| Federal Tax News |      |
| Federal Tax Compliance Calendar Divided Supreme Court: Tax On Bankrupt Debtor's Post-Petition Farm Sale Not Dischargeable Upfront Payments By CFCs Under NPCs Excepted From U.S. Property Treatment IRS Identifies Problems With "Concise Descriptions" On Schedule UTP Chief Counsel Updates Ex Parte Communication Rules Seventh Circuit Affirms Penalty For Early Withdrawal From IRA Holding Funds From Pension Plan Allowing Taxpayer's Early Withdrawal IRS Determines Service Provider Exempt From Code Sec. 6050W Reporting IRS Guidance Provides Offer In Compromise Specialists With Initial Contact Procedures Tax Court Upholds IRS Decision Not To Credit Overpayment Where Responsible Person Penalty Applied Sixth Circuit Affirms Government Forced Sale Of Marital Home Held By Entireties Automatic Stay In Bankruptcy No Bar To Voluntary Dismissal Of Tax Court Case Tax Briefs |
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| Washington Update | |
Obama Promotes 5-Item "To Do" List For Congress Federal Tax Compliance Calendar May 15 Payroll Monthly Schedule Depositors May 18 Payroll Semiweekly Schedule Depositors May 23 Payroll Semiweekly Schedule Depositors May 25 Payroll Semiweekly Schedule Depositors May 31 Payroll Semiweekly Schedule Depositors June 1 Payroll Semiweekly Schedule Depositors June 6 Payroll Semiweekly Schedule Depositors Divided Supreme Court: Tax On Bankrupt Debtor's Post-Petition Farm Sale Not Dischargeable Hall, Sup. Ct., May 14, 2012 In a 5-4 decision, the Supreme Court has determined that the federal income tax liability on capital gains resulting from a debtor farmers' post-petition farm sale was not "incurred by the estate" under section 503(b) of the Bankruptcy Code. As a result, the tax on that capital gain was neither collectible nor dischargeable within a Chapter 12 plan and remained the liability of the individual farmer. Take Away. The majority opinion, while sympathetic to the situation in which its decision places some farmers, could not ignore what it considered "the statute's plain language" that supported its holding in favor of the IRS. The dissenting opinion characterized the majority's interpretation as unintended by Congress and contrary to the purpose Chapter 12 of the Bankruptcy Code, to "help family farmers in economic difficulty…." Treating post-petition tax liability as non-dischargeable may result in leaving certain farmers with too few assets and income available for a Chapter 12 plan to proceed. Background The taxpayers, a couple, sought Chapter 12 (family farm) bankruptcy protection, selling their farm shortly after filing the petition with the intention of paying off outstanding liabilities with the proceeds. The IRS challenged the couple's treatment of the tax liability from the capital gain on the sale as a general unsecured claim. The Ninth Circuit, in reversing the district court, held that a Chapter 12 estate cannot "incur" post-petition federal income tax liability for purposes of section 503(b) of the Bankruptcy Code because it is not a separate entity under Tax Code Secs. 1398 and 1399. Therefore, the capital gain tax was not a priority claim that was eligible for the exception under 11 U.S.C. Sec. 1222(a)(2), which allows certain government claims to be dischargeable and payable in less than full. Comment The Ninth Circuit's decision created a split in the Circuits since, under similar facts, the Eighth Circuit in Knudsen, 581 F.3d 696 (2009) had held that taxes arising from the sale of a farm during bankruptcy could be treated as unsecured claims and dischargeable. Supreme Court's analysis 11 U.S.C. Sec. 1222(a)(2) provides that certain government claims, including any taxes "incurred by the estate," arising from the disposition of farm assets are stripped of priority status and downgraded to general, unsecured claims. At the heart of the Supreme Court's decision was an examination of whether a Chapter 12 estate is a separately taxable entity and, consequently, whether the phrase "incurred by the estate" applies. The Supreme Court found that Code Secs. 1398 and 1399 fail to transfer the responsibility for the payment of taxes from the debtor to the Chapter 12 estate. The plain language chosen by Congress points to a determination that a Chapter 12 estate is not a separate taxable entity unlike estates that are separately taxable in individual-debtor Chapter 7 or 11 cases. Further, the Court found that the history of Code Secs. 1398 and 1399 and amendments to the Bankruptcy Code supports a finding that Congress intended to treat Chapter 12 separately. The post-petition income taxes are thus not "incurred by the estate" in Chapter 12 cases and, therefore, are not dischargeable, the Court concluded. References: 2012-1 USTC ¶50,345; TRC IRS: 57,058. Upfront Payments By CFCs Under NPCs Excepted From U.S. Property Treatment TD 9589, NPRM REG-107548-11 Temporary and proposed regs were recently issued by the IRS describing the treatment of upfront payments made under certain notional principal contracts (NPCs). The IRS explained that certain obligations of United States persons arising from upfront payments made by controlled foreign corporations (CFCs) under contracts cleared by a derivatives clearinghouse do not constitute United States property. The temporary regs are effective for payments made after May 10, 2012 but may be applied retroactively to earlier payments. Take Away. "The regulations clarify that certain obligations created through common financial transactions by foreign affiliates of U.S. corporations do not create taxable income to those U.S. corporations," Philip West, chair of the tax practice at Steptoe & Johnson, LLP, Washington, D.C., stated. "The transactions addressed under the regs are common when clearing organizations are used and therefore the clarification was important." "The securities industry has been seeking this guidance for over two years now," West added. Comment The IRS issued guidance to nonresident aliens and foreign corporations that hold notional principal contracts (NPCs) providing for payments determined by reference to payments of dividends from sources within the United States in March ( T.D. 9572). The IRS also issued proposed regs to clarify Code Sec. 1256 contracts and notional principal contracts in 2011 (NPRM REG-111283-11). Background NPCs are financial instruments that provide for one party to receive payments from a counterparty in exchange for consideration or promise to pay the counterparty similar amounts calculated on different basis. The payments of at least one party must be based on a variable interest rate, price or other index. Payments under an NPC are either periodic payments, nonperiodic payments, or termination payments NPCs include interest rate and commodity swap agreements and similar arrangements with payments calculated by reference to the product of notional principal amount and the fixed or variable rate or price. When a NPC includes a significant nonperiodic payment, the contract is generally treated as two separate transactions, the IRS explained. One transaction is an on-market, level payment swap; the other is a loan. For purposes of Code Sec. 956, the IRS may treat any nonperiodic payment in connection with an NPC, whether or not it is significant, as one or more loans. If a party to an NPC makes below-market payments or receives above-market periodic payments under the terms of the contract, the IRS explained that the party will typically make a nonperiodic payment (an upfront payment) to the counterparty to compensate for the off-market coupon payments specified in the contract. Comment Code Sec. 956 generally requires an income inclusion by U.S. shareholders of a CFC that invests certain earnings and profits in United States property on the grounds that the investment is substantially the equivalent of a dividend being paid to them. The IRS noted that certain contracts, including credit default swaps and interest swaps, recently have begun to be cleared through U.S.-registered clearinghouses. The IRS predicted that the volume of contracts cleared by U.S.-registered clearinghouses will increase under Dodd–Frank Wall Street Reform and Consumer Protection Act. New exception The temporary regs create an exception to the definition of U.S. property for obligations of U.S. persons arising from upfront payments made with respect to cleared contracts properly classified as NPCs. Obligations of U.S. persons arising from upfront payments by a CFC that is a dealer in securities or commodities do not constitute U.S. property for purposes of Code Sec. 956. The upfront payment must be required under a contract cleared by a registered derivatives clearing organization or agency. The CFC must make the upfront payment to or through a United States person that is a clearing member of the clearing organization or agency or directly to the clearing organization or agency. The upfront payment must be made directly or indirectly to the counterparty to the contract, which must be required to make a payment to the clearinghouse equal to the upfront payment. The payment must be paid directly or indirectly to the CFC. References: FED ¶¶47,027; 49,532; TRC INTLOUT: 9,250. IRS Identifies Problems With "Concise Descriptions" On Schedule UTP The IRS has published guidance on its website that identifies problems with the "concise description" of issues that taxpayer must provide on Schedule UTP, Uncertain Tax Position Statement. The guidance gives examples of insufficient and sufficient descriptions of different issues. At the May Meeting of the American Bar Association Section of Taxation, Deborah Palacheck, special assistant to the commissioner, large business and international (LB&I), disclosed that approximately 1,900 Schedules UTP had been filed with the IRS for 2010, the first year that Schedule UTP was required. The IRS has sent "soft notices" to three percent of the filers, informing the taxpayer that they had not complied with the Instructions to Schedule UTP. Comment LB&I has jurisdiction over corporations with assets of at least $10 million. Ultimately, all "large" corporations under LB&I must file Schedule UTP; but for 2010 and 2011, only corporations with total assets of at least $100 million are required to file the form. Background Schedule UTP requires filers to provide a "concise description" of each uncertain tax position for which the corporation or a related entity has recorded a reserve on its audited financial statement. Accounting standards require corporations to identify these uncertain positions and maintain a reserve. If the position is substantially certain, no reserve is required. LB&I has phased-in review procedures for Schedule UTP. In a November 2011 memo, LB&I announced that it had established a centralized review team to determine whether Schedule UTP was completed properly. The team will contact taxpayers whose form provides an inadequate description of uncertain tax issues. When the team is satisfied with the description, the return with Schedule UTP will be assigned to an examiner. Concise description The 2010 instructions to Schedule UTP require a "concise description" of the tax position for which a reserve is established. The description must provide the relevant facts affecting the tax treatment of the position, and information that will apprise the IRS of the identity of the tax position and the nature of the issue. The description should not exceed a few sentences and should not assess the hazards of litigation. Taxpayers should rank the issues by the size of the reserve, but do not have to report the reserve amount. The IRS gave hypothetical examples of inadequate descriptions. These descriptions merely indicated that an issue was unsettled, but did not describe the issue or any of the facts. Samples of these descriptions are:
Adequate descriptions The IRS posted a table with four more hypothetical examples of inadequate descriptions and sufficient descriptions. These examples included:
Other examples involved the domestic production activities deduction, and ordinary and necessary business expenses under Code Sec. 162. Reference: TRC IRS: 18,106. Chief Counsel Updates Ex Parte Communication Rules IRS Chief Counsel has updated its ex parte communication rules relating to communications between its attorneys and Office of Appeals. Chief Counsel Notice CC-2012-010 reflects Rev. Proc. 2012-18, which earlier this year clarified the rules on permissible communications between Appeals and other parts of the IRS. Appeals. In Rev. Proc. 2012-18, the IRS instructed that a field attorney should not communicate ex parte with Appeals employees regarding an issue in a case pending before Appeals if that field attorney personally provided legal advice regarding the same issue in the same case to the originating function or personally served as an advocate for the originating function regarding the same issue in the same case. If the restriction on ex parte communications applies, Chief Counsel explained it will assign a different attorney to provide assistance to Appeals. Tax Court docketed cases. The ex parte communication rules do not apply to communications between Appeals and Chief Counsel concerning cases docketed in the Tax Court, with the exception of remanded collection due process cases. Statutory notices of deficiency. A statutory notice of deficiency represents the IRS's determination of a taxpayer's liability, not just the determination of Appeals. Chief Counsel attorneys must ensure that the notice of deficiency reflects legal theories and positions consistent with the current IRS position. This advice does not violate the ex parte communication rules, Chief Counsel explained. Comment The IRS revoked CC-2007-006 and CC-2009-010. CC-2012-10, TRC IRS: 24,058. Seventh Circuit Affirms Penalty For Early Withdrawal From IRA Holding Funds From Pension Plan Allowing Taxpayer's Early Withdrawal Kim, CA-7, May 9, 2012 The Seventh Circuit has affirmed a Tax Court decision in a case involving a former law firm employee who, at age 56, had rolled over his pension funds into an individual retirement account (IRA) rather than take a permitted early distribution from his employer's retirement plan. The taxpayer later took $240,000 of distributions from that IRA before age 59½, without paying the 10-percent additional tax. The Tax Court found he was liable for both the 10-percent additional tax and a substantial underpayment penalty. Take Away. Generally, under Code Sec. 72(t), a distribution from a qualified retirement plan (which includes IRAs) is subject to a 10-percent penalty tax that must be paid in addition to federal income tax if it is received from the plan by the plan participant before the participant reaches age 59½. Under certain circumstances, however, the early distribution may be exempt from the 10-percent tax. For example the distributions may be exempt under Code Sec. 72(t)(2)(A)(v) if "made to an employee" who has separated from the employer's service and is at least age 55. Comment "One of the handful of penalty exceptions is if you take a distribution from an employer-sponsored plan after age 55, provided you have worked for the employer until you turned 55," Jan Jacobson, senior counsel, retirement policy, at the American Benefits Council, Washington, D.C., stated. "If you stopped working for that employer prior to age 55, you can't qualify for the penalty exceptions by waiting around until you turn 55 to take the distribution." Background When the taxpayer reached age 56, he left his law firm and enrolled in graduate school. He rolled over retirement funds from his former employer's pension plan to an IRA, which under Code Sec. 402(c) is a nontaxable event. Before reaching age 59 1/2, the taxpayer withdrew $240,000 from the IRA, reported it as income, and paid federal income tax on the amount, but not the additional Code Sec. 72(t) 10-percent excise tax for early withdrawal. The Tax Court upheld the IRS determination that the taxpayer owed both the 10-percent excise tax on his early distribution from the IRA and a penalty of $4,090 for substantial underpayment of tax under Code Sec. 6662. The taxpayer appealed the decision. The Seventh Circuit affirmed the Tax Court's decision. Comment Code Sec. 72(t) also provides that early IRA distributions may be exempt from the 10-percent additional tax if used for certain qualified educational expenses, including tuition, fees, books, supplies, equipment and room and board. The Tax Court dispute therefore did not include amounts the taxpayer used to pay qualified education expenses for his graduate school program and his daughter's college. Court's analysis The Seventh Circuit found that the exemption from the 10-percent tax under Code Sec. 72(t)(2)(A)(v) for distributions "made to an employee after separation from service after attainment of age 55" did not apply to the taxpayer because he had not been an employee when he withdrew the retirement funds. It did not matter that the taxpayer could have taken an exempt distribution when he had been an employee because the taxpayer had rolled over that money into an IRA, and the Tax Code requires early distributions from IRAs to be subject to the 10-percent additional tax. Finally, the court found that the taxpayer was not excused from the Code Sec. 6662 penalty for a substantial underpayment because he did not have substantial authority or a reasonable basis for his tax treatment of the IRA distributions. References: 2012-1 ustc ¶50,340; TRC RETIRE: 42,552. IRS Determines Service Provider Exempt From Code Sec. 6050W Reporting LTR 201219013 In a recently-issued private letter ruling, the IRS has determined that a taxpayer did not have a reporting requirement as a third party settlement organization (TPSO) under Code Sec. 6050W, because the taxpayer engaged in two separate arrangements with customers and providers. The transfer of funds from customers to providers was not the taxpayer's primary purpose. Instead, its primary purpose was to provide services to customers. Take Away. The IRS Information Reporting Program Advisory Committee (IRPAC) has called Code Sec. 6050W reporting a "sea change" for reporting organizations and has urged the agency to provide more guidance. In late 2011, the IRS postponed for one year the effective date for backup withholding under Code Sec. 6050W, which will apply to payments made after December 31, 2012. Background The taxpayer provided services to its customers through websites. Customers paid for these services with credit or debit cards. Comment The IRS did not state what type of services the taxpayer provided to customers. The taxpayer also contracted with various providers. The taxpayer paid providers through its accounts payable system by an automated clearinghouse network, wire transfer, or check for the pre-negotiated amounts. The taxpayer's customers were not parties to the contracts between the taxpayer and its providers. IRS analysis Under Code Sec. 6050W, taxpayers must report two types of transactions: payment card transactions and third party network transactions. A payment settlement entity in the payment card context is a merchant acquiring entity; in the third party network context, it is a TPSO. A TPSO is the central organization that has the contractual obligation to make payments to the participating payees of third party network transactions. Under IRS regs, a third party payment network is provided for when there is an arrangement that (i) involves the establishment of accounts with the central organization by a substantial number of providers of goods and services, (ii) who are unrelated to the central organization, (iii) who have agreed to settle transactions with purchasers according to the terms of the agreements, (iv) provides standards and mechanisms for settling the transactions and (v) guarantees payment to the providers of goods and services in settlement of transactions with purchasers. The IRS determined that the taxpayer was a participating payee with respect to its customers because it accepted payment by credit and debit card. However, the taxpayer was not a TPSO with respect to its customers, because it did not enable purchasers, its customers, to transfer funds through the use of a payment network to providers of goods and service. The taxpayer engaged in two separate agreements: one with customers and another with providers. The services provided by the taxpayer, the IRS noted, are not focused on the transfer of funds from customers to providers. Comment The IRS analogized the taxpayer's situation to Example 17 under the Code Sec. 6050W regs. A health care network operated by a health carrier collects premiums from members, under a contract between members and the health carrier. The network pays health care providers, under a separate contract, to compensate providers for services rendered to members. The health carrier is not a TPSO operating a third party payment network that enables purchasers to transfer funds to providers of goods and services. Reference: TRC FILEBUS: 9,320. IRS Guidance Provides Offer In Compromise Specialists With Initial Contact Procedures SBSE 05-0512-045 In the midst of an uptick in the acceptance by the IRS of offers-in-compromise, the IRS Small Business/Self Employed (SB/SE) Division has reissued interim guidance directed toward offer specialists (OS). The guidance focuses on the initial review in field offer in compromise cases, first contact procedures, and taxpayer discussions during an OIC investigation. Take Away. The IRS accepted 27 percent of offers-in-compromise submitted in 2010 and 34 percent of offers in 2011, Scott Reisher, director, Collection Division, reported at the 2012 May Meeting of the American Bar Association (ABA) Section of Taxation in Washington, D.C., on May 11. "The number increased due to the streamlined offer-in-compromise procedures," Reisher explained. Eighty percent of offers were resolved within nine months. Initial contact The SB/SE guidance, which was initially issued in June 2011, emphasizes achieving taxpayer satisfaction through prompt and productive initial contact with the taxpayer (or Power of Attorney (POA)). The guidance instructs the OS that initial contact should consist of an immediate and direct discussion of the viability of the OIC and what documents are required to make a recommendation on the acceptability of the OIC. Initial actions should also involve review of financial information, completion of a preliminary asset/equity table (AET) and income/expenses table (IET), and contacting the taxpayer for any additional information. Within that framework, local offices are given discretion to review taxpayer's current compliance with reporting and payment obligations prior to the assignment to the OS. Items covered Initial contact, which generally takes place after an initial financial analysis, generally should be made by telephone. That initial telephone call should include discussion of the following:
The OS is advised not to request any information from the taxpayer that is available through internal sources. The OS is also instructed to follow up in writing, in an information request letter, any request for additional information made on the telephone call. Discussion of any disputed assets value, income determination or expense disallowance must be documented in the automated OIC (AOIC) or integrated collection systems (ICS) histories. Comment Throughout the SB/SE memorandum, the IRS emphasizes prompt action on the part of the OS, from its opening advice that "the timeliness of case actions in an offer investigation is important" to a final note that "contact time frames are the maximum time frames for contact." Comment Initial telephone contact, as now required under the SB/SE procedure, apparently has had a dramatic impact on the acceptance rate. In a discussion last June 2011 concerning improving the OIC process, IRS National Taxpayer Advocate Nina Olson reported that one recent study found that, under the "old system"using correspondence, OICs had a 14-percent acceptance rate. Once the IRS got on the phone, it was able to get the information it needed more easily, and its acceptance rate increased to 65 percent under that particular study. Reference: TRC IRS: 42,106. Tax Court Upholds IRS Decision Not To Credit Overpayment Where Responsible Person Penalty Applied Weber, 138 TC No. 18 The Tax Court has rejected a taxpayer's claim that the IRS improperly applied his income tax overpayment to his Code Sec. 6672 responsible person penalty. The taxpayer's election to apply the overpayment to a future tax year, rather than to the Code Sec. 6672 penalty, was not binding on the IRS. Take Away. The IRS collects the Code Sec. 6672 penalty no more than once. In this case, there were multiple responsible persons. The penalty is considered collected only after the passage of two years from the date of payment. The court noted that the IRS faces the risk that, if it stops collecting after receiving amounts that equal the trust fund shortage, one assessed person may later prove himself or herself not responsible and therefore be entitled to a refund. Where more than one person is held liable for the Code Sec. 6672 penalty and one of those persons believes he or she is entitled to contribution from others, the taxpayer may bring a separate suit claiming a right of contribution. Background In July 2007, the IRS assessed a $1 million Code Sec. 6672 penalty against the taxpayer as a responsible person in connection with trust fund liability with respect to a particular business's employment tax withholding obligations. In October 2007, the taxpayer filed his 2006 return reporting an overpayment of $47,000. The taxpayer elected to have his overpayment applied to his 2008 estimated tax. On his 2007 and 2008 returns, the taxpayer requested that the 2006 overpayment be applied to his estimated taxes. The IRS informed the taxpayer that it had previously applied the overpayment to the Code Sec. 6672 penalty. The taxpayer requested a collection due process (CDP) hearing. According to the taxpayer, the Code Sec. 6672 penalty had been satisfied (by payments other than from the taxpayer) and the IRS should credit his 2006 overpayment to his 2007 liability. The resulting 2007 overpayment would then be credited against—and would satisfy—his 2008 liability. The IRS rejected the taxpayer's argument and he appealed to the Tax Court. Court's analysis The court found that taxpayers may elect to apply an overpayment to the succeeding year. Where a taxpayer has made an overpayment of tax, the IRS has discretion to credit that overpayment to another liability. Here, the he IRS received the taxpayer's 2006 return after the Code Sec. 6672 penalty had been assessed. The IRS had to choose whether to apply the overpayment to the taxpayer's Code Sec. 6672 penalty or as an estimated payment to the taxpayer's future tax liability. The court found no basis to criticize the IRS's determination to apply the overpayment to the Code Sec. 6672 penalty. Consequently, the 2006 overpayment was no longer available; it had been used up, the court found. The court further found that if the IRS held the taxpayer's money wrongly, the agency held it not as an overpaid 2006 income tax but as an overpaid Code Sec. 6672 penalty. No regulation permits a taxpayer to elect to have an overpayment of a Code Sec. 6672 penalty to be applied to his or her income tax liability, the court noted. Additionally, the court rejected the taxpayer's claim that it could adjudicate his right to a Code Sec. 6672 penalty refund. The court found that Code Sec. 6330, which confers its CDP jurisdiction, does not grant it jurisdiction to adjudicate refund claims for unrelated liabilities. The taxpayer's remedy was in federal district court. References: TRC IRS: 51,056.25. Sixth Circuit Affirms Government Forced Sale Of Marital Home Held By Entireties Winsper, CA-6, May 10, 2012 The Sixth Circuit has found that a federal district court improperly denied the IRS's request to foreclose on tax liens against married taxpayers and sell their residential property held as tenants by the entireties. The district court abused its discretion by improperly placing the burden of justifying the foreclosure on the government. Rather, the district court had limited discretion to justify its decision not to foreclose, and should have found that the government had the paramount interest in a forced sale of the property. Take Away. The district court erred by relying on the four-factor balancing test from United States v. Rodgers, 83-1 ustc ¶9374, to determine that the IRS had not presented sufficient evidence to support its forced sale of the taxpayers' property under Code Sec. 7403. The Sixth Circuit, however, found that the district court had to apply the Rodgers test to justify the exercise of its limited discretion not to order the forced sale. Background There are four factors in the Rodgers balancing test. These are (i) prejudice to the government; (ii) whether a third party with a non-liable separate interest in the property would have a legally recognized expectation that the separate property would not be subject to a forced sale; (iii) likely prejudice to the non-liable third party; and (iv) the relative character and value of the non-liable and liable interests in the property. Taxpayers were a married couple against whom the IRS issued separate tax assessments of disproportionate amounts, with the husband owing approximately $901,052 and the wife owing $50,575. The IRS brought action in court, seeking to reduce the separate tax assessments to judgment and to foreclose the tax liens against the real property the taxpayers owned as tenants by the entirety. The district court estimated that, after payment of the mortgage and, assuming a 50-50 split of the proceeds, a forced sale would result in $71,500 for both the government and the wife. The district court found that the government had not presented sufficient evidence supporting the exercise of its authority to force the sale of the property and collect the husband's share of the sale. Court's analysis The Sixth Circuit reapplied the Rodgers test. It found that the husband's partial interest had minimal value, and therefore the government had a greater interest in a forced sale of the entire property. It also found that finding an absence of prejudice based on the small percentage of debt satisfied would favor taxpayers with the largest tax liability. Applying the other factors, the Sixth Circuit found that the wife did have an expectation that her property would not be sold to satisfy her husband's separate tax liability. However, that expectation, her sentimental value for her home, and her 50-percent interest in the property did not override the government financial interest in a forced sale of the entire property. References: 2012-1 ustc ¶50,342; TRC IRS: 45,160. Automatic Stay In Bankruptcy No Bar To Voluntary Dismissal Of Tax Court Case Settles, 138 TC No. 19 In a case of first impression, the Tax Court has found that the 11 USC 362(a)(8) automatic stay does not bar it from granting a taxpayer's motion to dismiss his petitions. The taxpayer had sought the Tax Court's review of IRS collection action. Comment The taxpayer petitioned for review of IRS collection action under Code Sec. 6330(d) and not to redetermine a deficiency under Code Sec. 6213(a). A taxpayer that files a petition for review a collection action has the option to withdraw that petition. The court noted that in Wagner it had distinguished petitions in collection cases from petitions in deficiency cases because Code Sec. 7459(d), under which a decision of the Tax Court dismissing the proceeding is considered as its decision that the deficiency is the amount determined by the IRS, applies only to a petition that is filed for redetermination of a deficiency. Background In June 2009, the taxpayer challenged IRS determinations in the Tax Court concerning his 1998-2002 tax years. The taxpayer filed for Chapter 11 bankruptcy protection in September 2009. The Tax Court issued an order automatically staying proceedings. The taxpayer subsequently sought a declaratory judgment from the bankruptcy court as to the existence and/or correctness of the IRS's proof of claim for outstanding income tax liabilities (which were the same outstanding liabilities challenged in the Tax Court). The bankruptcy court found that the taxpayer was estopped from challenging the amounts of the outstanding tax liabilities. The taxpayer moved to dismiss his Tax Court petitions while bankruptcy court proceedings were pending and the automatic stay in the Tax Court had not been vacated or lifted. Comment The IRS did not oppose the taxpayer's motion to dismiss his Tax Court petitions. Court's analysis A court found that a bankruptcy petition operates as a stay, applicable to all entities, of the commencement or continuation of a proceeding before Tax Court concerning a tax liability of a debtor. According to the taxpayer, 11 U.S.C. sec. 362(a)(8) stays the commencement or continuation of an action, but not its dismissal. The Tax Court looked to other courts for guidance. Generally, 11 U.S.C. 362(a)(1) does not prevent courts from dismissing cases against debtors for failing to comply with court rules or to prosecute. The automatic stay also does not prevent a court from dismissing a case against the debtor on the motion of the plaintiff under F.R.Civ.P. 41(a). However, dismissal would constitute a continuation of the judicial proceeding where an order of dismissal against the debtor would require a court to consider issues related to the underlying case, and would be barred by the automatic stay. The court also reviewed the purposes of the automatic stay. The automatic stay protects debtors by giving them breathing room, stopping collection efforts and giving debtors the opportunity to attempt a repayment or reorganization plan and protects creditors because otherwise certain creditors would be able to pursue their own remedies against the debtor's property. Creditors acting first would obtain payment in preference to and to the detriment of other creditors. The court concluded that dismissing the taxpayer's petitions would not require it to consider any issues related to the underlying cases. Dismissal would not constitute a continuation of the judicial proceedings and would be consistent with the purposes of the automatic stay. Additionally, Tax Court Rule 41(a)(2) allows dismissal at the taxpayer's request on terms that the court considers proper. The purpose of the rule, the court noted, is to protect the non-moving party; the IRS had no objection. References: TRC LITIG: 6,456. Internal Revenue Service For pension plan years beginning in May 2012, the IRS has released the corporate bond weighted average interest rate, the permissible range of interest rates used to calculate current plan liability and to determine the required contribution under Code Sec. 412(l) for plan years through 2012, and the current corporate bond yield curve and related segment rates for the purpose of establishing a plan's funding target under Code Sec. 430(h)(2). Notice 2012-36, FED ¶46,361; TRC RETIRE: 15,304.10. Jurisdiction A couple's complaint seeking injunctive relief, damages and release of liens filed against their property was dismissed for lack of subject matter jurisdiction and for failure to state a claim upon which relief could be granted. The couple failed to allege that the tax liens were unenforceable or that they satisfied their tax liability. Thurman, DC Ariz., 2012-1 ustc ¶50,337; TRC IRS: 51,158.20. Tax Crimes An individual's sentence for interfering with the tax laws under Code Sec. 7212 was properly enhanced. Although skimming currency receipts from his business and using that money to pay employees and suppliers was not, by itself, a particularly elaborate form of tax evasion, when combined with his other attempts to conceal his income, it was a sophisticated scheme. Ghaddar, CA-7, 2012-1 ustc ¶50,338; TRC IRS: 66,462.05. An individual's sentence for failure to pay over withheld taxes and filing false returns was vacated and remanded for resentencing because the district court erred in refusing to group the individual's offenses under the U.S. Sentencing Guidelines. The government's claim that the counts should not be grouped since they were not of the same general type because the offenses involve different schemes, objectives and victims, and took place at different times was rejected. There was no requirement in the guidelines for the objectives, schemes and victims to be common or the offense to take place at the same time. Register, CA-11, 2012-1 ustc ¶50,336; TRC IRS: 66,462.05. Summons An IRS summons directing an individual to appear and produce documents pertaining to a limited liability company in which he was a member and his individual tax liability was ordered enforced. The government established its prima facie case for enforcement under Powell, which the individual failed to rebut. D. Princinsky, DC Mich., 2012-1 ustc ¶50,343; TRC IRS: 21,300. Income An individual was required to recognize capital gains from sales of property because he failed to show that he had engaged in like-kind exchanges involving those properties. Failure-to-file additions to tax were sustained since the taxpayer had stipulated that he had not filed returns until several years after the due dates. He was also assessed accuracy-related penalties for negligent underpayment of tax for the years at issue. Zurn, TC, Dec. 48,065(M); TRC SALES: 30,100. Deficiencies and Penalties A married couple was not entitled to a refund of a failure-to-pay penalty because the notice of federal tax lien (NFTL) sent to the couple satisfied the notice and demand requirement for the imposition of the failure-to-pay penalty. The couple failed to produce any evidence to show that the liability amount listed on the NFTL contained a material error. Although the IRS assessed the penalty earlier than it should have been assessed, the failure-to-pay penalty was still justified. Shafmaster, DC N.H., 2012-1 ustc ¶50,341; TRC IRS: 45,052.10. A married couple, who omitted a large amount of income from their return for the tax year at issue, was liable for the substantial underpayment of tax penalty. The husband's argument that funds his wife received "in lieu of a dividend" and amounts deposited into their checking account by a bank were nontaxable income was rejected. Levy, TC, Dec. 48,066(M); TRC PENALTY: 3,108. An individual's unpaid income tax liabilities and penalties were summarily reduced to judgment. The individual conceded his liability for the assessments and penalties for all but one of the tax years at issue and the government conceded a reduced liability for the remaining year. Montalvo, DC Calif., 2012-1 ustc ¶50,339; TRC IRS: 27,200. An individual was not entitled to waiver of the penalty for failure to make estimated tax payments. The Tax Court had jurisdiction to hear the taxpayer's argument for waiver of the penalty. However, the IRS was entitled to commence a levy proceeding against the taxpayer in order to collect the unpaid penalty. Farhoumand, TC, Dec. 48,064(M); TRC FILEIND: 21,056.10. Obama Promotes 5-Item "To Do" List For Congress The Obama Administration released a new "To-Do" list of 5 issues the President wants Congress to address before it leaves for the summer recess. The items include: establishing a 20-percent tax credit for costs associated with moving jobs out of foreign countries and back into the United States; enabling easier mortgage refinancing for responsible home owners; extending 100-percent expensing and creating a new 10-percent income tax credit for small businesses with new hires or wage increases; extending tax credits for clean energy production; and creating a Veteran Jobs Corps to aid military veterans in finding employment. "These are traditionally ideas that have had bipartisan support," the President said while speaking at the College of Nanoscale Science and Engineering in Albany, New York. "They'll grow the economy faster and they'll create more jobs." House Passes Sequestration Replacement Bill On May 10, 2012, the House passed the Sequester Replacement Reconciliation Bill (HR 5652) by a vote of 218 to 199. The legislation is meant to raise federal revenue and provide alternative spending cuts to those that are set to automatically occur on January 2, 2013. The bill includes a provision passed by the House Ways and Means Committee that would raise an estimated $7.6 billion in revenue through tighter controls on refundable child tax credits. Among the controls is a provision within Code Sec. 24(d), which would require a tax filer's social security number on a tax return claiming the $1,000 credit. Many non-U.S. citizens are currently able to claim the credit by using an IRS-provided taxpayer ID number. The bill did not receive support from House Democrats. It is expected to fail in the Senate. Executives Take Issue With Proposed Dividends And Capital Gains Rate Increase Executive Vice President and Chief Administrative Officer Martin Barrington of Altria Group Inc. and 18 CEOs, in a May 9 letter to Treasury Secretary Timothy Geithner, expressed concern that an increase in the tax rates on dividends and capital gains would have an adverse effect on the economy. Pointing to the President's fiscal year (FY) 2013 budget proposals, the letter stated that, "The administration's plan to increase the top tax rate on dividends from 15 percent to 39.6 percent in 2013 will likely have a seriously disruptive effect on the economic sector, reducing the incentive to pay dividends." The letter also pointed out that the FY 2013 budget proposal would increase the top U.S. integrated tax rate on capital gains to 56.7 percent. The letter urged the administration to retain the current 15-percent tax rate on dividends and capital gains. "If we don't, it could spark a new wave of volatility in our financial markets and give a competitive edge to overseas corporations at a time when we need capital formation here in America to create jobs and expand our economy." President Obama's FY 2013 budget proposal included a provision that would have the current dividends rate revert back to the levels that existed before the Jobs and Growth Tax Relief Reconciliation Act of 2003. Prior to 2003 dividends were taxed as ordinary income. The President's proposal to let the dividends tax revert back to its pre-2003 level would bring in an estimated $206 billion in revenue. IRS Webcast Outlines Circular 230 Requirements For RTRPs Registered tax return preparers (RTRPs) are subject to the same standards as attorneys/CPAs and enrolled agents (EAs) under Treasury Department Circular No. 230, said IRS speakers before a May 8 IRS Tax Talk Today panel. They outlined several important provisions of Circular 230, such as the prohibition on splitting taxpayers' refunds in order to ensure payment, limitations on when RTRPs may charge a contingency fee, the requirements of the due diligence standard, when conflicts of interest prevent an RTRP from providing services to a client, and sanctions for violations of the regulations. "Everything about Circular 230, Subpart B in particular and Subpart C, 10.51, is important," Karen Hawkins, director, IRS Office of Professional Responsibility, said during the panel. The webcast is available at www.taxtalktoday.com. TIGTA Report Finds Fault With IRS Whistleblower Controls In a follow up review of its 2009 report, the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS Whistleblower Program Office had not fully addressed previously reported problems in the processing of whistleblower claims. In its review, TIGTA determined that IRS employees manually transferred claim information from the three systems into a single inventory control system, Entellitrak. However, IRS officials did not ensure steps were taken to reconcile and correct the inaccurate information that was reported in our Fiscal Year 2009 review. "Without adequate oversight of whistleblower claims, the IRS is not as effective as it could be in responding timely to tax noncompliance issues," said J. Russell George, Treasury Inspector General for Tax Administration. Treasury/IRS To Hold Consultation On Tribal Benefits Treasury and the IRS plan to host a stakeholder conference call with Tribes and Tribal leaders on May 30, 2012, to discuss the application of the general welfare exclusion to certain Indian tribal government programs that provide benefits to tribal members. As announced in IR-2012-52, the IRS also plans to publish written guidance to address issues raised by the tribes, including the proper tax treatment for allocations of gaming profits to general welfare programs. |
