Source: https://procedurallytaxing.com/author/stephenolsen/page/2/
Timestamp: 2019-04-20 18:21:13+00:00

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Procedure Round Up(date): Regulations, Mount Up! & State Law SOL Issue When Suing Promoters.
This will be a short post that touches on some temporary and final regulations that were issued in the last quarter of last year that impact tax procedure, specifically information reporting and the preparer due diligence rules, which we have previously covered. The second portion of the post will deal with a state law statute of limitations issue from a tax shelter participant suing the promoter.
Back in March of 2015, I wrote about the temporary regulations dealing with reporting of winnings from bingo, keno, and slot machines. The Service has finalized those regulations, which can be found here. I believe the final regulations are similar to the temporary regulations (although aspects regarding electronic slot machines were not included in the final regs). These rules peg the required reported winnings at $1,200 for bingo and slot machines (but $1,500 for keno). Anyone have any idea why those amounts are different (or what keno is, I don’t go to casinos much)? The information on the information reporting must include the name, address, and EIN of the payee, along with a description of the two types of ID used to verify the payee’s address.
Discharge Reporting- Buy Now, Three Years, No Payments!
I thought I had written up the proposed regulations from 2014 relating to the rules on discharge of indebtedness reporting when a borrower had not paid for more than three years, but I cannot find the post (very possible I just read about it and found it interesting). Under Section 6050P, prior regulations treated nonpayment of debt for 36 months as an “identifiable event”, which indicated formal discharge of indebtedness and required the issuance of a Form 1099-C. This caused many borrowers to believe the debt had been discharged, but it was simply an IRS reporting requirement. Tax professionals, lenders and borrowers did not like the rule. The final regulations can be found here. The regulations eliminate the passage of that time frame as a reportable event, which is a good result. This change may have come from discussions started in the ABA Tax Section, Low Income Taxpayer Committee.
Preparer Due Diligence Regs Updated.
The Government has issued temporary/proposed regulations regarding the preparer due diligence rules, which can be found here. We’ve talked about preparer due diligence repeatedly on the blog, including one of our first posts (and most popular), where Les extensively discussed peeing in pools. That was re-posted earlier this year, and can be found here. In both 2014 and 2015, Section 6695 dealing with preparer due diligence was amended. The penalty was indexed for inflation, and the due diligence requirements were expanded to include the Child Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit. The proposed regulations update the provisions to take into account these changes.
In late December 2016, the Service issued guidance (Notice 2017-9) regarding the new de minimis safe harbor provisions enacted under the PATH act. In general, failure to include all required information on an information return or payee statement will result in a penalty being imposed on the issuer. The penalty is dependent on various factors, including the amount incorrectly reported, when it was not reported, how quickly it is rectified, and potentially other factors.
The penalty under Section 6721 can be reduced or eliminated in certain circumstances. There is a de minimis exception to Section 6721, which allows the penalties to be waived if the error is corrected on or before August 1st in the year it is filed. This is limited to the greater of ten returns or .5 percent of the information returns filed. For returns required to be filed after December 31, 2016, there is a safe harbor that applies, where, if the information return has an error of $100 or less, or involves less than $25 of withholding, then the safe harbor applies, and no corrected return is required. The notice is clear that this does not apply for intentional acts or intentional disregard. It also indicates that regulations will be forthcoming regarding the safe harbor.
The de minimis safe harbor will not apply, however, if the payee elects out of the safe harbor. Under Section 6721(c)(3)(B) and Section 6722(c)(3)(B), the payee can make an election and the payor has thirty days to furnish a corrected payee statement to the payee and the IRS. If it is not done within thirty days the penalties will apply (it is possible for additional time in limited circumstances).
The payor must provide the manner for making such an election, which can be any reasonable manner including by writing, electronically or by telephone. The payee must be told in writing the fashion in which the election can be made. The notice goes on to indicate the timing of when the election must be made, and indicates the election must: 1) clearly state the election is being made; 2) the payee’s name, address, and TIN; 3) the type of statements and account numbers; and 4) the years in which the election should apply.
So, if you are super angry that Gigantor Bank and Lack of Trust Company misstated your 1099 by $4.37, you now have your avenue for redress.
I initially saw this suit, and thought some aspect pertained to federal law claims against the tax shelter promoter, but the claims were state law based. It is, however, still an interesting statute of limitations issue, that could impact future rulings based on state law.
In Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, the Eleventh Circuit, following direction from the Florida Supreme Court, has reversed the district court in holding the statute of limitation on state based claims against a tax shelter promoter by a participant were not time barred.
The particular holding is for a relatively straightforward issue. After the defendant admitted fault, the IRS issued a notice of deficiency to the plaintiff for his involvement in the shelter. This occurred in October of 2007. On November 1, 2012, there was a final tax court order disposing of the case (90 days thereafter appeal rights expired). On November 4, 2013, plaintiff filed suit against the defendant alleging various state law claims including fraud from the promoting and selling of the transaction.
Under Florida law and the facts in this case, do the claims of the plaintiff taxpayers relating to the CARDS tax shelter accrue at the time the IRS issues a notice of deficiency or when the taxpayer’s underlying dispute with the IRS is concluded or final.
The Florida Supreme Court, which the Eleventh Circuit followed, determined that the claims accrued at the time the tax court order became final, which was ninety days after the order was issued when the appeals period had passed. See Kipnis v. Bayerische Hypo-Und Vereinsbank, AG 202 So. 3d 859 (Fla. 2016). I think this is inline generally with what the federal law would be in most analogous situations, but would invite others to comment on this aspect if they have thoughts.
And, “collected proceeds” Tax Court case is finally final…now will there be an appeal?
…[T]he Service took the position collected proceeds did not include criminal penalties and civil forfeitures. The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code. As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.
The Court concluded the statute was clear on its face, and the penalties and forfeitures were included. I would highly recommend reading the post if you are interested in this area. Although I heaped self-praise on myself, the post is really strong because of the input from Jack Townsend on the case and Les Book. It also links back to our initial post on this case, which Dean Zerbe wrote, and which is also an important but different holding. Dean, who was lead counsel on the case, also provided some comments on the second holding, which we included in a separate post, found here.
The Service had sought a motion for reconsideration, but it was denied on January 28th in apparently a one sentence order (I could not track that down). It will be interesting to see if anything happens in the next 90 days.
This case has, somewhat directly, come up in the recent testimony of Treasury Secretary nominee Steve Mnuchin. Much of the remainder of this post will be borrowed from a press release by Kohn, Kohn, and Colapinto, co-counsel on the above case, which can be found here, and from Senator Grassley’s webpage.
The IRS Chief Counsel’s office emptied the in basket in making arguments for the Motion for Reconsideration – including the availability of funds for award payments. To no avail. While I appreciate that Counsel wanted to defend its corner, at the end of the day the Tax Court wasn’t buying what IRS Counsel was selling. This decision gives Treasury Secretary nominee Mnuchin and the new administration an opportunity to embrace the Tax Court’s final ruling and show that it supports the IRS whistleblower program and is serious about going after big time tax cheats.
The IRS has chosen to interpret the whistleblower law narrowly to the detriment of whistleblowers and several instances, the IRS has interpreted the terms ‘collected proceeds’ which is the base for determining the amount of award to exclude criminal penalties and certain other proceeds suggest penalties assessed for undisclosed foreign bank accounts. Two questions, and I will say that both – should you be confirmed, can I count on you to be support of the whistleblower program and work to ensure its success and would you be willing to review the IRS’s administration program including its very narrow interpretation of the words ‘collected proceeds?
We are aware there is tax fraud. There is tax fraud as you said, and we need to be diligent and I believe that the whistleblower laws are very important part of that. I will work very hard with you on that.
It was our first time meeting, so Mr. Mnuchin and I spent a few minutes getting acquainted. We then discussed a series of issues. We covered the importance of comprehensive tax reform on both the corporate and individual levels and how tax fairness is critical to economic growth and job creation. I’ve often said that a major undertaking like tax reform requires the President’s use of his bully pulpit to rally support behind a plan from Congress and the American people. There’s an opportunity to do that with a new administration. I emphasized the importance of listening to whistleblowers within the Treasury Department and those who come to the IRS with allegations of major tax fraud. The provisions improving the IRS whistleblower office that I drafted are working, but it’s required a lot of oversight to maintain the momentum, and I’d like to see a Treasury secretary who will build on the progress. Enforcing tax fraud is a matter of fairness for the majority of the taxpayers who pay what they owe. Mr. Mnuchin and I discussed the burden of the estate tax on family farms and businesses. I emphasized the need to treat alternative energy tax incentives fairly, including keeping the current phase-out for the wind energy production tax incentive as is. Alternative energy drives job creation in Iowa and nationwide. We discussed currency manipulation as well as the need to broaden the scope of the Committee on Foreign Investment in the United States to cover food security. Mr. Mnuchin seemed to appreciate the need for the review process to become broader than it is now to help protect U.S. interests. I look forward to covering these issues and more in Mr. Mnuchin’s nomination hearing.
Having a Treasury secretary who understands the whistleblower role in enforcing tax fraud is important. Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud. Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe. The IRS has made progress in working with whistleblowers, but there’s more work to be done. Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.
I also asked Mr. Mnuchin about the importance of supporting the congressionally established phase-out of the wind energy production tax credit. A smooth transition and the certainty of the phase-out are necessary for a fast-growing industry that supports numerous jobs in Iowa and elsewhere around the country. The industry needs to be able to maintain its successful growth even as its tax credit phases out. Mr. Mnuchin said he supported the smooth phase-out. And I asked Mr. Mnuchin about the role of private contractors in collecting tax debt that the IRS hasn’t tried to collect. He agreed that it makes sense to use outside help in closing the tax gap.
I’ve expressed my personal views on the whistleblower program in the past. I am fully in favor of having a whistleblower program, but my perception of the IRS handling of the program has not been favorable. I recognize the financial and other constraints, but it does seem like other aspects of the agency may not be favorably inclined towards it, that the roll out had significant issues, and that internally there have been some efforts to thwart what seem like straightforward requirements of payment. I hope the program continues to grow under Mr. Mnuchin or anyone else who may take over as Secretary of Treasury.
For more on this case, the testimony, and the recent report on whistleblower awards, check out Dean’s post on Forbes here.
I am sitting in my dining room writing, and there is freezing rain outside, I’ve got a terrible cold, and my wife is cleaning up some child’s vomit. I can’t help but think how nice it would be to live somewhere much warmer, that wasn’t as affected by these seasonal illnesses …. And, wouldn’t it be all the better if I paid far less in taxes? Maybe I should trade Love Park for Love City (nickname of St. John’s, USVI—which is apparently giving people money to come visit)?
The United States Virgin Islands have shown up in a lot of tax procedure cases over the last decade (like a ton!, there are only around 100,000 residents, and it seems like there is an important case every week). So why is that the case?
Well, it is, for some, a legal tax shelter. Normally, a US Citizen must file his or her return with the Service on a specified date, and the Service must assess tax within three years of filing a return, but if no return is filed the period of limitations remains open indefinitely. See Section 6501. To be filed, “the returns must be delivered…to the specific individual…identified in the Code or Regulations.” See Allnut v. Comm’r. This normally means somewhere with the Service. The USVI however operates a “separate but interrelated tax system.” Huff v. Comm’r. Bona fide USVI residents are required to only file tax returns with the USVI Bureau of Internal Revenue (“VIBIR”). See Section 932(c)(2). If the taxpayer is not a bona fide resident, but has USVI source income, the taxpayer must file with the VIBIR and the Service. In an effort to bring businesses to the USVI, an economic development program was implemented in USVI, which allows for a reduction of USVI tax on certain USVI residents up to 90% of their income tax. Not sure how much economic development it has spurred, but a lot of rich people began trying to be bona fide USVI residents (or at least claimed they were), and the IRS took exception.
Below is a discussion of a few cases relating to claims of USVI residency. One will review the requirements of residency, and why parking a boat may not be enough. It also highlights the interesting SOL issue of whether a USVI return starts the limitations period when the taxpayer is not a USVI resident. The final case below investigates what happens if a non-resident pays tax to USVI (claiming to be a resident) and the refund statute of limitations has passed after there has been a determination that the person was not a resident.
In Commissioner v. Estate of Travis L. Sanders, the Eleventh Circuit reversed the Tax Court and remanded for additional fact findings regarding whether or not the decedent had ever been a resident of the USVI (and from the tone of the case, the Court gave fairly clear indication that the Tax Court should find he was not a resident). The Tax Court opinion in Sanders can be found here. The issue in the case was whether the filing of a USVI return started the statute of limitations, which the Court decided hinges on whether he was a resident of USVI. As stated above, this has been a hot topic over the last few years, which we have not covered much on PT.
In Sanders, the taxpayer made his money on surge protectors (I think high end, not the consumer ones your computer is plugged into). The more protectors he sold, the more his balance sheet surged. In 2002, Mr. Sanders began spending some (but not much) time in the USVI. From ’02 to ’04, the years in question, Mr. Sanders stayed at the Ritz, and then parked his yacht on the islands and stayed on the boat. He spent somewhere between 8 and 18 days on the islands in ’02, between 49 and 78 days in ’03, and between 74 and 109 days in ’04. He kept his FL home, never established a personal mailing address in the USVI, his girlfriend (eventually wife) remained in FL, his minor child lived in FL, and he spent considerable time at the company HQ in FL.
As to his work at the surge company, he became a limited partner in a USVI company, which employed him, and then contracted his services to the company he had created. Mr. Sanders took the position that this was USVI source income, and that he was a USVI resident. He then claimed the income was exempt from United States taxes (and it was potentially entitled to a 90 percent tax credit under USVI tax laws – hence the set up).
The IRS said this Caribbean dream was a little too dreamy, and in 2010 issued a notice of deficiency, alleging Mr. Sanders was not a bona fide USVI resident and that the set up was, as Jack Townsend would say, a b@!! $&!1 tax shelter. Unfortunately, our Captain Sanders died in 2012, and did not get to see if his scheming worked. In August, the Eleventh Circuit didn’t weigh in on the BS’iness of the tax shelter, but did overturn the Tax Court as to whether the statute of limitations prohibited the assessment. Why did the courts disagree?
How to qualify as a USVI resident has changed somewhat over recent years, and, the discussion to follow regarding the statute of limitations on filing with VIBIR may no longer apply, as the Service and VIBIR entered into an information sharing agreement in ’07, and following that the Service agreed to treat certain returns filed with VIBIR as starting the statute of limitations regardless of whether the person was actually resident of USVI.
This was prior to ’07, and the Service took the position that Mr. Sanders was not a bona fide resident of the USVI in the years in question, and therefore the return he filed with VIBIR did not start the running of the statute of limitations in the United States. Mr. Sanders (and the USVI government) argued he was a bona fide resident, and the statute had run.
The Court did not determine whether Mr. Sanders was or was not a bona fide resident, and remanded for further fact finding. It was clear from the tenor of the opinion that based on the facts before the Court it strongly (very, very, very strongly) disagreed with the Tax Court conclusion that Mr. Sanders was a resident.
The more important holding, although not new law, was that the statute of limitations for filing his US Federal tax return would only run due to the VIBIR filing if Mr. Sanders was a bona fide resident (requiring a substantive finding of fact), and there was no good faith exception to this requirement implied in the statute.
In discussing the good faith exception, the Eleventh Circuit reviewed the meaning and use of the term bona fide and found it required objective proof. The Court did note there are some fairness concerns in not having such an exception, but said that was not sufficient to read such an exception into the statute. In addition, it noted that “entwining of the merits of a case with the statute of limitations is not uncommon in tax cases.” The Eleventh Circuit rejected the good faith exception, holding filing with VIBIR only triggers the statute if the taxpayer is a bona fide resident (not merely that the taxpayer believes he is).
As to the bona fide residency, as mentioned above, the Eleventh Circuit gave a pretty heavy indication as to its feelings as to residency. The Court stated that “[b]ecause the Tax Court never decided the nature and extent of Sanders’s physical presence, it cannot have properly weighed this factor.” Further, “[e]ven Sanders’s own estimate that he spent 18 days in the USVI…places him on the island for only a small portion of time,” and “he had no personal home on the islands for any part of [the years in question].” And, “[l]iving in a condominium partially owned by one’s employer (and which is not even available for every visit) does little to evidence an intention to reside there indefinitely…”, but the Court did note that moving the boat to the island and connecting it to utilities was slightly more indicative of residence; although, noted this was less strong evidence than a fixed home. There were various other similar quotes, making it fairly clear the Court did not think Sanders was a bona fide resident.
Although I’ve discussed this type of planning in the past with clients for both USVI and PR (and other more exotic jurisdictions), this type of planning has a more common analogous state level planning topic; which is selecting a state level income tax residence (in my practice, it is usually someone in NY, NJ, MA, and less often PA, considering a move to FL). Obviously, the analysis is different, but the advice is the same; you can’t just say you think you are a resident, you have to take meaningful steps that can prove you are.
Also, interesting to note, at least to me, that the Chief Justice of the Eleventh Circuit was appointed by George H. W. Bush, who once claimed residency in Texas while staying a limited number of days per year in the Houstonian, which Texas accepted and Maine, DC, and other states never questioned. Perhaps the Houstonian is more homey than the Ritz.
Where Does My Entity Reside?
The Third Circuit had an interesting, albeit unsurprising, holding in the end of October relating to USVI residency of entities. In VI Derivatives, LLC v. United States, the Third Circuit affirmed the district court’s denial of the taxpayer’s motion to dismiss for lack of subject matter jurisdiction, holding that res judicata barred the challenge to subject matter jurisdiction. In VI Derivatives, various LLCs were challenging their residency, but the lower court had previously already determined the residency of the entity owners (the Ventos, more on them in a minute). In that holding, the Court indicated there was no separate determination to be made regarding the entities, “Because those partnerships are pass-through entities…, they do not have residencies separate from their owners.” When the entities filed a motion to dismiss for lack of subject matter jurisdiction based on residency, the District Court denied the motions, holding res judicata barred the challenge because the residency decision on the owners constituted a final judgement on the merits, which was not appealed. The Third Circuit agreed.
For those of you who follow tax procedure closely, especially offshore matters, the Ventos are turning into a familiar family. Cases pertaining to the capital gains ($180MM) generated from the sale of Richard’s Vento’s business have generated interesting holdings regarding USVI residency, summons enforcement, and FOIA (and probably others that I am forgetting).
Not a shocking holding either. In Vento v. Comm’r, the Tax Court reviewed the case of Renee Vento (daughter of Richard), who claimed foreign tax credits on her United States return for tax she paid in the USVI. In the year the tax arose, Renee lived in the US. For the tax year, she filed her income tax return with VIBIR including the payment of tax claiming to be a USVI resident, and the IRS transferred her estimated US payments to VIBIR. Later, the IRS and Courts determined she was not a USVI resident, and a notice of deficiency was issued. An agreed assessment was determined, with Renee treated as a US resident. Renee apparently sought a refund on the VIBIR return, but this was likely denied due to the passing of the statute of limitations. Renee then attempted to seek credits on her US return under Section 901 for payments she made to VIBIR (and the IRS payments that were converted to VIBIR payments) for the tax year in question. Renee also claimed that for the IRS or the Court to hold otherwise would unfairly subject her to double taxation in the US and USVI.
The IRS responded by arguing that Renee was not a USVI resident, and therefore the payments were not compulsory, so no credits could be issued.
The Tax Court agreed with the Service. It found that Renee had no USVI source income, and therefore there was no obligation to pay tax, so the payments to VIBIR were not “taxes paid”. Section 901(b)(1) allows a credit for “the amount of any income…tax paid or accrued during the taxable year to any…possession of the United States.” The Court found that the holdings regarding residency did not appear to give much credence to Renee’s position, which it found undercut her argument that she had a reasonable basis for paying VIBIR. The Court also found that Renee had not exhausted all of her potential remedies to reduce her liability to USVI. As such, the Tax Court found Renee did not meet her burden of showing that she had validly paid tax to USVI.
Before getting to the equity argument, the Court did note that Congress did not intend that taxes paid to USVI be eligible for the foreign tax credit. The Court viewed the coordination rules under Section 932(c) as eliminating the potential for double taxation that the FTC usually solved. Further, the Regulations specifically state that for FTC purposes, USVI income of a Section 932(a) taxpayer is treated as income from sources within the United States. See Reg. 1.932-1(g)(1)(ii)(B). The Court did also note that Renee’s situation may allow her to “slip through the crack in the statutory framework,” as under the literal terms she did not earn any USVI income, but it did not believe Congress would have intended that result. The Court did not, however, hold on this rationale, as the “taxes paid” reasoning was sufficient.
Whatever sympathy we might have for petitioners, however, does not compel us to allow them a credit against their U.S. tax liabilities to which they are not legally entitled.16 To the extent that petitioners pay tax on the same income to both the United States and the Virgin Islands, they must seek a remedy elsewhere; they cannot find it in section 901.
Our sympathy for petitioners would be tempered to the extent that tax avoidance motives prompted their claims to Virgin Islands residence. While the limited record before us is silent regarding petitioners’ motivations, our agreement to base our decision on the parties’ stipulations and admissions under Rule 122 does not require us to ignore the District Court’s observation in VI Derivatives, LLC v. United States…, aff’d in part, rev’d in part sub nom. Vento v. Dir. of V.I. Bureau of Internal Revenue… that “the timing of the [Vento] family’s decision to ‘move’ to the Virgin Islands is suspicious.” According to that court, Vento family members realized a significant gain as a result of a transaction that occurred at the beginning of 2001. Becoming Virgin Islands residents for that year held out the prospect of more than $9 million in tax savings to the family.
Sounds a bit like unclean hands. Don’t argue equity after your tax fraud-ish behavior. A bit harsher than the original taxpayer friendly Sanders holding before the Tax Court.
While reading the case, I wondered if the taxpayer could have made an argument about the amounts paid to the US that were “covered into” USVI (payments) pursuant to Section 7654. That is the provision that makes the US pay over any tax collections it has to the possession. I believe USVI intervened in this case (although I could be confusing my USVI residency cases), and the US was clearly a party. It would seem both were on notice that their transfer of funds was potentially incorrect. I have done no research on this, so the notion could be completely off base, but it was my initial thought while reading.

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