Source: https://procedurallytaxing.com/category/restitution/
Timestamp: 2019-04-21 10:14:39+00:00

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The Tax Court had an important holding regarding whistleblower awards on August 3rd in Whistleblower 21276-13W v. Commissioner (it is really hard to come up with bad puns about the case titles when they don’t include the names), where the whistleblower was successful in arguing, over the IRS’s objections, that criminal fines and civil forfeitures collected by the IRS were included in “collected proceeds” for whistleblower awards. This is another IRS loss (seems like they lose all these whistleblower cases), and another case where it looks as though the IRS is actively attempting to thwart the program or minimize payments to whistleblowers. Although I agree the government should not overpay awards, I still get the impression that the IRS has not found the right balance with what to contest in this realm.
In this case, the whistleblower provided information regarding a financial institution*** that eventually pled guilty to conspiring to defraud the IRS, filing false returns, and evading income tax. As penance for its terrible behavior it paid the IRS $74MM and change (damn!) in tax restitution, criminal fines, and civil forfeitures under 18 USC § 3571. The financial institution and the Service agreed that the tax restitution was $22MM, the fine was $22M, and the forfeiture was about $16MM (plus another $16MM previously forfeited).
Before getting to the underlying conflict in this case, it should be noted that Mr. and Mrs. Whistleblower already have had a tough go at getting paid. These folks had already taken at least one stop to the Tax Court in Whistleblower 21276-13W v. Commissioner, 144 TC 290 (2015). We were lucky enough to have Dean Zerbe, the attorney on at least the 2015 case (current case has counsel listed as sealed) and essentially the guru of all that is IRS whistleblower claims, write up that case, which can be found here. The 2015 case was a major case also, where the Service tried to argue the whistleblowers had failed to provide the evidence leading to the collection of tax (somewhat because they had not filed Form 211 very early on), and highlighted the immense importance of de novo review in these cases, as opposed to the abuse of discretion standard argued by the Service. I would encourage everyone to review Dean’s prior post (and we’ll reach out and see if he has any comments on this case also).
Back to the August 3rd holding. All parties agreed the whistleblowers were going to get paid 24%, but they did not agree on what. The whistleblowers argued it should be 24% of the full recovery, but the Service argued it should only be based on the tax restitution. That gave the whistleblowers about thirteen million reasons to ask the Court to clarify.
The Law – Don’t Blow the Statutory Interpretation!
The Whistleblowers responded, “screw you, we help you bust a tax cheat and this is how you treat us?” That may be inaccurate, as I did not review the brief. Their position, as summarized by the Court, was that the statute put no such restrictions on payments, and the total amount was a settlement resulting for actions taken by the IRS based on information provided by the whistleblowers.
Our holding in this matter is not in conflict with our holding in Whistleblower 22716-13W v. Commissioner, 146 T.C. __, wherein the Court examined the $2 million threshold requirement of section 7623(b)(5)(B). Section 7623(b)(5)(B) provides that for a whistleblower to qualify for the mandatory whistleblower award, “the tax, penalties, interest, additions to tax, and additional amounts in dispute [must] exceed $2,000,000.” … In arguing his case before us, the whistleblower asserted that FBAR penalties constituted an “additional amount” as used in section 7623(b)(5)(B).
We rejected the whistleblower’s assertion. In interpreting what constitutes “additional amounts” we held that the phrase “additional amounts” as it appears in the series in section 7623(b)(5)(B), i.e., “tax, penalties, interest, additions to tax, and additional amounts”, was a term of art. We noted that the phrase “additional amounts” when used in a series that also includes “tax” and either “additions to tax” or “additions to the tax” appeared nearly 40 times in title 26, and when the words were tied together, as they are in section 7623(b)(5)(B), they had a specific technical meaning. We stated we repeatedly have held that the phrase “additional amounts”, which the whistleblower sought to extend to FBAR penalties, “is a term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A” of title 26 which are assessed, collected, and paid in the same manner as taxes.
In reaching our holding, we determined that the wording in the threshold requirement of section 7623(b)(5)(B) (”if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000”) is different from that of section 7623(b)(1), which provides for an award of a percentage of the collected proceeds (”including penalties, interest, additions to tax, and additional amounts”).
Les also noted that Treasury regulations promulgated in 2014 limit the definition of collected proceeds to “amounts collected under the provisions of title 26, United States Code.” The regulations did not apply in this case, though unless the IRS and Treasury throw in the towel on this, the Tax Court will have to consider it in the future under Chevron. While not written in a Chevron framework, however, this opinion is a strong indication that the Tax Court might strike down the regulatory definition of collected proceeds.
***Correction: I noted in an earlier version that information was provided about a taxpayer and the taxpayer had negotiated the allocation above, but the prosecuted entity here is a bank that assisted other taxpayers in the evasion. Jack Townsend was kind enough to email me about the error, and explain there is a good chance the restitution is an estimated figure and the Service may not know who the underlying taxpayers actually are.
The case of United States v. Janean Del’Andrae provides further insight into what happens when the IRS makes an assessment based on a restitution order. We have talked about restitution based assessments previously here and here. This relatively new basis for assessment came into being with the passage of the Firearms Excise Tax Improvement Act of 2010 and the creation of IRC 6201(a)(4) allowing assessment based on restitution orders in criminal cases. Some of the kinks are still being worked out and this case illustrates one of the kinks. The district court’s decision to award attorney’s fees in this context confuses me and other aspects of the opinion confuse me. That confusion may make for a confusing and disjointed post and I apologize. The facts developed in the opinion do not seem to warrant an attorney’s fees award against the government here but I will circle back to that at the end. Getting to the result of what interest the taxpayer owes following a restitution based assessment provides the most important aspect of this case.
As the Court explains in the case, the new basis for assessment did not immediately cause the IRS to make assessments using this procedure. The IRS waited for instructions from its lawyers on what to do and those instructions initially came out in Chief Counsel Notice 2011-18. Two years later in Chief Counsel Notice 2013-12 additional guidance was provided. The Court states that “procedures for the assessment process were not officially developed until the Chief Counsel Notice 2013-12 was issued on July 31, 2013.” That statement does not make sense to me because the 2013 notice does not deal with assessment procedures but rather with the process of how to handle a restitution case in litigation. I think the Court may have misstated the purpose of this notice and the timing of the procedures for dealing with restitution based assessments. The Notice issued in 2011 deals much more directly with assessment procedures. Both of these notices are Chief Counsel notices designed to give guidance to Chief Counsel lawyers and not necessarily to the IRS.
Here, the taxpayer’s restitution order occurred in 2012. The delay of the IRS in implementing procedures for restitution assessments creates problems that ultimately lead to the award of attorney’s fees against the IRS but I am uncertain that the Court quite got the timing right in attributing the problem to the 2013 notice. The place to focus on IRS procedures is not notices issued by Chief Counsel’s office but changes to the Internal Revenue Manual. Here, the provisions for restitution based assessments first appeared in IRM 5.19.23 on June 6, 2014, and IRM 4.8.6 in October 7, 2014. The new IRM provisions followed the Interim Guidance on Criminal Restitution Procedures issued in SBSE 04-0214-0013 dated February 5, 2014 Except for how this impacts the decision on attorney’s fees, it is not especially relevant but does create more confusion in trying to follow the opinion.
Janean Del’Andrae pled guilty to one count of tax evasion. The opinion is not clear about the count to which she pled or how many counts with which she was charged. The IRS charged that she not only evaded her personal income taxes for the year 2005 but also that she participated in evading the taxes of Del-Co Western Corporation, a company in which she and her husband were officers. The court makes a passing reference to payroll taxes but the remainder of the opinion seems to make it clear the evasion of corporate income taxes was the problem. The sentencing court ordered restitution in the amount of $138,509.50 calculated to cover the corporate taxes for 2004 ($49,845.37) and 2005 ($38,307.13) as well as her individual income taxes for 2005 ($48,357.00). The judgment against her was entered on July 11, 2012, and she stroked a check that day for the full amount of the restitution (making her an unusual defendant, most of whom do not have the money to pay the tax at this stage of their case) and tendered it to the clerk of court. On September 17, 2012, the IRS received the payment.
The opinion does not state what happened next but maybe nothing happened. On September 12, 2014, the court granted defendant’s Motion to Enforce Plea Agreement and issued an order requiring the IRS to give the defendant credit for the restitution payment. The order required the IRS to credit the payment on July 11, 2012 even though it took the court over 60 days to deliver the check to the IRS. It appears the IRS was significantly delayed in making the assessment probably because it took the IRS a long time to develop the assessment procedures for restitution based assessments. I agree that the defendant should get credit from the date of payment but wonder how the payment of the interest on the money for those 60 days was credited between the judicial and executive branches.
The court states that the IRS eventually assessed the appropriate amount of taxes. It also assessed interest on the taxes from the due date of the returns until July 11, 2012, when it gave credit to the defendant and the corporation for the payment of the taxes. The assessment of interest occurred without using the deficiency procedures which seems appropriate under these circumstances. The defendant continued to dispute the correct amount of the corporate liability for 2005 so the IRS did not assess the liability for that period. One of the problems with this opinion is that the Court’s description of events does not use the terms that one might expect or use them with sufficient precision to allow me to know exactly what happened. It is clear, however, that in March 2015 the corporation made a payment towards its 2013 liability. In doing so it overpaid the 2013 liability by $65,917. The IRS latched onto the overpayment and used it toward additional corporate and personal tax liabilities. The use of this overpayment creates the focus of the litigation. Defendant filed a motion for an order to show cause seeking answers concerning the application of the payments. The balance of the opinion essentially focuses on how the IRS did and should have used the overpayment and why its actions were right or wrong.
The restitution order contemplated that the IRS would charge interest and penalties but did not order the payment of these amounts or spell them out in any way. The defendant argues that the IRS should not assess interest for the time prior to the date of the restitution order. The defendant further argues that the IRS should follow deficiency procedures in order to assess interest on a tax liability determined by a restitution order. The IRS argues that interest runs from the due date of the return for restitution payments as it does for all liabilities and further argues that the use of deficiency procedures is unnecessary to assess interest on the amount listed in a restitution order. The court agreed with the IRS that interest on restitution assessments need not follow the deficiency procedure but may occur in the same manner as the assessment of the underlying tax assessed pursuant to the restitution procedure.
The second issue concerns the application of the overpayment on the 2013 corporate taxes to the personal liability of the defendant. The court says that the IRS argued that the application of a corporate payment to the personal liability of the individual is proper because “Defendant [the individual] and Del-Co are jointly and severally liable for the tax and related interest that Defendant evaded.” The court further states that the IRS argued, “the joint and several liability arises because Defendant agreed to pay restitution for the loss caused by her evasion of Del-Co’s taxes.” I am unconvinced that the IRS argued the case in the way described by the court. If it did I am confused. It is possible the IRS made an alter ego argument. Whatever was argued, the court found that the defendant and the corporations were not jointly and severally liable and that the IRS should not take payments on the corporate account and apply them to the individual liability. If the IRS position reflects a legal conclusion that every time an individual is convicted and restitution is ordered based on corporate and individual liabilities this type restitution order allows it to move money between the individual and corporate accounts, then this decision represents a repudiation of that position. If the IRS was simply arguing here that, based on these facts, the finances of the corporation and the individuals merged, the IRS lost a factual argument.
After reaching this conclusion the Court found that “because the IRS delayed the application of Defendant’s restitution payments and may have improperly applied Del-Co’s overpayment to Defendant’s tax account, the Defendant incurred unnecessary costs to clarify the IRS’s actions” and therefore costs and attorney’s fees were ordered against the United States. The delay in applying the payments here seems to have resulted from the implementation of a new statute and did not harm petitioners. I do not see that as a basis for awarding fees. To the extent that the IRS inappropriately applied the payment of the corporation, I feel the court should have provided more information about the steps that were taken to fix the wrongful application before the court proceeding as a prerequisite to the award of attorney’s fees.
I take away from this case the reinforcement of the IRS position that interest may be assessed on restitution assessments in the same summary manner as the assessment of the tax itself. The application of payments issue, if it reflects a legal position asserted by the IRS in restitution cases, represents a victory for taxpayers. Because I am unconvinced that the IRS was arguing this as a legal matter, I think that the application of payments issue is simply a factual determination that must be determined on a case by case basis. There will be many more cases exploring the restitution assessment procedure as this becomes more common. I hope they offer a clearer view of what the parties presented but even in the murky view offered by this case, the issue of interest in restitution cases gets a little clearer.
At last week’s ABA Tax Section meeting in Chicago one of the panels I enjoyed most was the Civil and Criminal Tax Penalties discussion on tax preparer fraud moderated by Sara Neil of Capes Sokol (whose colleague Justin Gelfand has written on identity theft for us as a guest), with Scott Clarke from DOJ, Matt Mueller from Wiand Guerra King in Tampa and Paula Junghans from Zuckerman Spaeder in DC.
The panel’s materials included a 2015 case, United States v Horn, from the district court in Maryland. Horn involved a hearing regarding whether a return preparer who had pleaded guilty to one count of preparing and filing false returns in violation of 26 USC 7206(2) should be required to pay restitution. The opinion is by Judge Marvin Garbis, a former tax practitioner and author of books and articles on tax procedure. I do not know Judge Garbis personally but I recall one of my mentors Michael Saltzman admiring him for his tax procedure chops (no small feat as Michael’s talent was matched by a healthy and justified sense of tax procedure ego).
The opinion concludes for very practical reasons that the IRS should not be able to make a restitution based assessment (RBA) against Horn, and how it gets there rings some interesting tax procedure bells that I found worthy of a post.
The parties stipulated that the preparer Judianne Horn provided 16 clients with tax returns that listed false deductions on Schedule A or false business losses on Schedule C. The stipulation laid out over a four-year period the understatements of tax liabilities on a year-by-year basis for Horn’s clients. The total understatement of tax liabilities for the 42 federal tax returns (not every client had a return filed in every year) was $281,764.
We have recently discussed in the revision to Saltzman and Book the 2010 legislative change codified in Section 6201(a)(4)(A) that allows the IRS to assess and collect restitution under an order in Title 18 section 3556 “in the same manner as if such amount were such tax.” We discussed restitution based assessments in SaltzBook Chapter 10 (dealing with assessments) and in Jack Townsend’s redo of Chapter 12 (dealing with tax crimes); Keith also discussed it in PT in a post last year.
There are lots of interesting issues that spin off this important administrative power, and Horn raises one, namely whether the IRS has the ability to use RBA powers when the offense at issue relates to a preparer’s misconduct that implicates multiple taxpayers with multiple tax liabilities.
This creates a substantial level of complexity for determining the amount of restitution to be imposed and imposes a substantial management burden on the IRS and the court to monitor, not only in the application of restitution payments made by the defendant but also collections made by the IRS from taxpayers whose liabilities are the subject of the restitution order.
The function of restitution is to require a defendant to restore to the victim of a crime the loss caused by the defendant’s criminal conduct. A restitution award is not to be issued for punitive purposes or to provide the victim with a profit. Thus, the amount of restitution should not exceed the loss to the victim actually cased by the defendant.
In the context of a false federal income tax return, the actual loss to the IRS for which restitution should be paid is the deficit in tax collected with regard to the return in question-i.e., the amount of tax that would have been reported due on an accurate, correct tax return and paid, reduced by the amount collected by the IRS with regard to that return. (emphasis added).
Defense counsel could be accused of a failure to provide effective assistance unless he/she reviewed the IRS’s proposed adjustments to each of these 42 returns, presumably with the assistance of a qualified tax professional.
Judge Garbis notes that the review should lead to some process (at cost that may be borne by the State if the defendant is represented by appointed counsel) whereby the defendant could access records and even potentially interview witnesses in a search for offsetting adjustments.
On the other hand, criminal cases in which the restitution ordered is not traceable to a tax – such as when a taxpayer submits false documents or tells lies during an examination – may not result in assessable restitution.
Whether aiding and assisting in preparing and filing someone else’s tax return constitutes an amount of restitution ordered “for failure to pay any tax” is a question that the Horn opinion sidesteps and that I suspect other opinions may tackle, though IRS lists in its 2011 notice the 7206(2) offense Hom pleaded guilty to as an offense that “may” meet the requirements for assessment.
Back to the Horn opinion and what it does address. In discussing RBA, the opinion notes that once restitution is assessed, the IRS can use its full collection powers, with the assessment also subject to interest and late payment penalties.
However, when issuing a restitution order that does not result in an RBA, a sentencing court can exercise its discretion and decide whether to set a fixed date for payment in full or a schedule for partial payments consistent with the court’s finding regarding the defendant’s financial circumstances.The opinion illustrates the discretion with examples as to what the court (unlike the IRS) might do: Often, when a defendant does not have the ability to make full payment immediately, a sentencing court will defer all, or part, of the payment obligation during the time a defendant is incarcerated and will set a periodic payment schedule with the first payment due when the defendant is released from prison. The restitution order can provide that the amount of each periodic payment is subject to change depending upon changes in a defendant’s financial circumstances. The sentencing court can require, or waive, the accrual of interest on the unpaid balance. There will be no automatic “late payment penalty” applied to any unpaid balance of the full amount of restitution. Rather, the district court would consider imposing a sanction for a failure to make a restitution payment, taking into account the court’s determination of the defendant’s financial ability to meet the obligation.
In the absence of an RBA, a defendant’s restitution obligation is reduced, dollar for dollar, as the defendant makes payments pursuant to the restitution order.
IRS on the other hand treats payments made pursuant to an RBA as involuntary, with IRS having discretion to allocate the payments as it chooses among tax, interest and penalties. IRS may even, as the opinion notes, allocate payments to any other of the defendant’s own assessed liabilities that are wholly unrelated to the offense giving rise to the RBA.
Judge Garbis thus sets the stage for an administrative mess that led in part to his concluding that he would not order restitution in the case. Recall that when imposing restitution the IRS is not to collect more than the correct amount of tax at issue. When there are multiple taxpayers and multiple potential assessments and collections from those third parties, unless there is a process to track those payments and allocate the payments to the individual liabilities it would be very difficult for the IRS to represent to the court that it would limit its collection on the preparer’s assessed restitution to reflect its collection from those third parties whose returns the IRS would presumably examine.
[T]he Government has taken the position that it will not seek to collect income tax underpaid by – or, better put, unwarranted refund payments made to – the taxpayers who filed the false returns.
Perhaps IRS did so because it wanted precedent on the books that it could get restitution in a case such as this, or perhaps it did so because it knew that resource constraints limited it from examining those 16 taxpayers and the 42 returns at issue (I won’t even go the SOL issues stemming from third party fraud, an issue we have spoken about in the BASR v US case in a guest post by Robin Greenhouse).
Nevertheless, unless the I.R.S. can make a decision to grant these taxpayers a gift from the Department of the Treasury, it should seek to have these taxpayers comply with their future tax obligations. Hence, if the Defendant were now to make a restitution payment that is applied to a tax liability of W.W., a taxpayer who obtained more than $17,000 of unwarranted refunds, it would appear that W.W. would have taxable income in the year of the Defendant’s payments.
This conclusion relates to the notion illustrated in cases such as Old Colony that a person has gross income when someone else pays that person’s tax on his or her behalf. The Horn opinion thus states that even if the IRS were not going to examine the prior returns to reflect ensuring past compliance, “the I.R.S. should monitor continually its application of restitution payments and ensure future tax compliance by the taxpayers to whose tax liabilities the payments are allocated.” While I have not fully thought through the Old Colony issue that Judge Garbis raises (for example, is the possible inclusion of income dependent upon there being an assessed liability agains the taxpayer?), the discussion at least implicates issues of coordination and the mechanism that the IRS would or should use to credit any restitution payments against individual taxpayer liabilities.
Indeed, it appears doubtful that the I.R.S. can, realistically, keep the Defendant and the Court (Probation Officer) informed of its application of Defendant’s payments. Moreover, the Government has described no coherent existing, or proposed, practicable process for keeping track of, and advising the Court (Probation Officer) and Defendant of, the status of payments made by, or collected from, taxpayers with respect to tax liabilities included in the restitution amount.
The “bottom line” is that if a tax return preparer defendant is unable to make more than modest partial payment of the restitution obligation, then a restitution order resulting in an RBA would impose a monitoring obligation on the I.R.S. and the Court (i.e., the Probation Officer) that, if at all possible to meet, would cause disproportionate managerial problems for the I.R.S. and the Court. (footnotes omitted).
The complexity and “disproportionate management burden” on the IRS and the court thus led to the conclusion that it was inappropriate to issue a restitution order. That burden was exacerbated by the financial circumstances of the defendant, as the court noted that a restitution order causing an RBA might be appropriate perhaps when “prompt, full payment can be required.” The opinion concludes by noting that it could have required restitution that would not have led to an RBA but that it chose not to in this case.
Jack Townsend has noted that the relatively new RBA powers create some administrative challenges even when the restitution relates to an offense stemming from the defendant’s own tax liability (see his 2014 discussion of Murphy v Commissioner and procedures associated with RBA over at his Federal Tax Crimes blog here, with its sensible recommendation that IRS issue regs under the RBA statute).
The Horn opinion touches on some practical and legal challenges associated with an RBA that implicates third parties and their respective tax liabilities. In an email exchange over this case Jack offers the observation that “some of the real or imagined administrative problems that Horn raises could be solved by simply wiping off restitution on the criminal side once it has been assessed.” As Jack notes, that “would let the IRS’s collection tools work the way they always work. It would also take legislation.” While at it, Jack suggests that with the “IRS’s robust tax collection mechanisms delegating tax restitution collection to the IRS and getting the courts / probation office / U.S. Attorney out would be a good use of limited resources.” Jack also suggests that it would make sense for any delegation to the IRS include the IRS having the power to compromise the assessed restitution.
IRS and DOJ have many tools at their disposal to go after crooked preparers, but Horn serves notice that at least among judges willing to inquire how the IRS will go about its business, the IRS may not be able to use an RBA when it comes to convicted preparers.
Here we go with some of the tax procedures from July that we didn’t otherwise cover. This is fairly long, but a lot of important cases and other materials. Definitely worth a review.
Starting off with some internal guidance from the Service, it has held that the signature of the president of a corporation that subsequently merged into a new corporation was sufficient to make a power of attorney binding on the new corporation (the pres served in the same capacity in NewCo). In CC Memo 20152301F, the Service determined it could rely on the agent’s agreement to extend the statute of limitations on assessment based on the power of attorney. There is about 14 pages of redacted material, which makes for a fairly uninteresting read. There was some federal law cited to allow for the Service reliance, but it also looked to IL law to determine if the POA was still valid. This would have a been a more interesting case had the president not remained president of the merged entity.
The Tax Court, in Obiakor v. Comm’r, has held that a taxpayer was entitled to a merits review by the Service and the court during a CDP case of the underlying liability for the TFRP where the Service properly sent the Letter 1153 to the taxpayer’s last known address, but the taxpayer failed to receive the letter. The letter was returned to the Service as undeliverable, and the Service did not show an intent by the taxpayer to thwart receipt. This creates a parallel structure for TFRP cases with deficiency cases regarding the ability of the Tax Court to review the underlying liability when the taxpayer did not previously have an opportunity to do so based on failure to actually receive a notice mailed to their last known address. Unfortunately for the taxpayer, in the Court’s de novo review, the Court also found the taxpayer failed to make any “cogent argument” showing he wasn’t liable.
In Devy v. Comm’r, the Tax Court had an interesting holding regarding a deficiency created by a taxpayer improperly claiming refundable credit. The IRS allowed the credit requested on the return and then applied it against a child support obligation the taxpayer owed. Subsequently, the IRS determined that he was not entitled to the credit and assessed a liability. The Tax Court found it lacked the ability to review the Service’s application of the credit under Section 6402(g), which precludes any court in the US to review a reduction of a credit or refund for past due child support obligations under Section 6402(c), as well as other federal debts and state tax intercepts . The taxpayer also argued that he should not have to repay the overpayment because the Service elected to apply it against the child support obligation, not pay it to him. The Court stated that whether it is paid over to the taxpayer or intercepted, the deficiency was still owed by the taxpayer. See Terry v. Comm’r, 91 TC 85 (1988).
With a lack of splits in the Circuits, SCOTUS has denied certiorari in Mallo v. IRS. Mallo deals with the discharge of tax debts when the taxpayer files late tax returns. Keith posted in early June on the Solicitor General’s position before SCOTUS, urging it to deny cert. Keith’s post has a link to our prior coverage on this matter.
The DC Circuit had perhaps its final holding (probably not) in Tiger Eye Trading, LLC v. Comm’r, where it followed the recent SCOTUS holding in Woods, affirming the Tax Court’s holding that the gross valuation misstatement penalty applied to a tax shelter partnership, but the Court could not actually adjust the outside basis downward. The actual adjustment had to be done in a partner level proceeding, but the Court did not have to work under the fiction that the partner had outside basis above zero in an entity that did not exist. Taxpayers interested in this area should make sure to read our guest post by Professor Andy Grewal on the Petaluma decision by the DC Circuit that was decided on the same day, which can be found here.
In Shah v. Comm’r, the 7th Cir. reviewed the terms of a settlement agreement between a taxpayer and the Service which contained a stipulation of facts, but did not contain a calculation of the deficiency in any applicable year. The Tax Court provided an extension to calculation the amount outstanding. No agreement could be made, and the Service petitioned the Court to accept its calculation. Various additional extension were obtained, and the taxpayers went radio silence (apparently for health issues and inability to understand the IRS calculations). The Tax Court then ordered the taxpayers to show cause why the IRS calculations should not be accepted, instead of providing a trial date. The taxpayer objected due to IRS mistakes, but the Court accepted the IRS calculations somewhat because the taxpayers had not been cooperative. The Seventh Circuit reversed, and held that the Tax Court was mistaken in enforcing the settlement, because there was not a settlement agreement to enforce. The Seventh Circuit indicated that informal agreements may be enforceable, but the court may “not force a settlement agreement on parties where no settlement was intended”. See Manko v. Comm’r, 69 TCM 1636 (1995). The 7th Circuit further stated that it was clear the taxpayers never agreed to the calculations (which the IRS acknowledged). At that point, the Service could have moved for summary judgement, or notified the Tax Court that a hearing was required, not petitioned to accept the calculations. Keith should have a post in the near future on another 7th Circuit case dealing with what amounts to a settlement, where the agreement was enforced. Should be a nice contrast to this case.
The Service has issued a PLR on a taxpayer’s criminal restitution being deductible as ordinary and necessary business expenses under Section 162(a). In the PLR, the taxpayer was employed by a company that was in the business of selling “Z”. That sounds like a cool designer drug rich people took in the 80’s, but for the PLR that was just the letter they assigned to the product/service. Taxpayer and company were prosecuted for the horrible thing they did, and taxpayer entered into two agreements with the US. In a separate plea agreement, he pled to two crimes, which resulted in incarceration, probation, a fine, and a special assessment, but no restitution. In a settlement agreement, taxpayer agreed to restitution in an amount determine by the court. Section 162(f) disallows a deduction for any fine or similar penalty paid to the government in violation of the law, but other payments to the USofA can be deductible under Section 162(a) as an ordinary and necessary business expense. The PLR has a fairly lengthy discussion of when restitution could be deductible, and, in this case, determined that it was payable in the ordinary course of business, and not penalty or other punishment for the crime that would preclude it under Section 162(f), as those were decided under the separate settlement agreement. The restitution was simply a repayment of government costs.
This kind of makes me sad. The Tax Court has held that a guy who lived in Atlantic City casino hotels, had no other home, and gambled a lot was not a professional gambler. See Boneparte v. Comm’r. Nothing that procedurally interesting in this case, just a strange fact pattern. Dude worked in NYC, and drove back and forth to Atlantic City every day to gamble between shifts at the Port Authority. Every day. The court went over the various factors in determining if the taxpayer is engaging in business, but the 11 years of losses seemed to make the Court feel he just liked gambling (addicted) and wasn’t really in it for the profits.
S-corporations are a strange tax intersection of normal corporations and partnerships (which are a strange tax intersection of entity taxation and individual taxation), but the Court of Federal Claims has held that s-corps are clearly corporations in determining interest on a taxpayer overpayments. In Eaglehawk Carbon v. US, the Court held that the plain language of Section 6621(a) and (c)(3) were clear that corporations, including s-corporations, were owed interest at a reduced rate.
The Third Circuit in US v. Chabot has joined all other Circuits (4th, 5th, 7th, & 11th – perhaps others) that have reviewed this matter, holding that the required records doctrine compels bank records to be provided by a taxpayer even if the Fifth Amendment (self-incrimination) might apply. We’ve covered this exception a couple times before, and you can find a little more analysis in a SumOp found here from January of 2014. This is an important case and issue in general, and specifically in the offshore account area. We will hopefully have more on this in the near future.
A Magistrate Judge for the District Court for the Southern District of Georgia has granted a taxpayer’s motion to keep its tax returns and records under seal, which the other party had filed as part of its pleadings. The defendants in this case were The Consumer Law Group, PA and its owners, who apparently offered services in reducing consumer debt. In 2012, the Florida AG’s office filed a complaint against them for unfair and deceptive trade practices, and for misrepresenting themselves as lawyers. Two years prior it was charged in NC for the same thing. One or more disgruntled customers filed suit against the defendants, and apparently attached various tax returns of the defendants to a pleading. Presumably, these gents and their entity didn’t want folks to know how profitable their endeavor (scamming?) was, and moved to keep the records under seal. The MJ balanced the presumption of openness against the defendants’ interest. The request was not opposed, so the Court stated it was required to protect the public’s interest. In the end, the Court found the defendant’s position credible, and found the confidential nature of returns under Section 6103 was sufficient to outweigh the public’s interest in the tax returns.

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