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Summary Opinions for the week ending 8/28/15

Posted on Sep. 28, 2015

IMG_0286I’m pretty sure every single week is a good week to be Keith Fogg, but two weeks ago was good even by his standards.  The adorable baby girl to the left is Keith’s first granddaughter, Lily.  Keith’s daughter and Lily are both doing wonderful, and the entire family is ecstatic.  Also cool, Keith presented at the ABA Tax Section meeting last week in Chicago.  The panel was entitled Basic and Trending Issues in Tax Collection, which also featured Nina Olson and Mary Gillum.  At the presentation, he used many PT posts to highlight a number of cases implicating these issues.  Those materials can be found here for free!…which makes sense, because they are on the blog for free also.

To the other tax procedure:

  • This is actually from September, but I thought I would include it now, since it is receiving a fair amount of attention.  The IRS has announced it is terminating its appeals arbitration program.  Jack Townsend has coverage on his Federal Tax Procedure Blog, as does Prof. Timothy Todd on Forbes.  In the Revenue Ruling announcing the termination of the program, the Service noted only two cases were successfully handled with the arbitration.  The mediation programs are still available.
  • Also from September, but making the news last week, Coca-Cola had disclosed on its Form 8-K with the SEC that the IRS has issued a SNOD indicating it intends to assess $3.3 billion (with a B) in taxes and interest due to transfer pricing matters for licensing intangibles to related foreign entities.   Kelly Phillips Erb over at Forbes has some additional coverage, indicating this will be designated for trial, which would impact CC’s ability to seek administrative solutions in Appeals or in the Advanced Pricing and Mutual Agreement Program.  It also means the IRS thinks this case will have significant impact on the tax law.  Interestingly, the 8-K notes the transfer pricing methodology was approved in a closing agreement with the Service in ’96, and confirmed on audit through ’06.   We’ll be following this moving forward, and seems like it should implicate a handful of tax procedure items.
  • Agostino & Associates has issued its September Monthly Journal of Tax Controversy, and this month drifts into tax policy to go along with its usual high quality practice articles. The first article touches on the need to educate Congress on the negative impacts to customer service for taxpayers and the issues it creates for practitioners.  In addition, there is a great article on collateral sanctions in tax administration, and a substantial FAQ on FATCA.
  • The Ninth Circuit upheld the negligence penalties on a taxpayer (lawyer) and his spouse for the improper deduction of a conservation easement due to the fact that a mortgage on the property was not properly subordinated.  See Minnick v. Comm’r for the primary holding, and this ancillary opinion for the negligence penalty discussion.   When an easement is placed on property, it must be done so in perpetuity, and having a pre-existing mortgage that could foreclose on the property thwarts that requirement.  Treasury Regulations 1.170A-14(g)(2) requires any mortgage to be subordinated to the easement in order to obtain the deduction.  In Minnick, the taxpayer took out loans against a property of $1.5MM by 2005.  Shortly thereafter, land development plans were approved to develop a portion of the property, and the taxpayer made a donation of an easement allegedly worth about $941,000 to a land conservation group.  In 2011, when the taxpayer found out about the subordination requirement, the bank agreed to subordinate the debt.  The Court does not specify, but it seems like the property was worth far more than the debt and easement value.  The taxpayer argued that the fact that the easement remained in place, and the fact that the mortgage was eventually subordinated (no harm, no foul) should allow for the deduction.  The Ninth Circuit held that the statute and regulations were clear that the debt had to be subordinated at the time of the easement, and therefore no deduction was allowed.  Ouch!  I should have pulled the briefs on the penalty issue, but did not have time.  The Ninth Circuit gives a nod to a reasonable cause defense for taking the deduction, but states Mr. Minnick was a lawyer who could have read the code and regulations.   If that is the full reason for the lack of reasonable cause, it is somewhat alarming.   Mr. Minnick may not be the one holding the bag at the end of the day, as he sued his lawyer for malpractice relating to the setup of the easement.
  • In Shockley v. Comm’r, we have another Tax Court case dealing with transferee liability and the two prong test under Section 6901 requiring independent liability under state law and the federal law. Marilyn Ames recently covered this topic in great detail for us as it related to the Slone case in the Ninth Circuit just a few days ago.
  • PMTA 2015-010 was released by the Service, which deals with how best to remove the assessment of employment taxes on a professional employer organization (company that handles payroll and pays over withholding taxes), so that the Service could assess against the actual employer.  The PMTA gives an interesting look into the Service processes, but may not be that useful to practitioners in advocating for clients.  There is a line in the memo that I found somewhat confusing, which seemed to indicate only one assessment for the period could be made for the taxes.  This prevented the assessment on the actual employer.  In this case, the withholding agent was actually not a withholding agent under the statute or the common law, so the assessment was incorrect; however, there are situations where the assessment would be correct, and I can’t imagine the Service is then barred from assessing against the employer (or the folks controlling the employer as transferee).  The Service decided to abate the assessment under Section 6404(a) against the withholding agent, which, if it had been a proper assessment does not seem like the correct choice.  The issue present and conclusion were as follows:

Issue:  Whether Code sections 6020 and 6404 provide authority to the Service to prepare and file a Form 941-X in order to remove or abate employment tax liabilities of a professional employer organization.

Conclusion:  Code section 6404 is the legal authority upon which the Service may abate employment tax liabilities assessed against a professional employer organization in the circumstances noted below. Section 6020, which authorizes substitutes for return against non-filers, is an insufficient legal basis for removing or abating a previously made assessment of tax.

  • Another fairly specific issue, but also interesting.  The 11th Circuit vacated its August 4th opinion in Taylor v. Pekerol, and issued a new opinion on August 14th dealing with the unlawful disclosure of tax information related to a taxpayer’s tax crimes prosecution to other criminal suspects and the local news.  The case was tossed at the district level, finding the pro se litigant failed to state a claim regarding the potential violations of Section 6103(k) and 7431(a), and, any such claim would be futile because it was (1) Heck-barred (great term) and that (2) the good faith exceptions to the statutes covered the alleged conduct.

The Circuit Court remanded and gave leave to amend the complaint, finding that there was potential for violations, and Heck was inapplicable.  Two quick interesting notes.  First, Heck is a gosh darn case that holds a criminal cannot bring a civil suit for damages if the judgement would necessarily imply the invalidity of his conviction. See Heck v. Humphrey, 512 US 477 (1994).  Here, the Court found the disclosure of tax information would not cast doubt on the conviction.  Another issue raised by the government was that the District Court had dismissed the case without prejudice, which it argued should prevent the plaintiff from amending his complaint.  The thought being that he could have refiled.  The 11th generally agreed, but said that if the dismissal was tantamount to being with prejudice, it could allow the amendment.  In Taylor, the statute had closed on the claims, preventing him from refiling the case, so amendment was proper.

  • Section 6707A can be tough on taxpayers who fail to recognize they have entered into a reportable transaction and failed to disclose the same (sure the to-good-to-be-true alarm should probably be sounding off, but it is understandable that some folks think those types of results can be accomplished with good tax planning ).  The Service actually suspended collection efforts on certain penalties under the Section from ’09 to ’10, and the penalty amount was drastically reduced after 2006. The Service has issued proposed regulations on how to calculate the lower penalty amount for failure to report reportable transactions under the amended statute.  Still no reasonable cause exception though.
  • Last January, we covered the 5th Circuit holding in US v. Marshall, which dealt with the extent of transferee liability for gift tax, and whether the tax assessed can surpass the face value of the gift when taking into account interest that may have accrued.  The Marshall in question was J. Howard Marshall, who was involved in a May/very-late-December (like after Christmas) relationship with Anna Nicole Smith (I just read her Wikipedia entry and her first movie was The Hudsucker Proxie?!?!).  She has nothing to do with this case, as it pertains to gifts he made to other family members and trusts for other family members.   The 5th Circuit in August withdrew the prior November order, denied a petition for rehearing, and issued a new decision.  You can find a link to the updated order on TaxProfBlog here.  For all the details, check out the prior posting linked above.  The prior holding stated that the donees were responsible for the tax and interest, which was not capped by the language.  In the updated holding, the 5th Circuit reversed its position, stating that the tax and interest imposed on the donee is limited to the value of the gift under Section 6324(b).  Apparently, Judge Reavley changed his position on this matter, perhaps convinced by Judge Owen, or the very persuasive writing found in the Procedurally Taxing post in January.
  • Former Bears’ QB Kyle Orton thought something stunk, and it wasn’t his play, or the landfills his investment was dealing with, or the methane gas those landfills were supposed to be creating for sale.  What stunk was the faulty tax advice he received in investing in those entities and the creation of the same that resulted in expected tax credits not being issued.  In Green Gas Delaware Statutory Trust v. Commissioner, the Service disallowed the tax credits and assessed substantial tax pursuant to a final partnership administrative adjustment (FPAA).  The TMP sought to dismiss the case for lack of jurisdiction, arguing the FPAA was invalid because the IRS failed to follow the 120 day timeframe in issuing the NBAP and FPAA, and failed to give a hearing before issuing the FPAA.  The Court held that the issuance of the NBAP in an untimely fashion did not invalidate the issuance of the FPAA, following Bedrosian v. Comm, and Wind Energy Tech Assoc. II v. Comm.  The Court noted that Section 6223(e) provided the remedy for the failure to timely file the notice, and it would not expand that relief to include invalidating the FPAA.  Similarly, the Court found the failure to offer the partnership or partners the ability to participate in an administrative proceeding violated Section 6224, but, like the untimely notice, it did not invalidate the FPAA.   The Court found the partners “may” participate under the statute, but there was no affirmative obligation on the Service to attempt to have a meeting with all parties involved.
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