Source: https://taxlitigator.me/page/2/
Timestamp: 2017-08-21 04:28:31
Document Index: 259642841

Matched Legal Cases: ['§ 4', '§ 5', '§ 6320', '§ 482', '§ 1', '§ 1']

TAXLITIGATOR - Tax Controversy (Civil & Criminal) Report | The difficult will be done immediately, the impossible will take a little more time . . . | Page 2
Posted by: Lacey Strachan | June 20, 2017
On June 15, 2017, the California state Legislature voted to pass a comprehensive reform of the State Board of Equalization (BOE), known as the Taxpayer Transparency and Fairness Act of 2017 (AB 102).[i] As passed by both the Assembly and Senate, this legislation was signed by Governor Jerry Brown on June 27, 2017 as part of the 2017-18 budget trailer package.
The Taxpayer Transparency and Fairness Act of 2017 strips the BOE, which currently administers over thirty tax and fee programs, of most of its powers and instead establishes a new agency: the California Department of Tax and Fee Administration (DOT). The new DOT will be under the control of a director appointed by the Governor and subject to Senate confirmation. This is a change from the BOE, which is governed by five elected Board members and is the nation’s only elected tax commission.[ii]
The enactment of this new legislation comes on the heels of a March 2017 report by the Department of Finance, which performed an evaluation of the BOE, including its sales and use tax resource utilization, outreach activities, and sales and use tax reporting.[iii] The Department of Finance’s evaluation found that “certain board member practices have intervened in administrative activities and created inconsistencies in operations, breakdowns in centralized processes, and in certain instances result in activities contrary to state law and budgetary and legislative directives.”[iv] State Controller Betty T. Yee stated on Thursday that the “sweeping reform passed today takes the duties of BOE down to the studs and structurally remodels to ensure more consistent, fair, transparent, and efficient administration of California’s tax laws and appeals.”[v]
Beginning July 1, 2017, the BOE will remain responsible for only (1) the review, equalization, or adjustment of property tax assessments; (2) the measurement of county assessment levels and adjustment of secured local assessment rolls; (3) the assessment of certain pipelines and related responsibilities; (4) the assessment of taxes on insurers; and (5) the assessment and collection of excise taxes on alcohol.
The Taxpayer Transparency and Fairness Act of 2017 also establishes a new Office of Tax Appeals, which will create tax appeal panels, each consisting of three administrative law judges, with offices in Sacramento, Fresno and Los Angeles. Each administrative law judge is required by statute to have been an active member in the State Bar of California for at least five years immediately preceding his or her designation to a tax appeals panel, and possess knowledge and experience with regard to the administration and operation of the tax and fee laws of the United States and of California. As such, the administrative law judges must be active, experienced tax lawyers in the state of California.
The Office of Tax Appeals will handle all appeals currently handled by the BOE (other than those relating to the responsibilities retained by the BOE), including petitions for redetermination, administrative protests, claims for refund, and appeals from an action of the Franchise Tax Board. The new Office of Tax Appeals will begin conducting appeals on or after January 1, 2018.
The tax appeals panels are required to publish a written opinion for each appeal decided by each tax appeals panel within 100 days after the date upon which a tax appeals panel’s decision becomes final. Taxpayers may be represented on an appeal by any authorized person or persons, at least 18 years of age, of the person’s choosing, including, but not limited to, an attorney, appraiser, accountant, bookkeeper, employee, business associate, or other person.
Decisions of the tax appeals panel are appealable to the California Superior Court subject to a de novo standard of review. In most California tax disputes (other than for determinations regarding a taxpayers residency status), the underlying liabilities are required to be paid and matters proceed to Superior Court litigation on the basis of a complaint for refund.
Internally, the BOE has a Settlement Section and the FTB has a Settlement Bureau, that were created to provide an administrative resolution of tax disputes on a “hazards of litigation” basis in a manner somewhat similar to the IRS Office of Appeals. Most experienced practitioners would likely conclude that these settlement procedures led to a realistic resolution of an administrative tax dispute often overcoming the need to present a matter to the members of the BOE.
It remains to be seen how this transition will impact taxpayers with cases currently pending before the BOE. Procedurally, although transfer of the administrative duties of the BOE is to occur by July 1, those duties will mostly be handled by the current administrative personnel of the BOE. As such, one might anticipate some, but not much, of an interruption in the examination and collection of taxes from California taxpayers.
Whether six months is a sufficient amount of time for the selection and training of qualified administrative law judges for the Office of Tax Appeals will remain to be seen. However, the requirement for published decisions should be helpful in the administration of future tax disputes within the settlement functions of the DOT (assuming the BOE Settlement Section is to continue) and the FTB. Historically, practitioners were disadvantaged by the inability to determine how other similarly situated tax disputes were resolved and how similar, or not, certain decisions of the BOE may be to an underlying dispute. Transparency in the administration of tax law is, from every perspective, is good for all.
[i] AB-102 The Taxpayer Transparency and Fairness Act of 2017: California Department of Tax and Fee Administration: Office of Tax Appeals: State Board of Equalization.(2017-2018), available at https://leginfo.legislature.ca.gov/faces/billCompareClient.xhtml?bill_id=201720180AB102.
[ii] http://www.boe.ca.gov/info/about.htm.
[iii] http://www.dof.ca.gov/Programs/Osae/documents/Board_of_Equalization_Evaluation_March-2017.pdf
[iv] Evaluation, California State Board of Equalization Sales and Use Tax Reporting Retail Sales Tax Fund Adjustment, prepared by Office of State Audits and Evaluations, California Department of Finance, March 2017 at iv.
[v] Press Release, “CA Controller Cheers Passage of Tax Board Overhaul,” 6/15/2017, available at http://sco.ca.gov/eo_pressrel_18545.html.
Posted by: Robert Horwitz | June 13, 2017
Plea agreements in criminal tax cases normally have a section containing the calculation of the agreed Sentencing Guideline Range. The plea agreement also typically recites that the Government will recommend a guideline range sentence as long as the defendant meets his obligations under the plea agreement, but that the court is not required to accept the Government’s sentencing recommendations or the parties’ agreements as to facts and sentencing factors. Most defendants probably assume that in fact the Government’s recommendation is the maximum sentence that they will receive and that if the court sentences outside the Guideline range it will impose a lesser sentence. This is not always the case, as the defendant learned in United States v. Avan Nguyen, 2016 U.S. App. LEXIS 6390 (5th Cir., April 13, 2017).
Nguyen owned a wholesale salon equipment business. He pled guilty to aiding and abetting the filing of a false and fraudulent corporate tax return. The plea agreement recited that the Guideline range, after acceptance of responsibility was a level 13, which translates to a 12-18 month term of imprisonment, and that he would forfeit $1.1 million in seized funds. The district court imposed a sentence of 36 months imprisonment followed by 1 year supervised release and a fine of $250,000. The reason: the district court disagreed with the Government and Nguyen’s interpretation of certain facts.
During the investigation, the IRS determined that third parties had made almost $5 million in structured deposits into Nguyen’s business accounts. A raid on his house yielded over $3.2 million in cash, most of it wrapped in bundles of $10,000. The Presentence Report discussed the apparent structuring conduct and recommended an upward departure based on either Guidelines § 4A1.3 (underrepresented criminal history) or Guidelines § 5K2.21 (uncharged conduct). The district court did not accept the recommendation, but did consider the apparent structuring conduct in exercising its discretion under Booker v United States to make an upward variance to the maximum allowable sentence.
Although the Government took the position that there was insufficient evidence that Nguyen was involved in criminal structuring, the district court determined that Nguyen had in fact engaged in criminal structuring. The district court based its finding on several facts beyond the seizure of cash and the structured deposits. These included that Chase Bank wrote to Nguyen that it believed that structured deposits were made to his bank account, after which he changed the name of his business and opened up a new account under the new business name. A number of structured deposits were made to the new account. The district court held that these facts supported a finding that Nguyen knew of the reporting obligations for deposits over $10,000 and knowingly and intentionally had structured deposits made to avoid the reporting requirements.
The court of appeals reviewed the district court’s sentence under an abuse of discretion standard. Finding that there were no procedural errors committed by the district court, that there was sufficient evidence to support its conclusion that Nguyen was engaged in criminal structuring and that the district court articulated a number of factors supporting its sentence, the court of appeals affirmed the sentence.
Criminal tax cases often involve defendants who may have engaged in other financial or tax-related offenses that are not charged. Because plea agreements in criminal tax cases often contain a litany of the defendant’s “bad acts,” this could include facts suggesting that there was uncharged criminal conduct. From time to time an overzealous special agent may provide the probation officer with evidence about such conduct. The decision in Nguyen is an object lesson in criminal tax cases: the district court is not bound by the plea agreement. If presented with evidence detrimental to the defendant, a sentence about the Guideline range may be imposed.
Posted by: Robert Horwitz | June 5, 2017
The IRS may soon adopt a variation on Southwest Airlines’ slogan “you are now free to move about the country.” The IRS variant “you are now not free to move about the world.” We previously blogged about enactment of Internal Revenue Code sec. 7345, which authorizes the State Department to deny a revoke a passport of an individual if the IRS certifies that the individual owes over $50,000 in tax, penalties and interest. See, http://www.taxlitigator.com/if-you-dont-pay-your-taxes-you-not-be-able-to-travel-by-robert-s-horwitz/.
For a passport to be revoked, the IRS must certify that the taxpayer owes $50,000 in tax, penalties and interest that have been assessed and that either 1) a notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or b) levy has been issued. Recently, the IRS posted on its website that it will soon begin to certify tax debts to the State Department. As of early May, 2017, certifications have not been sent, but taxpayers who owe more than $50,000 in tax, penalties and interest can expect in the near future to have their passports revoked or applications for passport denied. A taxpayer who is making payments under on an installment agreement or has not entered into an offer in compromise or settlement agreement with the IRS is not subject to certification. Similarly, the IRS will not certify a taxpayer who has requested a collection due process hearing with respect to a notice of intent to levy or a taxpayer who has requested innocent spouse relief.
A taxpayer whose passport has been revoked or who has had a passport application denied because of past due taxes, is not without a remedy: sec. 7345(e) provides that a person who has been notified by the IRS of certification “may bring a civil action against the United States in a district court of the United States or the Tax Court to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.”
Aside from the wisdom of allowing the IRS to strip a citizen of his or her right to travel outside the US, the statute has a number of holes. The statute requires the IRS to notify the individual “contemporaneously” of certification and the right to bring a civil action but does provide how notice is to be given. This is in contrast with other IRC sections requiring notice, such as notices of deficiency (IRC 6212), collection due process notices (IRC 6320 & 6330), summonses (IRC 7603 & 7609) and worker classification notices (IRC 7436), which require at a minimum written notice by certified or registered mail. The IRS website states it will send taxpayers notice by regular mail on Notice CP 508C. This may not be as good a way as certified mail to ensure that the taxpayer receives notice and pays attention to it, but it is probably sufficient to pass Constitutional muster. Although many people consider the right to travel outside the U.S. as fundamental, the Supreme Court views it as “no more than an aspect of the ‘liberty’ protected by the Due Process Clause of the Fifth Amendment.” Califano v. Gautier Torres, 435 U.S. 1, 5 n.6 (1978) (per curiam).
There are other holes in the statute. The statute does not provide whether the taxpayer or the Government has the burden of proof. It does not indicate what issues can be considered: can the merits of the assessment be contested or only whether the IRS correctly calculated the amount owed. It does not indicate whether a taxpayer is entitled to a trial on the merits or just summary review by the court. Whether failure to pay tax justifies restricting a citizen’s right to foreign travel has not been decided, but given that several appeals courts have upheld the statute authorizing denial of a passport for unpaid child support, Eunique v Powell, 371 F.3d 971 (9the Cir. 2002); Weinstein v. Albright, 261 F.3d 127 (2nd Cir. 2001), courts will probably uphold the constitutionality of sec. 7345. It may be several years before we know the answers, however, since these issues will need to be decided in litigation
Posted by: Lacey Strachan | April 24, 2017
On March 23, 2017, the Tax Court ruled against the IRS in its lengthy transfer pricing dispute with Amazon.com, Inc. (“Amazon U.S.”) over Amazon’s transfer pricing policies relating to intangible assets provided by Amazon U.S. to its European subsidiary in 2005 and 2006 that were required to operate Amazon’s European website business.[i] In redetermining the IRS’s reallocation of income from Amazon’s European subsidiary to Amazon U.S., the Tax Court held that the IRS abused its discretion and acted arbitrarily and capriciously in its original determinations against Amazon.
Transfer Pricing Adjustments. Under Section 482 of the Internal Revenue Code, the IRS has broad authority to allocate gross income and deductions among commonly controlled entities if necessary “to prevent evasion of taxes or clearly to reflect the income.”[ii] The purpose of Section 482 is to prevent artificial shifting of income between controlled entities in order to ensure that the amount of income reported by each entity for U.S. tax purposes is consistent with the economics of the transactions between the related entities, which is especially relevant where income is shifted from the U.S. to a jurisdiction with a lower tax rate.[iii]
The IRS has broad powers under Section 482. While the general rule in Tax Court cases is that the taxpayer has the burden of proving by a preponderance of the evidence that the taxpayer’s return was correct, in Section 482 cases, the IRS’s determinations will be upheld unless the taxpayer is able to show that that IRS’s determination was arbitrary, capricious, or unreasonable.[iv] Note that while the taxpayer’s burden of proving the IRS’s determination to be arbitrary, capricious, or unreasonable is unique to Section 482 adjustments, the arbitrary, capricious, or unreasonable standard is also used for determining when the IRS loses its presumption of correctness for its adjustments in a Notice of Deficiency, allowing the taxpayer to shift the burden of proof to the IRS.[v]
Amazon’s Transfer Pricing Policies. In examining Amazon’s transfer pricing policies, the IRS determined that amounts Amazon’s European subsidiary paid for the intangible assets it received in 2005 and 2006 from Amazon U.S. for use in its business in Europe in 2005 and 2006 were not at arm’s length.[vi] The arrangement between Amazon’s European subsidiary and Amazon U.S required Amazon’s European subsidiary to make a “buy-in” payment for the preexisting intangibles it received from Amazon U.S. in a series of transactions in 2005 and 2006, as well as a cost sharing arrangement to split the costs of Amazon’s ongoing intangible development costs. The effect of the cost sharing arrangement was to essentially make Amazon’s European subsidiary a co-owner of the subsequently developed intangibles. Amazon originally reported a buy-in payment from Amazon’s European subsidiary of $254.5 million, to be paid over 7 years.
The IRS Acted Arbitrarily and Capriciously. The IRS determined that the buy-in payment should have instead been $3.6 billion, which it subsequently reduced to $3.468 billion. Rather than using a method allowed in the regulations under Section 482 for specifically valuing each of the intangible assets transferred to Amazon’s European subsidiary, the IRS valued the intangible assets using a discounted cash flow analysis, as though Amazon U.S. had transferred an entire operating business to its European subsidiary. Finding that Amazon’s European subsidiary was already an operating company when it received the intangibles, the Tax Court held the IRS abused its discretion in using this method, because it erroneously included in its determination of the arm’s length buy-in payment the value of the European subsidiary’s existing ongoing business (e.g., its existing goodwill) and also the value of subsequently created intangibles, which were separately compensated for using the cost sharing arrangement. The IRS’s approach in the Amazon case was the same as the method it had used in the case Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009), where the Tax Court had held that method to be arbitrary and capricious.[vii] The Tax Court further held that the IRS abused its discretion in its determination of its adjustments to Amazon’s determination of amounts its European subsidiary owed pursuant to the cost sharing arrangement for subsequently created intangibles, based on its determination that 100% of Amazon’s “Technology and Content” costs are subject to the cost sharing agreement, whereas Amazon’s position was that only 50% were allocable to the ongoing intangible development costs.[viii]
The Tax Court Finds Amazon’s Methods Reasonable. Once finding that the IRS acted arbitrarily and capriciously, the Tax Court evaluated the taxpayer’s arguments in support of the amounts charged and found that the taxpayer’s “comparable uncontrolled transaction” (CUT) method is the best method for calculating the requisite buy-in payment and the taxpayer’s system of allocating costs for the cost sharing arrangement was a reasonable basis for allocating costs, though the Tax Court made certain adjustments to the taxpayer’s application of the methods.
[ii] IRC § 482.
[iii] Treas. Reg. § 1.482-1(a)(1).
[iv] Amazon.com, Inc., 148 T.C. No. 8 at p. 174.
[v] See, e.g., Sealy Power Ltd. v. Comm’r, 46 F.3d 381, 386 (5th Cir. 1995) (“Several courts have recognized, however, that they need not give effect to the presumption of correctness and may instead shift the burden from the taxpayer to the Commissioner when the notice of deficiency is determined to be arbitrary or excessive.”).
[vi] Treas. Reg. § 1.482—7(g)(2).
[vii] Amazon.com, Inc., 148 T.C. No. 8 at pp. 73-88.
[viii] Id. at 174-177.