Tax Procedure: Naked Assessments, New Matter, and the Burden of Proof, a Procedural Grab Bag

shutterstock_449681443The burden of proof is important in any litigation. While this is equally true in tax cases, there are some special rules that apply. For example, a tax assessment issued by the IRS is subject to a presumption of correctness, leaving the taxpayer to establish, by a preponderance of the evidence, that the assessment is incorrect. See Helvering v Taylor, 293 U.S. 507, 515 (1935). But that presumption may not apply if the assessment is “naked” and lacks any foundation. See United States v. Janis, 428 U.S. 433, 441-42 (1976). In a similar vein, while the burden of proof is generally on the taxpayer, if the IRS asserts new matter in its answer, the government will bear the burden of proof.… Read More

Jurisdiction: The Full Payment Rule for Refund Claims and Divisible Taxes

divisible-taxesIf a tax is not subject to Tax Court review, the taxpayer is free to pursue a refund claim, but full payment is a jurisdictional prerequisite. Flora v. United States, 362 U.S. 145, 150-51 (1960). In some contexts the full payment requirement is relaxed because the tax is divisible; for example, a corporate officer challenging a trust fund recovery penalty assessment need only pay the tax for one employee to establish jurisdiction. Psaty v. United States, 442 F.2d 1154, 1159 (3d Cir. 1971). While the trust fund recovery penalty is recognized as a divisible tax, the question whether a tax is divisible remains open in a number of other contexts.… Read More

Tax Shelters: The IRS Identifies Micro-Captive Insurance Schemes as a Transaction of Interest.

tax-shelters-micro-captive-trasactionsThe IRS periodically identifies tax strategies it considers abusive as “reportable transactions,” a designation that triggers disclosure obligations for material advisors involved in the transactions. See I.R.C. § 6111(a). They also must maintain lists of participants involved in reportable transactions. See I.R.C. § 6112(a). And individual taxpayers must make disclosures with their returns. See Treas. Reg. § 1.6011-4(a).

Reportable transactions come in a variety of forms. Where the IRS determines that a particular type of transaction is a tax avoidance scheme, it will designate it as a listed transaction, making all substantially similar transactions subject to the reporting and record-keeping requirements outlined above.… Read More

Tax Procedure: A Look at the U.S. Role in Collecting Foreign Taxes

united-states-and-canadaThe United States has entered into bilateral tax treaties with a significant number of countries. The general goal of these arrangements is to increase trade by eliminating double taxation. As a consequence, they have rules to determine the residence of taxpayers and provisions limiting the ability of the treaty partners to impose taxes in certain cases.

A few of these treaties include provisions for collection assistance; earlier this year, a district court addressed a challenge to a request for collection assistance received from the Kingdom of Denmark. See Dileng v. Comm’r, 157 F. Supp. 2d 1336 (N.D. Ga. 2016). Recently, a district judge in North Carolina addressed the collection assistance provisions of the U.S.-Canada treaty.… Read More

Tax Crimes: Employment Taxes, Section 7202, and the Statute of Limitations

employment taxesEmployers are required to withhold FICA and income tax from employees’ pay checks and make periodic deposits of the amounts withheld. If the taxes are not withheld and paid over to the IRS, the employer is subject to monetary penalties and individuals affiliated with the employer may face personal liability for the trust fund recovery penalty. See I.R.C. §§ 6656 (employer penalty); 6672 (trust fund recovery penalty).

The failure “to collect, account for, and pay over” these taxes is also a felony. I.R.C. § 7202. While payroll tax violations were rarely prosecuted historically, times have changed, and the Tax Division has made employment tax prosecutions a priority.… Read More

What Can Slot Machines Tell Us About the Treatment of NOLs under Pennsylvania’s Corporate Net Income Tax?

pa-taxIn December of 2015, Pennsylvania’s Commonwealth Court issued an important decision holding that the structure of the net loss carryover deduction for the Corporate Net Income Tax violated the uniformity clause of the Pennsylvania Constitution. Nextel Communs. of the Mid-Atlantic, Inc. v. Commw., 129 A.3d 1 (Pa. Commw. 2015). Specifically, the court held that the cap on the deductibility of losses violated the uniformity clause by treating taxpayers in a disparate fashion based on their taxable income without any reasonable justification. Nextel, 129 A.3d at 9-10. The court ordered a refund to remedy the violation. Id. at 12-13. Currently, the case is on appeal to the Supreme Court of Pennsylvania; all briefs have been filed and the matter is awaiting further action from the court.… Read More

Tax Procedure: Special Estate Tax Liens and Administrative Expenses

tax-lienCongress created statutory liens to assure that taxes are collected. Federal tax liens function very much like judgments, although there is no judge involved. Instead, the administrative determination by the IRS becomes a lien after notice and demand. I.R.C. § 6321; see also Treas. Reg. § 301.6321-1. The lien becomes immediately effective against the taxpayer, but it only has priority against third parties if a notice is filed. I.R.C. § 6323(a). Even then, the general federal tax lien can be primed by certain other types of interests. See I.R.C. § 6323(b).

Estate taxes are treated differently. There is a special tax lien that applies specifically to estate taxes.… Read More

State and Local Taxation: PA Supreme Court Invalidates Local Share Assessment Levied Against Casino’s Slot Revenue Outside Philadelphia

slotsThe Pennsylvania Constitution requires that taxes be uniform: “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” Pa. Const. art. VIII, § 1. While this provision sounds similar to the equal protection clause of the Fourteenth Amendment, in practice, it is much more robust.

On September 28, 2016, the Pennsylvania Supreme Court ruled that the local share assessment imposed under Section 1403 of the Pennsylvania Race Horse Development and Gaming Act violated the uniformity clause of the Pennsylvania Constitution because casinos were taxed differently based upon the amount of their gross revenue.… Read More

Charitable Deductions: Appraisals, the IRS and Substantial Compliance

charitable-deductionsSection 170 of the Internal Revenue Code provides a tax deduction for any charitable donation. Cash donations are relatively straight-forward, but donations of property are not. If the value of the donated property exceeds $5,000, there are qualified appraisal rules that apply under the Treasury Regulations. See Treas. Reg. § 1.170A-13(c)(3). The requirements are technical, and they give rise to a fair volume of litigation.

On September 20, 2016, the Tax Court issued a taxpayer-friendly ruling in a case that illustrates both how technical the qualified appraisal rules are and how hard the IRS will fight to enforce them. Cave Buttes, LLC v.Read More

Tax Procedure: The Eleventh Circuit Sustains Penalty Defense Based upon an Accountant’s Advice

accountantTaxpayers frequently rely upon an accountant to prepare their returns, and that involves more than just filling out forms. In preparing a return, an accountant will need to make judgments about the appropriate treatment of tax items, including whether income represents capital gain or ordinary income and whether expenditures should be capitalized or treated as business expenses.

If the IRS concludes that one of these judgment calls is incorrect, the taxpayer can be exposed to penalties, such as the accuracy-related penalty under section 6662 of the Internal Revenue Code. Taxpayers frequently point to the accountant’s role in an effort to avoid liability for the penalty; the Code provides a defense where the taxpayer shows that that there was “reasonable cause” for the position taken on the return and that she acted in good faith.… Read More