Trial Courts Archives | Page 20 of 40

Trial Courts

National Taxpayer Advocate 2016 Report – Penalties

by McDermott Will & Emery | Jan 26, 2017 | Appellate Courts, IRS Appeals, IRS Guidance, Trial Courts, Uncategorized

Every year, the Taxpayer Advocate Service’s (TAS) Annual Report to Congress provides a unique perspective regarding the workings of the Internal Revenue Service (IRS) and how the IRS relates to the vast majority of taxpayers. That insight is particularly valuable when the IRS chooses to assert penalties—one of the most policy-driven decisions that the IRS can make. In its 2016 report, the TAS makes a number of important observations and recommendations related to three of the most commonly asserted types of penalties—accuracy-related penalties, failure-to-file and failure-to-pay penalties, and the Trust Fund Recovery Penalty.

Accuracy-Related Penalties

The TAS identified 122 cases litigated between June 1, 2015, and May 31, 2016 (the reporting period), involving accuracy-related penalties. Of those cases, the IRS prevailed in full in 86 cases (70 percent), taxpayers prevailed in full in 20 cases (16 percent), and 16 cases were split decisions (13 percent) (percentages were rounded down in the original report). Unusual this year were the number of split decisions and the number of taxpayer wins in pro se cases. Many cases involving the negligence penalty turned upon the taxpayer’s failure to maintain adequate books and records related to the adjustments at issue.

In 2013, the TAS issued a study noting that the IRS’s imposition of accuracy-related penalties, subsequently abated after an assessment and a successful taxpayer appeal (among other fact patterns), could lead to a perception of unfairness among taxpayers regarding the IRS’s manner of assertion of these penalties. The TAS cited this study in its 2016 report, and noted again that this conduct could be detrimental to voluntary taxpayer compliance and could undermine the purpose of accuracy-related penalties.

In fact, a main priority of the Annual Report overall is to improve voluntary compliance, a fundamental element of our tax system. The TAS notes that “unnecessary coercion” by the IRS—whether through unsustained penalties or otherwise—could have the effect of reducing voluntary compliance.

Failure-to-File / Failure-to-Pay Penalties

The TAS identified 45 total decisions involving failure-to-file and failure-to-pay penalties in the reporting period. Of these, 28 cases involved taxpayers representing themselves. The majority of cases involved full or partial taxpayer losses.

The TAS noted, consistent with our experience, that the IRS frequently relies upon selection of failure-to-file and failure-to-pay cases through its Reasonable Cause Assistant software, which makes the initial decision to impose the relevant penalties in most cases without significant human involvement. Personal review of the penalty decision does not generally occur until after the taxpayer files an administrative appeal. The TAS advocated for heightened personal review of these penalties and heightened consideration of relevant facts and circumstances potentially supporting abatement.

Trust Fund Recovery Penalties

The TAS noted that several Trust Fund Recovery Penalty cases this year had successfully challenged whether the penalty was properly noticed and assessed. United States v. Appelbaum, 117 A.F.T.R.2d 2016-633 (W.D.N.C.); Romano-Murphy v. United States, 816 F.3d 707 (11th Cir. 2016).

The TAS further discussed a number of unsuccessful taxpayer challenges to assessment of the Trust Fund Recovery Penalty on grounds of [...]

Continue Reading

Circuit Courts Agree Timely Filing Requirement for a Tax Court Petition is Jurisdictional

by McDermott Will & Emery and McDermott Will & Schulte | Jan 23, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

Arguably the most important aspect of litigating a case in the Tax Court or in a refund forum is the timely filing of the petition or complaint. Absent timely filing, the court may not have jurisdiction and the case could be dismissed without the court ever reaching the substantive issues. On January 13, 2017, the Seventh Circuit joined several other circuit courts in confirming that the time for filing a petition in Tax Court is jurisdictional, not a claims processing rule.

In Tilden v. Commissioner, No. 15-3838 (available here), the taxpayer’s petition was mailed on the last day of the 90-day filing deadline. It was not stamped and bore no postmark; instead, a USPS print-at-home postage label was attached by legal staff, and it was delivered to the post office the same day. The Internal Revenue Service (IRS) argued this was insufficient for timelymailing under the “mailbox rule” of Internal Revenue Code (Code) Section 7502. The Tax Court disagreed with both parties about what section of the regulations applied, and used the date the envelope was entered into the postal service’s tracking system as the date of postmark and filing—which was two days late. Thus, the Tax Court dismissed the petition for lack of jurisdiction (available here).

On appeal, the Seventh Circuit raised sua sponte the issue of whether the filing deadline for a Tax Court petition is jurisdictional or a claims processing rule. The proper characterization of the filing deadline is extremely important. If the deadline is considered jurisdictional, then late filing automatically precludes the taxpayer from seeking relief in the Tax Court. But, the taxpayer may still pay the tax due, file a claim for refund with the IRS, and file a complaint in a refund forum (if the IRS denies or fails to timely act on the claim). On the other hand, if the deadline is a claims processing rule, the taxpayer’s options may be limited. Although the taxpayer that files a late petition might be able to demonstrate that the Tax Court should hear its case, if the court were to determine that the petition was untimely, it arguably would be required under the Code to enter a decision on the merits for the IRS, rather than a dismissal for lack of jurisdiction. That result eliminates the alternative refund forum.

In Tilden, the Seventh Circuit considered the Supreme Court’s current approach in non-tax cases for determining whether deadlines are jurisdictional or claims processing rules, but decided that the language of the relevant statute and the body of Tax Court and circuit court precedent compelled a finding that the 90-day deadline is jurisdictional. Finding it “imprudent to reject that body of precedent” under principles of stare decisis, the Seventh Circuit followed the Tax Court and other circuit court precedent. The Seventh Circuit further disagreed with the Tax Court’s holding on the relevant postmark regulations to conclude that the petition was timely filed.

Practice Point: The Seventh Circuit’s opinion is a good reminder as to the [...]

Continue Reading

US Supreme Court Denies Petitions for Certiorari Filed In Two Federal Tax Cases

by Robin L. Greenhouse | Jan 13, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

On January 9, 2017, the US Supreme Court denied the petitions for certiorari filed in two federal tax cases.

In Chemtech Royalty Assoc. LP v. United States, Sup. Ct. Dkt. No. 16-810 (2016), 823 F.3d 282 (5th Cir. 2016),

Dow Chemical Co. challenged the decisions by the US Court of Appeals for the Fifth Circuit finding that the partnerships were a “sham” that should be disregarded for tax purposes and imposing the 40 percent substantial understatement penalty. In its petition, Dow complained of the “especially stringent” scrutiny applied by the Fifth Circuit to review a taxpayer’s decision to use the partnership form. “Applying that improper presumption against partnerships, the court became the first court in the nearly seventy years since Culbertson [337 US 733 (1949)] to hold that an investor that contributes its own capital in exchange for an equity interest in the partnership can be disregarded for tax purposes if its equity stake, like preferred stock, is relatively protected against fluctuations in profits and losses.”

The US Supreme Court also denied the petition filed by Dynamo Holdings Ltd. Partnership, Dynamo Holdings Limited Partnership v. United States, Sup. Ct. Dkt. No. 16-358 (2016) 816 F.3d 1310 (11th Cir. 2016),seeking review of an Eleventh Circuit decision that upheld the enforcement of IRS summonses. Dynamo asked the Supreme Court to consider whether it was unfairly denied a request to amend the case submission to support an evidentiary hearing under then new standard established by this Court in an earlier appearance of this case. Dynamo complained that “this Court held for the first time, United States v. Clarke, 573 US ___, 134 S. Ct. 2361 (2014), that an individual or entity that receives an IRS summons is entitled to a limited evidentiary hearing to obtain discovery to support the claim that the summons should be quashed where that party points to specific facts or circumstances plausibly raising an inference of bad faith.” In contrast, “[W]hen this case began in 2011, the standard in the Eleventh Circuit was that an individual or entity was entitled to an evidentiary hearing based upon the mere allegation of improper purpose . . . [and Dynamo was found by] the Eleventh Circuit to have satisfied that standard. On remand from Clarke, the district court denied Petitioners request to make amended submissions to meet the new standard, and the district court and Eleventh Circuit ruled that Petitioners’ former submissions did not meet the new standard.”

Practice Tip:

In deciding whether to file a petition for certiorari, the party should consider the likelihood of the petition being granted and whether the Court’s denial of the petition will result in an adverse negative inference for a continuing issue that is being litigated in other jurisdictions. These cases illustrate how difficult it is to have the Supreme Court grant review. The Supreme Court accepts few petitions each year and in the absence of a split in the circuits, a petition is unlikely to succeed [...]

Continue Reading

APA Challenge to Notice of Deficiency: QinetiQ Affirmed

by Jeffrey M. Glassman and McDermott Will & Schulte | Jan 10, 2017 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

On January 6, 2017, the US Court of Appeals for the Fourth Circuit, by published opinion, affirmed the US Tax Court’s (Tax Court) earlier ruling in QinetiQ US Holdings, Inc. v. Commissioner. We previously wrote about the case here, here, and here. To refresh, the taxpayer had argued in Tax Court that the Notice of Deficiency issued by the Internal Revenue Service (IRS), which contained a one-sentence reason for the deficiency determination, violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the Notice of Deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law. The taxpayer appealed to the Fourth Circuit.

In an opinion written by Circuit Judge Barbara Keenan, the court concluded that the IRS complied with all applicable procedural requirements. The court reasoned that the Internal Revenue Code (Code) provided a unique system for judicial review that should govern the content requirements for a Notice of Deficiency. Per the court, it “is that specific body of law, rather than the more general provisions for judicial review authorized by the APA, that governs the content requirements of a Notice of Deficiency.” The court cited a Fourth Circuit opinion from 1959, in which it held that the Code’s provisions for de novo review are incompatible with limited judicial review of final agency actions allowed under the APA.

The court held that the APA’s requirement of a reasoned explanation in support of a “final” agency action does not apply to a Notice of Deficiency issued by the IRS. A Notice of Deficiency, the Court reasoned, cannot be a “final” agency action within the meaning of the APA, because the agency action is not one “by which rights or obligations have been determined, or from which legal consequences will flow.” After issuing a Notice of Deficiency, the IRS may later assert in Tax Court new theories and allege additional deficiencies. Moreover, a taxpayer may also raise new matters in Tax Court. In addition, the court cited to the Supreme Court’s 1988 opinion in Bowen v. Massachusetts, emphasizing that Congress did not intend for the APA “to duplicate the previously established special statutory procedures relating to specific agencies.”

The court also held that the Notice of Deficiency issued to QinetiQ satisfied the requirement of Code section 7522(a), which requires that the IRS “describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions [...]

Continue Reading

Court Opinions – A Year In Review

by Editorial Team | Jan 4, 2017 | Appellate Courts, IRS Guidance, Transfer Pricing Resource, Trial Courts, Uncategorized

Several notable court opinions were issued 2016 dealing with a variety of substantive and procedural matters. In our previous post – Tax Controversy 360 Year in Review: Court Procedure and Privilege – we discussed some of these matters. This post addresses some additional cases decided by the court during the year and highlights some other cases still in the pipeline.

(more…)

Court Holds that Willful Failure to File FBAR Standard is the Lesser Standard of Recklessness

by K. Christy Vouri-Misso | Dec 19, 2016 | Appellate Courts, Trial Courts, Uncategorized

On December 2, 2016, the US District Court for the Central District of California found that taxpayers who failed to file a Report of Foreign Bank and Financial Accounts (FBARs) for three foreign accounts, one of which, in the court’s view, was intentionally kept secret from all persons except their children, for over a decade were “at least recklessly indifferent to a statutory duty.” Read more about the case here. The court found that the taxpayers were “sophisticated,” pointing to evidence that they ran a successful camera shop, and that they lacked credibility having made several misrepresentations on their failed attempt to apply to the Offshore Voluntary Disclosure Program (OVDP) and for making unbelievable assertions at trial. The court did not apply the heightened standard of willfulness applicable to criminal trials, a violation of a known legal duty, finding that civil trials apply the lesser standard of reckless disregard of a statutory duty. Additionally, the court rejected the defendants’ argument that the government had to show willfulness under the clear and convincing standard of proof and applied the typical civil preponderance of the evidence standard of proof. The taxpayers’ lawyer has stated that they will appeal the decision.

Practice note: Ensuring that OVDP applications are complete and truthful is crucial to their acceptance and, as demonstrated here, can and will be used against the taxpayer in any later proceedings. The taxpayers in this case had a number of factors working against them, and, as shown here, offshore reporting cases will often turn on their own specific facts. As more and more FBAR enforcement cases are being docketed around the country, it will be interesting to see whether reviewing courts will apply a uniform standard for willfulness under the FBAR statute.

Graev v. Commissioner: Tax Court Divided on Penalty Procedural Rules

by Jeffrey M. Glassman and McDermott Will & Emery | Dec 12, 2016 | Trial Courts, Uncategorized

In tax litigation, there are often (at least) two important categories of issues to consider: (1) substantive; and (2) procedural. A great deal of tax litigation will be focused on the substance of the Internal Revenue Service’s (IRS) adjustments (e.g., was a taxpayer entitled to a particular deduction?). But the procedural aspects should not be ignored. If the IRS did not abide by its procedural requirements before making a tax adjustment, consideration should be given to whether the IRS’s adjustment is procedurally invalid. Sometimes taxpayers win on these issues; other times they do not. The United States Tax Court’s (Tax Court) recent case, Graev v. Commissioner, is an example of the latter.

In Graev, an IRS Revenue Agent determined that a 40 percent gross valuation misstatement penalty should apply. The Revenue Agent prepared a “Penalty Approval Form” in accordance with Internal Revenue Manual (I.R.M.) procedures and submitted it to his immediate supervisor. The supervisor checked the form’s “Approved” box and initialed the form in its space for “Group Manager Initials.” The Revenue Agent then prepared a proposed notice of deficiency determining the 40 percent penalty and no other penalties.

The proposed notice of deficiency was referred to the IRS Office of Chief Counsel (Chief Counsel) for review, pursuant to I.R.M. procedures. The Chief Counsel attorney assigned to the case prepared a memorandum back to the Revenue Agent’s office with proposed revisions to the notice of deficiency. Specifically, the Chief Counsel attorney instructed the inclusion of an alternative 20 percent accuracy-related penalty. The Chief Counsel attorney signed the memorandum and his immediate supervisor initialed it.

The Revenue Agent revised the notice of deficiency to include the alternative 20 percent penalty, but his immediate supervisor did not approve it in writing. The IRS ultimately issued the revised notice of deficiency, which included a signature by an IRS Technical Services Territory Manager and a page on which the penalties were computed. Under the Internal Revenue Code (Code), the 20 percent and 40 percent penalties cannot be stacked. As a result, the computation for the 40 percent penalty was shown fully, but the computation for the 20 percent penalty was calculated as zero.

(more…)

Tax Court Inconsistent on IRS’s Use of ‘Secret Subpoenas’

by McDermott Will & Schulte | Dec 7, 2016 | Court Procedure Matters, Trial Courts, Uncategorized

We have previously written about Judge Mark V. Holmes’ dislike of the Internal Revenue Service’s (IRS) practice of issuing subpoenas to non-parties without informing the taxpayer. To recap, Tax Court Rule 147 allows a party to issue a subpoena to a non-party but does not specifically require that prior notice be given to the other side of the issuance of the subpoena. Rather, the subpoena is enforceable as of the beginning of the court’s trial session. In contrast, Fed. R. Civ. Proc. 45 requires notice to other parties before service of non-party subpoenas for the production of documents, information or tangible things. In two prior orders, Judge Holmes ordered that the IRS must serve on taxpayers all non-party subpoenas together with all responses and documents that the non-parties produced have been in the form of unpublished orders. In his orders, Judge Holmes adopted the notification requirement of Fed. R. Civ. Proc. 45, and explained his rationale for his orders.

Unfortunately for taxpayers, Tax Court orders are not to be treated as precedent under Tax Court Rule 50(f), and therefore are not binding on any other Judge of the Tax Court. This point is illustrated by Judge Carolyn P. Chiechi’s December 2, 2016, orders in six related cases (see, e.g., Tangel v. Commissioner), where she stated that “[a] party that issues a subpoena under Rule 147(a) and/or (b) is not required to give prior notice to the other party.” Judge Chiechi further noted that under the facts and circumstances presented the IRS did not issue the subpoenas to harass, annoy, embarrass, oppress or cause an undue burden on the taxpayers. (more…)

December 2016 Changes to the Federal Rules of Civil and Appellate Procedure: Electronic Service and Word Counts

by Joshua D. Rogaczewski | Dec 1, 2016 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

December 1 is an important day for federal litigators and for tax practitioners with cases pending in federal district and appellate courts. It brings with it changes to the rules governing their day-to-day practices. This year, those changes are few and simple but important.

First, electronic service no longer entitles litigants to three extra days to respond to something. Items not served personally have historically triggered what many practitioners referred to as a “mailbox rule” of three extra days to respond to the item, and the concept appears in Federal Rule of Civil Procedure 6(d) and Federal Rule of Appellate Procedure 26(c). For many years, items served electronically were inexplicably treated (contrary to fact) as if they were not delivered immediately. That is no longer the case. The rules have caught up to technology, and in district court and the courts of appeals serving an item by email or using the electronic case filing (ECF) system’s notice function will not give one’s adversary additional time to respond unless a local rule preserves the status quo, as Eastern District of Texas Rule of Civil Procedure 6 does.

Second, the courts of appeals have moved almost entirely to word-count limits for papers. For many years now, litigants did not have to comply with page limits for briefs if their papers complied with certain word-count limits. Other papers, however, such as motions and petitions had only page-count limits. Several applicable appellate rules (21 [mandamus petitions], 27 [motions], 29 [amicus briefs], 35 [rehearing en banc petitions], and 41 [rehearing petitions]) have been amended to include word-count limits. In addition, the word counts for briefs have been reduced from 14,000 to 13,000 for opening, response, and cross-appeal response-and-reply briefs; 16,500 to 15,300 for cross-appeal opening-and-response briefs; 7,000 to 6,500 for reply briefs. Please see McDermott’s modified table showing the applicable word limits for the most common pleadings. These reductions were controversial when proposed and many circuits have opted out of them, as indicated in their local rules. E.g., 7th Cir. R. App. P. 32(c).

Finally, appellate practitioners need to determine how courts are implementing the changes. Some courts are applying the old rules to appeals docketed before December 1, 2016, and the new rules to ones docketed on or after December 1, 2016. Others are using the setting of the briefing schedule as the line of demarcation, and some appear willing to modify the rules in the middle of a briefing schedule.

Practice Note: In light of these changes, now is a good time to review the local rules of the federal courts where your cases are pending or where you typically practice to ensure you are not dropping any deadlines or failing to meet your word counts.

Court Holds Compensation Paid to Four Sons Was Not Reasonable

by Kevin Spencer and Ruth Wimer | Nov 30, 2016 | Court Procedure Matters, Trial Courts, Uncategorized

Reasonable compensation is a fact based analysis, and once again has been decided against the taxpayer. In Transupport, Inc. v Commissioner, T.C. Memo. 2016-216, the issue presented for decision was whether amounts deducted by the taxpayer, a distributor and supplier of aircraft engines and parts, during 2006‒2008 as compensation that was paid to the four sons of taxpayer’s president and majority shareholder were reasonable and deductible pursuant to Internal Revenue Code (IRC) Section 162 and whether accuracy related penalties applied. In 2005, the president and 98-percent owner of Transupport, gifted and sold shares in equal percentages to his four sons. The president and his four sons were the sole employees and officers for the tax years at issue. The president determined the compensation payable to his sons without consultation with his accountant or anyone else, and the only factors considered were reduction of reported taxable income, equal treatment of each son and share ownership. (more…)

Older Posts »

« Newer Posts

EDITOR IN CHIEF

Edward Froelich

EDITOR IN CHIEF

STAY CONNECTED

TOPICS

ARCHIVES

RECENT POSTS