Oh, Canada: Tax Treaties and Foreign Obligations

The United States has entered into a variety of bilateral tax treaties. As a general matter, they are designed to promote trade and avoid double taxation. But they also serve other purposes, such as providing for mutual assistance in tax administration matters. As the Fourth Circuit recently held, that means that the IRS can be deployed to collect taxes owed to another country. Retfalvi v. United States, No. 18-2158, 2019 U.S. App. LEXIS 21004 (4th Cir. July 16, 2019).

In 1995, the tax treaty between the United States and Canada was amended to add new article 26A, which provided that the United States and Canada would assist each other with unpaid taxes.… Read More

Doubling Down, or How to Make the Worst of a Bad Situation

tax obstruction

In blackjack, you can double your bet in the middle of a hand, but then you can only draw one more card; this strategy is known as doubling down. Doubling down has acquired a secondary meaning, which is “to become more tenacious, zealous, or resolute in a position or undertaking.”  In this broader context, the wisdom of doubling down will largely depend on the wisdom of your position: If you double down on a dumb strategy, you will simply dig a deeper hole for yourself. For example, if you have questionable tax positions, including improper employment tax practices, it is a bad idea to double down with the IRS, because your civil tax problem may not stay civil.… Read More

It’s Better to Be the King than to Be a Return Preparer

nullum tempus occurrit regi

Nullum tempus occurrit regi, sometimes shortened to nullum tempus, is an old principle of common law. The phrase means time will not run against the king, and the point is that he is not subject to statutes of limitations like the rest of us. While we lack a king, the principle remains alive in U.S. law, surfacing recently in a penalty case against a return preparer. Armstrong v. United States, No. 18-CV-06532-LHK, 2019 U.S. Dist. LEXIS 103604 (N.D. Cal. June 20, 2019).

A large number of taxpayers rely upon certified public accountants and other return preparers to assist them in complying with their tax obligations.… Read More

Titles Just Might Matter, or Why the Secretary Wasn’t Responsible

trust fund penalty

A title is “an appellation of dignity, honor, distinction, or preeminence attached to a person or family by virtue of rank, office, precedent, privilege, attainment, or lands.” https://www.merriam-webster.com/dictionary/title. Many human beings crave titles because they suggest power and status.

Ashley C. Scott is a little different: She recently argued that the title she held meant that she lacked power. Ashley argued that she lacked power because she was the secretary of a corporation controlled by her father, and the IRS had assessed her with the trust fund recovery penalty in an effort to collect unpaid employment taxes.

Under section 6672 of the Internal Revenue Code, individuals can be held liable for unpaid employment taxes of a business with which they are affiliated:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

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Employment Taxes: The IRS May Obtain Injunctive Relief Against Chronic Delinquents

Commencing in 2015, the IRS established new enforcement initiatives for employment taxes. One initiative has focused on criminal enforcement, resulting in a significant increase in criminal cases against business owners who fail to withhold and to pay over employment taxes.

A second initiative has focused on civil injunction actions against businesses that are repeat offenders. The Internal Revenue Code grants jurisdiction to district courts to provide equitable relief in favor of the government:

The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws.

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What’s in a Name? Sometimes Quite a Lot

To enforce the Internal Revenue Code, the IRS has been given broad powers to investigate:

For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized-
(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and
(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

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Entities that Are Generally Disregarded Sometimes Are Not

DAF Charters, LLC v. Comm’r

It is well known that single-member LLCs are disregarded for tax purposes, unless the owner elects for it to be treated as a corporation. While that is generally true, it proved to be specifically wrong for one taxpayer that operated a charter yacht. DAF Charters, LLC v. Comm’r, No. 21317, 2019 U.S. Tax Ct. LEXIS 15 (May 9, 2019).

John Staluppi formed DAF Charters, LLC (“DAF” or the “Taxpayer”), a Florida limited liability company, in 2011, and then transferred his membership interest to a Cayman Islands corporation, DAF Charters, Ltd. on May 8, 2012. Id. at *1. Staluppi remained as the manager of DAF; the Taxpayer operated a charter yacht known as Diamonds Are Forever, which was registered in the Cayman Islands on January 5, 2012.… Read More

Double or Nothing: Playing the Penalty Lottery

tax penalty

Penalties and their approval have received a lot of attention from the Tax Court recently. The starting point is section 6751(b) of the Internal Revenue Code, which provides “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” I.R.C. § 6751(b).

In March of 2017, the Second Circuit issued its decision in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), holding that the written approval requirement was an essential element of a penalty claim and that the written approval must occur either as of the date the notice of deficiency imposing the penalty is issued or as of the time the penalty is asserted in either an answer or amended answer.… Read More

We Know It When We See It: Pennsylvania’s Supreme Court Invalidates a Slot Machine Tax

Sands Bethworks Gaming v. Pa. Dep’t of Revenue

When a state or local tax is invalidated in Pennsylvania it is typically based upon either the Commerce Clause of the United States Constitution, art. I, § 8, cl. 3, or the Uniformity Clause of the Pennsylvania Constitution, art. VIII, § 1. Last week, however, the Supreme Court of Pennsylvania struck down a tax relying primarily on the Fourteenth Amendment, and most of the Court’s members could not decide which part invalidated the tax. Sands Bethworks Gaming v. Pa. Dep’t of Revenue, No. 216 MM 2017, 2019 PA LEXIS 2361 (Pa. Apr. 26, 2019). That may sound strange, but it is not the Court’s fault: The relevant precedent is frankly not consistent.… Read More

Tax Procedure: Say Goodbye to Common Law, and Get a Receipt

mailbox rule

“Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.”

Many would identify the quotation as the Postal Service motto, but the Postal Service does not have a motto.1 And frankly, its non-motto is not true, as a certain amount of mail simply disappears. Those familiar with Murphy’s Law2 will recognize that the more important the document, the more likely it is to get lost in the mail, which brings us to tax returns and refund claims.

If the Post Office mishandles a refund claim, and the IRS gets the claim after the deadline, what happens?… Read More