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IRS Valuation Expert for Michael Jackson Estate Case Almost Thrown Out!

by and | Oct 2, 2017 | , , ,

On September 29, 2017, Judge Mark Holmes of the United States Tax Court (Tax Court) issued an order in the estate tax valuation case brought by the Estate of Michael Jackson (the Estate). In the case, the Estate moved to strike the testimony of the Internal Revenue Service’s (IRS) valuation expert witness on the grounds that he lied. The IRS acknowledged that its expert “did not tell the truth when he testified that he did not work on or write a valuation report for the IRS Examination Division in the third-party taxpayer audit.” Apparently, the expert had worked on the valuation of Whitney Houston’s Estate on behalf of the IRS, and failed to list the engagement in his report. He also omitted one publication that he wrote and one case in which he provided expert-witness testimony at a deposition.

The question for the Court was the proper remedy for the omissions, with sanctions ranging from striking all of the expert’s testimony (and thereby depriving the IRS of the only evidence in its favor on the key issues in the case) to discounting the expert’s testimony and weight to be given to his opinions. The Court decided to take the latter route.

The Court explained that striking expert testimony pursuant to Tax Court Practice and Procedure Rule 143(g) (governing expert witness reports) occurs when a putative expert omits information from the report without good cause for the omission. In this case, the Court explained that the IRS’s expert failed to disclose his valuation work on his long list of expert-testimony engagements attached to his resume, but ruled that the omission was merely a “clerical error.” However, the expert did provide false testimony at trial when he testified he did not work on or write a valuation report in the matter involving Whitney Houston’s Estate. The Court determined that there had to be some negative consequences for the expert’s false testimony, and settled on discounting his credibility and opinions.

Practice Point: The order in Estate of Michael Jackson, as well as the Tax Court’s prior opinion in Tucker v. Commissioner, TC Memo. 2017-183, highlight a very important aspect of preparing an expert report for submission in Tax Court: it must be complete and accurate at the time of its submission. It is good practice to run a litigation database search (e.g., Lexis or Westlaw) on your expert’s testimony experience as a check on what the expert has listed in his report.



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Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity

by and | Sep 28, 2017 | , ,

In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions.  Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously.  In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity.  Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.”  (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5).  However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted.  See Tax Court Rule 345(b). (more…)



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Tax Court Holds Payment from Qualified Settlement Fund is Includable in Taxpayer’s Gross Income

by | Sep 25, 2017 | , ,

In Ritter v. Commissioner, TC Memo. 2017-185 (September 19, 2017), the Tax Court held that a taxpayer’s receipt of a payment from a section 468B qualified settlement fund (QSF) was includable in gross income for the 2013 taxable year. The QSF was established pursuant to a settlement agreement between a federal banking regulator and the taxpayer’s former mortgage servicer (Bank) in which the Bank agreed to take certain actions to remedy deficiencies and unsafe or unsound practices in (i) the Bank’s residential mortgage servicing and (ii) the Bank’s initiation and handling of foreclosure proceedings. The Bank foreclosed on the taxpayer’s principal residence in 2010 while the taxpayer was in bankruptcy proceedings and protected by federal bankruptcy law. (more…)



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Tax Court Announces 2018 Judicial Conference in Chicago on March 26-28, 2018

by and | Sep 19, 2017 | ,

On Friday, September 15, the Tax Court announced that it will be holding its 2018 Judicial Conference in Chicago, Illinois, on the campus of Northwestern University’s Pritzker School of Law on March 26-28, 2018. The press release provides:

The 2018 Tax Court Judicial Conference will be held in Chicago, Illinois, on the campus of Northwestern University’s Pritzker School of Law on Monday evening, March 26, 2018, Tuesday, March 27, 2018 (entire day), and Wednesday, March 28, 2018 (half day). The purpose of the judicial conference is to provide attendees with the opportunity to (1) review and discuss issues of material interest regarding the tax litigation process, (2) discuss ways in which the tax litigation process in the Court may be improved, and (3) network with fellow Tax Court practitioners. In addition to the Judges of the United States Tax Court, the Court intends to invite representatives from the Internal Revenue Service, the Department of Justice, private practice, low-income taxpayer clinics, academia, Capitol Hill, and other courts. A variety of plenary and breakout sessions will address issues relevant to practice before the Court.

Applications to attend the 2018 Tax Court Judicial Conference will be accepted from September 15, 2017, through November 15, 2017. An application form is available on the Court’s website at https://www.ustaxcourt.gov/judicial_conference_application.pdf. Please note that space is limited, and the Court may not be able to extend an invitation to all those who apply.

We have attended the Tax Court Judicial Conference on several occasions and have spoken on panels at the conference. The material presented is extremely informative and provides a unique opportunity to personally interact with judges and fellow Tax Court practitioners. Applications are being accepted from now through November 15, 2017, either by email or regular mail. If you plan to attend, please send us an email so we can say hello!



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Tax Court Rejects IRS Argument that Corporate Taxpayer Failed to File Valid Return

by | Sep 13, 2017 | , ,

The issue of whether a valid tax return has been filed usually comes up in the context of individuals. One common situation involves taxpayers who file so-called zero returns or returns with an altered jurat and protest paying any taxes. Another common situation, which has received substantial attention lately, involves whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code. We previously posted on the latter.

This post focuses on the uncommon situation where the IRS disputes whether a corporate taxpayer filed a valid return. As we have previously discussed, in the widely cited Beard v. Commissioner, 82 TC 766 (1984), the Tax Court defined a four-part test (the Beard Test) for determining whether a document constitutes a “return.” To be a return, a document must: (1) provide sufficient data to calculate tax liability; (2) purport to be a return; (3) be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) be executed by the taxpayer under penalties of perjury. This test applies to all types of taxpayers, and its application to corporate taxpayers was recently highlighted in New Capital Fire, Inc. v. Commissioner, TC Memo. 2017-177.

In New Capital Fire, Capital Fire Insurance Co. (Old Capital) merged into New Capital Fire, Inc. (New Capital), with New Capital surviving, on December 4, 2002. The merger was designed to be a tax-free reorganization under Internal Revenue Code (Code) Section 368(a)(1)(F). Old Capital did not file a tax return for any part of 2002 and New Capital filed a tax return for 2002 which included a pro forma Form 1120-PC, US Property and Casualty Insurance Company Income Tax Return, for Old Capital’s 2002 tax year. The IRS issued Old Capital a notice of deficiency in 2012 determining that Old Capital was required to file a return for the short tax year ending December 4, 2002, because the merger failed to meet to reorganization rules. (more…)



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Motion Practice – Moving for Summary Adjudication

by | Sep 6, 2017 | , ,

Summary judgment is a common practice in all courts, including courts hearing tax disputes. Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Full or partial summary judgment is appropriate where there is no genuine issue of material fact and a decision may be rendered as a matter of law on the issue presented. Summary judgment can be obtained by a party upon the filing of a motion if the pleadings and other evidence in the record, including any affidavits or declarations in support of or against the motion, demonstrate that no factual dispute exists. Each court has its own particular rules on motions for summary judgment, but all are grounded on the essential requirement that the pertinent facts not be in dispute. The party moving for summary judgment bears the burden of showing that no genuine issues exists as to any material fact and that it is entitled to judgment as a matter of law, with all factual materials and inferences drawn from them considered in the light most favorable to the nonmoving party. To defeat a motion for summary judgment, the nonmoving party must do more than merely allege or deny facts; it must set forth specific facts showing a genuine dispute for trial. Thus, facts that are not properly supported or that are irrelevant or unnecessary will not be counted.

The decision of whether to file a motion for summary judgment must be carefully made. In some cases the decision may be fairly straightforward because both sides agree on the pertinent facts and the issue is purely legal. However, in other cases, the factual record may not be as clear and the parties may differ on which facts are material and which properly remain in dispute. Further, a motion for summary judgment by one party may result in a cross-motion for summary judgment by the other party. Thus, the party initially moving for summary judgment needs to be confident that it will not need additional facts or supporting information from witnesses before seeking summary adjudication. (more…)



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Tax Court Reinforces Plain Meaning Approach in Interpreting Tax Statutes

by and | Sep 1, 2017 | , ,

The Internal Revenue Service (IRS) and taxpayers frequently spar over the meaning and interpretation of tax statutes (and regulations). In some situations, one side will argue that the statutory text is clear while the other argues that it is not and that other evidence of Congress’ intent must be examined. Courts are often tasked with determining which side’s interpretation is correct, which is not always an easy task. This can be particularly difficult where the plain language of the statute dictates a result that may seem unfair or at odds with a court’s views as the proper result.

The Tax Court’s (Tax Court) recent opinion in Borenstein v. Commissioner, 149 TC No. 10 (August 30, 2017), discussed the standards to be applied in interpreting a statute and reinforces that the plain meaning of the language used by Congress should be followed absent an interpretation that would produce an absurd result.

In Borenstein, the taxpayer made tax payments for 2012 totaling $112,000, which were deemed made on April 15, 2013. However, she failed to file a timely return for that year and the IRS issued a notice of deficiency. Before filing a petition with the Tax Court, the taxpayer submitted return reporting a tax lability of $79,559. The parties agreed that this liability amount was correct and that the taxpayer had an overpayment of $32,441 due to the prior payments. However, the IRS argued that the taxpayer was not entitled to a credit or refund of the overpayment because, under the plain language of Internal Revenue Code Sections 6511(a) and (b)(2)(B), the tax payments were made outside the applicable “lookback” period keyed to the date the notice of deficiency was mailed. (more…)



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Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage

by and | Aug 23, 2017 | , ,

On August 14, 2017, the United States District Court for the District of Columbia (DC District Court) decided Starr International Company, Inc. v. United States. In Starr International, the DC District Court held that the Internal Revenue Service (IRS) was not arbitrary or capricious in finding at least one of the taxpayer’s principal purposes for moving its residency to Switzerland was to obtain tax benefits under the US-Swiss Treaty.

Before discussing the facts and holding in Starr International, it is helpful to set the stage for the dispute. The United States has a bilateral tax treaty with a number of nations to avoid double taxation and encourage cross-border investments. Bilateral tax treaties provide benefits to residents of the two contracting states. The United States has a bilateral tax treaty with Switzerland (the US-Swiss Treaty). Treaty benefits under the US-Swiss Treaty are generally desirable for qualified taxpayers because treaty coverage reduces the tax on certain types of transactions, such as US-source dividend income for Swiss residents.

Article 1 of the US-Swiss Treaty provides, except as otherwise provided, the Treaty shall apply to persons who are residents of Switzerland. A person generally is treated as a resident of Switzerland if that person, under Swiss law, is liable to tax therein by reason of his domicile, residence or other similar criteria. However, Article 22, Limitation on Benefits, provides additional criteria to claim benefits provided for in the US-Swiss Treaty.

The Limitation on Benefits provision of the US-Swiss Treaty contains multiple objective tests to claim benefits provided for in the US-Swiss Treaty. All the tests provided in Article 22 aim to identify entities with legitimate, non-tax purposes for residency in Switzerland. This provision intends to stop taxpayers from “treaty shopping” and establishing residency in Switzerland with the principal purpose of obtaining benefits of the US-Swiss Treaty.

(more…)



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Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

by and | Aug 17, 2017 | , ,

We recently wrote here about “John Doe” summonses and a case where an anonymous “John Doe” was allowed to intervene in a summons enforcement action. To refresh, under Internal Revenue Code (IRC) Section 7602 the Internal Revenue Service (IRS) has broad authority to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records would be covered by the summons, the IRS may issue a “John Doe” summons to a third party to produce documents related to the unidentified taxpayers.

In Hohman v. United States, Case No. 16-cv-11429 (E.D. Mich. July 11, 2017), two John Doe summonses directed a banking institution to deliver to the IRS records related to three accounts, which were identified only by account numbers. Two of the accounts were held by limited liability companies (LLCs) and the other was held by an individual. The banking institution notified some of the account-holders that it had received a John Doe summons that sought records for accounts relating to them.

The account-holders filed a civil action, alleging that the IRS’s efforts to obtain their financial records through the use of John Doe summonses violated the federal Right to Financial Privacy Act (RFPA). The RFPA accords customers of banks and similar financial institutions certain rights to be notified of and to challenge in court administrative subpoenas of financial records in the possession of banks.  The individual account-holder did not allege that the IRS actually obtained or disclosed any records of account information as a result of the John Doe summons.

The government moved, under Rule 12(b)(1) of the Federal Rules of Civil Procedure (FRCP), to dismiss the RFPA claims for lack of subject-matter jurisdiction. The government asserted that it has sovereign immunity from the account-holders’ RFPA claims. The waiver of sovereign immunity under the RFPA applies only to claims that a government authority disclosed or obtained financial records.

The court agreed with the government. First, the court concluded that the RFPA’s waiver of sovereign immunity applies only to “customers,” and the LLCs were not “customers” as defined under the RFPA. The court reasoned that the plain language of the RFPA does not state that an LLC is either a “person” or a “customer” and the court was not at liberty to expand the definitions. Second, the court concluded that sovereign immunity was not waived with respect to the individual’s claim because the individual had not alleged that the IRS actually obtained or disclosed any financial records or information from the account as a result of the John Doe summons.

Practice Point:  Although waivers of sovereign immunity are often construed strictly, taxpayers should consult with their advisors to determine whether their particular facts may allow an action against the government.



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Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

by and | Aug 16, 2017 | , , , , ,

In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.

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