Summary Opinions for the weeks of July 4th and July 11th

• IRS has announced that ITINs will now only expire if not used on tax returns for five consecutive years.  They used to expire after five years.

• From Accounting Today, a story on the TIGTA Report regarding the Service’s poor handling of amended tax returns.   TIGTA found about 20% of the amended returns had erroneous refunds issued.  On the bright side, four out of five didn’t .  That would have landed you a solid B- in college; enough to return the following semester and continue drinking.

• From Jack Townsend’s Federal Tax Crimes Blog, a write up of US v. McBride, where a lawyer was indicted for tax obstruction, and the prosecution requested the indictment be sealed.  Jack uses the word skullduggery, which is pretty awesome, but the post generally covers when indictments should be sealed and the reasons that, in general, they should not.

• In Public.Resource.org v. US, the Northern District of California has dismissed the Government’s motion to dismiss the FOIA request of Public.Resource.org for all types of nonprofits’ Form 990s in machine readable format.  The Feds claimed that FOIA is trumped by the Code sections dealing with the release of Forms 990.  The Yes We Scan organization is able to fight another day as the Court found that there was no basis for the Service’s position, and the position would undermine FOIA.

• The Frank Sawyer Trust of May 1992, which we very briefly mentioned in SumOp before, requested the Tax Court reconsider its prior holding that it was liable as a transferee for tax debts of entities it had held.  The two items in dispute were whether the IRS should apply equitable recoupment for estate tax overpayments in the settlor’s wife’s estate, and if the trust should be responsible for the penalties imposed on the entities.  Terribly oversimplified, the same income tax issue giving rise to the tax debt also caused the trust to be able to sell the entities at higher prices.  Those entities were in the spouse’s estate, and the resulting tax inflated the entities value and arguably a refund of estate tax due on that amount.  The Court stated the test for recoupment as:

[t]o apply equitable recoupment, the taxpayer must prove the following elements: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.

Only points two and three were in dispute.  The Court found that income and estate tax can be imposed on the same item and that the Service was inconsistently treating the two taxes arising from that same item.  As to the penalties, the actions giving rise to the penalties occurred months after the sale by the trust.  The Court found the Service failed to evidence the connection between the trust and the inappropriate acts, and declined to impose the penalties on the taxpayer.  An interesting case, and one that I suspect will be appealed – again (it has already gone up to the First Circuit at least once).

• In Heckman v. Comm’r, the Tax Court has held that the extended six year statute of limitations applies for assessment on a taxpayer when the taxpayer receives a distribution from a disqualified ESOP in an amount exceeding 25% of his gross income for the year.  Section 6501(a) imposes the general three year statute, but that can be extended under Section 6501(e)(1)(A) to six years when a taxpayer makes an omission on his return in an amount that is greater than 25% of the amount of gross income stated on the filed return (As I’m sure you will all remember, this provision has received a lot attention over the last few years regarding inflated basis transactions).  If you adequately disclose the transaction or item, the normal three year statute still applies.  The disclosure must be legit though, and can just be you yelling it at an IRS building as you drive by.  The Court found the possible verbal disclosure some years later, and the return of a related entity that had some clues as to the ESOP termination were insufficient disclosure, and allowed the six year statute.  This situation was fairly egregious, and the same individual controlled all aspects of the entities, ESOP and his personal returns.  But what about the situation where the individual did not know his ESOP distribution was not properly tax deferred, or perhaps were an IRA rollover is not valid for reasons outside the taxpayer’s control?  Probably the same result, as the statute speaks only to “omits from gross income”, and has no language regarding knowledge or intent.  See Benson v. Commissioner.  I would still research the issue, and try to come up with a good argument, especially if there was no reason your client should have known about the omission.

• FAQs on the new voluntary education program for preparers at the IRS, which the AICPA is suing to stop, claiming it is an end run around Loving.   TaxGirl has some great coverage at Forbes found here.

• Big Mo Vaughn has struck out with the Tax Court (much like all his plate appearances with the Mets at the end of his career – horrible acquisition by then GM Steve Phillips, almost as bad as Mr. Phillips decision to have an affair with a twenty-something-year-old intern at ESPN). The Court found he did not show reasonable cause for failure to file his tax return and failure to pay his taxes where there was not evidence if he even asked his accountant or financial advisor if it had been done.  Unfortunately, Mo’s financial advisor apparently stole close to $3MM from him during this same time period.  In a clever argument, Mo argued this caused him to be “disabled”, which was in line with a bankruptcy case, Am. Biomaterials Corp, 954 F2d 919, out of the Third Circuit.  Unfortunately, the Tax Court sided with Valen Mfg. Co. v. US, 90 F3d 1190, out of the Sixth Circuit, which held  in Am. Bio the CEO and CFO were the bad actors, making it impossible for the corporation to comply.  Whereas in Valen, the bookkeeper failed to file, but the executives remained able to review the bookkeepers actions.  The Tax Court said Mo was more like the executives in Valen, who could have questioned his crook of a financial planner.