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Tax Court Disallows a $33 Million Charitable Donation Deduction Because Taxpayer Did Not Sufficiently Fill Out Form

Serving as a vivid reminder that it is vital that a taxpayer comply strictly and completely with the charitable deduction regulations, the Tax Court recently denied a $33 million charitable deduction in its entirety and imposed a gross valuation misstatement penalty because the taxpayer did not properly fill out Form 8283.

In Reri Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), a partnership donated an interest in a piece of property to the University of Michigan.  The donor retained an appraiser who assigned a fair market value of $33 million to the donation.  The taxpayer prepared a Form 8283 appraisal summary and included the form with its return.  The form indicated that the donor had acquired the donated interest through a purchase but did not include an amount for the donor’s “cost or other adjusted basis.”  Importantly, the Court does not state whether the taxpayer also attached the appraisal report prepared by the appraiser.

The Tax Court denied the entire deduction solely because the Form 8283 did not list the donor’s cost basis. According to the court, Congress prescribed strict substantiation requirements when claiming a charitable deduction over certain amounts in order “to alert the Commissioner to potential overvaluations of contributed property and thus deter taxpayers from claiming excessive deductions.”  A failure to comply with these requirements will result in a denial of the deduction, even if the amount of the deduction is correct.

A taxpayer can sometimes avoid this draconian result if it substantially complies with the regulations. Critically, a taxpayer does not do so if it fails to provide sufficient information to alert the IRS to a potential overvaluation.

That is precisely what the court determined happen here. By failing to list the adjusted cost basis of the property, as required by Treas. Reg. § 170A-13(c)(4)(ii)(E), the taxpayer did not comply with the regulations.  Omitting the cost basis “prevented the appraisal summary from achieving its intended purpose,” as “[t]he significant disparity between the claimed fair market value and the price [the taxpayer] paid to acquire [the property] just 17 months before it assigned [the property] to the University, had it been disclosed, would have alerted [the IRS] to a potential overvaluation of [the property].”  As such, the taxpayer did not substantially comply with the regulations and justified denying the entire deduction ab initio.

The Tax Court also imposed a 40% gross overvaluation penalty on the taxpayer. After finding the fair market value of the donation was only approximately $3 million, subjecting the taxpayer to the penalty, the court rejected the taxpayer’s reasonable cause defense.  Even though it had an appraisal, the court held that “a taxpayer must do more than simply accept the result of a qualified appraisal” and rejected, as immaterial, the taxpayer’s evidence of a second earlier appraisal that appeared to conform to the one prepared for the return.

Though not the subject of this litigation, it is important to note that there may be consequences to the appraiser, as well. With a judicial determination that the value claimed was grossly overstated, the appraiser may be subject to, among other things, a penalty pursuant to I.R.C. § 6695A.  If the IRS imposes a penalty on the appraiser, the IRS’s Office of Professional Responsibility (OPR) may also take action, see Circular 230 § 10.60, and can reprimand or even disqualify the appraiser.

If you have any questions about this post or about how to ensure that you comply with the substantiation requirements before donating property, please contact Jeff Erney at Jeffry.Erney@dentons.com or Peter Anthony at peter.anthony@dentons.com

Supreme Court Agrees to Review Sweeping Tax Obstruction of Justice Decision

In a decision that could have far reaching consequences in both the civil and criminal tax realms, on June 27th, the U.S. Supreme Court agreed to review the conviction of Carlo Marinello, who was found guilty of obstructing justice by failing to maintain proper books and records and failing to file tax returns.

The Supreme Court will likely settle a dispute that emerged among the lower courts about the proper scope of the obstruction statute under the Internal Revenue Code. The Supreme Court’s decision will have obvious consequences in the criminal tax world.  That is plain.  What is less apparent, is the power the decision could have in a civil audit.  Depending on how the Supreme Court rules, it could provide the IRS a substantial criminal hammer to wield against taxpayers who dispose of, or fail to maintain, business records, even if they have no knowledge that a criminal investigation has begun.

The Supreme Court will likely hear argument on this case in the fall and issue a decision sometime after that. We will keep you updated on the case, so be sure to check back.

Background

The below facts come from the opinion of the U.S. Court of Appeals for the Second Circuit.

In 1990, Carlos Marinello founded a freight service company that couriered packages between the United States and Canada. He kept little documentation of his income and expenses, and shredded or threw away any documentation that he may have had.  From 1992 onward, Mr. Marinello did not file personal or corporate tax returns.

In 2004, the IRS received an anonymous tip and opened a criminal investigation into Mr. Marinello and his company. That criminal investigation was closed the next year because the IRS could not determine if the unreported income was significant.  Mr. Marinello had no knowledge of that investigation.  Around that same time, he consulted with an attorney and an accountant who advised him he must file returns and maintain proper business records.  Despite that advice, Mr. Marinello did not do so.

The IRS was not done with Mr. Marinello yet. In 2009, the IRS re-opened the investigation and interviewed him. Mr. Marinello admitted to not filing returns and to shredding most of his business records.

The United States charged Mr. Marinello with nine counts of tax-related offenses. The conduct alleged in the indictment occurred prior to Mr. Marinello’s interview with the IRS in 2009.  One of the offenses charged was for obstruction of justice under 26 U.S.C. § 7212(a).  Section 7212(a) makes it a crime to “obstruct or impede . . . the due administration of this title.”  The government alleged that Mr. Marinello violated this section by, among other things, “failing to maintain corporate books and records for [his company]” and “destroying, shredding and discarding business records of [his company].” Mr. Marienllo was found guilty of the offense.

Decisions Below

Before the trial court, Mr. Marinello argued that to commit obstruction of justice under section 7212, one must have knowledge of a pending IRS investigation. The trial court rejected such an argument, holding that all that was necessary was for the jury to find that Mr. Marinello intended to obstruct the due administration of the Internal Revenue laws.  He appealed to the U.S. Court of Appeals in New York City.

Before the Appeals Court, Mr. Marinello again argued that the obstruction statute requires knowledge of a pending investigation. A panel of the Second Circuit disagreed, holding that the statute “criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation.”  In doing so, the Second Circuit aligned itself with 3 other appeals courts.  It also reinforced a circuit split, as the Sixth Circuit in Cincinnati, Ohio had reached a different conclusion on the same question.

Mr. Marinello sought review before the full Second Circuit. While the court declined to review the decision of the panel, two judges dissented from the denial of review and warned of the consequences of the court’s decision.  Judge Jacobs wrote ominously that if this decision was allowed to remain the law of the land, “nobody is safe: the jury charge allowed individual jurors to convict on the grounds, variously, that Marinello did not keep adequate records; that, having kept them, he destroyed them; or that, having kept them and preserved them from destruction, he failed to give them to his accountant.”  The decision affords, he wrote, “oppressive opportunity for prosecutorial abuse.”

Potential Consequences

As Judge Jacobs warned, should the Supreme Court uphold the decision, a taxpayer should be weary about engaging in any of the conduct, such as disposing of business records, that landed Mr. Marinello in jail. As Judge Jacobs so succinctly put it, “How easy it is under the panel’s opinion for an overzealous or partisan prosecutor to investigate, to threaten, to force into pleading, or perhaps (with luck) to convict anybody” (emphasis in the original).  Now, more than ever, it is important that taxpayers in civil cases are represented by competent counsel aware of the potential criminal pitfalls an otherwise cautious taxpayer may find themselves in.

Contact Jeff Erney for questions about this post.  Jeffry.Erney@dentons.com

Tax Court Finds Predictive Coding Satisfies Reasonable Inquiry Standard for Responding to Discovery Requests

The Tax Court recently denied the Internal Revenue Service’s (“IRS”) motion to compel the production of electronically stored information by Petitioner, Dynamo Holding Limited Partnership, which was not delivered as part of a discovery response based on the mutually agreed-upon use of “predictive coding.” Dynamo holdings, Ltd. v. Comm’r, Docket Nos. 2685-11, 8393-12. Predictive coding is an electronic discovery method that involves the use of keyword search, filtering and sampling to automate portions of an e-discovery document review. This method attempts to reduce the number of irrelevant and non-responsive documents that need to be reviewed manually.

The IRS and Petitioners had agreed that Petitioners would run a search for terms determined by the IRS on the potentially relevant documents. Petitioners used the predictive coding model to provide the IRS with a selection of documents that the model determined to be relevant.

The IRS, believing the response to be incomplete, served Petitioners with a new discovery request asking for all documents containing any of a series of search terms under a simple keyword or Boolean search, speculating that these documents were “highly likely to be relevant.”   Petitioners objected to this new discovery request as duplicative of the previous discovery responses made through the use of predictive coding. Petitioners contended that the predictive coding algorithm worked correctly, and that the 765 documents excluded as not relevant by the predictive coding algorithm, were properly excluded because they were outside the relevant time frame or otherwise are not relevant. The IRS thereafter filed a motion to compel the production of these documents.

The Tax Court denied the motion, asserting that it was predicated on two myths. The first of these stated myths was the “myth of human review” that “manual review by humans of large amounts of information is as accurate and complete as possible – perhaps even perfect – and constitutes the gold standard by which all searches should be measured.” The second myth was “the myth of a perfect response,” which is beyond the requirements of the Tax Court Rules. The Tax Court found that that the Tax Court Rules and the Federal Rules of Civil Procedure require only that the responding party make a “reasonable inquiry” when making a discovery response. The court explained that “when the responding party is signing the response to a discovery demand, he is not certifying that he turned over everything, he is certifying that he made a reasonable inquiry and to the best of his knowledge, his response is complete.”  As this standard was satisfied by Petitioners in their utilization of predictive coding to locate the relevant documents, the IRS’s attempt to expand e-discovery beyond the agreed upon predictive coding was unsuccessful.

The Ninth Circuit Holds Equitable Recoupment Not Time-Barred

In a taxpayer win, the Ninth Circuit recently reversed the Tax Court and held equitable recoupment was not time barred.  Revah v. Comm’r, No. 11-70211 (9th Cir. Sept. 17, 2014) (unpublished opinion).  Relying on longstanding precedent, the Ninth Circuit held the taxpayers were not statutory barred from applying for equitable recoupment because it’s permitted even with respect to an untimely refund claim.  Thus, even though the taxpayers failed to timely file their refund claims, “untimeliness is not a ground upon which the tax court may deny equitable recoupment.”  Id.

Equitable recoupment is a judicial doctrine that applies where one transaction or event is subject to two taxes based on inconsistent theories.  The equitable recoupment doctrine “allows a litigant to avoid the bar of an expired statutory limitation period” and “prevents an inequitable windfall to a taxpayer or to the Government that would otherwise result from the inconsistent tax treatment of a single transaction, item, or event affecting the same taxpayer or a sufficiently related taxpayer.”  Menard, Inc. v. Comm’r, 130 T.C. 54, 62 (2008).  To establish equitable recoupment a taxpayer must prove: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.  Id. at 62-63.  In practice, taxpayers often have difficulty mounting arguments of equitable recoupment against the IRS, although the Government typically has more success in this area.

The IRS audited and made adjustments to the Revahs’ 1999 and 2000 tax returns related to inventory and bad debt, and resulting in a decrease in the net operated losses the taxpayers reported on their 1997 and 1998 returns.  The taxpayers accepted the adjustments assuming that, as the examiner acknowledged, they would be able to reduce income in 2001 through amended returns.  After the exam and in 2005, the taxpayers filed amended returns in accordance with the examiner’s adjustments, but the refund claims were denied as untimely.  The taxpayers petitioned the Tax Court for relief asserting the equitable recoupment doctrine.  The Tax Court (Judge Cohen) found the taxpayers’ inability to use the NOLs to reduce tax liabilities was not the result of the inequitable application of inconsistent theories of taxation contemplated by the equitable recoupment doctrine, and thereby denied the petition.  The Ninth Circuit reversed and remanded in favor of the doctrine’s application, illustrating that there is hope for future taxpayers seeking to offset current IRS liabilities with past credits under the doctrine.

Sixth Circuit Sharpens Ford’s Focus on Payment of Overpayment Interest

While it appears that Ford’s petition for certiorari to the Supreme Court yielded Ford some of the answers it was looking for, Ford is still without the approximately $470 million in what it argues is overpayment interest.  As we discussed in a previous article, the Supreme Court asked the Sixth Circuit to address the question of proper venue.  The Government had previously argued that the Tucker Act (28 U.S.C. § 1491(a)) is the only general waiver of sovereign immunity regarding overpayment interest.  As such, the Government urged a district court would not have jurisdiction under 28 U.S.C. § 1346(a)(1) as Ford was not seeking to recover money that was already paid.  In an opinion dated October 1, the Sixth Circuit denied the Government’s claim that refund claims for overpayment interest, as opposed to claims for tax, penalties, and interest on tax and penalties, must exclusively be brought in the Court of Federal Claims rather than an appropriate federal district court.  This issue had previously been decided by the Sixth Circuit in Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005).  In Scripps, the Sixth Circuit held that a suit to obtain overpayment interest includes a “recovery” of money as is described in 28 U.S.C. § 1346(a)(1).  The Sixth Circuit, in seeing no reason to revisit the Scripps decision, declined to revisit the issue and held against the Government’s jurisdiction claim.

Once the Sixth Circuit confirmed proper jurisdiction of the case, it then turned to the merits of the case.  The Sixth Circuit initially addressed whether Section 6611 (relating to overpayment of interest) constitutes a “waiver of sovereign immunity that must be strictly construed,” which would, in turn, require a narrow reading of the term “overpayment.”  The Government argued that Section 6611 constitutes a waiver of sovereign immunity, and as such, the term “overpayment” should be subject to the strict construction canon.  Ford argued that 28 U.S.C. § 1346(a)(1) was the appropriate waiver of sovereign immunity, and that Section 6611 was instead a substantive right underlying the claim.  The Sixth Circuit found that, during the years at issue, any distinction between overpayments of “deposits in the nature of a cash bond” and “advance tax payments” had been made by the Service and not by Congress.  As such, the Sixth Circuit held that the any distinction between deposits and advance tax payments are substantive only, and do not implicate sovereign immunity.

Next, the Sixth Circuit turned to the “date of overpayment,” and whether such date is properly determined as the day that Ford remitted deposits or, alternatively, the date that on which such deposits were converted into advance tax payments.  The Sixth Circuit determined that this issue turns on whether the payments were made by Ford “for the purpose of discharging its estimated tax obligations.”  The Sixth Circuit looked to the “tradeoffs” presented in Rev. Proc. 84-85 (which had been in effect during the years at issue).  In essence, the Sixth Circuit determined that in order for Ford to stop the accrual of underpayment interest, Ford had the ability to either (i) remit a cash-bond deposit which would not pay Ford potential overpayment interest, but which could be returned upon Ford’s demand, or (ii) make an advance tax payment, which would allow Ford to recoup interest with respect to an overpayment, but would deny Ford the immediate ability to recoup the funds.  The Sixth Circuit viewed the form of the remittances, either as a cash-bond deposit or an advance tax payment, as dispositive of the purpose of the payment.  As such, since Ford initially remitted cash-bond deposits, the Sixth Circuit found that Ford “did not remit those deposits to discharge its estimated tax deficiency.”  Thus, the Sixth Circuit held for the Government and found that the remittances were cash-bond deposits that were not entitled to overpayment interest, and that the “date of overpayment” did not begin until the date the payments were converted to advance tax payments.

While Ford received favorable rulings from the Sixth Circuit regarding both proper venue and whether Section 6611 constitutes a separate waiver of sovereign immunity, Ford ultimately lost regarding when an “overpayment” begins.  Ford now has the ability to file yet another petition for certiorari to the Supreme Court.  While any potential petition remains to be seen, it appears that the case at hand is finally narrowed down to the sole issue of when an “overpayment” begins.

The Tax Court Rejects the IRS’s Section 6901 Analysis

On May 29, 2014, the Tax Court, in a division opinion, decided another transferee liability case in favor of the taxpayers.  See Swords Trust v. Commissioner, 142 T.C. No. 19 (2014). In Swords, the taxpayers (which were four separate trusts) together owned all the outstanding shares of stock in a C corporation, Davreyn.  Davreyn was a personal holding company that owned a substantial amount of stock in Reynolds Metal (which produced the popular aluminum foil brand, Reynolds Wrap).  Prior to the transaction at issue, Reynolds Metal merged with Alcoa, Inc., another aluminum company, and Davreyn’s existing Reynolds Metal stock was converted into shares of Alcoa stock.

Sometime in 2000, the taxpayers’ accountant learned about an opportunity for shareholders of a personal holding company to sell their appreciated stock to a financial buyer in a tax-efficient manner.  The taxpayers eventually agreed to enter into such proposed stock sale and on February 15, 2001, the taxpayers executed a stock purchase agreement wherein the taxpayers sold all of their stock in Davreyn to Alrey Trust (an entity that was affiliated with the investment banking firm, Integrated Capital Associates or ICA).  Unbeknownst to the taxpayers, Alrey Trust immediately liquidated Davreyn and then sold the Alcoa stock.  On its tax return, Alrey Trust reported a substantial gain on the subsequent sale of the Alcoa stock and offset such gain with an artificial loss that was generated from a Son-of-Boss transaction.

After assessing substantial tax liabilities against Alrey Trust and Davreyn—both to no avail—the IRS proceeded to attempt to collect Davreyn’s unpaid tax liability from the taxpayers, as transferees of Davreyn’s assets.  The IRS argued that a two-step analysis applies in determining whether the taxpayers, as transferees, are liable under Section 6901 for Devreyn’s unpaid taxes:  (1) analyze whether the subject transactions are recast under Federal law, which in Swords was primarily the Federal substance over form doctrine, and then (2) apply State law to the transactions as recast under Federal law.  Of course, to anyone familiar with transferee liability cases, this argument should not come as a surprise—it has functioned as the constant mantra of the IRS in several prior transferee liability cases.  Even though the First, Second and Fourth Circuit Courts had all recently rejected this argument, the IRS found itself once again in front of the Tax Court reiterating its Section 6901 argument.  See Diebold Found., Inc. v. Commissioner, 736 F.3d 172, 184-185 (2d Cir. 2013); Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 597, 604-605 (1st Cir. 2013); Starnes v. Commissioner, 680 F.3d 417, 428-429 (4th Cir. 2012).  This time though, the Tax Court explicitly rejected the IRS’s proposed two-step analysis.  As the Fourth Circuit held in Starnes, the question of whether a transfer occurred for purposes of Section 6901 is separate from the question of whether the transfer was fraudulent for state law purposes.  See Starnes, 680 F.3d at 428-429.  Accordingly, the Tax Court found that Section 6901 requires that the court apply state (rather than Federal) law to determine whether a transaction is recast under a substance over form (or similar) doctrine.

The IRS argued alternatively that the applicable state law, Virginia, has a substance over form doctrine that applies to recast the series of transaction as one transfer between each of the taxpayers and Davreyn.  Again, the Tax Court disagreed, finding that the IRS “has left us unpersuaded that the Supreme Court of Virginia would apply a substance over form analysis to the present setting.”  Swords, 142 T.C. *15.  The IRS had not identified an adequate Virginia case wherein the court applied a substance over form or similar doctrine.  Moreover, even if such an analysis would apply in Virginia, the Tax Court was unpersuaded that the taxpayers or their representatives had the requisite actual or constructive knowledge of Alrey Trust’s plans to sell the Alcoa stock and to illegitimately avoid any resulting tax liability.  The Tax Court concluded that the transaction was in form and substance a sale of stock and that the transaction should not be recast as a sale of assets followed by a liquidating distribution.  After analyzing the transaction in light of Virginia’s actual fraud statute, constructive fraud statue and trust fund doctrine, the Tax Court found that the IRS failed to establish an independent basis under Virginia state law for holding the taxpayers liable for Davreyn’s unpaid tax.  Accordingly, Section 6901 did not apply to this case.

Circuit Split In Summons Procedures

As part of the examination process, the IRS has wide latitude to obtain documents, records, or other information from a taxpayer.  The IRS normally requests and receives information informally.  Other times, however, the IRS resorts to a more forceful tact—an administrative summons.  This approach has teeth, as the federal district courts have statutory authority to compel compliance.

To have a summons enforced in federal district court, the IRS generally must satisfy four prima facie requirements established fifty years ago by the Supreme Court in United States v. Powell.  Those requirements are: (1) the investigation must be conducted for a legitimate purpose; (2) the summons must be relevant to that purpose; (3) the IRS must not already have the information sought; and (4) the IRS must have followed the administrative steps required by the Internal Revenue Code.

Recently, in Jewell v. United States, the Court of Appeals for the Tenth Circuit focused on the fourth requirement.  Code section 7609(a)(1) provides special administrative procedures for third-party summonses (e.g., the IRS summons person A regarding person B).  One of these specified procedures provides that “notice of the summons shall be given to any person identified [person B in the example above] . . . no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined.” (emphasis added).  In Jewell, the government admitted that the taxpayer had not received the statutorily-prescribed notice.  Thus, as the Tenth Circuit phrased it, “[t}he resulting question is whether we are free to disregard the statutory requirement.”

The Tenth Circuit’s inquiry focused first on the interpretation of the section 7609(a)(1) 23-day notice requirement.  Was notifying the taxpayer mandatory?  The Tenth Circuit rejected the government’s arguments to the contrary, concluding that Congress intended to require mandatory notice.  The court noted that the authority cited by the government “did not disturb the age-old precept that ‘shall’ means ‘shall'”.

The Tenth Circuit’s inquiry then focused on whether the notice requirement was an “administrative step” under Powell.  Looking at the common meaning of the term, the court concluded that the 23-day notice provision was an administrative step, as contemplated by Powell.  The court concluded that the summonses at issue should be quashed.

Although the 23-day requirement and the Powell requirements both seem rather straightforward—and we agree that the Tenth Circuit is correct—the Tenth Circuit’s opinion created a circuit split.  As the court acknowledged, five other circuit courts have declined to apply Powell in the same manner.  The First Circuit has acknowledged that the IRS must comply with all required administrative steps, but allowed enforcement of a summons where only 21 days of notice was provided.  The Second, Sixth, and Eleventh Circuits are willing to excuse the notice defect where the taxpayer is not prejudiced.  And the Fifth Circuit has allowed enforcement of a summons to avoid elevating “form over substance.”

With such disparate approaches being taken by different circuits, this issue could find its way to the Supreme Court next term.

IRS Granted Considerable Latitude to Delay Payment of Tax Refunds

A recent Fifth Circuit opinion, El Paso CGP Co., L.L.C. v. United States, illustrates that the IRS’s authority under the Code’s mitigation rules is, at least in the Fifth and Third Circuits, construed broadly.  Acknowledging the general rule that a closing agreement with the IRS prevents the IRS from reopening a year included in that agreement, the Fifth Circuit’s opinion—overall, favorable to the IRS—turns upon the exceptions to this general rule found in the Code’s mitigation rules, which allow the IRS to reopen a closed tax year through an assessment within one year of a closing agreement.  However, the Fifth Circuit offered a taxpayer-friendly interpretation of the variance doctrine, which generally provides that in a refund suit, a taxpayer may not raise a ground for recovery which was not previously set forth in the taxpayer’s administrative refund claim.

As is the case in many tax cases, this dispute involved a much earlier tax year—here, 1986.  On a company’s 1986 tax return, the company claimed various tax credits, which exceeded the allowable amount for that year.  As a result, the company carried some of those credits forward to 1987 through 1990.  After an IRS audit of the 1986 tax return, the IRS disallowed some of the credits and increased the company’s liabilities for 1986 – 1990, which the company later paid.

Several years later, the IRS and the company executed a Form 870-AD (“Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment”), in which the company agreed to the assessment and collection of a tax deficiency for 1986 but reserved the right to file a claim for refund.  The company later exercised this right and filed an approximately $18 million refund claim, primarily attributable to replacing the disallowed tax credits with other tax credits which the company originally had carried forward to later years.  This action, however created tax deficiencies for 1987 through 1990.

In July 2005, the IRS and the company agreed on the amounts of liability owed or refund due for each of the 1986 through 1990 taxable years and entered a “Closing Agreement”.  Pursuant to the Closing Agreement the company was owed a refund for 1986 and had deficiencies for 1987 – 1990.

In September 2005, the IRS made only a partial payment of the agreed-upon refund due for 1986.  The IRS asserted that the remaining portion would be used to satisfy the deficiencies for 1987 – 1990.  In August 2006, the company sought from the IRS a refund the remaining amount for 1986, asserting that the IRS had failed to assess deficiencies within the applicable one-year statute of limitations.  The company further asserted that the IRS was precluded from collecting deficiencies from 1987 – 1990 because the IRS failed to follow the mitigation rules.  The IRS denied the refund claim, and the company filed a refund suit in district court.

The district court granted summary judgment to the Government.  First, the district court held that it lacked jurisdiction because the refund suit was not based on a valid administrative refund claim.  The district court reasoned that the administrative refund claim was disposed of by the Closing Agreement.   As another basis for holding that it lacked jurisdiction, the district court concluded that the refund suit violated the variance doctrine because the grounds for recovery in the refund suit varied from the grounds in the original administrative refund claim.  The company appealed.

Stating that courts “have not always been so dogmatic in applying” the variance doctrine, the Fifth Circuit disagreed with the district court and concluded that it had jurisdiction over the refund suit.  The Fifth Circuit noted that there is an exception from the variance doctrine where, as in this case, the Government’s “unilateral action creates the substantial variance.”  The court further stated that the Government “cannot use the variance doctrine to straightjacket the taxpayer when the Government unexpectedly changes its litigation strategy.”

It was not all bad news for the Government though.  Although the court concluded that the IRS had failed to assess tax within the applicable period of limitations, the court concluded the IRS had complied with the mitigation rules (i.e., which allowed the IRS to reopen the closed tax years).

The court rejected a contention from the company that each tax year must be treated separately and followed an approach taken by the Third Circuit.  Pursuant to that approach, the court reasoned that the separate-tax-year concept should not apply where the parties reach an agreement, such as the Closing Agreement, that permits the IRS to pay out or recover a sum attributable to multiple years.  Accordingly, the court held that when a taxpayer enters into a closing agreement with the IRS, the IRS can comply with the mitigation rules by “assessing and collecting” any net deficiency from the years covered by the Closing Agreement (or, alternatively, by  “refunding or crediting” a net overpayment).

This approach essentially allows the IRS to take a piecemeal approach to resolving a taxpayer’s liability after entering a Closing Agreement and affords the IRS another “bite at the apple,” even after statutes of limitations for assessment are arguably closed—which could substantially delay closure of a tax dispute and payment of a refund.

Tax Court Signs Off on Homebuilder Tax Deferral

A large family-owned homebuilding business recently prevailed in Tax Court to the tune of millions of dollars of tax deferral.

The Shea family, over the course of about 40 years, built one of the largest private homebuilder businesses in the United States.  The family operated their business through several entities (collectively, the “companies”).  These companies built, developed, marketed, and sold homes in planned communities, replete with amenities ranging from meditation gardens to golf courses.  The communities’ amenities represented a large portion of the companies’ overall costs.  The Tax Court dispute centered on the proper interpretation of an accounting method for reporting the companies’ taxable income.

Pursuant to Code section 460, taxpayers who receive income from contracts that are not completed in the year in which they are entered into generally must recognize income and expenses throughout the duration of the contract (known as the “percentage of completion method of accounting”).  Different rules, however, apply for home construction contracts.  These rules focus on income recognition when a contract is completed.  The statute does not define completion, but Treasury regulations provide two tests for determining whether a contract is completed.

Under the first test, a contract is completed when the customer is able to use the subject matter of the contract for its intended purpose and at least 95% of the total contract costs attributable to the subject matter have been incurred by the taxpayer (the “use and 95% completion test”).  Treas. Reg. § 1.460-1(c)(3)(i)(A).  Under the second test, the contract is completed upon final completion and acceptance of the subject matter of the contract (the “final completion and acceptance test”).  Treas. Reg. § 1.460-1(c)(3)(i)(B).  Although these regulations might seem facially straightforward, the IRS and the companies disagreed about how these regulations should be interpreted.

In particular, the parties disagreed about what constituted the subject matter of each purchase and sales contract.  Per the IRS, the subject matter of each contract was merely the home and lot upon which it sat.  Under the IRS’s interpretation, the companies would be required to report income when each home in the planned communities was sold.  The companies and the Tax Court, in an opinion authored by Judge Robert Wherry, disagreed.

The court concluded that, despite integration clauses which seemingly limited the subject matter of the contract to that which was provided in the contract, the relevant “contract” for purposes of the regulatory analysis was much broader.  The court found it important that homebuyers were contracting not merely for a home, but for the “entire lifestyle of the development and its amenities”, on which the companies focused their marketing efforts.  The court also rejected as “simplistic and short sighted” an IRS argument that certain state law legal definitions relating to real estate contracts should govern the analysis.

The court similarly dismissed the IRS’s interpretation of the relevant regulations.  The court concluded that, contrary to an IRS contention, the plain meaning of the phrase “subject matter of the contract” also included common improvements.  The court noted that the regulations explicitly state that “to determine whether final completion and acceptance of the subject matter of the contract have occurred, a taxpayer must consider all relevant facts and circumstances.”  Accordingly, the court concluded that the companies were entitled to defer income from their contracts until 95% of the total contract costs were incurred or the development (or phase of a development) was completed and accepted.

The court recognized that the “clearly articulated exception for homebuilders . . . reflects a deliberate choice by Congress that home construction contracts should be treated differently and accorded the more generous deferral of the completed contract method.”

In a concluding footnote, the court warned taxpayers from extending the rationale of the case to create “extremely long, almost unlimited deferral periods”.  The court noted that such efforts would likely fail.   That said, similarly-situated taxpayers should consult their tax advisors to determine whether they are on the correct method of accounting and whether their taxable income has been reported consistently with this opinion.  If not, they may be entitled to significant tax deferral.   Note, however, that the IRS generally must approve changes to taxpayers’ methods of accounting.

Recent Amendments to the Federal Rules of Appellate Procedure Include Changes to Procedures for Appeals from Tax Court

On December 1, 2013, amendments to the Federal Rules of Appellate Procedure went into effect.  Several of these amendments relate to appeals from decisions of the U.S. Tax Court.  The amended Rules provide needed clarity on two issues–the procedures applicable to interlocutory appeals from Tax Court, and the Tax Court’s status an independent court, not an administrative agency.

Rules 13 and 14, as previously written, did not address the right to an interlocutory appeal (i.e., an appeal of a trial court ruling that occurs before the entire trial court case has concluded).  Code section 7482(a)(2), however, provides a right to permissive interlocutory appeals from the Tax Court.

Pursuant to section 7482(a)(2), the Tax Court judge presiding over a case essentially must allow for an interlocutory appeal to occur.  Specifically, the Tax Court judge must include with the order to be appealed a statement that a controlling question of law is involved with which there is a substantial ground for a difference of opinion, and that an immediate appeal from that order may materially advance the conclusion of the litigation.  If this statement is included, the U.S. Court of Appeals to which the order is appealable (see section 7482(b)) has discretion to permit an appeal taken from such order.  In addition, Tax Court proceedings are not stayed unless ordered by a judge of the Tax Court or the U.S. Court of Appeals having jurisdiction over the appeal.

As amended, the previously-written Rule 13 became Rule 13(a), and the permissive interlocutory appeal provision was inserted as Rule 13(b).

Rule 13(b) states that an appeal by permission is governed by Rule 5.  Rule 5 provides the general procedural requirements (e.g., to whom the petition for permission to appeal must be filed, the contents of the petition, the page length, etc.) for filing a petition for permission to appeal.

Rule 14 was amended to conform with other rules by specifying that rules (other than Rule 24(a), relating to Leave to Proceed in Forma Pauperis (discussed below)) referring to the “district court and district clerk”  are to be read as referring to the Tax Court and its clerk.

Also modified was Rule 24, “Proceeding in Forma Pauperis”, which in Latin translates closely to “proceeding in the form of a pauper”.  This rule relates to the procedures for seeking waiver of court fees if a party cannot afford these fees.  The amendments to Rule 24 were mostly stylistic.  Per the drafters of the amendments, the language in the previous version of the rule created a false impression that the Tax Court was an agency within the executive branch, rather than an independent court.  The rule previously referred to an appeal from “an administrative agency, board, commission, or officer (including for the purpose of this rule the United States Tax Court)”.  Now, the rule has separate clauses for “an appeal from the United States Tax Court” and “an appeal or review of a proceeding before an administrative agency, board, commission, or officer”.

Managing Claims for ERISA Benefits

Very few areas involve more tax rules and more controversies (with many more opponents than just the Internal Revenue Service) than the area of employee benefits.  You may know this better as the realm of ERISA and ERISA plans.  Occasionally, I will be contributing posts to this blog from the perspective of controversies, tax and otherwise, involving ERISA matters.  This is my first.

There are a variety of ways that an ERISA plan can end up in court.  ERISA provides three basic jurisdictional paths to the courthouse, the most commonly used of which is a suit by a participant or beneficiary for benefits payable by an ERISA-covered benefit plan under section 502(a)(1)(B) of ERISA, 29 USC section 1132(a)(1)(B).  The jurisprudence governing suits of this nature is long and surprisingly complex, and it will provide grist for this blog on multiple occasions in the future.

The U.S. Supreme Court recently addressed a recurring problem area in the jurisprudence under section 502(a)(1)(B) of ERISA in a 9-0 opinion released on December 16, 2013.  In that opinion, the Court determined that a statute of limitations written into a plan document can be enforceable.   Heimeshoff v. Hartford Life & Accident Insurance Co.,  571 U.S. ___ , 2013 WL 6569594 (S. Ct. Dec. 16, 2013).

Julie Heimeshoff was covered under a long term disability plan  insured by Hartford and sponsored by Wal-Mart Stores, Inc.  On August 22, 2005, she filed a claim for LTD benefits under the plan.  For a lot of valid reasons, the final denial of her benefits was not issued until November 26, 2007.  Ms. Heimeshoff then filed suit for the unpaid benefits on November 18, 2010, almost three years to the day after the final denial was issued.  Experienced lawyers among you would look at a claim first asserted in 2005 and at a suit filed on that claim more than 5 years later and think, there has to be a statute of limitations defense in these facts.  You would be correct, but not as clearly as you might suspect.

ERISA has a statute of limitations provision for some lawsuits, but has no stated statute of limitations for actions brought under section 502(a)(1)(B) of ERISA.  The courts have developed a process for providing a statute of limitations for these suits to fill this statutory void.  Like many of its counterparts, the Wal-Mart LTD plan also had reacted to the void by creating its own statute of limitations for these suits.  It contained a provision that stated:  “Legal actions cannot be taken against The Hartford … [more than] 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.”  Ms. Heimeshoff’s lawsuit was filed more than three years after proof of loss was required, but within three years (barely) after the date of the last denial in the plan’s internal administrative review process under section 503 of ERISA.  The question answered by the U. S. Supreme Court was whether after considering these plan terms, Ms. Heimeshoff’s suit was filed too late.  The answer was, yes, it was filed too late.  This three year statute of limitations (that accrued on the date written proof of loss was required) was enforceable so long as the length of the limitations period was “reasonable” and there was no controlling statute to the contrary.

Here are some potentially intriguing action items for consideration:

(1) Seriously consider reviewing any of your existing ERISA plan terms that create a contractual statute of limitations for claims under section 502(a)(1)(B) of ERISA for that statute’s compliance with the requirements of Heimeshoff.  Be sure that during your review, you are differentiating between the plan’s deadline for initially filing a claim for benefits under the plan and the plan’s deadline for filing a lawsuit to attempt to recover unpaid, denied benefits. Only the latter has been affected by Heimeshoff.   Your plan’s new statute may overlap with the period of time needed to exhaust the plan’s administrative remedies under section 503 of ERISA, but it must leave time afterwards for filing suit, so integrate your plan’s new statute of limitations carefully with its internal administrative review procedures and time frames.  The fact that three years was a reasonable length for the statute does not mean that three years or fewer will always be reasonable or that longer than three years will always be unreasonable.  The fact that 9 Justices agreed that three years was reasonable in these circumstances provides no small amount of comfort that three years ought to be reasonable again.

(2)  In cases where it does not already exist in your ERISA plans, seriously consider adding a plan-based statute of limitations for suits brought under section 502(a)(1)(B) of ERISA to seek benefits under your ERISA plan.  In doing so, be careful to select an accrual date trigger (a start date) that will yield consistent results in a variety of circumstances, is as objective and easily discernable by a participant and court as possible and will be viewed by a disinterested trier of fact as being a reasonable way to begin the statute’s running.  For some insured plans, the trigger accrual date used in Heimeshoff – the “time written proof of loss is required” – will work for some insured plans, but not in all such plans, and it is more troublesome as an accrual date for an ERISA plan that is not funded with insurance.

(3)  Heimeshoff said that if the results from applying a plan’s statute of limitations were viewed as too harsh, equitable principles could be used to mitigate the impact.  Not too long ago, the U.S. Supreme Court said in U.S. Airways v. McCutchen that ERISA plans could by their terms limit the application of equitable principles to the plan.  Should your ERISA plan take up the invitations of Heimeshoff and McCutchen and revise its plan terms accordingly?

(4) Consider whether Heimeshoff can be extended to allow your ERISA plan to add and enforce a statute of limitations for suits brought under section 502(a)(3) of ERISA.

Companies May be Able to Deduct Settlement Payments Made to Resolve Potential Health Care Fraud Liability

Is there any silver lining when your company settles a False Claims Act suit with the government?  Possibly, in the form of a tax deduction.  In general, a taxpayer may deduct their ordinary and necessary business expenses.  A taxpayer may also deduct, as an ordinary and necessary business expense, a payment made in settlement of a claim.  A taxpayer may not, however, deduct any fine or penalty paid for a violation of the law.  Treasury Regulations provide that compensatory damages paid to the government do not constitute a fine or penalty.

The False Claims Act currently provides for a civil penalty of between $5,000 and $10,000 plus triple the amount of damages which the Government sustains because of the person’s actions.  In general, the damages (i.e., the losses sustained by the government) are considered compensatory, and the $5,000 to $10,000 penalty plus the triple damages (excluding the actual damages) are considered punitive.  For example, let’s say the government suffered a $100,000 loss due to healthcare fraud and imposed a $5,000 penalty plus $300,000 multiplied damages.  Under the general rule, one may think that $100,000 should be considered compensatory, whereas $205,000 would be considered punitive.  The current state of the law, however, is much more nuanced.

In 1976, when a prior version of the False Claims Act which authorized only double damages was in effect, the Supreme Court characterized the damages provision as “necessary to compensate the government completely for the costs, delays, and inconveniences occasioned by fraudulent claims.”   Sixteen years later, with the current triple damages provision in effect, the Supreme Court stated that the “damages multiplier has compensatory traits along with the punitive.”  A case-by-case determination is necessary to determine the portion of punitive and compensatory damages.

In Fresenius Medical Care Holdings, Inc. v. United States, 111 A.F.T.R. 2d 2013-1938 (D. Mass. 2013), the U.S. District Court for the District of Massachusetts (“District Court”), analyzed the deductibility of settlement payments made to the government to resolve a dialysis company’s potential liability under the False Claims Act (i.e., relating to allegations of Medicare and Medicaid fraud) and other causes of action.

During the 1990s, whistleblowers brought qui tam civil actions against an entity that later became a subsidiary of the dialysis company.  The dialysis company, to resolve its potential criminal liability, agreed to pay a substantial penalty.  To resolve its potential civil liability, the dialysis company agreed to pay the government approximately $385 million –of which approximately $66 million was to be paid to the whistleblowers.  The settlement agreement provided that the dialysis company agreed that nothing in the agreement was “punitive in purpose or effect.”  After paying the agreed-upon settlement, the company deducted the entire civil settlement payments as ordinary and necessary business expenses.  The IRS, after an audit, determined that only $193 million (i.e., approximately half) of the settlement payments were compensatory and thus properly deductible.  The dialysis company disagreed with the IRS’s determination that only half of the settlement was compensatory and filed an administrative appeal.  On appeal, the IRS agreed that the approximately $66 million paid to the whistleblowers was deductible, but maintained that approximately $127 million was not deductible.  The dialysis company paid all tax that the IRS said was due, and filed suit to recover the disallowed portion.  After a trial, a jury concluded that an additional $95 million was deductible (i.e., $353 million of the $385 million settlement was deductible).  The dialysis company moved for entry of final judgment.

Stating that “a factfinder must determine to what extent ‘multiple’ damages are, in fact, compensatory”, the District Court made clear that the IRS or taxpayers cannot unilaterally characterize payments.  The District Court found it reasonable for the jury to conclude that pre-judgment interest, which was not included in the settlement agreements, was necessary to make the government whole.  In addition, the District Court found it reasonable for the jury to conclude that the criminal settlement payment was intended to cover the bulk of punitive damages.  The District Court granted the dialysis company’s motion.

Key Takeaway: If you are negotiating with the government to negotiate a False Claim Act settlement you should consider the tax effects.  You may be entitled to a substantial tax benefit.

SCOTUS Vacates and Remands Ford Decision to Determine Proper Jurisdiction

Did Ford commit a venue foot-fault?  The Government thinks so.  An opinion from the Supreme Court last week gives lawyers yet another illustration of the principle that jurisdictional challenges may be raised at any time – even in a court of last resort. In response to Ford Motor Company’s petition for certiorari to recover overpayment interest of approximately $470 million in deposits in the form of cash bonds remitted to the IRS before Ford converted them to payments (see our previous post), the Supreme Court of the United States vacated the Sixth Circuit’s judgment and remanded to the Sixth Circuit.  The opinion can be found here.  The Supreme Court is asking the Sixth Circuit to determine whether the district court lacked jurisdiction under 28 U.S.C. § 1491(a) (the “Tucker Act”), which requires claims against the U.S. founded insofar as relevant upon any Act of Congress be brought in the Court of Federal Claims.  Essentially, the Government argues that refund claims for overpayment interest, as opposed to claims for tax, penalties, and interest on tax and penalties, must exclusively be brought in the Court of Federal Claims rather than an appropriate federal district court.  To explain why it was raising this novel argument for the first time before the Supreme Court, the Government argued that it had failed to previously raise the issue due to controlling circuit precedent holding that 28 U.S.C. § 1346(a)(1) grants original jurisdiction over claims for overpayment interest both to district courts and the U.S. Court of Federal Claims.  Under this precedent, an award of overpayment interest is typically considered to be an essential component of the relief sought under a tax or penalty refund claim and is interpreted to fall within a district court’s refund jurisdiction under 28 U.S.C. § 1346.    

The Supreme Court determined that, because it is a court of “final review” and not one of “first view,” the Sixth Circuit should be the initial court to consider the Government’s claim.  The Supreme Court also urged the Sixth Circuit to consider if such determination impacts whether or not Section 6611 of the Internal Revenue Code (relating to overpayment interest) is a waiver of sovereign immunity that should be narrowly construed.  Interestingly, if the Sixth Circuit again determines that Section 6611 of the Code is the provision that waives sovereign immunity for claims of overpayment of interest, then presumably Ford is in the same place it was before the Supreme Court vacated and remanded the Sixth Circuit’s decision: seeking certiorari and “arguing that the Sixth Circuit was wrong to give [Section] 6611 a strict construction.”  Alternatively, if the Government is correct regarding its interpretation of the Tucker Act, and if the case cannot be transferred to the Court of Federal Claims, Ford may be time-barred from filing a claim for refund, potentially losing its claim to $445 million – an important reminder of the importance of choice of venue when filing suit.

Anticipate Litigation, Check. Anticipate Communications Between a Testifying Expert and Parties Other than the Taxpayer or the Taxpayer’s Attorney, Ch…Wait, What? To Involve Counsel, Or Not To Involve Counsel Is the Question.

Taxpayers continually find themselves facing decisions that will end up being scrutinized during future IRS examinations, and courts have repeatedly found that such concern, coupled with other factual indicia, can satisfy the “anticipation of litigation” requirement for work product protection under Federal Rule of Civil Procedure (“FRCP”) 26(b)(3).  (For a seminal case on this topic, please see United States v. Adlman, 134 F.3d 1194 (2d. Cir. 1998)).  The U.S. District Court for the District of Delaware recently grappled with this issue in a Government action to enforce several IRS summonses related to an examination of a $4.5 billion worthless stock deduction claimed by Vivendi S.A.’s U.S. subsidiary, Veolia Environment North American Operations, Inc. (the “Taxpayer”), during the 2006 tax year. See United States v. Veolia Environment N. Am. Operations, Inc., D. Del., No. 1:13-mc-03 (Oct. 25, 2013).  The taxpayer previously provided 600,000+ pages of bates-stamped documents to the Government in response to more than 25 summonses and hundreds of Information Document Requests during the examination of the Taxpayer’s 2004-2006 tax years.  Approximately 300 withheld documents remained at issue.

In Veolia, the Court found the Taxpayer adequately established their anticipation of litigation during the transaction’s 2006 planning stages.  The Court was specifically persuaded by the Taxpayer’s 2006 retention of outside counsel to advise on litigation possibilities, a Private Letter Ruling request on certain aspects of the transaction, the Taxpayer’s participation in a pre-audit program for the IRS to review the transaction, the Taxpayer’s audit history, and the amount of the claimed deduction.  Interestingly, the Court even opined that if the government’s contention that the Taxpayer had a history of engaging in similar transactions in the ordinary course of business was true, work product protection could still apply given the facts of the case.  This was all consistent with aspects of the established case law on the anticipation of litigation issue.

Unfortunately for the Taxpayer, the Government’s claims and the court’s analysis did not stop there.  During 2006, the Taxpayer retained a French valuation firm to provide a risk exposure analysis on the transaction and identify and supervise U.S. valuation experts that could prepare valuation reports to substantiate the claimed deduction.  One firm was retained in 2006 and produced a pre-transaction valuation report that supported the claimed position and another firm was retained in 2007 to provide a second valuation report to buttress the argument.  These reports were prepared independently and both were ultimately provided to the Government to support the claimed position.

The Government argued that the Taxpayer’s provision of the two valuation reports made their preparers testifying experts under FRCP 26(b)(4) and any communications that relayed factual data to the testifying experts were not protected according to FRCP 26(b)(4)(C)(ii). The first point was not heavily disputed, and the Taxpayer appears to have provided significant amounts of information to the Government during the examination.  Regarding the second issue, the Court focused on the privilege log and held that some of the documents presented therein appear to be factual communications to testifying experts that are not protected under the work product doctrine.  Importantly, the Court also stated that FRCP 26(b)(4)(C) and its protections did not extend to parties other than the Taxpayer or the Taxpayer’s attorneys.  That final point may have been moot in Veolia, given the court’s indication that the referenced communications constituted facts and data; however, it raises an important aspect of the rule to be mindful of.

The number of litigated summons cases involving privilege and work product claims continues to increase.  And the pace of new cases may continue to grow given the IRS’s new IDR policy, which promises to increase significantly the numbers of summonses that are issued.  For taxpayers and tax advisors, this is an area of concern that should be closely monitored.

Ford Attempts to Catch the Ear of SCOTUS in Pursuit of Approximately $470 Million

Approximately five years after its Detroit counterparts received billions of dollars from the federal government, Ford Motor Company is attempting to recoup approximately $470 million in overpayment interest it believes it is owed from the federal government.  Ford has petitioned the Supreme Court of the United States claiming that the Sixth Circuit improperly extended the “narrow construction” of a waiver of sovereign immunity to a narrow construction of Section 6611 of the Internal Revenue Code (relating to interest on overpayment of taxes).  In arguing that certiorari is warranted, Ford noted that there is confusion among the circuit courts over the application of the strict construction canon to waivers of sovereign immunity.  The Supreme Court docket for Ford’s case can be found here, and the petition for certiorari is here.

Originally, for the tax years 1983-1989, 1992, and 1994, the IRS determined that Ford had underpaid its taxes.  In an effort to toll potential interest charges on its potential underpayment, Ford took advantage of a special rule in Rev. Proc. 84-58 that allowed it to make additional payments as a cash bond (i.e., a deposit), which had the effect of stopping the accrual of underpayment interest.  Years later, Ford converted the deposit into an “advance payment” to satisfy further tax liabilities.  However, the IRS subsequently determined that Ford had overpaid its taxes for the years in question.  Ford then received from the IRS the amount of the overpayment, plus interest.  The parties agree on the amount of the overpayment, but disagree as to when the overpayment interest should begin to accrue.

Ford argued, unsuccessfully, that the date of overpayment began once Ford had submitted the deposit.  The government argued that since the payments must be made with respect to a tax liability, the date of overpayment did not begin until Ford requested that the IRS treat the cash bonds as “advance payments” to satisfy further tax liabilities.   The district court agreed with the government, holding that Ford was not entitled to overpayment interest until it converted the deposit into an advance payment.  Ford Motor Co. v. United States, 105 A.F.T.R.2d 2010-2775 (E.D. Mich. 2010) (available through PACER and major commercial reporting services).

On appeal, the Sixth Circuit, acknowledging that Ford’s interpretation of Code Section 6611 was “strong,” applied a strict construction canon to Code Section 6611 and affirmed the holding of the district court.  Ford Motor Co. v. United States, 508 Fed. Appx. 506 (6th Cir. 2012) (not recommended for publication).  The Sixth Circuit found that that Code Section 6611 is the provision that waives sovereign immunity for claims of overpayment interest and that the canon of narrow construction should apply to resolve the interpretation of Code Section 6611 in the government’s favor.

Ford is now asserting that 28 U.S.C. § 1346(a)(1) is the provision that waives the government’s sovereign immunity with respect to overpayment interest, and Code Section 6611 is the provision that confers the substantive right underlying the claim for overpayment interest.  As such, and consistent with Supreme Court precedent, Code Section 6611 should not, Ford argues, be subject to the strict construction canon.  In Ford’s petition for certiorari, it argued that “in direct conflict with [the Supreme] Court’s precedents, the Sixth Circuit invoked the strict construction canon to construe not the waiver of sovereign immunity, but instead the separate, substantive provision.”  If the Supreme Court rules in Ford’s favor (and sends the case back to the Sixth Circuit on remand), the Sixth Circuit’s seemingly sympathetic view of Ford’s reading of Code Section 6611 may ultimately lead to a decision that could lead to some taxpayers seeking additional interest on overpayments.   However, in 2004 Congress enacted Code Section 6603, which provides, in general, that if a taxpayer follows certain procedures pursuant to a deposit made after October 22, 2004, interest may accrue from the date of the deposit so long as the deposit is with respect to a “disputable tax.”  Thus, even if Ford were to prevail, taxpayers that follow the requirements of Code Section 6603 (and corresponding Revenue Procedure 2005-18) will not have to rely on the Ford case.

“Strategies for Managing Parallel Proceedings with Fifth Amendment Implications,” Inside the Minds: Strategies for Criminal Tax Cases

The DOJ Tax Division has long recognized the efficacy of parallel criminal and civil proceedings and actively pursues them in its current endeavor at increased enforcement. Parallel proceedings often present complicated issues that create additional challenges for taxpayers and their attorneys. When a parallel proceeding is pending, the invocation of the Fifth Amendment by either the taxpayer, a tax advisor, or other non-party witness can create adverse implications in a subsequent proceeding.  Taxpayers and their attorneys must carefully navigate the risk of an adverse inference against the taxpayer under the circumstances of the particular case.  The well-informed attorney can prepare to face all of these issues and effectively navigate the specific facts of his or her case.  The following discussion will explain and analyze: the effect of a party’s invocation in independent proceedings, the effect of a party’s invocation in parallel proceedings, the implications of a non-party’s invocation, and whether an invoker can waive the privilege and later testify.

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Qualified Offers and the Recovery of Administrative and Litigation Costs from the IRS

Taxpayers and taxpayers’ counsel may be able to proactively fit within the net worth requirements set forth in 28 U.S.C. § 2412(d)(1)(B), which sets forth the standard applicable to both recovery of litigation costs and shifting the burden of proof to the government in tax cases. For example, a taxpayer may be able to successfully fit within net worth requirements by making distributions at any time before the date the case is filed. The following discussion provides a summary of this taxpayer position in recent litigation, the government’s opposition to this position, and the taxpayer’s appropriate—and successful—reply. In addition, relevant portions of the court’s holding and the case law the Government relied upon is also attached for the convenience of the reader. This discussion contains excerpts from Southgate Master Fund, LLC v. United States651 F. Supp. 2d 596 (N.D. Tex. 2009).

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