Eleventh Circuit Archives - TAX CONTROVERSY 360

Eleventh Circuit

Courts Split on Supervisory Approval Requirement for Tax Penalties

by Kevin Spencer, Sarah M. Raben and McDermott Will & Emery | Sep 28, 2022 | Appellate Courts, Court Procedure Matters, IRS Audits, Trial Courts

Since Chai v. Commissioner, an opinion by the US Court of Appeals for the Second Circuit subsequently followed by the US Tax Court in several opinions, there has been a substantial number of cases litigating issues involving supervisory approval of federal civil tax penalties. Two recent additions to that list include decisions from the Ninth and Eleventh Circuits, where both Courts departed from the Tax Court’s analysis and ruling on the issue. The disagreement centers on when approval must occur. (Some of our prior discussions on this topic are linked below.)

LAIDLAW’S AND THE NINTH CIRCUIT

In Laidlaw’s Harley-Davidson Sales, Inc. v. Commissioner, the Ninth Circuit, reversing the Tax Court’s ruling, applied a textualist approach and held that approval is required only before the assessment of a tax penalty and not before the Internal Revenue Service (IRS) communicates a proposed penalty to the taxpayer. The Court reasoned that the “language of [Internal Revenue Code (Code) section 6571(b)] provides no reason to conclude that an ‘initial determination’ is transformed into ‘something more like a final determination’ simply because the revenue agent who made the initial determination subsequently mailed a letter to the taxpayer describing it.” While the Court was “troubled” by the manner in which the IRS communicated the potential imposition of the penalty, it explained that a court’s role is to “apply the law as it is written, not to devise alternative language.” In reaching its decision, the Ninth Circuit disagreed with the position developed by the Tax Court in recent years.

KRONER AND THE ELEVENTH CIRCUIT

In Kroner v. Commissioner, the Eleventh Circuit followed Laidlaw’s Harley Davidson Sales and similarly concluded that the IRS satisfies Code Section 6751(b) so long as a supervisor approves the penalty before it is assessed. The Court explained that this was the best reading of the statute because (1) it is more consistent with the meaning of the phrase “initial determination of such assessment,” (2) it reflects the absence of any express timing requirement in the statute, and (3) it is a workable reading in the light of the statute’s purpose. The Court suggested that the IRS may be wise “to have a supervisor approve proposed tax penalties at an early juncture…but the text of the statute does not impose an earlier deadline.”

The Eleventh Circuit was explicit in its departure from Chai and Tax Court precedent, stating that “the Chai court missed an important aspect of the statute’s purpose: it is not just about bargaining, it is also a check on the imposition of erroneous penalties.” The Court also explained that “appropriate penalties should be assessed and collected. Chai’s analysis of these competing interests leaned heavily on the former to the detriment of the latter when justifying its departure from the statutory text.”

Practice Point: It remains to be seen whether this issue will make its way to the Supreme Court of the United States given the apparent circuit split on the issue as [...]

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Courts Outline Boundaries of the Anti-Injunction Act Post-CIC Services

by Kevin Spencer, Sarah M. Raben and McDermott Will & Emery | Aug 23, 2022 | Appellate Courts, Court Procedure Matters, IRS Appeals, Trial Courts

Since the Supreme Court of the United States’ decision in CIC Servs., LLC v. IRS was issued in May 2021, courts have grappled with how to apply the Anti-Injunction Act (AIA) in other contexts. The US Court of Appeals for the Eleventh Circuit recently affirmed the dismissal of a lawsuit under the AIA in Hancock County Land Acquisitions, LLC v. United States, while the Court of Appeals for the First Circuit recently held that the AIA does not prevent a challenge to the Internal Revenue Service’s (IRS) use of John Doe summons in Harper v. Rettig.

In July, we posted about a circuit split between the Sixth and Eleventh Circuits over claimed Administrative Procedure Act (APA) violations. As discussed below, these post-CIC Services decisions are shaping the boundaries of challenges based upon the APA and the AIA.

THE ELEVENTH CIRCUIT

The taxpayer in this case reported a $180 million deduction for a conservation easement on land it owned in Mississippi. The IRS audited the taxpayer and requested an extension of the statute of limitations on assessment in Internal Revenue Code (IRC) Section 6501. The taxpayer initially declined, but 11 months after the request it agreed to extend the limitations period. At that point, the IRS had almost finished with its examination, and the parties never executed the extension. The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA), and the taxpayer was unable to pursue an administrative resolution with the IRS Office of Independent Appeals (IRS Appeals). The taxpayer filed suit in US federal district court, arguing, among other things, that the IRS violated the APA when it did not send the case to IRS Appeals, resulting in the taxpayer being deprived of pre-litigation administrative resolution of its tax dispute. The IRS moved to dismiss the complaint for lack of subject matter jurisdiction, which the district court granted.

On appeal, the taxpayer argued that the suit was not barred by the AIA, citing CIC Services. The Eleventh Circuit, however, explained that the three considerations that led to that conclusion in CIC Services were the “same three considerations [that] lead to the opposite conclusion here.” The Court found that the taxpayer: (1) would not be subject to any costs separate and apart from the tax penalty from the FPAA; (2) was on the cusp of liability when it filed its suit and (3) would not suffer any criminal punishment by following the AIA’s “familiar pay-now-sue-later procedure.” The Court stated, “at its heart, this suit is a ‘dispute over taxes,’” and it was far from clear that under no circumstances could the IRS prevail on the merits of the taxpayer’s claim.

THE FIRST CIRCUIT

In 2013, the taxpayer in this case opened an account with a digital currency exchange. He deposited bitcoin into his account in 2013 and 2014. In 2015, he started to liquidate his Bitcoin holdings, which lasted until 2016 when his holdings were depleted. At that [...]

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Sixth Circuit Denies Proceeds Regulation Rehearing Request, Sets Up a Circuit Split

by Sarah M. Raben and McDermott Will & Emery | Jul 13, 2022 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts

The US Court of Appeals for the Sixth Circuit recently denied a taxpayer’s request for a rehearing en banc in Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117, leaving a highly contested conservation easement regulation in place and setting up a split between the Sixth and Eleventh Circuits.

In Oakbrook, the taxpayer argued that Treas. Reg. § 1.170A-14(g)(6)(ii), known as the “proceeds regulation,” was invalid because it did not satisfy the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. The regulation addresses how to allocate proceeds between donors and donees if an easement is judicially extinguished and the property is sold. In May 2020, the US Tax Court held that the regulation was “procedurally and substantively valid” under the APA. The Sixth Circuit agreed with the Tax Court, upholding the regulation.

The Sixth Circuit’s order issued July 6, 2022, indicated that neither the judges on the original panel nor any other judge on the full court requested a vote for a suggested rehearing. Last year, however, the Eleventh Circuit reached the opposite conclusion in Hewitt v. Commissioner, finding that the same regulation was invalid because it violated the APA. Thus, there is a clear circuit split on the issue.

Practice Point: The government did not seek a review of the Hewitt decision from the Supreme Court of the United States, so that ruling stands in the Eleventh Circuit. It remains to be seen whether the taxpayer in Oakbrook files a petition for a writ of certiorari to the Supreme Court. With a split between the Sixth and Eleventh Circuits, it is possible this conservation easement battle could be headed to the Supreme Court to determine the fate of the proceeds regulation.

IRS Chief Counsel Signals Increased Tax Enforcement

by Kevin Spencer, Jenny L. Johnson Ware and McDermott Will & Emery | Jan 27, 2022 | Appellate Courts, Court Procedure Matters, IRS Appeals, IRS Audits, IRS Guidance, Trial Courts

The Internal Revenue Service (IRS) Chief Counsel is the chief legal advisor to the Commissioner of Internal Revenue on all matters pertaining to the interpretation, administration and enforcement of the Internal Revenue Laws. In this regard, the IRS Office of Chief Counsel is responsible for litigating cases in the US Tax Court. Such cases can arise from examinations conducted by different divisions within the IRS, such as the Large Business & International (LB&I), Small Business/Self Employed (SB/SE), Tax Exempt & Government Entities (TE/GE) and Wage & Investment (W&I) Divisions.

On January 21, 2022, the IRS Office of Chief Counsel announced plans to hire up to 200 additional attorneys to assist with litigation efforts. The announcement specifically notes that new hires are necessary “to help the agency combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.” They will also help the IRS manage its increasing caseload as part of its multiyear effort to combat what it believes are abusive schemes and to ensure that the appropriate taxes and penalties are paid. The new hires will be located around the country and focus on audits of complex corporate and partnership issues.

Additionally, there are a significant number of cases before the Tax Court that involve conservation easements and micro-captive insurance arrangements. The IRS’s attack on the donation of conservation easements is well known in the tax world. To date, the IRS has largely been successful in these cases based on non-valuation arguments that easement deeds do not comply with the applicable regulations. However, in the recent Hewitt v. Commissioner case, the US Court of Appeals for the Eleventh Circuit dealt a significant blow when it held that the IRS’s interpretation of Treas. Reg. § 1.170A-14(g)(6)(ii) was arbitrary and capricious and violated the Administrative Procedure Act because the US Department of the Treasury failed to respond to significant comments submitted during the notice-and-comment process. Many conservation easements are within the Eleventh Circuit’s jurisdiction and other appellate courts are expected to weigh in soon, which could result in the IRS and taxpayers proceeding to trial on valuation issues. Valuation issues are inherently fact intensive and will require the IRS to utilize substantial resources to litigate.

Practice Point: Much has been written about the trend of decreased enforcement by the IRS over the past several years, owing in part to decreased or stagnant funding from US Congress. Tax litigation, particularly in fact intensive cases involving valuation issues and transactions the IRS (but not necessarily the courts) deemed abusive, requires the expenditure of substantial resources by the IRS. The IRS has signaled that it is ready to reverse the trend. All IRS tax controversies start with the examination of the taxpayer’s positions on the return. We have seen an increase in IRS audit activity in the last year or so, especially with medium-sized businesses and high-net-worth individuals. The Chief Counsel is assembling his “army” to litigate positions developed during the examination. It’s a good time for taxpayers [...]

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IRS Opposes Granting of Certiorari in Cases Addressing Definition of Return

by McDermott Will & Emery and Roger J. Jones | Mar 16, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Uncategorized

Two petitions for certiorari pending before the Supreme Court of the United States ask the Court to resolve the question of whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code (BC). The answer to this question will determine whether a bankrupt taxpayer’s tax debts can be discharged or are permanently barred from discharge. According to these petitions, the courts of appeal are divided as to the answer.

BC § 523(a) generally allows a debtor to discharge unsecured debt, except for, inter alia, tax debts of debtors who: (1) failed to file tax returns; (2) filed fraudulent tax returns; or (3) filed late tax returns, where a bankruptcy petition is filed within two years of the date the late return was filed. See BC § 523(a)(1)(B)(i), (B)(ii), (C).

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