Multiple Issues - When can you "rely" on the IRS; Did the Tax Cheat really beat the system; Jenkens & Gilchrist; and the 40% penalty issue surfaces again!

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.

I almost reached over and told the distinguished tax planner – what exactly are you relying on? – But, I didn’t. Rather it reminded as to Evergreen. The issue in Evergreen is rather straightforward - taxpayer wants to depose certain government officials that wrote Treas. Reg. §§ 1.752-6 and 1.752-6T. The Court correctly denied the request on the following grounds:

  • The personal views, intentions, etc. of the drafters of such regulations are not relevant in construing regulations or determining the validity thereof. See, Bankers Trust N.Y. Corp. v. United States, 225 F.3d 1368 (Fed. Cir. 2000). See also
    • Sidell v. Comm'r of Internal Revenue, 225 F.3d 103, 111 (1st Cir. 2000) (rejecting the taxpayer's reliance on a number of internal IRS memoranda to show that a proposed regulation was not meant to cover a particular situation); 
    • Conn. Gen. Life Ins. Co. v. Comm'r of Internal Revenue, 177 F.3d 136, 145 (3d Cir. 1999), cert. denied, 528 U.S. 1003 (1999) ("reliance upon remembered details from officials who lacked the ultimate authority to issue any proposed regulation has little support in the law"); 
    • Schwalbach v. Comm'r of Internal Revenue, 111 T.C. 215, 228 n.4 (1998) (giving "no weight" to oral statements made by "agents of the Commissioner" describing the content of final regulations); 
    • Armco Inc. v. Comm'r of Internal Revenue, 87 T.C. 865, 867-68 (1986) (affidavit of IRS employee explaining his intent in drafting a regulation irrelevant to interpreting the regulation); 
    • Vons Cos. v. United States, 51 Fed. Cl. 1, 21 (2001) ("this court [should be] extraordinarily hesitant to attribute to the IRS or the Treasury Department interpretations of a revenue ruling made by individual IRS employees that represent their personal views, rather than the official position of the agency").

Rather for purposes of reliance there is the code, case law, revenue rulings, revenue procedures, final regulations, at times proposed regulations, private letter rulings if you are the taxpayer that requested the PLR, certain notices and announcements. For a detailed list see IRM 32.2.2.10.

  • Note even as to case law there are limitations. See Stratmore v. Commissioner, T.C. Memo. 1984-547 (memorandum opinions are limited to their own “precise factual situation”). See Nico v. Commissioner, 67 T.C. 647, 654 (1977) (“We consider memorandum opinions of this Court to be controlling precedent”); McGah v. Commissioner, 17 T.C. 1458, 1459 (1952) (“our practice which is that memorandum decisions are not cited”); Andrews v. Commissioner, 931 F2d 132, 138 n.9 (1st Cir. 1991) (“We note that prior memorandum decisions of the Tax Court are not treated by that Court as binding precedent.”) See also Golsen v. Commissioner, 54 T.C. 742, 757 (1970) (Tax Court applies law of the Circuit)

Thus, for reliance I would not rely on the IRS’s web-site for penalty protection. To my esteemed colleague educate your client and tell him he should get a private letter ruling, as he can afford it. If the Client doesn’t want to, well he is going to have to comply with FIN 48 anyways so, he better get a tax opinion. But when you write the tax opinion, please do not cite the web-site as authority, as the IRS will view this as non-binding authority, i.e. see Evergreen.

Both the Wall Street Journal and Tax Notes Today reported the mess that is Walter C. Anderson. Yes, Department of Justice fumbled but let’s just say - the game as to taxes due and owing is not over. Knowing my friends at the IRS the jeopardy and termination assessments are coming down the pike. Thus, yes it was embarrassing but this does not mean he won’t end up paying the IRS what ever is determined to be the true and correct tax. That is assuming - well let’s not state the obvious.

Speaking of messes the Wall Street Journal and Tax Notes Today reported the demise of Jenkens & Gilchrist. For those that have read Diversified Group., Inc. v. Daugerdas, 139 F.Supp.2d 445 (S.D.N.Y.2001) such as the IRS (who probably went through that case file with a fine tooth comb) the fall of Jenkens should not come as a surprise. Being that as a Government attorney I fought these transactions and now as private practitioner have had to pick up the pieces for those taxpayers that were sold these transactions, I just wonder what were these venerable institutions thinking? I will not state the obvious but the message from the Federal Government is clear – tax shelters at then end of the day may be hazardous to the firm as institution and to the professional practitioner.

Finally there is Cemco Investors, LLC v. United States, - F. Supp. – ( N.D. Ill. 2007), were the issue of substantial valuation misstatement arose. Well let’s say the result was contrary to Klamath Strategic Investment Fund, LLC v. United States, --- F.Supp.2d ----, 2007 WL 283790, (E.D.Tex.. 2007). The Court instead relied on Santa Monica Pictures, LLC v. Commissioner, T.C. Memo 2005-104. The Court could have gone with Gilman v. Commissioner, 933 F.2d 143 (2d Cir.1991), affg. T.C. Memo.1990-205 but they didn’t. Why not- in Santa Monica, the Judge attempts to distinguish the fully reviewed Tax Court opinion of Todd v. Commissioner, 89 T.C. 912 (1987) aff’d 862 F.2d 540 (5th Cir.1988). I guess the District Court found the tax court judge’s argument persuasive. Question: Since Santa Monica was only a T.C. Memo is it fair to say that the rest of the Tax Court did not find the judge’s opinion in Santa Monica as persuasive as the IRS alleges it to be. Santa Monica is currently on appeal. Stay tuned!

RJT INVESTMENTS X, LLC Tax Court's quick visit to the Son-of Boss store

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.

The Government’s brief sets forth the issues as follows:

  1. Whether the Tax Court had jurisdiction to determine the partnership item components of the partner’s basis in his partnership interest in RJT.
  2. Whether the Tax Court had jurisdiction to determine that RJT was a sham, that it lacked economic substance, and that it was formed and/or used for tax avoidance purposes.

The reason for the issues being framed in such a narrow manner is according to the Government, the taxpayer conceded that the transaction had no economic substance and admitted that it would present no evidence in challenging the notice. Rather, according to the Government, the only issue was jurisdictional as the Court lacked jurisdiction over the sham issue and the issue over outside basis.

As they there are two sides to a story and we do await taxpayer’s version of the facts and the law to determine whether this case was worthy of the headlines it received from the IRS.



Announcement 2006-100: Appeals Closing Cases Involving Unsettled Listed Transactions

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.”

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.”

There is reason for this concern. It cannot be ignored that the Office of Chief Counsel has been emphatic that, as to Son-of Boss transactions, the IRS will vigorously pursue those taxpayers that did not participate in the settlement initiative. Message being delivered by the IRS: "Concede or be prepared to litigate."

Now it appears that the message the IRS is saying: "Hold it. We need time to prepare the case prior to sending the case for litigation." Private practitioners cannot ignore that the Office of Chief Counsel is highly involved in making sure that the Son-of-Boss cases are properly being developed. Moreover, these teams from the Office of Chief Counsel are further limited in terms number and personnel (i.e. litigators) while the Son-of-Boss cases are numerous (over 500 and some reports say over 1,000). Thus, it is not surprising that the Office of Chief Counsel wants the cases developed when the case is docketed not that the case has to be developed when the case arrives for litigation.

So what is that private practitioners are faced with: Counsel attorneys assisting the revenue agents through a plethora of the Son-of-Boss cases using IDR’s, interviews, possibly summons to develop these cases. In the meantime the private practitioner will not have access to the same information (see section 6103) while the IRS’s attorney has access to multiple years and multiple cases without fear of discovery and can develop the facts as they deem necessary.

Observation: Are we heading for another showdown similar to the Mary Kay Ash problem? In Ash v. Commissioner, 96 T.C. 459 (1991), the IRS successfully modified/overturned Universal Manufacturing Co. v. Commissioner, 93 T.C. 589 (1989), and Westreco, Inc. v. Commissioner, T.C. Memo. 1990-501. Will the Tax Court be sympathetic to the taxpayer?. If a guess was to be ventured – probably not. See Judge Swift’s concurring opinion in Ash v. Commissioner, 96 T.C. at 478 – 481.

Thus under this new policy let the obvious be stated - Leverage is in the facts. The IRS has only only a window of time to develop the facts. Therefore be careful when agreeing to the statute extensions being requested from the IRS as your leverage as to the “keys to the facts” may have been waived away – turned over to the IRS.