosure on a timely filed Form 709 (due April 15 the following year), which then starts a three year statute of limitations. There is an exception when a gift is not shown or appropriately disclosed. When there is inadequate disclosure, the IRS has unlimited time for assessment. When this is the case, the gift can be brought up decades later upon the audit of the Form 706 for the taxpayer’s estate after death. To adequately disclose, the taxpayer must provide sufficient information to “apprise [the Service] of the nature” of the gift. The Regulations flesh out what the IRS thinks is required:
(i) A description of the transferred property and any consideration received by the transferor; (ii) The identity of, and relationship between, the transferor and each transferee; … (iv) A detailed description of the method used to determine the fair market value of property transferred, including any financial data (for example, balance sheets, etc. with explanations of any adjustments) that were utilized in determining the value of the interest, any restrictions on the transferred property that were considered in determining the fair market value of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability, claimed in valuing the property . . . .In addition, if the value of the entity or of the interests in the entity is properly determined based on the net value of the assets held by the entity, a statement must be provided regarding the fair market value of 100 percent of the entity (determined without regard to any discounts in valuing the entity or any assets owned by the entity), the pro rata portion of the entity subject to the transfer, and the fair market value of the transferred interest as reported on the return. . .
See Reg. 301.6501(c)-1(f)(2).
Surprisingly, there is not much case law or other guidance on what is actually adequate disclosure. The LAFA highlights two cases, Sanders and Lewis, but neither actually has much of a discussion. Both were motions for summary judgement, and the Courts found there was a material question about the adequate disclosure, causing the motions to be dismissed without any concrete takeaways. There was Chief Counsel Advice issued in 2002 discussing the statute in the transfer of closely held LLC interests. The advice indicated inadequate disclosure had occurred where the taxpayer failed to specify the number of units transferred, the percentage ownership interest transferred, and the nature of the interests. Interestingly, in that advice, Chief Counsel referenced the income tax regulations extending the statute of limitations for understatements of income, and the fact that a “clue” may be sufficient to cut off the statute. Later in the advice, it did indicate that more than a “clue” would likely be required for proper disclosure.
Back to the LAFA, in which it was concluded that insufficient disclosure occurred. On a 709, the taxpayer disclosed the transfer of an LP interest and an LLP interest to the taxpayer’s daughter. It disclosed the name, percentage and value. One of the EINs for the entity was incorrectly stated (missing one digit), and the “LP” and “LLP” were both left off the name of the entities. The LAFA indicates these by themselves are fatal, and could result in an unlimited statute of limitations. I disagree with this determination and would be inclined to take this before a judge. The LAFA indicates there were 70 possible different EINs that could have resulted because of the missing digit. I have to assume the Service has a searchable database, and could quickly have used the disclosed name to determine the correct one. That error by the preparer should not result in unlimited statute of limitations.
The advice also indicates the valuation was not adequately disclosed, resulting in the statute remaining open. In the summary attached to the return, it was not explicitly stated how the valuation was done, no financial information was provided to back up the valuation, the discount percentages were not explained, and it appeared that additional, unspecified discounts were taken. I would like to see the actual statement, not the redacted version. A fair amount of disclosure was made, including that a valuation of the underlying property was done, which would implicate net asset value was used in the valuation. Although the LAFA makes it seem unclear as to how the discounts were taken, my view might be different when reviewing the return as a whole. In any event, the LAFA provides guidance on what the IRS might consider worth litigating, and should be considered in preparing summaries of gifts or attaching the appraisals.
- In the end of August, the IRS announced it would abate penalties for missing or incorrect TINs for colleges and universities that filed Form 1098-T with the incorrect information for 2012 to 2014. Under Section 6721, a penalty is imposed for each information return that is not filed or filed with incorrect or incomplete information. For 2015, Section 6724(f) was modified to provide prospective relief for educational institutions that fail to include the TIN, if the organization attempted to obtain the information but was not able to obtain the information. The change was not retroactive, but the IRS has decided to waive the prior penalties. The notice indicates the IRS will contact the schools, but those who are not contacted should respond to the original penalty assessment notice. No guidance is provided for those who already responded to the original penalty assessment. In those cases, the institutions will have to contact the Service to make a refund claim. It is possible some of those could be approaching the statute of limitations for the refund.
- In the last SumOp we touched on the new opinion issued in the Marshall case from the Fifth Circuit holding the maximum amount of gift tax, penalties and interest that could be collected from the donee was the value of the initial gift under Section 6324(b) (reversing its prior holding). It is also worth noting that the Fifth Circuit upheld the lower court’s holding that the executor of Mr. Marshall’s estate and trustees of related trusts were personally liable for the outstanding gift tax debt because they paid other creditors, set aside funds for charity, distributed personal property, paid rent on a vacant apartment, and paid for accounting and legal services of other entities instead of paying the government. The Court held that 31 USC § 3713, the Federal Priority Statute, applied, because each fiduciary knew about the possible debts, although the fiduciaries argued they did not have actual knowledge. The Court determined “notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim” was found (and the fiduciaries essentially stated as much). Marshall predominately dealt with transferee liability under Section 6901(a)(1)(A), but 31 USC § 3713 is incorporated by reference under Section 6901(a)(1)(B), and states a fiduciary is liable for the estate and gift taxes if distributions were made in a manner contrary to 31 USC § 3713. I’m sure those involved are not happy with the result, but it has been a great gift tax procedure case.
- Also in last week’s SumOp, we touched on the Minnick case, where the Ninth Circuit held that a taxpayer was not entitled to a conservation easement because the mortgage on the donated property was not properly subordinated. Reader Scott Davies commented, indicating that oral argument of that case was available on YouTube. You can read the comment here, which has the video imbedded.
- The District Court for the Middle District of Georgia issued an order on two motions in the case Dickerson v. Suntrust Banks, Inc. which was somewhat unique. The Court allowed the defendant bank’s motion to amend its pleading to properly add the United States (instead of the IRS), but also granted the United States’ motion to dismiss it from the action. In the case, the taxpayer plaintiffs filed suit against the bank defendant alleging breach of contract, conversion, intentional infliction of emotional distress, violations of the GA fair business practices act and RICO statute, and, my favorite, wrongful dishonor (all I envision for this is an angry button-down father chasing a young man from his house). The claims arose from the bank defendant’s closing of taxpayer’s account after being informed by the IRS that the accounts held erroneous tax refunds from numerous other taxpayers. A portion of the funds were remitted to the IRS.
The bank defendant alleged that it took these actions based on an indemnification agreement it entered into with the IRS, which stated the IRS would repay the bank defendant for any payments it had to make to the taxpayer later based on the funds remitted to the IRS. When the bank was served, it in turn filed a third party complaint against the IRS indicating it was entitled to the indemnification. The government filed a motion to dismiss, arguing it had not waived sovereign immunity.
The bank argued that under The Little Tucker Act, 28 USC 1346, the Court had jurisdiction, because it was a civil claim against the US for over $10,000 based on a contract. The Court found that there could have been a contract, and the Tiny Tuck could provide jurisdiction, but the bank did not allege any violation of the agreement. Since there was no alleged violation, the Little Tucker Act did not provide jurisdiction. I wonder if counsel for the bank had tried to include that the IRS had to defend any related claim.
- From Jack Townsend’s Federal Tax Crimes blog, a post highlighting how to ensure conferences are obtained in criminal tax matters with the IRS and DOJ before indictments in criminal matters.
- Around this time last year in SumOp, we covered the Tax Court case Law Office of John Eggersten v. Commissioner, where the Tax Court reversed its prior holding and held the general statute of limitations under Section 6501 (unlimited because no return was filed) applied to the assessment of ESOP excise tax. The Service argued the statute of limitations under Section 4979A(e)(2)(D) supplemented, but did not replace the general statute. The Sixth Circuit, in a split decision, has affirmed the tax court. The quick and dirty is that the law firm and the ESOP that owned the stock in the law firm each filed the required income tax returns. Due to some changes in the law, which the ESOP didn’t fully comply with, it also needed to file a Form 5330. The Sixth Circuit determined the information filed on the other returns was not sufficient for the Service to calculate the tax due that should have been reflected on the Form 5330. The taxpayer argued that although that was the case, it provided sufficient information on its returns to meet the requirement under Section 4979A that the limitations period begins with “the filing of a return…on which an entry has been made with respect” to the tax. See Section 6501(b)(4). The Court held that exception only applies if the information is reported on a return for which the tax should be reported, which was the return the taxpayer failed to file.