Vince Nardone: Tax and Controversy

Tax Court Validates Unified Partnership Audit Penalty Regulations

       Guest Author: M. Pilar Honer, Esq., Columbus, Ohio

 

          In New Millennium Trading, L.L.C. v. Commissioner, 131 T.C. No. 18, the Tax Court, consistent with prior case law, held that treasury regulation § 301.6221-1T(c) and (d) (the “Regulation”) prevented 70% partner AJF-1 from raising a partner-level defense in the partnership level proceeding.  The court also for the first time addressed the issue as to whether the Regulation was valid, and in using the Chevron standard, held that it was.  The Regulation provides that a partner-level defense may not be raised during a partnership-level proceeding.  This Regulation stems from TEFRA, which was enacted by Congress to eliminate the administrative burdens of duplicative audits, duplicative litigations, and inconsistent tax treatments when dealing with partnerships items. TEFRA provides that all partnership items are determined in a single partnership-level proceeding.  These determinations, including the imposition of penalties, are then binding on all partners and may not be challenged in a subsequent partner-level proceeding.  Further, at the partnership-level proceeding, the court may only consider the partnership’s defenses rather than the individual partner’s defenses.

           

            In the present case, partner AJF-1, wanted to raise its own partner-level defenses to the FPAA determination, which held that I.R.C. § 6662 penalties applied to partnership New Millenium Trading, LLC (“New Millenium”).  The Regulation, however, did not allow AJF-1 to raise its own personal defenses until a later refund action. AJF-1, therefore, raised two arguments to prevent the application of the Regulation.  First, that the Regulation was invalid because it was promulgated without authority and conflicted with Congress’ statutory scheme.  Second and in the alternative, that even if the Regulation is valid, it was not applicable to the present case.

 

            First, as to the validity of the Regulation, the court followed the Chevron standard  of analysis and upheld the Regulation as being a valid interpretation of the statute.  Under the Chevron standard of analysis, the court first asks whether Congress has already spoken directly to the precise question at issue.  If Congress’ intent has been clearly spoken, then both the court and the agency must give effect to Congress’ expressed intent.  If, however, Congress has not directly addressed the question at issue, then the court must determine whether the agency’s answer is based on a permissible construction of the statute.   

 

            As to the first part of the Regulation, that a partner-level defense may only be raised in a subsequent refund action, the court held that Congress had already spoken directly on point.  The court found that Congress’ intent was clearly expressed when reading I.R.C. §§ 6221, 6223(c)(1), and 6230(c)(4). Therefore, that part of the Regulation was upheld.  As to the Regulation’s definition as to what constitutes a partner-level defense, the court held was a permissible interpretation of the statute. The Regulation defines a partner-level defense as those that are “personal to the partner or are dependent upon the partner’s separate return.”  The court found that this definition did not limit the partner’s defenses but rather just confirmed that they are one’s that are personal to the partner. 

           

            Since the Regulation was upheld as being valid, AJF-1 presented an alternative argument that since it was a 70% partner, its defenses should be considered.  Its reasoning was that since partner-level conduct led to the imposition of the penalties, partner-level defenses should be considered at the partnership-level proceeding.  In support of its argument, AJF-1 relied on an IRS issue paper.  This issue paper stated that “to the extent that the taxpayer effectively acted as the general partner and that the intent of the general partner is determined at the partnership level, it is likely that such partnership level determinations may also dispose of partner-level defenses under the unique facts of each case.” The court as not persuaded by this issue paper because although AJF-1 was a 70% partner, it was not a general partner.  AJF-1 also cited two cases, Santa Monica Pictures, L.L.C v. Commissioner, T.C. Memo. 2005-104, and Long Term Capital Holdings v. U.S., 330 F. Supp. 2d 122, both where the courts considered the defenses of a managing partner.  Again, here the court raised the distinguishing fact that AJF-1 was not a managing partner and was not persuaded by these cases as well.  Therefore, the court held that AJF-1 could not raise its own individual defenses at the partner-level proceeding but would have to wait until a later refund action.

Download New Millenium Trading, LLC v. Commissioner

IRS Announces Voluntary Disclosure for Unreported Offshore Income

On March 26, 2009, the Internal Revenue Service announced a voluntary disclosure program for unreported offshore income.  Tax professionals have been calling for and asking the IRS to institute this program for some time.  In practice, you find two type of people that have this offshore income: (i) one that says I have it and I am not going to disclose it and (ii) the other that says I have it and I want to disclose it but I am very concerned about the penalties, interest, and criminal exposure.  This program will not help the first person, who is likely always willing to violate the law to better their financial situation.  But, for those people that want to come in from the cold and correct their prior misfilings, this program is a good option and something that we can certainly help them with.

The IRS has indicated that for those people that voluntarily come forward to get right with the government each of those people will get a fair settlement.  The IRS had indicated that it will set up a penalty framework that makes sense for everyone involved.  Now, to be clear, what the IRS sees as being fair and making sense, is not always consistent with what taxpayers believe is fair or make sense.  As an example, the IRS made clear that taxpayers that come forward will have to: (i) pay back taxes and interest for six years; (ii) pay either an accuracy or delinquency penalty on all six years; as well as (iii) a penalty of twenty percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value.   The trade off for paying the taxes, interest, and significant penalties for the six years is you can avoid criminal prosecution.  Is this fair and does it make sense, it depends. 

From my perspective, it is a good deal.  Anytime you can pay a monetary penalty to avoid going to prison for your prior misdeeds, it is a good result.  But, you need to come forward and deal with it now.  For taxpayers who continue to hide their heads in the sand, the IRS will come down hard on them.

See the attached documents from the IRS regarding more details on the voluntary disclosure program.

Download Offshore voluntary disclosure program

Suspect Fraud - Turn in Your Clients the IRS Says!

The Internal Revenue Service today solicited tax professionals to turn in clients and others if we suspect fraud is occurring.  See the attached materials from the IRS.  The IRS even provides us with instructions and forms on how to do so.  But, as tax professionals we need to be very careful and take into consideration or legal and ethical obligations to our clients and to our profession.  We certainly do not advocate or encourage any misconduct on behalf of our clients.  On the other hand, should we be the ones turning them in?  It depends, on your position and role with that client.  As a tax attorney, I cannot see to many instances where I would be doing so.  But, tax accountants must look at this from a different perspective and, in some instances, maybe required to inform the authorities of the wrong doing.  All I can say is seek competent tax counsel experienced in these type of matters before doing so.

Download DOC003

IRS Cans Private Collectors of Federal Tax Liabilities

IRS has announced that after an extensive review of the private debt collection program, including its cost effectiveness, IRS will not renew its contracts with two private debt collection agencies.  See the news release attached below in IR 2009-19.  This is great news for taxpayers.  Although I recognize that some taxpayers may have horror stories to tell about dealing with an IRS revenue officer.  In most instances, they are very professional.  Now, that does not mean they are going to give the taxpayer a break, but they generally do a good job of looking at the collection alternatives.  I would certainly rather work with the IRS then some private company or attorney.  

The whole idea of having some private debt collector collect for the IRS has always left a bad taste in my mouth.  I practice in Ohio and the Ohio Department of Taxation and the Ohio Attorney General's Office contracts with third party attorneys, who simply actas debt collectors and they financially benefit from each transaction that they collect on.  The is certainly a conflict of interest.  In addition, many of the attorneys, also called special counsel, have a certain political affiliation (i.e., same as the Ohio Attorney General), which never mixes well with legal work.  All and all, it is a very poor system in Ohio when it comes to collection work.  Thus, I am happy that the IRS has canned the idea for now and will not follow in Ohio's footsteps.  

The bad news, however, that came out of the news release is that the IRS intends to hire another 1,000 revenue officers in the next year.  See the attached notice from the IRS. 

Download Debt Collection - No more private

IRS - Filing Requirements of Tax Returns

The Internal Revenue Service recently reminded taxpayers of their obligation to file a federal personal income tax return.  See the attached document.  The one thing I find interesting and thought it would be helpful to discuss is the confusion regarding filing an extension, but not paying the tax due, or not filing at all because the taxpayer cannot pay.

First, simply because you file an extension to file your return, moving the deadline from April 15th to October 15th, does not mean that you can also pay the tax liability on October 15th.  You must still pay theamount due by April 15th.  And, if you do not know the exact amount to pay you better pay an estimated amount or be subject to penalties and interest, which add up very quickly and can be easily described as draconian.

Second, if you cannot pay the tax liability you should not make matters worse by not filing your tax return.  The better option is to file your return, wait until you receive a response from the IRS demanding payment, and then contact the IRS to make payment arrangements.  By failing to file your return, you ultimately subject yourself to criminal and civil penalties that are not fun.  File your return.  The IRS will work with you on the payments, no matter what you hear from others.

Download IRS - Filing Requirements

Vince Nardone Speaks to CPAs at GBQ Regarding Due Diligence Requirements of a Tax Return Preparer

I spoke today to GBQ's Tax group regarding a tax return preparer's due diligence requirements in preparing a client's tax return.  As a tax return preparer, you must be aware of these rules and the Internal Revenue Service's commitment to hold you to a heightened standard.  See the attached presentation below.

Download Due Diligence Requirements - Tax Return Preparer