Posted by: evanjdavis | February 14, 2017

IRS Reiterates its Focus on Captive Insurers by EVAN J. DAVIS

Back in November 2016, I wrote about the IRS’s recent designation of “micro-captive” insurance arrangements as “transactions of interest.” In Notice 2016-66, the IRS required most captive insurers to file a form describing who sold and set up the captive, among other things.  Presumably, the IRS wanted that information to quickly determine which persons to target for possible promoter penalties or even criminal prosecution.

On January 31, 2017, the IRS issued a notice showing that its focus on captive insurers won’t be going away anytime soon.   The IRS’s Large Business and International Division issued a statement identifying 13 “campaigns” that target “compliance issues” that greatly concern LB&I.  The IRS’s notice suggests that the agency is focusing its scarce resources on a handful of issues to get the most bang for the buck, instead of hoping to catch issues with a randomized approach.  The list of 13 campaigns contains some of the usual suspects for LB&I, including Offshore Voluntary Disclosure Program rejects, related-party transactions, and repatriation schemes.  However, the bulk of the campaigns are issues or schemes that the IRS has more-recently identified as possible tax dodges.  And that includes “micro-captive” insurance companies.

After stating what micro-captive insurance companies do – often wholly owned by the insured, they provide insurance to related companies, allowing a premium deduction to the insured and, if the rules are followed, tax-advantaged treatment of premiums by the captive – the IRS described its concerns with captives. In particular, the IRS believes “the manner in which the [insurance] contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices.”  In plain English, the IRS is concerned that: the insurance policies aren’t targeting real risks (think hurricane insurance in Nebraska); the premiums are set to maximize tax savings instead of based on actuarial analysis of the risks; or the captives are administered as personal piggy banks instead of true insurers.

The IRS then gave the answer that many of us were expecting after it issued Notice 2016-66 and required thousands of captive insurers to file a disclosure form: it will be conducting issue-based examinations of captives. The surprising part of the announcement – which may be disconcerting to captives that have pushed the boundaries – is that the IRS also announced that it developed a training strategy for the campaign.  Given how few IRS employees currently understand captive insurers, the agency’s captive-insurance experts were presumably overwhelmed with the disclosure forms.  The IRS stepped up with money and personnel, so this campaign appears to have legs.

Left unsaid is how many of the issue-based examinations will lead not just to audit adjustments but also civil penalties and criminal prosecutions of both clients and, more likely, promoters. The IRS will expect a return on its investment, and that spells bad news for the more-aggressive promoters and clients.  The only silver lining is that – having investigated a captive insurer while I was a federal prosecutor – captives are sufficiently complicated that very few situations would make a compelling criminal case, and neither the IRS nor the Department of Justice likes to lose a tax prosecution.

EVAN DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. 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 Criminal Division.

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, 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 filing season heats up, taxpayers and preparers need to be aware of the many foreign reporting requirements. There is a lot more to know than an FBAR and a box on Schedule B.  Failure to know and follow the rules can be costly.  Edward S. Flume, a U.S. citizen residing in Mexico, had ownership interests in two Mexican corporations, but failed to file Forms 5471 and was hit with $10,000 penalties for 9 years, including multiple $10,000 penalties for 2 years. Flume v. Commissioner, T.C. Memo. 2017-21.

Mr. Flume had a 50% ownership in one corporation, later reducing his interest to 9%. In a second corporation, he and his wife each owned 50%, but later claimed they each only owner 9% despite total control of a UBS account in the corporation’s name.  Backdated documents supporting their reduced ownership did help them.  Mr. Flume had a tax preparation firm in Mexico prepare his returns, but he failed to inform them of his corporations.

Mr. Flume timely filed his tax returns for the years at issue, but did not file Forms 5471. The IRS audited Mr. Flume’s ownership of foreign corporations and assessed penalties for failure to file Forms 5471 under IRC §6679(a) for one year, and under IRC §6038(b) for the remaining years.  Mr. Flume didn’t pay and the IRS issued a Notice of Intent to Levy.  Mr. Flume requested a CDP hearing challenging the underlying liability.  The IRS sustained the collection action and Mr. Flume petitioned the Tax Court.

Taxpayers are required to file Form 5471 if they fall into one or more of several categories. The Court discussed the legal requirements in detail as follows:

“Section 6038(a)(1) imposes information reporting requirements on any U.S. person, as defined in section 957(c), who controls a foreign corporation. A person controls a foreign corporation if he owns or constructively owns stock that is more than 50% of the total combined voting power of all classes of voting stock or owns more than 50% of the total value of shares of all classes of stock. Sec. 6038(e)(2). A U.S. person must furnish, with respect to any foreign corporation which that person controls, information that the Secretary may prescribe. Sec. 6038(a)(1). Form 5471 and the accompanying schedules are used to satisfy the section 6038 reporting requirements. The Form 5471 must be filed with the U.S. person’s timely filed Federal income tax return. Sec. 1.6038-2(i), Income Tax Regs.

Additionally, the information reporting requirements prescribed in section 6038(a)(1) also are imposed on any U.S. person treated as a U.S. shareholder of a corporation that was a CFC for an uninterrupted period of 30 days during its annual accounting period and who owned stock in the CFC on the last day of the CFC’s annual accounting period. Secs. 951(a)(1), (b), 6038(a)(4); see also Rev. Proc. 92-70, sec. 2, 1992-2 C.B. 435, 436. A U.S. shareholder, with respect to any foreign corporation, is a U.S. person who owns under section 958(a), or is considered as owning under section 958(b), 10% or more of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. Sec. 951(b).

Section 6046 requires information reporting by each U.S. citizen or resident who is at any time an officer or director of a foreign corporation, where more than 10% (by vote or value) of stock is owned by a U.S. person. Sec.6046(a)(1)(A). The stock ownership threshold is met if a U.S. person owns 10% or more of the total value of the foreign corporation’s stock or 10% or more of the total combined voting power of all classes of stock with voting rights. Sec. 6046(a)(2). A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his interest to less than the stock ownership requirement is required to provide certain information with respect to the foreign corporation.  Sec. 1.6046-1(c)(1)(ii)(c), Income Tax Regs.”

The penalties for failing to timely file a Form 5471 are $10,000 per corporation per annual accounting period. If notified by the IRS of the failure, additional penalties of up to $50,000 can apply.

Mr. Flume was required to file Form 5471 for various reasons depending on the year. To avoid the penalty a taxpayer must demonstrate reasonable cause.  As the Court points out, there are no regulations defining reasonable cause in the Form 5471 context, but court cases have generally required a taxpayer to demonstrate that he exercised ordinary business care and prudence, but was unable to file within the required time. United States v. Boyle, 469 U.S. 241, 246 (1985).  A taxpayer can also demonstrate reasonable cause by relying on his tax adviser.  The taxpayer must show that the adviser was competent, the taxpayer provided necessary and accurate information, and that he actually relied in good faith on the advice.

Mr. Flume argued that his preparer failed to advise him to the Form 5471 requirement. The only problem for Mr. Flume was that he didn’t inform his preparer that he had foreign corporations until one of the later years at issue.

Although this case is a Form 5471 case, there are lessons to be learned for all foreign reporting issues. The relationship between a taxpayer and his or her tax preparer is crucial.  If you do not tell your preparer about your foreign assets, you can’t expect proper reporting, and if hit with penalties you can’t rely on the advice not given.  As foreign penalties go, Form 5471 penalties are relatively low at $10,000 per corporation, per year.  Other penalties can be much more severe.

In an interesting footnote, the Court asked the parties to address the whether there were any prohibited ex parte communications between the IRS Office of Appeals and the originating function. Petitioner failed to address the issue and therefore is deemed to have conceded it.  In a CDP context, taxpayers should always make sure that the ex parte rules are followed and that any communication between the Settlement Officer and the Revenue Agent, for example, include you or your representative.

JONAHAN 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.

Among other research tools available to taxpayers and practitioners, the Tax Court’s website is a valuable resource for those researching tax issues and can be particularly helpful for those preparing for a case before the Tax Court. The following is a guide to some of the resources available to the public on the Tax Court’s website: http://www.ustaxcourt.gov.

Opinion Search.[i]  Although Tax Court opinions are widely available on various subscription-based services, taxpayers and practitioners can access TC Opinions and Memorandum Opinions dating back to September 25, 1995, for free on the Tax Court website.  The Tax Court’s Opinion Search feature allows users to search for opinions by: (1) date; (2) petitioner’s name or a case name keyword; (3) judge; (4) type of opinion; and (5) a text search of the body of the opinion.  The default number of search results is set to 5, but can be changed to “All” so that the search returns all opinions that meet the search criteria.  This is a particularly convenient way to search for opinions written by the current Tax Court judges.

Orders Search.[ii]  Past pretrial orders issued by a judge can be a valuable tool for practitioners dealing with various trial and pretrial issues, including discovery disputes and questions regarding the admissibility of evidence.  While these issues are sometimes addressed in a TC Opinion or a Memorandum Opinion, they are often disposed of in a pretrial order by the judge.  Although under Rule 50(f) of the Tax Court Rules of Practice and Procedure these orders cannot be cited as precedent, the Orders Search feature can give taxpayers and practitioners the opportunity to gain insight into how a particular judge rules on various pretrial issues that may be relevant to their pending case.  These orders are not readily available outside of the Tax Court website and the Tax Court website makes it easy to search the orders, with similar search criteria to the Opinions Search page.

Docket Inquiry.[iii]  If there is a particular Tax Court case a taxpayer or practitioner is interested in, the Tax Court website features a Docket Inquiry, which allows users to look up a docket by docket number or by party name.  The Docket Inquiry page for a case shows the attorney information for each party, lists all of the filings in a case, and allows the user to view orders, opinions, and decisions the Court has filed in the case.  This feature is more limited than docket inquiry searches available for Federal district court cases through pacer.gov, because briefs and other filings by parties are not available electronically to the public for Tax Court cases.

eFiling Rules and Instructions.[iv]  In addition to providing the full Tax Court Rules of Practice and Procedure[v] and background information about how to start a Tax Court case[vi], the Tax Court website also separately publishes a Practitioners’ Guide to Electronic Case Access and Filing[vii], which provides specific rules, instructions, and other guidance to taxpayers and practitioners about eFiling in a Tax Court case.  In the Tax Court, electronic filing (eFiling) is now mandatory for most parties represented by counsel (except for the initial petition, which currently must be filed in paper form) and is available, but not required, for pro se taxpayers through Petitioner Access.  In addition to providing basic background information about how to get started with eFiling, the Practitioner’s Guide provides rules and guidance on issues including good cause exception to eFiling, what documents may be eFiled, timeliness of eFiled documents, format and style of documents, service of eFiled document, how to handle errors made in eFiling documents, and also provides a checklist for eFiling and detailed eFiling Instructions.  Even if a practitioner understands how the eFiling system works, it is important for a practitioner to still be familiar with the Practitioner’s Guide because it contains specific rules pertaining to eFiled documents that are not included in the Tax Court’s Rules of Practice and Procedure.

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a senior tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere in complex civil tax litigation and criminal tax prosecutions (jury and non-jury). She represents U.S. taxpayers in litigation before both federal and state courts, including the federal district courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the Ninth Circuit Court of Appeals. Ms. Strachan has experience in a wide range of complex tax cases, including cases involving technical valuation issues. She routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

[i] The direct link to the Opinions Search page is: http://www.ustaxcourt.gov/USTCInOP/OpinionSearch.aspx

[ii] The direct link to the Orders Search page is: http://www.ustaxcourt.gov/InternetOrders

[iii] The direct link to the Docket Inquiry page is: http://www.ustaxcourt.gov/docket.htm

[iv] General information about the Tax Court’s eAccess and eFiling procedures are available here: http://www.ustaxcourt.gov/electronic_access.htm

[v] The Tax Court Rules of Practice and Procedure are available here: http://www.ustaxcourt.gov/rules.htm

[vi] The Tax Court website includes a “Taxpayer Information” section (http://www.ustaxcourt.gov/taxpayer_info_intro.htm) that provides information on how to file a petition to begin a Tax Court case and an overview of how the Tax Court process works.  The Tax Court also provides information about fees (http://www.ustaxcourt.gov/fees.htm) and sample forms for certain filings (http://www.ustaxcourt.gov/forms.htm).

[vii] The direct link to the Practitioner’s Guide to Electronic Case Access and Filing is: http://www.ustaxcourt.gov/eaccess/Practitioners_Guide_to_eAccess_and_eFiling.pdf

Second Circuit Holds Justice Department’s Feet to the Fire to Prove the Fifth Amendment Doesn’t Apply in Two Cases

There is no Fifth Amendment protection for the content of most records, but the act of producing records is protected by the Fifth Amendment if the government could use the fact of a taxpayer having produced documents against her.  For example, if a sole proprietor kept two sets of books – one showing “real” revenue and another showing less revenue that he used to prepare tax returns – the books themselves would not be protected by the sole proprietor’s Fifth Amendment rights.  However, if the government subpoenaed all books and records from the sole proprietor, he could assert his Fifth Amendment rights against producing the books and records because the act of producing the books would incriminate him.  How?  By confirming that he knew there were two sets of books, and that the books being turned over were for his business as opposed to someone else’s business.  An experienced lawyer representing the sole proprietor would likely be successful at asserting a Fifth Amendment defense to producing records to the IRS and Department of Justice (“DOJ”).

The IRS and DOJ may counter with one of three common exceptions to this act-of-production privilege: (1) “collective entities” such as corporations don’t have Fifth Amendment rights, so the IRS could try to subpoena a corporation, trust, or LLC to designate a custodian and produce documents without regard to possible incrimination of the entity or its members; (2) if the subpoenaed records, such as certain foreign banking records, are required by law to be kept (aka the “required records exception”), then the government may successfully force a taxpayer to turn over records even if the act of producing incriminates the taxpayer; and (3) if the government already knows that the taxpayer has the records, then her production of documents isn’t incriminating because her possession thereof is a “foregone conclusion.”

In August 2016, the Second Circuit Court of Appeals shot down the DOJ and IRS’s attempt to use the foregone conclusion exception to the act-of-production privilege. In United States v. Greenfield, 831 F3d 406 (2d Cir. 2016), the Court noted that an employee of a Liechtenstein bank had leaked bank documents in 2008 showing that clients, including Mr. Greenfield, appeared to have had foreign bank accounts in 2001.  In 2013, acting on the leaked documents, the IRS subpoenaed the taxpayers to produce foreign bank records, and the taxpayer’s lawyers responded by claiming the act-of-production privilege.  After the district court ruled against the taxpayers, the Second Circuit reversed the district court’s decision and held that the fact that the taxpayers may have had documents ten years before the subpoena, is insufficient for the government to meet its burden to show (a) the documents still exist, (b) they are authentic without having to rely on the taxpayer to authenticate them, and (c) they have remained in the taxpayer’s possession.  The Second Circuit noted that generally the government has met its burden in cases involving much shorter periods – weeks or months – and events such as the death of the family patriarch here made it likely that the documents would have been destroyed.  The appellate court went out of its way to explain how continued possession of documents could be incriminatory, and that two years was too long to assume that a taxpayer would keep important documents such as expired passports.  Although the Second Circuit asserted that it was thoroughly analyzing the case so as to give the government a roadmap to strengthen its evidence and then serve another summons, in reality it will be very difficult for the government to overcome the hurdles that the Second Circuit erected without finding an eyewitness who recently saw the documents.

Proving Greenfield was no fluke, last week the Second Circuit reversed a district court’s order compelling a taxpayer to turn over records and testify about them.  In United States v. Fridman, 2016 TNT 240-13, the district court had found all three exceptions applied to the IRS subpoena issued to the taxpayer’s trust, for records of foreign bank accounts. The Second Circuit wasn’t satisfied with the district court’s unsupported conclusions, noting the district court hadn’t explained why any of those exceptions applied to particular documents.  The appellate court sent the case back to the district court to explain in detail – if it could – which exception applied and to which documents.

The cases reinforce why lawyers should press the government to show how it has met its heavy burden to prove an exception to the Fifth Amendment’s act-of-production protection.

EVAN DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. 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 Criminal Division.

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, 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).

The Tax Court issued a reminder that a partner’s distributive share of partnership income is taxable to the partner even if he never actually receives money.[1]  Also, ignoring your tax professional’s advice does not constitute “reasonable cause”.

Walter Mack, a partner at a New York law firm received a K-1 showing his distributive share of income as $479,743.[2]  He reported $75,000 as income, claiming that under New York State law he was required to use the rest to pay his firm’s expenses in an effort to keep the firm from going out of business.[3]

Mr. Mack’s position was that because of the 2008 recession, other partners could not cover the firm’s expenses so he needed to step in. Mr. Mack sought the advice of tax professionals who advised him that although the tax law might be unfair, he needed to report his entire distributive share as income.  He decided to ignore their advice and “face the consequences”.[4]  He prepared his own return and reported a total of $75,000 from his firm.

Not surprisingly, the IRS audited Mr. Mack and issued a Notice of Deficiency, adding an accuracy-related penalty to the unreported income. The IRS filed for summary judgment and the Court granted the motion.  Summary judgment is not used in Tax Court nearly as much as state courts or Federal District Courts, and is usually seen in Collection Due Process cases.  This case shows that it can be used effectively in a deficiency case, where the facts are not really in dispute.

The result in this case is obvious, but a reminder that income does not have to actually be received to be taxable. The Court notes that Mr. Mack’s did not allege that his firm failed to claim expenses, which would have reduced its income and therefore his distributive share.  It also points out that if Mr. Mack’s putting his share back into the firm was a capital contribution, that it is not deductible.

This case also highlights that ability to pay is not a winning argument in a deficiency case. That might be an argument raised with a revenue agent or appeals officer in the hopes that they will choose to settle the case, but the Tax Court will not consider it.  Ability to pay is of course an argument for collections and could come before the Court through a Collection Due Process case.

Finally, to no one’s surprise, the Court held the Macks liable for the accuracy-related penalty. The opinion puts it perfectly.

“Mr. Mack admits that tax professionals explained to him that the tax law required him (albeit “unfairly”, they said) to report his share of the partnership income (and advised him to dissolve the firm in order to stay in compliance with his own tax obligations), and that he disregarded their advice and affirmatively decided not to do so but instead to “face the consequence”. The accuracy-related penalty is now part of that consequence.”

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.

[1] Mack v. Commissioner, T.C. Memo. 2016-229.

[2] Id.

[3] Id.

[4] Id.

AGOSTINO & ASSOCIATES –To download a great article prepared by our very close friends at the Law Firm of Agostino & Associates in Hackensack, NJ ( http://www.agostinolaw.com ), see the Agostino & Associates Newsletter – http://files.constantcontact.com/f7d16a55201/ab897fa2-b252-47cc-ba92-138337eb9269.pdf

Invoking the Fifth Amendment in Audits With Offshore Issues: Required Records Under The Bank Secrecy Act, Greenfield, and Continuation Penalties by Frank Agostino, Esq. and Lawrence A. Sannicandro, Esq. – The Internal Revenue Service (“IRS”) continues to deliver on its promise to audit taxpayers who made quiet disclosures, who imprudently entered into the Streamlined Filing Compliance Procedures (“Streamlined Program”), or who never disclosed offshore accounts. These audits, which are typically based on third-party information received under the Foreign Account Tax Compliance Act (“FATCA”), tax information exchange agreements, or as a result of the Swiss Bank Program, require a special strategy because the third-party information that triggered the audit (whether right or wrong) usually supports the conclusion that the taxpayer violated U.S. law. Practitioners handling audits with undisclosed offshore accounts must be especially proactive in asserting all applicable privileges, including the Fifth Amendment privilege against self-incrimination.

This article explains that tax professionals handling offshore audits should assert all applicable privileges, including the Fifth Amendment privilege against self- incrimination, when submitting to an IRS interview or responding to a summons or an information document request (“IDR”).

Then, this article discusses three common situations in which a taxpayer may rightly invoke his or her Fifth Amendment privilege against self-incrimination during an audit with offshore issues.

  1. The first situation is in response to an IDR or a summons by the IRS seeking information with respect to foreign bank accounts. In this regard, the Court of Appeals for the Second Circuit’s recent decision in United States v. Greenfield breathes new life into Fifth Amendment objections to some, if not many, of the documents the IRS routinely requests in an offshore audit.
  2. The second situation is during IRS interviews, especially where the revenue agent possesses third-party information suggesting a violation of the internal revenue laws but refuses to disclose the specifics of that information.
  3. The third situation is in response to revenue agents’ requests for taxpayers to file past due international information returns to avoid continuation penalties. On this point, a recent Order by the United States Tax Court (“Tax Court”) in Youssefzadeh v. Commissioner supports that a line-by-line assertion of the Fifth Amendment privilege on delinquent foreign information returns is a viable alternative to filing a potentially inculpatory information return.

GREAT ARTICLE!! FOR THE FULL ARTICLE SEE http://files.constantcontact.com/f7d16a55201/ab897fa2-b252-47cc-ba92-138337eb9269.pdf

AGOSTINO & ASSOCIATES, with a national practice based in Hackensack, NJ, specializes in tax and tax controversies (civil and criminal), offers in compromise, voluntary disclosures, tax lien discharges, innocent spouse determinations, forfeitures, estate planning and probate, contract and contract litigation.  A firm comprised truly great, caring people who want the best for their clients !

For further information, contact Frank Agostino or Lawrence A. Sannicandro, Esq.- directly at (201) 488-5400 or visit http://www.agostinolaw.com

 

 

In a strange set of facts, the Tax Court reconsidered a prior decision because one of the IRS’ experts lied in his report and testimony, but the outcome remained the same. On November 19, 2015, the Tax Court issued a Memorandum Opinion in AD Inv. 2000 Fund LLC[1], in favor of the IRS, holding that a currency option transaction lacked economic substance.  The trial testimony consisted primarily of expert witnesses, two for the IRS, one for Petitioner.  In an unrelated subsequent Tax Court case[2] (Tucker v. CIR), it was discovered that one of the IRS’ witnesses in AD Inv. 2000lied in both his expert report and his trial testimony regarding his expert qualifications.  Voir dire in the Tucker case revealed that the expert failed to update his curriculum vitae with respect to certain aspects of his employment history and the trial in which he had testified in.  Under Tax Court Rule 143(g), experts are required to include in their report a list of all cases during the previous 4 years that they testified as an expert at trial or by deposition.

Petitioner in AD Inv. 2000 filed a motion to vacate, on the grounds the expert lied. Respondent, perhaps surprisingly, did not object.  In reconsidering its decision, and ignoring the expert’s report, the Court reentered decision for the IRS.[3]  In the first decision, the Court made 5 principal findings, two of which were made on the basis of expert testimony.[4]  The Court, however, determined that there was corroborating testimony from other experts, and therefore, the outcome does not change.

Although this case ultimately did not cost the IRS a favorable decision, practitioners should learn the lesson to thoroughly vet your expert and their report.  In the Tax Court, an expert’s direct testimony is his or her expert report.  Expert reports must include the following:

  1. Complete statement of all opinions the witness expresses and the basis and reason for them;
  2. The facts or data considered by the witness in forming them;
  3. Any exhibits used to summarize or support them;
  4. The witness’ qualification, including a list of all publications authored in the previous 10 years;
  5. A list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and
  6. A statement of the compensation to be paid for the study and testimony in the case.

Experts can make or break a case. Make sure your expert is qualified, and that his or her report follows the rules.  Just as important, make sure the IRS’ witness is qualified.

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 in Washington, D.C.

[1] AD Inv. 2000 Fund LLC, T.C. Memo. 2015-223.

[2] Tucker v. Commissioner, T.C. Dtk. No. 12307-04.

[3] AD Inv. 2000 Fund LLC, T.C. Memo. 2016-226.

[4] AD Inv. 2000 Fund LLC, T.C. Memo. 2015-223.

In a closely watched decision by the Supreme Court issued today, the Court unanimously sided with the Ninth Circuit over the Second Circuit when it determined that, to prove securities fraud against a “tippee” who receives an insider tip, the government is not required to show that the “tipper” received anything tangible in return.  https://www.supremecourt.gov/opinions/16pdf/15-628_m6ho.pdf   

The decision slams the door shut on the Second Circuit’s approach, announced in 2014 in the case United States v. Newman.  In Newman, the Second Circuit broke with other Circuits – and, it turns out, Supreme Court precedent – when it determined that, when prosecuting a tippee, the government must demonstrate that an insider who gives a tip to a friend or relative must receive something valuable in return.  The Supreme Court had previously decided that a tipper must receive a personal gain, and had suggested that personal gain could simply be to help the tipper’s friend or relative.  The Newman court ignored the Supreme Court’s suggestion and said that the tipper must receive at least a potential gain in money or something else valuable, in exchange for the tip.  The Second Circuit’s decision was the first to give “teeth” to the personal-benefit element.   

Soon after Newman, the Ninth Circuit hewed to the literal reading of Supreme Court precedent later in United States v. Salman, and the Supreme Court agreed with this approach today.  As the Supreme Court explained, it would be illegal for an insider to trade on inside knowledge and then give the trading proceeds to a friend or relative as a gift.  Therefore, according to the Supreme Court, it is illegal for an insider to tip off a friend or relative with the expectation that the friend or relative will then trade on the tip and pocket the gain directly.  Characterizing this simple test as a “commonsense point,” the Court defanged the personal-benefit element and noted that the jury instructions retain safeguards to ensure the government does not overreach with its securities-fraud prosecutions. 

As the former Securities Fraud Coordinator for the U.S. Attorney’s Office, I was particularly interested in how short the opinion was, and how little regard the Justices appeared to have for the Second Circuit’s Newman decision.  However, the Supreme Court’ did not address Newman’s second controversial holding – that the government must demonstrate that the tippee on trial knew about the tipper’s personal benefit.  This knowledge can be very difficult for the government to prove with “remote” tippees, who may be many steps removed from the initial tip.  The Department of Justice is no doubt looking for such remote-tippee cases in other circuits to attack this “knowledge of the personal benefit” holding in Newman by creating a circuit split that only the Supreme Court can resolve.  Stay tuned. 

EVAN DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. 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 Criminal Division. 

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, 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).

 

The 2016 ABA 33rd Annual National Institute on CRIMINAL TAX FRAUD and Sixth Annual National Institute on TAX CONTROVERSY being held December 7-9 at the WYNN HOTEL in Las Vegas – EVERYONE IS INVITED TO ATTEND!

The National Institutes represent the annual gathering of the criminal tax defense bar and civil tax dispute practitioners. This program brings together high-level government representatives, judges, corporate counsel, and private practitioners engaged in all aspects of tax controversy, tax litigation, and criminal tax prosecutions and defense.Curriculum topics include:

  • Roundtable discussions with senior officials from the IRS and the Tax division of the U.S. Department of Department
  • Strategies for experienced practitioners when representing clients in examination, at appeals, and during criminal investigations
  • Breakout sessions focused on civil tax controversy and criminal tax defense strategies
  • Advice from judges on what they want to hear from you

 

The Low Income Taxpayer Assistance Workshop (coordinated by Frank Agostino), Civil Tax Workshop and Criminal Tax Workshop will be held on Wednesday, December 7 and the National Institutes will be held on December 8-9 (concluding on Friday, December 9 no later than 1:00 p.m.).

The Annual Maggiano’s Reception (coordinated by Larry Campagna) and the Woman’s Networking Event (coordinated by Jenny Johnson) will be held on Thursday Evening, December 8.

The AGENDA and brochure are available at http://www.americanbar.org/content/dam/aba/events/cle/2016/12/ce1612ctf/ce1612ctf_brochure.authcheckdam.pdf

REGISTRATION information is available at: http://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=255363497 (If the link doesn’t work, search 33rd Annual National Institute on Criminal Tax Fraud and the ABA site should come up for you).

HOTEL INFORMATION: Wynn⃒ Encore Las Vegas, 3131  Las Vegas Boulevard South, Las Vegas, NV 89109

Hotel Reservations can be made by calling the hotel directly at 866.770.7555 or online at  https://aws.passkey.com/event/15062747/owner/18530/landing

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