Supreme Court Upholds Integrity of IRS Summons Process

us-supreme-courtIn a unanimous decision, the U.S. Supreme Court upheld the integrity of IRS summons enforcement proceedings. The high court rejected the IRS position and held that a taxpayer has the right to conduct an examination of IRS officials regarding their reasons for issuing a summons when the taxpayer shows facts raising a plausible inference of bad faith.

The IRS sought to disregard taxpayer affidavits attesting that the IRS issued the summonses to punish the taxpayer for refusing to extend the statute of limitations and that the summons enforcement action was designed to evade limitations on Tax Court discovery. The IRS characterized the taxpayer’s claims as bare assertions.

For more about the underlying matter and the parties’ positions, please see our article in the current issue of the Federal Lawyer: Bare Assertions, Naked Allegations, & Improper Purposes.

The Supreme Court rejected the IRS arguments and established the appropriate standard for reviewing the proper purpose required to enforce an IRS summons. The Court ruled that the taxpayer is entitled to examine an IRS agent as part of a summary enforcement proceeding when the taxpayer “can point to specific facts or circumstances plausibly raising an inference of bad faith.” Stated differently, “the taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive.”

Though the Court dismissed the IRS arguments, it also found the intermediate decision of the 11th Circuit in favor of the taxpayers lacking. The Supreme Court found the 11th Circuit’s brief opinion potentially too far ranging in its result and remanded the matter for a more specific findings on the errors adduced to the district court. It also suggested that certain legal issues discussed in the district court opinion, specifically those related to the interplay between summons enforcement and Tax Court discovery, might be subject to review by the 11th Circuit. So while the taxpayer has secured a certain victory, there likely will be more clarification to come on this issue.

Read the U.S. Supreme Court’s opinion here:
U.S. v. Clarke, 573 U.S. ___ (No. 13-301, June 20, 2014)

Second Circuit Affirms Importance of Proper Valuations for Facade Easements

Second Circuit Court of AppealsOn Wednesday, June 18, 2014, the Second Circuit Court of Appeals affirmed the U.S. Tax Court’s ruling in Scheidelman v. Commissioner, TC Memo 2013-18.

This is Scheidelman’s second, and likely final, visit to the Second Circuit Court of Appeals. See our previous discussion of the Second Circuit’s decision to vacate and remand the case back to the U.S. Tax Court.

Read the full opinion here:  Scheidelman v. Commissioner, No. 13-2650 (2d. Cir., June 18, 2014).

Famous Fridays: Nicolas Cage, Spending A Fortune In Sixty Seconds

nicolas-cage-240

Regardless of your opinions on his talent as an actor, Nicolas Cage amassed a fortune for his consistent roles in movies since 1981. Cage won an Oscar for his performance in Leaving Las Vegas, but he may be best known for his roles in adventure movies Con Air, Face/Off, Gone in Sixty Seconds, Lord of War, and Ghost Rider. He earned more than $150 million from acting between 1996 and 2011, and found a way to spend almost all of it.

Cage accumulated 15 personal homes between 2000 and 2007 ranging from a castle in England to a Bel Air mansion that was taken off the market when nobody could meet Cage’s $35 million asking price. He also spent $7 million on a private island in the Bahamas, purchased 4 yachts, and a $30 million private jet. His car collection would have made Memphis Raines proud with nine Rolls Royces, 30 motorcycles, a $500,000 Lamborghini, and a $1 million Ferrari Enzo.

He earned $40 million and was the fifth-highest paid actor by Forbes in 2009, but on the whole it was a bad year financially for Cage. Even this income wasn’t enough to sustain Cage’s lifestyle. His Bel-Air mansion was foreclosed upon by each of the six lenders supplying six mortgages totaling nearly $20 million. The IRS placed a lien on his New Orleans home to collect over $13 million in unpaid taxes and penalties for tax years from 2002-2007. A large part of the bill stemmed from using a company he owned to write off $3.3 million in personal expenses including costs for limos, meals, gifts, travel, and his private jet. Among other things, the IRS adjusted his taxable income from $430,000 to $1.9 million in 2003 and from $17 million to $18.5 million in 2004. The IRS reduced the expenses for his private jet by over $500,000 in several other tax years.

He fired and sued his business advisor and began making headway on his back taxes by selling some of his properties, a dinosaur skull worth over $250,000 and Action Comics #1 for $2.16 million. In 2012, Cage made a payment of over $6.2 million to the IRS cutting his debt in half. His marketability as an actor and the rumored National Treasure 3, should put Cage well on his way to paying off the IRS.

 

IRS Releases Guidance on Convertible Virtual Currency: Bitcoin Treated As Property for Federal Tax Purposes

opengraphThe IRS released Notice 2014-21 on Tuesday, March 25th to provide guidance on the treatment of convertible virtual currencies, like Bitcoin, as property, not currency, for Federal tax purposes.

The IRS distinguishes between virtual currency, a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, and convertible virtual currency, which has an equivalent value in real currency or can act as a substitute for real currency. The Notice specifically mentions Bitcoin as an example of a convertible virtual currency.

Notice 2014-21 only applies to convertible virtual currency. The Notice provides additional instructions for determining basis, calculating gain or loss, and necessary forms for reporting transactions using convertible virtual currency.

You can read the full Notice here:
IRS Notice 2014-21

U.S. Supreme Court Reverses Sixth Circuit on FICA Withholding for Severance Payments

Seal_of_the_United_States_Supreme_Court.svgOn Tuesday, March 25, 2014, the United States Supreme Court reversed the Sixth Circuit Court of Appeals decision in U.S. v. Quality Stores, Inc.

Find earlier discussion of the Sixth Circuit decision here.

Read the full opinion here:
United States v. Quality Stores, No. 12-1408 (March 25, 2014)

Route 231, LLC v. Commissioner: Tax Court Issues Memorandum Opinion on Transferability of Investment Tax Credits

us_tax_courtIn Route 231 LLC v. Commissioner, the Tax Court found that a partnership’s transfer of Virginia conservation easement tax credits to a partner who agreed to make a capital contribution of 53¢ for every $1 of tax credit received in exchange for a 1% partnership interest and the credits was not a capital contribution followed by an allocation of credits but rather was a disguised sale under IRC § 707, taxable to the partnership as income.

Read the full opinion here:
Route 231 LLC v. Commissioner, TC Memo 2014-30

IRS Releases Criminal Investigation Statistics

irs-sealThe IRS released its Criminal Investigation Annual Report for fiscal year 2013 on Monday, February 24. The fiscal year ended September 30, 2013, so the report covers the fourth quarter of 2012 and the first three quarters of 2013. The report shows increases in enforcement actions and convictions for tax crimes. IRS Criminal Investigation continues its focus on identity theft crimes, recommending prosecution of over 1,250 individuals who were involved in identity theft crimes in fiscal year 2013.
As of September 30, 2013, the IRS was able to report the following:

  • IRS Criminal Investigation initiated 5,314 cases and recommended 4,364 cases for prosecution.
  • A 12.5% increase in investigations initiated compared to the 2012 fiscal year.
  • An 18% increase in prosecution recommendations compared to the 2012 fiscal year.
  • The conviction rate for fiscal year 2013 was 93%.
  • Total convictions increased by over 25% from fiscal year 2012 to fiscal year 2013.
  • 80% of convictions in fiscal year 2013 resulted in confinement to federal prison, halfway house, home detention, or some combination thereof.
  • IRS Criminal Investigation seized over $465 million in assets in fiscal year 2013.
  • Taxpayers forfeited over $517 million in assets in fiscal year 2013.

Notably, despite the controversy over regulation of return preparers, only 309 investigations of return preparers were initiated in fiscal year 2013, down from 443 in fiscal year 2012.

Here is the full report.

 

Shea Homes v. Commissioner: Tax Court Allows Homebuilder to Defer Recognition of Income from Home Sales

us_Tax_Court_fasces-with-red-ribbonIn Shea Homes, Inc. v. Commissioner, the Tax Court allowed a homebuilder to defer the recognition of income, using the completed contract method under IRC § 460(e)(1)(A), from home sales in a newly constructed development until the entire development was nearly complete.

The specific facts and contracts in Shea were crucial to the court’s determination.

Read the entire opinion here:
Shea Homes, Inc. v. Commissioner, 142 T.C. No. 3 (2014).

Court of Appeals Rules that IRS Cannot Regulate Return Preparers

The D.C. Circuit Court of Appeals has affirmed the ruling of the lower court and held that the IRS does not have the statutory authority to regulate tax return preparers.

In a unanimous and rather direct opinion, the Court of Appeals listed six reasons why the 130 year old statute, 31 U.S.C. § 330, relied upon by the IRS was insufficient to authorize regulation of non-accountant and non-attorney tax return preparers.

  1. Tax return preparers do not represent taxpayers, they assist them;
  2. Tax return preparers do not practice before the IRS;
  3. Tax return preparers are not representing taxpayers a contested proceeding;
  4. If valid, the authority of the underlying statute would make all other statutes regulating tax return preparers, e.g. the IRC, moot;
  5. The statute’s text and legislative history do not support the broad regulatory powers claimed by the IRS; and
  6. Finally, the IRS didn’t apply the century-old statute to regulate tax return preparers until 2011 and before that the agency’s statements about return preparer regulation were inconsistent with the current interpretation.

The court summarized its view: “the traditional tools of statutory interpretation – including the statute’s text, history, structure, and context – foreclose and render unreasonable the IRS’s interpretation of Section 330.” It also advised the IRS that if it wishes to regulate tax return preparers it should introduce and pass new legislation.

Despite the resounding defeat, the IRS may still petition the appellate court a for rehearing en banc, which would presumably include the three recently appointed members of the D.C. Circuit. The deadline for that motion is March 28.

If the IRS seeks a writ for certiorari with the U.S. Supreme Court, it must file a petition by May 12.

Read the entire opinion here:
Loving v. IRS, No. 13-5061 (D.C. Cir. Feb. 11, 2014)