For the first time, Avram Salkin, Chuck Rettig, Steve Toscher & Dennis Perez of Hochman, Salkin, Rettig, Toscher & Perez, PC join together for a panel presentation to be held at noon on Friday, Aug 25 for the CalCPA Hollywood/Beverly Hills Discussion group at the Olympic Collection, 11301 Olympic Blvd., West Los Angeles.

Avram Salkin, Chuck Rettig, Steve Toscher & Dennis Perez have practiced together for 30+ years and have handled literally every type of tax dispute (civil and criminal, federal and state) that might be encountered by you or your clients.

Their presentation will provide invaluable insight and advice drawn from their combined 150+ years of professional experience in the tax trenches including practical advice for real-life client issues, focusing on current tax enforcement priorities and procedures, practitioner representation strategies and techniques, and ethical considerations – truly a “can’t miss” presentation by three of the most respected tax controversy practitioners in the United States.

LEARNING OBJECTIVES:

• Practice tips: learn current IRS tax priorities and procedures.
• Gain defensive representation strategies and techniques.
• Define legal issues and evidentiary benchmarks for government engagements
• Understand how to better represent your client in preparing returns and when facing IRS examination.

DISCUSSION TOPICS:

Civil and criminal tax disputes, privileges, conflicts, defending the indefensible tax return on audit and in litigation, overview of current IRS Wealth Squad examination techniques, voluntary disclosures – domestic and foreign (streamlined vs. the OVDP; “noisy” vs. “quiet”), practical advice regarding previously undeclared offshore financial accounts and assets (FBARs), benefits of Qualified Amended Returns and FOIA requests, and various ethical considerations and the avoidance of penalties for your clients and for you!

REGISTRATION AND LOCATION:

Online registration is available at http://www.calcpa.org/events-and-programs/event-details?id=9adf907a-a2ab-470b-a11c-7e840b91a7da (online registration will close on Aug 25 but walk-ins are welcome to attend and pay at the door). To ensure there is space available, call CalCPA Program Associate Tracey Zink at (818) 546-3554.

The program will start promptly at Noon.
•Fees: $42/member, $52/nonmember
•Add $5 for same day and at door registration
Parking and lunch included
•Address: Olympic Collection Banquet Hall and Conference Center, 11301 Olympic Blvd., West Los Angeles 90064

Posted by: Steven Toscher | August 15, 2017

THE ARM OF THE U.S. TAX MAN IS LONG by Steven Toscher

After defending taxpayers for more than thirty years, I have read a lot of court opinions and you know it is not a good sign when the opinion starts “The arm of the U.S. tax man is long….” That was the language recently used by the District Court in Dewees v. United States, Case No. 16-cv-01579 (CRC) (District of Columbia, August 8, 2017).

Mr. Dewees was a “refugee” from the Internal Revenue Service’s (“IRS”) Offshore Voluntary Disclosure Program (“OVDP”).  It appears he decided not to go forward with the OVDP, but to opt out.  No doubt because he felt the penalties sought to be imposed under the OVDP were excessive.  Mr. Dewees is a U.S. citizen who lives and operates a consulting business in Canada.  One of the compliance issues he faced was the failure to file the Forms 5471 for his consulting business.

As part of the Voluntary Disclosure Program, the IRS proposed to assess a penalty of $185,862 for failing to file FBARs for the years 2003 through 2008.  That was too much for the taxpayer, so he withdrew from the OVDP.

It is not clear from the opinion what the IRS did regarding the FBAR penalties, but they did, in September 2011, assess $120,000 in penalties for Dewees’ failure to file Forms 5471 for the years 1997 through 2008.  Code Section 6038(c) authorized the IRS to impose a $10,000 penalty for each yearly failure to file, unless  it was due to “reasonable clause.”  It appears Dewees did request an  abatement based upon reasonable cause, but the IRS denied it.

Here is where it gets interesting.  In May 2015, the Canadian Revenue Agency notified Mr. Dewees that it was holding a Canadian tax refund due to his outstanding $120,000 penalty  to the IRS.  The Canadian offset  was based upon Article XXVI (A) of the United States-Canada Income Tax Convention.  Dewees paid the amounts due, plus interest and filed a claim seeking a refund which was rejected in May 2016.

The taxpayer brought an action in the District Court of the District of Columbia, (likely because he was a non-U.S. resident) and raised a number of interesting claims requesting that the Court find that the collection assistance provisions of the United States-Canada Tax Convention were unconstitutional for violating (1) the excessive fines clause of the Eight Amendment; (2) the due process clause of the Fifth Amendment; and (3) the equal protection of the Fifth Amendment.

The claims raised by the taxpayer are worth noting, but more interesting is the use of the provision of the United States-Canada Income Tax Convention which does provide for assistance in tax collection matters. Most existing United States income tax treaties do not provide for assistance in tax collection matters, but some do.  Under the common law rule, international collection is not in the cards.  However, a treaty provision can provide for collection assistance.

Even where there is a provision to provide for international assistance in collection, it has been rarely used. The Dewees case indicates this is changing.

One of the impediments of implementing international collection is resources.  If the United States does not have enough resources to collect its own taxes, how can it devote resources to collecting other countries taxes?  However, a mere offset done by computer, like what the Canadian Revenue Agency did, is easy.  Another  sign of our ever changing tax world in the digital age.

As for the claims under the Eight Amendment and the Fifth Amendment, they were all interesting, but disposed of quickly by the District Court.  The one claim that did get more attention was the Eighth Amendment claim for “excessive fines.”  The District Court devoted quite a bit of its opinion reviewing the historical case law that a “tax penalty” is outside the Eighth Amendment’s reach.  This however should be contrasted with the FBAR penalty which the courts so far have held is a penalty subject to Eighth Amendment review.  See United States v. Bussell, 117 A.F.T.R. 2d 2016-439.  2015 WL 9957826, (C.D. Calif. 2015), appeal pending (9th Cir). See also, Toscher and Lubin “When Penalties Are Excessive – The Excess Fines Clause as a Limitation of the Imposition of the Willful FBAR Penalty,” Journal of Tax Practice and Procedure, December 2009-January 2010.

Another take away from the case is the IRS assessment of $120,000 in Form 5471 penalties—for twelve (12) years.  We of course do not know what happened to the FBAR penalties, but some might think the IRS was being  vindictive here because the taxpayer opted out of the OVDP penalty.  Twelve (12) years of Form 5471 penalties—penalties  that the IRS used to waive routinely— seems like piling on.

Some things in the tax world are changing; other things never change.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com

In a case that proves even the most-respected judges get reversed, Manhattan district judge Jed Rakoff’s decision to permit an informant’s testimony after the informant read transcripts of the defendants’ U.K. government-compelled testimony, was unanimously reversed by a Second Circuit panel on July 19, 2017.

Immunity comes in two flavors: “direct use” and “derivative use.” Direct use immunity is limited to preventing the government from introducing the immunized statements in its case-in-chief (the government’s part of the case) against the declarant if he goes to trial. Derivative use immunity includes use immunity and is co-extensive with the Fifth Amendment; it prevents the government from using the immunized statements for any purposes, and if they end up going to trial against the declarant they must prove that evidence being introduced didn’t derive from the declarant’s immunized statements. In the United States, forcing someone to testify or give a statement while only giving use immunity is considered “compelling” their testimony for Fifth Amendment purposes. Any compelled statements can’t be used against them in their trials. That’s why in the United States a court or government can only compel testimony – on pain of civil contempt – if they grant derivative use immunity.

Cue “God Save the Queen.”

The Brits appear not to share the U.S.’s enlightened view of immunity. In the U.K. investigation into LIBOR manipulation – rigging a benchmark exchange/interest rate to benefit certain traders – the U.K. government compelled testimony by Anthony Allen and Anthony Conti after giving them only direct use immunity. If prosecuted in the U.K., the prosecutors couldn’t introduce their testimony directly but they could use it for a variety of other purposes, including to develop and track down new evidence.

The U.S. government recognized that this incomplete immunity could prove to be a problem if Allen and Conti were prosecuted in the U.S., so the U.S. interviewed both before they testified under compulsion of use immunity. If the transcripts had never surfaced in the U.S. case, then they would have been irrelevant. But they did surface.

Another target of the U.K. LIBOR investigation, Paul Robson, received “discovery” of the evidence against him, including transcripts of Allen’s and Conti’s testimony compelled subject only to direct use immunity. Robson read the testimony, marked up the transcripts, and then was told the U.K. had dropped its investigation. Turns out this wasn’t good news for Robson, Allen, and Conti, as it just signaled that the U.K. was stepping aside to permit the U.S. to prosecute the three men along with a handful of others.

Robson agreed to plead guilty and cooperate against his co-defendants including Allen and Conti. At that point, the fact that Robson had reviewed their compelled testimony became a ticking time bomb for the U.S. government. It exploded not at trial, but on appeal.

At trial, Allen and Conti moved to dismiss the indictment and reverse the trial conviction based Robson’s trial testimony and on the grand jury having heard Robson’s exclusive (and arguably tainted) accounts of Allen’s and Conti’s actions and statements. Judge Rakoff, a recognized expert in securities cases and one of the most-respected trial judges nationwide, denied the motions and permitted Robson to testify against Allen and Conti. He accepted, among other things, a conclusory statement by Robson that the transcripts hadn’t tainted his testimony.

After Allen and Conti were convicted, they appealed and argued that allowing Robson’s hearsay statements before the grand jury and his trial testimony after his having reviewed and internalizing transcripts of their compelled testimony meant that the government had to prove that all its evidence – including Robson’s trial testimony – had not been derived from the compelled testimony. This so-called Kastigar analysis, named after the Supreme Court decision, is supposed to be very difficult for the government to meet. Allen and Conti complained that Judge Rakoff had accepted at face value the witness’s blanket statements that his testimony hadn’t been affected by the transcripts despite that he couldn’t segregate what he knew before and after reading the transcripts, thereby lowering what is supposed to be a high Kastigar bar.

The Second Circuit, relying on the D.C. Circuit’s analysis in reversing Oliver North’s conviction in the Iran-Contra scandal, reversed the convictions based on the government’s use of Robson’s possibly-tainted testimony in obtaining the indictment. An indictment returned after presentation of involuntary testimony – a federal agent summarized Robson’s possibly-tainted statements to the grand jury – must be dismissed unless the government can prove beyond a reasonable doubt that the grand jury would have indicted without the testimony. Robson’s statements were essential to the indictment, to the extent that he was the sole witness for much of the most-damaging evidence. Although Judge Rakoff was convinced that Robson’s statements weren’t tainted by his having reviewed the defendant’s transcripts, once the Second Circuit decided Robson’s statements were tainted, it was nearly a foregone conclusion that the government couldn’t prove beyond a reasonable doubt that his tainted statements were irrelevant to the grand jury’s decision to indict.

What’s the takeaway? The very same coordination that DOJ touts in its FCPA and tax prosecutions can lead to a poison pill for resulting U.S. prosecutions. Skilled defense counsel will use this holding and the logical underpinnings – including quotations such as that coordination with foreign law enforcement “need not affect the fairness of our trials at home” – to push back against any coordination that directly or indirectly undermines a defendant’s constitutional protections.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).

Posted by: Steven Toscher | August 8, 2017

A BILLION HERE, A BILLION THERE – IT ADDS UP by Steven Toscher

The Treasury Inspector General for Tax Administration (“TIGTA”) recently issued a report suggesting that the Internal Revenue Service (“IRS”), by failing to properly implement its wage reporting matching program is leaving at least $7 billion on the table.

The IRS and the Social Security Administration have a computer matching program called the Combined Annual Wage Reporting (“CAWR”) Program which compares employee wage and withholding information reported to the IRS on employment tax forms to withholding documents filed with the Social Security Administration.  The purpose of the IRS-CAWR Program is to ensure that employers report the proper amount of employment taxes and Federal income tax withholding on their employment tax returns.  In today’s digital driven world, it is a program which makes great sense.

The TIGTA report found that in “most” cases where discrepancies are found, the IRS does followe-up with the taxpayer.  In 2013,  of  137,272 discrepancy cases, the IRS only worked approximately 17% or 23,184.  The remaining 114,088  (83%) discrepancy cases which were not worked had potential unreported tax difference of more than $7 billion.

In addition to not working all  the cases, the TIGTA report found that the IRS case selection process did not properly ensure  priority was given to discrepancy cases with the highest potential tax assessment.  TIGTA analyzed 114,088 discrepancy cases that were not worked to identify those with the highest potential unreported tax amounts case type.  Their analysis indicated that there had been total potential unreported tax of more than $6.8 billion.

TIGTA recommended that the Small Business/Self-Employed Division evaluate the current agreement and workload processes with the Social Security Administration to determine if changes could be made and  to revise its case selection criteria to include cases with the highest potential tax assessment.  TIGTA also recommended that the IRS take actions to include prior year discrepancy cases when the current year discrepancy case was selected for the same employer.

Interestingly, the IRS agreed with 6 of the 7 TIGTA recommendations.  IRS management did not agree to include the prior year discrepancy cases, but that it would consider employers that  had a prior discrepancy case as part of a selection criterion for current year cases.  The full report can be found at https://www.treasury.gov/tigta/auditreports/2017reports/201740038fr.pdf.

In today’s digital world, the only possible excuse for leaving $7 billion on the table is a lack of manpower at the IRS.  Some may blame the IRS, but the blame could with the Congress and  inadequate funding of the IRS.  This is a simple fix.  Resources should be put toward this $7 billion problem.  Hit a button, find   the discrepancies and  collect the additional employment tax liability.  A billion here and a billion there adds up.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com

In Canna Care, Inc. v. Commissioner, No. 16-70265 (9th Cir. July 25, 2017), the Ninth Circuit Court of Appeals  affirmed the Tax Court’s decision that a marijuana dispensary was not entitled to the deduct its operating expenses because it was in the business of trafficking in a “controlled substance.”  Yes, under Federal law, marijuana is still a “controlled substance”  and Section 280E of the Internal Revenue Code precludes the deduction of what would otherwise be ordinary and necessary business expenses.  Appellate counsel for the dispensary raised some  novel arguments on appeal, including  (1) whether Section 280E as applied violates the excessive fines clause of the Eighth Amendment to the Constitution; (2) whether Section 280E precludes  state and local tax deductions; and (3) whether Section 280E precludes appellant’s net operating loss carryover deduction from  a prior year.

Unfortunately the Circuit Court  decided not address these issues because none of the  novel arguments were  raised in the Tax Court and not preserved on appeal.  The Ninth Circuit noted that “absent exceptional circumstances, this court will not consider an argument that was not first raised in the Tax Court.”

The undersigned saw the oral argument (one can go to the Ninth Circuit’s website and still see it) and appellate counsel  did a great  job with these  very difficult  arguments, but the Ninth Circuit judges were not biting.  The argument was premised on the fact “things have changed.”  That is, most states now have legalized marijuana for medical purposes and more and more states are enacting laws legalizing recreational use.

The states’ interest in these local laws is not only  medical and compassion for  people who  benefited from marijuana, but also the ever increasing need for tax revenue.  California also recently went the way of Colorado, and other states, legalizing the recreational use of marijuana and it is anticipated that the sales will generate significant a tax revenue for the state.

There are ongoing lobbying efforts to repeal Section 280E in light of the “changes” which have happened, but the statute is clear and marijuana is still a controlled substance within the meaning of the statute.

The point to be made here though is that the current state of affairs is a mess regarding tax policy.  Marijuana dispensaries which operate legally under state law are unable to bank like any other business and  in most cases are required to deal in cash.  Not only does this present risks to all involved,  cash businesses tend to be less compliant than non-cash businesses and  that may  be a bit of an understatement.

Equally important, a state law compliant marijuana dispensary is unable to deduct it to ordinary and necessary expenses substantially raising the effective marginal tax rate. That also is a temptation for the less than compliant taxpayer.

With the disallowance of expenses, the question raised in the Ninth Circuit was whether the income tax on the dispensary was in fact not a tax, but a “penalty” subject to restrictions and limitations imposed by the Eight Amendment to the Constitution.  While this argument has gained traction regarding the FBAR penalty (which is not a tax),[i] the Circuit Court recognized that Congress has plenary authority to impose a very high tax rate so the excessive fines clause argument went nowhere.  It was a nice try though.

We need a rational system of taxation for businesses which are allowed to legally operate in the states.  The irrationality of the current system will not help tax compliance.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com  Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com

[i]  See United States v Bussell, 117 A.F.T.R. 2d 2016-439. 2015 WL 9957826, (C.D Calif. 2015)  See also,  Toscher and Lubin “When Penalties Are Excessive—The Excess Fines Clause as a Limitation of the Imposition of the Willful FBAR Penalty, Journal of Tax Practice and Procedure, December-2009- January 2010.

 

 

 

 

 

 

 

 

6494580_1.docx

Every lawyer should leave no stone unturned when it comes to representing their client. Advantages, like your car keys, can be found in places you never think to look.  The Tax Court issues three types of opinions, Division or TC opinions, Memorandum opinions, and Summary opinions.  Division opinions have precedential value and tend to cover issues of first impression.  Memorandum opinions are technically non-binding, but are frequently cited.  Summary opinions are for small tax cases and have no precedential value.  All representatives know how to search for cases and the value favorable case law has, especially if there is a Division opinion supporting your position.

These aren’t the only places to find possible published advantages. The Tax Court probably issues over a hundred orders every day, most of which have no relevance outside of the case it applies to.  Judges, however, can issue a Designated Order, that the judge believes might be of wider interest.  Designated orders will be posted to the Tax Court’s website each day, and all orders after June 17, 2011 are searchable.  The individual judge who issues the order has the discretion as to whether the order is designated.  Designated orders can cover a wide variety of topics such as summary judgment and other motions.  Under Tax Court Rule 50(f), orders are not to be treated as precedent.  As one recent designated order shows, however, they can be immensely helpful.  Do not overlook them.

On July 20, 2017, Judge Gustafson issued an order in Vallee v. Commissioner, Docket No. 13513-16W, a whistleblower case.[i]  In the order, Judge Gustafson tells the parties that in preparing their response and reply, respectively, to a motion to compel, they may wish to reflect on “non-precedential orders” issued in another whistleblower case.  Judge Gustafson highlights that the orders are not precedential, and that the Court doesn’t expect the parties to cite them, distinguish them, or rely of them, but states that orders, “May be helpful to the parties in showing the undersigned judge’s thinking about this area.  The parties are invited to correct that thinking where they think it may be in error.”

As an attorney, you don’t always get this type of explicit direction from a Judge telling you he thinks prior orders may be important. Searching for relevant orders can let you know what the judge is thinking, which is worth its weight in gold.  Most cases will settle before going to trial and requiring an opinion, but before settling the Court may have issued a detailed order giving you useful information.  Failing to search orders might result in failing to gain your client the advantage they need.

Jonathan Kalinski specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world.  He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

[i] The order can be found at https://www.ustaxcourt.gov/InternetOrders/DocumentViewer.aspx?IndexSearchableOrdersID=234317

We previously blogged about an award of attorney fees by the Court of Federal Claims in the BASR Partnership case – https://taxlitigator.me/2017/03/13/son-of-boss-shelter-beats-irs-gets-attorney-fees-by-robert-horwitz/. The Tax Court’s recent opinion in Fitzpatrick v. Commissioner, T.C. Memo 2017-88, underlines the importance of making a qualified offer, at least if the taxpayer meets the net worth limitations of the statute, Internal Revenue Code §7430.  The maximum net worth for an individual is $2 million, with individuals who file a joint return being treated as separate individuals.  The net worth limitation for the an unincorporated business, a partnership or a corporation is $7 million.

The IRS sent the taxpayer a letter notifying her of a proposed trust fund recovery penalty. She never received the letter.  Since she did not protest the proposed assessment, the penalty was assessed and the IRS began collection activity.  She filed for a collection due process hearing.  Because she never received notice of the proposed assessment, the Appeals Office considered the liability on the merits.  While the matter was pending in Appeals, she submitted a qualified offer, which Appeals never acted on.   After the Appeals Officer determined the taxpayer was liable for the penalty, she petitioned the Tax Court.  Following a seven day trial, the Tax Court issued an opinion holding that the taxpayer was not liable for the penalty.  She moved for attorney fees and costs under §7430.

Normally, to be awarded attorney fees in a tax case, your net worth may not exceed the statutory limit, you have to be the prevailing party and the Government must fail to establish that its position was substantially justified. The IRS’s position is “substantially justified” if based on all the facts and circumstances and the relevant legal precedents the IRS acted reasonably.  If, however, there is a qualified offer and the taxpayer is forced to go to trial and ultimately prevails, the taxpayer is entitled to attorney fees and costs from the date the offer is submitted.

A qualified offer is in writing and

(A) is made during the qualified offer period;

(B) specifies the amount of the taxpayer’s liability (not including interest);

(C) states that it is a qualified offer for purposes of §7430(g); and

(D) remains open from the date it is made until the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.

The qualified offer period begins on the date the IRS first sends a letter proposing a deficiency that can be appealed to IRS Appeals. It ends 30 days before the date the case is first set for trial.

Ms. Fitzpatrick was determined to be the prevailing party. The Court determined that the information available to the IRS when it made the assessment and the Appeals Office made its determination was sufficient for a reasonable person to conclude that she was liable for the penalty.  Thus, she was only entitled to attorney fees that were incurred after the offer was submitted.

Ms. Fitzgerald was awarded fees based on the statutory rate. For 2015-2017, that rate is $200 per hour.  The Court determined that she failed to establish that special factors existed that justified a higher rate.  The fees and costs awarded her were $179,049.70.  so making a qualified offer in Ms. Fitzgerald’s case didn’t hurt.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com

Jeremy and Margaret Jacobs, owners of the Boston Bruins through three entities, checked the IRS into the boards and walked out of Tax Court with no deficiency.[i]  The only issue in the case was whether the entity that owns the Bruins could deduct 100% of meal expenses for away games.  The IRS argued the 50% haircut under IRC §274(n)(2) applied.  The taxpayer claimed the de minimis exception, which allows the entire deduction applied.

The opinion goes into seemingly obvious detail about the requirement that the Bruins play half their regular season games at home and half on the road, that its goal is to win hockey games, and that failing to show up for a game leads to a forfeit.   The Collective Bargaining Agreement (CBA) between the league and the players also contains specific travel requirements such as arrival and departure times relative to game time and location.  But, in the context of the de minimis exception, these facts are crucial in the outcome as meals play an essential role.  Once the NHL schedule is released, the Bruins negotiate with away hotels to provide hotel rooms, conference rooms, and of course meals.  The Bruins staff goes to great lengths to select the specifics of the meals and enters into a banquet event order (BEO) with the hotel.

Meals are mandatory for players, and are provided to all Bruins traveling staff, not just players and coaches. Players and coaches will meet during meals to review strategy, watch film, and the PR staff will go over media inquiries.  During the years at issue the Bruins deducted $255,754, and $286,446 for away game meals.

To qualify for the de minimis exception, as a preliminary matter, access to the eating facility must be available on substantially the same terms to each member of a group of employees. Basically, you cannot discriminate in favor of highly compensated employees.  In this case, meals were provided to all traveling employees, so the Bruins play on.

Employee meals provided in a nondiscriminatory manner satisfy the de minimis exception if they meet 5 requirements: (1) the eating facility is owned or leased by the employer; (2) the facility is operated by the employer; (3) the facility is located on or near the business premises of the employer; (4) meals are provided during, or immediately before or after the employee’s workday; and (5) the annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility.

At first blush, it would seem like that IRS had a winning argument, but an analysis of each factor and the specifics of the Bruins business illustrate why the Bruins ultimately prevailed. The Bruins do not enter into a formal lease agreement with hotels, but the Court held the BEO and hotel contract function as a lease because the Bruins pay for the right to use and occupy hotel meal rooms.

Under the regulations, operation by the employer includes contracting with another to operate the eating facility. The negotiations between the Bruins and the hotel over the specific meal room requirement met this requirement.

The third requirement, that meals be provided on or near the business premises of the employer, would appear to be too much to overcome. The Tax Court had previously held, however, that a rented hotel suite could constitute a company’s business premises.[ii]  The requirement is functional, not spatial, and not limited by geography.  Here the Court relied heavily on the nature of the Bruins business, namely, a hockey team that travels across the US and Canada to play games with the goal of winning as many as possible.  Players need to be properly housed and fed in order to accomplish that goal.  Hotels are therefore, essential to the Bruins business.

The fourth requirement, the revenue/operating cost test, is met if the meals are excludable from the employees income under IRC §119, which means the meals must be furnished for the convenience of the employer and furnished on the employer’s business premises. Meals are for the convenience of the employer if it is furnished for substantial noncompensatory business reasons.  In this case the players get meals to maximize performance, and the rest of the traveling team receives meals to make sure everything runs smoothly for the players.

The fifth and final requirement, that meals be provided during, before or after the workday is obvious and needs to analysis.

The deficiency in the case was rather small, certainly compared to the overall wealth of Mr. and Mrs. Jacobs, and the expenses to bring this case to trial was likely many multiples greater than the amount at stake. The issue, however, not only repeats itself every year for the Bruins, but for every professional sports team.  This is a substantial win for team owners.

Outside the professional sports world, the case illustrates the specific requirements needed to deduct 100% of meals. Many companies may deduct meals without much thought to what is actually needed to properly claim the deduction.  Similarly, companies might subject themselves to the 50% haircut, without taking advantage of the de minimis exception.

Jonathan Kalinski specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world.  He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

 

[i] Jacobs v. Commissioner, 148 T.C. No. 24 (2017).

[ii] Mabley v. Commissioner, T.C. Memo. 1965-323

 

 

Category: Tax Court

 

Tags: Tax Court, Meals and Entertainment, IRC §274, de minimis, deductions

 

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A dual-national (U.S. and Canadian) citizen who lives in Canada found a warm reception in federal district court in Seattle, in the person of Judge James Robart. In the process, taxpayer Jeffrey Pomerantz demonstrated that the Department of Justice can’t rely on assumptions and innuendo to show that a taxpayer willfully failed to file IRS forms disclosing foreign bank accounts.

Many but not all taxpayers know that, if they have foreign bank accounts that together contain more than $10,000, then they have to: (1) check the “yes” box in response to the foreign-accounts question on their tax return; and (2) file the Treasury Department’s foreign bank account reporting form (“FBAR form”).

The Department of Justice (“DOJ”) filed a civil complaint in federal district court in Seattle to collect civil FBAR penalties for Pomerantz’s supposedly willful failure to file an FBAR form.  The difference between willful and non-willful FBAR penalties can be massive: willful violations usually result in a penalty of 50% of the highest balance in the unreported accounts; non-willful violations are penalized at up to $10,000 per occurrence.

In its complaint, the government alleged that Pomerantz had set up a shell company in the Turks and Caicos, failed to report interest on his Forms 1040 from Canadian and Swiss bank accounts that held more than $ 1 million, and failed to file FBAR forms for the same accounts. To make matters worse, Pomerantz would not agree to service of the complaint by mail and refused to disclose his home address to the DOJ lawyer, leading Judge Robart to authorize DOJ to serve Pomerantz by international mail.  Looking like you are dodging service tends to annoy judges, which is particularly bad when the judge is later called on to rule on your motion to dismiss.

Pomerantz represented himself, and argued in his motion to dismiss that DOJ made a handful of false allegations and had failed to allege enough facts in its complaint to show that his failure to file an FBAR form was willful instead of merely inadvertent. The government argued, in response, that Pomerantz’s course of conduct – setting up a Turks and Caicos company, opening bank accounts in that company’s name, and not reporting his foreign interest income on his tax return – was, according to case law, sufficient to assume Pomerantz’s related failure to file an FBAR was willful instead of a mistake.

Judge Robert didn’t buy the government’s argument. Instead, the judge dissected the government’s allegations and found they didn’t support the government’s conclusions.  In particular, Judge Robart noted that the Canadian bank accounts were in Pomerantz’s own name, not the Turks and Caicos company, and the accounts pre-dated the company, so his setting up the company wasn’t evidence that Pomerantz was trying to hide his pre-existing accounts.  Judge Robert also rejected the government’s vague “willful blindness” argument – that acts such as checking the foreign-accounts box “no” on a tax return is sufficient to show the taxpayer knew or deliberately avoided knowing about FBAR filing – by pointing out the government didn’t allege Pomerantz checked the box “no” or alleged any similar facts.  The fact that Pomerantz failed to report his income is a far cry from his having checked “no” on a tax form, and Judge Robart recognized this distinction and found for Pomerantz on this point as well.   The judge granted the motion to dismiss the FBAR penalties for the Canadian accounts, a major win for Pomerantz.

The decision wasn’t all good news for Pomerantz, at least for now. Judge Robart did agree with the government that it was permissible to assume, giving the government the benefit of the doubt in a motion to dismiss, that Pomerantz’s setting up Swiss accounts in the name of the Turks and Caicos shell company was evidence that Pomerantz intended to evade the FBAR filing requirement. (However, Pomerantz’s motion to dismiss suggests the government may have difficulty proving it was a shell company.)  The judge denied the motion to dismiss the FBAR penalty on the Swiss account.

In sum, the judge wanted to dismiss just the FBAR penalty associated with the Canadian accounts and allow the Swiss accounts penalty to proceed. However, because the FBAR penalty assessed did not distinguish between the Canadian and Swiss accounts, the judge dismissed the entire case and invited the government to re-assess the FBAR penalty related just to the Swiss accounts and come back another day.

Having just learned from a government attorney that the IRS appears to be sending more civil FBAR penalty collection cases to DOJ to file suits against the taxpayers, this case will be useful to remind both DOJ and judges that merely having a foreign account isn’t sufficient proof of willful failure to file an FBAR. The government can’t rely on innuendo and logical leaps to make its case, and it’s worth fighting back when they try to do so.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).

As part of the Internal Revenue Service’s (“IRS”) continuing  international enforcement effort,  it recently released training materials on  what it means to be “substantially complete”  for an  international information return.  The training is significant because the failure to file a “substantially complete” foreign information return can subject the filer to substantial penalties and the failure to file a “substantially complete” form could also leave open the statute of limitations on  the  assessment of  additional taxes and penalties.

The training of  IRS agents on the topic of “substantially compete” and substantial compliance reflects the evolution of the seriousness of the Service’s commitment to enforce international reporting obligations.  Historically, the IRS was quite forgiving of a taxpayer’s failure to file required information reporting forms.  The forgiving  attitude has been evolving over the last ten (10) years and the IRS, absent the demonstration of “reasonable cause,” is not as forgiving.  Moreover, historically most IRS agents were not familiar with the numerous international reporting forms which lent itself to a more accommodating position with taxpayers.  If IRS agents do not know the requirements, how can a taxpayer be  held to a higher standard?

The  IRS is more closely focusing on the requirements for filing the international reporting forms.  Not only must they be filed to avoid the potential penalties and statute of limitations issue, they must be “substantially complete.”

There are numerous international reporting forms (beyond the scope of this blog), but the more important ones are:

Form 5471 – relating to a controlled foreign corporation; Form 5472 – relating to foreign ownership of a U.S. corporation;  Form 8865- return of U.S. persons with respect to certain foreign partnerships; Form 8858- information return of U.S. persons with respect to certain foreign disregarded entities; Form 926 – return for U.S. transfer of property to a foreign corporation; and Forms 3520 and 3520-A – the annual returns to report transactions with foreign trusts or the receipt of certain foreign gifts.  Each of the forms carries with it substantial penalties for a failure to comply.

While the focus of the completeness of the information reporting forms is a new development of the IRS international enforcement effort, there is a long common law history of what is “substantial compliance.”  The Court precedent relates primarily to non-foreign information reporting, but will provide guidance to the IRS, taxpayers and the Courts as to whether there has been “substantial compliance.”

The IRS’ position is that in determining whether a tax return satisfies a reporting requirement or whether a taxpayer has complied with a statutory or regulatory requirement, two different standards that may apply.  The first requires “strict compliance” with the statute or regulatory requirement; the second requires “substantial compliance.”  In analyzing the statue or regulatory requirement, the first step is to determine which standard applies – – and that may not be clear.  The Service has indicated the Courts may consider the following:

– – if the particular information requirement be relates to the “substance or essence” of the statute or regulation, strict compliance is necessary. On the other hand, if the requirement is seen as “procedural or directory” then substantial compliance can apply.

If an IRS agent raises an error or an omission in a form, the taxpayer will want to try to fit the issue within the “substantial compliance” doctrine.

The leading case cited by the IRS is an old Board of Tax Appeals case (the predecessor to the Tax Court)  by the name of Indiana Rolling Mills Co. v. Commissioner, 13 B.T.A. 1141 (1928) – – yes, in 2017 in connection with the international enforcement effort, we are looking back to guidance in the 1920’s.

The Indiana Rolling Mills Co. v. Commissioner  case deals with the required signatures on a domestic corporate tax return.  The statute required that the corporate tax return be sworn to by the President and the Treasurer of the company.  In Indiana Rolling Mills, the corporate return was sworn to by the Vice-President and Secretary.  The IRS argued that the return was not valid for purposes of the statute of limitations.  A  harsh position indeed.

The Court stated the general rule of statutory construction is that provisions that relate to the “essence of the thing to be done are mandatory,” those that do not relate to the essence of the thing to be done are “directory.”  Here, the essence of the statute was making an honest return.  If the return represented information fairly and honestly given and sworn to by officers of the corporation who are familiar with its affairs,  the Court determined the taxpayer “substantially complied” with the statute.  The fact that the Treasurer or Assistant Treasurer did not swear the return did not go the essence of the statute.

There are a number of cases in the area and it should be kept in mind that the “substantial compliance” doctrine is taxpayer favorable.  Taxpayers do not need to be perfect, but they need to be in good faith and substantially comply with what the statute or regulations require.

The IRS has issued some internal guidance in connection with the application of the substantial compliance doctrine for international information reporting penalties.  The leading internal guidance is Chief Counsel Advice (“CCA”) 20429007 entitled “Whether Form 5472 was Substantially Complete.”  CCA 20429007 concerns the meaning of the term “substantially incomplete” in regard to a Form 5472, relating to an information return of a 25% foreign owned U.S. corporation as that term is used in Regulation Section 1.6038A-4(a)(i).  The CCA considered whether a taxpayer’s return would be considered incomplete and therefore subject to penalty under a variety of factual scenarios.  The CCA identifies two approaches that could be used to determine whether a return is substantially complete.  The first is “strict compliance,” an interpretation of the rules under which virtually any substantive inaccuracy could render the return substantially incomplete.  The second is the facts and circumstances approach.  The CCA provides a list of seven (7) factors that should be considered in a facts and circumstances analysis.  These factors deal with the proportionality and magnitude of the errors and its impact on the IRS to be able to efficiently examine the information required by the statute and regulations.

It is indeed a new world.  Not many years ago, failures or inaccuracies in international reporting were often forgiven by the IRS; now, with the IRS’ new focus on international enforcement, not only must  the information returns be filed, they will be scrutinized for completeness and at a minimum meet the substantial compliance standard.

This new IRS  scrutiny has significant consequences.  We are familiar with situations where the IRS solicits information reporting forms and not only are there initial penalties for failure to file the form, there are what is referred to as “continuation” penalties for the continued failure to file the form.  These can become very significant.  We have seen situations where the information forms have been filed, but the Service has taken the position that they were not “substantially complete” and sought to impose continuation penalties.  It is dangerous out there.  Get it right the first time but if the examining agent  raises the issue, think “substantial compliance.”

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com  Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com

 

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