Florida Tax Litigation Lawyer & Attorney : Fox Rothschild : Serving West Palm Beach, Jacksonville, Miami

We have heard that the Government state that the United States v. Stein, et al. is the “largest criminal tax case in American history”. United States v. Stein, 452 F. Supp. 2d 230, 237 (S.D.N.Y. 2006). Now because of the ruling in Stein v. KPMG, LLP --- F.3d ----, 2007 WL 1487822, (2d Cir. 2007), the largest criminal tax case in American history is on the verge of dismissal. Is this stopping the government from pursuing tax shelters criminally? Absolutely not just ask the defendants in United States v. Coplan, et al.

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The long awaited opinion finally came out and length is an appropriate term but not in terms of pages but rather what the opinion has to say about TEFRA and the statute of limitations.

Footnote 20 of the opinion reflects the Commissioner’s views as to TEFRA and the statue of limitations as follows:

“The Court: The Kligfelds, they take the life-enhancing serum, they don't get rid of their distributed partnership property until 2100. They got the property in 1999. The IRS says inflated basis, partnership item, we're going to issue an FPAA for 1999, even though now it's January of 2100. Kosher?
IRS Counsel: Yes, I believe that is the case, your Honor”

The question is did the Court agree? The answer appears to be yes.

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A week after Eileen O’Connor had addressed the ABA Tax Section and had reveled in the Government’s victories in the FICA wars over medical residents; the Eleventh Circuit cast a pall over the Government’s victory parade with its decision in United States v. Mount Sinai Medical Center of Florida, Inc., -- F.3d --- (11th Cir. 2007). The Eleventh Circuit’s message to the Government was clear – if the statute is clear there is no need to go any further. Since there is a split in authority, we can pretty much guess were this will end up. Hinck v. United States, 127 S.Ct. 2011 (2007) coupled with EC Term of Years Trust v. United States, - U.S. - (2007) may provide some clues as to how the Supreme Court “interprets” the Internal Revenue Code – can we say strict construction!

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Last week there was an interesting article on Tax Notes Today as to a pending bill pertaining to Economic substance. But just as quickly, i.e. in a blink of an eye, it was removed. However, this did not stop the story from having a life of its own as I and a few tax litigators debated was it really going to pass. That debate is sill ongoing.

But for those who have not seen the pending language, William Caudill from Fulbright & Jaworski’s Houston office, was kind enough to forward me the legislation that is pending before Congress as to Economic Substance. As they say here its:

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In Californians Helping to Alleviate Medical Problems Inc., the Court analyzed the language and the legislative history of § 280E and held, in good part, for the taxpayer. The Court’s opinion is a framework for statutory analysis and, just as important from a tax litigation perspective, a lesson on how the Court views testimony when it is corroborated by the objective facts.

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One piece of advice: If you are not a member of the ABA Tax Section then join! If you are a member of the ABA Tax Section then try to attend at least one of the conferences held throughout the year. This year I was fortunate to be part of a panel that presented to the Young Lawyer’s section a Q&A on IDR’s.

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It's that time of the year. This year I will be speaking on Friday , May 11th, from 1:30 - 2:30 p.m. at the following workshop: "Court Practice & Procedure Roundtable Discussion: Practical Tips for Young Lawyers." My topic will be on Information Document Requests ("IDR's") what the IRS wants and how to respond". My colleague will be Joshua Odintz. Joshua will speak on summons. As they say he is good. Our preferred format will be a Q&A. It should be a good session.

My partner Jerry August will be speaking on “Partnership Allocation Issues Under Section 704(B) For The Closely-Held Business; Issuing Interests In Profits And Capital To Service” on Friday, May 11th at 10:00 a.m. If you haven't heard Jerry speak before you are in for a treat.

So if you have a chance stop by and introduce yourself to Jerry or I or both.

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Another case where the reader of the opinion is left wondering – Why did this case go trial? The results - Bad facts equals the IRS winning another Family Limited Partnership case. However, there is some positive news to come out this case. Rather than relying on ambiguous, nebulous language, Judge Kroupa rolls up his sleeves and delves into the Bongard standards in detail.

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The Supreme Court held that as to third party wrongful levy actions there is a specific statute § 7426(a)(1) that governs this area. Therefore, the limitations period for a tax refund action under 28 U.S.C. § 1346(a)(1) does not apply. The outcome is not a surprise but the analysis in the decision, albeit short and simple, again raises questions as to the strategy being employed by the Government in its battles as to tax shelters.

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In United States v. Stein, 2007 TNT 32-19 (S.D.N.Y. 2007), the Court denied the Government’s motion to depose certain witness that live abroad. The denial was based on the Court’s reading of Federal Rule Criminal Procedure 15, (hereinafter referred to as “FRCP 15”). Being that Tax Court Rules contain similar language and the Tax Court decisions/orders are infrequently reported, the district court’s decision is worth taking “a look at”.

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If asked how many of us could succinctly tell a client the difference between res judicata and collateral estoppell? Well it appears that the 5th Circuit and the 10th Circuit have trouble differencing these judicial terms as well as the rest of us. Unfortunately for Davenport, the 5th Circuit’s definition of res judicata caused them to be found liable for the gift’s taxes under § 6324 while a co-personal representative of the same estate may be off the hook.

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Well the Government asked the Court to reconsider its opinion. Let’s just say for the Government that said motion was not a wise choice but for taxpayers in the Fifth (and maybe the Eleventh) they say “Thank You”!!!

Not only did the Court not reconsider its opinion but it further elaborated as to why the plaintiff’s were entitled to deduct operational and interest expenses. Bottom line – It looks like the taxpayers did a lot better than they would have if they had agreed to the settlement initiative offered by the IRS.

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This past week there was a lot of interesting news that came around. The first issue really came out two weeks ago in an order issued by the United States Court of Claims in Evergreen Trading, LLC v. United States. I did not consider it worth mentioning it until I overheard a conversation between two distinguished tax planners with one of them bemoaning the IRS’s lack of guidance on a particular subject but then bragging about how he conducted a search on the IRS’s web-site to ascertain the IRS’s position which allowed him to render advice to the client.

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This past week Tax Notes Today ran a story entitled: “Appeals Needs to Be 'On Same Page' as Rest of IRS, Brown Says" by Dustin Stamper, 2007 TNT 54-2. Yet another article by the people at TNT.

In summary your IRS Deputy Commissioner of Services and Enforcement Kevin Brown is suggesting that the Appeals Division is not interpreting the law as they should. Yet in the same breath he tells private practitioners that they need not be concerned as to Appeals’ independence. Right and Attention passengers of the Titanic we have found ice for our drinks so don’t be concerned with that little hole on the side.

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This past week Tax Notes Today ran a story entitled: “IRS gives Agents Blanket Authority to Apply Partnership Anti-abuse Reg.” Stratton, 2007 TNT 51-5. It was a great article.

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The facts in Allen are rather straight forward: Taxpayer was a truck driver. Taxpayer gave his Form W-2, section 401(k) statement, mortgage interest statement, and property statements to his accountant. Accountant prepared and filed taxpayer's returns with the IRS.

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In Chief Counsel Notice 2007-007, which consisted of five pages, IRS counsel issued guidelines as to the E-Discovery Amendments to the Federal Rules of Civil Procedure, (hereinafter referred to as the “E-Discovery Amendments”). In all honesty my initial reaction was: why? Why would/should United States Tax Court litigators be concerned with these new amendments? Then I saw who signed the Chief Counsel Notice and realized that as usual, the scrivener was ten steps ahead of the game.

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Did you hear that champagne cork pop from Washington, D.C.? I think we all did as this past week the Supreme Court denied certiorari in Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006). The obvious question becomes - Now What?

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I will “blame” the severe weather conditions in the Northeast for the lack of cases reported this week. But thanks to Tax Notes Today, tax practitioners were able to see what the Government argued in Klamath and taxpayer’s response.

Before I get to those arguments, if you like this kind of transparency then take notice that the United States Tax Court is accepting comments as to the amendments to its proposed rules. Under the proposed rules, only if you live in the Washington DC area will you have access to its electronic filings. Otherwise, you will still have to contact the Docket room and obtain a hard copy.

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When I assisted large case examiners during the period of time that “tax solutions” were being marketed, I used to quip that I would love to know what was going on in those meetings wherein the accounting firm was making the tax department into a profit center. So I must admit, I have been fascinated with the ongoing investigation into KPMG. Unfortunately, I have a learned a bitter lesson: “be careful what you ask for you may get it”. It appears what we are all getting is a lesson in constitutional rights that is frankly alarming to those that follow/practice law let alone tax law.

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Two opinions were announced this week - Klamath Strategic Investment Fund, LLC v. United States, --- F.Supp.2d ----, 2007 WL 283790, (E.D.Tex.. 2007); Estate of Kanter v. Commissioner, T.C. Memo. 2007-21. These two opinions were highly anticipated as they afforded the respective Courts an opportunity to interpret new judicial doctrines/rules and answer questions concerning the trial judge’s role in evaluating and determining witness credibility.

In addition, in three separate publications, the IRS’s criminal and civil intentions as to foreign transactions were broadcast.

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One of the most highly anticipated decisions was rendered today. The opinion is 457 pages long and as to the issue of fraud, the Tax Court (Judge Haines) found for the IRS.  As we are aware the Supreme Court in Ballard v. Commissioner, 544 U.S. 40 (2005) reversed the Eleventh Circuit and the Seventh Circuit because the United States Tax Court was found not to have followed T.C. Rule 183.  

By order dated July 10,2006, the Eleventh Circuit instructed the Tax Court as follows:

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Being that I worked in the IRS’s Office of Chief Counsel for 13 years, the question tends to be asked: What are the issues that the IRS is looking at? My response is usually a shrug because I really do not know how the IRS determines what issues are the “hot issues.” But what I can relay to you is the advice that a very senior and experienced Special Trial Attorney once gave me: “If you want to know the issues that are on the radar screen read the journal.” This blog is not intended as a plug but since that time I have read the daily Tax Notes Reports, the BNA daily reports and the Wall Street Journal. Curiously, his advice has been rather accurate.

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This past week the Tax Section of the American Bar Association held its midyear meeting in Hollywood, Florida. I was able to attend two break-out sessions of interest – Tax Shelters and Court Procedure and Practice.

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Last April it was noted that the Tax Court had ruled against a taxpayer involved in a Son-Of- Boss case. It turned out the ruling was a one page order issued by Judge Laro. Judge Laro is one of the most respected judges on the United States Tax Court. Thus, a one page dispositive order as to a Son-of Boss case caught everyone’s attention. As suspected the case is now on appeal and the Government’s brief has been posted on Tax Analysts. See 2007 TNT 8-37.

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When I worked at the Office of Chief Counsel, Counsel’s advantage was it knowledge of the stipulation of fact process and Counsels’ appreciation of how the Tax Court viewed the importance of the Stipulation of facts. Succinctly stated, even before the trial started an artfully drafted stipulation of facts may position a party to victory. Mathia et al. v. Commissioner, T.C. Memo. 2007-4 reminds all litigants of the importance of the stipulation of facts process.

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Announcement 2006-100 provides in relevant part:

"When a settlement cannot be reached by the Office of Appeals in a case that is not docketed in the Tax Court, it is expected that the case will proceed to litigation. The Service wants to ensure that it has fully developed the limited number of unagreed cases that involve listed transactions (within the meaning of Treas. Reg. § 1.6011-4) before it sends a statutory notice of deficiency (or other determination notice triggering litigation rights) to the taxpayer. Consequently, the Service is revising its procedures to provide that when the Office of Appeals and the taxpayer are unable to reach a satisfactory settlement in a nondocketed case involving a listed transaction, the Office of Appeals will close out its consideration, notify the taxpayer, and send the case to the appropriate Operating Division for further handling."

Announcement 2006-100 has created quite a stir. For an interesting discussion see Stranton, IRS Officials Defend New Approach to Appeals, Penalties. Vol. 52 TNT No. 13, p. 222 (December 29, 2006). In the article the statement is made: “Indeed some practitioners view the notice as an end run around discovery rules in court.”

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During my days working with the Office of Chief Counsel, I was fortunate to be involved in tax shelter litigation. In one of those meetings in Washington, D.C. a former deputy chief counsel uttered the phrase “not all LILO’s are bad”. Reason - LILO’s are factually intense. Surprise! A LILO case was decided through a motion for summary judgment – BB&T Corporation v. United States, 2007 TNT 4-19 (M.D. N.C. 2007).

BB&T, a financial service company, participated in a LILO transaction ("Transaction") with Sodra Cell AB ("Sodra"), a Swedish company, a world-wide manufacturer of wood pulp. The Transaction at issue involved the lease and sublease of the pulp manufacturing equipment (the "Equipment") at one of Sodra's pulp-manufacturing facilities.

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The IRS recently issued its Appeals Settlement Guidelines for Family Limited Partnerships and Family Limited Liability Companies. The guidelines issued cover four separate topics:

(i) whether the fair market value of transfers of family limited partnership or corporation interests, by death or gift, is properly discounted from the pro rata value of the underlying assets;
(ii) whether the fair market value at date of death of Code section 2036 or 2038 transfers should be included in the gross estate;
(iii) whether there is an indirect gift of the underlying assets, rather than the family limited partnership interests, where the transfers of assets to the family limited partnership (funding) occurred either before, at the same time, or after the gifts of the limited partnership interest were made to family members;
(iv) whether an accuracy-related penalty under section 6662 is applicable to any portion of the deficiency.

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The Court of Appeals overturned various lower court opinions and the Federal Circuit created yet another legal standard as to the economic substance. In Black & Decker Corp. v. United States, 436 F.3d 431 (4th Cir. 2006), which involved a transfer of stock in exchange, in part, for contingent liabilities, the Fourth Circuit remanded the case back to the lower court for consideration of the economic doctrine test under Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89, 91 (4th Cir. 1985). In TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006), overturned the lower court decision based on “the totality-of-the-circumstances”. The 2d circuit cited as authority Commissioner v. Culbertson, 337 U.S. 733, 742 (1949), which is an assignment of income case. But by far the most important case was Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006). In Coltec Industries, the Federal Circuit Court created a new standard for economic substance.

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Welcome to the Federal Tax Litigation Blog. Here you will find commentary on and links to important issues affecting and arising in Federal Tax Litigation. We expect that content will change on a regular basis so you are encouraged to check back often. To view previous posts, you can click on any of the "Topics" listed on the right hand side of the page. Should you have any questions about how to use the Blog or if you have suggestions for improving it, please let us know.

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