For years, Beck Asset Management ($26M in AUM) in Zurich has made an unusual disclosure in its Form ADV out “of an abundance of caution.”

The firm’s latest Form ADV reveals that “Josef Beck works as Investment Advisor for Beck Verwaltungen AG (“BVAG”), an entity that is under common control with Beck AM only because it shares a single board member with BVAG.” It goes on to state that the U.S. indicted Beck in 2012 on criminal charges related to helping wealthy Americans avoid taxes.

For Full Article (page 7) Click Here.

 

 

We are pleased to announce that Steven Toscher and Jonathan Kalinski will be speaking at the upcoming CalCPA Cannabis Industry Virtual Symposium webinar on Criminal Tax Issues/Going Through an IRS Audit, Friday, August 7, 2020, 1:45 p.m.
COVID-19 has wreaked havoc on the economy, and the cannabis sector was not immune. Supply chains and distribution were disrupted, revenues were hit hard and labor has been impacted. Join us Aug. 7 for the Cannabis Industry Virtual Symposium, where you’ll learn about tax, legal and accounting updates impacting cannabis industry businesses and their professional advisors. You’ll gain an understanding of new and recently implemented policies, practical insights to serving cannabis-industry clients and walk away with ideas from accounting experts, attorneys and business owners.
Learn about the tax, legal and accounting information relevant to the cannabis industry. A significant increase in cannabis industry activity is here which leads to an increase and demand for professional services. Attend to gain an understanding of new and recently implemented policies, practical insights to serving cannabis-industry clients and get takeaways from accounting experts, attorneys and business owners.

 

Click Here for full information.

On March 21, 2018, the Supreme Court issued its much awaited decision in Marinello, and in doing so, imposed significant limitations on the government’s ability to bring obstruction charges in tax cases under the so-called Omnibus Clause of 26 U.S.C. § 7202(a).  Since that time, tax practitioners have been watching to see how impactful the decision would be on the government’s charging decisions in criminal tax cases.  Part of the watching also involved waiting for updates to the U.S. Justice Department’s Criminal Tax Manual (“CTM”) concerning the scope of Section 7212(a)’s Omnibus Clause.[i]  Earlier this month, the Tax Division ended the waiting and issued Chapter 17 of the CTM to specifically address the impact of Marinello on prosecutorial decisions involving charges contemplated by the Omnibus Clause of Section 7212(a).[ii]

Background of 26 U.S.C. § 7212(a) & Marinello

IRC § 7212(a) prohibits acts that obstruct or impede, or endeavor to obstruct or impede, the due administration of the Internal Revenue Code.[iii]  This statutory provision is referred to as the “Omnibus Clause.”

In 2018, the Supreme Court in Marinello reviewed the scope of the Omnibus Clause as a result of a split in the Circuit.  The split was significantly more favorable to the government, in that, only in decisions rendered by the Sixth Circuit were judicial limits being placed on charges prosecuted under the Omnibus Clause.  All other courts of appeals considering the issue had upheld a more generous interpretation of the Omnibus Clause and thus, affirmed convictions of defendants prosecuted for actions that occurred before, or even in the absence of, an IRS audit or investigation.[iv]

The decision in Marinello significantly narrowed the approach of the majority of the Circuits,  holding that § 7212(a) obstruction charges required that the government prove the defendant was aware of a pending tax-related proceeding or that the defendant could “reasonably foresee that such a proceeding would commence”, and that the government also establish a “nexus” between the defendant’s acts and the investigation.[v]  The Marinello Court made clear that the Omnibus Clause as a whole must involve actions intended to interfere with targeted tax-related proceedings, such as a particular investigation or audit.[vi]

Prosecutorial Discretion in Tax Cases

As noted above, prior to the Supreme Court’s ruling in Marinello, a majority of the courts supported an expansive reading of the Omnibus Clause, thus leaving charging decisions under this statute largely up to the discretion of prosecutors.  This discretion, more often than not, did evidence a fair amount of restraint by prosecutors such that charges under Section 7212(a) were limited to actions occurring after an IRS audit or overt tax investigation had begun.

To provide further context as to the limits on prosecutorial discretion in criminal tax cases, it is worth noting that approval to file a federal tax charges is, in most instances, ultimately overseen by the Tax Division, as Tax Division authorization is required to prosecute crimes arising under Title 26.  As part of the Tax Division’s oversight of tax cases, in addition to providing the basic foundation for national consistency in charging decisions, the Tax Division makes its policies and directives available to both prosecutors and the public in the CTM.  Again, worth noting, the CTM, in general, “provides only internal Department of Justice guidance.  It is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal.  Nor does the CTM place any limitations on otherwise lawful litigative prerogatives of the Department of Justice.”[vii]

The CTM does, however, provide uniform, internal guidance in charging decisions, including Tax Division Directives which speak directly to prosecutorial decisions in charging violations of Title 26.  Violations of Title 26, of course, include charges involving the Omnibus Clause of § 7212(a).[viii]

The CTM has, for over 30 years, specifically included directives relevant to § 7212(a).  Tax Division Directive 77, issued in 1989, created DOJ’s self-imposed limitations on charging a violation of § 7212(a), stating the charge “should be reserved for conduct occurring after a tax return has been filed- typically conduct designed to impede or obstruct an audit or criminal tax investigation”.[ix]   Tax Division Directive 129, issued in 2004, to supersede Directive 77, set forth that a § 7212(a) charge was most appropriate for corrupt conduct intended to impede an IRS audit or investigation such as “providing false information, destroying evidence, attempting to influence a witness to give false testimony, and harassing an IRS employee.”[x]  The Tax Division’s recent issuance of the updated Chapter 17 in the CTM, as such, is intended to provide such information to not only the public, but also federal prosecutors considering charges under the Omnibus Clause of § 7212(a) in light of the Supreme Court’s decision in Marinello.

Criminal Tax Manual – Updated Chapter 17

 Chapter 17 begins with the statutory language of IRC § 7212[xi] and an explanation of the code section and Marinello.[xii] The chapter continues with the Tax Division’s policy, which is stated as follows – “an Omnibus Clause charge should… be based on acts of commission and not acts of omission.”   Here are the highlights:

Section 17.04 analyzes, generally, the elements of the omnibus clause as construed in Marinello. It provides a more detailed explanation of the case and the Court’s findings. It also provides a brief description of United States v. Aguilar[xiii] in relation to Marinello.

Section 17.04[1] discusses the Omnibus Clause’s means rea requirement as “corruptly” rather than “willfully” and notes that Marinello did not alter the definition of “corruptly.”

Section 17.04[2] discusses the second element of the Omnibus Clause – an “endeavor.” The manual notes that Marinello “did not purport to place any categorical limitations on the types of ‘endeavors.’”

Section 17.04[3] discusses “Omissions as Endeavors.” In Marinello, the government suggested the Supreme Court limit the Omnibus Clause’s scope by excluding omissions from the scope of the statute.[xiv]  However, the Court opted to limit scope by requiring a nexus to a pending or foreseeable proceeding, leaving open the question of whether an Omnibus Clause conviction could be predicated upon an omission. “Against this legal backdrop” the Tax Division has decided that Omnibus Clause prosecutions would not be based on omissions without the express authorization of the Tax Division.

Section 17.04[4] discusses “Targeted Administrative IRS Action.”  The Supreme Court did not provide an exhaustive list of administrative conduct that would fall within the scope of the Omnibus Clause, but did make specific reference to both “investigations” and “audits.”[xv]  The section refers to United States v. Miner[xvi] for further guidance on this issue. Miner explained that knowledge of pending IRS collection activities against a taxpayer, including notices of deficiency, notices of tax past due, and federal tax liens falls within the scope.[xvii]  United States v. Faller provides further guidance by finding that a taxpayer’s knowledge that the IRS had taken steps to collect unpaid income taxes was sufficient to fall within scope.[xviii]  Finally, United States v. Westbrooks adds within the scope a taxpayer who provides false testimony at a hearing to show cause where a court had to determine a taxpayer’s compliance with an IRS subpoena for tax records.[xix]

 

Section 17.04[5] discusses the “Pending or Reasonably Foreseeable” requirements.  The Marinello Court stated that the administrative proceeding intended to be obstructed or impeded must be “pending at the time the defendant engaged in obstructive conduct or, at the least, was then reasonably foreseeable by the defendant.”[xx]  Marinello slightly expanded the Andersen ruling to state that “it is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually,” but “the proceeding must at least be in the offing.”[xxi]

Section 17.04[6] discusses the “‘Nexus’ Between Conduct and a Particular Administrative Proceeding.” Marinello did not analyze how the government would prove a nexus and did not require proof of a nexus between the corrupt endeavor and the IRS’ administrative proceedings with regards to a specific tax year or period.  Rather, the government must prove a “‘nexus’ between the defendant’s conduct and a particular administrative proceeding.”[xxii]  Marinello used the definition of “nexus” from United States v. Aguilar.[xxiii]

Section 17.04[7] discusses “Pleading Violations of the Omnibus Clause under Marinello.”  The Tax Division’s position is that “the nexus requirement is one of proof and does not constitute a newly created core element that must be expressly and separately pled in the indictment in order to state an offense.”  However, to avoid issues in the future, the manual recommends that indictments should “at least allege facts showing that the nexus-to-a-pending-or-foreseeable-proceeding requirement is satisfied…”  The manual provides a model indictment form which expressly alleges a nexus to a pending or foreseeable proceeding.

Section 17.04[8] titled “Jury Instructions after Marinello” states that the “nexus-to-a-pending-or-reasonably-foreseeable-proceeding” requirement must be reflected in jury instructions. Section 17.04[8][a] titled “Specific Unanimity of Corrupt Endeavors” states that although a jury must unanimously agree that all elements of the offense have been proven, the jury does not have to be unanimous with regards to the particular means by which the offense was committed.

Section 17.04[9] discusses “Unit of Prosecution.” Though not expressly stated, Marinello assumes that the Officer Clause and Omnibus Clause of IRC 7212(a) state two separate offenses.[xxiv] Marinello did not address other interpretations.

Section 17.05 discusses “Venue” but acknowledges that “courts have not yet addressed whether Marinello’s holding that the government must prove a nexus to a targeted tax-related proceeding provides a basis for venue in a district where such a proceeding is pending, in addition to any district where a corrupt endeavor took place.”

Section 17.06 titled “Statute of Limitations” states that the statute of limitations for a violation of the Omnibus Clause is six years from the last act that constitutes a violation.

Conclusion

 The Tax Division’s CTM, which is part of the Justice Manual, is important to ensuring that Department of Justice policies are not only available to all DOJ components and employees to facilitate government efficiency and overall consistency in the execution of their sworn duties, but also provides transparency to the public.  The Tax Division’s updated Chapter 17, to address the Supreme Court’s decision in Marinello, provides further insight into the circumstances when a charge under the Omnibus Clause of Section 7212(a), will most likely be deemed appropriate.

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C.  Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal)  Ms. Brown  specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. 

Gary Markarian is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of the joint JD/LL.M. Taxation program at Loyola Law School, Los Angeles. While in law school, Mr. Markarian served as an intern at the Tax Division of the U.S. Attorney’s Office (C.D. Cal) and Internal Revenue Service Office of Chief Counsel’s Large Business and International Division.

[i] Sandra R. Brown, A Taxing Impediment, L.A. Law.,  Jan. 2019, at 24, 29, https://www.lacba.org/docs/default-source/lal-back-issues/2019-issues/january-2019.pdf.

[ii]  Criminal Tax Manual at Chapter 17.

[iii] 26 U.S.C. § 7212(a) provides, in relevant part, “Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both.”

[iv] See Dep’t of Just., Crim. Tax Manual, 3.00, Note 3, Tax Div. Pol’y Directives & Memoranda, 49 (2012), https://www.justice.gov/sites/default/files/tax/legacy/2014/08/05/CTM%20Chapter%203.pdf#Directive %20No.%20129.

[v]  United States v. Marinello, 138 S. Ct. 1101, 1110 (2018).

[vi]  United States v. Marinello, 138 S. Ct. at 1104.

[vii] Criminal Tax Manual at Title Page 0. https://www.justice.gov/tax/foia-library/criminal-tax-manual-title-page-0

[viii] See Justice Manual, formerly United States Attorney’s Manual, 6-4.200 – Tax Division Jurisdiction and Procedures, available at https://www.justice.gov/usam/usam-6-4000-criminal-tax-case-procedures#6-4.200.

[ix] See United States v. Kassouf, 144 F.3d 952, 955 (6th Cir. 1998).

[x] See Dep’t of Just., Crim. Tax Manual, 3.00 Tax Div. Pol’y Directives & Memoranda, 49 (2012), https://www.justice.gov/sites/default/files/tax/legacy/2014/08/05/CTM%20Chapter%203.pdf#Directive %20No.%20129.

[xi] CTM 17.01.

[xii] CTM 17.02.

[xiii] United States v. Aguilar, 515 U.S. 593 (1995).

[xiv] Sup. Ct. Tr. Pp. 59-63.

[xv] United States v. Marinello, 138 S. Ct. at 1110.

[xvi] United States v. Miner, 774 F.3d 336 (6th Cir. 2014).

[xvii] United States v. Miner, 774 F.3d at 346.

[xviii] United States v. Faller, 675 Fed App’x 557 (6th Cir. 2017).

[xix] United States v. Westbrooks, 728 Fed. App’x 379 (5th Cir. 2018) (per curiam).

[xx] United States v. Marinello, 138 S. Ct. at 1110 (citing Arthur Andersen LLP v. United States, 554 U.S. 696, 703, 707-08 (2005)).

[xxi] United States v. Marinello, 138 S. Ct. at 1110.

[xxii] United States v. Marinello, 138 S. Ct. at 1109.

[xxiii] United States v. Marinello, 138 S. Ct. at 1109 (quoting United States v. Aguilar, 515 U.S. 593 (1995).

[xxiv] United States v. Marinello, 138 S. Ct. at 1104-05.

We are pleased to announce that Dennis Perez, Michel Stein and Jonathan Kalinski will be speaking at the upcoming CPA Academy webinar, Resolving Employment Tax Disputes on Thursday, July 23, 2020,1:00 p.m. (PST).

The IRS is increasing both civil and criminal enforcement against taxpayers who fail to comply with withholding and remitting of employment taxes. Noncompliance can cause heavy penalties and interest against taxpayers that could destabilize a company and its operations. Tax professionals and advisers must grasp a complete understanding of tax rules and available techniques to avoid or minimize tax assessments and penalties.

This webinar will guide tax professionals and advisers on critical issues relating to employment taxes. The panel will discuss essential techniques to avoid penalties and handling IRS audits stemming from employment taxes. The panel will also address worker classification issues and methods to overcome them, the impact of California AB 5, key considerations for state versus federal compliance, the Government use of injunctions and criminal aspects of employment tax issues. Listen as we provide effective methods to avoid or minimize trust fund recovery penalties and tactics in handling IRS examinations.

Click Here to Register.

Hope everybody is having a good weekend and staying safe.  I wanted to send out a reminder for the upcoming University of San Diego School of Law – RJS Law Tax Controversy Institute on Friday, July 17, 2020, from 10:30 am to 2:45 p.m. (PST). This year the program will be a webinar and will be complimentary for all attendees.  We already have almost 500 people signed up but our Zoom platform can hold thousands. We have been preparing and I am very excited about the program and did I say it was free.  Get up to date knowledge of what the tax enforcement landscape looks like in the COVID environment.

We have two amazing programs planned including—

“What Every Practitioner Needs to Know in Handling a Tax Controversy in the COVID-19 Environment.”

“IRS New Emphasis on Fraud Enforcement and Criminal Investigations”

We have a great line up of Government and private speakers this year including:

  • The Honorable Emin Toro, Judge, United States Tax Court
  • Sharyn Fisk, Director of the IRS Office of Professional Responsibility (Keynote speaker)
  • Don Fort, Chief IRS Criminal Investigation
  • Darren John Guillot – Deputy Commissioner for Collection and Operations Support SBSE Division, IRS
  • De Lon Harris – Deputy Commissioner for Examination SBSE Division, IRS
  • Damon Rowe – Executive Director, Fraud Enforcement Office, SBSE, Division, IRS
  • Kathy Keneally – former Assistant Attorney General, Tax Division, U.S. DOJ, Partner, Jones Day
  • Richard Carpenter, ’84 (JD) – Principal, Richard Carpenter Tax Law Office
  • Lavar Taylor – Principal at Law Offices of A. Lavar Taylor, LLP
  • Bryan Skarlatos – Partner, Kostelanetz & Fink, LLP
  • Marty Schainbaum – Former Assistant U.S. Attorney, Former IRS Regional Counsel Trial Attorney

During the program Sharyn Fisk, the new Director of OPR will be giving us a keynote on what is happening in her office and we will also be presenting the Richard Carpenter Award to M. Carr Ferrguson. The award is given to individuals who personify honesty, integrity, ethics, and compassion throughout his/her careers in the field of tax controversy and have demonstrated outstanding dedication and expertise while working in the legal tax field.

It will almost be as good as being there. Please join us.

For Full Programming Details Click Here.

The IRS had not been shy about highlighting that taxpayers need to report any and all virtual currency transactions appropriately and that it will use its enforcement tools to ensure such compliance.[i]  The IRS’s data-gathering efforts are part of those enforcement tools.   In 2017, the Government used a John Doe Summons to obtain a judicial order requiring Coinbase Inc., a virtual currency exchange, to provide customer information, including user profiles, transactions logs, records of payments processed, account statements, and correspondence for approximately 13,000 individuals.[ii]  In 2018, the IRS announced a virtual currency compliance campaign through the LB&I division.[iii]  In 2019, the IRS announced its plan to send “soft letters” to nearly 10,000 taxpayers, educating them on tax compliance for virtual currencies.[iv]  For individuals and business entities that engage in virtual currency transactions  through investing in it, operating a market place or exchange, or forming and managing a private investment fund in cryptocurrency, it is imperative that they understand that records of these transactions are not out of the reach of the Government.  To that point, the Fifth Circuit Court of Appeals recently ruled that bitcoin data in the hands of a third-party is not covered by the Fourth Amendment of the U.S. Constitution.[v]  That means the Government does not need a judicial warrant and a showing of probable cause to obtain such data.  Instead, federal agents can request the information by issuing a  subpoena or, in the case of agencies such as the IRS which have summons authority, by the issuance of a summons to a third-party.

United States v. Gratkowski

Mr. Gratkowski was engaged in illicit activities related to a website on the “dark web.”  The Federal Government, in analyzing a publicly viewable bitcoin blockchain, identified  a cluster of bitcoin addresses controlled by an illicit website.[vi]  Armed with this information, the Government served a grand jury subpoena on Coinbase for all information on the Coinbase customers whose accounts had sent Bitcoin to any of the addresses in the Website’s cluster.[vii]  Coinbase identified Mr. Gratkowski as one of these customers.  As a result, the Government was then able to obtain a search warrant for Mr. Gratkowskis house and there they found a hard drive containing illicit materials related to the website on the dark web.[viii]  Mr. Gratkowski moved to suppress the evidence based upon an assertion that the information subpoenaed from Coinbase was protected under the Fourth Amendment from such seizure, based upon his asserted legitimate expectation of privacy in records involving his Bitcoin transactions.

Fourth Amendment Protection

The Fourth Amendment protects individuals against unreasonable search and seizures of “their persons, houses, papers, and effects” by the Government.[ix]  However, for an individual to successfully assert that their rights have been infringed upon by the Government, in violation of the  Fourth Amendment, the individual must have a reasonable expectation of privacy in the items searched or seized.[x]  When it comes to financial records, this important legal doctrine can sometime be key to a taxpayer’s defense and ability to suppress evidence obtained by the IRS in its criminal investigation.

Generally, an individual  has no legitimate expectation of privacy in information he or she voluntarily turns over to a third party.[xi]  A key set of documents which the IRS will routinely seek to obtain in its investigation are bank records.  Almost 80 years ago,  the Supreme Court in  U.S. v. Miller held that bank records were not subject to Fourth Amendment Protections.[xii]  The Court concluded that bank records were not confidential communications but rather negotiable instruments which contained only information voluntarily conveyed to the banks and exposed to their employees in the ordinary course of business which, under the third-party disclosure doctrine, negated the individuals legitimate expectation of privacy in such records.[xiii]

Flash forward 80 years.  For Mr. Gratkowski, his financial transactions no longer consisted simply of banking records maintained in a brick and mortar building on paperwork or microfilm.  Instead, Mr. Gratkowski used Bitcoin on the dark web, which, likely in his mind, not only carried an expectation of privacy but also secrecy.  As such, Mr. Gratkowkski argued it was the Supreme Court’s 2018 decision in Carpenter v. U.S., rather than its decision in Miller, which should control in his case.[xiv]

In Carpenter, which involved cellphone location data, the Supreme Court limited the applicability of the third-party disclosure doctrine and held that the heightened protections for individual privacy interests under the Fourth Amendment did apply to searches involving cellphone location data and  historical cellphone location records.  Mr. Gratkowski argued records of his Bitcoin transactions were more akin to the cellphone location data than physical financial bank records, thus, the Government search of his records from Bitcoin’s public blockchain and Coinbase should be protected by the Fourth Amendment.[xv]  The Fifth Circuit disagreed, holding that Mr. Gratkowski’s use of Coinbase was actually more akin to the brick and mortar bank records in issue in the Supreme Court’s holding in Miller than the cellphone location data in issue in its decision in Carpenter.[xvi]  As part of the analysis, the Court noted the “nature of information on the Bitcoin blockchain and the voluntariness of the exposure weigh heavily against finding a privacy interest in an individual’s information on the Bitcoin blockchain.”[xvii]  Rather, it is well known that each Bitcoin transaction is recorded in a publicly available blockchain.  Every Bitcoin user has access to the public Bitcoin blockchain and can see every Bitcoin address and its respective transfers.  Due to this public availability, it is possible to determine the identities of Bitcoin address owners by analyzing the blockchain.[xviii]  While a Bitcoin user could maintain a high level of privacy by transacting without a third-party intermediary like Coinbase, those users who do use an intermediary cannot claim a legitimate expectation of privacy in such records.[xix]

Zietzke v. U.S.

For those outside of the 5th Circuit, it is also worth noting that the decision in Gratkowski does not stand alone; it aligns with the 2019 District Court decision in Zietzke v. U.S. [xx]

In Zietzke, the petitioner also argued the holding of Carpenter should apply to the Government’s subpoena of his records on the virtual currency exchange Bitstamp.[xxi]  The District Court disagreed, finding such records do not involve surveillance like what was involved in Carpenter.[xxii]  Rather, the Government’s request was for financial records which were already exposed to and owned by a third party (a virtual currency exchange) and thus Zietzke’s privacy interests were greatly diminished.[xxiii]  The Court further distinguished Carpenter, noting that nothing in the records implicated petitioner’s anticipation of privacy in his physical location or his expectation of privacy in the whole of his physical movements.[xxiv]  The Court concluded that the records stored on the virtual currency exchange will at most reveal one’s buying and spending history as well as one’s wealth.[xxv]

Conclusion

When it comes to investigating taxpayer compliance in the arena of virtual currency, records which reveal a taxpayer’s buying and spending as well as the taxpayer’s wealth, are exactly what the IRS is looking for.  As both of these decisions make clear, when it comes to information published on the public blockchain, the Fourth Amendment does not preclude the IRS from readily getting what it is looking for without obtaining a warrant.

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C.  Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal)  Ms. Brown  specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. 

Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C. Mr. Tunden recently graduated from the Graduate Tax Program at NYU School of Law and the J.D. Program at UC Davis School of Law. During law school, Mr. Tunden served as an intern at the Franchise Tax Board Legal Division and at the Tax Division of the U.S. Attorney’s Office (N.D. Cal).

[i] See Michel Stein, Cryptocurrency Enforcement is Here, July 30, 2019 available at https://www.taxlitigator.com/cryptocurrency-enforcement-is-here-by-michel-stein/

[ii] Id.

[iii] Id.

[iv] www.irs.gov (see Curry, “Rettig on Virtual Currency Letters: Take a Hint,” 164 Tax Notes Federal 929 (Aug. 5, 2019)).

[v] United States v. Gratkowski, No. 19-50492 (June 30, 2020 5th Cir.)

[vi] Id. at 3.

[vii] Id.

[viii] Id.

[ix] U.S. Const. Amend. IV.

[x] See, United States v. Jones, 565 U.S. 400, 406 (2012).

[xi] See, Smith v. Maryland, 442 U.S. 735, 743-44 (1979).

[xii] United States v. Miller, 425 U.S. 435, 439-40 (1976).

[xiii] Id. at 442.

[xiv] Carpenter v. United States, 138 S. Ct. 2206, 2217 (2018).

[xv] Supra note 5, Gratkowski at 6.

[xvi] Id. at 8.

[xvii] Id.

[xviii] Id. at 7.

[xix] Id.

[xx] Zietzke v. United States, 426 F. Supp. 3d 758 (W.D. Wash. 2019).

[xxi] Id. at 11-12.

[xxii] Id. at 12-13.

[xxiii] Id.

[xxiv] Id.

[xxv] Id. at 13.

On the eve of filings lawyers often stay awake at night hoping everything goes right.  Occasionally something goes wrong, you just hope it doesn’t happen to you.  Add one more horror story to the list.  In a harsh result, the Ninth Circuit held that the Tax Court correctly dismissed as untimely Organic Cannabis Foundation’s petition.[1]

The core facts are as follows.  The IRS issued notices of deficiency for two cannabis entities with last date to file a petition of April 22.  On April 21, the legal assistant prepared to mail the petitions using the fastest delivery option, FedEx First Overnight.  This should have arrived at the Tax Court on April 22 without needing to rely on the mailbox rule.  The mailbox rule under IRC section 7502 says that timely mailing is timely filing, even if the document arrives after the due date.  After dropping off the package to FedEx however, something happened.  FedEx placed a new label on the package that indicated a mailing date of April 22, with arrival set for April 23.  Still no problem because the mailbox rule would apply, right?  Wrong.  The mailbox rule only applies if you use one of the designated private delivery options specified by the IRS.  At the time the petition was mailed, FedEx First Overnight was a newer option and not on the list.  Two weeks later, it was added.

On the morning of April 22 the legal assistant noticed she didn’t receive delivery confirmation from FedEx and contacted them.  She was told the person couldn’t deliver it because they couldn’t get to the door because of construction or some sort of police action.  No further delivery attempt was made that day.  The petition was delivered the next day, April 23.

The IRS apparently didn’t think there was a problem initially as it took 15 months from the filing of the petition for them to file a motion to dismiss for lack of jurisdiction.  As a former IRS Counsel attorney, generally a motion to dismiss will be filed right away when the petition is untimely.

It is easy to play armchair quarterback and second guess.  If FedEx delivered the package as they apparently should have on April 22, we wouldn’t be hearing about any of this.  What, if anything, could have been done differently to avoid this outcome?  A couple of things come to mind.  First, if using a private delivery service like FedEx or UPS, attorneys should always make sure to select one of the designated methods.  This changes periodically so check the list before selecting a delivery option.  Second, to avoid the issue of private delivery service, many practitioners still use the U.S. Postal Service certified mail as the gold standard.  Get your green card stamped and you are good to go.  It might take a week or more for the Tax Court to file the petition, but you can rely on the mailbox rule without worry.  Third, and one few might have actually done, is that that on April 22 when it was clear FedEx did not deliver the petition, and the attorneys may have noticed that First Overnight was not a designated option, they could have mailed another petition using either USPS or a designated delivery option.  In this scenario the first untimely petition would have arrived first, but the second one would be timely.

The taxpayer argued that even if the petition was untimely, IRC section 6213(a) is not jurisdictional and that based on recent Supreme Court precedent it should be subject to equitable exceptions to avoid harsh results.  The Ninth Circuit in this case joins the Seventh Circuit in Tilden v. Commissioner in rejecting this argument.  The Court holds that Congress has acted in the case of IRC 6213 to impose jurisdictional consequences.  Specifically, the Court points to (1) the fact that 6213 uses the word jurisdiction, (2) the broader statutory context that 6213 operates in, and (3) the historical treatment. The Taxpayer has the option to file a petition or to pay the tax and file a claim for refund and a suit for refund.  Under the taxpayer’s reading the Court stated that if the Tax Court dismissed a petition as untimely it would bar later seeking a refund.  Finally, throughout history 6213 has been interpreted by court as jurisdictional.

This case may reach the right result, but is undoubtedly an extreme outcome.  It illustrates that practitioners need to be careful in how they mail documents to the IRS and Tax Court.  Let’s hope that the taxpayer can get some relief through audit reconsideration.

Jonathan Kalinski is a principal at Hochman Salkin Toscher Perez P.C. and 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] Organic Cannabis Foundation, Inc. dba Organicann Health Center v. Commissioner, 2020 WL 3278718 (9th Cir. 2020).  This case involved another taxpayer, Northern California Small Business Assistants, Inc. (“NCSBA”).  NCSBA’s 2012 tax year is currently before the Tax Court.  In October 2019, the Court in a reviewed opinion held that IRC section 280E was not a penalty and therefore, was not subject to an Eighth Amendment excessive fines analysis.  Notably, three judges dissented.  A decision has not been entered in the case.

We are pleased to announce that Steven Toscher, Michel Stein and Jonathan Kalinski will be speaking at the Spidell Webinar–Taxation of Cannabis— on Thursday July 9th  at 10:00 a.m. – 12:00 p.m.  The cannabis business has been growing at very fast pace in California and other jurisdictions since legislative changes legalizing and regulating the sale, manufacture and cultivation of cannabis.  We will cover a wide range of topics including:

  • The impact of recent Tax Court cases on the cannabis business.
  • The legal landscape of the cannabis business in California and other states
  • The impact of cannabis as an illegal controlled substance under federal law
  • California sales and excise taxes of the cannabis business
  • Handling IRS examinations of the cannabis business
  • Collection issues unique to the cannabis business
  • The impact of IRC Section 280E on the cannabis business
  • Cost of Goods Sold issues unique to the cannabis business
  • The risk of criminal investigations and prosecutions of the  cannabis businesses

Use coupon code WB7620 to save 20% (Cost of $77.60).
Click Here For More Information.

The moratorium on IRS investigations and collections set forth by the People First Initiative will be ending soon on July 15.[i]  and very high wealth taxpayers should get ready for a little attention from the IRS.  If the moratorium is not extended, the IRS is poised to start the examination of several hundred high net worth taxpayers.  The IRS expects that between July 15 and September 30 several hundred examinations of these taxpayers will be started.[ii]  Each of the cases assigned within the IRS Large Business & International (LB&I) Division will typically involve a pass-through business as the related entity, said LB&I Commissioner Douglas O’Donnell.[iii]  A high-income individual’s enterprise could involve trusts in the Small Business/Self-Employed (SB/SE) Division, tiered partnerships under LB&I’s jurisdiction, and retirement plans that the Tax Exempt and Government Entities (TE/GE) Division examines.  These examinations may also involve private foundations related to the taxpayer.

Global High Wealth Group

The Global High Wealth Group is an industry group created by the IRS LB&I in 2009.  The purpose of the Global High Wealth Group (also known as the “Wealth Squad”) is to bring together an IRS team of specialist to coordinate the compliance, review and, if necessary, detailed examination of complex returns of high wealth individuals and their related entities.  The Global High Wealth Group conducts tax compliance reviews of high net worth individuals and the network of enterprises and entities they control.

The Wealth Squad is designed to allow the IRS to better understand the sophisticated financial, business and investment arrangements of the taxpayer.  The IRS does this by engaging a team of specialists to take a unified, holistic look at the entire web of inter-related entities controlled by the taxpayer to discover the entire economic picture of the enterprise and to assess the tax compliance of that overall enterprise.

The initial examination focus has been on individuals with tens of millions of dollars in assets or income.  Following a review of the initial examinations, the selection criteria will likely evolve to take into account information obtained in the examinations as well as to utilize the expertise of the expanding group of Wealth Squad specialists which will include flow-through specialists, international examiners, economist to identify economic trends, appraisal experts to advise on valuation issues, and technical advisors to provide industry or specialized tax expertise.  It will draw upon resources throughout the IRS including the TE/GE Division, the SB/SE Division, and numerous international information exchange agreements.  In truly egregious situations, the examiners may also make a referral of taxpayers and/or their advisors to the IRS Criminal Investigation division given the IRS new emphasis on fraud referrals from the operating divisions.

IRS Campaigns

IRS LB&I commissioner Douglas O’Donnell has connected this enforcement effort with the recently announced Tax Cut and Job Act (“TCJA”) compliance campaign.[iv]  The TCJA campaign involves issue-based examinations instead of the LB&I old approach of placing large multinational businesses under continuous audits by a rolling teams of examiners.  This will involve large amount of information sharing amongst various IRS divisions.

The TCJA compliance campaign is much broader in approach than other campaigns.[v]  This campaign will look at the entirety of a tax return and thus give examiners the authority to look beyond a specific issue. The TCJA compliance campaign also encompasses the impact on tax returns from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.  The treatment stream for this campaign may include examinations, soft letters, outreach, new and improvement practice units and development of future issue-based campaigns.

Since its creation in 2009 the IRS Global High Wealth Group has been criticized that it was ineffective. The criticism is largely due to employee turnover at the IRS, budget cuts, and complex transactions that take time for examiners to understand.[vi]  However the IRS has increased it’s budget and has been hiring steadily and has a new determination to tackle this very complex compliance and enforcement matter.  The IRS new willingness to accomplish its mission across the operating division lines will also add effectiveness to this effort.  The past problems with enforcement will likely not occur now that the IRS is better equipped to audit these specialized group of taxpayers and have learned important lessons from their past examination efforts.  One organization.  One mission.  We know why Willie Sutton robbed banks and we know why sound tax administration requires that all taxpayers comply with the tax laws.

Steven Toscher is  the Managing Principal of Hochman Salkin Toscher Perez P.C., and specializes 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.

Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C.  Mr. Tunden recently graduated from the Graduate Tax Program at NYU School of Law and the J.D. Program at UC Davis School of Law. During law school, Mr. Tunden served as an intern at the Franchise Tax Board Legal Division and at the Tax Division of the U.S. Attorney’s Office (N.D. Cal).

[i] The Peoples First Initiative suspended many collection and examination functions due to COVID-19 between April 1, 2020 and July 15, 2020.

[ii] Comments from IRS LB&I Division Commissioner Douglas O’Donnell at the NYU Tax Controversy Institute held on June 18, 2020.

[iii] Id.

[iv] Supra note 2.

[v] IRS LB&I campaign descriptions available at https://www.irs.gov/businesses/corporations/lbi-active-campaigns.

[vi] Jesse Eisinger and Paul Kiel, The IRS Tried to Take on the Ultrawealthy. It Didn’t go Well, ProPublica, April 5, 2019, available at https://www.propublica.org/article/ultrawealthy-taxes-irs-internal-revenue-service-global-high-wealth-audits.

We are pleased to announce that Sandra Brown will be speaking at the ABA Virtual 2020 May Meeting –When You Need to Disclose More Than Just a Tax Crime — on Tuesday July 14th at 2:00 p.m. – 3:00 p.m. (EST).

Under the IRS voluntary disclosure practice, in exchange for a timely, accurate, and complete disclosure and full cooperation during the associated audit, the IRS will not refer the taxpayers to the U.S. Department of Justice for criminal investigation and prosecution. But what if your client committed non-tax offenses that don’t require a referral from the IRS? What is the risk that the IRS will share the information with another federal agency, who may choose to prosecute? Will the voluntary disclosure protect a taxpayer from prosecution for hiring or harboring undocumented workers, failing to file Forms 8300, or other non-tax criminal conduct? Panelists will review frequent dilemmas faced when a client engages in criminal conduct outside of the Internal Revenue Code, options available to address these issues, how the IRS will treat, and whether it will disseminate, such information received through a voluntary disclosure, and best practices in these cases.

For More Information Click Here.

 

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