TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

We are pleased to announce that Edward M. Robbins, Jr. will also be speaking on June 26th at the Agostino & Associates International and Domestic Tax Controversy Update at the Bergen Community College at the Meadowlands. BBQ to follow at The Green at Hackensack Court Square on the topic of Farhy Update, Aroeste, Malta Pensions and what it portends for IRS enforcement, Moore

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In Connelly v. United States, the U.S. Supreme Court examined an estate-tax issue involving how to value life insurance proceeds received by a closely held corporation upon a principal shareholder’s death. Typically, such proceeds are used by the corporation to buy back shares from the deceased shareholder’s estate, thereby keeping the corporation in the family. The parties stipulated that the insurance proceeds were an asset that increased the value of the corporation. The Court had to decide whether the corporation’s contractual obligation to purchase the deceased shareholder’s shares offset the life insurance proceeds.

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Founded in 1960, Hochman Salkin Toscher Perez, P.C., is internationally recognized as the preeminent tax law firm on the West Coast. The reputation of the firm for excellence and integrity in the tax community is unparalleled. The firm specializes in federal and state civil and criminal tax litigation, tax controversies and tax disputes with the federal, state, and local taxing authorities and white collar criminal defense, and has received many notable decisions on behalf of its clients before the Federal Appellate Courts, the Federal District Courts, the Bankruptcy Courts, the United States Tax Court, and various state courts, including the California Franchise Tax Board California Department of Tax and Fee Administration and the
California Employment Development Department.

We are pleased to invite you to the

 16th Annual NYU Tax Controversy Forum
to be held June 27 and 28
Westin New York, Times Square

You do not want to miss this program.

Two of our principals will be speaking on the following topics:

Michel R. Stein
Challenging Civil Penalties – Recent Developments
June 27

Sandra R. Brown
Handling Employee Retention Credit Audits and Investigations – Coloring in the Lines
June 28

For 16 years, the NYU School of Professional Studies Tax Controversy Forum has brought together government representatives and expert private practitioners to share their perspectives on a variety of topics involving federal tax audits, appeals, and litigation. The forum covers a wide range of controversy work, from procedural seminars to substantive programs, international issues, ethical problems, current enforcement initiatives, sensitive audits, and civil and criminal tax penalties.

Please Join Us.

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Founded in 1960, Hochman Salkin Toscher Perez P.C., is internationally recognized as the preeminent tax law firm on the West Coast. The reputation of the firm for excellence and integrity in the tax community is unparalleled. The firm specializes in federal and state civil and criminal tax litigation, tax controversies and tax disputes with the federal, state, and local taxing authorities and white collar criminal defense, and has received many notable decisions on behalf of its clients before the Federal Appellate Courts, the Federal District Courts, the Bankruptcy Courts, the United States Tax Court, and various state courts, including the California Franchise Tax Board and the California State Board of Equalization.

We are pleased to announce that Michel R. Stein and Sandra R. Brown will be speaking on June 26th at the Agostino & Associates International and Domestic Tax Controversy Update at the Bergen Community College at the Meadowlands. BBQ to follow at The Green at Hackensack Court Square on the following topics:

Michel R. Stein
State and Local Tax Updates

 Sandra R. Brown
IRS Criminal Tax Update

Register Here for the Seminar

Register Here for the BBQ

Founded in 1960, Hochman Salkin Toscher Perez P.C., is internationally recognized as the preeminent tax law firm on the West Coast. The reputation of the firm for excellence and integrity in the tax community is unparalleled. The firm specializes in federal and state civil and criminal tax litigation, tax controversies and tax disputes with the federal, state, and local taxing authorities and white collar criminal defense, and has received many notable decisions on behalf of its clients before the Federal Appellate Courts, the Federal District Courts, the Bankruptcy Courts, the United States Tax Court, and various state courts, including the California Franchise Tax Board and the California State Board of Equalization.

We are pleased to announce that once again HOCHMAN SALKIN TOSCHER PEREZ P.C. and it’s Managing Principal Steven Toscher have been recognized by Chambers and Partners, 2024 USA, for its strength and expertise in the areas of Tax Fraud and Tax Controversy. 

Additionally, we are pleased to announce that three of the firm’s principals, Steven Toscher, Dennis Perez and Sandra R. Brown are ranked in Chambers High Net Worth in the area of Tax: Private Client. 

Chambers is the world’s leading legal rankings and insights intelligence company. For over 30 years, Chambers has differentiated the very best legal talent by identifying and ranking law firm departments and lawyers globally.

Regarding our firm’s tax fraud and tax controversy related work, Chambers notes that HOCHMAN SALKIN TOSCHER PEREZ P.C. is “a respected tax boutique noted for its handling of contentious tax matters. It has a hugely impressive track record in tax controversy, alongside criminal and civil litigation at both state and federal level and is a respected Beverly Hills tax boutique with recognized controversy expertise at both state and federal level.”

Chambers further notes that our firm’s “Bench offers deep governmental experience and additional strength in criminal tax disputes. Broad client base includes public companies and high net worth individuals.” 

We are honored by the recognition awarded by Chambers and grateful to our clients who continue to trust us with their criminal and civil tax matters. These outstanding achievements are a true testament to the dedication and hard work of every individual at HOCHMAN SALKIN TOSCHER PEREZ P.C. Our firm looks forward to continuing to provide best in class service to our clients.  

Founded in 1960, Hochman Salkin Toscher Perez P.C., is internationally recognized as the preeminent tax law firm on the West Coast. The reputation of the firm for excellence and integrity in the tax community is unparalleled. The firm specializes in federal and state civil and criminal tax litigation, tax controversies and tax disputes with the federal, state, and local taxing authorities and white collar criminal defense, and has received many notable decisions on behalf of its clients before the Federal Appellate Courts, the Federal District Courts, the Bankruptcy Courts, the United States Tax Court, and various state courts, including the California Franchise Tax Board and the California State Board of Equalization.

We are pleased to announce that Evan Davis, Robert S. Horwitz and Jonathan Kalinski will be speaking at the upcoming Strafford webinar “Continuing Impact of Notable Cases: Applying Landmark Tax Decisions to Current Tax Matters” Friday, June 21, 2024, 10:00 a.m. – 11:50 a.m. (PST).

Landmark tax cases charted the course for tax calculations and continue to impact decisions made by the courts and taxpayers. These remarkable rulings are frequently revisited and cited as preparers navigate the complexities of the Internal Revenue Code.

As famous for its namesake, George M. Cohan, as its tax implications, the Cohan Rule resulted from the resolution reached in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). The Cohan Rule allows taxpayers to deduct reasonably estimated expenses when complete records do not exist. Recently, in Alvarado v. Commissioner (U.S.T.C. Jan. 3, 2024), the court allowed Alvarado, a used car dealer, to avoid fraud penalties and estimate his cost of goods, citing the Cohan Rule.

United States v. Boyle, 469 US 241 (S. Ct. 1985) is another significant case with continuing impact. Boyle established that reliance on a tax preparer does not constitute reasonable cause for unfiled or late-filed tax returns. The U.S. Court of Appeals for the Eleventh Circuit recently cited this case in its decision relative to e-filed returns, Lee v. U.S. 84 F.4th 1271 (11th Cir. Oct. 24, 2023). The court determined that the Boyle decision applied to electronically filed tax returns as well as paper.

Tax practitioners and advisers should be familiar with the key elements of the most influential tax cases and understand how they are being applied to tax decisions today.

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We are pleased to announce that Michel R. Stein will be speaking at the upcoming SVBA webinar “IRS Enforcement Priorities for 2024 and Beyond” Tuesday, June 18, 2024, 12:00 p.m. (PST).

Michel Stein will lead a discussion on what tax practitioners can expect from the Internal Revenue Services’ audit priorities and enforcement action after the Inflation Reduction Act of 2022.

Information about signing up for the webinar can be obtained from the following link:

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Not many years ago the government and most practitioners viewed the Anti-Injunction Act as presenting an almost insurmountable barrier to challenges to IRS regulations and rulings. That view began to change with Mayo Foundation for Medical Education & Research v United States, 562 U.S. 44 (2011), which recognized that IRS regulations are subject to review in the same manner as those of any other agency (“we are not inclined to carve out an approach to administrative review good for tax law only”). What this meant for review of IRS rulings and notices became clear in CIC Services, LLC v IRS, 141 S.Ct. 1582 (2021), involving a challenge to IRS Notice 2016-66, which identified certain micro-captive arrangements as listed transactions. The Court held that a person could seek judicial review of an IRS notice to challenge reporting requirements for failure to comply with the Administrative Procedures Act (APA) because to do so was not an attempt to enjoin the assessment or collection of a tax.

Internal Revenue Code §6011(a) authorizes the Secretary of Treasury to issue regulations requiring the filing of returns and statements by “any person.” In 2003, the IRS promulgated Treas. Reg. §1.6011-4, which, for the first time, required taxpayers who participated in “reportable” or “listed” transactions and their material advisors to file reports with the IRS. Treas. Reg. §1.6011-4 (b)(2) defines “listed transaction” as a reportable transaction “determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.” In 2004, Congress enacted IRC §6707A, which imposed civil penalties upon taxpayers and material advisors who fail to report listed transactions. For a taxpayer who fails to report a listed transaction these penalties range from $10,000 ($5,000 for a natural person) to $200,000 ($100,000 for a natural person). A material advisor who violates the disclosure provisions faces a penalty of at least $200,000 and up to 50% of the gross income received for its advice or assistance. If a violation is willful, the maximum civil penalty is 75% of gross income and potential criminal charges.

Presently the IRS has identified 36 listed transactions, 28 through notices and the rest through revenue rulings. All of these notices or rulings were issued without notice and comment procedures. There are currently 34 active listed transactions, 28 of which were identified prior to enactment of §6707A. Notice 2017-10 was issued after enactment of §6707A. It “designates certain conservation easement transactions as presumptively tax-avoidant listed transactions.”

On June 4, 2024, the Eleventh Circuit in Green Rock, LLC v. IRS, Case No. 23-11041, affirmed a district court decision invalidating Notice 2017-10 as to Green Rock. The suit was brought by an entity that was a promoter and material advisor of syndicated conservation easements. After issuance of Notice 2017-10 it complied with the filing requirements imposed for listed transactions. Green Rock nonetheless asserted that Notice 2017-20 was invalid because it was not issued in compliance with the notice and comment requirements of the APA.

As the Court noted in its opinion, this past December Congress amended IRC §170(h) to provide that syndicated conservation easements of the type identified in Notice 2017-10 will no longer be allowed to write off easement donations based on inflated valuations.[1] After enactment of this amendment Green Rock ceased syndicating conservation easements.

The Eleventh Circuit began by discussing how, in response to the proliferation of certain corporate tax shelters, the IRS designed the reportable transaction regime to target those shelters and ferret out improper tax avoidance transactions.

An agency ruling that is meant to have the force of law, and violation of which can expose a person to civil or criminal penalties, is a “legislative ruling” and must be issued in accordance with the APA’s notice and comment procedures. The IRS claimed that listed transaction notices were exempt from APA notice and comment procedures. This argument turned on the definition of “reportable transaction” contained in §6707A(c)(1):

“Reportable Transaction-The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type the Secretary determines as having a potential for tax avoidance or evasion.”

“Listed transaction” is a reportable transaction “the same as or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.” IRC §6707A(c)(2).

As noted by the Court, there is no language in the Code that exempts listed transactions from APA notice-and-comment requirements either expressly or by implication. An agency is exempt from notice and comment procedures only if Congress expressly exempts it. While there is no magical formula for exemption, it will be implied only where Congress has expressly established procedures that are “so clearly different from those required by [the APA] that it must have intended” them to displace the APA procedures.

According to the IRS, the lack of such language was no impediment to finding that the procedure for designating listed transactions was exempt from the APA. Congress had used part of the language of Treas. Reg. §1.6011-(4)(b) in crafting the definitional provisions of §6707A. As a result, Congress was aware of the regulation and must have endorsed the notice procedure for designating listed transactions. 

Not so fast, said the Eleventh Circuit. Congressional awareness of the regulation is not enough to overcome the requirements of the APA. That Congress, in drafting §6707A, omitted the “by notice” language contained in the regulation indicates that Congress did not intend to exempt the IRS from notice and comment requirements when designating listed transactions. The Court agreed with the Sixth Circuit in Mann Construction, Inc. v. United States, 27 F. 4^th 1138 (2022)[2], that the language of §6707A “cannot bear the weight of the Service’s argument.” In fact, the definition of “reportable transaction”

“can fairly be read to allow the Service to define the substance of a reportable transaction through regulations issued under the Service’s section 6011 authority ….  But an indirect series of cross-references hardly suffices to supplant the base-line procedures of the Administrative Procedures Act.”

Congress’ cross-reference was to §6011, which requires the Secretary to prescribe regulations (not notices) for making returns and statements. Congress had the opportunity to adopt the notice procedures when it enacted §6707A but did not. This silence was “the opposite of an express statement.”

Finally, the IRS argued that the Court’s interpretation would invalidate every listed transaction. The Court pointed out that pre-2004 listed transactions were not legislative when issued since they did not result in the imposition of civil or criminal penalties for noncompliance. Section 6707A can be read as ratifying the existing listed transactions without exempting the IRS from prospective notice and comment procedures. In any event, the Eleventh Circuit stated it was only dealing with Notice 2017-10.

Despite prior rulings by the Sixth Circuit and the Tax Court that notice and comment procedures apply to listed transaction designations issued after the enactment of §6707A, IRS has continued to claim that listed transaction notices are exempt.  It is unlikely Green Rock will make the IRS change its position. The case, however, further highlights the IRS’s continued vulnerability to challenges for violations of the APA. Practitioners should remain alert to whether IRS guidance which impacts or is contrary to a position of their clients was issued in compliance with APA notice and comment requirements.

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[1] A taxpayer can claim a charitable contribution deduction for the donation of a “qualified conservation easement.” Congress added subsection (h)(7) that provides that a contribution by a partnership shall not be treated as a qualified conservation easement “if the amount of such contribution exceeds 2.5 times the sum of each partner’s relevant basis in such partnership.”

[2] In Mann Construction, the Sixth Circuit invalidated Notice 2007-66 for failure to comply with notice and comment requirements.

In 2015 Congress enacted the Bipartisan Budget Act of 2015 (“BBA”) that, among other things, repealed the TEFRA partnership audit provisions and replaced them with BBA partnership audit provisions effective for partnership tax years beginning after December 31, 2017. Both the TEFRA and BBA partnership audit provisions provided for an audit and adjustments at the partnership level. Under the TEFRA provisions any additional tax is assessed against and collected from the individual partners. Under the BBA provisions, however, any “imputed underpayment” is assessed against and collected from the partnership, unless the partnership makes a so-called “push-out election.”

BBA section 1101(g)(4) allowed partnerships to elect into the BBA audit provisions for tax years beginning after November 2, 2015, and before January 1, 2018. To do so, a partnership was required to submit an election that satisfies the requirements of Treas. Reg. sec. 301.9100-22(b)(2). The Tax Court recently addressed the issue of what constitutes a valid election into the BBA audit regime in SN Worthington Holdings, LLC v. Commissioner, 162 T.C. No. 10.

In October 2018, the IRS notified Worthington that its 2016 return had been selected for audit and that it had 30 days within which to elect into the BBA audit procedures. Worthington submitted a completed election form signed under penalties of perjury. One of the representations in the election was that Worthington had sufficient assets to pay and anticipated having sufficient assets to pay the imputed underpayment, as required by Treas. Reg. sec. 301.9100-22(b)(2)(ii)(e)(4). IRS sent Worthington a letter that, based on a review of Worthington’s return it did not have sufficient assets to pay the imputed underpayment and that if it disagreed it should submit documents to the IRS. Worthington did not respond. The IRS subsequently wrote to Worthington that its election was invalid both because it had insufficient assets and that the election was not made by the proper person.[1]

IRS commenced a TEFRA audit of Worthington. In June 2020, Worthington informed the IRS the audit should not be under TEFRA because it had elected into the BBA audit procedures. In August 2020, the IRS issued a TEFRA Final Partnership Administrative Adjustment (FPAA) and Worthington filed a timely petition with the Tax Court. In 2023, Worthington moved to dismiss the case for lack of jurisdiction because the FPAA was invalid. The Court granted the motion.

After reciting the facts, the Court stated that it had jurisdiction over a TEFRA case if (a) there was valid FPAA and (b) a timely petition was filed by the proper person. The IRS argued the election was invalid since the taxpayer was required to provide additional information requested to validate its representations and that allowing an election into the BBA audit procedures when a partnership cannot establish that it has sufficient assets to pay the potential imputed underpayment “would frustrate the purpose of the BBA procedures.” It also argued that based on its failure to respond to the IRS letter and its subsequent actions Worthington should be equitably estopped from arguing that the election was valid.

To decide the motion, the Court had to address two issues: (a) was the FPAA valid and (b) if it was valid, was Worthington equitably estopped from arguing that the FPAA was invalid.

Addressing the first issue, the Court gave a brief overview of TEFRA and BBA audit procedures. Under Treas. Reg. sec. 301.9100-22(a) an election made in accordance with the regulations was valid. The regulations required a written election containing a series of representations, including that the partnership had sufficient assets, and reasonably anticipated having sufficient assets, to pay the imputed underpayment. Since Worthington’s election made this representation, it complied with the regulations.

Discussing valid elections, the Court stated that a taxpayer makes a valid election when it complies “with the plain text of the election requirements.” Once the requirements were met the IRS “may not add ad hoc additional requirements” and “may not require the taxpayer to satisfy more stringent requirements than the provisions authorizing the election.” Since Worthington’s election satisfied the requirement that it had sufficient assets to satisfy an imputed underpayment, the election complied with the regulation. 

The Court rejected IRS’s second argument that under Treas. Reg. sec. 301.9100-2(a) an election is invalid if it frustrates the purpose of the BBA and that allowing a partnership to make an election if it did not have sufficient assets to pay the imputed underpayment would frustrate the BBA’s purpose. In addition to pointing to the fact that BBA has procedures where a partnership’s assets were insufficient to promptly pay the imputed underpayment, the Court stated that when there is doubt as to the meaning of a regulation, it is interpreted against the drafter. The IRS could have required partnerships to establish that they had sufficient assets, but it didn’t do so. Since Worthington made a valid election into the BBA audit procedures, the TEFRA procedures were inapplicable and the FPAA issued to Worthington was invalid.

The Court next address whether Worthington was equitably estopped from claiming the FPAA was invalid. To establish equitable estoppel, a party has to show five elements. The first is that there was a false statement or misleading silence by the party claimed to be estopped. Since Worthington never informed the IRS that it made an incorrect determination on the election’s validity for almost two years, there was misleading silence. The second element is that the false representation or misleading silence was about a statement of fact and not an opinion or statement of law. Here, the IRS had all facts needed to determine whether the election was valid. Thus, Worthington’s misleading silence was on a question of law. The third element is that the party claiming estoppel did not know all the facts. Since the IRS had all facts needed to apply the regulation, this element was not established. Thus, the IRS failed to establish two of the five necessary elements for equitable estoppel, and the Court found that equitable estoppel did not apply.

The Court ended by stating that an order of dismissal will be “silenced.”

In making an election, a taxpayer has to make sure that it has complied with all the requirements for the election. These are usually contained in the statute and regulations. If those requirements are met, the Worthington ruling tells us that an IRS challenge to the election cannot be sustained.

[1] The IRS abandoned this claim in Tax Court.

We are pleased to announce that Steven Toscher, Sandra R. Brown and Robert Horwitz will be speaking at the upcoming CalCPA webinar “IRS Scrutiny of ERCs” Tuesday, June 11, 2024, 9:00 a.m. – 10:30 a.m. (PST).

The employee retention credit, enacted as part of the CARES Act, is a US federal tax credit that provides an incentive to employers who continued to employ individuals during the COVID-19 pandemic. Since its enactment, there have been questions as to whether a business qualified and how to interpret what qualified as a full or partial suspension of operations in order to be eligible for the credit. Companies engaged advisors – some of whom were diligent in determining a businesses’ eligibility – though others engaged advisors, whose business models created incentives to take aggressive positions on employee retention credit qualification that likely are not sustainable under audit. This panel will discuss the IRS’ increased enforcement efforts in the area of Employee Retention Credits (ERC), explain how to spot red flags indicating abuse of the ERC, describe the civil and criminal penalties that can apply to taxpayers, promoters and practitioners for erroneously claiming ERC credits, and provide tips on how to help clients correct mistakes where appropriate.

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