tag:blogger.com,1999:blog-18284907738502688942023-11-15T11:34:44.846-05:00www.section6694penalty.com ab@irstaxattorney.comAlvin Brown & Associates is a tax law firm specializing in IRS issues and problems servicing taxpayers and tax professionals thoughout the U.S. and abroad. Contact ab@irstaxattorney.com for assitance on any IRS tax matter or call 703-425-1400.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.comBlogger624125tag:blogger.com,1999:blog-1828490773850268894.post-58529505037899986842011-02-07T05:40:00.000-05:002011-02-07T05:41:12.129-05:00section 6694 penalty + injuctionU.S. v. DOVE, Cite as 107 AFTR 2d 2011-XXXX, 01/26/2011 <br />________________________________________<br />UNITED STATES OF AMERICA, Plaintiff, v. SIDNEY DOVE, individually, and d/b/a Sid's Tax, Defendant. <br />Case Information: <br />Code Sec(s): <br />Court Name: UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION, <br />Docket No.: 10 C 60,<br />Date Decided: 01/26/2011.<br />Disposition: <br />HEADNOTE <br />. <br />Reference(s): <br />OPINION <br />UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION, <br />MEMORANDUM OPINION<br />Judge: CHARLES P. KOCORAS, District Judge: <br />This case comes before the court on two motions submitted by Plaintiff the United States of America (“the Government”). The Government moves for the entry of summary judgment on Count I of the Complaint pursuant to Fed. R. Civ. P. 56. The Government also asks for a permanent injunction against Defendant Sidney Dove, individually, and doing business as Sid's Tax, pursuant to 26 U.S.C. § 7407. For the reasons set forth below, the motions are granted. <br />BACKGROUND 1<br />Defendant Sidney Dove (“Dove”) operated a business, Sid's Tax, out of his home in Joliet, Illinois. Dove prepared or assisted in the preparation of federal income tax returns for others in return for monetary compensation. Dove prepared nearly 330 federal income tax returns in 2008, 263 returns in 2009, and 95 returns in 2010. <br />Dove was recently the subject of an investigation by the Internal Revenue Service (“IRS”). The IRS examined 79 of the returns Dove prepared and assessed additional tax for all but one of those tax returns. 2 As a consequence of its limited examination of the returns Dove prepared, the IRS assessed an additional $610,000 in taxes. The IRS' investigation revealed a pattern of overstatement of charitable contributions, employee business expenses, and Schedule C expenses on the examined returns. The IRS also sent an undercover special agent to Dove's place of business. Dove prepared a return for the undercover agent which included education credits that the agent would not have been entitled to under the tax code. <br />Dove later described some of his tax preparation practices during a preliminary injunction hearing. Dove testified that he routinely deducted 10% of a client's income as a charitable contribution without determining whether his customer had documentation to support such a deduction. Dove also stated that he prepared a return for a customer in which he improperly reported various deductions for a piece of investment property that the customer never used as rental property. Dove also testified that he would report whatever information his customers told him without requesting any documents to support their oral representations. <br />The Government instituted this action against Dove on January 6, 2010. Count I of the Complaint alleges that Dove prepared income tax returns which understated the taxpayer's liability in violation of 26 U.S.C. § 6694. On March 23, 2010, we held a preliminary injunction hearing and granted the Government's motion for a preliminary injunction against Dove precluding him from preparing 2009 tax returns for the duration of the filing season. The Government now moves for summary judgment under Fed. R. Civ. P. 56 and for a permanent injunction against Dove pursuant to 26 U.S.C. § 7407. 3 <br />LEGAL STANDARDS<br />I. Motion For Summary Judgment Pursuant To Fed. R. Civ. P. 56<br />Summary judgment is appropriate only when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. Proc. 56(c). A genuine issue of material fact exists when the evidence is such that a reasonable jury could find for the nonmovant. Buscaglia v. United States, 25 F.3d 530, 534 (7th Cir. 1994). The movant in a motion for summary judgment bears the burden of demonstrating the absence of a genuine issue of material fact by specific citation to the record; if the party succeeds in doing so, the burden shifts to the nonmovant to set forth specific facts showing that there is a genuine issue of fact for trial. Fed. R. Civ. Proc. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). In considering motions for summary judgment, a court construes all facts and draws all inferences from the record in favor of the nonmoving party.Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255 (1986). <br />II. Motion For Permanent Injunction Under 26 U.S.C. § 7407<br />When a party requests an injunction which is explicitly authorized by statute, courts refrain from using the standard permanent injunction test and instead determine whether the moving party has established that the statutory conditions for injunctive relief are present. SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975). To enjoin an individual from acting as a tax preparer pursuant to section 7407, the Government must show that: (1) the defendant is an “income tax return preparer” within the meaning of 26 U.S.C. § 7701(a)(36); (2) the defendant continually or repeatedly engaged in conduct described in 26 U.S.C. § 7407(b)(1)(A)–(D); and (3) an injunction prohibiting such conduct would not be sufficient to prevent that person's further interference with the proper administration of the tax code.See 26 U.S.C. § 7407(b)(2); United States v. Reddy, 500 F. Supp. 2d 877, 882 [99 AFTR 2d 2007-2742] (N.D. Ill. 2007). <br />DISCUSSION<br />We will discuss the Government's motion for summary judgment first before turning to its motion for a permanent injunction. <br />I. Motion For Summary Judgment As To Count I<br />The Government asks that we grant summary judgment in its favor on Count I because no genuine issues of fact exist regarding whether Dove violated 26 U.S.C. § 6694. To demonstrate an individual's liability under section 6694, the Government must show that: (1) the individual qualified as an “income tax preparer” as defined in 26 U.S.C. § 7701(a)(36); (2) a tax return prepared by the individual contained an understatement of tax liability due to a position for which there was not a realistic possibility of being sustained on the merits; (3) the individual knew (or reasonably should have known) of such position; and (4) such position was not disclosed pursuant to section 6662(d)(2)(B)(ii) and was not frivolous. 26 U.S.C. § 6694(a)(1)–(3). <br />The undisputed facts demonstrate that Dove violated 26 U.S.C. § 6694. From 2008 until 2010, Dove acted as an “income tax preparer” as that term is defined by the Internal Revenue Code in that he prepared hundreds of income tax returns in exchange for compensation. 26 U.S.C. § 7701(a)(36). Dove prepared a number of returns that significantly understated the taxpayer's liability because of positions that had no possibility of being sustained on the merits. For example, Dove habitually deducted 10% of his clients' income as charitable donations without ensuring whether the taxpayer had any documents to support the deduction. Additionally, the record contains no evidence to suggest that Dove disclosed the positions in a manner authorized by the tax code or that the positions could be considered frivolous. In the absence of disputes regarding Dove's repeated preparation of returns with unrealistic positions, we find the Government is entitled to summary judgment as to Count I. <br />II. Motion For Permanent Injunction Pursuant To 26 U.S.C. § 7407<br />The Government also moves for a permanent injunction against Dove prohibiting him from acting as an income tax preparer. To enjoin an individual from acting as a tax preparer pursuant to section 7407, the Government must show that: (1) the defendant is an “income tax return preparer” within the meaning of 26 U.S.C. § 7701(a)(36); (2) the defendant continually or repeatedly engaged in any of the conduct described in 26 U.S.C. § 7407(b)(1)(A)–(D); and (3) an injunction prohibiting such conduct would not be sufficient to prevent that person's further interference with the proper administration of the tax code. We have already concluded that Dove may be classified as an income tax preparer because he operated a business in which he prepared returns for other taxpayers in exchange for money. The court also finds that Dove repeatedly committed one of the improper tax preparation practices listed in 26 U.S.C. § 7404(b)(1)(A)–(D). Specifically, Dove prepared dozens of returns over the course of three years that understated the taxpayer's liability and contained assertions that had little chance of being sustained on the merits in violation of 26 U.S.C. § 6694. <br />Finally, we find that the circumstances surrounding Dove's conduct in this case show that an injunction prohibiting further violations of the tax code would be insufficient to prevent his continued interference with the tax code. In assessing the likelihood of an individual's future violations of the Internal Revenue Code, a court should examine the totality of the circumstances, including factors as: <br />the gravity of harm caused by the offense; the extent of the defendant's participation and his degree of scienter; the isolated or recurrent nature of the infraction and the likelihood that the defendant's customary business activities might again involve him in such transaction; the defendant's recognition of his own culpability; and the sincerity of his assurances against future violations.<br />United States v. Kaun, 827 F.2d 1144, 1149–50 [60 AFTR 2d 87-5623] (7th Cir. 1987) (quoting SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). The IRS' limited investigation into Dove's tax practices revealed that he had prepared 78 returns which understated his customers' tax liability by $610,000. Dove knowingly violated section 6694 on a number of occasions by asserting positions on returns that had little chance of surviving scrutiny and deliberately refusing to obtain documents to determine the validity of his customers' contentions. See United States v. Nobles, 69 F.3d 172, 185 (7th Cir. 1995) (“It is well settled that willful blindness or conscious avoidance is the legal equivalent to knowledge[]”). Additionally, Dove has submitted a document to the court indicating that he desires to continue preparing tax returns for others. Dove's continuous and knowing violations of the tax laws over the last three years and his stated intention to continue preparing tax returns in the future demonstrates the need for the Government's requested relief in this case. Accordingly, the motion for a permanent injunction under 26 U.S.C. § 7407 is granted. <br />CONCLUSION<br />The Government's motion for summary judgment is granted. The Government's motion for permanent injunction is granted. <br />PERMANENT INJUNCTION<br />Upon Plaintiff United States of America's Motion for Permanent Injunction against Defendant Sidney Dove, it is hereby: <br />ORDERED that Defendant Sidney Dove, individually or doing business as Sid's Tax, or any other name or using any other entity is permanently enjoined from directly or indirectly acting as income tax return preparers and are hereby prohibited from preparing, filing, or assisting in the preparing and filing of federal income tax returns, amended returns, or other related forms and documents on behalf of any person other than himself; <br />ORDERED that Defendant Sidney Dove, individually or doing business as Sid's Tax, or any other name or using any other entity is permanently enjoined from advising, assisting, counseling, or instructing anyone about the preparation of a federal tax return; <br />ORDERED that Defendant Sidney Dove prepare and provide counsel for the United States of America a list of everyone for whom he has prepared (or helped to prepare) a federal income tax return since January 1, 2006, and set forth on said list all of the names, addresses, e-mail addresses, telephone numbers, and Social Security numbers within fifteen (15) days of the entry of this order; <br />ORDERED that Defendant Sidney Dove shall mail or otherwise deliver a copy of this Permanent Injunction and the Memorandum Opinion and Order to all customers for whom he has prepared federal income tax returns or assisted in the preparation of their federal income tax returns, on or before February 28, 2011. By March 4, 2011, Defendant Dove shall file with this Court — and serve upon Plaintiff — an affidavit stating, under penalty of perjury, that he has fully complied with this Order. In that affidavit, Defendant Dove shall specifically name the clients to whom he has mailed or otherwise delivered a copy of this Permanent Injunction and the Memorandum Opinion and Order. <br />Charles P. Kocoras <br />United States District Judge <br />Dated: January 26, 2011 <br />________________________________________<br />1 <br /> On October 28, 2010, the Government sent Dove a statement advising him of the required procedures for answering their motion for summary judgment pursuant to Local Rule 56.2. Despite Dove's receipt of this notice, he did not submit a response to the Government's statement of facts or a statement of facts of his own. The Seventh Circuit Court of Appeals has “consistently held that a failure to respond by the nonmovant as mandated by the local rules results in an admission.” Smith v. Lamz, 321 F.3d 680, 683 (7th Cir. 2003). While courts must construe pro se pleadings liberally, Dove's unrepresented status does not absolve him from complying with Local Rule 56.1. See Greer v. Bd. of Ed. of City of Chicago, 267 F.3d 723, 727 (7th Cir. 2001). As Dove has neglected to submit a response in compliance with Local Rule 56.1, by operation of the rule all facts asserted by the Government are admitted. <br />________________________________________<br />2 <br /> One improperly prepared return resulted in the refund of $33 to the taxpayer. <br />________________________________________<br />3 <br /> The Government has also requested preliminary injunction under 26 U.S.C. § 7402 and a permanent injunction pursuant to 26 U.S.C. § 7408. As a result of our conclusion that the Government is entitled to an injunction under 26 U.S.C. § 7407, we need not address the Government's alternative grounds for injunctive relief.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-1307123810253385862011-01-03T14:06:00.000-05:002011-01-03T14:07:19.074-05:00voluntary reporting requirementsPart III <br />Administrative, Procedural, and Miscellaneous <br />26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; <br />determination of correct tax liability. <br />(Also: Part 1, §§ 6662, 6694, 1.6662-4, 1.6694-2) <br /><br />Rev. Proc. 2011-13 <br /><br />SECTION 1. PURPOSE <br /><br />This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and <br />identifies circumstances under which the disclosure on a taxpayer's income tax return <br />with respect to an item or a position is adequate for the purpose of reducing the <br />understatement of income tax under section 6662(d) of the Internal Revenue Code <br />(relating to the substantial understatement aspect of the accuracy-related penalty), and <br />for the purpose of avoiding the tax return preparer penalty under section 6694(a) <br />(relating to understatements due to unreasonable positions) with respect to income tax <br />returns. This revenue procedure does not apply with respect to any other penalty <br />provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related 2<br />penalty, the section 6662(i) increased accuracy-related penalty in the case of <br />nondisclosed noneconomic substance transactions, and the section 6662(j) increased <br />accuracy-related penalty in the case of undisclosed foreign financial asset <br />understatements). <br />This revenue procedure applies to any income tax return filed on 2010 tax <br />forms for a taxable year beginning in 2010, and to any income tax return filed on <br />2010 tax forms in 2011 for short taxable years beginning in 2011.<br />SECTION 2. CHANGES FROM REV. PROC. 2010-15 <br /> 01 This revenue procedure has been updated to include reference to: (i) the.<br />section 6662(i) increased accuracy-related penalty in the case of nondisclosed <br />noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related <br />penalty in the case of undisclosed foreign financial asset understatements; and (iii) the <br />Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain <br />corporations. <br /> <br /> 01 If SECTION 3. BACKGROUND <br /> 01 If section 6662 applies to any portion of an underpayment of tax required to.<br />be shown on a return, an amount equal to 20 percent of the portion of the <br />underpayment to which the section applies is added to the tax (the penalty rate is 40 <br />percent in the case of gross valuation misstatements under section 6662(h), <br />nondisclosed noneconomic substance transactions under section 6662(i), or <br />undisclosed foreign financial asset understatements under section 6662(j)). Section <br />6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a 3<br />substantial understatement of income tax. <br /> 02 Section 6662(d)(1) provides that there is a substantial understatement of.<br />income tax if the amount of the understatement exceeds the greater of 10 percent of the <br />amount of tax required to be shown on the return for the taxable year or $5,000. <br />Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than <br />an S corporation or personal holding company) has a substantial understatement of <br />income tax if the amount of the understatement exceeds the lesser of 10 percent of the <br />tax required to be shown on the return for a taxable year (or, if greater, $10,000) or <br />$10,000,000. Section 6662(d)(2) defines an understatement as the excess of the <br />amount of tax required to be shown on the return for the taxable year over the amount <br />of the tax that is shown on the return reduced by any rebate (within the meaning of <br />section 6211(b)(2)). <br /> 03 In the case of an item not attributable to a tax shelter, section.<br />6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the <br />portion of the understatement attributable to the item if the relevant facts affecting the <br />item’s tax treatment are adequately disclosed in the return or in a statement attached to <br />the return, and there is a reasonable basis for the tax treatment of the item by the <br />taxpayer.. <br /> 04 Section 6694(a) imposes a penalty on a tax return preparer who prepares a.<br />return or claim for refund reflecting an understatement of liability due to an <br />“unreasonable position” if the tax return preparer knew (or reasonably should have <br />known) of the position. A position (other than a position with respect to a tax shelter or 4<br />a reportable transaction to which section 6662A applies) is generally treated as <br />unreasonable unless (i) there is or was substantial authority for the position, or (ii) the <br />position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a <br />reasonable basis. If the position is with respect to a tax shelter (as defined in section <br />6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the <br />position is treated as unreasonable unless it is reasonable to believe that the position <br />would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3 <br />I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter <br />transactions. <br /><br />05 In general, this revenue procedure provides guidance for determining when.<br />disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section <br />6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all <br />required information in accordance with the applicable forms and instructions, and the <br />money amounts entered on these forms must be verifiable.. <br /> 06 Fiscal and short tax year returns. (a) In general. This revenue procedure.<br />may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This <br />revenue procedure may also apply to a short year return for a period beginning in 2011 <br />if the return is to be filed before the 2011 forms are available. (Note that individuals are <br />generally not put in this position as a decedent's final return for a fractional part of a <br />year is due the fifteenth day of the fourth month following the close of the 12-month <br />period which began with the first day of such fractional part of the year. See Treas. <br />Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must 5<br />take into account any tax law changes that are effective for tax years beginning after <br />December 31, 2010, even though these changes are not reflected on the form. <br />(b) Tax law changes effective after December 31, 2010. This document does not <br />take into account the effect of tax law changes effective for tax years beginning after <br />December 31, 2010. If a line referenced in this revenue procedure is affected by such a <br />change and requires additional reporting, a taxpayer may have to file Form 8275, <br />Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the <br />Service prescribes criteria for complying with the requirement. <br /> 07 A complete and accurate disclosure of a tax position on the appropriate.<br />year’s Schedule UTP, Uncertain Tax Position Statement, will be treated as if the <br />corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a <br />Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a <br />Schedule UTP. <br />SECTION 4. PROCEDURE <br /> 01 General.<br />(1) Additional disclosure of facts relevant to, or positions taken with respect to, <br />issues involving any of the items set forth below is unnecessary for purposes of <br />reducing any understatement of income tax under section 6662(d) (except as otherwise <br />provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms <br />and attachments are completed in a clear manner and in accordance with their <br />instructions. <br />(2) The money amounts entered on the forms must be verifiable, and the 6<br />information on the return must be disclosed in the manner described below. For <br />purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can <br />prove the origin of the amount (even if that number is not ultimately accepted by the <br />Internal Revenue Service) and the taxpayer can show good faith in entering that <br />number on the applicable form. <br /><br />(3) The disclosure of an amount as provided in section 4.02 below is not <br />adequate when the understatement arises from a transaction between related parties. <br />If an entry may present a legal issue or controversy because of a related-party <br />transaction, then that transaction and the relationship must be disclosed on a Form <br />8275 or Form 8275-R. <br />(4) When the amount of an item is shown on a line that does not have a <br />preprinted description identifying that item (such as on an unnamed line under an “Other <br />Expense” category) the taxpayer must clearly identify the item by including the <br />description on that line. For example, to disclose a bad debt for a sole proprietorship, <br />the words “bad debt” must be written or typed on the line of Schedule C that shows the <br />amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other <br />income (loss) items with differences, or Part III, line 35, Other expense/deduction items <br />with differences, the entry must provide descriptive language; for example, "Cost of noncompete agreement deductible not capitalizable.” If space limitations on a form do not <br />allow for an adequate description, the description must be continued on an attachment. <br /><br />(5) Although a taxpayer may literally meet the disclosure requirements of this <br />revenue procedure, the disclosure will have no effect for purposes of the section 6662 7<br />accuracy-related penalty if the item or position on the return: (1) Does not have a <br />reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax <br />shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the <br />taxpayer failed to keep adequate books and records with respect to the item or position. <br />(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty <br />as applicable to tax return preparers if the position is with respect to a tax shelter (as <br />defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A <br />applies. <br /><br />02 Items.<br />(1) Form 1040, Schedule A, Itemized Deductions: <br />(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all <br />required information. <br />(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8 <br />must list each type of tax and the amount paid. <br />(c) Interest Expenses: Complete lines 10 through 15, supplying all required <br />information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under <br />section 163(d) unless Form 4952, Investment Interest Expense Deduction, is <br />completed, or (ii) amounts disallowed under section 265. <br />(d) Contributions: Complete lines 16 through 19, supplying all required <br />information. Enter the amount of the contribution reduced by the value of any <br />substantial benefit (goods or services) provided by the donee organization in <br />consideration, in whole or in part. Entering the value of the contribution unreduced by<br />the value of the benefit received will not constitute adequate disclosure. If a contribution <br />of $250 or more is made, this section will not apply unless a contemporaneous written <br />acknowledgment, as required by section 170(f)(8), is obtained from the donee <br />organization. If a contribution of cash of less than $250 is made, this section will not <br />apply unless a bank record or written communication from the donee, as required by <br />section 170(f)(17), is obtained from the donee organization. If a contribution of property <br />other than cash is made and the amount claimed as a deduction exceeds $500, attach <br />a properly completed Form 8283, Noncash Charitable Contributions, to the return. In <br />addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane <br />has a value of more than $500, this section will not apply unless a contemporaneous <br />written acknowledgment, as required by section 170(f)(12), is obtained from the donee <br />organization and attached to the return. An acknowledgment under section 170(f)(8) is <br />not required if an acknowledgment under section 170(f)(12) is required. <br />(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts, <br />and attach to the return. Each item or article for which a casualty or theft loss is claimed <br />must be listed on Form 4684. <br />(2) Certain Trade or Business Expenses (including, for purposes of this section, <br />the following six expenses as they relate to the rental of property): <br />(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e) <br />must be followed. <br /><br />(b) Legal Expenses: The amount claimed must be stated. This section does not <br />apply, however, to amounts properly characterized as capital expenditures, personal 9<br />expenses, or non-deductible lobbying or political expenditures, including amounts that <br />are required to be (or that are) amortized over a period of years. <br />(c) Specific Bad Debt Charge-off: The amount written off must be stated. <br />(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, <br />Compensation of Officers, must be completed when required by its instructions. The <br />time devoted to business must be expressed as a percentage as opposed to "part" or <br />"as needed." This section does not apply to "golden parachute" payments, as defined <br />under section 280G. This section will not apply to the extent that remuneration paid or <br />incurred exceeds the employee-remuneration deduction limitations under section <br />162(m), if applicable. <br />(e) Repair Expenses: The amount claimed must be stated. This section does <br />not apply, however, to any repair expenses properly characterized as capital <br />expenditures or personal expenses. <br />(f) Taxes (other than foreign taxes): The amount claimed must be stated. <br />(3) Differences in book and income tax reporting. <br />For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below, <br />the information provided must reasonably apprise the Service of the potential <br />controversy concerning the tax treatment of the item. If the information provided does <br />not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately <br />disclose the item (see Part II of the instructions for those forms). <br />Note: An item reported on a line with a pre-printed description, shown on an <br />attached schedule or “itemized” on Schedule M-1, may represent the aggregate 10<br />amount of several transactions producing that item (i.e., a group of similar items, <br />such as amounts paid or incurred for supplies by a taxpayer engaged in <br />business). In some instances, a potentially controversial item may involve a <br />portion of the aggregate amount disclosed on the schedule. The Service will not <br />be reasonably apprised of a potential controversy by the aggregate amount <br />disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R <br />regarding that portion of the item.<br /><br />Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an <br />attachment when directed by the instructions), will not constitute an adequate <br />disclosure. <br /><br />Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new <br />Schedule B, Additional Information for Schedule M-3 Filers, must also be completed. <br />For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional <br />Information for Schedule M-3 Filers, must also be completed. When required, these <br />new Schedules are necessary to constitute adequate disclosure. <br /><br />(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for <br />Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II <br />(reconciliation of income (loss) items) and Column (a), Expense per Income Statement, <br />of Part III (reconciliation of expense/deduction items); Column (b), Temporary <br />Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income <br />(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), <br />Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and 11<br />Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction <br />items). <br /><br />(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books <br />With Income per Return.<br />(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for <br />Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per <br />Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), <br />Expense per Income Statement, of Part III (reconciliation of expense/deduction items); <br />Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II <br />(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction <br />items) and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of <br />income (loss) items); and Column (d), Deduction per Tax Return, of Part III <br />(reconciliation of expense/deduction items). <br /><br /><br />(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss) <br />Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or <br />More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of <br />income (loss) items) and Column (a), Expense per Income Statement, of Part III <br />(reconciliation of expense/deduction items); Column (b), Temporary Difference, and <br />Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and <br />Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per <br />Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction <br />per Tax Return, of Part III (reconciliation of expense/deduction items).<br /><br />(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss) <br />Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets <br />of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II <br />(reconciliation of income (loss) items) and Column (a), Expense per Income Statement, <br />of Part III (reconciliation of expense/deduction items); Column (b), Temporary <br />Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income <br />(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), <br />Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and <br />Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction <br />items). <br /><br />(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation <br />for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss) <br />per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), <br />Expense per Income Statement, of Part III (reconciliation of expense/deduction items); <br />Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II <br />(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction <br />items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of <br />income (loss) items) and Column (d), Deduction per Tax Return, of Part III <br />(reconciliation of expense/deduction items). <br />(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation <br />for Foreign Corporations With Total Assets of $10 Million or More: Column (b), <br />Temporary Difference, Column (c), Permanent Difference, and Column (d), Other 13<br />Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of <br />income (loss) items) and Part III (reconciliation of expense/deduction items). <br /><br />(4) Foreign Tax Items: <br />(a) International Boycott Transactions: Transactions disclosed on Form 5713, <br />International Boycott Report; Schedule A, International Boycott Factor (Section <br />999(c)(1)); Schedule B, Specifically Attributable Taxes and Income (Section 999(c)(2)); <br />and Schedule C, Tax Effect of the International Boycott Provisions, must be completed <br />when required by their instructions. <br />(b) Treaty-Based Return Position: Transactions and amounts under section <br />6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position <br />Disclosure Under Section 6114 or 7701(b), must be completed when required by its <br />instructions. <br /><br />(5) Other: <br />(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to <br />the return. <br />(b) Employee Business Expenses: Complete Form 2106, Employee Business <br />Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach <br />to the return. This section does not apply to club dues, or to travel expenses for any <br />non-employee accompanying the taxpayer on the trip. <br />(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and <br />attach to the return. <br />(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the 14<br />return. <br /><br />SECTION 5. EFFECTIVE DATE <br />This revenue procedure applies to any income tax return filed on a 2010 tax form <br />for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax <br />form in 2011 for a short taxable year beginning in 2011. <br />SECTION 6. DRAFTING INFORMATION <br />The principal author of this revenue procedure is Francis M. McCormick of the <br />Office of Associate Chief Counsel (Procedure & Administration). For further information <br />regarding this revenue procedure, contact Branch 2 of Procedure and Administration at <br />(202) 622-4940 (not a toll free calReturn Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-82902804570281880502011-01-03T09:59:00.000-05:002011-01-03T10:00:46.952-05:00Restitution cannot be abated in an Offer in CompromiseThomas M. Gillum v. Commissioner, TC Memo 2010-280 , Code Sec(s) 6330; 7122.<br />________________________________________<br />THOMAS M. GILLUM, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .<br />Case Information:<br />Code Sec(s): 6330; 7122<br />Docket: Docket No. 16110-07L.<br />Date Issued: 12/22/2010<br />Judge: Opinion by THORNTON<br />HEADNOTE<br />XX.<br />Reference(s): Code Sec. 6330 ; Code Sec. 7122<br />Syllabus<br />Official Tax Court Syllabus<br />Counsel<br />Kenneth R. Boiarsky, for petitioner.<br />Elizabeth Downs, for respondent.<br />Opinion by THORNTON<br />MEMORANDUM FINDINGS OF FACT AND OPINION<br />Pursuant to sections 6320(c) and 6330(d), petitioner seeks judicial review of respondent's determination sustaining the filing of a Federal tax lien with respect to petitioner's Federal income tax liabilities for 1998, 2000, 2001, and 2002, and sustaining a proposed levy to collect petitioner's Federal income tax liabilities for each of the years 1996 through 2002. 1Petitioner also seeks judicial review of various letters that respondent allegedly sent to various entities, as petitioner's nominees or alter egos, denying them collection due process hearings with respect to respondent's filing of Federal tax liens.<br />FINDINGS OF FACT<br />The parties have stipulated some facts, which we incorporate by this reference. When he filed his petition, petitioner resided in Arkansas.<br />Petitioner is a veterinarian. He operates his practice under the business name Cloverdale Animal Hospital, LLC (Cloverdale).<br />In 2004 petitioner was criminally prosecuted for willful failure to file tax returns, in violation of section 7203, for taxable years 1996 through 2002. In December 2005 petitioner pleaded guilty to one count of criminal failure to file a Federal income tax return for 2000. His criminal plea agreement provided, inter alia, for entry of an order of mandatory restitution under 18 U.S.C. section 3663A for “the full amount of the taxes due and owing for all prosecution years.” The plea agreement stated: “At this time, the United States and the defendant agree that the amount of restitution payable by the defendant is $416,210.” The plea agreement also stated: “Except to the extent otherwise expressly specified herein, this Agreement does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” The plea agreement stated further: “This Agreement is binding only upon the United States Attorney's Office for the Eastern District of Arkansas and the defendant. It does not bind *** any other federal, state or local prosecuting, administrative, or regulatory authority.”<br />In its judgment filed December 12, 2005, the District Court reduced the amount of restitution, labeled “criminal monetary penalties”, to $246,226. 2 The District Court also ordered a schedule of payments, with a lump sum of $25 due immediately and the balance due in monthly installments equaling 10 percent of petitioner's monthly gross income. 3<br />While the criminal proceedings were pending against petitioner, on August 13, 2004, he filed amended returns for taxable years 1996, 1997, and 1998, and on September 7, 2004, he filed an amended return for taxable year 1999. 4 Also on September 7, 2004, petitioner filed delinquent returns for taxable years 2000, 2001, and 2002.<br />On October 25, 2004, respondent assessed the taxes that petitioner had reported on his delinquent returns for 2000, 2001, and 2002. On March 14, 2005, respondent assessed the tax that petitioner had reported on his amended 1998 return, and on June 26, 2006, respondent assessed the taxes that petitioner had reported on his amended returns for 1996, 1997, and 1999. In each instance, respondent also assessed applicable additions to tax and interest.<br />On October 18, 2006, respondent sent petitioner Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (the lien notice), with respect to petitioner's taxable years 1998, 2000, 2001, 2002, and 2003. On October 26, 2006, respondent sent petitioner Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing (the levy notice), with respect to petitioner's taxable years 1996 through 2003. The levy notice indicated that as of November 25, 2006, petitioner would owe $839,856 of tax, penalties, and interest for these years. 5<br />On November 21, 2006, petitioner timely submitted Form 12153, Request for a Collection Due Process Hearing, indicating that he disagreed with both the lien notice and the levy notice. 6<br />The request covered petitioner's tax years 1996 through 2002 but not 2003. In his request petitioner asserted that the criminal plea agreement and judgment reflected the full settlement of his tax liabilities for 1996 through 2002. He asserted that “payment on these years is exclusively covered under an agreed court order for restitution”, that he was making payments to the IRS for these tax years under this agreement, and that unless he failed to meet his obligations under the court order, the IRS must “cease and desist from further collection activity.” Petitioner did not propose any collection alternative in his hearing request.<br />On October 26, 2006, in anticipation of submitting a request for a hearing, petitioner submitted Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with respect to himself, and on October 27, 2006, petitioner submitted Form 433-B, Collection Information Statement for Businesses, with respect to Cloverdale. On these forms petitioner failed to provide complete information. For example, on Form 433-A he did not provide requested bank account numbers and routing information, detailed credit card information, the estimated value of three vehicles, or required information with respect to his personal assets and living expenses. In response to a question asking whether he had transferred any assets for less than their actual value within the past 10 years, he checked “No” but then wrote “Possible”. The form required several attachments, including proof of current expenses, which petitioner failed to provide.<br />On Form 433-B petitioner did not provide detailed information with respect to Cloverdale's accounts receivable, business assets, bank accounts, or available credit. In response to a question requesting detailed information with respect to Cloverdale's income and expenses, petitioner replied “see statement attached”, but did not attach any such statement. The form also required several other attachments, which petitioner failed to provide.<br />On May 15, 2007, the settlement officer held the first of three telephone conferences with petitioner's representative. In this conference the settlement officer opined that neither the criminal plea agreement nor the judgment barred the IRS from any civil or administrative actions with respect to petitioner's civil tax liabilities and did not compromise those liabilities. The settlement officer asked the representative whether he wished to propose any collection alternatives. The representative proposed as a collection alternative that the IRS limit its collection action to the terms of the plea agreement and judgment. They agreed to have a second conference.<br />Before the second conference the settlement officer reviewed the collection administrative case file, which included, among other things: (1) A memorandum, dated February 22, 2007, from Revenue Officer Robert Brown to IRS district counsel in Oklahoma City, Oklahoma, requesting approval to file alter ego and nominee liens and levies against several entities created by petitioner<br />(the request); (2) a memorandum from respondent's associate area counsel in Oklahoma City responding to the request (the memorandum); and (3) several diagrams detailing petitioner's alleged alter ego and nominee activities. 7<br />The request indicated on the basis of findings contained therein that, notwithstanding his prior criminal conviction, petitioner was still using various sham trusts, nominees, and alter egos to shield assets and income from taxation. More particularly, the request included findings that petitioner had funneled unreported cash payments from Cloverdale to grantor trusts and other entities to pay his and his family's personal expenses, including cable TV bills, college tuition, life insurance premiums, vacation expenses, car payments, and hardwood flooring for petitioner's residence. The request concluded that petitioner had created certain nominee entities, including a trust known as Lestat Ops, to hold personal assets and real estate for the purpose of placing them out of the reach of creditors, mainly the Government. 8<br />The memorandum indicates that “nominee” refers to an entity or person to whom a taxpayer has transferred property in an attempt to conceal it. According to the memorandum, a Federal tax lien encumbers such property because although a third party may have legal title, the taxpayer actually owns the property and enjoys its full use and benefit. The memorandum also indicates that an alter ego generally involves a sham corporation or other entity used by the taxpayer as an instrumentality to avoid his or her own legal obligations. In the memorandum respondent's associate area counsel approved nominee liens against three trusts created by petitioner, including Lestat Ops, as well as against petitioner's wife, and approved alter ego liens againstCloverdale, another limited liability company, and two other trusts that petitioner had created.<br />Cloverdale and Lestat Ops received from the IRS Letters 3172, dated May 15, 2007, providing notice of the filing of Federal tax liens and advising of the right to a collection due process (CDP) hearing. By letters dated June 20, 2007, requests for CDP hearings with respect to these two entities were timely submitted. Shortly thereafter, Cloverdale and Lestat Ops received letters from Revenue Officer Robert Brown, dated June 25, 2007, acknowledging receipt of the hearing requests but advising that CDP rights were not available to these entities because petitioner previously had been afforded CDP rights with respect to the same tax periods listed in the lien notices. The letters indicated, however, that the entities were entitled to a “Collection Appeal” with the revenue officer's manager.<br />On May 21, 2007, the settlement officer held a second telephone conference with petitioner's representative. Petitioner's representative continued to maintain, as a collection alternative to the proposed levy, that collection should be limited to the amount specified in the criminal plea agreement and judgment. The settlement officer indicated that he had reviewed financial statements and related information in the collection administrative file and concluded that the financial statements did not provide full disclosure of petitioner's income and assets. Consequently, he was unable to recommend acceptance of petitioner's proposed collection alternative. Petitioner's representative requested details of the alleged nondisclosure. The settlement officer declined to discuss the details at that time, indicating that he would research the matter. They agreed to have another conference.<br />After seeking advice of IRS counsel, on May 24, 2007, the settlement officer held the third and final telephone conference with petitioner's representative. The settlement officer asserted that petitioner had failed to completely disclose his income, expenses, and assets, making it impossible to adequately evaluate his ability to pay. Without specifically referencing the request or memorandum that he had reviewed, the settlement officer asserted that petitioner had diverted income into various entities and paid personal expenses through these entities for no apparent legitimate business reason. He also asserted that petitioner had attempted to place numerous assets beyond respondent's reach in various nominee or alter ego entities. According to the settlement officer's case activity record, petitioner's representative expressed surprise at this information, indicated that petitioner apparently had not disclosed all the facts to him, and stated that he understood why the settlement officer could not consider a collection alternative. After another discussion about the effect of the criminal plea agreement and judgment, the settlement officer advised the representative that the proposed collection actions would be sustained.<br />On June 15, 2007, respondent's Office of Appeals mailed petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the determination), sustaining the Federal tax lien filing and the proposed levy. With respect to petitioner's underlying liability the determination stated:<br />In this case the taxpayer agreed to pay restitution for the full amount of the taxes due for all prosecution years (1996 through 2002), but the judge, who is not bound by the plea agreement, subsequently ordered payment of restitution in the amount that is equivalent of the tax liability for only one count of the total criminal case. The restitution amount relates to the tax liability, but it is not the equivalent of the tax liability. It is the determination of Appeals that neither the plea agreement nor the court judgment represent a settlement or compromise of the tax liability, and do not bar IRS from taking additional collection actions. The determination also rejected petitioner's proposed collection alternative of limiting collection to the terms of the criminal plea agreement and judgment, stating:<br />Appeals has determined from this review that the taxpayer has not accurately reported income and expenses, which make it impossible to determine his true ability to pay the tax liability. The taxpayer has done this by diverting income through various entities (trusts, limited liability companies, and his wife) and paying personal expenses through these entities for no apparent reason other than to avoid taxes and the collection of taxes. He has also placed assets beyond the reach of IRS by purchasing them in the name of various entities he controls or transferring them to these entities. It is clear that the taxpayer maintains full use and benefits of these assets, which include real estate, vehicles, watercraft, and all-terrain vehicles. Because these assets and any encumbrances against these assets have not been disclosed, Appeals is not able to determine their net equity and collection potential. For these reasons Appeals cannot accept the only collection alternative proposed by the taxpayer's representative. The determination also concluded that the proposed tax lien filing and levy action properly balanced the need for efficient collection of taxes with the concern that collection action be no more intrusive than necessary.<br />Petitioner timely petitioned this Court for judicial review of this determination. The petition also seeks judicial review of letters which petitioner asserts respondent mailed on June 25, 2007, to four entities created by petitioner, including Cloverdale and Lestat Ops, denying them the opportunity for CDP hearings with respect to the filing of tax liens against them as petitioner's alleged nominees, transferees, or alter egos. 9<br />OPINION<br />I. Statutory Framework Section 6321 imposes a lien in favor of the United States on all property and property rights of a person who is liable for and fails to pay tax after demand for payment has been made. The lien arises when assessment is made and continues until the liability is paid or becomes unenforceable by lapse of time. Sec. 6322. For the lien to be valid against certain third parties, the Secretary must file a notice of Federal tax lien; within 5 business days thereafter, the Secretary must provide written notice to the taxpayer. Secs. 6320(a), 6323(a). The taxpayer then has 30 days to request an administrative hearing before an Appeals officer. Sec. 6320(a)(3)(B), (b)(1); sec. 301.6320-1(c)(1), Proced. & Admin. Regs. To the extent practicable, a hearing requested under section 6320 is to be held in conjunction with a related hearing requested under section 6330. Sec. 6320(b)(4).<br /> Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before levying on the person's property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. The person may challenge the underlying tax liability if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604 (2000). After receiving a notice of determination, the person may seek judicial review in this Court. Sec. 6330(d)(1); Pension Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019. If the validity of the underlying tax liability is properly at issue, we review Sego v. Commissioner, supra. Other issues that issue de novo. we review for abuse of discretion. Id.<br />II. Petitioner's Challenge to His Underlying Liabilities<br />Petitioner contends that respondent erred in sustaining the lien and levy notices because they contravene the criminal plea agreement and judgment. Petitioner's contention represents in part a challenge to his underlying liabilities for 1996 through 2002. 10 Respondent concedes that petitioner is entitled to make such a challenge but contends that it is without merit.<br />Respondent assessed petitioner's taxes for the years in question on the basis of the amounts petitioner self-reported on his amended or delinquent returns for these years. Petitioner does not contend that he incorrectly reported his tax liabilities on these returns. Rather, he contends that his aggregate tax liability for 1996 through 2002 is limited to the $246,226 of restitution ordered in the criminal judgment. We disagree.<br />Pursuant to 18 U.S.C. section 3663(a) (2006), a District Court may order restitution to the victim of a criminal offense. In some circumstances, as in petitioner's criminal case, restitution is mandatory. See 18 U.S.C. sec. 3663A (2006). An order to pay restitution is a criminal penalty rather than a Creel v. Commissioner, 419 F.3d 1135, 1140 [96 AFTR 2d 2005-5487] (11th civil penalty. Cir. 2005). Although restitution is based upon an estimation of civil tax liability, it is not a determination of civil tax liability and generally does not bar the Commissioner from assessing a greater amount of civil tax liability. See Morse v. Commissioner, 419 F.3d 829, 833-835 [96 AFTR 2d 2005-5814] (8th Cir. 2005), affg. T.C. Memo. 2003-332 [TC Memo 2003-332]; Hickman v. Commissioner, 183 F.3d 535, 537-538 [84 AFTR 2d 99-5346] (6th Cir. 1999), affg. T.C. Memo. 1997-566 [1997 RIA TC Memo ¶97,566]; M.J. Wood Associates, Inc. v. Commissioner, T.C. Memo. 1998-375 [1998 RIA TC Memo ¶98,375]. In fact, the restitution statute expressly contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount paid under a restitution order “shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in *** any Federal civil proceeding”. 18 U.S.C. 3664(j)(2) (2006). 11<br />Petitioner relies upon Creel v. Commissioner, supra, in support of his contention that respondent's proposed collection actions contravene the restitution order. Petitioner's reliance on Creel is misplaced. In Creel, the Court of Appeals found that a restitution order, which specifically encompassed “any interest and penalties which may be imposed by the Internal Revenue Service”, included the civil penalties that the Id. at Commissioner later sought to recover in a civil suit. 1140. Furthermore, at the time of the civil suit the taxpayer in Creel had fully settled the ordered restitution, and the U.S. attorney had filed a satisfaction of judgment and had also recorded a cancellation and release that of the judgment lien.<br />Taking into account these unusual circumstances, the Court Id. of Appeals held that the Government had discharged the taxpayer's civil tax liabilities as part of the criminal case.<br />By contrast, petitioner's plea agreement expressly states that it “does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” Further, the plea agreement states that it is “binding only upon the United States Attorney's Office for the Eastern District of Arkansas and the defendant” and “does not bind *** any other federal, state or 11(...continued) this statement or the appropriateness of this treatment. Consequently, we give this issue no further consideration. local prosecuting, administrative or regulatory authority.” The criminal judgment refers to the restitution payments as “criminal monetary penalties” and makes no mention of civil liabilities or penalties. Furthermore, there is no evidence that petitioner has satisfied his criminal restitution order or received any discharge.<br />We conclude and hold that petitioner's criminal plea agreement and judgment ordering restitution did not discharge, and do not limit respondent's assessment and collection of, petitioner's civil tax liabilities for his taxable years 1996 through 2002.<br />III. Petitioner's Proposed Collection Alternative We review the settlement officer's denial of a collection alternative for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604 (2000). The U.S. Court of Appeals for the Eighth Circuit, to which any appeal of this case would lie, describes the abuse of discretion standard as “markedly deferential: if the amount of tax owed is not in dispute, courts may disturb the administrative decision only if it constituted `a clear abuse of discretion in the sense of clear taxpayer abuse and unfairness by the IRS.” Fifty Below Sales & Mktg., Inc. v. United States, 497 F.3d 828, 830 [100 AFTR 2d 2007-5551] (8th Cir. 2007) (quoting Robinette v. Commissioner, 439 F.3d 455, 459 [97 AFTR 2d 2006-1391] (8th Cir. 2006), revg. 123 T.C. 85 (2004)).<br />The only collection alternative that petitioner has proposed is to limit his 1996 through 2002 liability to $246,226; i.e., the amount of restitution ordered by the District Court in the criminal proceeding. Insofar as this “collection alternative” represents petitioner's reassertion of his challenge to his underlying civil tax liabilities, it was properly rejected for the reasons just discussed. And for essentially those same reasons, the restitution order does not require respondent to adhere to the restitution payment schedule set forth therein to collect petitioner's civil tax liabilities.<br />Insofar as petitioner's “collection alternative” might be viewed as representing, in effect, an offer-in-compromise, the settlement officer did not abuse his discretion in rejecting it. The regulations set forth three grounds for compromising a liability: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. As just discussed, petitioner has put forward no legitimate issue regarding his civil tax liabilities. Nor has he expressly argued that his collection alternative was for the promotion of effective tax administration. 12 That leaves doubt as to collectibility.<br />For purposes of evaluating an offer-in-compromise, doubt as to collectibility exists “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122- 1(b)(2), Proced. & Admin. Regs. Because he submitted incomplete Forms 433-A and 433-B, petitioner failed to provide the settlement officer all financial information necessary to evaluate his ability to fully pay his civil tax liabilities. For that reason, if for no other, the settlement officer did not abuse his discretion in rejecting any collection alternative based on doubt as to collectibility. See, e.g., Kansky v. Commissioner, T.C. Memo. 2007-40 [TC Memo 2007-40]; Criner v. Commissioner, T.C. Memo. 2003-328 [TC Memo 2003-328].<br />IV. Fair Hearing Petitioner complains that he was denied a fair collection hearing because the settlement officer did not disclose to his representative all the information in the collection administrative file which the settlement officer had reviewed in reaching his conclusions. 13<br />Collection hearings are conducted in an informal setting that does not include the right to discovery. See Katz v. Commissioner, 115 T.C. 329 (2000), Davis v. Commissioner, 115 T.C. 35, 41-42 (2000). The information that the settlement officer reviewed related to matters that should have been within petitioner's knowledge, and the settlement officer did in fact share with petitioner's representative the nature of his concerns about petitioner's nondisclosure of income and assets. 14 More fundamentally, as just discussed, petitioner's failure to provide the settlement officer all required financial information was reason enough for the settlement officer to reject his collection alternative. We do not see that the settlement officer's disclosure or nondisclosure of the materials in question had any significant bearing on the fairness or outcome of petitioner's hearing.<br />V. Denial of CDP Hearings for Nominees and Alter Egos Petitioner asserts that certain entities, including Cloverdale and Lestat Ops, received nominee or alter ego lien notices but were improperly denied CDP hearings. 15 According to the regulations, nominees and alter egos holding property for a taxpayer are not entitled to CDP hearings. Sec. 301.6330- 1(b)(2), Q&A-B5, Proced. & Admin. Regs. In any event, we cannot enter a decision affecting the entities in question because they are not parties to this proceeding. See Dalton v. Commissioner, 135 T.C. , (2010) (slip op. at 15).<br />V. Conclusion<br />We sustain respondent's determinations sustaining the filing of the notice of Federal tax lien and the proposed levy.<br />Decision will be entered for respondent.<br />________________________________________<br />1<br /> Unless otherwise indicated, all section references are to the Internal Revenue Code. All figures are rounded to the nearest dollar.<br />________________________________________<br />2<br /> This amount corresponded to the amount stated in the plea agreement as representing petitioner's total tax liability for the years 1999 through 2001. The record does not conclusively show why the District Court reduced the restitution in this manner.<br />________________________________________<br />3<br /> The record does not establish whether petitioner has complied with the restitution order.<br />________________________________________<br />4<br /> Insofar as the record shows, these were the first returns that petitioner filed for these years. Apparently, they were characterized as “amended” returns because respondent had previously prepared substitutes for returns for petitioner's taxable years 1996 through 1999.<br />________________________________________<br />5<br /> The notice indicates that $47,567 of this amount relates to petitioner's 2003 taxable year.<br />________________________________________<br />6<br /> After petitioner submitted his request for a collection due process (CDP) hearing, on Dec. 8, 2006, respondent issued to petitioner a notice of deficiency with respect to petitioner's taxable years 1998 through 2002. The parties agree that the deficiencies determined in the notice are not at issue in this case.<br />________________________________________<br />7<br /> The record does not reveal who prepared these diagrams.<br />________________________________________<br />8<br /> The request describes Lestat Ops as a trust which holds the real estate upon which petitioner's veterinary clinic is located and indicates that the trust's beneficiaries are petitioner's children.<br />________________________________________<br />9<br /> The record contains the June 25, 2007, letters, described supra , from Revenue Officer Robert Brown to Cloverdale and Lestat Ops. The petition seems to assert that two other entities, Piraeus Group and MRMLBS, received similar letters also dated June 25, 2007. The record does not contain copies of any such letters.<br />________________________________________<br />10<br /> Petitioner has stipulated that his 2003 liability (which was encompassed by the lien and levy notices but was not included either in petitioner's request for a CDP hearing or in respondent's determinations) is not at issue in this case.<br />________________________________________<br />18<br /> <br />________________________________________<br />11<br /> Conversely, payments made pursuant to restitution orders are applied against tax liabilities. See United States v. Clayton, 613 F.3d 592 [106 AFTR 2d 2010-5556] (5th Cir. 2010); United States v. Tucker, 217 F.3d 960, 962 [89 AFTR 2d 2002-409] (8th Cir. 2000); M.J. Wood Associates, Inc. v. Commissioner, T.C. Memo. 1998-375 [1998 RIA TC Memo ¶98,375]. The record is silent as to what amounts, if any, of restitution petitioner has paid. On brief respondent states that petitioner's “restitution payments will ultimately be applied to his civil tax liability for the taxable year 2000, and if in excess of that liability to other years”. Petitioner, who filed no reply brief, has not challenged<br />________________________________________<br />11<br /> <br />________________________________________<br />12<br /> The Commissioner may compromise a tax liability for promotion of effective tax administration if: (1) Collection in full could be achieved but would cause economic hardship; or (2) if there are compelling public policy or equity considerations identified by the taxpayer. Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.; see Speltz v. Commissioner, 124 T.C. 165, 172-173 (2005), affd. 454 F.3d 782 [98 AFTR 2d 2006-5364] (8th Cir. 2006). Petitioner has not argued and the record does not suggest that he meets these conditions. Nor does the record suggest that petitioner raised these issues at the collection hearing; accordingly, he is not entitled to raise them in this proceeding. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007).<br />________________________________________<br />13<br /> The materials which the settlement officer reviewed included Revenue Officer Brown's request to IRS district counsel to file alter ego and nominee liens and levies and district counsel's memorandum approving the filing of alter ego and nominee liens. Petitioner contends that these materials were not included in the administrative file. The parties have stipulated, however, that the stipulated exhibits, which include the materials in question, “constitute the complete administrative record in this case”. Petitioner has not raised, and consequently we do not consider, any issue as to whether the settlement officer's review of such materials entailed any improper ex parte communication.<br />Over respondents' objection, petitioner called the settlement officer as a witness at trial, attempting to show that the settlement officer failed to adequately explain the reasons for his determination. Cf. Robinette v. Commissioner, 439 F.3d 455, 461 [97 AFTR 2d 2006-1391] (8th Cir. 2006) (indicating that judicial review based on the administrative record may permit “the receipt of testimony or evidence explaining the reasoning behind the agency's decision”), revg. 123 T.C. 85 (2004). The settlement officer's testimony, however, had little probative value or relevancy. On brief respondent renews his objection to the settlement officer's testimony. Because we have not relied upon this testimony in our analysis or holdings, it is unnecessary to address further respondent's objection.<br />________________________________________<br />14<br /> Shortly before the second telephone conference between petitioner's representative and the settlement officer on May 21, 2007, the IRS had mailed to Cloverdale and Lestat Ops (and, according to petitioner's allegations, at least two other entities) nominee notices of Federal tax lien filing.<br />________________________________________<br />15<br /> Respondent issued the nominee notices of Federal tax lien filing for Cloverdale and Lestat Ops (and, according to petitioner's allegations, for at least two other entities) on May 15, 2007, months after respondent had issued petitioner the notice of Federal tax lien filing upon which this case is predicated.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-71856020549297448022010-12-31T10:37:00.001-05:002010-12-31T10:37:52.923-05:00PTIN numbersNotice 2011-6, 2011-3 IRB, 12/30/2010, IRC Sec(s).<br /><br />Headnote:<br /><br /><br />Reference(s):<br /><br />Full Text:<br /><br />Purpose<br /><br />This notice provides guidance regarding the implementation of new Treasury regulations governing tax return preparers. Section 1 of this notice provides guidance regarding the requirement to obtain a preparer tax identification number (PTIN) under section 1.6109-2 and identifies the forms that qualify as tax returns or claims for refund for purposes of those regulations. Section 2 of this notice provides interim rules applicable to certain PTIN holders during the implementation phase of the new regulations governing tax return preparers.<br /><br />Background<br /><br />The IRS made findings and recommendations in Publication 4832, “ Return Preparer Review,” which was published on January 4, 2010, concerning the results of an in-depth review of the tax return preparer industry. The IRS recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers. The IRS published: (1) final regulations (75 FR 60309) addressing tax return preparer PTIN requirements on September 30, 2010; (2) final regulations (75 FR 60316) regarding the user fee to apply for or renew a PTIN on September 30, 2010; and (3) proposed regulations (REG-138637-07) addressing competency testing requirements, continuing education requirements, and extension of the ethics rules under 31 CFR Part 10 (reprinted in Treasury Department Circular 230 (Circular 230)) for tax return preparers on August 23, 2010.<br /><br />1. Guidance under section 1.6109-2<br /><br />.01 PTINs Obtained After September 28, 2010<br /><br /> Section 1.6109-2 provides that beginning after December 31, 2010, all tax return preparers must have a PTIN that was applied for and received at the time and in the manner as prescribed by the IRS. This notice confirms that tax return preparers who obtain a PTIN or a provisional PTIN and pay any applicable user fee after September 28, 2010, have applied for and received a PTIN in the manner prescribed by the IRS for purposes of the section 6109 regulations.<br /><br />.02 Individuals Who May Obtain a Ptin<br /><br /> Section 1.6109-2(d) provides that for returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's PTIN or other number prescribed by the IRS. Additionally, after December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN.<br /><br /> Section 1.6109-2(d) also provides that, except as provided in paragraph (h), beginning after December 31, 2010, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer to obtain a PTIN. Section 1.6109-2(h) provides that the IRS may prescribe exceptions to the PTIN rules in appropriate guidance, including the requirement that an individual be an attorney, certified public accountant, enrolled agent, or registered tax return preparer before receiving a PTIN.<br /><br />The IRS has decided to allow certain individuals who are not attorneys, certified public accountants, enrolled agents, or registered tax return preparers to obtain a PTIN and prepare, or assist in the preparation of, all or substantially all of a tax return in certain discrete circumstances.<br /><br />a. Tax Return Preparers Supervised by Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Retirement Plan Agents, and Enrolled Actuaries<br /><br />Until further guidance is issued, the IRS, in accordance with the authority to provide exceptions to the PTIN rules under section 1.6109-2(h), will permit any individual eighteen years or older to pay the applicable user fee and obtain a PTIN permitting the individual to prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if:<br /><br />(i) the individual is supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS under Circular 230 § 10.3(a) through (e);<br />(ii) the supervising attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual;<br />(iii) the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and<br />(iv) the individual passes the requisite tax compliance check and suitability check (when available).<br />For purposes of this provision, a law firm is a law partnership, professional corporation, sole proprietorship, or any other association authorized to practice law in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A certified public accounting firm is a partnership, professional corporation, sole proprietorship, or any other association that is registered, permitted, or licensed to practice as a certified public accounting firm in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association, other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before the IRS and that is 80 percent or a greater percent owned by one or more attorneys, certified public accountants, enrolled agents, enrolled actuaries, or enrolled retirement plan agents authorized to practice before the IRS under sections 10.3(a) through (e) of Circular 230, respectively.<br /><br />Individuals applying for a PTIN under this provision will be required to certify on the PTIN application that they are supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual and provide a supervising individual's PTIN or other number if prescribed by the IRS. If at any point the individual is no longer supervised by the signing attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary, the individual must notify the IRS as prescribed in forms, instructions, or other appropriate guidance and will not be permitted to prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation under this provision.<br /><br />Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not be subject to a competency examination or continuing education requirements. These individuals, however, may not sign any tax return they prepare or assist in preparing for compensation, represent taxpayers before the IRS in any capacity, or represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner.<br /><br />Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.<br /><br />b. Individuals Who Prepare Tax Returns Not Covered by the Registered Tax Return Preparer Competency Examination(s)<br /><br />The Treasury Department and the IRS have proposed rules that will require an individual to pass a registered tax return preparer minimum competency examination (competency examination). The IRS anticipates, however, that the tax returns and claims for refund covered by the competency examination(s) initially offered will be limited to individual income tax returns (Form 1040 series tax returns and accompanying schedules). Although the IRS anticipates the types of returns and claims for refunds covered by the competency examination(s) may expand in the future, the IRS recognizes that certain compensated tax return preparers do not prepare Form 1040 series tax returns or related claims for refunds and that the tax returns and claims for refunds prepared by some of these individuals may not be covered by the competency examinations for a significant period of time. The IRS has determined that individuals should not be required, as a condition to obtaining a PTIN, to pass a competency examination covering tax returns and claims for refunds not prepared by the individual. Therefore, until further guidance, this notice, in accordance with the authority under section 1.6109-2(h), provides that any individual eighteen years or older may pay the applicable user fee and obtain a PTIN if:<br /><br />(i) the individual certifies that the individual does not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examination(s) for registered tax return preparers administered under IRS oversight (1040 series until further notice); and<br />(ii) the individual passes the requisite tax compliance check and suitability check (when available).<br />Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not yet be subject to a competency examination. These individuals are not currently required to satisfy the same continuing education requirements that a registered tax return preparer must complete to renew their PTIN. In the future, the IRS may require through forms, instructions, or other appropriate guidance that these individuals complete continuing education to renew their PTIN.<br /><br />Individuals who obtain or renew a PTIN under this provision may sign the tax returns or claims for refunds that they prepare for compensation as the paid preparer. These individuals may also represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination if the individual signed the tax return or claim for refund for the taxable year under examination. They may not, however, represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Enrolled retirement plan agents and enrolled actuaries who obtain a PTIN under this provision may continue to practice and represent as provided in Circular 230.<br /><br />Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.<br /><br />.03 Forms Requiring a Ptin<br /><br /> Section 1.6109-2(h) provides that the IRS may specify in appropriate guidance the returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the PTIN regulations. Consistent with that authority, the IRS hereby specifies that all tax returns, claims for refund, or other tax forms submitted to the IRS are considered tax returns or claims for refund for purposes of section 1.6109-2 unless otherwise provided by the IRS. For purposes of this provision, the term tax forms is interpreted broadly. An individual must obtain a PTIN to prepare for compensation all or substantially all of any form except those specifically identified by the IRS as not subject to the requirements of § 1.6109-2. At this time, the IRS identifies the following forms as not subject to the requirements of § 1.6109-2:<br /><br />Form SS-4, Application for Employer Identification Number;<br /><br />Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;<br /><br />Form SS-16, Certificate of Election of Coverage under FICA;<br /><br />Form W-2 series of returns;<br /><br />Form W-7, Application for IRS Individual Taxpayer Identification Number;<br /><br />Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding;<br /><br />Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment;<br /><br />Form 872, Consent to Extend the Time to Assess Tax;<br /><br />Form 906, Closing Agreement On Final Determination Covering Specific Matters;<br /><br />Form 1098 series;<br /><br />Form 1099 series;<br /><br />Form 2848, Power of Attorney and Declaration of Representative;<br /><br />Form 3115, Application for Change in Accounting Method;<br /><br />Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits;<br /><br />Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners;<br /><br />Form 4419, Application for Filing Information Returns Electronically;<br /><br />Form 5300, Application for Determination for Employee Benefit Plan;<br /><br />Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans;<br /><br />Form 5310, Application for Determination for Terminating Plan;<br /><br />Form 5500 series;<br /><br />Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips;<br /><br />Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests;<br /><br />Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests;<br /><br />Form 8508, Request for Waiver From Filing Information Returns Electronically;<br /><br />Form 8717 User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request;<br /><br />Form 8809, Application for Extension of Time to File Information Return;<br /><br />Form 8821, Tax Information Authorization;<br /><br />Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program<br /><br />The IRS may in future guidance modify the list of documents that do not qualify as tax returns or claims for refund for purposes of section 1.6109-2(h).<br /><br />2. Interim Rules<br /><br />.01 Provisional PTINs<br /><br />As discussed in section 1 of this notice, an individual may be designated as a registered tax return preparer if the individual successfully completes a competency examination or otherwise meets requisite standards prescribed by the IRS. The IRS, however, does not expect to offer the competency examination before mid 2011. Therefore, to allow tax return preparers to obtain a PTIN and continue to prepare tax returns or claims for refund until the competency examination is available, the IRS, as an interim rule, will allow individuals who are not attorneys, certified public accountants, or enrolled agents to obtain a provisional PTIN before the date that the competency examination is first offered (“ initial test offering date” ). Individuals may obtain a provisional PTIN through the IRS' new online PTIN application system or by submitting to the IRS a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. The individual must annually renew the provisional PTIN and pay the applicable user fee.<br /><br />The IRS generally will not issue provisional PTINs in accordance with this provision after the initial test offering date. After the initial test offering date, only attorneys, certified public accountants, enrolled agents, and registered tax return preparers, or individuals defined in section 1.02(a) or (b) of this notice will be eligible to obtain a PTIN in accordance with section 1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN.<br /><br />Until December 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the individual holding the provisional PTIN is not an attorney, certified public accountant, enrolled agent, or registered tax return preparer. After December 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN obtained in accordance with this provision may keep the PTIN only if the holder of the provisional PTIN is eligible to obtain a PTIN in accordance with section 1.6109-2, section 1.02(a) or (b) of this notice, or future guidance.<br /><br />.02 Return Preparation by Provisional Ptin Holders<br /><br />Tax return preparers who properly obtain a provisional PTIN before the initial test offering date will be permitted, subject to the requisite federal tax compliance check and suitability check (when available), to prepare for compensation all or substantially all of any tax return or claim for refund until December 31, 2013. During the transition period from the initial test offering date through December 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency examination as often as the examination is offered.<br /><br />These interim rules apply to those tax return preparers who obtain a provisional PTIN prior to the initial test offering date. An individual who is subject to the competency testing requirement for becoming a registered tax return preparer who does not obtain a PTIN before the initial test offering date must pass the competency examination and be designated as a registered tax return preparer to be permitted to prepare for compensation all or substantially all of a tax return or claim for refund.<br /><br />The holder of a provisional PTIN may represent that the holder is authorized to practice before the IRS by preparing and filing tax returns or claims for refund, but the holder of a provisional PTIN may not represent that the holder is a registered tax return preparer or has passed the competency examination necessary to become a registered tax return preparer.<br /><br />.03 Practice Based on Return Preparation<br /><br />The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer generally is limited to preparing tax returns, claims for refund, or other documents for submission to the IRS and to limited representation as described below. A registered tax return preparer may prepare all or substantially all of a tax return or claim for refund. The IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer may prepare and sign.<br /><br />Registered tax return preparers may represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS during an examination if the registered tax return preparer prepared and signed (or prepared and was not required to sign) the tax return or claim for refund for the taxable period under examination.<br /><br />Prior to January 1, 2011, any individual generally may prepare a tax return or claim for refund for compensation. An individual who prepares and signs a taxpayer's return or claim for refund as the preparer generally may represent that taxpayer during an examination of the taxable period covered by that return or claim for refund. The proposed Circular 230 regulations generally do not extend this right of representation to individuals who are not practitioners after December 31, 2010. To ensure that tax return preparers have sufficient time to become registered tax return preparers, these interim rules provide that an individual may represent a taxpayer during an examination provided the individual prepared and signed the taxpayer's return or claim for refund as the preparer for the taxable period under examination and the individual was permitted under the regulations or other published guidance to prepare the taxpayer's return or claim for refund for compensation. This right to represent the taxpayer does not, however, permit an individual who is not an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary to represent the taxpayer before appeals officers, revenue officers, Counsel, or similar officers or employees of the IRS or the Department of Treasury.<br /><br />.04 Continuing Education<br /><br />The proposed Circular 230 regulations require registered tax return preparers to complete fifteen hours of continuing education each registration year. As an interim rule, there is no continuing education requirement for registered tax return preparers or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on September 30, 2010.<br /><br />.05 Ethics and Conduct<br /><br />The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer, therefore, will be subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Accordingly, as an interim rule, practice before the IRS by a tax return preparer who obtains a provisional PTIN or any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS also is subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Tax return preparers holding a provisional PTIN and other individuals who for compensation prepare, or assist in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS must not engage in disreputable conduct under section 10.51 of Circular 230. The IRS may, by written notification, revoke a provisional PTIN if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct under section 10.51 of Circular 230. The tax return preparer may, within 30 days after receipt of the notice of revocation of the provisional PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.<br /><br />The interim rules described in this notice and any final regulations apply to all tax return preparers who prepare all or substantially all of a tax return or claim for refund for compensation. As discussed in section 1 of this notice, all tax returns, claims for refund, or other documents submitted to the IRS unless otherwise provided for in section 1 of this notice or other guidance are tax returns for purposes of the PTIN regulations.<br /><br />Contact Information<br /><br />The principal author of this notice is Matthew D. Lucey of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice contact Matthew D. Lucey on (202) 622-4940 (not a toll-free call).Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-30175647975641649162010-12-29T09:07:00.000-05:002010-12-29T09:08:20.430-05:00New 2011 6694 disclosure guidelinesIRS updates disclosure rules to lessen understatement and preparer penalties<br />Rev Proc 2011-13, 2011-3 IRB<br />A revised revenue procedure identifies when disclosure on a taxpayer's return for an item or a position is adequate to reduce a Code Sec. 6662(d)understatement of income tax under the accuracy-related penalty, and to avoid the Code Sec. 6694(a) preparer penalty for understatements due to unreasonable positions. It applies to any income tax return filed on 2010 tax forms for tax years beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short tax years beginning in 2011.<br />Background. Under Code Sec. 6662 , a 20% penalty applies to the portion of a tax underpayment that is attributable to a substantial understatement of income tax. The penalty rate is 40% in the case of gross valuation misstatements under Code Sec. 6662(h) , nondisclosed noneconomic substance transactions under Code Sec. 6662(i) , or undisclosed foreign financial asset understatements under section Code Sec. 6662(j) . An understatement is “substantial” if it exceeds the greater of 10% of the amount of tax required to be shown on the return for the tax year or $5,000. However, a corporation (other than an S corporation or personal holding company) has a substantial tax understatement if the understatement exceeds the lesser of (1) 10% of the tax required to be shown on the return for a tax year (or, if greater, $10,000), or (2) $10 million. ( Code Sec. 6662(d) )<br />For a non-tax shelter item, the understatement is reduced to the extent the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the taxpayer's tax treatment. ( Code Sec. 6662(d)(2)(B)(ii) )<br />Under Code Sec. 6694(a) , a penalty is imposed on a tax return preparer who prepares a return or refund claim reflecting an understatement of liability due to an “unreasonable position” if he knew (or reasonably should have known) of the position. A position (other than for a tax shelter or a reportable transaction) is generally treated as unreasonable unless (1) there is or was substantial authority for the position; or (2) the position was properly disclosed under Code Sec. 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter or a reportable transaction, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. ( Notice 2009-5, 2009-1 CB 309 )<br />Revised procedure. In Rev Proc 2011-13 , IRS sets out the circumstances under which disclosure of information on a return is considered to be adequate to avoid the substantial understatement penalty under Code Sec. 6662(d) and the preparer penalty under Code Sec. 6694(a) for understatements due to unreasonable positions. A corporation making a complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP (Uncertain Tax Position Statement), will be treated as if it had filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position. However, the filing of a Form 8275 or Form 8275-R, will not be treated as if the corporation filed a Schedule UTP.<br />Additional disclosure of relevant facts or positions taken with respect to issues involving any of the items listed in Rev Proc 2011-13 is unnecessary for purposes of reducing any understatement of income tax under Code Sec. 6662(d) (except as otherwise provided in Rev Proc 2011-13, Sec. 4.02(3) , concerning Schedules M-1 and M-3), if forms and attachments are completed in a clear manner and in accordance with instructions.<br />Although a taxpayer may literally meet Rev Proc 2011-13 's disclosure requirements, the disclosure won't have an effect for purposes of the Code Sec. 6662 accuracy-related penalty if the item or position on the return: (1) doesn't have a reasonable basis as defined in Reg. § 1.6662-3(b)(3) ; (2) is attributable to a tax shelter item as defined in Code Sec. 6662(d)(2) ; or (3) isn't properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position. Disclosure will have no effect for purposes of the Code Sec. 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in Code Sec. 6662(d)(2)(C)(ii) ) or a reportable transaction to which Code Sec. 6662Aapplies.<br />Rev Proc 2011-13, Sec. 4.01(2) provides that money amounts entered on forms must be verifiable, and the information on the return must be disclosed in the manner described in Rev Proc 2011-13, Sec. 4.02(3) . A number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by IRS) and can show good faith in entering that number on the applicable form. Further, the disclosure of an amount as provided in Rev Proc 2011-13, Sec. 4.02 , isn't adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on Form 8275 or Form 8275-R.<br />When the amount of an item is shown on a line that doesn't have a preprinted description identifying that item, the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a sole proprietorship's bad debt, the words “bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language (e.g., “Cost of non-compete agreement deductible not capitalizable”). If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.<br />.<br />Rev. Proc. 2011-13, 2011-3 IRB, 12/28/2010, IRC Sec(s).<br />________________________________________<br />Headnote:<br />Reference(s):<br />Full Text:<br />1. Purpose<br />This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and identifies circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. This revenue procedure does not apply with respect to any other penalty provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related penalty, the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions, and the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements).<br />This revenue procedure applies to any income tax return filed on 2010 tax forms for a taxable year beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short taxable years beginning in 2011.<br />2. Changes From Rev. Proc. 2010-15<br />.01. This revenue procedure has been updated to include reference to: (i) the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements; and (iii) the Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain corporations.<br />3. Background<br />.01. If section 6662 applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20 percent of the portion of the underpayment to which the section applies is added to the tax (the penalty rate is 40 percent in the case of gross valuation misstatements under section 6662(h), nondisclosed noneconomic substance transactions under section 6662(i), or undisclosed foreign financial asset understatements under section 6662(j)). Section 6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a substantial understatement of income tax.<br />.02. Section 6662(d)(1) provides that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of the amount of tax required to be shown on the return for the taxable year or $5,000. Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than an S corporation or personal holding company) has a substantial understatement of income tax if the amount of the understatement exceeds the lesser of 10 percent of the tax required to be shown on the return for a taxable year (or, if greater, $10,000) or $10,000,000. Section 6662(d)(2) defines an understatement as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax that is shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).<br />.03. In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to the item if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer..<br />.04. Section 6694(a) imposes a penalty on a tax return preparer who prepares a return or claim for refund reflecting an understatement of liability due to an “ unreasonable position” if the tax return preparer knew (or reasonably should have known) of the position. A position (other than a position with respect to a tax shelter or a reportable transaction to which section 6662A applies) is generally treated as unreasonable unless (i) there is or was substantial authority for the position, or (ii) the position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3 I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter transactions.<br />.05. In general, this revenue procedure provides guidance for determining when disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section 6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable.<br />.06. Fiscal and short tax year returns. (a) In general. This revenue procedure may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This revenue procedure may also apply to a short year return for a period beginning in 2011 if the return is to be filed before the 2011 forms are available. (Note that individuals are generally not put in this position as a decedent's final return for a fractional part of a year is due the fifteenth day of the fourth month following the close of the 12-month period which began with the first day of such fractional part of the year. See Treas. Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must take into account any tax law changes that are effective for tax years beginning after December 31, 2010, even though these changes are not reflected on the form.<br />(b) Tax law changes effective after December 31, 2010. This document does not take into account the effect of tax law changes effective for tax years beginning after December 31, 2010. If a line referenced in this revenue procedure is affected by such a change and requires additional reporting, a taxpayer may have to file Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the Service prescribes criteria for complying with the requirement.<br />.07. A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP, Uncertain Tax Position Statement, will be treated as if the corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a Schedule UTP.<br />4. Procedure<br />.01. General<br />(1) Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) (except as otherwise provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms and attachments are completed in a clear manner and in accordance with their instructions.<br />(2) The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. For purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the Internal Revenue Service) and the taxpayer can show good faith in entering that number on the applicable form.<br />(3) The disclosure of an amount as provided in section 4.02 below is not adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on a Form 8275 or Form 8275-R.<br />(4) When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as on an unnamed line under an “ Other Expense” category) the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a bad debt for a sole proprietorship, the words “ bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language; for example, “Cost of non-compete agreement deductible not capitalizable.” If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.<br />(5) Although a taxpayer may literally meet the disclosure requirements of this revenue procedure, the disclosure will have no effect for purposes of the section 6662 accuracy-related penalty if the item or position on the return: (1) Does not have a reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position.<br />(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies.<br />.02. Items<br />(1) Form 1040, Schedule A, Itemized Deductions:<br />(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all required information.<br />(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8 must list each type of tax and the amount paid.<br />(c) Interest Expenses: Complete lines 10 through 15, supplying all required information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under section 163(d) unless Form 4952, Investment Interest Expense Deduction , is completed, or (ii) amounts disallowed under section 265.<br />(d) Contributions: Complete lines 16 through 19, supplying all required information. Enter the amount of the contribution reduced by the value of any substantial benefit (goods or services) provided by the donee organization in consideration, in whole or in part. Entering the value of the contribution unreduced by the value of the benefit received will not constitute adequate disclosure. If a contribution of $250 or more is made, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(8), is obtained from the donee organization. If a contribution of cash of less than $250 is made, this section will not apply unless a bank record or written communication from the donee, as required by section 170(f)(17), is obtained from the donee organization. If a contribution of property other than cash is made and the amount claimed as a deduction exceeds $500, attach a properly completed Form 8283, Noncash Charitable Contributions, to the return. In addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane has a value of more than $500, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(12), is obtained from the donee organization and attached to the return. An acknowledgment under section 170(f)(8) is not required if an acknowledgment under section 170(f)(12) is required.<br />(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts, and attach to the return. Each item or article for which a casualty or theft loss is claimed must be listed on Form 4684.<br />(2) Certain Trade or Business Expenses (including, for purposes of this section, the following six expenses as they relate to the rental of property):<br />(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e) must be followed.<br />(b) Legal Expenses: The amount claimed must be stated. This section does not apply, however, to amounts properly characterized as capital expenditures, personal expenses, or non-deductible lobbying or political expenditures, including amounts that are required to be (or that are) amortized over a period of years.<br />(c) Specific Bad Debt Charge-off: The amount written off must be stated.<br />(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, Compensation of Officers , must be completed when required by its instructions. The time devoted to business must be expressed as a percentage as opposed to “part” or “as needed.” This section does not apply to “golden parachute” payments, as defined under section 280G. This section will not apply to the extent that remuneration paid or incurred exceeds the employee-remuneration deduction limitations under section 162(m), if applicable.<br />(e) Repair Expenses: The amount claimed must be stated. This section does not apply, however, to any repair expenses properly characterized as capital expenditures or personal expenses.<br />(f) Taxes (other than foreign taxes): The amount claimed must be stated.<br />(3) Differences in book and income tax reporting.<br />For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below, the information provided must reasonably apprise the Service of the potential controversy concerning the tax treatment of the item. If the information provided does not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately disclose the item (see Part II of the instructions for those forms).<br />Note: An item reported on a line with a pre-printed description, shown on an attached schedule or “ itemized” on Schedule M-1, may represent the aggregate amount of several transactions producing that item (i.e., a group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business). In some instances, a potentially controversial item may involve a portion of the aggregate amount disclosed on the schedule. The Service will not be reasonably apprised of a potential controversy by the aggregate amount disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R regarding that portion of the item.<br />Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an attachment when directed by the instructions), will not constitute an adequate disclosure.<br />Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new Schedule B, Additional Information for Schedule M-3 Filers, must also be completed. For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional Information for Schedule M-3 Filers, must also be completed. When required, these new Schedules are necessary to constitute adequate disclosure.<br />(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items).<br />(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.<br />(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement , of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items) and Column (d), Income (Loss) per Tax Return , of Part II (reconciliation of income (loss) items); and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).<br />(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss) Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).<br />(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items).<br />(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement , of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).<br />(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation for Foreign Corporations With Total Assets of $10 Million or More: Column (b), Temporary Difference, Column (c), Permanent Difference , and Column (d), Other Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).<br />(4) Foreign Tax Items:<br />(a) International Boycott Transactions: Transactions disclosed on Form 5713, International Boycott Report; Schedule A, International Boycott Factor ( Section 999(c)(1)) ; Schedule B, Specifically Attributable Taxes and Income ( Section 999(c)(2)); and Schedule C, Tax Effect of the International Boycott Provisions , must be completed when required by their instructions.<br />(b) Treaty-Based Return Position: Transactions and amounts under section 6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), must be completed when required by its instructions.<br />(5) Other:<br />(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to the return.<br />(b) Employee Business Expenses: Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach to the return. This section does not apply to club dues, or to travel expenses for any non-employee accompanying the taxpayer on the trip.<br />(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach to the return.<br />(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the return.<br />5. Effective Date<br />This revenue procedure applies to any income tax return filed on a 2010 tax form for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax form in 2011 for a short taxable year beginning in 2011.<br />6. Drafting Information<br />The principal author of this revenue procedure is Francis M. McCormick of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Branch 2 of Procedure and Administration at (202) 622-4940 (not a toll free call).Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-88731455145750742342010-10-01T10:19:00.001-04:002010-10-01T10:19:42.963-04:00The Small Business Jobs Act of 2010The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details. <br />Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000. <br />The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). <br />Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).<br /><br />The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details. <br />Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000. <br />The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). <br />Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).<br />If you've recently started a business, or if you're in the process of starting one now, you should be aware of a recent tax law change that could make a big difference in your tax bill. The recently enacted 2010 Small Business Jobs Act doubles the amount of start-up expenses that someone starting a business in 2010 can write off this year. Here are the details. <br />Generally, expenses incurred before a business begins don't generate any deductions or other current tax benefits. However, under pre-2010 Small Business Jobs Act law, taxpayers, whether they were individuals, corporations or partnerships, were permitted to elect to write off up to $5,000 of “start-up expenses” in the year business began, and the rest could be deducted over a period of 180 months. The $5,000 figure was reduced by the excess of total start-up costs over $50,000. You were deemed to have made this election unless you opted out. <br />The new law doubles the amount that can be written off for 2010 to $10,000 and increases the phaseout threshold from $50,000 to $60,000. It is important to note that this increased deduction is temporary, and only applies to tax years beginning in 2010. <br />Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a startup expense is the cost of analyzing the potential market for a new product. <br />As you can see, it's important to keep a record of these start-up expenses, and to make the appropriate decision regarding the write-off election. As mentioned above, if you opt out of the election, there is no current tax benefit derived for the eligible expenses covered by the election. Also, you should be aware that an election either to deduct or to amortize start-up expenditures, once made, is irrevocable.<br />Analysis of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (i.e., Title II of HR 5297, generally referred to in the Analysis as the “2010 Small Business Act”), as signed into law by the President on Sept. 27, 2010 ( PL 111-240, 9/27/2010 ). <br />The 2010 Small Business Act includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized Code Sec. 6707A penalty rules. <br /> RIA observation: “The Small Business Jobs Act of 2010” is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.<br />Here are the highlights of the tax and pension changes in the 2010 Small Business Act. <br />Dollar amounts for expensing liberalized. For tax years beginning in 2010, the 2010 Small Business Act increases the maximum Code Sec. 179 expensing amount from $250,000 to $500,000 and the beginning-of-phaseout amount from $800,000 to $2,000,000. For tax years beginning in 2011, the same $500,000 maximum expensing amount and $800,000 beginning-of-phaseout amount will apply even though, under pre-2010 Small Business Act law, those amounts had been scheduled to revert to $25,000 and $200,000, respectively. <br /> RIA observation: Virtually all small businesses and many medium sized businesses that don't have heavy machinery and equipment needs would be able to use expensing. For property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction won't phase out completely until the cost of expensing-eligible property exceeds $2,500,000 ($2,000,000 beginning-of-phaseout amount) + $500,000 (dollar limitation)).<br /> RIA observation: The 2010 Small Business Act provides a welcome tax-saving windfall to taxpayers that already have placed in service Code Sec. 179 eligible property at a cost that exceeded the pre-2010 Small Business Act dollar amount limits.<br />Qualified real property expensing. For any tax year beginning in 2010 or 2011, a taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property. (Certain types of property, such as that used for lodging, would not be eligible.) (Code Sec. 179(f)(1) ) The dollar cap applies to the aggregate cost of qualified real property. This change applies to property placed in service after Dec. 31, 2009, in tax years beginning after that date. <br /> RIA observation: This is the first time that Code Sec. 179 expensing can be claimed for realty. Under pre-2010 Small Business Act law, the expensing election was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software.<br />However, no amount attributable to qualified real property can be carried over to a tax year beginning after 2011, but to the extent that any amount cannot be carried over to a tax year beginning after 2011, the Code will be applied as if no Code Sec. 179 expensing election had been made for that amount. <br />Other expensing changes. The 2010 Small Business Act also provides that a taxpayer's ability to revoke a Code Sec. 179 election without IRS consent applies to any tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(c)(2) ) Additionally, computer software is qualifying property for purposes of the Code Sec. 179 election if it is placed in service in a tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(d)(1)(A)(ii) ) <br />Bonus first-year depreciation extended through 2010. The 2010 Small Business Act extends 50% bonus first-year depreciation for one year, i.e., makes it available for qualifying property acquired and placed in service in 2010 (as well as 2011, for certain long-lived property). (Code Sec. 168(k)(2)(A)(iv) and Code Sec. 168(k)(2)(A)(iii) ) <br /> RIA observation: Bonus depreciation provides an extra writeoff to all businesses, large or small, and a windfall to taxpayers that already have bought and placed in service bonus-depreciation-eligible property in 2010.<br />First year dollar cap for autos increased by $8,000. Under Code Sec. 280F , depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos is subject to dollar limits that are annually adjusted for inflation. The 2010 Small Business Act boosts the first year business-auto write-off by $8,000 (i.e., from $3,060 to $11,060 for autos and from $3,160 to $11,160 for light trucks or vans) for vehicles that are qualified property for bonus depreciation purposes (i.e., are new and acquired and placed in service in 2010). (Code Sec. 168(k)(2)(A)(iv) ) <br />Special long-term contract accounting rule for bonus depreciation. Bonus depreciation will be decoupled from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less. More specifically, for property placed in service after Dec. 31, 2009, solely for purposes of determining the percentage of completion under Code Sec. 460(b)(1)(A) , the cost of qualified property will be taken into account as a cost allocated to the contract as if bonus depreciation had not been enacted. (Code Sec. 460(c)(6) ) Qualified property is property otherwise eligible for bonus depreciation that has a MACRS recovery period of 7 years or less and that is placed in service after Dec. 31, 2009, and before Jan. 1, 2011 (Jan. 1, 2012, in the case of Code Sec. 168(k)(2)(B) property (certain longer-lived property)). <br />Deduction for startup expenses increased. For tax years beginning in 2010, the deduction for startup expenses under Code Sec. 195 is increased from $5,000 to $10,000 and the phaseout threshold is increased from $50,000 to $60,000. Code Sec. 195(b)(3) ) <br />100% exclusion for gain from qualified small business (QSBS) stock. There is a 100% exclusion of gain from the sale of QSBS stock (a) acquired after Sept. 27, 2010 and before Jan. 1, 2011, and (b) held for at least five years. (Code Sec. 2012 ) <br />Five-year carryback of small business unused general business credits. The general business credit (GBC) generally can't exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25% of so much of the taxpayer's net regular tax liability as exceeds $25,000. Credits in excess of this limitation may be carried back one year and forward up to 20 years. The 2010 Small Business Act extends the carryback period from one to five years for eligible small business (ESB) credits determined in tax years beginning in 2010. (Code Sec. 39(a)(4) ) <br />ESB credits, for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million. <br />ESB credits not subject to AMT. For ESB credits determined in tax years beginning in 2010, ESBs, as defined above for purposes of the longer credit carryback, may use all types of general business credits to offset their alternative minimum tax (AMT). (Code Sec. 38 ) More specifically, the tentative minimum tax will be treated as being zero for ESB credits. Thus, an ESB credit can offset both regular and AMT liability. <br />Reduced recognition period for S corp built in gains tax. Where a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at 35% on all gains that were built-in at the time of the election if the gains are recognized during the recognition period. The recognition period generally is the first ten S corporation years (or the ten-period after the transfer). For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. <br />For any tax year beginning in 2011, the 2010 Small Business Act shortens the holding period of assets subject to the built-in gains tax to 5 years if the fifth tax year in the recognition period precedes the tax year beginning in 2011. (Code Sec. 1374(d)(7) ) <br />One year self-employment tax break. For tax years beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer under Code Sec. 162(l) can be taken into account (i.e., can be deducted) in computing net earnings from self-employment. (Code Sec. 162(l)(4) ) <br />The Joint Committee on Taxation's Technical Explanation of H.R. 5297 says that it is intended that earned income within the meaning of Code Sec. 401(c)(2) be computed without regard to the deduction for the cost of health insurance. <br />Cell phones no longer listed property. For tax years beginning after Dec. 31, 2009, cell phones (and similar telecommunications equipment) are removed from the definition of listed property under Code Sec. 280F (Code Sec. 280F(d)(4)(A) ) <br />Relaxed penalty for failure to include reportable transaction information with return. Retroactively effective to penalties assessed after Dec. 31, 2006, the controversial Code Sec. 6707A penalty is revised so that the penalty for failure to disclose a reportable transaction (i.e., a transaction IRS has identified as a listed tax shelter or as having the characteristics of a tax shelter) to IRS is commensurate with the tax benefit received from the transaction. Thus, under the 2010 Small Business Act, the penalty is 75% of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals. For listed transactions, the maximum penalty is $200,000 for corporations and $100,000 for individuals, while for other reportable transactions, the maximum penalty is $50,000 for corporations and $10,000 for individuals). (Code Sec. 6707A(b) ) <br />The 2010 Small Business Act pays for its tax breaks with the following revenue raisers: <br />Information reporting for rental income. For payments made after Dec. 31, 2010, persons receiving rental income from real property will have to file information returns to IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. Exceptions are provided for individuals temporarily renting their principal residences (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs). (Code Sec. 6041(h) ) <br />Increased penalty for failure to timely file information returns. For information returns required to be filed after Dec. 31, 2010, the 2010 Small Business Act increases the Code Sec. 6721 penalties for failure to timely file information returns to IRS. The first-tier penalty increases from $15 to $30, and the calendar year maximum increases from $75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar year maximum increases from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250. <br />Increased penalty for failure to furnish a payee statement. The Code Sec. 6722 penalty for failure to furnish a payee statement is revised to provide tiers and caps similar to those applicable to the penalty for failure to file the information return. A first-tier penalty will be $30, subject to a maximum of $250,000; the second-tier penalty will be $60 per statement, up to $500,000, and the third-tier penalty will be $100, up to a maximum of $1,500,000. Limitations will apply on penalties for small businesses and increased penalties for intentional disregard that parallel the penalty for failure to furnish information returns. <br />Exception to pre-levy CDP hearing rule for Federal contractors. For levies issued after Sept. 27, 2010, IRS may issue levies before a CDP hearing with respect to Federal tax liabilities of Federal contractors identified under the Federal Payment Levy Program. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Code Sec. 6330(f)(4) ) <br />Code Sec. 457(b) plans could include Roth accounts. For tax years beginning after Dec. 31, 2010, retirement savings plans sponsored by state and local governments (i.e., governmental Code Sec. 457(b) plans) will be able to include Roth accounts. (Code Sec. 402A(e)(1) , Code Sec. 402A(e)(2) ) <br />Certain retirement plans can rollover distributions into Roth accounts. For distributions after Sept. 27, 2010, 401(k), 403(b), and governmental 457(b) plans will be able to permit participants to roll their pre-tax account balances into a designated Roth account. If the rollover is made in 2010, the participant may elect to pay the tax in 2011 and 2012. (Code Sec. 402A(c)(4) ) <br />Limit on credit for production of biofuel from cellulosic feedstocks. For fuels sold or used after Dec. 31, 2010, eligibility for the Code Sec. 40 tax credit for the production of biofuel from cellulosic feedstocks will be limited to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application). (Code Sec. 40(b)(6)(E)(iii) ) <br />Annuitization of nonqualified annuity allowed. For amounts received in tax years beginning after Dec. 31, 2010, the 2010 Small Business Act will permit a portion of an annuity, endowment, or life insurance contract to be annuitized while the balance is not annuitized, if the annuitization period is for 10 years or more, or is for the lives of one or more individuals. (Code Sec. 72(a) ) <br />Sourcing of guarantee income. Amounts received directly or indirectly for guarantees of indebtedness of the payor issued after Sept. 27, 2010 will be sourced like interest and, as a result, if paid by U.S. taxpayers to foreign persons will generally be subject to withholding tax. (Code Sec. 861(a)(9) ) This change prospectively overturns the holding in Container Corporation, Successor to Interest of Container Holdings Corporation, Successor to Interest of Vitro International Corporation, (2010) 134 TC No. 5 , that fees paid by a U.S. subsidiary to its foreign parent for guaranteeing the subsidiary's debt were analogous to payments for a service and therefore were not U.S. source income. <br />Accelerated estimated tax payment for large corporations. Estimated taxes for large corporations (those with assets of not less than $1 billion) otherwise due for July, August, or September of 2015, will be increased by 36%. <br />Cites in the analysis to the appropriate Committee Reports ( JCX-47-10 for the 2010 Small Business Act) are cited as Com Rept. <br />Click here for the relevant text of JCX-47-10. <br />The Analysis of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 is reproduced at ¶101 et seq. <br />The Client Letters and Interoffice Memos begin at ¶901 et seq. <br /> © 2010 Thomson <br /><br />Tax and Pension Provisions of the Small Business Jobs Act of 2010<br />RIA's Complete Analysis of the of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (i.e., Title II of H.R. 5297, generally referred to in the An, signed into law by the President on September 27. The 2010 Small Business Act (P.L. 111-240) includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized Code Sec. 6707A penalty rules. The Small Business Jobs Act of 2010 is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules. <br /> Code Sec. 179 expensing limit increases to $500,000 and phaseout threshold increases to $2,000,000 for tax years beginning in 2010 and 2011<br />Code Sec. 179(b)(1), as amended by 2010 Small Business Act §2021(a)(1)<br />Code Sec. 179(b)(2), as amended by 2010 Small Business Act §2021(a)(2)<br />Generally effective: Property placed in service in tax years beginning after Dec. 31, 2009<br />Committee Reports, see ¶5605 <br />Generally, taxpayers can elect to treat the cost of any section 179 property (defined below) placed in service during the tax year as an expense which is not chargeable to capital account, and any cost so treated is allowed as a deduction for the tax year in which the section 179 property is placed in service, see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq. <br />Under pre-2010 Small Business Act law, the deductible Code Sec. 179 expense could not exceed $250,000 (dollar limitation) in the case of a tax year beginning in 2008 through 2010, and the maximum deductible expense had to be reduced (i.e., phased out, but not below zero) by the amount by which the cost of section 179 property placed in service during a tax year beginning in 2008 through 2010 exceeded $800,000 (beginning-of-phaseout limitation). FTC 2d/Fin ¶L-9900; , FTC 2d/Fin ¶L-9907; USTR ¶1794.01; TaxDesk ¶268,411; The $250,000 and $800,000 amounts were not adjusted for inflation, see FTC 2d/Fin ¶L-9907.1; USTR ¶1794.01; TaxDesk ¶268,411; . <br /> RIA illustration 1: In 2010, T, a calendar-year taxpayer, places into service section 179 property with a cost of $1,000,000. Under pre-2010 Small Business Act law, the maximum amount T could elect to expense was $50,000: $250,000 (maximum expense for 2010) − $200,000 (the amount by which the cost of section 179 property placed in service, $1,000,000, exceeded the beginning-of-phaseout amount for 2010, $800,000).<br />Under pre-2010 Small Business Act law, for tax years beginning after 2010, the dollar limitation was to be $25,000 and the beginning-of-phaseout amount was to be $200,000. FTC 2d/Fin ¶L-9900; , FTC 2d/Fin ¶L-9907; USTR ¶1794.01; TaxDesk ¶268,411; The $25,000 and $200,000 amounts were not to be adjusted for inflation, see FTC 2d/Fin ¶L-9907.1; USTR ¶1794.01; TaxDesk ¶268,411; . <br />Under pre-2010 Small Business Act law, qualifying property for purposes of the Code Sec. 179 expensing election (“section 179 property”) was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software placed in service in tax years beginning before 2011. FTC 2d/Fin ¶L-9901; , FTC 2d/Fin ¶L-9922; USTR ¶1794.02; TaxDesk ¶268,424; <br />The following concepts and computations are affected by the amount of the Code Sec. 179 deduction limit, and the beginning-of-phaseout amount, for a particular tax year: <br />• 50% bonus depreciation for “qualified disaster assistance property,” see FTC 2d/Fin ¶L-9366; USTR ¶1684.085; TaxDesk ¶267,756; ; <br />• the expense deduction ceiling amount for partnerships and partners, S corporations and their shareholders. FTC 2d/Fin ¶L-9900; FTC 2d/Fin ¶L-9909; USTR ¶1794.01; TaxDesk ¶268,414; ; and <br />• the maximum Code Sec. 179 expense deduction and phaseout amount for enterprise zone businesses, see FTC 2d/Fin ¶L-9951; , FTC 2d/Fin ¶L-9952; USTR ¶13,97A4; , USTR ¶1794.01; TaxDesk ¶268,402; , TaxDesk ¶268,413; . <br />New Law. The 2010 Small Business Act provides that, for tax years beginning in 2010 or 2011: <br />... the dollar limitation on the Code Sec. 179 expense deduction is $500,000 (Code Sec. 179(b)(1)(B) as amended by 2010 Small Business Act §2021(a)(1)) , and <br />... the reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phaseout amount). (Code Sec. 179(b)(2)(B) as amended by 2010 Small Business Act §2021(a)(2)) <br />Thus, for tax years beginning in 2010 and 2011, the maximum amount a taxpayer can expense is increased to $500,000 and the phase-out threshold amount is increased to $2 million. (Com Rept, see ¶5605) <br /> RIA observation: Thus, the $500,000 amount (discussed above) of qualified property that can be expensed is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during 2010 or 2011 exceeds $2,000,000. Accordingly, for property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction phases out completely when the cost of the property exceeds $2,500,000 ($2,000,000 (beginning-of-phaseout amount) + $500,000 (dollar limitation)).<br />For tax years beginning after 2011, the 2010 Small Business Act provides for a $25,000 dollar limitation on the Code Sec. 179 expense deduction (Code Sec. 179(b)(1)(C) as amended by 2010 Small Business Act §2021(a)(1)) and a $200,000 beginning-of-phaseout amount. (Code Sec. 179(b)(2)(C) as amended by 2010 Small Business Act §2021(a)(2)) <br /> RIA observation: Thus, the reversion to the $25,000 dollar limitation and $250,000 beginning-of-phaseout amount will take effect for tax years beginning in 2012 and later, one year later than under pre-2010 Small Business Act law.<br /> RIA observation: The 2010 Small Business Act's increased expensing limits should help stimulate the economy by motivating taxpayers, in the short term, to invest in section 179 property (as defined above) before the lower deduction ($25,000) and phaseout thresholds ($200,000) take effect in 2012 and later tax years. According to a Senate News release dated July 28, 2010, expensing is an important tool for small businesses because it is the most accelerated type of depreciation. A Floor Statement of Senator Max Baucus dated July 28, 2010, provides that the increase in the Code Sec. 179 thresholds in the 2010 Small Business Act will effectively decrease the cost of newly purchased equipment (making it more economical for businesses to invest), increase businesses' cash flow, and encourage them to make further capital investments.<br /> RIA illustration 2: Z, a calendar-year taxpayer, places into service in 2010 section 179 property with a cost of $1,000,000. The maximum amount Z can elect to expense is $500,000: $500,000 (maximum expense for 2010) − $0 (the amount by which the cost of section 179 property placed in service during 2010, $1,000,000, exceeds the beginning-of-phaseout amount for 2010, $2,000,000).<br />For the eligibility for a Code Sec. 179 deduction of “qualified real property” placed in service in tax years beginning in 2010 or 2011, see ¶102 . <br />For the one-year extension of the provision permitting revocation of a Code Sec. 179 election without IRS consent to apply to Code Sec. 179 elections made for tax years beginning in 2011, see ¶103 . <br />For the one-year extension of the eligibility of off-the-shelf computer software for Code Sec. 179 expensing to apply to property placed in service in tax years beginning in 2011, see ¶103 . <br />Effective: Property placed in service after Dec. 31, 2009, in tax years beginning after Dec. 31, 2009. (2010 Small Business Act §2021(e)(1)) <br /> <br /> Code Sec. 195 specified deduction limit and phaseout for start-up costs are increased to $10,000 and $60,000, respectively, for 2010<br />Code Sec. 195(b)(3), as amended by 2010 Small Business Act §2031(a)<br />Generally effective: Tax years beginning after Dec. 31, 2009 and before Jan. 1, 2011<br />Committee Reports, see ¶5608 <br />Start-up expenses of a trade or business are not deductible unless the taxpayer elects to deduct them. A taxpayer is deemed to have made this election unless it chooses to forgo the election by clearly electing to capitalize those costs on the return for the tax year in which the trade or business began, see FTC 2d/Fin ¶L-5001; , FTC 2d/Fin ¶L-5001.1; USTR ¶1954; , USTR ¶1954.03; TaxDesk ¶301,001; , TaxDesk ¶301,001.1; . <br />Under Code Sec. 195(b)(1)(A)(ii) , a taxpayer can elect a current deduction for up to $5,000 of start-up expenditures in the tax year in which the active trade or business begins. However, this $5,000 amount is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $50,000 (the deduction phaseout threshold). FTC 2d/Fin ¶L-5000; FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; The remainder of the start-up expenditures can be claimed as a deduction ratably over 180 months starting with the month the active trade or business began, see FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; . <br /> RIA observation: Thus, in the tax year in which an active trade or business begins, a taxpayer may be able to claim both the up-to-$5,000 deduction and the ratable portion of any excess start-up costs.<br /> RIA observation: These rules primarily benefit smaller businesses. They can elect to deduct currently all or most of their start-up expenditures. Larger start-ups have to deduct their start-up expenditures over 180 months.<br />All start-up expenditures related to a particular trade or business, whether incurred before or after Oct. 22, 2004 (the date that the $5,000/$50,000 rule discussed above came into effect), are considered in determining whether the cumulative cost of start-up expenditures exceeds the deduction phaseout threshold, see FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; . <br />New Law. The 2010 Small Business Act provides that, in the case of a tax year beginning in 2010, Code Sec. 195(b)(1)(A)(ii) (discussed above) is applied— (Code Sec. 195(b)(3) as amended by 2010 Small Business Act §2031(a)) <br />(A) by substituting “$10,000” for “$5,000,” and (Code Sec. 195(b)(3)(A) ) <br />(B) by substituting “$60,000” for “$50,000.”(Code Sec. 195(b)(3)(B) ) <br />Thus, for tax years beginning in 2010, the 2010 Small Business Act increases the amount of start-up expenses a taxpayer can elect to deduct from $5,000 to $10,000. The 2010 Small Business Act also increases the deduction phaseout threshold so that the $10,000 is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $60,000. (Com Rept, see ¶5608) <br /> RIA observation: If a taxpayer begins an active trade or business in a tax year beginning in 2010 and the taxpayer's business start-up expenses are $10,000 or less, the taxpayer can deduct those expenses in full in 2010.<br /> RIA illustration 1: X Corp., a calendar year taxpayer, incurs $10,000 of start-up expenditures that relate to an active trade or business that begins on July 1, 2010. If X elects to forgo the election to capitalize start-up expenses (as discussed above), X could deduct the entire amount of the start-up expenditures for tax year 2010.<br /> RIA illustration 2: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $56,000. For 2010, X can deduct $10,000 plus $1,533, the portion of the remaining $46,000 ($56,000 − $10,000) that is allocable to July 2010 through Dec. 2010 ($46,000/180 × 6).<br /> RIA illustration 3: Y Corp. is a fiscal year taxpayer with a fiscal year of July 2010 through June 2011, and incurs start-up expenditures of $56,000 for an active trade or business that begins on July 1, 2010. For that fiscal year, Y can deduct $10,000 plus $3,067, the portion of the remaining $46,000 ($56,000 − $10,000) that is allocable to July 2010 through June 2011 ($46,000/180 × 12).<br /> RIA observation: As Illustrations 2 and 3 above show, for total expenditures up to and including $60,000 for a trade or business that begins in 2010, a taxpayer can deduct, in the year the trade or business began, $10,000 of the start-up costs, plus the ratable portion of start-up costs over $10,000 incurred in the tax year in which the active trade or business began.<br /> RIA illustration 4: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $69,500. For 2010, X can deduct $500 ($10,000 − ($69,500 − $60,000)) plus $2,300, the portion of the remaining $69,000 ($69,500 − $500) allocable to July 2010 through Dec. 2010 ($69,000/180 × 6).<br /> RIA illustration 5: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $210,000. For 2010, X can deduct $7,000 ($210,000/180 × 6), the amount allocable to July 2010 through Dec. 2010.<br /> RIA observation: Since the $10,000 and $60,000 amounts discussed above only apply for tax years beginning in 2010, presumably, for tax years beginning in 2011 and beyond, the $5,000 and $50,000 amounts will again apply, in the absence of additional legislation.<br />Effective: Tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2031(b)) and before Jan. 1, 2011 (Code Sec. 195(b)(3) ) <br /><br />Gain exclusion for qualified small business stock (QSBS) is temporarily increased to 100% for both regular tax and AMT purposes<br />Code Sec. 1202(a)(3), as amended by 2010 Small Business Act §2011(b)(2)<br />Code Sec. 1202(a)(4), as amended by 2010 Small Business Act §2011(a)<br />Generally effective: Stock acquired after Sept. 27, 2010 and before Jan. 1, 2011<br />Committee Reports, see ¶5601 <br />Noncorporate taxpayers can, within limits (see below), exclude a percentage of the gain realized on the sale or exchange of “qualified small business stock” (QSBS) held for more than five years. Under pre-2010 Small Business Act law, the excluded percentage was 50% (60% for certain gain attributable to QSBS in a qualified business entity, see below), but was 75% for any QSBS acquired after Feb. 17, 2009 and before Jan. 1, 2011. FTC 2d/Fin ¶I-9100; et seq.USTR ¶12,024; TaxDesk ¶246,600; et seq. <br />For regular income tax purposes, the portion of the gain that is includible in taxable income is taxed at a maximum rate of 28% (Com Rept, see ¶5601) . FTC 2d/Fin ¶I-5100; FTC 2d/Fin ¶I-5110.13; USTR ¶14.08; TaxDesk ¶223,323; . Thus, for regular tax purposes, the gain from QSBS that is subject to the 50% exclusion is taxed at a maximum effective rate of 14%, and the gain from QSBS that is subject to the 75% exclusion is taxed at a maximum effective rate of 7%, see FTC 2d/Fin ¶I-9100.1; et seq. USTR ¶12,024; TaxDesk ¶246,600.1; et seq. <br />For alternative minimum tax (AMT) purposes, under pre-2010 Small Business Act law, a percentage of the excluded gain was a preference item, and, thus, included in income, regardless of when the stock was acquired. For dispositions made in tax years beginning before Jan. 1, 2011, the percentage of the otherwise-excluded gain that was a preference item (the preference percentage) was in all cases 7% (7% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began after Dec. 31, 2000 (except for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 28% (28% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began before Jan. 1, 2001 (and for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 42% (42% preference stock). FTC 2d/Fin ¶A-8300; FTC 2d/Fin ¶A-8304; FTC 2d/Fin ¶A-8304.1; USTR ¶574; TaxDesk ¶697,004; TaxDesk ¶697,004.1; <br />For AMT purposes, the portion of the total gain that is includible in taxable income is taxed at a maximum rate of 28%. Thus, for AMT purposes: (1) gain from 7% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 14.98%; (2) gain from 28% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 17.92%; (3) gain from 42% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 19.88%, and (4) gain from 28% preference stock subject to the 75% exclusion is taxed at a maximum effective rate of 12.88% (see the observation below), see FTC 2d/Fin ¶A-8304; , FTC 2d/Fin ¶A-8304.1; TaxDesk ¶697,004; , TaxDesk ¶697,004.1; . <br /> RIA observation: The 75% exclusion is treated, immediately above, as applying only to 28% preference stock (and not to 7% or 42% preference stock) for the following reasons: (1) stock is 7% preference stock only if disposed of in a tax year beginning before Jan. 1, 2011 (above), but, because, the 75% exclusion apples only to stock acquired after Feb. 17, 2009 (see above), stock eligible for the 75% exclusion cannot both meet the 5-year holding period requirement for QSBS and be disposed of in a tax year beginning before Jan. 1, 2011, and (2) stock acquired after Feb. 17, 2009 can be 42% preference stock only in the unlikely event that it was acquired under an option, or other right or obligation, acquired before Jan. 1, 2001 (above).<br />Generally, for gain to be excludible, the taxpayer must acquire the stock at original issue, and after Aug. 10, '93, see FTC 2d/Fin ¶I-9102; USTR ¶12,024; TaxDesk ¶246,636; . The gain excludible by a taxpayer for the QSBS of any one corporation is the greater of: (1) ten times the taxpayer's basis (excluding post-issuance basis increases) in that corporation's QSBS disposed of by the taxpayer in the tax year, or (2) $10 million ($5 million if married filing separately), and the $10 million (or $5 million) amount is reduced by the total amount of eligible gain taken into account by the taxpayer on dispositions of that corporation's QSBS in earlier tax years (referred to below as the basis-or-dollar-amount limit rule), see FTC 2d/Fin ¶I-9112; USTR ¶12,024.01; TaxDesk ¶246,603; . QSBS must be issued by a corporation that meets a gross assets limit and certain other requirements, see FTC 2d/Fin ¶I-9103; et seq. USTR ¶12,024.02; TaxDesk ¶246,641; et seq. <br />Under pre-2010 Small Business Act law, for QSBS in a corporation that also qualified as a “qualified business entity” (QBE), the exclusion rate was 60% (but 75% if the 75% rate discussed above would otherwise apply). No gain attributable to periods after Dec. 31, 2014 was eligible for the 60% (or 75%) rate. A QBE for purposes of the QSBS rules is a corporation that meets the requirements of a QBE under the empowerment zone rules, except that the DC Enterprise Zone isn't treated as an empowerment zone.FTC 2d/Fin ¶I-9100; FTC 2d/Fin ¶I-9100.1B; USTR ¶12,024; TaxDesk ¶246,602; <br />New Law. The 2010 Small Business Act provides that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011— (Code Sec. 1202(a)(4) as amended by 2010 Small Business Act §2011(a)) <br />(1) the 50% gain exclusion for QSBS for regular tax purposes is increased to 100%; (Code Sec. 1202(a)(4)(A) ) <br />(2) the 60% gain exclusion for QSBS issued by a QBE (see above) doesn't apply; (Code Sec. 1202(a)(4)(B) ) <br />(3) and the treatment of a percentage of the excluded gain for QSBS as an AMT preference item (see above) doesn't apply. (Code Sec. 1202(a)(4)(C) ) <br />Additionally, the 2010 Small Business Act changes the last day on which QSBS can be acquired to be eligible for the 75% gain exclusion from Dec. 31, 2010 to Sept. 27, 2010 . (Code Sec. 1202(a)(3) as amended by 2010 Small Business Act §2011(b)(2)) <br /> RIA observation: Code Sec. 1202(a)(4)(B) (item (2) on the above list) assures that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011 and issued by a QBE, the 100% exclusion provided by Code Sec. 1202(a)(4)(A) (item (1) on the above list) applies, and not the 60% exclusion that would have otherwise applied to QSBS issued by a QBE under pre-2010 Small Business Act law (see above).<br /> RIA observation: The date change made by the 2010 Small Business Act to Code Sec. 1202(a)(3) (see above) assures that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011, the 100% exclusion provided by Code Sec. 1202(a)(4)(A) applies, and not the 75% exclusion that would have otherwise applied under pre-2010 Small Business Act law (see above).<br /> RIA observation: For QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011, no regular tax or AMT is imposed on the sale of QSBS held for more than five years (see above).<br /> RIA illustration : On Oct. 1, 2010, T, an individual, acquires at original issuance 100 shares of QSBS at a total cost of $100,000. The stock isn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001. T sells all of the shares on Oct 2, 2015 for $1.1 million. Assuming that none of the possible income exclusion is barred by the “basis-or-dollar-amount limit rule” (see above), T can exclude from income all of the $1 million of gain for regular tax and AMT purposes.<br /> RIA observation: If pre-2010 Small Business Act law had applied in the above illustration, the maximum effective tax rates on the $1 million of gain would have been a regular tax rate of 7% (under the 75% exclusion, see above) and an AMT rate of 12.88% (because the stock is 28% preference stock, i.e., stock disposed of after Dec. 31, 2010 that wasn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001, see above).<br /> RIA observation: Unless Congress extends beyond Dec. 31, 2010, the deadline for acquiring QSBS eligible for the 100% gain exclusion, the 50% and 60% gain exclusion rules will again be in effect, and the percentage of otherwise-excluded gain treated as an AMT preference item will be, in most cases, 28% (see above).<br />Effective: Stock acquired after Sept. 27, 2010 (2010 Small Business Act §2011(c)) and before Jan. 1, 2011. (Code Sec. 1202(a)(4) as amended by 2010 Small Business Act §2011(a)) <br /><br />5-year carrybacks are allowed for unused eligible small business credits determined in the first tax year beginning in 2010<br />Code Sec. 39(a)(3)(A), as amended by 2010 Small Business Act §2012(b)<br />Code Sec. 39(a)(4), as amended by 2010 Small Business Act §2012(a)<br />Generally effective: Credits determined for the taxpayer's first tax year beginning in 2010<br />Committee Reports, see ¶5602 <br />Code Sec. 38 provides a tax credit (the general business credit or GBC) that consists of the component credits listed in Code Sec. 38(b) , see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; . <br />Under Code Sec. 38(c)(1) (the tax liability limit), the GBC is limited to the excess, if any, of the taxpayer's “net income tax” (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the GBC) over the greater of (1) the taxpayer's tentative minimum tax or (2) 25% of the portion of the taxpayer's “net regular tax liability” (generally, the regular income tax reduced by most non-refundable credits other than the GBC) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule), see FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; . <br />Code Sec. 39 provides that amounts of GBC that aren't used because of the tax liability limit can be carried back and carried forward for specified periods. Under pre-2010 Small Business Act law, the carryback period was, generally, one tax year, and the carryforward period was, generally, 20 tax years. FTC 2d/Fin ¶L-15200; FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; Specifically,Code Sec. 39(a)(1) provides that the unused credit is a carryback to the tax year preceding the unused credit year and a carryforward to each of the 20 tax years following the unused credit year. Additionally, Code Sec. 39(a)(2)(A) provides that the unused credit is carried to the earliest of the 21 tax years to which the credit can be carried, and Code Sec. 39(a)(2)(B) provides that the unused credit is carried to each of the other 20 tax years to the extent that the unused credit can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (which, in substance, apply the tax liability limit to carrybacks and carryforwards), see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; . <br />However, under Code Sec. 39(d) , no component credit is allowed to be carried back to any tax year before the first tax year for which the credit is allowable (i.e., any tax year before the tax year that the legislation which provides the component credit first allows the credit (the Code Sec. 39(d) limitation)), see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; . <br />Under an exception to the generally applicable one-year carryback period, Code Sec. 39(a)(3) provides that an unused portion of the GBC that is attributable to the marginal well production credit (the marginal well portion) is a carryback to each of five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year, see above). Additionally, the unused marginal well portion is carried to the earliest of the 25 tax years (instead of 21 tax years, see above) to which the portion can be carried, and to each of the other 24 tax years (instead of 20 tax years, see above) to the extent that the unused marginal well portion can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (see above), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; . <br />Code Sec. 39(a)(3) also provides that the five-year carryback period and other rules discussed immediately above apply notwithstanding the Code Sec. 39(d) limitation (and, thus, an unused marginal well portion can be carried back to years otherwise barred by the Code Sec. 39(d) limitation), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; . <br />In addition, Code Sec. 39(a)(3) provides that, for the marginal well portion, the carryback and carryforward rules apply separately from the business credit, except for the marginal well portion (the marginal well separate application rule), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; . <br />Under Code Sec. 196 , some components of the GBC, if not allowed by the end of the carryforward period, can be deducted at that time, see FTC 2d/Fin ¶L-15212; USTR ¶1964; TaxDesk ¶380,510; . <br />New Law. “Eligible small business credits” (as defined below and in ¶301 ) that are determined in the first tax year of the taxpayer beginning in 2010 but are unused (i.e., aren't allowed due to the tax liability limit described above): (Code Sec. 39(a)(4) as amended by 2010 Small Business Act §2012(a)) <br />(1) are carried back to each of the five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year as provided in Code Sec. 39(a)(1) , see above), (Code Sec. 39(a)(4)(A)(i) ) <br />(2) are carried, in their entire amount, to the earliest of the 25 tax years (instead of 21 tax years as provided in Code Sec. 39(a)(2)(A) , see above) to which the credits can be carried, and(Code Sec. 39(a)(4)(A)(ii) ) <br />(3) are carried to each of the other 24 tax years (instead of 20 tax years as provided in Code Sec. 39(a)(2)(B) , see above) to the extent that the eligible small business credits can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (which, in substance, apply the tax liability limit to carrybacks and carryforwards, see above). (Code Sec. 39(a)(4)(A)(iii) ) <br /> RIA illustration 1: T, an eligible small business (see “Eligible small business credits” below), has a tax year that ends on June 30. For its tax year beginning July 1, 2010 (the 2011 tax year), T has determined an eligible small business credit of $100,000. However, because of the tax liability limit (see above), T isn't allowed any of the $100,000 of unused eligible small business credit in the 2011 tax year. T carries the entire $100,000 of unused eligible small business credit back to the tax year ending June 30, 2006 (the 2006 tax year), which is the both the earliest year in the five-year carryback period and the earliest tax year in which the tax liability limit doesn't bar the allowance of the $100,000 credit. <br /> RIA illustration 2: The facts are as in illustration (1) except that, because of the tax liability limit, T is allowed only $30,000 of the $100,000 of unused eligible small business credit for the 2006 tax year. T is allowed the other $70,000 of the credit in the tax year ending June 30, 2007 (the 2007 tax year), to the extent that the tax liability limit doesn't bar the allowance of the $70,000 of credit in the 2007 tax year. <br />The rules discussed above apply notwithstanding Code Sec. 39(d) . (Code Sec. 39(a)(4)(A) ) <br /> RIA observation: Thus, as is true for the marginal well production credit portion of the GBC, unused eligible small business credits can be carried back to years otherwise barred by the Code Sec. 39(d) limitation (i.e., to a tax year before the first tax year that the carried-back component credit of the GBC was allowable, see above).<br /> RIA illustration 3: The facts are as in illustration (1) except that it is additionally specified that the $100,000 of unused eligible small business credit consists solely of the agricultural chemicals security credit, which is effective only for amounts paid or incurred after May 22, 2008, see FTC 2d/Fin ¶L-18301; USTR ¶45O4; TaxDesk ¶384,064; . The $100,000 of credit is allowed in the 2006 tax year because the Code Sec. 39(d) limitation doesn't bar the carryback of the credit to that year. <br />Eligible small business credits. <br />For purposes of the rules discussed above, “eligible small business credits” are as defined in Code Sec. 38(c)(5)(B) . (Code Sec. 39(a)(4)(B) ) Thus, eligible small business credits are the sum of the general business credits as determined for the tax year for an eligible small business. (Com Rept, see ¶5602) <br /> RIA observation: That is, under Code Sec. 38(c)(5)(B) as amended by the 2010 Small Business Act, eligible small business credits (ESB credits), for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are either corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million. For further discussion, see ¶301 .<br />For the rule that requires that Code Sec. 39 (the carryback and carryforward rules, see above) apply separately to eligible small business credits, see ¶301 . <br />Coordination with marginal well production credit. <br />The marginal well separate application rule (see above) is amended to provide that for the marginal well portion of the GBC, the carryback and carryforward rules apply separately from the business credit, except for the marginal well portion or the eligible small business credits. (Code Sec. 39(a)(3)(A) as amended by 2010 Small Business Act §2012(b)) <br />Effective: Credits determined in tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2012(c)) but only for the first tax year of the taxpayer beginning in 2010.(Code Sec. 39(a)(4)(A) ) <br /> Eligible small businesses (ESBs) can offset AMT liability with general business credits in tax years beginning in 2010<br />Code Sec. 38(c)(5), as amended by 2010 Small Business Act §2013(a)<br />Code Sec. 38(c)(2)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(1)<br />Code Sec. 38(c)(3)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(2)<br />Code Sec. 38(c)(4)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(3)<br />Generally effective: Credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of those credits<br />Committee Reports, see ¶5603 <br />Code Sec. 38 provides a tax credit (the general business credit) that consists of the component credits listed in Code Sec. 38(b) , see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; . <br />Under Code Sec. 38(c)(1) (the tax liability limitation), the general business credit is limited to the excess, if any, of the taxpayer's “net income tax” (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the general business credit) over the greater of: <br />(1) the taxpayer's tentative minimum tax for the tax year (see the observation immediately below), or <br />(2) 25% of the portion of the taxpayer's “net regular tax liability” (generally, the regular income tax reduced by most non-refundable credits other than the general business credit) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule). FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; <br /> RIA observation: Under Code Sec. 55 , the tentative minimum tax is the taxpayer's alternative minimum taxable income (in excess of an exemption amount) multiplied by a percentage, and the taxpayer's actual AMT is the excess of the tentative minimum tax over the taxpayer's regular tax (after the regular tax is reduced by the foreign tax credit and certain other amounts), see FTC 2d/Fin ¶A-8101; , FTC 2d/Fin ¶A-8103; , FTC 2d/Fin ¶A-8105; USTR ¶554.01; TaxDesk ¶691,001; , TaxDesk ¶691,003; , TaxDesk ¶691,005; . Thus, a taxpayer has an AMT liability only in those tax years in which the tentative minimum tax exceeds the regular tax (reduced as described above). Accordingly, in a tax year in which a taxpayer has an AMT liability, the general business credit generally isn't allowed against either the AMT or the regular tax (if any). And, in a tax year in which the taxpayer doesn't have an AMT liability, but the tentative minimum tax is in excess of the amount computed under the 25%-in-excess-of-$25,000 rule (above), the excess may limit the extent to which the general business credit is allowed against the regular tax (if any).<br />Under pre-2010 Small Business Act law, the following general business credits could offset AMT liability: <br />... the empowerment zone employment credit (including renewal community employment credits for tax years beginning before 2010) could offset 25% of AMT under Code Sec. 38(c)(2) (see FTC ¶L-15202.1; USTR ¶384.02; TaxDesk ¶380,503; ); <br />... the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) could offset 100% of AMT under Code Sec. 38(c)(3) (see FTC ¶L-15202.2; USTR ¶384.02; TaxDesk ¶380,503.5; ); or <br />... certain enumerated specified credits could offset 100% of AMT under Code Sec. 38(c)(4) , see FTC ¶L-15202.3; USTR ¶384.02; TaxDesk ¶380,503.1; . <br />Under Code Sec. 39 , amounts of otherwise allowable general business credits that aren't allowed because of the tax liability limit can, generally, be carried back one year to the tax year before the unused credit year, and carried forward to each of the 20 years following the unused credit year, see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; . And, under Code Sec. 196 , some components of the general business credit, if not allowed by the end of the carryforward period, can be deducted at that time, see FTC 2d/Fin ¶L-15212; USTR ¶1964; TaxDesk ¶380,510; . <br />New Law. For eligible small business (ESB) credits (defined below) determined in tax years beginning in 2010 (Code Sec. 38(c)(5)(A) as amended by 2010 Small Business Act §2013(a)) ,Code Sec. 38 and Code Sec. 39 are applied separately with respect to ESB credits. (Code Sec. 38(c)(5)(A)(i) ) <br />Specifically, in applying Code Sec. 38(c)(1) (the limitation based on a taxpayer's tax liability, see FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; ) to ESB credits (Code Sec. 38(c)(5)(A)(ii) ) in tax years beginning in 2010: (Code Sec. 38(c)(5)(A) ) <br />(1) the tentative minimum tax is treated as being zero, and (Code Sec. 38(c)(5)(A)(ii)(I) ) <br />(2) the limitation based on a taxpayer's tax liability under Code Sec. 38(c)(1) (as modified by item (1), above) is reduced by the credit allowed under Code Sec. 38(a) for the tax year (i.e., the sum of the current year, carryforward, and carryback business credit amounts), other than ESB credits. (Code Sec. 38(c)(5)(A)(ii)(II) ) <br />Since the 2010 Small Business Act provides that the tentative minimum tax is treated as being zero for ESB credits (see item (1) above), an ESB credit can offset both regular and AMT liability. (Com Rept, see ¶5603) <br />For five-year carryback of ESB credits permitted under the 2010 Small Business Act, see ¶203 . <br /> RIA observation: As explained below, ESB credits include all of the credits listed in Code Sec. 38(b) (the list of the credits comprising the current year business credit, see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; ). As a practical matter, a taxpayer's current year business credit for a tax year beginning in 2010 won't include any general business credits other than ESB credits. Thus, for tax years beginning in 2010, the phrase “other than the ESB credits” in Code Sec. 38(c)(5)(A)(ii)(II) (see item (2) above) is presumably only relevant for determining the treatment of carryforwards and carrybacks of credits other than ESB credits from other tax years (i.e., from a tax year not beginning in 2010).<br /> RIA observation: The rules for ESB credits described in items (1) and (2) above are essentially identical to the rules that permit certain specified credits to offset AMT liability, see FTC ¶L-15202.3; USTR ¶384.02; TaxDesk ¶380,503.1; .<br /> RIA illustration 1: T, a sole proprietor, is an ESB (see below) and uses the calendar year as his tax year. For 2010, T has (1) a regular tax liability of $30,000 (before taking into account any credits), (2) an AMT of $15,000 (before taking into account any credits) and (3) a tentative minimum tax of $45,000. T has ESB credits of $50,000 and no other tax credits. <br />Under Code Sec. 38(c)(5)(A)(i) , the tax liability limitation is separately computed and applied. The limitation is equal to the excess of $45,000 (T's net income tax for the year) over the greater of: (a) $0 (T's tentative minimum tax treated as being zero), or (b) $1,250 (25% of the excess of T's net regular tax liability of $30,000 over $25,000). Since (b) is greater than (a), T's $45,000 of net income tax for the year is reduced by $1,250 and, thus, the tax liability limit is $43,750. Thus, for 2010, T is allowed $43,750 of his $48,000 of ESB credits in reduction of his regular tax liability and AMT. The $4,250 ($48,000 minus $43,750) of disallowed ESB credits can be separately carried back or forward to other tax years to the extent permitted by Code Sec. 39 (see above and ¶203 ).<br />ESB credits defined. <br />For purposes of Code Sec. 38(c) , the term “ESB credits” means the sum of the credits listed in Code Sec. 38(b) (the list of the component credits of the current year business credit, see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; ) that are determined for the tax year with respect to an ESB (defined below). (Code Sec. 38(c)(5)(B) ) <br />The ESB credits cannot be taken into account under: <br />... the rules permitting the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) to offset 25% of AMT under Code Sec. 38(c)(2) , <br />... the rules permitting the New York Liberty Zone employment credit (for certain wages paid or incurred before 2004) to offset AMT under Code Sec. 38(c)(3) , or <br />... the rules permitting specified credits to offset AMT under Code Sec. 38(c)(4) . (Code Sec. 38(c)(5)(B) ) <br /> RIA observation: Thus, any credit meeting the definition of an ESB credit can't be taken into account as an empowerment zone credit, a New York Liberty Zone employment credit, or as a specified credit under Code Sec. 38(c)(2) ,Code Sec. 38(c)(3) , or Code Sec. 38(c)(4) . Due to the five-year carryback for ESB credits described at ¶203 , it is generally more advantageous for a taxpayer's credits that qualify as ESB credits to be taken into account as ESB credits rather than as empowerment zone employment credits, New York Liberty Zone employment credits, or specified credits, since these credits can only be carried back one year. Also, the treatment of an empowerment zone employment credit as an ESB credit permits that credit to offset 100% (instead of only 25%) of AMT.<br />ESB defined. <br />For purposes of Code Sec. 38(c) , an ESB is, with respect to any tax year: (Code Sec. 38(c)(5)(C) ) <br />... a corporation the stock of which is not publicly traded, (Code Sec. 38(c)(5)(C)(i) ) <br />... a partnership, or (Code Sec. 38(c)(5)(C)(ii) ) <br />... a sole proprietorship, (Code Sec. 38(c)(5)(C)(iii) ) <br />if the average annual gross receipts of the corporation, partnership, or sole proprietorship for the three-tax-year period preceding the tax year does not exceed $50,000,000. (Code Sec. 38(c)(5)(C) ) For example, a calendar year corporation meets the $50 million gross receipts test for the 2010 tax year, if as of Jan. 1, 2010, its average annual gross receipts for the three-tax-year period ending on Dec. 31, 2009, does not exceed $50 million. (Com Rept, see ¶5603) <br /> RIA observation: A fiscal year taxpayer meets the $50 million gross receipts test for its tax year beginning in 2010 if its annual gross receipts for its tax years beginning in 2007, 2008, and 2009 (the three-tax-year testing period) does not exceed $50 million.<br /> RIA illustration 2: ABC Corporation, a calendar year taxpayer, had gross receipts of $75 million in 2007, $45 million in 2008, and $36 million in 2009. ABC's average annual gross receipts for the three-tax-year testing period are $52 million [($75 million + $45 million + $36 million) ÷ 3]. Since ABC's gross receipts for the three-tax-year testing period exceed $50 million, ABC isn't an ESB and its general business credits can't offset the AMT under Code Sec. 38(c)(5) .<br /> RIA observation: Although ABC's general business credits aren't ESB credits in illustration (2), any credits that are specified credits or empowerment zone employment credits can still offset ABC's AMT liability.<br />For purposes of applying the $50 million gross receipts test described above, rules similar to the rules of Code Sec. 448(c)(2) and Code Sec. 448(c)(3) (relating to the $5 million gross receipts exception to the prohibition on the use of the cash method of accounting by certain entities, see FTC 2d/Fin ¶G-2069; et seq. USTR ¶4484; TaxDesk ¶440,806; et seq.) apply. (Code Sec. 38(c)(5)(C) ) Thus, an ESB is, with respect to any tax year, a corporation, the stock of which is not publicly traded, or a partnership, which meets the gross receipts test of Code Sec. 448(c) , substituting $50 million for $5 million each place it appears. For a sole proprietorship, the gross receipts test is applied as if it were a corporation. (Com Rept, see ¶5603) <br /> RIA observation: Thus, for purposes of applying the gross receipts test in Code Sec. 38(c)(5)(C) , the following rules apply: <br />... the Code Sec. 448(c)(2) rule aggregating gross receipts of related entities in determining whether the gross receipts test is met (see FTC 2d/Fin ¶G-2071; USTR ¶4484; TaxDesk ¶440,808; ). For this purpose, entities are related if they would be treated as a single employer under Code Sec. 52(a) (aggregation of members of controlled groups of corporations, see FTC 2d/Fin ¶L-17787; USTR ¶514; TaxDesk ¶380,719; ) or Code Sec. 52(b) (aggregation of commonly controlled businesses, whether or not incorporated, see FTC 2d/Fin ¶L-17787; USTR ¶514; TaxDesk ¶380,719; ), or under Code Sec. 414(m) (aggregation of certain affiliated organizations that provide services, see FTC 2d/Fin ¶H-7953; USTR ¶4144.05; ) or Code Sec. 414(o) (aggregation under authority of IRS to prevent avoidance of employee benefit requirements through the use of separate organizations, employee leasing or other means, see FTC 2d/Fin ¶H-7925; USTR ¶4144.01; TaxDesk ¶295,340; ). Thus, even if a taxpayer would have been an ESB based on its own gross receipts, its credits aren't ESB credits, if taking into account the gross receipts of all related entities, the total average gross receipts for the three-tax-year testing period exceeded $50 million. Also, gross receipts attributable to transactions between the related entities aren't taken into account for purposes of the $50 million gross receipts test. <br />... the Code Sec. 448(c)(3)(A) rule regarding the determination of gross receipts for corporations not in existence for the entire three-year period (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). Thus, if a taxpayer (for example, a corporation) hasn't been in existence for the entire three-year period, the gross receipts test is applied on the basis of the period in which the corporation has been in existence. <br />... the Code Sec. 448(c)(3)(B) rule annualizing gross receipts in the case of a short tax year (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). Thus, the gross receipts for any tax year of less than 12 months are annualized by multiplying the gross receipts for the short period by twelve and then dividing the result by the number of months in the short period. <br />... the Code Sec. 448(c)(3)(C) rule reducing gross receipts for returns and allowances (see FTC 2d/Fin ¶G-2070; USTR ¶4484; TaxDesk ¶440,808; ). <br />... the Code Sec. 448(c)(3)(D) rule taking predecessor corporations into account in determining whether a corporation meets the gross receipts test (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). <br /> RIA illustration 3: Partnership X and Partnership Y are treated as a single entity under the Code Sec. 448(c)(2) aggregation rules. Partnership X had gross receipts of $30 million in 2007, $25 million in 2008, and $15 million in 2009. Partnership Y had gross receipts of $20 million in 2007, $35 million in 2008, and $19 million in 2009. Each partnership uses the calendar year as its tax year. Assume Partnership X has $5 million of current year business credits for 2010 and Partnership Y doesn't have any general business credits for 2010. <br />For purposes of determining whether the average annual gross receipts exceed $50 million, Partnership X and Partnership Y's average gross receipts for the three-tax-year testing period are $48 million [($30 million + $25 million + $15 million + $20 million + $35 million + $19 million) ÷ 3]. Since Partnership X and Partnership Y's average annual gross receipts ($48 million) for the three-tax-year testing period don't exceed $50 million, Partnership X and Partnership Y are both ESBs. Thus, Partnership X's general business credits are ESB credits. For the requirement that partners also must satisfy the gross receipts requirement, see below.<br /> RIA observation: For the first tax year of an entity's existence, the entity will qualify as an ESB, unless its gross receipts have to be aggregated with an existing entity (or entities) under Code Sec. 448(c)(2) , or the entity is treated as having a predecessor entity under Code Sec. 448(c)(3)(D) that had average annual gross receipts in excess of $50 million for the three-tax year testing period.<br />Partners and S corporation shareholders. <br />Credits determined with respect to a partnership or S corporation are not treated as ESB credits by any partner or shareholder unless the partner or shareholder meets the gross receipts test under Code Sec. 38(c)(5)(C) for the tax year in which the credits are treated as current year business credits. (Code Sec. 38(c)(5)(D) ) Thus, credits determined with respect to a partnership or S corporation are not treated as ESB credits by a partner or shareholder unless the partner or shareholder meets the gross receipts test for the tax year in which the credits are treated as current year business credits. (Com Rept, see ¶5603) <br /> RIA observation: Thus, for ESB credits of a partnership or an S corporation, the gross receipts requirement has to be satisfied at the entity level and at the partner or S shareholder level.<br /> RIA illustration 4: The facts are the same as in illustration (3). Partnership X has two individual partners, D and E, who each own 50% of Partnership X. <br />For the three-tax-year testing period, D had average annual gross receipts of $40 million and E had average annual gross receipts of $51 million. Since D's average annual receipts don't exceed $50 million, D can use his distributive share ($2.5 million) of X's ESB credits to offset any AMT liability. On the other hand, E, whose average annual gross receipts for the three-tax-year testing period exceed $50 million, can't use his distributive share ($2.5 million) of Partnership X's ESB credits to offset any AMT liability, unless the credits are specified credits (that can offset 100% of AMT) or empowerment zone employment credits (that can offset 25% of AMT).<br /> RIA observation: Code Sec. 38(c)(5)(D) doesn't expressly provide any rules for determining the gross receipts of individual partners and S corporation shareholders. The rules provided in Code Sec. 448(c)(2) andCode Sec. 448(c)(3) (that are incorporated by reference in Code Sec. 38(c)(5)(C) , see above) don't address issues related to individuals because the prohibition on the use of the cash method of accounting under Code Sec. 448 applies to entities rather than individuals, see FTC 2d/Fin ¶G-2054; et seq. USTR ¶4484; TaxDesk ¶440,806; . Thus, IRS may need to provide guidance on certain issues including: <br />... whether the gross receipts of an individual partner or shareholder would include his pro-rata share of the gross receipts of the partnership or S corporation even if those receipts haven't been distributed to the partner or S shareholder. <br />... whether the gross receipts of an individual partner would include the gross receipts of his spouse. <br />Ordering rules. <br />The 2010 Small Business Act makes conforming changes to the ordering rules used for calculating the tax liability limitation under Code Sec. 38(c) for the following credits by inserting “ESB credits” in the list of credits that require separate calculations for purposes of Code Sec. 38 and Code Sec. 39 : <br />... the rule permitting the empowerment zone employment credit to offset 25% of AMT. (Code Sec. 38(c)(2)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(1)) <br />... rules permitting the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) to offset AMT. (Code Sec. 38(c)(3)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(2)) <br />... rules permitting specified credits to offset AMT. (Code Sec. 38(c)(4)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(3)) <br /> RIA observation: Presumably, the effects of the amendments to Code Sec. 38(c)(2)(A)(ii)(II) , Code Sec. 38(c)(3)(A)(ii)(II) , and Code Sec. 38(c)(4)(A)(ii)(II) are to require that the taxpayer separately apply the general business credit tax liability limitations on ESB credits after doing: <br />... the combined calculation required for most other credits that make up the general business credit; <br />... the separate calculation required for the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) under Code Sec. 38(c)(2)(A) ; <br />... the separate calculation of the general business credit tax liability limitations on the New York Liberty Zone business employee credit for certain wages paid or incurred before 2004 under Code Sec. 38(c)(3)(A) ; and <br />... the separate calculation of the general business credit tax liability limitations on the specified credits under Code Sec. 38(c)(4)(A) . <br />For a tax year beginning in 2010, the above rules will presumably only affect a taxpayer's carryforwards of the empowerment zone employment credit, the New York Liberty Zone business employee credit, and the specified credits, because the ESB credits for that tax year will include those credits.<br /> RIA observation: Thus, as is true for the empowerment zone employment credit, the New York Liberty Zone business employee credit, and the specified credits, carrybacks and carryforwards of any unused ESB credits are calculated separately (rather than in a combined calculation). For five-year carryback for ESB credits, see ¶203 .<br />Redesignation. <br />The 2010 Small Business Act redesignated pre-2010 Small Business Act Code Sec. 38(c)(5) (providing special rules for determining the general business credit of married individuals, controlled groups, estates and trusts, and banks, regulated investment companies, and real estate investment trusts) as Code Sec. 38(c)(6) . (2010 Small Business Act §2013(a)) <br />Effective: Credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of those credits. This effective date applies to the rules of 2010 Small Business Act §2013(a) (i.e.,Code Sec. 38(c)(5) , as discussed above). (2010 Small Business Act §2013(d)) <br /> RIA observation: The 2010 Small Business Act doesn't provide an effective date for the conforming changes made to the ordering rules (see above) by 2010 Small Business Act §2013(c) . Presumably, the effective date for those changes is Sept. 27, 2010.<br />Rules for apportioning the limitation on the minimum tax credit among members of a controlled group of corporations are corrected<br />Code Sec. 55(e)(5), as amended by 2010 Small Business Act §2013(b)<br />Generally effective: Sept. 27, 2010<br />Committee Reports, see ¶None <br />In computing the otherwise allowable minimum tax credit (see FTC 2d/Fin ¶A-8800; et seq. USTR ¶554.01; TaxDesk ¶691,500; et seq.) for a tax year that a corporation is exempt from the alternative minimum tax (AMT) as a small corporation (as defined in FTC 2d/Fin ¶A-8140; et seq. USTR ¶554.01; TaxDesk ¶691,200; et seq. ), the corporation has to reduce its regular tax liability for that year (after reduction by specified credits) by 25% of the excess of the liability over $25,000. Under pre-2010 Small Business Act law, Code Sec. 55(e)(5) provided that the $25,000 amount was apportioned among members of a controlled group of corporations under rules similar to the rules of Code Sec. 38(c)(3)(B) for purposes of computing the limit on the general business credit. FTC 2d/Fin ¶A-8807; USTR ¶554.01; TaxDesk ¶691,507; <br /> RIA observation: The reference to Code Sec. 38(c)(3)(B) in Code Sec. 55(e)(5) is incorrect because Code Sec. 38(c)(3)(B) contains the definition of the New York Liberty business employee credit rather than rules for apportioning the limit on the general business credit among members of a controlled group of corporations. The incorrect reference resulted from Congress's failure to change the reference in Code Sec. 55(e)(5) to reflect two earlier redesignations of the rules formerly provided in Code Sec. 38(c)(3)(B) by 2002 Job Creation and Worker Assistance Act §301(b)(1) (Sec. 301(b)(1), PL 107-147, 3/9/2002 ) and 2004 Jobs Act § 711(a) (Sec. 711(a), PL 108-357, 10/22/2004 ). Under pre-2010 Small Business Act law, the apportionment rules were provided in Code Sec. 38(c)(5)(B) , see FTC 2d/Fin ¶L-15202.2; USTR ¶384.02; TaxDesk ¶380,503.5; . For the redesignation of Code Sec. 38(c)(5)(B) by the 2010 Small Business Act as Code Sec. 38(c)(6)(B) , see ¶301 .<br />New Law. The 2010 Small Business Act strikes the reference to Code Sec. 38(c)(3)(B) in Code Sec. 55(e)(5) and inserts a reference to Code Sec. 38(c)(6)(B) .(Code Sec. 55(e)(5) as amended by 2010 Small Business Act §2013(b)) <br /> RIA observation: According to a Senate Summary of Changes Made in the Substitute Amendment (dated July 21, 2010), the 2010 Small Business Act provides a correct cross reference to the general business credit provision on controlled groups from elsewhere in the Code.<br />Effective: Sept. 27, 2010 <br /><br />Employer-provided cell phones don't require strict “listed property” substantiation for employer's deduction and employee's exclusion as fringe benefit<br />Code Sec. 280F(d)(4)(A), as amended by 2010 Small Business Act §2043(a)<br />Code Sec. 274(d), 2010 Small Business Act §2043(a)<br />Code Sec. 280F(d)(3), 2010 Small Business Act §2043(a)<br />Code Sec. 132, 2010 Small Business Act §2043(a)<br />Code Sec. 179, 2010 Small Business Act §2043(a)<br />Generally effective: Tax years beginning after Dec. 31, 2009<br />Committee Reports, see ¶5611 <br />Under Code Sec. 274(d) , no deduction or credit is allowed for an item of “listed property” (as defined in Code Sec. 280F(d)(4) ) unless the taxpayer substantiates, by adequate records or by the taxpayer's own statement supported by sufficient corroborating evidence, the following elements for the item: the amount of each separate expenditure for the item (e.g., the cost of buying it), the amount of each business or investment use of the item based on the appropriate measure (e.g., time), the total use of the item for the tax period, the date of each expenditure for or use of the item, and the business purpose for each expenditure for or use of the item. ( FTC 2d/Fin ¶L-4644; USTR ¶2744.10; TaxDesk ¶295,333; ) <br />Additionally, if, for the year listed property is placed in service, it isn't used more than 50% for business purposes, the property: (1) doesn't qualify for the Code Sec. 179 expensing election (see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.), and (2) is depreciable only under straight-line depreciation using the alternative depreciation (ADS) recovery periods (see FTC 2d/Fin ¶L-9402; USTR ¶280F4; TaxDesk ¶267,502; ). ( FTC 2d/Fin ¶L-10018; USTR ¶280F4; TaxDesk ¶267,615; ) <br />Except as otherwise provided, employer-provided fringe benefits are included in an employee's gross income as compensation for services. The employee must include in gross income the amount by which the fair market value of the fringe benefit exceeds the sum of (a) any amounts paid for the benefit by or for the employee, and (b) any amount specifically excluded by a Code section. ( FTC 2d/Fin ¶H-1055; USTR ¶1324; TaxDesk ¶134,003; ) A specific exclusion is provided for working condition fringe benefits (WCFBs). A WCFB is any property or services provided to an employee by the employer to the extent the cost of the property or services would have been deductible by the employee under either Code Sec. 162 (as trade or business expenses) or Code Sec. 167 (as depreciation expenses), taking into account the appropriate substantiation requirements, if the employee had paid for the property or services himself. Thus, for example, if the employer-provided property is “listed property,” the employee can't exclude the item as a WCFB unless the Code Sec. 274(d) substantiation requirements are met. ( FTC 2d/Fin ¶H-1701; USTR ¶1324.05; TaxDesk ¶134,010; ) <br />And, under Code Sec. 280F(d)(3) , an employee who owns or leases listed property that he uses in his employment isn't allowed any depreciation deduction, expensing allowance, or deduction for lease payments for that use unless it's for the convenience of the employer and required as a condition of employment. ( FTC 2d/Fin ¶L-10022; USTR ¶280F4; TaxDesk ¶267,618; ) <br />Under pre-2010 Small Business Act law, “listed property” as defined by Code Sec. 280F(d)(4) included cellular telephones (cell phones) and other similar telecommunications equipment (e.g., PDAs and Blackberry devices). (FTC 2d/Fin ¶L-10000; FTC 2d/Fin ¶L-10002; USTR ¶280F4; TaxDesk ¶267,616; ) This meant that the Code Sec. 274(d) substantiation requirements had to be met in order for employers to be able to deduct the cost of cell phones they provided to employees for employment-related business use, and for employees to treat employer-provided cell phones as excludible WCFBs. Employees couldn't deduct the costs of using their own cell phones for work unless a “convenience of the employer” test was met. Responding to complaints by individual businesses as well as business groups that treating cell phones as listed property was archaic and unreasonably burdensome, IRS issued Notice 2009-46 , which proposed simplified substantiation procedures for employer-provided cell phones and requested comments on those proposals (see FTC 2d/Fin ¶L-4644.1; TaxDesk ¶295,333.1; ). <br />New Law. The 2010 Small Business Act (the Act) removes cellular telephones (cell phones) and other similar telecommunications equipment from the categories of “listed property” under Code Sec. 280F(d)(4) .(Code Sec. 280F(d)(4)(A) as amended by 2010 Small Business Act §2043(a)) Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property don't apply to cell phones. (Com Rept, see ¶5611) <br /> RIA observation: According to the Senate Finance Committee Summary dated July 21, 2010, the Act “delists” cell phones so their cost can be deducted or depreciated like other business property costs, without onerous recordkeeping requirements. This means employers may deduct the cost of providing cell phones to their employees for employment-related business use, without having to satisfy the strict substantiation requirements for listed property. To support a deduction for the cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the deduction for other types of business equipment (see FTC 2d/Fin ¶L-4501; et seq. USTR ¶1624; TaxDesk ¶257,001; et seq.).<br /> RIA observation: The removal of cell phones from the Code Sec. 280F(d)(4) categories of “listed property” has important tax consequences for employers providing cell phones to employees for employment-related business use, employees using cell phones in connection with their employment, and self-employed individuals using cell phones in their businesses.<br /> RIA observation: The “delisting” of cell phones also means that cell phones are no longer subject to the limitations described above for listed property that isn't used more than 50% for business purposes. That is, a taxpayer won't be denied a Code Sec. 179 expensing election for a cell phone (see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.), and won't be limited to using straight-line depreciation under the ADS system for a cell phone (see FTC 2d/Fin ¶L-9402; USTR ¶280F4; TaxDesk ¶267,502; ), solely because the cell phone isn't used more than 50% for business purposes in the year it's placed in service (see FTC 2d/Fin ¶L-10018; USTR ¶280F4; TaxDesk ¶267,615; ).<br /> RIA observation: The Act also makes it easier for employees to claim deductions for their own cell phones if used for employment-related purposes. The elimination of “listed property” treatment means that the employee's use of his own cell phone won't have to be “for the convenience of the employer” and “as a condition of employment” (required under Code Sec. 280F(d)(3) for listed property) for the deductions (e.g., depreciation, expensing, lease payments) to be available. But the employee's use of his cell phone still must be in connection with the performance of services as an employee; i.e., the deductions are available only to the extent the cell phone is used for employment-related purposes. The costs associated with the employee's personal use of his own cell phone continue to be personal expenses, which are nondeductible under Code Sec. 262(a) (see FTC 2d/Fin ¶L-1009; USTR ¶2624; TaxDesk ¶255,507; ).<br />Employer-provided cell phones as an excludible fringe benefit. <br /> RIA observation: For employees, the elimination of “listed property” treatment for cell phones makes it easier to claim employer-provided cell phones as excludible WCFBs. The Code Sec. 274(d) substantiation requirements no longer apply to the cell phones, so the employee won't have to meet those requirements to be allowed a Code Sec. 162 deduction for the phone. This, in turn, means the employee can exclude the cost of the phone as a WCFB, without having to keep the detailed records that Code Sec. 274(d) requires for listed property.<br />The Act doesn't affect IRS's authority to determine the appropriate characterization of cell phones as a WCFB under Code Sec. 132(d) . (Com Rept, see ¶5611) <br /> RIA observation: Although the Act makes it easier for employees to claim the WCFB exclusion for employer-provided cell phones, it doesn't address the employee's personal use of the phone. It doesn't appear that a cell phone used for some personal use as well as for employment-related business use would pass muster as a WCFB. As explained above, a WCFB is any property or service provided to an employee of the employer to the extent that, if the employee paid for the property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec. 167 (see FTC 2d/Fin ¶H-1701; USTR ¶1324.05; TaxDesk ¶134,010; ). However, under Code Sec. 262(a) , no deduction is allowed for personal, living, or family expenses, unless otherwise provided (see FTC 2d/Fin ¶L-1009; USTR ¶2624; TaxDesk ¶255,507; ). Thus, absent a specific exclusion for personal cell phone use (e.g., as a de minimis fringe benefit, see below), an employee's exclusion for an employer-provided cell phone is limited to an amount based on his employment-related business use of the phone.<br />The Act doesn't affect IRS's authority to determine that the personal use of cell phones that are provided primarily for business purposes may qualify as a de minimis fringe benefit. (Com Rept, see ¶5611) <br /> RIA observation: Code Sec. 132(a)(4) provides a specific exclusion from gross income for de minimis fringe benefits. As defined in Code Sec. 132(e) , a de minimis fringe benefit is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees (see FTC 2d/Fin ¶H-1801; et seq. USTR ¶1324.06; TaxDesk ¶134,013; et seq.). IRS could declare an employee's personal use of an employer-provided cell phone to be a tax-free de minimis fringe benefit.<br />Effective: Tax years beginning after Dec. 31, 2009. (2010 Small Business Act §2043(b)) <br /> RIA recommendation: Taxpayers that are subject to estimated tax in 2010, and that expect to report cell phone-related expenses for any of the remaining estimated tax installments for a tax year beginning after Dec. 31, 2009 (e.g., the installment for the fourth quarter of 2010, for calendar year taxpayers, see FTC 2d/Fin ¶S-5241; USTR ¶66,544.02; TaxDesk ¶571,335; ), should take advantage of the relaxed substantiation requirements for cell phones used for business purposes. That is, taxpayers may claim otherwise allowable deductions for the cell phones without having to comply with the strict “listed property” substantiation requirements.<br /> <br />Health insurance costs for self and family are deductible in computing 2010 self-employment tax <br />Code Sec. 162(l)(4), as amended by 2010 Small Business Act §2042(a)<br />Generally effective: Tax years beginning after Dec. 31, 2009, and before Jan. 1, 2011<br />Committee Reports, see ¶5610 <br />Income tax deduction for self-employed individual's health insurance costs. <br />A self-employed individual can deduct as a trade or business expense the amount paid during the tax year for health insurance for: <br />... the taxpayer; <br />... the taxpayer's spouse; <br />... the taxpayer's dependents; and <br />... effective Mar. 30, 2010, any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. ( FTC 2d/Fin ¶L-3510; USTR ¶1624.403; TaxDesk ¶304,420; ) <br />The deduction isn't available for any month for which the taxpayer is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer or of the taxpayer's spouse, dependent, or under-age-27 child. ( FTC 2d/Fin ¶L-3510; USTR ¶1624.403; TaxDesk ¶304,420; ) <br />The deduction is limited to the earned income (within the meaning of Code Sec. 401(c) , i.e., net earnings from self-employment) from the trade or business for which the health insurance plan was established. ( FTC 2d/Fin ¶L-3511; USTR ¶1624.403; TaxDesk ¶304,420; ) <br />Health insurance costs not deductible for self-employment tax. <br />With certain exceptions, each U.S. citizen or resident alien who has self-employment income for the tax year must pay a 15.3% self-employment (SE) tax consisting of: <br />(1) a 12.4% old-age, survivors, and disability insurance (OASDI) tax, commonly referred to as “social security tax”; and <br />(2) a 2.9% hospital insurance (HI) tax, commonly referred to as “Medicare tax.” <br />Both taxes are applied to net earnings from self-employment above a “floor” amount. There is also an annually-adjusted “ceiling” limitation on the OASDI tax ($106,800 in 2010), but no ceiling on the HI tax. ( FTC 2d/Fin ¶A-6001; USTR ¶14,014; TaxDesk ¶575,501; ) <br />Net earnings from self-employment are generally an individual's trade or business income, less the deductions permitted by the Code that are attributable to that trade or business, plus the individual's distributive share of partnership income or loss. ( FTC 2d/Fin ¶A-6101; USTR ¶14,024; TaxDesk ¶576,012; ) <br />However, under pre-2010 Small Business Act law, a self-employed individual's health insurance costs, although deductible for income tax purposes, weren't deductible in determining net earnings from self-employment. FTC ¶A-6113; USTR ¶1624.403; TaxDesk ¶576,023; <br /> RIA observation: Thus, business owners couldn't deduct the cost of health insurance for themselves and their family members for purposes of calculating self-employment tax. (Senate Finance Summary, July 21, 2010)<br />New Law. Under the 2010 Small Business Act, the rule disallowing a deduction of a self-employed individual's health insurance costs in determining net earnings from self-employment applies only for tax years beginning before Jan. 1, 2010, or after Dec. 31, 2010.(Code Sec. 162(l)(4) as amended by 2010 Small Business Act §2042(a)) <br />Thus, for the taxpayer's first tax year beginning after Dec. 31, 2009, the income tax deduction allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who haven't attained age 27 as of the end of the tax year is also allowed in calculating net earnings from self-employment for purposes of self-employment tax. (Com Rept, see ¶5610) <br /> RIA observation: By reducing the after-tax cost of health insurance coverage, the provision makes it easier for the self-employed to afford coverage or to increase their existing coverage.<br /> RIA illustration : For 2010, a self-employed individual (X) paid $13,770 for health insurance coverage for himself, his spouse, his 13-year-old son, and his 11-year-old daughter. As a result of the new provision, X can deduct the $13,770 in computing his net earnings from self-employment. <br />The 15.3% self-employment tax rate applied to the $13,770 of premiums is $2,107. But X's actual tax saving will be less. <br />If X's net earnings from self-employment are at least $120,570 (the $106,800 OASDI ceiling plus the $13,770 deduction), there will be no reduction in X's 12.4% OASDI tax. Only X's 2.9% HI tax, which has no ceiling, will be reduced. <br />In addition, an above-the-line income tax deduction is allowed for one-half of self-employment tax. (See FTC 2d/Fin ¶K-4401; USTR ¶1644.07; TaxDesk ¶326,002; ) So, any reduction in X's self-employment tax as a result of the new provision will cause an increase in X's income tax.<br />Effect on earned income limitation. <br />It's intended that earned income, within the meaning of Code Sec. 401(c) , be computed without regard to the self-employment tax deduction for health insurance costs. Thus, the self-employment tax deduction won't affect the earned income limitation on the income tax deduction for self-employed individual's health insurance costs. However, a technical correction may be needed to achieve this result. (Com Rept, see ¶5610) <br />Effective: Tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2042(b)) , and before Jan. 1, 2011 (Code Sec. 162(l)(4) ) , i.e., the above rule only applies for the taxpayer's first tax year beginning after Dec. 31, 2009.(Com Rept, see ¶5610) <br /> RIA recommendation: Because the rule permitting deduction of health insurance costs for purposes of the self employment tax is retroactive to the beginning of 2010, individuals who didn't reduce their earned income from self-employment for these amounts in calculating their 2010 estimated tax should consider recalculating and adjusting any remaining estimated tax payments for 2010 (e.g., for the installment for the fourth quarter of 2010, for most calendar year taxpayers, see FTC 2d/Fin ¶S-5241; USTR ¶66,544.02; TaxDesk ¶571,335; ).<br /> <br />Retirement plan distributions may be rolled over to a designated Roth account, but not tax-free; 2010 rollovers are taxed in 2011 and 2012<br />Code Sec. 402A(c)(4), as amended by 2010 Small Business Act §2112<br />Generally effective: Distributions made after Sept. 27, 2010<br />Committee Reports, see ¶5617 <br />A qualified profit-sharing plan may include a cash or deferred arrangement, i.e., a 401(k) plan, which allows employees to make an election between receiving cash or having “elective contributions” made to the plan. Similarly, a 403(b) plan may allow employees to enter into a salary reduction agreement, under which employees may make an election between receiving cash or having “salary reduction contributions” made to the plan. The amount of elective deferrals (including elective contributions to a 401(k) plan and salary reduction contributions under a 403(b) plan) that an employee is permitted under either a 401(k) plan or a 403(b) plan is limited to an aggregate amount for a tax year ($16,500 for 2010), with an additional annual “catch-up” amount ($5,500 for 2010) for employees over age 50. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8975.1; ; FTC 2d/Fin ¶H-9151; ; FTC 2d/Fin ¶H-12471; USTR ¶4014.176; ; USTR ¶4024; ; USTR ¶4034.11; TaxDesk ¶284,011; ; TaxDesk ¶284,025; Pension Analysis ¶28,125.1; ; Pension Analysis ¶28,402; ; Pension Analysis ¶36,072; Pension & Benefits Explanations ¶401-4.176; ; Pension & Benefits Explanations ¶402-4; ; Pension & Benefits Explanations ¶403-4.11; ) <br />If an “applicable retirement plan” (such as a 401(k) plan or a 403(b) annuity plan) includes a “qualified Roth contribution program,” then plan participants may elect to make either (i) non-excludable contributions to a “designated Roth account” in the plan, or (ii) excludable elective or salary reduction contributions in a non-Roth account. A participant who receives a plan distribution from a 401(k) plan or 403(b) plan generally must include in gross income the amount of elective or salary reduction contributions received in the distribution, and the earnings on these contributions. In contrast, after a five-tax-year holding period, a participant may receive from a designated Roth account qualified distributions—of both the elective or salary reduction contributions and the earnings on the elective deferrals—that are completely excludable from gross income. Qualified distributions from a designated Roth account must be made after the participant reaches age 59-1/2, dies, or becomes disabled. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; ) <br />A participant may receive a distribution of elective contributions under a 401(k) plan, or salary reduction contributions under a 403(b) plan, only after attainment of age 59-1/2, severance from employment, plan termination, hardship, disability, or death. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8978; ; FTC 2d/Fin ¶H-9200; ; FTC 2d/Fin ¶H-9201; ; FTC 2d/Fin ¶H-12479; USTR ¶4014.1763; ; USTR ¶4034.12; TaxDesk ¶284,005; Pension Analysis ¶28,128; ; Pension Analysis ¶28,502; ; Pension Analysis ¶36,080; Pension & Benefits Explanations ¶403-4.1763; ; Pension & Benefits Explanations ¶403-4.12; ) <br />Eligible rollover distributions from eligible retirement plans (i.e., generally, plan distributions other than periodic distributions, minimum required distributions, or hardship distributions) may be contributed, without an annual dollar limit, to a 401(k) plan or a 403(b) plan and certain other plans, if certain requirements are met. Distributions rolled over to an eligible retirement plan generally are not includible in gross income. ( FTC 2d/Fin ¶H-3300; ; FTC 2d/Fin ¶H-3305.1; ; FTC 2d/Fin ¶H-11400; ; FTC 2d/Fin ¶H-11402; ; FTC 2d/Fin ¶H-12400; ; FTC 2d/Fin ¶H-12491; USTR ¶4024.04; ; USTR ¶4034.03; ; USTR ¶4574; TaxDesk ¶135,714; ; TaxDesk ¶144,001; ; TaxDesk ¶284,706; Pension Analysis ¶32,803; ; Pension Analysis ¶36,092; ; Pension Analysis ¶40,406.1; Pension & Benefits Explanations ¶402-4; ; Pension & Benefits Explanations ¶403-4.03; ; Pension & Benefits Explanations ¶457-4; ) <br />Under pre-2010 Small Business Act law, rollovers to a designated Roth account could have been made only from another designated Roth account. FTC 2d/Fin ¶H-12290.17A; FTC 2d/Fin ¶H-12295.3; USTR ¶4014.1745; Pension Analysis ¶35,251.3; Pension & Benefits Explanations ¶401-4.1745; <br />Individuals who receive eligible rollover distributions from qualified Code Sec. 401(a) plans, 403(b) annuities, traditional IRAs, and governmental section 457 plans, may roll over these distributions directly into a Roth IRA, subject to the respective requirements for rollovers from these plans. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.17; USTR ¶408A4; TaxDesk ¶283,318; Pension Analysis ¶35,218; Pension & Benefits Explanations ¶408A-4; ) <br /> RIA observation: Thus, eligible rollover distributions from a qualified Code Sec. 401(a) plan, a 403(b) annuity plan, and a governmental section 457 plan, may be rolled over to a Roth IRA—but under pre-2010 Small Business Act law, these distributions could not have been rolled over to a designated Roth account.<br />The tax-free treatment that ordinarily applies for rollovers from eligible retirement plans does not apply to a qualified rollover contribution from an eligible retirement plan to a Roth IRA. Rather, for any distribution made with respect to an individual from an eligible retirement plan that is contributed to his Roth IRA in a qualified rollover contribution, the individual must include in gross income any amount that would have been includible in gross income if it were not part of a qualified rollover contribution. The Code Sec. 72(t) 10% early withdrawal tax does not apply to the rolled over amounts includible in gross income. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.20; USTR ¶408A4; TaxDesk ¶283,326; Pension Analysis ¶35,221; Pension & Benefits Explanations ¶408A-4; ) <br />However, any portion of a distribution from a Roth IRA that: (i) is allocable to a qualified rollover contribution that was made to the Roth IRA from an applicable retirement plan, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the distribution were includible in income. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.38; USTR ¶408A4; TaxDesk ¶283,346; Pension Analysis ¶35,239; Pension & Benefits Explanations ¶408A-4; ) <br />Any amount that is includible in an individual's gross income for a tax year beginning in 2010 by reason of a distribution from an eligible retirement plan that is rolled over to a Roth IRA in a qualified rollover contribution, must be included in gross income ratably over the two-year period beginning with the first tax year beginning in 2011. An individual may elect out of the two-year ratable inclusion in gross income of the taxable portion of a 2010 distribution rolled over to a Roth IRA. However, the ratable inclusion of distribution income in gross income in 2011 and 2012 is accelerated if rollover amounts are distributed from the Roth IRA before 2012, or generally, if the individual dies before 2012. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.20B; et seq. USTR ¶408A4; TaxDesk ¶283,326.1; et seq. Pension Analysis ¶35,221B; et seq. Pension & Benefits Explanations ¶408A-4; ) <br />The employer maintaining a plan, the plan administrator, or the person issuing annuities, under which designated distributions may be made, or all of these persons (whichever is appropriate), must include additional information in reports required underCode Sec. 408(i) or Code Sec. 6047 that IRS may require to ensure the proper reporting of gross income from distributions rolled over to Roth IRAs. ( FTC 2d/Fin ¶S.3399.4; et seq. USTR ¶4084.04; ; USTR ¶408A4.04; TaxDesk ¶813,032; ; TaxDesk ¶813,039; Pension Analysis ¶56,315; ; Pension Analysis ¶56,352; Pension & Benefits Explanations ¶408-4; ; Pension & Benefits Explanations ¶408A-4; ) <br />New Law. The 2010 Small Business Act provides that, for an “applicable retirement plan”—a qualified 401(k) plan, 403(b) annuity plan, or governmental section 457 plan (see ¶502 )—that maintains a qualified Roth contribution program, a distribution to an individual from (i) the portion of the plan that is not a designated Roth account, may be rolled over, in a qualified rollover contribution (within the meaning of Code Sec. 408A(e) , i.e., the Roth IRA rules), to (ii) the designated Roth account maintained under the plan for the benefit of the individual to whom the distribution was made. (Code Sec. 402A(c)(4)(B) as amended by 2010 Small Business Act §2112(a)) However, the rollover is not tax-free, see below. <br /> RIA observation: Under the Roth IRA rules, a “qualified rollover contribution” means a rollover contribution from (i) another Roth IRA, or (ii) an eligible retirement plan, provided the rollover rules for that type of eligible retirement plan (e.g., Code Sec. 402(c) , for qualified plans) are met. Thus, a qualified rollover contribution to a designated Roth account is a rollover contribution from an applicable retirement plan that maintains a qualified Roth contribution program.<br />A plan that includes a designated Roth program is permitted, but not required, to allow rollover contributions (described above) to a designated Roth account. (Com Rept, see ¶5617) <br />A rollover contribution to a designated Roth account, if elected by an employee (or his surviving spouse), may be made through a direct rollover, i.e., the transfer of assets from the account that is not a designated Roth account, to the designated Roth account. (Com Rept, see ¶5617) <br />Any distribution from an applicable retirement plan (other than from a designated Roth account) that is contributed in a qualified rollover contribution to the designated Roth account, is not taken into account as a designated Roth contribution. (Code Sec. 402A(c)(4)(C) ) <br /> RIA observation: Thus, qualified rollover contributions to a designated Roth account do not count towards the maximum limit on the amount of elective deferrals for the tax year that an employee may designate as “designated Roth contributions.”<br />Requirements for rollovers to designated Roth accounts. <br />To be eligible for rollover to a designated Roth account, a distribution must be (i) an eligible rollover distribution, (ii) otherwise allowed under the plan, and (iii) allowable in the amount and form elected. For example, an amount in a 401(k) plan account that is subject to distribution restrictions cannot be rolled over to a designated Roth account under the new rollover rules. However, an employer may expand its distribution options beyond those currently allowed by the plan—e.g., a 401(k) plan can be amended to provide for in-service distributions, or distributions before normal retirement age—in order to allow employees to make a direct rollover of plan amounts to the designated Roth account within that plan. Indeed, a plan may condition an employee's eligibility for a new distribution option (e.g., eligibility for in-service distributions) on the employee's election to have the distribution directly rolled over to the designated Roth account.(Com Rept, see ¶5617) <br /> RIA caution: If a 401(k) plan is so amended to allow in-service distributions, on (or not on) condition that the distributions be rolled over to a designated Roth account, the Code Sec. 401(k)(2)(B) distribution restrictions continue to apply, generally precluding 401(k) plan distributions before the employee's (i) attainment of age 59-1/2, (ii) severance from employment, (iii) death or disability, or (iv) hardship.<br />Plan amendments. <br />If a plan allows rollover contributions to a designated Roth account, the plan must be amended to reflect this plan feature. Congress intends that IRS will provide employers with a remedial amendment period that allows employers to offer this rollover option to employees (and surviving spouses) for 2010 distributions, with sufficient time to amend the plan to reflect this option. (Com Rept, see ¶5617) <br />Designated Roth account vs. Roth IRAs. <br />Although there are many similarities between the treatment of Roth IRAs and designated Roth accounts, one difference is that, in determining the taxation of Roth IRA distributions that are not qualified distributions, after-tax contributions are considered recovered before income. This basis-first recovery rule for Roth IRAs does not apply to distributions from designated Roth accounts. Another difference is that a first-time home buyer expense can be a qualified distribution from a Roth IRA (even without the occurrence of another event, such as the individual reaching age 59-1/2), but cannot by itself be a qualified distribution from a designated Roth account. (Com Rept, see ¶5617) <br /> RIA observation: A taxpayer who can roll over an amount from an applicable employer plan to either a Roth IRA or a designated Roth account, might consider whether taking withdrawals from the Roth account or Roth IRA within the five-tax-year holding period for qualified distributions would result in additional tax on a distribution from a designated Roth account (because of the unavailability of the basis-first recovery rule). Also, a taxpayer who is contemplating a withdrawal from the Roth account or Roth IRA to purchase a home as a first-time home buyer, but who hasn't yet reached age 59-1/2, should consider that such a withdrawal can be a qualified distribution from a Roth IRA, but not from a designated Roth account, if the taxpayer has not reached age 59-1/2.<br />Rollovers to a designated Roth account are taxable. <br />Under the 2010 Small Business Act, the tax-free treatment of rollovers that ordinarily applies (under Code Sec. 402(c) for qualified plans, under Code Sec. 403(b)(8) for 403(b) annuities, and under Code Sec. 457(e)(16) for governmental section 457 plans) does not apply for distributions rolled over from an applicable retirement plan to a designated Roth account (as described above). Rather, the amount that an individual receives in a distribution from an applicable retirement plan that would be includible in gross income if it were not part of a qualified rollover distribution, must be included in his gross income. (Code Sec. 402A(c)(4)(A)(i) ) <br />If a direct rollover is made by a transfer of property to a designated Roth account, then the amount of the distribution is the fair market value of the property on the date of the transfer. (Com Rept, see ¶5617) <br />Early withdrawal tax. <br />The Code Sec. 72(t) 10% tax on early withdrawals (which generally applies to the taxable portion of a plan or IRA distribution made before the participant has reached age 59-1/2, unless an exception applies) does not apply to distributions from applicable retirement plans that are contributed to a designated Roth account in a qualified rollover contribution. (Code Sec. 402A(c)(4)(A)(ii) ) <br />However, although the Code Sec. 72(t) 10% early withdrawals tax generally does not apply to the portion of an early withdrawal that is rolled over in a qualified rollover contribution to a designated Roth account, a “recapture” rule applies to distributions within a specified five-tax-year holding period (under the rules of Code Sec. 408A(d)(3)(F) ). (Code Sec. 402A(c)(4)(D) ) <br /> RIA observation: Thus, any portion of a distribution from a designated Roth account that: (i) is allocable to a qualified rollover contribution from an applicable retirement plan other than a designated Roth account, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the (latter) distribution were includible in income.<br /> RIA observation: A participant who receives a distribution in Year 1 and rolls it over to a designated Roth account generally has basis in that account, to the extent of the amount includible in gross income from the distribution rolled over. Thus, a designated Roth account distribution received before the end of the specified five-tax-year holding period (for example, in Year 3) ordinarily, in part, would not be includible in the participant's gross income (to the extent the distribution is a return of basis). But under the recapture rules, the 10% early withdrawal tax would apply to the Year 3 distribution as if the Year 3 distribution were includible in income, up to the amount of the qualified rollover contribution that was includible in income in Year 1. As a result, the 10% early withdrawal tax will apply to the Year 3 distribution, up to the amount of the rollover distribution includible in gross income in Year 1.<br />Reporting. <br />The employer maintaining a plan, the plan administrator, or the person issuing annuities under which designated distributions may be made, or all of these persons (whichever is appropriate), must include additional information in reports required under Code Sec. 408(i) orCode Sec. 6047 that IRS may require to ensure the proper reporting of gross income from distributions rolled over to designated Roth accounts, as described above (as provided in Code Sec. 408A(d)(3)(D) ).(Code Sec. 402A(c)(4)(D) ) <br />2010 rollover distribution taxed in 2011 and 2012. <br />Any amount that is includible in a taxpayer's gross income for any tax year beginning in 2010 by reason of a distribution from an applicable retirement plan that is rolled over to a designated Roth account (as described above) is included in gross income ratably over the two-year period beginning in the first tax year beginning in 2011. However, the taxpayer may elect to not have this two-year deferral apply (and thus, to include the taxable portion in gross income in the 2010 tax year). Any such election for any distributions made during a tax year may not be changed “after the due date for such taxable year.” (Code Sec. 402A(c)(4)(A)(iii) ) <br /> RIA observation: Presumably, the “due date for such taxable year” refers to the due date for 2010, i.e., for most individuals, Apr. 15, 2011. Neither the Act nor the Committee Reports indicate that the “due date” includes extensions.<br />Distributions or death before 2012. <br />The deferral of the tax on applicable retirement plan distributions to an individual that are rolled over to a designated Roth account in 2010 must be accelerated (under the rule of Code Sec. 408A(d)(3)(E) ) if the individual receives distributions from the designated Roth account in 2010 or 2011. Acceleration is also required if the individual dies before 2012, unless a surviving spouse acquires the entire account and elects to continue the deferral. These rules apply to a distribution from an applicable retirement plan that is rolled over to a designated Roth account (as described above). (Code Sec. 402A(c)(4)(D) ) <br />Effective: Distributions made after Sept. 27, 2010. (2010 Small Business Act §2112(b)) <br /> ¶ 502. Governmental section 457 plans can include a “qualified Roth contribution program”<br />Code Sec. 402A(e)(1)(C), as amended by 2010 Small Business Act §2111(a)<br />Code Sec. 402A(e)(2)(B), as amended by 2010 Small Business Act §2111(b)<br />Generally effective: Tax years beginning after Dec. 31, 2010<br />Committee Reports, see ¶5616 <br />An “applicable retirement plan,” such as a 401(k) plan or a 403(b) annuity plan, has the option of including a “qualified Roth contribution program.” Under this program, plan participants are allowed to elect to make non-excludable “designated Roth contributions” to a “designated Roth account” in the plan, instead of excludable elective deferrals in a non-Roth account. A participant who elects to forego the exclusion from gross income for elective deferrals and makes designated Roth contributions instead, may receive qualified distributions from the designated Roth account that are excludable from gross income, after (i) waiting for a five-year holding period, and (ii) reaching age 59-1/2. Distributions after the five-tax-year holding period may also be qualified distributions if made on account of the participant's death or disability. <br />A “designated Roth contribution”—any contribution that a participant makes to a designated Roth account under a qualified Roth contribution program—is treated as an “elective deferral,” even though it is not excludable from gross income. An “elective deferral” under the qualified Roth contribution program rules means (i) employer contributions to 401(k) plans that would not be includible in employees' gross income (but for the Code Sec. 402A designated Roth account rules); and (ii) employer contributions to purchase a 403(b) annuity contract under a salary reduction agreement. FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; ) <br />Under pre-2010 Small Business Act law, only qualified Code Sec. 401(a) plans and 403(b) annuity plans were “applicable retirement plans” that could have offered a qualified Roth contribution program. Thus, designated Roth contributions included only elective deferrals under a 401(k) plan or a 403(b) annuity plan. FTC 2d/Fin ¶H-12295; FTC 2d/Fin ¶H-12295.2; FTC 2d/Fin ¶H-12295.4; USTR ¶402A4; TaxDesk ¶283,402; TaxDesk ¶283,404; Pension Analysis ¶35,251.2; Pension Analysis ¶35,251.4; Pension & Benefits Explanations ¶402A-4; <br />New Law. The 2010 Small Business Act adds governmental section 457 plans (i.e., Code Sec. 457(b) eligible deferred compensation plans of a Code Sec. 457(e)(1)(A) eligible employer) to the definition of “applicable retirement plans” that can offer a qualified Roth contribution program. (Code Sec. 402A(e)(1)(C) as amended by 2010 Small Business Act §2111(a)) <br />Thus, a section 457 plan maintained by a state, its political subdivision, agency, or instrumentality, or the state subdivision's agency or instrumentality, can include a qualified Roth contribution program. (Com Rept, see ¶5616) <br /> RIA observation: Thus, governmental section 457 plans may allow participants to make contributions to a designated Roth account.<br />To be consistent with permitting governmental section 457 plans to provide a qualified Roth contribution program, the 2010 Small Business Act amends the definition of “elective deferral” to include any elective deferral of compensation by an individual under a governmental section 457 plan. (Code Sec. 402A(e)(2)(B) ) <br />Effective: Tax years beginning after Dec. 31, 2010. (2010 Small Business Act §2111(c)) <br /> <br />Partial annuitization of nonqualified annuity contracts is possible after 2010<br />Code Sec. 72(a), as amended by 2010 Small Business Act §2113<br />Generally effective: Amounts received in tax years after Dec. 31, 2010<br />Committee Reports, see ¶5618 <br />Amounts “received as an annuity” under a life insurance, endowment, or annuity contract are includible in gross income, unless an exception is available. The payment may be over a specific period or during one or more lives. FTC 2d/Fin ¶J-5001; USTR ¶724; Pension Analysis ¶32,252; Pension & Benefits Explanations ¶74-4; <br />Under the annuity rule, a portion of each payment received is excluded based on an “exclusion ratio” (i.e., the “investment in the contract” divided by the “expected return”). The excludable amount of each payment is computed by multiplying it by the exclusion ratio. The “investment in the contract” is determined as of the “annuity starting date.” FTC 2d/Fin ¶J-5101; USTR ¶724; Pension Analysis ¶32,352; Pension & Benefits Explanations ¶72-4; <br />Before the 2010 Small Business Act, IRS, in Rev. Proc. 2008-24 , had ruled on the treatment of the partial exchange of annuity contracts, but IRS specifically said that the ruling did not apply to partial annuitization, which is the conversion of only a portion of an annuity, endowment or life insurance contract into annuity payments. In Rev. Proc. 2010-3 , IRS identified partial annuitization as a no ruling area that is under study by IRS. <br />New Law. Under the 2010 Small Business Act, the basic annuity taxation rule described above is retained without change. (Code Sec. 72(a)(1) as amended by 2010 Small Business Act §2113(a)) However, the 2010 Small Business Act adds a new rule that will permit the partial annuitization of a nonqualified annuity, endowment, or life insurance contract. <br />Under this new rule, if any amount is received as an annuity for a period of 10 years or more, or during one or more lives, under any portion of an annuity, endowment, or life insurance contract: <br />• that portion will be treated as a separate contract for annuity taxation purposes; <br />• for purposes of applying Code Sec. 72(b) (dealing with the calculation of the exclusion ratio for annuity distributions), Code Sec. 72(c) (definitions of “investment in the contract,” “expected return,” and “annuity starting date”), and Code Sec. 72(e) (dealing with the taxation of distributions from an annuity, endowment, or life insurance contract, that are not received as an annuity), the investment in the contract will be allocated pro rata between each portion of the contract from which amounts are received as an annuity, and the portion of the contract from which amounts are not received as an annuity, and <br />• a separate annuity starting date under Code Sec. 72(c)(4) (which defines “annuity starting date”) will be determined for each portion of the contract from which amounts are received as an annuity. (Code Sec. 72(a)(2) ) <br /> RIA observation: Thus, in its summary of the 2010 Small Business Act, dated July 21, 2010, the Senate Finance Committee indicates that the provision will allow holders of nonqualified annuities to elect to receive a portion of an annuity contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.<br /> RIA observation: Since “any portion” of an annuity contract is not defined, IRS guidance is needed to expand on this area of the new partial annuitization rule. Theoretically, “any portion” of a variable annuity could be a percentage of all the mutual fund assets in which the annuity is invested, or one mutual fund could be selected to annuitize.<br /> RIA observation: The new partial annuitization rule does not apply to the special rules for qualified employer retirement plans under Code Sec. 72(d) .<br />The new rule is not intended to change the current-law rules for amounts received as an annuity (or as a lump sum) from Code Sec. 401(a) qualified plans, Code Sec. 403(a) annuity plans, Code Sec. 403(b) annuity plans, or individual retirement plans. (Com Rept, see ¶5618) <br />Effective: For amounts received in tax years beginning after Dec. 31, 2010. (2010 Small Business Act §2113(b)) <br /> <br /><br /> Exception to pre-levy CDP hearing requirement extended to tax liability of certain federal contractors<br />Code Sec. 6330(f)(4), as amended by 2010 Small Business Act §2104(a)<br />Code Sec. 6330(h), as amended by 2010 Small Business Act §2104(b)<br />Generally effective: Levies issued after Sept. 27, 2010<br />Committee Reports, see ¶5615 <br />IRS may not levy against a person's property or right to property unless it notifies the person in writing of his right to a hearing before the levy, i.e., a pre-levy Collection Due Process hearing (CDP hearing). The written notification informing a taxpayer of his right to a pre-levy CDP hearing accompanies the written notice of intent to levy. FTC 2d/Fin ¶V-5255; USTR ¶63,304; TaxDesk ¶902,505; . <br />IRS, however, doesn't have to hold a pre-levy CDP hearing if it determines that collection of tax is in jeopardy or before levying on a state to collect a federal tax liability from a state tax refund or in the case of a “disqualified employment tax levy.” In those cases, however, the taxpayer must be given an opportunity for a post-levy CDP hearing within a reasonable time period after the levy. FTC 2d/Fin ¶V-5257; USTR ¶63,304; TaxDesk ¶902,507; . <br />Under pre-2010 Small Business Act law, a “disqualified employment tax levy” was any levy to collect employment taxes for any tax period if the person subject to the levy (or a predecessor) requested a hearing under Code Sec. 6330 for unpaid “employment taxes” (taxes under Chapters 21, 22, 23 or 24 of the Code) arising in the most recent two-year period before the beginning of the tax period for which the levy was served. FTC 2d/Fin ¶V-5257; USTR ¶63,304; TaxDesk ¶902,507; <br />The Federal Payment Levy Program (FPLP) is an automated levy program that IRS has implemented with the Department of the Treasury, Financial Management Service (FMS). The FPLP was developed as the means to administer the continuous levy provision. Thus, no paper levy documents are served to levy under this provision. FTC 2d/Fin ¶V-5217; . Before making payments to federal contractors, an automated check for federal tax liabilities generally occurs using the FPLP. When a tax liability is identified, IRS issues a CDP notice to the contractor, but can't levy the payment until the CDP requirements are complete. Thus, under pre-2010 Small Business Act law, the chance to levy payments to the contractor might be lost because the CDP requirements couldn't be completed before the payment was made. <br />Under the continuous levy program, the effect of a levy on “specified payments” payable to or received by a taxpayer is continuous from the date the levy is first made until the levy is released. Notwithstanding Code Sec. 6334 (which provides exemptions from levy), this continuous levy will attach to up to 15% of any specified payment due to the taxpayer. However, the 15% maximum rate discussed above is increased to 100% in the case of any specified payment that is due to a vendor of goods or services sold or leased to the federal government. FTC 2d/Fin ¶V-5216; USTR ¶63,314.03; TaxDesk ¶902,216; . <br />A specified payment is: (a) any federal payment for which eligibility isn't based on a payee's income or assets (or both); (b) the minimum exempted amount of salary and wages; (c) worker's compensation payments; (d) annuity or pension payments under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act; (e) unemployment benefits; and (f) certain means-tested public assistance payments. FTC 2d/Fin ¶V-5217; USTR ¶63,314.03; TaxDesk ¶902,216; . <br />New Law. The 2010 Small Business Act provides that IRS also won't have to hold a pre-levy CDP hearing if IRS has served a “federal contractor levy.” (Code Sec. 6330(f)(4) as amended by 2010 Small Business Act §2104(a)) A federal contractor levy is any levy if the person subject to the levy (or any predecessor of that person) is a federal contractor. (Code Sec. 6330(h)(2) as amended by 2010 Small Business Act §2104(b)) Thus, IRS will be allowed to issue levies before a CDP hearing for federal taxes owed by federal contractors identified under the FPLP. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Com Rept, see ¶5615) <br /> RIA observation: Although IRS will be allowed to issue levies without a pre–levy CDP hearing regardless of whether the tax liability is identified through the FPLP, as a practical matter most federal contractor levies are likely to result from the FPLP.<br /><br />Certain recipients of rental income from realty paying rental expenses of $600 or more in a post-2010 tax year will be subject to information reporting<br />Code Sec. 6041(h), as amended by 2010 Small Business Act §2101(a)<br />Generally effective: Payments made after Dec. 31, 2010<br />Committee Reports, see ¶5612 <br />Code Sec. 6041(a) requires information reporting to IRS by all persons engaged in a trade or business who make certain payments in the course of that trade or business of $600 or more in any tax year to another person. Payments subject to information reporting are rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable income (with certain exceptions set forth in Code Sec. 6041(a) ). For payments made after Dec. 31, 2011, payments subject to information reporting will also include amounts in consideration for property and gross proceeds. FTC 2d/Fin ¶S-3655; FTC 2d/Fin ¶S-3656; USTR ¶60,414; TaxDesk ¶814,001; A taxpayer whose rental activity is a trade or business is subject to this reporting requirement, but, under pre-2010 Small Business Act law, a taxpayer whose rental real estate activity is not considered a trade or business was not subject to the above described reporting requirement. (Com Rept, see ¶5612) <br />New Law. The 2010 Small Business Act provides that solely for purposes of Code Sec. 6041(a) , and except as provided in Code Sec. 6041(h)(2) (discussed below), a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. (Code Sec. 6041(h)(1) as amended by 2010 Small Business Act §2101(a)) <br />Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. (Com Rept, see ¶5612) <br /> RIA illustration 1: A owns a 12-floor commercial building in the downtown area of City X. A rents out units as office or retail space in the building. A hires a plumber in Year 1 to make repairs to the building and pays the plumber $2,000 for Year 1. A is considered to be in a trade or business and must file an information return showing the $2,000 payment to the plumber.<br />Exceptions for certain recipients. <br />The rental property expense payment reporting treatment described above will not apply to: <br />... any individual who receives rental income of not more than the minimal amount, as determined under IRS regs; (Code Sec. 6041(h)(2)(B) ) <br /> RIA observation: Presumably, IRS will timely issue regs that will indicate the minimal amount of rental income that a recipient would need to earn to be subject to the reporting requirement.<br />... any individual, including one who is an active member of the uniformed services or an employee of the intelligence community (as defined in Code Sec. 121(d)(9)(C)(iv) , see FTC 2d/Fin ¶I-4528.4A; USTR ¶1214; TaxDesk ¶225,708.3A; ) if substantially all rental income is derived from renting the individual's principal residence (within the meaning of Code Sec. 121 , see FTC 2d/Fin ¶I-4522; USTR ¶1214; TaxDesk ¶225,702; ) on a temporary basis; (Code Sec. 6041(h)(2)(A) ) <br /> RIA observation: The term “substantially all” rental income is not defined for purposes of Code Sec. 6041(h)(2)(A) , nor is “temporary basis.” Thus, a situation may exist where a person renting his principal residence can reasonably expect to sell his residence within six months, but because the residential real estate market in the area declined, the person may have to wait several years to sell the property or take the property off the market for a period of time. It's unclear whether the taxpayer's intent will control for purposes of the “temporary basis” test, or whether IRS will set a length of time under regs or other guidance.<br /> RIA illustration 2: B is laid off from his job in New Jersey and is hired for a new job in California. B is unable to sell his principal residence in New Jersey before moving, but not wanting to leave it vacant, he rents the house to C in Year 1. B expects his move to be permanent and intends to sell his New Jersey house as soon as he can. It becomes necessary during Year 1 for B to have a leak in the roof repaired for $1,000. Presumably, B will not have to file an information return for his $1,000 payment in Year 1 to a roofing contractor, if he is considered to be renting the principal residence on a temporary basis.<br /> RIA observation: If the house in New Jersey is no longer considered B's principal residence because he buys or rents a residence in California, and the facts and circumstances indicate that B's principal residence is now in California (see Reg §1.121-1(b)(2) ), presumably B would not meet the exception to information reporting in Code Sec. 6041(h)(2)(A) .<br /> RIA observation: If B rented out his house in New Jersey, was employed in California, bought a home in California, moved his family to California, registered to vote in California, obtained a California drivers' license, registered his car(s) in California, filed California resident or part-year resident income tax returns, moved his bank accounts to California, joined a church and social organizations in California, presumably the house in New Jersey would no longer be considered B's principal residence.<br /> RIA observation: The result may be different if B rented his house to C in order to go to California for a four-months' temporary assignment on his job. If B stayed in a hotel, a bed and breakfast, or other temporary lodging in California and intended to return to New Jersey, presumably the house he rented to C would be considered his principal residence. The definition of principal residence is based on all the facts and circumstances under the Code Sec. 121 regs.<br /> RIA observation: An individual who owns several residences will need to look to Code Sec. 121 and the regs under that Code section to determine which residence is the principal residence if one or more residences are rented out, in order to determine whether the individual meets the Code Sec. 6041(h)(2)(A) exception to the treatment of the receipt of rental income from real estate as a trade or business.<br /> RIA illustration 3: R owns a house in Pennsylvania and a house in Florida. R divides his time between these two residences during the year. When R is at one residence, he arranges to rent the other, the Pennsylvania house to S and the Florida house to T. If R is to be considered not to be engaged in a trade or business with respect to one of the residences, he must determine which is his principal residence. This could be difficult if each property is rented for six months of the year. If R determines that the Pennsylvania house is his principal residence, then R is considered engaged in a trade or business with respect to the Florida house.<br />... any other individual for whom the requirements of Code Sec. 6041 would cause hardship, as determined under IRS regs. (Code Sec. 6041(h)(2)(C) ) <br /> RIA observation: Presumably, IRS will timely issue regs that will indicate what constitutes hardship with respect to information reporting requirements for persons receiving income from rental real estate.<br />Redesignations. <br />Pre-2010 Small Business Act Code Sec. 6041(h) and Pre-2010 Small Business Act Code Sec. 6041(i) are redesignated as Code Sec. 6041(i) andCode Sec. 6041(j) , respectively. (2010 Small Business Act §2101(a)) <br />Effective: Payments made after Dec. 31, 2010. (2010 Small Business Act §2101(b)) <br /> <br /> Per return rates for information return penalty doubled and maximum and minimum penalty amounts increased<br />Code Sec. 6721(a)(1), as amended by 2010 Small Business Act §2102(a)<br />Code Sec. 6721(b)(1), as amended by 2010 Small Business Act §2102<br />Code Sec. 6721(b)(2), as amended by 2010 Small Business Act §2102(c)<br />Code Sec. 6721(d)(1), as amended by 2010 Small Business Act §2102(d)<br />Code Sec. 6721(e)(2), as amended by 2010 Small Business Act §2102(e)<br />Code Sec. 6721(f), as amended by 2010 Small Business Act §2102(f)<br />Generally effective: Information returns required to be filed after Dec. 31, 2010 <br />Committee Reports, see ¶5613 <br />Code Sec. 6721 imposes penalties for failing to provide timely, complete, and correct information returns, see FTC 2d/Fin ¶V-1803; USTR ¶67,214; TaxDesk ¶861,025; . Under pre-2010 Small Business Act law, if a person didn't file a correct information return on or before Aug. 1 of the calendar year in which the required filing date occurred, the amount of the penalty was $50 per return (third-tier penalty), with a maximum penalty of $250,000 per calendar year. If a person filed a correct information return after the prescribed filing date but on or before the date that was 30 days after the prescribed filing date, the amount of the penalty was $15 per return (first-tier penalty), with a maximum penalty of $75,000 per calendar year. If a person filed a correct information return after the date that was 30 days after the prescribed filing date but on or before Aug. 1 of the calendar year in which the required filing date occurred, the amount of the penalty was $30 per return (second-tier penalty), with a maximum penalty of $150,000 per calendar year. FTC 2d/Fin ¶V-1805; USTR ¶67,214; TaxDesk ¶861,026; <br />Under pre-2010 Small Business Act law, if a failure was due to intentional disregard of a filing requirement, the penalty calculations above did not apply. Instead the penalty for each failure was the greater of $100 (the $100 minimum) or an amount that varied based on the type of return, with no $250,000 maximum. The penalty applied regardless of the period of the failure and the small business reduction described below did not apply. FTC 2d/Fin ¶V-1811; USTR ¶67,214; TaxDesk ¶861,027; <br />Under pre-2010 Small Business Act law, the maximum penalties for small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million) were much lower than the above maximum limits. They were $25,000 if the failures were corrected on or before 30 days after the prescribed filing date; $50,000 if the failures were corrected on or before Aug. 1; and $100,000 if the failures weren't corrected on or before Aug. 1. FTC 2d/Fin ¶V-1805; USTR ¶67,214; TaxDesk ¶861,026; <br />The Code specifies the information returns and other statements that are subject to these penalties, see FTC 2d/Fin ¶V-1804; USTR ¶67,214; TaxDesk ¶861,029; . <br />New Law. The 2010 Small Business Act increases the third-tier penalty (for failures not corrected within the time limits described above) from $50 to $100 (Code Sec. 6721(a)(1) as amended by 2010 Small Business Act §2102(a)(1)) and increases the calendar year maximum limit on it from $250,000 to $1,500,000. (Code Sec. 6721(a)(1) as amended by 2010 Small Business Act §2102(a)(2)) <br />The 2010 Small Business Act increases the first-tier penalty (for failures corrected within the 30-day period described above) from $15 to $30 (Code Sec. 6721(b)(1)(A) as amended by 2010 Small Business Act §2102(b)(1)) and increases the calendar year maximum limit on it from $75,000 to $250,000. (Code Sec. 6721(b)(1)(B) as amended by 2010 Small Business Act §2102(b)(2)) <br />The 2010 Small Business Act increases the second-tier penalty (for failures corrected by the Aug. 1 deadline described above) from $30 to $60 (Code Sec. 6721(b)(2)(A) as amended by 2010 Small Business Act §2102(c)(1)) and increases the calendar year maximum limit on it from $150,000 to $500,000. (Code Sec. 6721(b)(2)(B) as amended by 2010 Small Business Act §2102(c)(2)) <br />For small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million, see FTC 2d/Fin ¶V-1806; ) the calendar year maximum is increased from $100,000 to $500,000 for the third-tier penalty, (Code Sec. 6721(d)(1)(A) as amended by 2010 Small Business Act §2102(d)(1)(A)) from $25,000 to $75,000 for the first-tier penalty, (Code Sec. 6721(d)(1)(B) as amended by 2010 Small Business Act §2102(d)(1)(B)) and from $50,000 to $200,000 for the second-tier penalty. (Code Sec. 6721(d)(1)(C) as amended by 2010 Small Business Act §2102(d)(1)(C)) <br /> RIA observation: Thus, for the first-tier penalty (for failures corrected within the 30-day period described above), small businesses will have a maximum limit ($75,000) that will be the same as the maximum first-tier penalty limit for other businesses under pre-2010 Small Business Act law. In other cases, small businesses will have a maximum limit that will be higher than the generally applicable maximum under pre-2010 Small Business Act law, although it will still be much lower than the 2010 Small Business Act maximum for other businesses. Thus, for the third-tier penalty (for failures not corrected within the periods described above), small businesses will have a maximum penalty limit ($500,000) that will be twice the maximum third-tier penalty limit for other businesses ($250,000) that applied under pre-2010 Small Business Act law, but that will still be only one third of the 2010 Small Business Act maximum ($1,500,000) for other businesses.<br />The above changes are illustrated by the following table: <br /> Pre-Small Business Act general penalty Pre-Small Business Act small business penalty New general penalty New small business penalty <br />First tier penalty $15 (maximum $75,000) $15 (maximum $25,000) $30 (maximum $250,000) $30 (maximum $75,000)<br />Second tier penalty $30 (maximum $150,000) $30 (maximum $50,000) $60 (maximum $500,000) $60 (maximum $200,000)<br />Third tier penalty $50 (maximum $250,000) $50 (maximum $100,000) $100 (maximum $1,500,000) $100 (maximum $500,000)<br /> RIA observation: For returns required to be filed after 2010, the above changes double the basic per return penalty amount, but they increase the maximum limits even more dramatically. The maximum limit on the third-tier penalty is six times as large as under pre-Small Business Act law.<br /> RIA illustration 1: A Corporation (X) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 10,000 Forms 1099-MISC for Calendar Year 1. X eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, X was subject to a $250,000 penalty for the 10,000 forms that weren't filed by Aug. 1 ($50 × 10,000 = $500,000 subject to a $250,000 limit). Under 2010 Small Business Act law, X is subject to a $1,000,000 penalty for the 10,000 forms that weren't filed by Aug. 1 ($100 × 10,000 = $1,000,000, or less than the $1,500,000 limit).<br /> RIA illustration 2: A Corporation (Y) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 11,500 Forms 1099-MISC for Calendar Year 1. 6,000 of these returns are filed with correct information within 30 days, and 5,500 after 30 days but on or before Aug. 1. For the same year, Y fails to timely file 500 Forms 1099-INT. Y eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, Y was subject to a $25,000 penalty for the 500 forms that weren't filed by Aug. 1 ($50 × 500 = $25,000), $150,000 for the 5,500 forms filed after 30 days ($30 × 5500 = $165,000, limited to $150,000), and $75,000 for the 6,000 forms filed within 30 days ($15 × 6,000 = $90,000, limited to $75,000), for a total penalty of $250,000. Under 2010 Small Business Act law, Y is subject to a $50,000 penalty for the 500 forms that weren't filed by Aug. 1 ($100 × 500 = $50,000), $330,000 for the 5,500 forms filed after 30 days ($60 × 5,500 = $330,000, not subject to reduction by the $500,000 maximum limit), and $180,000 for the 6,000 forms filed within 30 days ($30 × 6,000 = $180,000, not subject to reduction by the $250,000 maximum penalty), for a total penalty of $560,000. Thus, the penalty more than doubled due to the combination of doubled per return amounts and maximum amounts that more than doubled.<br />The 2010 Small Business Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250. (Code Sec. 6721(e)(2) as amended by 2010 Small Business Act §2102(e)) <br />The new law also provides that the penalty amounts will be adjusted for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter. (Com Rept, see ¶5613) Specifically, for each fifth calendar year beginning after 2012, each of the dollar amounts under Code Sec. 6721(a) (relating to the third tier penalty), Code Sec. 6721(b) (relating to the first and second tier penalties), Code Sec. 6721(d) (relating to the special limits for small businesses), and Code Sec. 6721(e) (relating to intentional disregard) will be increased by the dollar amount multiplied by a cost-of-living adjustment. But, this won't apply to the $5,000,000 gross receipts test amount in Code Sec. 6721(d)(2)(A) ). The inflation adjustment will be determined under Code Sec. 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in Code Sec. 1(f)(3)(B) . (Code Sec. 6721(f)(1) as amended by 2010 Small Business Act §2102(f)) <br /> RIA observation: Tax bracket amounts are indexed for inflation under Code Sec. 1(f) . The cost-of-living adjustment for a calendar year under Code Sec. 1(f)(3) is generally the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for calendar year '92 (the permanent base year). FTC 2d/Fin ¶A-1103; USTR ¶14.08; TaxDesk ¶568,203; . Thus, 2011 will be the base year for the inflation adjustments of the penalty amounts described above.<br />Amounts adjusted for inflation under the above rules are rounded differently depending on whether they are large or small amounts. If any amount adjusted for inflation under the above rules is $75,000 or more, it will be rounded to the next lowest multiple of $500 (if it is not itself a multiple of $500). (Code Sec. 6721(f)(2) ) <br />If any amount adjusted for inflation under the above rules is less than $75,000, it will be rounded to the next lowest multiple of $10 (if it is not itself a multiple of $10). (Code Sec. 6721(f)(2) ) <br /> RIA observation: Thus, the per return penalties will be rounded to the next lowest multiple of $10, while the aggregate amounts will be rounded to the next lowest multiple of $500.<br /> RIA observation: The 2010 Small Business Act also increases Code Sec. 6722 penalties for failure to furnish correct payee statements, see ¶603 .<br />Effective: Information returns required to be filed after Dec. 31, 2010. (2010 Small Business Act §2102(h)) <br /> Per statement rates for payee statement penalty and maximum and minimum penalty amounts increased<br />Code Sec. 6722, as amended by 2010 Small Business Act §2102(g)<br />Generally effective: Information returns required to be filed after Dec. 31, 2010 <br />Committee Reports, see ¶5613 <br />Code Sec. 6722 imposes penalties for (a) any failure to furnish a payee statement to the person prescribed, on or before the date prescribed, and (b) any failure to include all of the information required to be shown on the payee statement or any inclusion of incorrect information on the payee statement. FTC 2d/Fin ¶V-1814; USTR ¶67,224; TaxDesk ¶861,066; . Under pre-2010 Small Business Act law, except in cases of intentional disregard, persons who committed such failures were subject to a $50 penalty for each payee statement with respect to which a failure occurred, but the total amount imposed on any person for all such failures during any calendar year could not exceed $100,000. FTC 2d/Fin ¶V-1816; USTR ¶67,224; TaxDesk ¶861,068; <br />Under pre-2010 Small Business Act law, where the failure act was due to intentional disregard of the requirement to furnish a correct statement, the penalty for each such failure was $100 or, if greater: <br />(1) 10% of the aggregate amount of the items required to be reported correctly, in the case of a payee statement other than a statement required under any of the following: <br />• Code Sec. 6041A(e) , in respect of returns required under Code Sec. 6041A(b) (statements concerning payments to direct sellers), <br />• Code Sec. 6045(b) (statements concerning transactions, including real estate transactions, reportable by brokers), <br />• Code Sec. 6050H(d) (statements of payments of $600 or more in a calendar year of mortgage interest that is received in the course of a trade or business), <br />• Code Sec. 6050J(e) (statement concerning foreclosures or abandonments of property held as security for business loans), <br />• Code Sec. 6050K(b) statements concerning certain exchanges of partnership interests), <br />• Code Sec. 6050L(c) (statements concerning certain dispositions of donated property), <br />or: <br />(2) 5% of the aggregate amount of the items required to be reported correctly in the case of a payee statement required under Code Sec. 6045(b) (statements concerning transactions, including real estate transactions, reportable by brokers), Code Sec. 6050K(b) (statements concerning certain exchanges of partnership interests), or Code Sec. 6050L(c) (statements concerning certain dispositions of donated property). <br />In the case of the intentional disregard penalties described above, there was no $100,000 limitation on the amount of penalties that may be imposed on a taxpayer for a given calendar year. In addition, these intentional disregard penalties were not taken into account in applying the $100,000 limitation to other penalties. FTC 2d/Fin ¶V-1818; USTR ¶67,214; TaxDesk ¶861,070; <br />New Law. The 2010 Small Business Act revises the penalty for failure to furnish a payee statement to provide tiers and caps similar to those applicable to the penalty for failure to file the information return, discussed at ¶602 .(Com Rept, see ¶5613) Thus, the 2010 Small Business Act increases the basic penalty from $50 to $100 and increases the calendar year maximum limit on it from $100,000 to $1,500,000. (Code Sec. 6722(a)(1) as amended by 2010 Small Business Act §2102(g)) The Committee Reports refer to this penalty as the third-tier penalty. (Com Rept, see ¶5613) <br />The definition of a failure is the same as under pre-2010 Small Business Act law. (Code Sec. 6722(a)(2) ) <br />However, the 2010 Small Business Act reduces the penalty for failures corrected on or before the day 30 days after the required filing date. In such cases the basic penalty is reduced from $100 to $30 (first-tier penalty). (Code Sec. 6722(b)(1)(A) ) The calendar year maximum limit per person for all such corrected failures is $250,000. (Code Sec. 6722(b)(1)(B) ) <br />The 2010 Small Business Act also provides for a less significant reduction if a failure subject to the penalty is corrected after the 30-day deadline above, but on or before Aug. 1 of the calendar year in which the required filing date occurred. In such a case the basic penalty is reduced from $100 to $60 (second-tier penalty). (Code Sec. 6722(b)(2)(A) ) The calendar year maximum limit per person for all such corrected failures is $500,000. (Code Sec. 6722(b)(2)(B) ) <br />Under the 2010 Small Business Act, the maximum penalties for small businesses are much lower than the above maximum limits. They are $500,000, rather than $1,500,000 if the failures aren't corrected on or before Aug. 1 of the calendar year in which the required filing date occurred (Code Sec. 6722(d)(1)(A) ) , $75,000 rather than 250,000 if the failures are corrected on or before 30 days after the prescribed filing date (Code Sec. 6722(d)(1)(B) ) , and $200,000 rather than $500,000 if the failures are corrected on or before Aug. 1. (Code Sec. 6722(d)(1)(C) ) Small businesses are defined as in Code Sec. 6721(d)(2) (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million, see FTC 2d/Fin ¶V-1806; USTR ¶67,214; TaxDesk ¶861,056; ).(Code Sec. 6722(d)(2) ) Thus, the 2010 Small Business Act changes the penalty structure in cases not involving intentional disregard from a simple structure ($50 per statement penalty up to a $100,000 maximum) into the complex structure illustrated by the following table: <br /> New general penalty New small business penalty <br />Penalty for failure corrected within 30 days $30 (maximum $250,000) $30 (maximum $75,000)<br />Penalty for failure corrected by Aug. 1 $60 (maximum $500,000) $60 (maximum $200,000)<br />Penalty for failure not corrected by Aug. 1 $100 (maximum $1,500,000) $100 (maximum $500,000)<br /> RIA observation: The exception for small business is particularly important because it relates to the maximum amount of the penalties. Although the above changes double the basic penalty amount where the statement doesn't meet the Aug. 1 deadline, they actually reduce it if the statement meets the 30-day deadline. But, the changes increase the maximum limits dramatically, except in the case of small businesses. Even the lowest maximum limit for persons other than small businesses (where the 30-day deadline is met) is $250,000 compared to the $100,000 limit under pre-Small Business Act law. Small businesses in this situation get a $75,000 maximum. The importance of the new law changes in the maximum limit are illustrated below.<br /> RIA illustration 1: A Corporation (X) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely furnish 10,000 statements for Calendar Year 1. X eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, X was subject to a $100,000 penalty for the 10,000 statements ($50 × 10,000 = $500,000, subject to a $100,000 limit). Under 2010 Small Business Act law, X is subject to a $1,000,000 penalty for the 10,000 statements because they weren't filed by Aug. 1 ($100 × 10,000 = $1,000,000, which is less than the $1,500,000 maximum limit).<br /> RIA illustration 2: A Corporation (Y) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 12,000 statements for Calendar Year 1. 6,000 of these are filed with correct information within 30 days of the required date, and 5,500 after 30 days but on or before Aug. 1, Year 2. 500 statements are eventually filed on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, Y was subject to a $100,000 penalty for the 12,000 statements ($50 × 12,000 = $600,000 subject to a $100,000 limit). Under 2010 Small Business Act law, Y is subject to a $50,000 penalty for the 500 statements that weren't filed by Aug. 1 ($100 × 500 = $50,000), $330,000 for the 5,500 statements filed after 30 days ($60 × 5,500 = $330,000, not subject to reduction by the $500,000 maximum limit), and $180,000 for the 6,000 statements filed within 30 days ($30 × 6,000 = $180,000, not subject to reduction by the $250,000 maximum penalty), for a total penalty of $560,000. Thus, the penalty greatly increased due to the greatly increased maximum amounts. If there were no maximum limits under pre-2010 Small Business Act law, the penalty would actually have decreased (from $600,000 to $560,000).<br />Except as provided below, a de minimis number (as defined below) of payee statements that do not include all of the information required to be shown on the statement or that include incorrect information will be treated as having been furnished with all of the correct required information, if the failure is corrected on or before Aug. 1 of the calendar year in which the required filing date occurs. (Code Sec. 6722(c)(1) ) The de minimis number is the greater of 10 or one half of 1 percent of the total number of payee statements that the person is required to file during that calendar year. (Code Sec. 6722(c)(2) ) <br /> RIA illustration 3: Thus, if a corporation is required to file 10,000 payee statements for Year 1, the calculation of the de minimis exception is based on the 10,000 and therefore the de minimis number is 50.<br />The 2010 Small Business Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250. (Code Sec. 6722(e)(2) ) The Act also provides that the penalty for each such failure is not affected by the reductions for correction within 30 days or by Aug. 1, the lower limits for small business and the exception for de minimis failures. (Code Sec. 6722(e)(1) ) In the case of these intentional disregard penalties, there is no $1,500,000 limitation on the amount of penalties that may be imposed on a taxpayer for a given calendar year. In addition, these intentional disregard penalties are not taken into account in applying the $1,500,000 limitation to other penalties. (Code Sec. 6722(e)(3) ) <br />The calculation of the intentional disregard penalties is the same as under pre-2010 Small Business Act law, except for the increased minimum penalty. (Code Sec. 6722(e)(2) ) <br />The 2010 Small Business Act also provides that the penalty amounts will be adjusted for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter. (Com Rept, see ¶5613) . Specifically, for each fifth calendar year beginning after 2012, each of the dollar amounts under Code Sec. 6722(a) (relating to the basic penalty), Code Sec. 6722(b) (relating to the reductions for correction within 30 days or by Aug. 1), Code Sec. 6722(d) (relating to the lower limits for small businesses), and Code Sec. 6722(e) (relating to intentional disregard) will be increased by the dollar amount multiplied by a cost-of-living adjustment. But, this won't apply to the $5,000,000 gross receipts test amount in Code Sec. 6722(d)(2) ). The inflation adjustment will be determined under Code Sec. 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in Code Sec. 1(f)(3)(B) . (Code Sec. 6722(f)(1) ) <br /> RIA observation: Tax bracket amounts are indexed for inflation under Code Sec. 1(f) . The cost-of-living adjustment for a calendar year under Code Sec. 1(f)(3) is generally the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for calendar year '92 (the permanent base year). FTC 2d/Fin ¶A-1103; USTR ¶14.08; TaxDesk ¶568,203; . Thus, 2011 will be the base year for the inflation adjustments of the penalty amounts described above.<br />Amounts adjusted for inflation under the above rules are rounded differently depending on whether they are large or small amounts. If any amount adjusted for inflation under the above rules is $75,000 or more, it will be rounded to the next lowest multiple of $500 (if it is not itself a multiple of $500). (Code Sec. 6722(f)(2)(A) ) <br />If any amount adjusted for inflation under the above rules is less than $75,000, it will be rounded to the next lowest multiple of $10 (if it is not itself a multiple of $10). (Code Sec. 6722(f)(2)(B) ) <br /> RIA observation: Thus, the per statement penalties will be rounded to the next lowest multiple of $10, while the aggregate amounts will be rounded to the next lowest multiple of $500.<br /> RIA observation: The 2010 Small Business Act also increases Code Sec. 6721 penalties for failure to file information returns, see ¶602 .<br />Effective: Information returns required to be filed after Dec. 31, 2010. (2010 Small Business Act §2102(h)) <br /> RIA observation: The effective date above seems to be tailored to the related changes in the Code Sec. 6721 penalties for failure to file information returns, see ¶602 . The above changes to the Code Sec. 6722 penalty seem to be effective for statements due after Dec. 31, 2010.<br /> Penalties for failing to report reportable and listed transactions retroactively reduced for post-2006 assessments<br />Code Sec. 6707A(b), as amended by 2010 Small Business Act §2041(a)<br />Generally effective: Penalties assessed after Dec. 31, 2006<br />Committee Reports, see ¶5609 <br />Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required under Code Sec. 6011 to be included with the return or statement. The penalty applies regardless of whether the transaction results in a tax understatement. The penalty also applies in addition to any other penalty that may be imposed under the Code. Regulations under Code Sec. 6011 require taxpayers to disclose with their returns certain information regarding each reportable transaction in which they participated. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; . <br />Under pre-2010 Small Business Act law, the penalty for failure to report reportable transactions was $10,000 in the case of a natural person and $50,000 for others. These amounts were increased, however, if they involved a listed transaction to $100,000 for a natural person, and $200,000 for all others. FTC 2d/Fin ¶V-2532; USTR ¶67,07A4; TaxDesk ¶866,502; <br />Reportable transactions are certain types of transactions IRS has identified as having a potential for tax avoidance or evasion. A listed transaction for Code Sec. 6707A purposes means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec. 6011 purposes. Such identification may be made by notice, reg or other forms of published guidance. FTC 2d/Fin ¶V-2533; USTR ¶67,07A4; TaxDesk ¶866,503; , TaxDesk ¶866,504; . <br />After noting a Congressional commitment to enact legislation to address the perceived inequities caused by the imposition of the high listed transaction penalties described above on small businesses, IRS announced, on July 6, 2009, a suspension of Code Sec. 6707A collection enforcement through Sept. 30, 2009, in cases where the annual tax benefit from the transaction was less than $100,000 for individuals or $200,000 for other taxpayers per year. On Sept. 24, 2009, this suspension was extended through Dec. 31, 2009 to give Congress time to address the issue. On Dec. 23, 2009, IRS announced its intention to further extend the suspension until Mar. 1, 2010 and said it would hold off until Mar. 1, 2010 on filing new notices of lien where the amount due was solely related to Code Sec. 6707A penalties. IRS said it would work with taxpayers experiencing financial hardship due to existing liens covered by the moratorium. On Mar. 2, 2010, a further extension until June 1, 2010, was announced along with a continued intention to hold off on filing new notices of lien on amounts due that were solely related to Code Sec. 6707A penalties. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; <br />New Law. The 2010 Small Business Act completely replaces the Code Sec. 6707A penalty structure. The new law says that, except as otherwise provided below, the amount of the penalty with respect to any reportable transaction shall be 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction if the transaction were respected for federal tax purposes). (Code Sec. 6707A(b)(1) as amended by 2010 Small Business Act §2041(a)) <br />The 2010 Small Business Act changes the general rule for determining the amount of the applicable penalty to achieve proportionality between the penalty and the tax savings that were the object of the transaction. (Com Rept, see ¶5609) <br />Regardless of the amount determined under the general rule, the penalty for each such failure may not exceed certain maximum amounts. (Com Rept, see ¶5609) The new law provides that the amount of the penalty with respect to any reportable transaction for any tax year can't exceed: <br />(A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person), <br />(B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person). (Code Sec. 6707A(b)(2) ) <br /> RIA observation: Thus, the above rules provide for a dramatic lowering of the penalties. Note that the previously applicable penalty amounts required to be imposed with respect to listed transactions ($100,000 for natural persons and $200,000 for others) are now the maximum penalties for such persons with respect to listed transactions. The maximums apply to limit the penalty if the decrease in tax that triggered the penalty was more than $133,333.33 (.75 × $133,333.33 = $100,000) for natural persons and more than $266,666.67 (.75 × $266,666.67 = $200,000) for others. <br />Similarly, the previously applicable penalty amounts required to be imposed with respect to reportable transactions ($10,000 for natural persons and $50,000 for others) are now the maximum penalties for such persons with respect to reportable transactions. These maximums apply to limit the penalty if the decrease in tax that triggered the penalty was more than $13,333.33 (.75 × $13,333.33 = $10,000) for natural persons and more than $66,666.67 (.75 × $66,666.67 = $50,000) for others.<br />The 2010 Small Business Act also establishes a minimum penalty with respect to failure to disclose a reportable or listed transaction. (Com Rept, see ¶5609) Thus, the new law provides that the amount of the penalty with respect to any transaction can't be less than $5,000 for a natural person and $10,000 for any other person. (Code Sec. 6707A(b)(3) ) <br />Illustration 1: Two individuals participate in a listed transaction through a partnership formed for that purpose. Both partners, as well as the partnership, are required to disclose the transaction. All fail to do so. The failure by the partnership to disclose its participation in a listed or otherwise reportable transaction is subject to the minimum penalty of $10,000, because income tax liability is not incurred at the partnership level nor reported on a partnership return. The partners in the partnership who also failed to comply with the reporting requirements of Code Sec. 6011 are each subject to a penalty based on the reduction in tax reported on their respective returns, but not in excess of $100,000 for each. (Com Rept, see ¶5609) <br />Illustration 2: A corporation participates in a single listed transaction over the course of three tax years. The decrease in tax shown on the corporate returns is $1 million in the first year, $100,000 in the second year, and $10,000 in the third year. If the corporation fails to disclose the listed transaction in all three years, the corporation is subject to three separate penalties: a penalty of $200,000 in the first year (as a result of the cap on penalties), a $75,000 penalty in the second year (computed under the general rule) and a $10,000 penalty in the third year (as a result of the minimum penalty) for total penalties of $285,000. (Com Rept, see ¶5609) <br /> RIA observation: The 2010 Small Business Act also requires an annual report to Congress relating to the above penalty, see ¶703 .<br />Effective: Penalties assessed after Dec. 31, 2006. (2010 Small Business Act §2041(b)) <br /> RIA observation: Thus, not only does the 2010 Small Business Act provide for a dramatic lowering of the potentially applicable penalties, but it also makes the change retroactive to a date that long precedes the moratorium declared on July 6, 2009.<br /> RIA recommendation: Taxpayers who have already paid a Code Sec. 6707A penalty should consider filing a refund claim due to the retroactive nature of the above change.<br /> <br />IRS required to submit annual reports to Congress on penalties and other enforcement actions<br />Code Sec. 6662A, 2010 Small Business Act §2103<br />Code Sec. 6700, 2010 Small Business Act §2103<br />Code Sec. 6707, 2010 Small Business Act §2103<br />Code Sec. 6707A, 2010 Small Business Act §2103<br />Code Sec. 6708, 2010 Small Business Act §2103<br />Code Sec. 6501(c)(10), 2010 Small Business Act §2103<br />Generally effective: Sept. 27, 2010<br />Committee Reports, see ¶5614 <br />Under Code Sec. 6662A , a 20% accuracy-related penalty applies for “reportable transaction understatements” for any tax year (referred to below as the “reportable transaction understatement penalty”). The penalty rises is 30% for any portion of any reportable transaction understatement for which certain disclosure rules are not met. There is a reasonable cause exception to the penalty that isn't available if the 30% penalty rate applies. An item is subject to the penalty rules if the item is attributable to: (a) any listed transaction and (b) any reportable transaction (other than a listed transaction) if a significant purpose of the transaction is federal income tax avoidance or evasion. Reportable transactions are certain types of transactions IRS has identified as having a potential for tax avoidance or evasion. A listed transaction means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec. 6011 purposes. FTC 2d/Fin ¶V-2281; ; FTC 2d/Fin ¶V-2282; USTR ¶66,62A4; TaxDesk ¶868,101; . <br />Code Sec. 6700 imposes a civil penalty on any person who: <br />• organizes (or assists in the organization of) or participates (directly or indirectly) in the sale of any interest in (a) a partnership or other entity, (b) any investment plan or arrangement, or (c) any other plan or arrangement, and <br />• makes or furnishes, or causes another person to make or furnish, in connection with such organization or sale (a) a statement on the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement, which he knows (or has reason to know) is false or fraudulent as to any material matter, or (b) a gross valuation overstatement as to any material matter. FTC 2d/Fin ¶V-2401; USTR ¶67,004; . <br />IRS is authorized to waive all or part of any Code Sec. 6700 penalty resulting from a gross valuation overstatement, if there was a reasonable basis for the valuation and the valuation was made in good faith. FTC 2d/Fin ¶V-2409; USTR ¶67,004; . <br />Code Sec. 6707 provides that a material advisor (as defined in Code Sec. 6111 , i.e., any person who provides any material aid, assistance, or advice with respect to a reportable transaction, and who directly or indirectly derives gross income in excess of a threshold amount for the advice or assistance) who fails to file a timely information return required under Code Sec. 6111(a) , or who files a false or incomplete information return, for a reportable transaction (including a listed transaction) is subject to a penalty. The penalty is ordinarily $50,000 for each failure. However, if the failure relates to a listed transaction, the penalty is increased. The Code Sec. 6707A rules below apply to the rescission of this penalty. Thus, the penalty won't be rescinded for a listed transaction and there will be no right to a judicial appeal of a refusal to rescind a penalty. FTC 2d/Fin ¶V-2501; USTR ¶67,074; TaxDesk ¶866,505; . <br />Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required under Code Sec. 6011 to be included with the return or statement. Regulations under Code Sec. 6011 require taxpayers to disclose with their returns certain information regarding each reportable transaction in which they participated. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; . IRS may rescind all or any portion of the penalty for failing to disclose a reportable transaction imposed by Code Sec. 6707A for any violation if: (a) the violation is for a reportable transaction other than a listed transaction, and (b) rescinding the penalty would promote compliance with the Code and effective tax administration. A rescission determination isn't reviewable in any judicial proceeding. FTC 2d/Fin ¶V-2535; USTR ¶67,07A4; TaxDesk ¶866,505; . The Small Business Act retroactively reduced the amount of the above penalty, see ¶701 . <br />Each material advisor must maintain a list with respect to any reportable transaction and furnish the list to IRS on request. FTC 2d/Fin ¶S-4408.1; USTR ¶61,124; . Under Code Sec. 6708 , any person required to maintain a list of advisees with respect to reportable transactions who fails to make that list available to IRS on its written request within 20 business days after the request, is liable for a penalty of $10,000 per day for each day of the failure after the 20th day, see FTC 2d/Fin ¶V-2503; USTR ¶67,084; . <br />IRS is required to maintain records and report on the administration of the penalties for failure to disclose a reportable transaction in two ways. First, each decision to rescind a penalty imposed under Code Sec. 6707 orCode Sec. 6707A must be memorialized in a record in the Office of the Commissioner. Second, IRS must provide an annual report to Congress on the administration of rescission under both Code Sec. 6707 andCode Sec. 6707A . The information relating to Code Sec. 6707A must be in summary form, while the information on rescission of penalties imposed against material advisors must be more detailed. But, the report isn't required to address administration of the other enforcement tools described above. FTC 2d/Fin ¶V-2535; USTR ¶67,07A4; . <br />New Law. The 2010 Small Business Act provides that IRS must submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate an annual report on the penalties assessed by IRS during the preceding year under certain specified provisions. <br />The penalty provisions specified as the subjects of the above annual report are: <br />(1) Code Sec. 6662A (relating to the accuracy-related penalty on understatements with respect to reportable transactions). <br />(2) Code Sec. 6700(a) (relating to promoting abusive tax shelters). <br />(3) Code Sec. 6707 (relating to failure to furnish information regarding reportable transactions). <br />(4) Code Sec. 6707A (relating to failure to include reportable transaction information with a return). <br />(5) Code Sec. 6708 (relating to failure to maintain lists of advisees with respect to reportable transactions). (2010 Small Business Act §2103(a)) <br />A summary of the penalties assessed for the preceding year is required. (Com Rept, see ¶5614) <br />The report required by the above rules must also include information on the following with respect to each year: <br />(A) Any action taken under 31 USC § 330(b) , with respect to any reportable transaction (as defined in Code Sec. 6707A(c) ). <br />(B) Any extension of the time for assessment of tax enforced, or assessment of any amount under such an extension, under Code Sec. 6501(c)(10) . (2010 Small Business Act §2103(b)) <br />31 USC § 330(b) , cited at (A) above, authorizes the Treasury Department to impose sanctions on those appearing before the Department, including monetary penalties and suspension from practice before the Department. Thus, actions taken against practitioners appearing before the Treasury or IRS with respect to a reportable transaction must be reported to Congress. (Com Rept, see ¶5614) <br />Code Sec. 6501(c)(10) , cited at (B) above, provides that if a taxpayer fails to include on any return or statement for any tax year any information with respect to a listed transaction that is required under Code Sec. 6011 to be included with that return or statement, the time for assessment of any tax with respect to that transaction won't expire before one year after the earlier of: (a) the date when the required information is furnished to IRS, or (b) the date that a material advisor meets the list-maintenance requirements with respect to a request by IRS under Code Sec. 6112(b) relating to the transaction with respect to the taxpayer. FTC 2d/Fin ¶T-4163; USTR ¶65,014.147; TaxDesk ¶838,055; . <br />Thus, instances in which IRS attempted to rely on the exception to the limitations period for assessment based on failure to disclose a listed transaction must be reported to Congress. (Com Rept, see ¶5614) <br />The first report required under the above rules must be submitted not later than December 31, 2010. (2010 Small Business Act §2103(c)) <br />Effective: Sept. 27, 2010. <br /> <br /> Certain 2015 estimated taxes due for corporations with assets of $1 billion or more increase to 159.25% <br />Code Sec. 6655, 2010 Small Business Act §2131<br />Generally effective: Sept. 27, 2010<br />Committee Reports, see ¶5621 <br />Generally, corporations are required to pay estimated income tax for each tax year in 4 equal installments due on the 15th day of the 4th, 6th, 9th, and 12th month of the tax year, see FTC 2d/Fin ¶S-5324.1; USTR ¶66,554; TaxDesk ¶609,201; . <br /> RIA illustration 1: D Corp. uses a tax year beginning on Jan. 1. The due dates for its installments are: Apr. 15, June 15, Sept. 15, and Dec. 15.<br />Under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), before amended by 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ), before amended by 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ), before amended by 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), and before amended by 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ), in the case of a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax otherwise due in July, Aug., or Sept. 2015 was 121.5% of that amount. 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on May 24, 2010, by 0.75 percentage points, 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on July 27, 2010, by 0.25 percentage points, 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on Aug. 11, 2010, by 0.5 percentage points, and 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on Aug. 16, 2010, by 0.25 percentage points. Thus, under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), as amended by 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ), as amended by 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ), as amended by 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), and as amended by 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ), in the case of a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax that would otherwise be due in July, Aug., or Sept. 2015 was 123.25% of that amount. <br />The amount of the next required installment after an increased installment must be appropriately reduced to reflect the amount of the increase. FTC 2d/Fin ¶S-5320; FTC 2d/Fin ¶S-5324.1; USTR ¶66,554; TaxDesk ¶609,201; <br />New Law. The 2010 Small Business Act provides that the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ) in effect on Sept. 27, 2010 is increased by 36 percentage points. (2010 Small Business Act §2131) Thus, the 2010 Small Business Act increases the required payment of corporate estimated tax otherwise due in July, Aug., or Sept. 2015 by 36 percentage points. (Com Rept, see ¶5621) <br /> RIA observation: Accordingly, the 2010 Small Business Act increases the corporate estimated tax payment due in July, Aug., or Sept. 2015 from 159.25% (123.25% + 36%) of the payment otherwise due.<br /> RIA illustration 2: X Corp., a calendar-year taxpayer with assets of $2 billion, calculates its estimated tax payment otherwise due in Sept. 2015 to be $100,000,000. Instead, X must make a payment of $159,250,000 ($100,000,000 × 159.25%) by the due date in Sept. 2015. X calculates its estimated tax payment otherwise due in Dec. 2015 to be $100,000,000. X reduces the estimated tax payment otherwise due in Dec. 2015 by $59,250,000 ($159,250,000 − $100,000,000). Thus, X must make a payment of $40,750,000 ($100,000,000 − $59,250,000) by the due date in Dec. 2015.<br /> RIA observation: Corporations with a fiscal year that begins July 1 will not be affected by the above rule, because they do not have any estimated tax payments due in July, Aug., or Sept.<br /> RIA illustration 3: Z Corp. uses a tax year beginning on July 1. For Z's tax year beginning July 1, 2015, the due dates for its installments are: Oct. 15, 2015, Dec. 15, 2015, Mar. 15, 2016, and June 15, 2016.<br /> RIA observation: The federal government's fiscal year begins Oct. 1. Thus, the 2010 Small Business Act effectively moves revenues from one fiscal year to another to meet budgetary requirements.<br />Effective: Sept. 27, 2010. (Com Rept, see ¶5621) <br /> ¶ 802. Crude tall oil and other fuels with acid numbers over 25 that are sold or used after Dec. 31, 2009 aren't eligible for the cellulosic biofuel producer credit<br />Code Sec. 40(b)(6)(E)(iii)(III), as amended by 2010 Small Business Act §2121(a)(3)<br />Generally effective: Fuels sold or used after Dec. 31, 2009<br />Committee Reports, see ¶5619 <br />The cellulosic biofuel producer credit is a component of the alcohol fuel credit. This credit is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year, and is in addition to any other credit available under the alcohol fuels credit, see FTC 2d/Fin ¶L-17501; USTR ¶404.01; TaxDesk ¶382,202; . The cellulosic biofuel producer credit applies to qualified cellulosic biofuel production after Dec. 31, 2008 and before Jan. 1, 2013, see FTC 2d/Fin ¶L-17516.1; USTR ¶404.07; TaxDesk ¶382,213; . <br />Cellulosic biofuel is any liquid fuel that: <br />... is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis; and <br />... meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under §211 of the Clean Air Act (42 USC 7545). <br />Cellulosic biofuel doesn't include any alcohol with a proof of less than 150. For this purpose, the determination of the proof of any alcohol is made without regard to any added denaturants. See FTC 2d/Fin ¶L-17516.5; USTR ¶404.01; TaxDesk ¶382,213; . Also, under pre-2010 Small Business Act law, cellulosic biofuel (as defined above) does not include unprocessed fuels (sometimes referred to as black liquor) that are: <br />... more than 4% of the fuel (determined by weight) is any combination of water and sediment, or <br />... the ash content of the fuel is more than 1% (determined by weight). FTC 2d/Fin ¶L-17516.5A; USTR ¶404.11; <br />The kraft process for making paper produces a by-product called black liquor, which has been used for decades by paper manufacturers as a fuel in the papermaking process. Black liquor is composed of water, lignin and the spent chemicals used to break down the wood. The amount of the biomass in black liquor varies. The portion of the black liquor that is not consumed as a fuel source for the paper mills is recycled back into the papermaking process. Black liquor has ash content (mineral and other inorganic matter) significantly above that of other fuels. (Com Rept, see ¶5619) <br />Crude tall oil is generated by reacting acid with “black liquor soap.” Crude tall oil is used in various applications, such as adhesives, resins, and coatings. It also can be burned and used as a fuel. (Com Rept, see ¶5619) <br />New Law. Under the 2010 Small Business Act, cellulosic biofuel (as defined above) does not include any fuel if the fuel has an acid number greater than 25. (Code Sec. 40(b)(6)(E)(iii)(III) as amended by 2010 Small Business Act §2121(a)(3)) In other words, the 2010 Small Business Act modifies the cellulosic biofuel producer credit to exclude from the definition of cellulosic biofuel fuels with an acid number of greater than 25. (Com Rept, see ¶5619) <br />The acid number is the amount of base required to neutralize the acid in the sample. The acid number is reported as weight of the base (typically potassium hydroxide) per weight of sample, or milligram (“mg”) potassium hydroxide per gram. The normal acid number for crude tall oil is between 100 and 175. As a comparison, ASTM (American Society for Testing and Materials) D6751 for biodiesel specifies that the acid number be less than 0.5 mg potassium hydroxide. ASTM D4806 for ethanol does not have acid value but instead limits “acidity” to 0.007 mg of acetic acid per liter, which is significantly below an acid number of 25. (Com Rept, see ¶5619) <br /> RIA observation: Since crude tall oil normally has an acid number between 100 and 175 (i.e., an acid number greater than 25), it is excluded from the definition of cellulosic biofuel and thus, isn't eligible for the cellulosic biofuel producer credit.<br /> RIA observation: According to a Senate Summary (dated July 21, 2010) of the 2010 Small Business Act, 2010 Small Business Act §2121 limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application).<br />Effective: Fuels sold or used after Dec. 31, 2009. (2010 Small Business Act §2121(b)) <br /> RIA caution: If a producer uses a fiscal year as its tax year, the producer may have already filed an income tax return that contains a claim of the cellulosic biofuel producer credit based on crude tall oil sold or used in 2010. In that case, the producer will need to consider filing an amended return to change its claim of the cellulosic biofuel producer credit to reflect the exclusion of crude tall oil from the definition of cellulosic biofuel for any fuels sold or used after Dec. 31, 2009.<br /> <br />New rules provided for sourcing guarantee income<br />Code Sec. 861(a)(9), as amended by 2010 Small Business Act §2112(a)<br />Code Sec. 862(a)(9), as amended by 2010 Small Business Act §2122(b)<br />Code Sec. 864(c)(4)(B)(ii), as amended by 2010 Small Business Act §2122(c)<br />Generally effective: Guarantees issued after Sept. 27, 2010<br />Committee Reports, see ¶5620 <br />Nonresident alien individuals and foreign corporations are generally subject to a 30% gross basis withholding tax on payments of U.S. source fixed or determinable annual or periodical (FDAP) income that is not effectively connected with a U.S. trade or business. ( FTC 2d/Fin ¶O-10101; ; FTC 2d/Fin ¶O-10103; ; FTC 2d/Fin ¶O-11903; USTR ¶8714.02; ; USTR ¶8814.02; ; USTR ¶14414; ; USTR ¶14424; TaxDesk ¶630,101; ; TaxDesk ¶632,001; ; TaxDesk ¶634,001; ) Foreign persons are also subject to U.S. income tax (in the same manner and at the same rates as U.S. persons) on income that is effectively connected with the conduct of a U.S. trade or business (ECI). Foreign source income is treated as ECI only if it falls into one of three specific statutory categories, and only if the foreign person has an office or other fixed place of business in the U.S. to which the income is attributable. Under pre-2010 Small Business Act law, one of these categories included interest or dividends derived in the active conduct of a banking, financing, or similar business within the U.S., or received by a corporation whose principal business is trading in stocks or securities for its own account. FTC 2d/Fin ¶O-10622; FTC 2d/Fin ¶O-10632; FTC 2d/Fin ¶O-10635; FTC 2d/Fin ¶O-10640.2; USTR ¶8614.11; USTR ¶8644.04; USTR ¶8644.05; TaxDesk ¶642,011; <br />The Code and regs provide sourcing rules for certain categories of income. For example, interest income is generally sourced to the residence of the obligor and personal services income is generally sourced to where the services are performed. Courts have sourced some items of income in categories that are not subject to a specific source rule by analogy, i.e., by applying the rule that applies to the most similar type of income. ( FTC 2d/Fin ¶O-10900; et seq. USTR ¶8614.01; TaxDesk ¶633,000; et seq.) <br />Under pre-2010 Small Business Act law, guarantee fees were not covered by a specific sourcing rule and courts had sourced them by analogy. Certain credit fees were sourced as income from services when they were charged for specific services, for example, the negotiation of letter of credit commissions. Acceptance and confirmation payments on export letters of credit to third party banks, on the other hand, have been treated as more closely analogous to interest because they involved a substitution of credit and the assumption of increased risk by the guarantor. In Container Corp. 134 TC No. 5 (Feb. 17, 2010), the Tax Court treated guarantee fees paid to a foreign parent as analogous to payments for services when the parent had no primary obligation to make payments on the underlying debt. The Court concluded that credit support — as opposed to credit substitution — was more in the nature of personal services and should be sourced as payments for services. Since the guarantee was based on the parent's assets and creditworthiness, the fees were held to be foreign source income and withholding was not required under Code Sec. 1442 .FTC 2d/Fin ¶O-10907.1; <br />New Law. The 2010 Small Business Act (Act) provides specific sourcing rules for guarantee fees that are intended to legislatively overrule Container Corp.(Com Rept, see ¶5620) Under the Act, gross income from sources within the U.S. includes amounts received, directly or indirectly, from: <br />(A) a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of that resident or corporation (Code Sec. 861(a)(9)(A) as amended by 2010 Small Business Act §2122(a)) , or <br />(B) any foreign person for the provision of a guarantee of any indebtedness of such person, if those amounts are connected with income that is effectively connected (or treated as effectively connected) with the conduct of a U.S. trade or business. (Code Sec. 861(a)(9)(B) ) <br />Any amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of that person, other than amounts derived from sources within the U.S. described in Code Sec. 861(a)(9) are treated as income from foreign sources. (Code Sec. 862(a)(9) as amended by 2010 Small Business Act §2122(b)) ) <br />Illustration : A foreign bank pays a guarantee fee to a foreign corporation (FC) for FC's guarantee of debt owed to the bank by FC's U.S. subsidiary. The cost of the guarantee fee is passed on to the U.S. subsidiary as additional interest on the debt. The guarantee is treated as U.S. source income because it is treated as paid indirectly by the U.S. subsidiary. (Com Rept, see ¶5620) <br /> RIA observation: This allows IRS to tax payments of guarantee fees from U.S. subsidiaries to foreign parents as it taxes other payments received by foreign companies in connection with financing U.S. risks by treating the fees like any other U.S. source FDAP income without regard to the nature of the underlying credit and economic arrangements. IRS had earlier ruled that (i) guarantee fees paid to a foreign parent for third party loans could not be treated as fees in exchange for services under U.S. tax principles, (ii) that guarantee fees were more closely analogous to interest payments and should be sourced under the interest sourcing rules, but (iii) that guarantee fees could not be characterized as interest under an income tax treaty (because the third party loans were not made for the use or forbearance of money) and payment were therefore ineligible for treaty benefits. FTC 2d/Fin ¶O-10907.1; .<br /> RIA observation: This provision prevents foreign multinationals from stripping out income from U.S. subsidiaries by guaranteeing their debts through a tax haven entity. If the guarantee fees were treated as foreign source (as they would be under Container Corp.), the payments would be deductible against U.S. earnings but not be limited by the Code Sec. 163(j) earnings stripping provisions (which limit the deductibility of certain interest payments to related persons, including interest on a loan from an unrelated tax-exempt or foreign person that is guaranteed by a related tax-exempt or foreign person, see FTC 2d/Fin ¶K-5364; ). Furthermore, they would not be subject to U.S. withholding tax, even if the payee was in a non-treaty country. (A taxpayer could not achieve these tax benefits with a guarantee from a CFC to the extent the CFC had inbound guarantees treated as investments in U.S. property under Code Sec. 956 , see FTC 2d/Fin ¶O-2549; USTR ¶9564.02; .)<br /> RIA observation: Most U.S. income tax treaties do not have specific rules on the treatment guarantee payments, but many include a catchall provision that governs the treatment of income not otherwise subject to a specific provision in the treaty. Some treaties provide an exemption from source country tax on other income. This type of provision would likely prohibit U.S. tax on guarantee fees paid by a U.S. subsidiary to a resident of the other treaty country, unless it was associated with a permanent establishment. Under the U.S.–Canada Treaty, the other income article includes a specific rule that guarantee fees derived by a resident of one country are taxable only in the country of residence unless they are attributable to a permanent establishment in the other country (see FTC 2d/Fin ¶O-19035; ). Payments of guarantee fees to a Canadian corporation for related party guarantees, therefore, are not subject to U.S. withholding tax under the U.S.–Canada Treaty so long as the Canadian corporation does not engage in the trade or business of providing guarantees through a U.S. permanent establishment.<br />The term "noncorporate residents" is intended to be consistent with Code Sec. 861(a)(1) (in connection with sourcing interest payments), except that foreign partnerships are not included. Payments from a foreign partnership with respect to guarantees of partnership debt are U.S. source if the payments are connected with ECI. (Com Rept, see ¶5620) <br /> RIA observation: This treatment is consistent with the Code Sec. 861(a)(1)(C) source rule for interest paid by a foreign partnership predominantly engaged in the active conduct of a trade or business outside the U.S.. Interest income of a foreign partnership from domestic sources is not U.S. source income unless it is paid by a trade or business engaged in by the partnership in the U.S., or it is allocable to income effectively connected (or treated as effectively connected) with the conduct of a trade or business in the U.S.<br />The 2010 Small Business Act further provides that amounts received for the provision of guarantees of indebtedness will be treated as effectively connected with the conduct of a foreign corporation's U.S. trade or business if they are attributed to an office or other fixed place of business within the U.S., and either (i) the taxpayer's principal business is the active conduct of a banking, financing, or similar business within the U.S., or (ii) the income is received by a foreign corporation engaged in a U.S. business consisting of trading in stocks or securities for its own account. (Code Sec. 864(c)(4)(B)(ii) as amended by 2010 Small Business Act §2122(c)) <br /> RIA observation: This conforming provision allows the U.S. to tax guarantee fees generated in the business of financing U.S. risks through subsidiaries as it taxes other payments received by foreign companies for financing such as interest (see FTC 2d/Fin ¶O-10632; ; FTC 2d/Fin ¶O-10635; USTR ¶8644.04; ).<br />IRS may provide source rules for other types of payments not covered by Code Sec. 861(a)(9) .(Com Rept, see ¶5620) <br />Effective: Guarantees issued after Sept. 27, 2010. (2010 Small Business Act §2122(d)) <br />Congress intends no inference regarding the source of income received for guarantees issued before Sept. 27, 2010. (Com Rept, see ¶5620) <br /> © 2010 Thomson <br /><br /><br /><br /><br />§ 6707A Penalty for failure to include reportable transaction information with return.<br />________________________________________<br /> (a) WG&L Treatises Imposition of penalty. <br />Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b). <br /> (b) WG&L Treatises Amount of penalty. <br /> (1) New Law AnalysisWG&L Treatises In general. <br />Except as otherwise provided in this subsection , the amount of the penalty under subsection (a) with respect to any reportable transaction shall be 75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes). <br /> (2) New Law AnalysisWG&L Treatises Maximum penalty. <br />The amount of the penalty under subsection (a) with respect to any reportable transaction shall not exceed— <br /> (A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person), or <br /> (B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person). <br /> (3) New Law Analysis Minimum penalty. <br />The amount of the penalty under subsection (a) with respect to any transaction shall not be less than $10,000 ($5,000 in the case of a natural person). <br /> (c) WG&L Treatises Definitions. <br />For purposes of this section — <br /> (1) WG&L Treatises Reportable transaction. <br />The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion. <br /> (2) Listed transaction. <br />The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011. <br /> (d) Authority to rescind penalty. <br /> (1) In general. <br />The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if— <br /> (A) the violation is with respect to a reportable transaction other than a listed transaction, and <br /> (B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration. <br /> (2) No judicial appeal. <br />Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding. <br /> (3) Records. <br />If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including— <br /> (A) a statement of the facts and circumstances relating to the violation, <br /> (B) the reasons for the rescission, and <br /> (C) the amount of the penalty rescinded. <br /> (e) Penalty reported to SEC. <br />In the case of a person— <br /> (1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and <br /> (2) which— <br /> (A) is required to pay a penalty under this section with respect to a listed transaction, <br /> (B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or <br /> (C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c), <br />the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies. <br /> (f) Coordination with other penalties. <br />The penalty imposed by this section shall be in addition to any other penalty imposed by this title.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-7646678145968116572010-09-29T09:39:00.000-04:002010-09-29T09:40:47.118-04:00retrn preparer identification number requirementsreturn preparer identifying number requirements<br /><br />Preamble to TD 9501, 09/28/2010 , Reg. § 1.6109-2 <br />IRS has issued final regs under Code Sec. 6109 providing guidance on the new, post-2010 requirement for tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and claims for refund of tax that they prepare. The regs, which are effective on Sept. 30, 2010, largely adopt proposed regs issued earlier this year and reject numerous commentator requests to limit the scope of the PTIN requirement. For companion regs establishing a new user fee for PTINs and the procedure for obtaining a PTIN, see ¶ 21 . <br />Background. Under Code Sec. 6109(a)(4) , any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number (SSN), or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance. <br />At the end of 2009, IRS released a 50-page study on the U.S. return preparer industry which carries detailed recommendations for new standards (registration, competency testing, continuing education, ethical standards), see Weekly Alert ¶ 31 01/07/2010 ). See Publication 4832, Return Preparer Review (Rev. 12-2009). <br />Click here for IRS's “Return Preparer Review.” <br />Earlier this year, IRS issued proposed regs explaining the new PTIN requirements for tax return preparers (see Weekly Alert ¶ 13 04/01/2010 ). Now, IRS has essentially finalized the proposed regs, and, in doing so, rejected many of the criticisms that had been leveled against the approach it took in proposed regs. <br />Here's a summary of what the final regs provide. <br />Requirement to use a PTIN. For tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a SSN as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. ( Reg. § 1.6109-2(a)(2) ) <br />The regs don't distinguish between domestic or foreign tax return preparers. IRS recognizes that foreign preparers don't know how to obtain a PTIN and says that it intends to issue transitional guidance before Dec. 31, 2010, explaining how foreign and other preparers who don't have SSNs can obtain a PTIN. ( Preamble to TD 9501, 09/28/2010 ) See ¶ 21 for guidance on applying for a PTIN for applicants without a SSN. <br />For tax returns or claims for refund filed before Jan. 1, 2011, a tax return preparer's identifying number remains the preparer's SSN or PTIN. ( Preamble to TD 9501, 09/28/2010 ) <br />Who can obtain a PTIN. Beginning after Dec. 31, 2010, all tax return preparers must have a PTIN or other IRS-authorized identification number. To obtain a PTIN or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before IRS under 31 USC § 330. ( Reg. § 1.6109-2(d) ) However, IRS may prescribe exceptions to the PTIN requirements, including the requirement that an individual be authorized to practice before IRS before receiving a PTIN or other prescribed identifying number, as necessary in the interest of effective tax administration. IRS may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the regs. ( Reg. § 1.6109-2(h) ) <br />IRS rejected calls to exempt (or grandfather) from the PTIN requirement state licensed tax return preparers, and to exempt return preparers of long-standing or those who prepare a small number of tax returns. IRS concluded that tax return preparers who prepare tax returns and claims for refund for compensation should be subject to uniform standards of qualification and practice, and that taxpayers should be assisted by tax return preparers subject to the same Federal regulations, regardless of a taxpayer's state of residence or variable circumstances such as the size of the business or the number of years a tax return preparer has been in the industry. ( Preamble to TD 9501, 09/28/2010 ) <br />The regs don't cover tax return preparation software, as developers of such software aren't return preparers. ( Preamble to TD 9501, 09/28/2010 ) <br />IRS concluded that arrangements for tax return preparation as part of a sales transaction are inherently agreements to prepare tax returns for compensation, notwithstanding any claim by tax return preparers that the tax return or refund claim preparation is not separately compensated. As a result, an individual who, in connection with a sale of goods or services, prepares all or substantially all of a tax return or claim for refund filed after Dec. 31, 2010, and does not furnish a valid PTIN on the tax return or claim for refund may be liable for the Code Sec. 6695(c) penalty, unless the failure to furnish a valid PTIN was due to reasonable cause and not due to willful neglect. ( Preamble to TD 9501, 09/28/2010 ) <br />Who is a tax return preparer. For purposes of the requirement to obtain a PTIN, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Factors to consider in determining whether an individual is a tax return preparer include, but are not limited to: <br />... the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax; <br />... the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and <br />... the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. ( Reg. § 1.6109-2(g) ) <br />Under the final regs, preparing a form, statement, or schedule, such as Schedule EIC (Form 1040), Earned Income Credit, may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the above factors. ( Reg. § 1.6109-2(g) ) <br />Like the proposed regs, the final regs provide that a tax return preparer for purposes of the PTIN rule excludes an individual who is not defined as a nonsigning tax return preparer in Reg. § 301.7701-15(b)(2) . That reg defines a nonsigning tax return preparer as any tax return preparer who, while not a signing tax return preparer (the individual who has the primary responsibility for the overall substantive accuracy of the preparation of a tax return or claim for refund of tax), prepares all or a substantial portion of a tax return or claim for refund. ( Reg. § 1.6109-2(g) , Preamble to TD 9501, 09/28/2010 ) A tax return preparer also does not include an individual described in Reg. § 301.7701-15(f) (such as volunteers, those who do tax counseling for the elderly, those preparing returns for their employers, those preparing returns for free). ( Reg. § 1.6109-2(g) ) <br />Four examples help explain who is a tax return preparer. They make it clear that someone who inputs client data into computer software but doesn't exercise any discretion or judgment about the underlying tax positions is not a tax return preparer. However, that person must get a PTIN if he also interviews clients, obtains information from them to prepare a return, and figures the amount and character of return entries and whether the client's information is sufficient for return preparation. ( Reg. § 1.6109-2(g) , Exs. 1 and 2) <br />If a signing tax return preparer has an employment arrangement or association with another person, then that other person's employer identification number (EIN) must also be included on the tax return or refund claim. ( Preamble to TD 9501, 09/28/2010 ) <br />IRS rejected requests from commentators in the industry and the Chief Counsel for Advocacy of the Small Business Administration to exempt tax return preparers who don't sign returns or refund requests, and act under the supervision of signing preparer who reviews the return or refund claim. IRS said that granting the requests would have meant exempting a sizeable segment of tax return preparers and thereby undercut effective oversight by IRS of the tax return preparer community. ( Preamble to TD 9501, 09/28/2010 ) <br /> RIA observation: However, in IR 2010-99 , issued at the same time as the final regs, IRS said it was considering exempting from the new return preparer testing and education requirements those who engage in return preparation for someone else. See ¶ 21 . <br />Other rules. Under Reg. § 1.6109-2(e) , IRS may designate an expiration date for any PTIN other prescribed identifying number and may further prescribe the time and manner for renewing a PTIN or other prescribed identifying number, including the payment of a user fee. Additionally, IRS may provide that any identifying number it issued before the Sept. 30, 2010, effective date of the regs will expire on Dec. 31, 2010, unless properly renewed as specified by IRS. <br />Under Reg. § 1.6109-2(f) , as prescribed in guidance, IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a PTIN or other prescribed identifying number. <br />References: For who is a tax return preparer, see FTC 2d/FIN ¶ S-1117 ; United States Tax Reporter ¶ 77,014.24 ; TaxDesk ¶ 867,002 ; TG ¶ 71753 . For the return preparer penalty, see FTC 2d/FIN ¶ V-2631 ; United States Tax Reporter ¶ 66,944 ; TaxDesk ¶ 867,019 ; TG ¶ 71769 . <br />TD 9501. Furnishing Identifying Number of Tax Return Preparer<br />AGENCY: Internal Revenue Service (IRS), Treasury. <br />ACTION: Final rule. <br />SUMMARY: This document contains final regulations under section 6109 of the Internal Revenue Code (Code) that provide guidance on how the IRS will define the identifying number of tax return preparers and set forth requirements on tax return preparers to furnish an identifying number on tax returns and claims for refund of tax they prepare. Additional provisions of the regulations provide that tax return preparers must apply for and regularly renew their preparer identifying number as the IRS may prescribe in forms, instructions, or other guidance. <br />DATES: Effective Date: These regulations are effective on [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. <br />Applicability Date: For dates of applicability, see §1.6109-2(i). <br />FOR FURTHER INFORMATION CONTACT: Stuart Murray at (202) 622- 4940(not a toll-free number). <br />SUPPLEMENTARY INFORMATION: <br />Paperwork Reduction Act <br />The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2176. The collection of information in these final regulations is in §1.6109-2(d) and (e). This information is required in order for the IRS to issue identifying numbers to tax return preparers who are eligible to receive them. <br />An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. <br />Background <br />This document contains final amendments to regulations under section 6109 of the Code relating to furnishing a tax return preparer's identifying number on tax returns and claims for refund of tax. Section 6109(a)(4) requires tax return preparers to furnish on tax returns and claims for refund of tax an identifying number, as prescribed, to ensure proper identification of the preparer, the preparer's employer, or both. In addition, section 6109(c) authorizes the Secretary "to require such information as may be necessary to assign an identifying number to any person." The requirement to furnish an identifying number on tax returns and claims for refund of tax applies to information returns described in §301.7701- 15(b)(4) and to electronically filed tax returns. <br />In 2009 the IRS conducted a comprehensive review of tax return preparers, culminating in Publication 4832, Return Preparer Review (Rev. 12-2009) (the Report). The Report recommended that tax return preparers be required to obtain and use a preparer tax identification number (PTIN) as the exclusive preparer identifying number. The Report also recommended that the IRS establish new eligibility standards to prepare tax returns -- including testing, continuing education, and Federal tax compliance checks. The proposed regulations adopted several of the recommendations made in the Report. The Treasury Department and the IRS conclude that adopting these provisions in the final regulations will increase tax compliance and help to ensure that tax return preparers are knowledgeable, skilled, and ethical. <br />To implement recommendations made in the Report, on March 26, 2010, the Treasury Department and the IRS published in the Federal Register (75 FR 14539) a notice of proposed rulemaking (REG-134235-08) proposing amendments to §1.6109-2 regarding the identifying number that a tax return preparer must furnish on tax returns and claims for refund of tax. A public hearing was held on the proposed regulations on May 6, 2010. The IRS received written public comments responding to the proposed regulations. <br />Summary of Comments and Explanation of Revisions Over 200 written comments were received in response to the notice of proposed rulemaking. All comments were considered and are available for public inspection. Most of the comments are summarized in this preamble. <br />1. Requiring the Use of PTINs <br />The final regulations adopt the proposed amendments to §1.6109-2, which provide that for tax returns or refund claims filed after December 31, 2010, tax return preparers must obtain and exclusively use the identifying number prescribed by the IRS in forms, instructions, or other guidance, rather than a social security number (SSN), as the identifying number to be included with the tax return preparer's signature on a tax return or claim for refund. Prior to these final regulations, the identifying number of a tax return preparer was the tax return preparer's SSN or an alternative number as prescribed by the IRS. The alternative number that the IRS has prescribed is a PTIN. After December 31, 2010, tax return preparers can only use a PTIN (or other number that the IRS prescribes in the future as a replacement to the PTIN) and may not use an SSN as a preparer identifying number unless the IRS directs otherwise. For tax returns or claims for refund filed before January 1, 2011, the identifying number of a tax return preparer will remain the preparer's SSN or PTIN. <br />The requirement to use a PTIN will allow the IRS to better identify tax return preparers, centralize information, and effectively administer the rules relating to tax return preparers. The final regulations will also benefit taxpayers and tax return preparers and help maintain the confidentiality of SSNs. Most of the comments received on the notice of proposed rulemaking support the requirement to use a PTIN as the exclusive identifying number for tax return preparers beginning next year. <br />Under the final regulations, a tax return preparer must sign and furnish a PTIN on a tax return or claim for refund if the tax return preparer has primary responsibility for the overall substantive accuracy of the preparation of the tax return or claim for refund. If a signing tax return preparer has an employment arrangement or association with another person, then that other person's employer identification number (EIN) must also be included on the tax return or refund claim. Tax return preparers who are required but fail to include a PTIN on a tax return or refund claim, or fail to include the EIN of any person with whom they have an employment arrangement or association, are subject to a penalty under section 6695(c), unless the failure to include an identifying number is due to reasonable cause and not due to willful neglect. <br />a. Supervised tax return preparers who do not sign tax returns <br />The proposed regulations provided that for purposes of the provisions of §1.6109-2 that would be applicable after December 31, 2010, the term tax return preparer means any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. The proposed regulations further provided that a tax return preparer for purposes of these provisions excludes an individual who is not defined as a nonsigning tax return preparer in §301.7701-15(b)(2). A nonsigning tax return preparer is defined in §301.7701-15(b)(2) as any tax return preparer who, while not a signing tax return preparer (the individual who has the primary responsibility for the overall substantive accuracy of the preparation of a tax return or claim for refund of tax), prepares all or a substantial portion of a tax return or claim for refund. <br />Some commentators recommended that individuals who prepare or assist in preparing all or substantially all of a tax return or claim for refund should not be required to obtain a PTIN if they do not sign the tax return or claim for refund and if they act under the supervision of another tax return preparer who substantively reviews the tax return or claim for refund and signs it. Commentators explained, for example, that in some accounting firms, employees who have passed the Uniform Certified Public Accountant Examination and are working toward their license as a certified public accountant are often involved in, or assist with, the preparation of tax returns. Although these employees do not sign tax returns or claims for refund as a tax return preparer, under the regulations as proposed, they are tax return preparers who must have a PTIN after December 31, 2010, if they prepare all or substantially all of a tax return or claim for refund. The commentators proposed an exemption for these individuals. <br />The Chief Counsel for Advocacy of the Small Business Administration (SBA) submitted similar comments, on behalf of small businesses, on the proposed amendments to §1.6109-2 as applied to tax return preparers who do not sign tax returns or claims for refund, in particular the provisions requiring tax return preparers to obtain and renew a PTIN as the IRS may prescribe. The SBA heard from small accounting firms that those firms would incur a substantial financial burden if the regulations include certified public accountant candidates and other paraprofessional employees who are involved in tax return preparation under the supervision of a certified public accountant who is a signing tax return preparer. The SBA also observed that requiring these individuals to register with the IRS as tax return preparers would not improve the accuracy of tax returns prepared in small accounting firms because the firms and certified public accountants within these firms are already subject to ethical and competency rules administered by state boards of accountancy, as well as Treasury Department Circular No. 230, 31 CFR Part 10. The SBA recommended that the regulations either exclude outright employees of firms engaged in certified public accountancy who are nonsigning tax return preparers or exclude these employees if they are supervised by a certified public accountant, attorney, or enrolled agent. <br />These final regulations are intended to address two overarching objectives. The first overarching objective is to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice. The second overarching objective is to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance. <br />The final regulations define a tax return preparer in §1.6109-2(g) as an individual who prepares for compensation, or assists in preparing, all or substantially all of a tax return or claim for refund of tax. The final regulations retain this definition from the proposed regulations without including the requested exemption. It is critical to the IRS's tax administration efforts that, in the first instance, the IRS is readily able to identify all individuals who are involved in preparing all or substantially all of a tax return or claim for refund. Additionally, by requiring regular renewal of a PTIN, tax return preparers will confirm their continuing competence and suitability to be tax return preparers. Accordingly, were the Treasury Department and the IRS to provide an exemption in these regulations for a sizeable segment of tax return preparers, it would undercut effective oversight by the IRS of the tax return preparer community. An exemption for some tax return preparers, as requested in the comments, would allow the exempt individuals to prepare tax returns and claims for refund without identifying themselves to the IRS as tax return preparers and without undergoing competency examinations and suitability checks and being subject to enforceable rules of practice. <br />b. Licensed tax return preparers, tax return preparers of longstanding, and those who prepare a small number of tax returns <br />In the proposed regulations, no distinction was made between tax return preparers licensed by a state authority as tax return preparers and unlicensed tax return preparers. A number of comments were received from state-licensed tax return preparers, particularly from those who are Licensed Tax Preparers or Licensed Tax Consultants in Oregon. These comments almost uniformly requested that state-licensed tax return preparers be "grandfathered" into the regulations and not be required to apply for a PTIN, renew an existing PTIN, or comply with requirements that the IRS may prescribe to obtain or renew a PTIN after December 31, 2010. Other commentators asked that the IRS consider an exemption from the regulations for tax return preparers who have been preparers for a certain period of years or who prepare annually a volume of tax returns below a certain (relatively small) number. Some commentators, however, were opposed to exemptions or grandfather provisions. The Report discussed at some length state licensing and regulation of tax return preparers, including state-by-state descriptions, but in the Report's recommendations, exemptions were not made for tax return preparers licensed or otherwise regulated under a state program. The Report also concluded that the IRS would not provide "grandfather" exemptions based on experience in preparing tax returns. The proposed regulations, consistent with the Report's recommendations, did not include any exemption for state-based licensure, length of experience, or number of tax returns prepared. <br />After careful consideration of the comments received on this issue, the final regulations do not include any exemption for state-based licensure, length of experience, or number of tax returns prepared. The Treasury Department and the IRS conclude that tax return preparers who prepare tax returns and claims for refund for compensation should be subject to uniform standards of qualification and practice. When obtaining the services of a tax return preparation business, taxpayers should be assisted by tax return preparers subject to the same Federal regulations, regardless of a taxpayer's state of residence or variable circumstances such as the size of the business or the number of years a tax return preparer has been in the industry. <br />c. Volunteers and other unpaid tax return preparers <br />The proposed regulations did not include volunteers and other unpaid tax return preparers as tax return preparers required to obtain a PTIN. Consistent with the definition of a tax return preparer under section 7701(a)(36), which requires a compensation element for an individual to be a tax return preparer, the definition of tax return preparer in the proposed regulations excluded an individual described in §301.7701-15(f), which lists, among others, any individual who provides assistance in the preparation of tax returns as part of a Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or Low-Income Taxpayer Clinic (LITC) program. Section 301.7701-15(f)(1)(xii) also excludes from the definition of a tax return preparer anyone who prepares a tax return or claim for refund without an explicit or implicit agreement for compensation. An insubstantial gift, favor, or service received for the preparation of a tax return or refund claim is not considered compensation. <br />Several commentators recommended that the final regulations require volunteer tax return preparers to obtain a PTIN. According to the commentators, putting volunteers under the regulations would provide several benefits, including increased tax compliance and improvement of the volunteer programs. Although commentators suggested that the PTIN and other requirements applicable to paid tax return preparers also apply to volunteers, it was noted that associated fees could be waived for volunteers. The comments also noted that extending the regulations to all tax return preparers who hold themselves out to the public as tax return preparers would unambiguously include individuals who prepare tax returns for customers purportedly for "free" but incident to a customer's purchase of a product or other service. <br />The final regulations adopt the same definition of tax return preparer as in the proposed regulations. The Treasury Department and the IRS conclude that the final regulations are properly limited to paid tax return preparers. The focus on paid tax return preparation in the Report and in these regulations is consistent with both the current reality of tax return preparation and applicable legal provisions, including §301.7701-15(f). As noted by the figures in the Report, volunteer tax return preparers are a small fraction of all tax return preparers and the tax returns prepared by volunteers are a small fraction of all prepared tax returns. <br />Only volunteers or other truly unpaid tax return preparers, however, are not tax return preparers for purposes of these regulations. As an example, individuals who prepare tax returns without compensation for relatives or friends as a personal favor are not within the definition of the term tax return preparer. <br />The Treasury Department and the IRS conclude that arrangements for tax return preparation as part of a sales transaction are inherently agreements to prepare tax returns for compensation under these regulations, notwithstanding any claim by tax return preparers that the tax return or refund claim preparation is not separately compensated. No change in these regulations is necessary to reflect this result. As a result, an individual who, in connection with a sale of goods or services, prepares all or substantially all of a tax return or claim for refund filed after December 31, 2010, and who does not furnish a valid PTIN on the tax return or claim for refund may be liable for the section 6695(c) penalty, unless the failure to furnish a valid PTIN was due to reasonable cause and not due to willful neglect. <br />d. Tax return preparation software <br />The proposed regulations did not specifically include any provisions on commercially available tax return preparation software or software developers. Several commentators expressed the concern that some tax return preparers use tax return preparation software to prepare multiple "self-prepared" tax returns for clients in order to hide the tax return preparers' involvement and avoid identifying themselves on the tax returns. The commentators proposed that the final regulations include limits on the purchase or use of software, such as a requirement built into the software to enter a PTIN to use the software to prepare more than one tax return. <br />The final regulations do not include any provisions with respect to software. Software developers are not tax return preparers for purposes of these final regulations, and the regulation of software is beyond the scope of these amendments to §1.6109-2. <br />e. Requiring the use of a PTIN after December 31, 2010 <br />Under the proposed regulations, the amendments to §1.6109-2 would apply to tax returns and claims for refund filed after December 31, 2010. For tax returns and claims for refund filed before then, the existing provisions of §1.6109-2 apply. Some commentators questioned whether, as a matter of implementation, January 1, 2011, is a realistic date for the requirements of these regulations. The final regulations maintain the distinction between tax returns and claims for refund filed on or before December 31, 2010, and those filed after that date. To the extent a transitional period may be necessary, the Treasury Department and the IRS may, under §1.6109-2(h) of the final regulations, prescribe in other guidance interim procedures for tax return preparers to apply for a PTIN or register with the IRS. <br />2. Eligibility to Receive a PTIN <br />a. Foreign tax return preparers <br />The proposed regulations did not specifically address foreign tax return preparers who prepare tax returns or refund claims. A frequent question in the public comments was whether the regulations as proposed would apply to foreign tax return preparers. These commentators also asked whether foreign tax return preparers who do not have an SSN will be eligible for a PTIN. Currently, both Form W-7P, "Application for Preparer Tax Identification Number," and the existing online process at www.irs.gov that can be used to apply for a PTIN require an applicant to provide the applicant's SSN. Many foreign tax return preparers are uncertain as to how they will obtain a PTIN, if they are required to have a PTIN. <br />The final regulations apply to tax return preparers regardless of United States or foreign citizenship or residency. The IRS will establish a process to obtain a PTIN for tax return preparers who do not have SSNs. The Treasury Department and the IRS intend to issue transitional guidance before December 31, 2010, which describes the process to obtain a PTIN for foreign and other tax return preparers who do not have SSNs. <br />b. User fees <br />The proposed regulations provided that, in applying for a PTIN, tax return preparers must pay a user fee that the IRS prescribes in forms, instructions, or other guidance. The proposed regulations also provided for the IRS to prescribe the manner for renewing a PTIN, including the payment of a user fee. Some commentators objected to the proposed requirement of a user fee to obtain or renew a PTIN. Sole proprietors and small preparation firms commented that a user fee, combined with the potential costs of minimum competency testing and for continuing education, would materially increase their business expenses. <br />The final regulations adopt the proposed provisions under which the IRS may prescribe requirements to apply for or renew a PTIN, including the payment of a user fee. By statute (31 U.S.C. 9701), Congress authorized Federal agencies to establish user fees. The Treasury Department and the IRS will prescribe in regulations the requirement to pay a user fee, the amount of any fee, and the time and manner of payment. A user fee to obtain or renew a PTIN will be necessary to recover the costs that the IRS will incur to implement and administer the processes to apply for and renew a PTIN. The amount of a user fee will be reasonable and based on accepted methods of calculation that reflect the costs to the government, the value of the service to the recipient, the public policy or interest served, and other relevant factors. <br />3. Terminology <br />a. Preparation of all or substantially all of a tax return or claim for refund <br />The requirement to obtain a PTIN applies to individuals who for compensation prepare, or assist in preparing, all or substantially all of a tax return or claim for refund. Section 1.6109-2(g) of the proposed regulations identified the following non-exclusive list of factors to determine whether an individual prepared or assisted in preparing all or substantially all of a tax return or claim for refund: <br />The complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax; <br />The amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and <br />The amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. <br />Examples are included in the proposed regulations to illustrate the provisions of paragraph (g). The final regulations retain these provisions, including the examples, consistent with the definition of a tax return preparer adopted in paragraph (g) of the final regulations. As explained, this definition of tax return preparer for purposes of these regulations is necessary for meaningful oversight of tax return preparation. The factors in paragraph (g) provide guidance for applying the test of whether an individual has prepared or assisted with preparing all or substantially all of a tax return or claim for refund. Paragraph (g) of the final regulations, however, also adds a sentence not in the proposed regulations to clarify that the preparation of a form, statement, or schedule, such as Schedule EIC (Form 1040), "Earned Income Credit," may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the factors in paragraph (g). <br />Paragraph (h) of the final regulations clarifies that the IRS may specify in other appropriate guidance the returns, schedules, and other forms to which these regulations will apply. <br />b. Registered tax return preparers <br />As provided in the proposed regulations, to obtain a PTIN or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the IRS under 31 U.S.C. 330 and Circular 230. This requirement will apply after December 31, 2010, unless the IRS prescribes exceptions, such as for a transitional period, as necessary for effective tax administration. A number of the comments noted a concern that the term registered tax return preparer is likely to cause confusion in the marketplace for tax return preparation. The commentators are concerned that this designation for a certain group of tax return preparers, when listed with attorneys, certified public accountants, and enrolled agents, may lead the public to mistakenly infer that registered tax return preparers have credentials and qualifications similar to those of attorneys, certified public accountants, and enrolled agents. Several commentators observed that some registered tax return preparers might even attempt to exploit this confusion to their commercial advantage. To avoid the potential for misperception, the commentators advocate that the IRS explain the distinctions between registered tax return preparers and other practitioners authorized to practice before the IRS under Circular 230. At least one commentator also recommended changing the term to "authorized tax return preparers." <br />The final regulations adopt the term registered tax return preparer. The Treasury Department and the IRS conclude that the term does not reasonably imply that registered tax return preparers are authorized to practice law or certified public accountancy or act as enrolled agents or that the term will cause material confusion or misunderstanding by the public. The role of registered tax return preparers and their authority to practice before the IRS will be addressed in amendments to Circular 230. The requirements and process to become a registered tax return preparer will be set forth in forms, instructions, and other appropriate guidance. In that regard, some commentators that employ tax return preparers requested that the IRS allow the employers to mass register their employees (with a means for employers to subsequently validate through the IRS an employee's standing as a registered tax return preparer with a current PTIN). The purpose of these final regulations, however, is not to provide guidance on the specific process for registration. <br />Special Analyses <br />It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. <br />It has been determined that a final regulatory flexibility analysis under 5 U.S.C. 604 is required for this final rule. The analysis is set forth under the heading, "Final Regulatory Flexibility Analysis." <br />Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. The Chief Counsel for Advocacy submitted comments on the notice of proposed rulemaking, which are discussed elsewhere in this preamble. <br />Final Regulatory Flexibility Analysis <br />When an agency either promulgates a final rule that follows a required notice of proposed rulemaking or promulgates a final interpretative rule involving the internal revenue laws as described in 5 U.S.C. 603(a), the Regulatory Flexibility Act (5 U.S.C. chapter 6) requires the agency to "prepare a final regulatory flexibility analysis." A final regulatory flexibility analysis must, pursuant to 5 U.S.C. 604(a), contain the five elements listed in this final regulatory flexibility analysis. For purposes of this final regulatory flexibility analysis, a small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction. 5 U.S.C. 601(3)-(6). The Treasury Department and the IRS conclude that the final regulations (together with other contemplated guidance provided for in these regulations) will impact a substantial number of small entities and the economic impact will be significant. <br />A statement of the need for, and the objectives of, the final rule <br />The final regulations are necessary for tax administration. The final regulations are needed to identify tax return preparers and the tax returns and claims for refund that they prepare, to aid the IRS's oversight of tax return preparers, and to administer requirements intended to ensure that tax return preparers are competent, trained, and conform to rules of practice. Mandating a single type of identifying number for all tax return preparers and assigning a prescribed identifying number to registered tax return preparers is critical to effective oversight. <br />Taxpayers' reliance on paid tax return preparers has grown steadily in recent decades, and a large number of U.S. taxpayers rely on paid tax return preparers for assistance in meeting the taxpayers' income tax filing obligations. Beyond preparing tax returns, tax return preparers also help educate taxpayers about the tax laws and facilitate electronic filing. Tax return preparers provide advice to taxpayers, identify items or issues for which the law or guidance is unclear, and inform taxpayers of the benefits and risks of positions taken on a tax return, and the tax treatment or reporting of items and transactions. Competent tax return preparers who are well educated in the rules and subject matter of their field can prevent costly errors, potentially saving a taxpayer from unwanted problems later on and relieving the IRS from expending valuable examination and collection resources. <br />Given the important role that tax return preparers play in Federal tax administration, the IRS has a significant interest in being able to accurately identify tax return preparers and monitor their tax return preparation activities. The final regulations, therefore, enable the IRS to more accurately identify tax return preparers and improve the IRS's ability to associate filed tax returns and refund claims with the responsible tax return preparer. The final regulations are intended to accomplish this result, and thereby advance tax administration, by requiring all individuals who are paid to prepare all or substantially all of a tax return or claim for refund of tax to obtain a preparer identifying number prescribed by the IRS. Pursuant to the final regulations, the IRS will require individuals who sign tax returns or claims for refund to furnish the tax return preparer's PTIN on a tax return or claim for refund when the return or refund claim is signed. The final regulations also provide that the IRS may require tax return preparers to apply for, and regularly renew, their PTINs. Under the final regulations, the IRS may prescribe a user fee payable when applying for a number and for renewal. <br />Summaries of the significant issues raised in the public comments responding to the initial regulatory flexibility analysis and of the agency's assessment of the issues, and a statement of any changes made to the rule as a result of the comments <br />The IRS did not receive specific comments from the public responding to the initial regulatory flexibility analysis in the proposed regulations that preceded these final regulations. The IRS did receive comments from the public on the proposed amendments to §1.6109-2. A summary of the comments is set forth elsewhere in this preamble, along with the Treasury Department's and the IRS's assessment of the issues raised in the comments and descriptions of any revisions resulting from the comments. <br />A description and an estimate of the number of small entities to which the rule will apply or an explanation of why an estimate is not available <br />The final regulations apply to individuals who prepare tax returns and claims for refund of tax. The estimated number of paid tax return preparers is as high as 1.2 million, which means the final regulations are likely to impact a large number of individuals. Most paid tax return preparers are employed by firms. A substantial number of paid tax return preparers are employed at small tax return preparation firms or are selfemployed tax return preparers. Any economic impact of these regulations on small entities generally will be on self-employed tax return preparers who prepare and sign tax returns or on small businesses that employ one or more individuals who prepare tax returns. <br />The appropriate NAICS codes for PTINs are those that relate to tax preparation services (NAICS code 541213), other accounting services (NAICS code 541219), offices of lawyers (NAICS code 541110), and offices of certified public accountants (NAICS code 541211). Entities identified as tax preparation services and offices of lawyers are considered small under the SBA's size standards (13 CFR 121.201) if their annual revenue is less than $7 million. Entities identified as other accounting services and offices of certified public accountants are considered small under the SBA's size standards if their annual revenue is less than $8.5 million. The IRS estimates that approximately 70 to 80 percent of the individuals subject to these final regulations are tax return preparers operating as, or employed by, small entities. <br />A description of the projected reporting, recordkeeping, and other compliance requirements of the rule, including an estimate of the classes of small entities subject to the requirements and the type of professional skills necessary for preparation of a report or record <br />The final regulations do not directly impose any reporting, recordkeeping, or similar requirements on any small entities. Rather, the final regulations provide that the IRS may prescribe in forms, instructions, or other guidance (including regulations) requirements for PTINs issued to tax return preparers, regular renewal of PTINs, and payment of a user fee when applying for or renewing a PTIN. In addition, other guidance may require certain tax return preparers to complete competency testing, complete continuing education courses, and adhere to established rules of practice governing attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents. <br />Applying for a PTIN and subsequent renewal will require reporting of certain information, but they are not expected to require recordkeeping. No particular or special professional skills will be necessary. These activities also will not require the purchase or use of any special business equipment or software. To the extent it will be necessary to apply for a PTIN (or similar identifying number that may subsequently replace a PTIN) online at www.irs.gov, most if not all tax return preparation businesses have computers and Internet access. The IRS estimates that applying for a PTIN will take 10 to 20 minutes per individual, with an average of 15 minutes per individual. <br />Under amendments to Circular 230 that the IRS will issue to implement recommendations in the Report, tax return preparers who apply to be registered tax return preparers and who regularly renew their status may be subject to recordkeeping requirements because they may be required to maintain specified records, such as documentation and educational materials relating to completion of continuing education courses. These requirements do not involve any specific professional skills other than general recordkeeping abilities already needed to own and operate a small business or to competently act as a tax return preparer. It is estimated that tax return preparers will annually spend approximately 30 minutes to 1 hour in maintaining records relating to the continuing education requirements, depending on individual circumstances. <br />A separate regulation addressing reasonable user fees has been proposed. Tax return preparers may be required to pay a user fee when first applying for a PTIN and at every renewal. Small entities may be affected by these costs if the entities choose to pay some or all of these fees for their employees. Under the amendments to Circular 230, tax return preparers may also incur costs for commercial continuing education courses and minimum competency examinations, plus incidental costs, such as for travel and accommodations, in order to maintain their status as registered tax return preparers under Circular 230. Course prices can vary greatly, from free to hundreds of dollars. Many small tax return preparation firms may choose, as with the user fee, to bear these costs for their employees. In some cases, small entities may lose sales and profits while their employed tax return preparers attend training or educational classes or are studying and sitting for examinations. Some small entities that employ tax return preparers may even need to alter their business operations if a significant number of their employees cannot satisfy the necessary registration and competency requirements. The Treasury Department and the IRS conclude, however, that only a small percentage of small entities, if any, may need to cease doing business or radically change their business model due to the final regulations. <br />Although each of the reporting and recordkeeping requirements and the costs identified above (in connection with the final regulations and the other anticipated guidance necessary to implement the Report) is not expected to singly result in a significant economic impact, taken together it is anticipated that they may have a significant economic impact on a substantial number of small entities. <br />A description of the steps the agency has taken to minimize the significant economic impact on small entities consistent with the stated objectives of applicable statutes, including a statement of the factual, policy, and legal reasons for selecting any alternative adopted in the final rule and why other significant alternatives affecting the impact on small entities that the agency considered were rejected <br />The Treasury Department and the IRS are not aware of any steps that could be taken to minimize the economic impact on small entities that would also be consistent with the objectives of these final regulations. These regulations do not impose any more requirements on small entities than are necessary to effectively administer the internal revenue laws. Further, the regulations do not subject small entities to any requirements that are not also applicable to larger entities covered by the regulations. <br />The Treasury Department and the IRS have determined that there are no viable alternatives to the final regulations that would enable the IRS to accurately identify tax return preparers, other than through the use of a PTIN, as provided in the regulations. <br />The Treasury Department and the IRS considered alternatives at multiple points. These final regulations are, in large measure, an outgrowth of, and in part carry out, the Report, which extensively reviewed different approaches to improving how the IRS oversees and interacts with tax return preparers. As part of the Report, the IRS received a large volume of comments on the issue of increased oversight of tax return preparers generally and on the proposed recommendation requiring tax return preparers to use a uniform prescribed identifying number. The comments were received from all categories of interested stakeholders, including tax professional groups representing large and small entities, IRS advisory groups, tax return preparers, and the public. The input received from this large and diverse community overwhelmingly expressed support for the proposed requirements. <br />Among the alternatives contemplated at the time were: <br />(1) Requiring all paid tax return preparers to comply with the ethical standards in Circular 230 or an ethics code similar to Circular 230, but not requiring any paid preparers to demonstrate their qualification and competency; <br />(2) Requiring tax return preparers who are not currently authorized to practice before the IRS to register with the IRS, complete annual continuing education requirements, and meet certain ethical standards, but not to pass a minimum competency examination; <br />(3) Requiring all paid tax return preparers to pass a minimum competency examination and meet other registration requirements; and <br />(4) Requiring all paid tax return preparers who are not currently authorized to practice before the IRS to pass a minimum competency examination and meet other registration requirements, but "grandfather in" tax return preparers who have accurately and competently prepared tax returns for a certain period of years. <br />These and other issues were raised in the public comments to the proposed regulations and were carefully considered in developing the final regulations. After consideration of all of the various alternatives and the responses received in the public comment process, the Treasury Department and the IRS conclude that the provisions of the final regulations will most effectively promote sound tax administration. Establishing a single, prescribed identifying number for tax return preparers will enable the IRS to accurately identify tax return preparers, match preparers with the tax returns and claims for refund they prepare, and better administer the tax laws with respect to tax return preparers and their clients. <br />Under the final regulations and the additional guidance described, the IRS will establish a process intended to assign PTINs only to qualified, competent, and ethical tax return preparers. The testing requirements that may be set forth in other guidance will establish a benchmark of minimum competency necessary for tax return preparers to obtain their professional credentials, while the purpose of the continuing education provisions is to require tax return preparers to remain current on the Federal tax laws and continue to develop their tax knowledge. The extension in other, prospective guidance of the rules in Circular 230 to any paid tax return preparer will require all practitioners to meet certain ethical standards and allow the IRS to suspend or otherwise appropriately discipline tax return preparers who engage in unethical or disreputable conduct. Accordingly, the implementation of qualification and competency standards is expected to increase tax compliance and allow taxpayers to be confident that the tax return preparers to whom they turn for assistance are knowledgeable, skilled, and ethical. <br />Drafting Information <br />The principal author of these final regulations is Stuart Murray of the Office of the Associate Chief Counsel, Procedure and Administration. <br />List of Subjects in 26 CFR Part 1 <br />Income taxes, Reporting and recordkeeping requirements. <br />List of Subjects in 26 CFR Part 602 <br />Reporting and recordkeeping requirements. <br />Amendments to the Regulations <br />26 CFR part 1 is amended as follows: <br />TAXES <br />The authority citation for part 1 continues follows: <br />U.S.C. 7805 *** <br />1.6109-2 also issued under 26 U.S.C. 6109(a). *** <br />Section 1.6109-2 is amended by revising the revising paragraphs (a)(2) and (d), and adding f), (g), (h), and (i) to read as follows: <br />Reg § 1.6109-2. <br />return preparers furnishing identifying numbers claims for refund and related requirements. returns or claims for refund filed on or 2010, the identifying number of an return preparer is that individual's social such alternative number as may be prescribed by the Internal Revenue Service in forms, instructions, or other appropriate guidance. <br />(ii) For tax returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's preparer tax identification number or such other number prescribed by the Internal Revenue Service in forms, instructions, or other appropriate guidance. ***** <br />(d) Beginning after December 31, 2010, all tax return preparers must have a preparer tax identification number or other prescribed identifying number that was applied for and received at the time and in the manner, including the payment of a user fee, as may be prescribed by the Internal Revenue Service in forms, instructions, or other appropriate guidance. Except as provided in paragraph (h) of this section, beginning after December 31, 2010, to obtain a preparer tax identification number or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the Internal Revenue Service under 31 U.S.C. 330 and the regulations thereunder. <br />(e) The Internal Revenue Service may designate an expiration date for any preparer tax identification number or other prescribed identifying number and may further prescribe the time and manner for renewing a preparer tax identification number or other prescribed identifying number, including the payment of a user fee, as set forth in forms, instructions, or other appropriate guidance. The Internal Revenue Service may provide that any identifying number issued by the Internal Revenue Service prior to the effective date of this regulation will expire on December 31, 2010, unless properly renewed as set forth in forms, instructions, or other appropriate guidance, including these regulations. <br />(f) As may be prescribed in forms, instructions, or other appropriate guidance, the IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a preparer tax identification number or other prescribed identifying number. <br />(g) Only for purposes of paragraphs (d), (e), and (f) of this section, the term tax return preparer means any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Factors to consider in determining whether an individual is a tax return preparer under this paragraph (g) include, but are not limited to, the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax; the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. The preparation of a form, statement, or schedule, such as Schedule EIC (Form 1040), "Earned Income Credit," may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the foregoing factors. A tax return preparer does not include an individual who is not otherwise a tax return preparer as that term is defined in §301.7701-15(b)(2), or who is an individual described in §301.7701-15(f). The provisions of this paragraph (g) are illustrated by the following examples: <br />Example 1. Employee A, an individual employed by Tax Return Preparer B, assists Tax Return Preparer B in answering telephone calls, making copies, inputting client tax information gathered by B into the data fields of tax preparation software on a computer, and using the computer to file electronic returns of tax prepared by B. Although Employee A must exercise judgment regarding which data fields in the tax preparation software to use, A does not exercise any discretion or independent judgment as to the clients' underlying tax positions. Employee A, therefore, merely provides clerical assistance or incidental services and is not a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. <br />Example 2. The facts are the same as in Example 1, except that Employee A also interviews B's clients and obtains from them information needed for the preparation of tax returns. Employee A determines the amount and character of entries on the returns and whether the information provided is sufficient for purposes of preparing the returns. For at least some of B's clients, A obtains information and makes determinations that constitute all or substantially all of the tax return. Employee A is a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. Employee A is a tax return preparer even if Employee A relies on tax preparation software to prepare the return. <br />Example 3. C is an employee of a firm that prepares tax returns and claims for refund of tax for compensation. C is responsible for preparing a Form 1040, "U.S. Individual Income Tax Return," for a client. C obtains the information necessary for the preparation of the tax return during a meeting with the client, and makes determinations with respect to the proper application of the tax laws to the information in order to determine the client's tax liability. C completes the tax return and sends the completed return to employee D, who reviews the return for accuracy before signing it. Both C and D are tax return preparers required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. <br />Example 4. E is an employee at a firm which prepares tax returns and claims for refund of tax for compensation. The firm is engaged by a corporation to prepare its Federal income tax return on Form 1120, "U.S. Corporation Income Tax Return." Among the documentation that the corporation provides to E in connection with the preparation of the tax return is documentation relating to the corporation's potential eligibility to claim a recently enacted tax credit for the taxable year. In preparing the return, and specifically for purposes of the new tax credit, E (with the corporation's consent) obtains advice from F, a subject matter expert on this and similar credits. F advises E as to the corporation's entitlement to the credit and provides his calculation of the amount of the credit. Based on this advice from F, E prepares the corporation's Form 1120 claiming the tax credit in the amount recommended by F. The additional credit is one of many tax credits and deductions claimed on the tax return, and determining the credit amount does not constitute preparation of all or substantially all of the corporation's tax return under this paragraph (g). F will not be considered to have prepared all or substantially all of the corporation's tax return, and F is not a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. The analysis is the same whether or not the tax credit is a substantial portion of the return under §301.7701-15 of this chapter (as opposed to substantially all of the return), and whether or not F is in the same firm with E. E is a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. <br />(h) The Internal Revenue Service, through forms, instructions, or other appropriate guidance, may prescribe exceptions to the requirements of this section, including the requirement that an individual be authorized to practice before the Internal Revenue Service before receiving a preparer tax identification number or other prescribed identifying number, as necessary in the interest of effective tax administration. The Internal Revenue Service, through other appropriate guidance, may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of these regulations. <br />(i) Effective/applicability date. Paragraph (a)(1) of this section is applicable to tax returns and claims for refund filed after December 31, 2008. Paragraph (a)(2)(i) of this section is applicable to tax returns and claims for refund filed on or before December 31, 2010. Paragraph (a)(2)(ii) of this section is applicable to tax returns and claims for refund filed after December 31, 2010. Paragraph (d) of this section is applicable to tax return preparers after December 31, 2010. Paragraphs (e) through (h) of this section are effective after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT <br />Par. 3. The authority citation for part 602 continues to read as follows: <br />Authority: 26 USC 7805. <br />Par. 4. In § 602.101, paragraph (b) is amended by revising the entry for "1.6109-2" in the table to read as follows: <br />§ 602.101 OMB Control numbers. ***** <br />(b) *** <br />CFR part or section where Current OMB control Identified and described No. <br />1.6109-2....................................1545-2176 <br />Steven T. Miller, <br />Deputy Commissioner for Services and Enforcement. <br />Approved: August 11, 2010 <br />Michael Mundaca, <br />Assistant Secretary of the Treasury (Tax Policy). <br />[FR Doc. 2010-24653 Filed 09/28/2010 at 11:15 am; Publication <br />Date: 09/30/2010] <br />§ 6109 Identifying numbers.<br />________________________________________<br /> (a) WG&L Treatises Supplying of identifying numbers. <br />When required by regulations prescribed by the Secretary: <br /> (1) Inclusion in returns. <br />Any person required under the authority of this title to make a return, statement, or other document shall include in such return, statement, or other document such identifying number as may be prescribed for securing proper identification of such person. <br /> (2) Furnishing number to other persons. <br />Any person with respect to whom a return, statement, or other document is required under the authority of this title to be made by another person or whose identifying number is required to be shown on a return of another person shall furnish to such other person such identifying number as may be prescribed for securing his proper identification. <br /> (3) Furnishing number of another person. <br />Any person required under the authority of this title to make a return, statement, or other document with respect to another person shall request from such other person, and shall include in any such return, statement, or other document, such identifying number as may be prescribed for securing proper identification of such other person. <br /> (4) Furnishing identifying number of tax return preparer. <br />Any return or claim for refund prepared by a tax return preparer shall bear such identifying number for securing proper identification of such preparer, his employer, or both, as may be prescribed. For purposes of this paragraph, the terms “return” and “claim for refund” have the respective meanings given to such terms by section 6696(e) . <br /><br />For purposes of paragraphs (1) , (2) , and (3) , the identifying number of an individual (or his estate) shall be such individual's social security account number. <br /> (b) Limitation. <br /> (1) Except as provided in paragraph (2) , a return of any person with respect to his liability for tax, or any statement or other document in support thereof, shall not be considered for purposes of paragraphs (2) and (3) of subsection (a) as a return, statement, or other document with respect to another person. <br /> (2) For purposes of paragraphs (2) and (3) of subsection (a) , a return of an estate or trust with respect to its liability for tax, and any statement or other document in support thereof, shall be considered as a return, statement, or other document with respect to each beneficiary of such estate or trust. <br /> (c) Requirement of information. <br />For purposes of this section , the Secretary is authorized to require such information as may be necessary to assign an identifying number to any person. <br /> (d) Use of social security account number. <br />The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title. <br /> (e) Repealed. <br /> (f) Access to employer identification numbers by Secretary of Agriculture for purposes of Food and Nutrition Act of 2008. <br /> (1) In general. <br />In the administration of section 9 of the Food and Nutrition Act of 2008 ( 7 U.S.C. 2018 ) involving the determination of the qualifications of applicants under such Act, the Secretary of Agriculture may, subject to this subsection , require each applicant retail store or wholesale food concern to furnish to the Secretary of Agriculture the employer identification number assigned to the store or concern pursuant to this section . The Secretary of Agriculture shall not have access to any such number for any purpose other than the establishment and maintenance of a list of the names and employer identification numbers of the stores and concerns for use in determining those applicants who have been previously sanctioned or convicted under section 12 or 15 of such Act ( 7 U.S.C. 2021 or 2024 ). <br /> (2) Sharing of information and safeguards. <br /> (A) Sharing of information. The Secretary of Agriculture may share any information contained in any list referred to in paragraph (1) with any other agency or instrumentality of the United States which otherwise has access to employer identification numbers in accordance with this section or other applicable Federal law, except that the Secretary of Agriculture may share such information only to the extent that such Secretary determines such sharing would assist in verifying and matching such information against information maintained by such other agency or instrumentality. Any such information shared pursuant to this subparagraph may be used by such other agency or instrumentality only for the purpose of effective administration and enforcement of the Food and Nutrition Act of 2008 or for the purpose of investigation of violations of other Federal laws or enforcement of such laws. <br /> (B) Safeguards. The Secretary of Agriculture, and the head of any other agency or instrumentality referred to in subparagraph (A) , shall restrict, to the satisfaction of the Secretary of the Treasury, access to employer identification numbers obtained pursuant to this subsection only to officers and employees of the United States whose duties or responsibilities require access for the purposes described in subparagraph (A) . The Secretary of Agriculture, and the head of any agency or instrumentality with which information is shared pursuant to subparagraph (A) , shall provide such other safeguards as the Secretary of the Treasury determines to be necessary or appropriate to protect the confidentiality of the employer identification numbers. <br /> (3) Confidentiality and nondisclosure rules. <br />Employer identification numbers that are obtained or maintained pursuant to this subsection by the Secretary of Agriculture or the head of the instrumentality with which the information is shared pursuant to paragraph (2) shall be confidential, and no officer or employee of the United States who has or had access to the social security account numbers shall disclose any such employer identification number obtained thereby in any manner. For purposes of this paragraph, the term “officer or employee” includes a former officer or employee. <br /> (4) Sanctions. <br />Paragraphs (1) , (2) , and (3) of section 7213(a) shall apply with respect to the unauthorized willful disclosure to any person of employer identification numbers maintained pursuant to this subsection by the Secretary of Agriculture or any agency or instrumentality with which information is shared pursuant to paragraph (2) in the same manner and to the same extent as such paragraphs apply with respect to unauthorized disclosures of return and return information described in such paragraphs. Paragraph (4) of section 7213(a) shall apply with respect to the willful offer of any item of material value in exchange for any such employer identification number in the same manner and to the same extent as such paragraph applies with respect to offers (in exchange for any return or return information) described in such paragraph. <br /> (g) Access to employer identification numbers by Federal Crop Insurance Corporation for purposes of the Federal Crop Insurance Act. <br /> (1) In general. <br />In the administration of section 506 of the Federal Crop Insurance Act, the Federal Crop Insurance Corporation may require each policyholder and each reinsured company to furnish to the insurer or to the Corporation the employer identification number of such policyholder, subject to the requirements of this paragraph. No officer or employee of the Federal Crop Insurance Corporation, or authorized person shall have access to any such number for any purpose other than the establishment of a system of records necessary to the effective administration of such Act. The Manager of the Corporation may require each policyholder to provide to the Manager or authorized person, at such times and in such manner as prescribed by the Manager, the employer identification number of each entity that holds or acquires a substantial beneficial interest in the policyholder. For purposes of this subclause, the term “substantial beneficial interest” means not less than 5 percent of all beneficial interest in the policyholder. The Secretary of Agriculture shall restrict, to the satisfaction of the Secretary of the Treasury, access to employer identification numbers obtained pursuant to this paragraph only to officers and employees of the United States or authorized persons whose duties or responsibilities require access for the administration of the Federal Crop Insurance Act. <br /> (2) Confidentiality and nondisclosure rules. <br />Employer identification numbers maintained by the Secretary of Agriculture or the Federal Crop Insurance Corporation pursuant to this subsection shall be confidential, and except as authorized by this subsection , no officer or employee of the United States or authorized person who has or had access to such employer identification numbers shall disclose any such employer identification number obtained thereby in any manner. For purposes of this paragraph, the term “officer or employee” includes a former officer or employee. For purposes of this subsection , the term “authorized person” means an officer or employee of an insurer whom the Manager of the Corporation designates by rule, subject to appropriate safeguards including a prohibition against the release of such social security account numbers (other than to the Corporations) by such person. <br /> (3) Sanctions. <br />Paragraphs (1) , (2) , and (3) of section 7213(a) shall apply with respect to the unauthorized willful disclosure to any person of employer identification numbers maintained by the Secretary of Agriculture or the Federal Crop Insurance Corporation pursuant to this subsection in the same manner and to the same extent as such paragraphs apply with respect to unauthorized disclosures of return and return information described in such paragraphs. Paragraph (4) of section 7213(a) shall apply with respect to the willful offer of any item of material value in exchange for any such employer identification number in the same manner and to the same extent as such paragraph applies with respect to offers (in exchange for any return or return information) described in such paragraph. <br /> (h) Identifying information required with respect to certain seller-provided financing. <br /> (1) Payor. <br />If any taxpayer claims a deduction under section 163 for qualified residence interest on any seller-provided financing, such taxpayer shall include on the return claiming such deduction the name, address, and TIN of the person to whom such interest is paid or accrued. <br /> (2) Recipient. <br />If any person receives or accrues interest referred to in paragraph (1) , such person shall include on the return for the taxable year in which such interest is so received or accrued the name, address, and TIN of the person liable for such interest. <br /> (3) Furnishing of information between payor and recipient. <br />If any person is required to include the TIN of another person on a return under paragraph (1) or (2) , such other person shall furnish his TIN to such person. <br /> (4) Seller-provided financing. <br />For purposes of this subsection , the term “seller-provided financing” means any indebtedness incurred in acquiring any residence if the person to whom such indebtedness is owed is the person from which such residence was acquired.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-52918479755576110552010-09-25T11:26:00.001-04:002010-09-25T11:26:39.547-04:00Wayne C. Evans v. Commissioner, TC Memo 2010-199 , Code Sec(s) 61; 274; 6015; 6501; 6663. <br /><br />--------------------------------------------------------------------------------<br />WAYNE C> EVANS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . <br />Case Information: Code Sec(s): 61; 274; 6015; 6501; 6663 <br /> Docket: Docket No. 24498-07, 24510-07. <br />Date Issued: 09/13/2010. <br />Judge: Opinion by Cohen, J. <br />Tax Year(s): <br />Disposition: <br /><br /><br />HEADNOTE <br />1. <br /><br />Reference(s): Code Sec. 61 ; Code Sec. 274 ; Code Sec. 6015 ; Code Sec. 6501 ; Code Sec. 6663 <br /><br />Syllabus <br />Official Tax Court Syllabus<br />Counsel <br />Kirk A. McCarville and Philip C. Wilson, for petitioners. <br />Heidi I. Hansen, for respondent. <br /><br />Opinion by COHEN <br /><br />UNITED STATES TAX COURT <br />MEMORANDUM FINDINGS OF FACT AND OPINION <br />In a notice sent July 27, 2007, respondent determined deficiencies in petitioners' Federal income taxes for 1995 and 1996 of $70,311 and $196,814, respectively. Respondent also determined penalties for fraud under section 6663 of $52,733.25 and $147,610.50 against Wayne C. Evans (Evans) for 1995 and 1996, respectively. The issues for decision are whether petitioners had unreported income resulting in an underpayment of tax for each year; whether the underpayment of tax for each year was due to fraud on the part of Evans, justifying the penalty and negating the bar of the statute of limitations; whether petitioners are entitled to any deductions not allowed by respondent; and whether Madelyn F. Evans (Ms. Evans) is entitled to relief under section 6015. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. <br /><br />FINDINGS OF FACT <br />Some of the facts have been stipulated between Evans and respondent, and the stipulated facts are incorporated in our findings by this reference. Ms. Evans declined to stipulate, asserting that she had no knowledge of the relevant facts. She did not contradict any of the facts in the stipulation between Evans and respondent, and the stipulated facts were established with respect to her, pursuant to a motion, order to show cause, and order following the procedures specified in Rule 91. Petitioners resided in Arizona at the time that they filed their petitions. At all material times, they were married to each other and resided together. <br /><br />From 1986 through the years in issue, petitioners resided on property on West Calle Concordia in Tucson, Arizona (the Concordia property). The Concordia property was purchased by Stephen and Rosalie Olsen (the Olsens) in 1986 and was refinanced in 1989 with a loan of $172,194.71 from Household Finance. Petitioners did not pay rent to the Olsens for their use of the Concordia property, but during 1995 they made payments on the Household Finance mortgage and otherwise to prevent foreclosure on the Concordia property. The sources and amounts of the payments are further described below. The Farming Authority and Huntington Construction On August 22, 1995, Evans entered into an agreement with the Tohono O'odham Farming Authority (the Farming Authority) pertaining to Evans' employment as the full-time general manager of the Farming Authority. Evans had oversight responsibility for the approval and disbursement of Farming Authority funds. The agreement provided, among other things, that The General Manager shall be responsible for causing the accounts of the Authority to be maintained in accordance with an accounting system established by the Authority's accountant or accounting firm. The records and accounts of the Authority will be available at all reasonable times for inspection and examination by authorized officers of the Authority and the Council. The Board may require special examinations to be made at any time. The General Manager shall arrange for an audit to be made at the close of each business year by a certified accounting firm approved by the Board. Evans' employment agreement specifically prohibited him from transacting business on the Farming Authority's behalf with any company in which he held a direct or indirect interest. By transacting business with such a company, Evans would have a conflict of interest. Evans' failure to disclose to his employer that he was conducting Farming Authority business with a company in which he had such an interest would be a breach of the fiduciary duty he owed to his employer. Any such conduct by Evans would be grounds for termination. <br /><br />Huntington Construction, Inc. (Huntington Construction), was an Arizona corporation effectively operated and controlled by Evans during 1995 and 1996. Evans concealed from the Farming Authority his ownership, operation, and control of Huntington Construction. Evans caused 22 checks totaling $449,005 in 1995 and 28 checks totaling $1,148,208 in 1996 to be paid to Huntington Construction from the Farming Authority. <br /><br />Willie Gilbert (Gilbert) was paid by Evans to sign checks drawn on the Huntington Construction account to conceal Evans' ownership and control of Huntington Construction. Checks were drawn on Huntington Construction's bank account to pay for Willie Gilbert's travel expenses, including one or more trips to Indiana where Gilbert had family. Records were not maintained to substantiate the business purpose of Gilbert's travel. Payments to Gilbert and other persons for services to Huntington Construction were not reported to the Internal Revenue Service by Huntington Construction. <br /><br />On September 8, 1997, the Tohono O'odham Nation filed a complaint against Evans, Ms. Evans, Willie Gilbert, Jane Doe Gilbert, Stephen Olsen, Rosalie Olsen, Dawson Riley, Jane Doe Riley, Huntington Construction, Western Pacific Construction, Inc., and Voice of God Recordings, Inc., in the U.S. District Court for the District of Arizona (the District Court) (the civil case). <br /><br />In June 2000, the civil case was settled with an agreement providing in part that Voice of God Recordings would pay $820,000 to the Tohono O'odham Nation. (Evans had caused the sum of $820,000 to be paid by Huntington Construction to Voice of God Recordings on behalf of petitioners, as further described below.) Ms. Evans was a party to the settlement agreement. <br /><br />On September 22, 1999, Evans was indicted in the District Court on 18 counts of embezzlement and theft from an Indian tribal organization; theft or bribery concerning programs receiving Federal funds; wire fraud; and frauds and swindles. The first count of the indictment alleged, in part, that beginning on or about December, 1994, and continuing through on or about September, 1997, in the District of Arizona, Wayne C. Evans, *** did embezzle, steal, knowingly convert to his use or the use of another, and did willfully misapply and permit to be misapplied, approximately $1.59 7 million of the moneys, funds, credits, goods, assets and other property belonging to or intrusted to the custody or care of the Tohono O'odham Indian Nation, by causing those funds to be paid to himself through use of Huntington Construction, an entity which he secretly and covertly controlled. On October 12, 2001, an Information was filed in the District Court charging Evans with filing a false tax return for 1996 in violation of section 7206(1). On October 12, 2001, Evans, represented by counsel, entered into a plea agreement in which he pleaded guilty to the first count of the indictment and to the information, specifically admitting facts establishing his guilt beyond a reasonable doubt. The facts admitted included the following: <br /><br /> Huntington Construction, Inc. was an Arizona<br /> corporation. Beginning at least as early as 1985,<br /> Wayne C. Evans effectively operated and controlled the<br /> affairs of Huntington Construction, Inc.<br /> Huntington Construction performed work for the<br /> Farming Authority while Wayne C. Evans was the Farming<br /> Authority's general manager and during the time Evans<br /> controlled its affairs. Between March, 1995 and<br /> August, 1996, the Farming Authority paid Huntington<br /> Construction approximately $1.597 million for work<br /> allegedly performed on Farming Authority projects.<br /> Wayne C. Evans was responsible for authorizing the<br /> payment of those funds. Wayne C. Evans failed to<br /> disclose and concealed from the Farming Authority that<br /> he effectively owned, operated and controlled<br /> Huntington Construction and the funds in its bank<br /> accounts while causing Farming Authority funds to be<br /> paid to Huntington Construction.<br /> Once Wayne C. Evans had effected the transfer of<br /> funds to Huntington, Wayne C. Evans controlled the use<br /> of those funds and used them for personal purposes.<br /> Once the funds were deposited to Huntington's bank<br /> accounts, Evans concealed his control of those funds by<br /> directing third-party nominees to sign checks and make<br /> payments from the Huntington accounts.<br /> On or about January 2, 2001, in Tucson, Arizona,<br /> Wayne C. Evans filed and subscribed to a joint U.S.<br /> Individual Income Tax Return for the calendar year<br /> 1996. Wayne C. Evans signed the return under penalties<br /> of perjury. The return understated Wayne C. Evans'<br /> total income for the 1996 tax year, in that Wayne C.<br /> Evans knowingly failed to include the above-mentioned<br /> monies from tribal funds during the 1996 calendar year.<br />A judgment of conviction pursuant to Evans' guilty plea was entered September 12, 2002. Evans was sentenced to 15 months in prison followed by 3 years of supervised release and was ordered to pay restitution of $138,935 to the Tohono O'odham Nation. The restitution amount was arrived at by taking the total amount of money Evans illegally received reduced by the $820,000 Voice of God Recordings paid in settlement of the civil suit. <br />On three occasions, in 2004, 2008, and 2009, Evans attempted to have the restitution provision in his sentence vacated, but the District Court and the Court of Appeals for the Ninth Circuit held that he was barred by his plea agreement from contesting the sentence. <br /><br />No income tax return was filed for Huntington Construction for 1995 or 1996. In January 2001, petitioners filed joint individual income tax returns for 1995 and 1996 on which they reported $12,204 and $7,210 of income from Huntington Construction for 1995 and 1996, respectively. Petitioners did not provide bank records reflecting income or expenses or receipts substantiating their expense deductions to their return preparer when the returns were prepared. The returns did not report all of the income petitioners received as a result of payments from the Farming Authority to Huntington Construction and disbursements from Huntington Construction to or for petitioners. <br /><br />After examining records of payments made by the Farming Authority to Huntington Construction and checks written on the bank accounts of Huntington Construction, respondent determined that petitioners had unreported income, that certain business expenses and personal itemized deductions were allowable, and that other checks represented payments for the personal benefit of petitioners and constituted taxable income to them. The personal itemized deductions allowed included charitable contributions to Voice of God Recordings. <br /><br />Checks drawn on Huntington Construction's account payable to its bank for cashier's checks or for cash totaled $39,760.29 in 1995 and $1,174,555.79 in 1996. Specific Items of Unreported Income On May 23, 1995, funds were withdrawn from Huntington Construction's bank account and used to purchase cashier's checks to Voice of God Recordings for $100,000 and to Coots Funeral Home for $5,980. At the same time, $700 in cash was withdrawn from the account. Coots Funeral Home provided funeral services for Evans' brother. <br /><br />On May 23, 1995, funds were withdrawn from the Huntington Construction account to purchase a $2,000 cashier's check payable to Western Pacific Construction, Inc. (Western Pacific). Western Pacific (sometimes referred to in the stipulation of facts as Pacific Western) was an Arizona corporation owned and controlled by petitioners. <br /><br />On July 26, 1995, funds were withdrawn from the Huntington Construction account to purchase a $16,025 cashier's check payable to the Olsens. <br /><br />On October 4, 1995, $11,084 was withdrawn from the Huntington Construction account to purchase a vehicle for one of petitioners' children. <br /><br />On December 14, 1995, funds were withdrawn from the Huntington Construction account to purchase a $1,500 cashier's check payable to the widow of Evans' brother. <br /><br />On January 30, 1996, funds were withdrawn from the Huntington Construction account to purchase a $159,422.79 cashier's check payable to Household Finance to be applied to the mortgage on the Concordia property. In conjunction with the payment, the Concordia property was transferred from the Olsens to the Campo Bello Irrevocable Trust. Petitioners are the grantors of the Campo Bello Irrevocable Trust and, along with their children, are the beneficiaries of the trust. <br /><br />On August 15, 1996, funds were withdrawn from the Huntington Construction account to purchase two $1,000 cashier's checks used to pay personal debts of petitioners. <br /><br />In September 1996, funds were withdrawn from the Huntington Construction account to purchase $820,000 and $70,000 cashier's checks payable to Voice of God Recordings on behalf of petitioners. <br /><br />During 1995 and 1996, Western Pacific received income totaling $83,009.92 and $7,603.12. Certain of the income was received from the Farming Authority, and much of it was received from Huntington Construction. No income tax returns were filed for Western Pacific, and petitioners did not include any income from Western Pacific on their return for 1995 or 1996. <br /><br />On February 1, 1995, funds totaling $26,756.54 were withdrawn from Western Pacific's bank account to make payments by or on behalf of petitioners to prevent a foreclosure on the Concordia property. During the years in issue, 43 checks written on Western Pacific's bank account were payable to petitioners or members of their family or to cash. Ms. Evans signed most of the checks written on the Western Pacific account. Ms. Evans' Liability Petitioners' Federal tax returns for 1995 and 1996 were filed in January 2001. Ms. Evans was aware of Evans' indictment and arrest at the time that she signed the joint returns, and she knew or should have known of the underreporting of income and understatement of taxes on those returns. She signed checks on the Western Pacific account by which that corporation's income was distributed to petitioners or to members of their family; she knew or should have known that such income had not been reported by Western Pacific or by petitioners on their returns. She received the benefits of the unreported income and the resulting underpayment of taxes to the same extent as Evans. <br /><br />OPINION <br />Respondent relies on section 6501(c)(1) as a defense to petitioners' assertion of the bar of the statute of limitations and, therefore, must prove that petitioners' 1995 and 1996 tax returns were false or fraudulent with the intent to evade tax. Because the question of fraud is determinative as to the statutory period of limitations as well as the penalty under section 6663 against Evans, we first discuss the evidence and our conclusions with respect to fraud. Respondent has not alleged fraud by Ms. Evans. However, proof of fraud against either spouse prevents the running of the period of limitations as to both spouses with respect to the income tax deficiencies on joint Hicks Co. v. Commissioner, 56 T.C. 982, 1030 (1971), returns. affd. 470 F.2d 87 [31 AFTR 2d 73-382] (1st Cir. 1972). <br /><br />The penalty in the case of fraud is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell, 303 U.S. 391, 401 [20 AFTR 796] (1938); Sadler v. Commissioner, 113 T.C. 99, 102 (1999). The Commissioner has the burden of proving, by clear and convincing evidence, an underpayment for each year in issue and that some part of the underpayment for each of those years is due to fraud. Sec. 7454(a); Rule 142(b). If the Commissioner establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and subjected to a 75-percent penalty, unless the taxpayer establishes that some part of the underpayment is not attributable to fraud. Sec. 6663(a) and (b). The Commissioner must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner, 90 T.C. 1130, 1143 (1988). <br /><br />The existence of fraud is a question of fact to be resolved upon consideration of the entire record. King's Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992). Fraud will never be presumed. Id.; Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer's intent is rarely available. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213, 223-224 (1971). Fraudulent intent may be inferred from various kinds of circumstantial evidence, or "badges of fraud", including the consistent understatement of income, inadequate records, implausible or inconsistent explanations of behavior, concealing assets, and failure to cooperate with tax authorities. Bradford v. Commissioner, 796 F.2d 303, 307 [58 AFTR 2d 86-5532] (9th Cir. 1986), affg. T.C. Memo. 1984-601 [¶84,601 PH Memo TC]. Dealing in cash is also considered a "badge of fraud" by the courts because it is indicative of a taxpayer's attempt to avoid scrutiny of his finances. See id. at 308. Additional "badges of fraud" include handling one's affairs to avoid making the records usually made in transactions of the kind. Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943). Evidence of fraud also includes a taxpayer's use of a business entity to cloak the personal nature of expenses. See Romer v. Commissioner, T.C. Memo. 2001-168 [TC Memo 2001-168]. <br /><br />Although Evans' conviction for subscribing a false Federal tax return does not collaterally estop him from denying that he fraudulently understated petitioners' income tax liability, his conviction is evidence of fraudulent intent. See Wright v. Commissioner, 84 T.C. 636, 643-644 (1985). Evans contends that he entered into the plea agreement solely to protect Ms. Evans in the face of a threat that she might be arrested. The details alleged in the counts of which he was convicted and admitted in the plea agreement are specific and convincing evidence of fraud, and he has not raised any doubt that the facts admitted are accurate. His motivation in entering into the plea agreement is irrelevant and in no way undermines the reliability of the overwhelming evidence of unreported income accompanied by other badges of fraud. <br /><br />Petitioners also contend that the amounts paid to Huntington Construction from the Farming Authority were for work before the time that Evans became general manager and that, therefore, those amounts were not embezzled from the Farming Authority in breach of his duties. Whether petitioners' business performed services for the Farming Authority before the time that Evans became the general manager is irrelevant in this case. The payments received by Huntington Construction and used for petitioners' personal purposes during the years in issue were income to them during those years. The failure to report that income resulted in underpayments of taxes and is clear and convincing evidence of fraud. <br /><br />Respondent has thus shown by clear and convincing evidence that petitioners received unreported income during each of the years in issue, at least in the amounts withdrawn from Huntington Construction and Western Pacific as set forth in our findings. Once the receipt of income is shown it is petitioners' burden to come forward with explanations of why receipts are not taxable or of offsetting deductions. See, e.g., Brooks v. Commissioner, 82 T.C. 413, 432-433 (1984), affd. without published opinion 772 F.2d 910 (9th Cir. 1985). Respondent does not have the burden of disproving petitioners' entitlement to deductions, even in a criminal case where the Government bears a heavier burden of See, e.g., Elwert v. United States, 231 F.2d 928, 933-936 [49 AFTR 546] proof. (9th Cir. 1956). Petitioners did not produce any records to substantiate their business expenses. Under the circumstances, we are entitled to infer that they did not maintain required records or that any records that were maintained would be unfavorable to their claims. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 [35 AFTR 1487] (10th Cir. 1947). Petitioners suggest that respondent had a burden to show that "Evans possessed a requisite amount of education and business experience or sophistication to keep such records." Although a taxpayer's education and experience may be considered in determining intent, we are satisfied that the complicated scheme engaged in by Evans is clear and convincing evidence that he had the "requisite *** business experience or sophistication" and that he knew that records are required to substantiate deductions. Under the management agreement with the Farming Authority, Evans was to maintain records and accounts, among other duties. Thus his failure to keep or to produce records may be regarded as concealment. <br /><br />Evans admitted in the plea agreement that he concealed his ownership of Huntington Construction from the Farming Authority. Petitioners argue that disguising assets or embezzlement, standing alone, does not establish intent to evade taxes. These facts taken together with other badges of fraud, however, are clear and convincing evidence of fraudulent intent. <br /><br />Respondent refers to the untimely filing of petitioners' tax returns as evidence of fraud. Petitioners argue that late filing, as contrasted with failure to file, is not indicative of fraud. The returns in this case, however, were filed after disclosure of Evans' criminal conduct in misappropriating funds. Returns were not filed for the entities through which the misappropriated funds were channeled to petitioners. Under these circumstances, we agree with respondent. <br /><br />The evidence is clear and convincing that petitioners dealt in large amounts of cash during the years in issue. Petitioners' response is to point to the paper trail on which respondent relies; petitioners assert that the paper trail negates fraudulent intent. Again the evidence must be considered in the context of the total factual record. That petitioners' schemes were discovered because they did not successfully hide all potential evidence is not an exonerating factor. Even if some portion of the cash was used for business expenses, the "handling of one's affairs to avoid making the records usual in transactions of the kind" has long been recognized as a badge of Spies v. United States, 317 U.S. at 499-500; see Bradford fraud. v. Commissioner, 796 F.2d at 308. <br /><br />Another badge of fraud in this case is the record of implausible and inconsistent explanations of behavior. Evans attempts to explain away his guilty plea and plea agreement as intended to protect his wife from arrest. He has not shown that the facts admitted in the plea agreement are inaccurate. He attempts to minimize his wrongful conduct toward the Farming Authority by asserting that funds were owed to Huntington Construction prior to his employment as general manager, but the receipt of $1.59 7 million in 1995 and 1996 calls for more than a generalized assertion that it was due before mid-1995. By the nature of the claim, corroborating documentary or witness evidence should have been available. Because such evidence was not produced, a negative inference again may be drawn. See Wichita Terminal Elevator Co. v. Commissioner, supra at 1165. In any event, the failure to report the income, regardless of the legality or illegality of its source, is the key element in this case. Disallowed Deductions As a general rule, with respect to the amounts of the deficiencies in issue, the taxpayer bears the burden of proof. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992); Rockwell v. Commissioner, 512 F.2d 882, 886 [35 AFTR 2d 75-1055] (9th Cir. 1975), affg. T.C. Memo. 1972-133 [¶72,133 PH Memo TC]. That burden may shift to the Commissioner if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's tax liability. Sec. 7491(a)(1). However, section 7491(a)(1) applies with respect to an issue only if the taxpayer has complied with the requirements under the Code to substantiate any item, has maintained all records required by the Code, and has cooperated with reasonable requests by the Commissioner for witnesses, information, documents, meetings, and interviews. Sec. 7491(a)(2)(A) and (B). For the reasons discussed above, petitioners' evidence is unreliable, and their claims are unsubstantiated. They have not satisfied the conditions for shifting the burden of proof to respondent. <br /><br />The deductions in dispute are identified by a list of checks that Evans generally claimed were business expenses of Huntington Construction, including travel expenses, vehicle expenses, and meals expenses that were not substantiated in accordance with section 274(d). Some disputed payments were made to petitioners' sons. Evans' testimony was not corroborated by records or other testimony, and none of the witnesses could identify specific services petitioners' sons performed during 1995 or 1996. Evans professed a lack of recollection with respect to many of the payments. His testimony asserting that certain payments related to loan transactions was not supported by any documentation of loans received or repaid. Testimony concerning attorney's fees was not supported by evidence establishing that the fees were business expenses rather than personal nondeductible expenses, such as fees relating to the criminal case. Business-related litigation referred to during the testimony apparently occurred 5 or more years before the years in issue. <br /><br />Many of the items that Evans asserted were business related were inherently personal, and the record of diversion of business income to pay personal expenses undermines the credibility of the generalized assertions of business purpose. The failure to keep adequate records, the use of cash, the absence of tax returns for Huntington Construction and Western Pacific, the failure to turn over records to petitioners' return preparer, and the implausible claims together render the uncorroborated testimony unreliable. Petitioners have not shown any error in the deficiency determinations for 1995 and 1996. <br /><br />Respondent has proven that the fraud penalty applies, and petitioners have not established that any part of the underpayments was not attributable to fraud. See sec. 6663(b). Respondent is not barred from assessing petitioners' 1995 and 1996 tax deficiencies. The penalty under section 6663 will be upheld. Section 6015 Relief Ms. Evans asserted in her petition a claim for relief from joint and several liability for 1995 and 1996 under section 6015. She does not qualify for relief under section 6015(c) because petitioners were married and living together at all material times. Relief under section 6015(b) requires that she establish that in signing the return she did not know, and had no reason to know, that there was an understatement of tax attributable to items of Evans. See sec. 6015(b)(1)(C). Under either section 6015(b)(1)(D) or (f), she must show that taking into account all of the facts and circumstances, it is inequitable to hold her liable for the deficiencies. <br /><br />At trial, Ms. Evans testified that she did not know anything about her husband's activities giving rise to an understatement of tax for each year, although she signed many of the checks by which funds were diverted to pay petitioners' personal expenses. We are not persuaded that she did not know or have reason to know of the understatements. At the time she signed the tax returns, she knew that Evans was being prosecuted for misappropriation of funds. As far as the record reflects, the unreported income was used by petitioners equally, and she has suggested no particular facts that would support a conclusion of inequity in holding her liable. It is not inequitable to hold her liable for the deficiencies on the joint returns. We need not, therefore, discuss the additional factors generally considered in determining entitlement to relief under section 6015. <br /><br />We have considered the other arguments of the parties. They are irrelevant to our decision or lack merit justifying discussion. To reflect the foregoing, <br /><br />Decisions will be entered for respondent. <br /><br /><br />--------------------------------------------------------------------------------<br />7<br /><br /> <br />--------------------------------------------------------------------------------<br />7<br /><br /> <br /> © 2010 Thomson Reuters/RIA. All rights reserved.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com1tag:blogger.com,1999:blog-1828490773850268894.post-5229946237061018322010-09-21T16:20:00.003-04:002010-09-21T16:22:35.201-04:00filing false tax returnsU.S. v. STADTMAUER, Cite as 106 AFTR 2d 2010-XXXX, 09/09/2010 <br /><br />--------------------------------------------------------------------------------<br />UNITED STATES OF AMERICA v. RICHARD STADTMAUER, Appellant.<br />Case Information: <br />Code Sec(s): <br /> Court Name: UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, <br />Docket No.: No. 09-1575, <br />Date Argued: 11/17/2009 <br />Date Decided: 09/09/2010. <br />Disposition: <br /><br />HEADNOTE <br />. <br /><br />Reference(s): <br /><br />OPINION <br />David Debold, Esquire Miquel A. Estrada, Esquire (Argued) Scott P. Martin, Esquire Gibson, Dunn & Crutcher LLP 1050 Connecticut Avenue, N.W. 9th Floor Washington, DC 20036-0000 <br /><br />Robert S. Fink, Esquire Kostelanetz & Fink, LLP 7 World Trade Center 34th Floor New York, NY 10007 <br /><br /> <br /><br />UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, <br /><br />Appeal from the United States District Court for the District of New Jersey (D.C. Criminal Action No. 2-05-cr-00249-003) District Judge: Honorable Jose L. Linares <br /><br />Before: AMBRO, ALDISERT, and ROTH, Circuit Judges <br /><br />OPINION OF THE COURT<br />Judge: AMBRO, Circuit Judge <br /><br />PRECEDENTIAL <br /><br /> Table of Contents<br />I. Background................................................... 5<br /> A. Richard Stadtmauer and the Kushner Companies........... 5<br /> B. The Other Players...................................... 7<br /> C. The Alleged Conspiracy................................. 8<br /> 1. The General Ledgers............................. 11<br /> i. Charitable Contributions................... 11<br /> ii. "Non-Property" Expenses................... 12<br /> iii. Capital Expenditures..................... 13<br /> iv. Gift and Entertainment Expenses........... 15<br /> 2. KC's Internal Financial Statements.............. 15<br /> 3. SSMB's Preparation of the Partnerships'<br /> Tax Returns................................... 16<br /> D. Evidence of Stadtmauer's Knowledge.................... 19<br /> 1. "Thursday Meetings" ............................ 21<br /> 2. "Richard Specials" and Other Special<br /> Financial Statements.......................... 23<br /> 3. Other Circumstantial Evidence of<br /> Stadtmauer's Knowledge of Tax Law<br /> and Consciousness of Guilt.................... 26<br /> i. Rationale for Private School Tuition<br /> Payments .............................. 26<br /> ii. The 1996 IRS Audit........................ 26<br /> iii. Dissenting Limited Partners and<br /> Executives............................. 27<br /> E. The Verdict and Stadtmauer's Post-Verdict<br /> Motions............................................ 30<br />II. Jurisdiction............................................... 31<br />III. Discussion................................................ 31<br /> A. Willful Blindness..................................... 32<br /> 1. Whether the District Court's Willful<br /> Blindness Instruction Applied to<br /> Stadtmauer's Knowledge of the Law............. 33<br /> 2. Willful Blindness and Cheek..................... 38<br /> 3. Whether the District Court's Willful<br /> Blindness Instruction Applied<br /> to the Element of Specific Intent............. 46<br /> 4. Whether Trial Evidence Warranted the<br /> Willful Blindness Instruction................. 50<br /> B. Lay Opinion Testimony................................. 52<br /> 1. Background...................................... 52<br /> 2. Analysis........................................ 59<br /> C. Prosecutorial Misconduct.............................. 71<br /> D. Expert Testimony...................................... 76<br /> E. Restrictions on Cross-Examination..................... 82<br />Following a two-month jury trial in the District Court for the District of New Jersey, Richard Stadtmauer was convicted of one count of conspiracy to defraud the United States (in violation of 18 U.S.C. § 371), and nine counts of willfully aiding in the filing of materially false or fraudulent tax returns (in violation of 26 U.S.C. § 7206(2)). On appeal, Stadtmauer raises many challenges to these convictions. We deal principally with the issue Stadtmauer raises last: whether the District Court erred in giving a willful blindness instruction in this case, including whether the Supreme Court's decision in Cheek v. United States, 498 U.S. 192 [67 AFTR 2d 91-344] (1991), forecloses the possibility that willful blindness may satisfy the legal knowledge component of the “willfulness” element of criminal tax offenses. We join our sister circuit courts in concluding that Cheek does not prohibit a willful blindness instruction that applies to a defendant's knowledge of relevant tax law. We reject also Stadtmauer's other claims of error, and thus affirm. <br /><br />I. Background 1<br />A. Richard Stadtmauer and the Kushner Companies<br />This criminal case stemmed from an investigation of Charles Kushner, a prominent real estate entrepreneur, political fundraiser, and philanthropist in New Jersey. Kushner controls hundreds of limited partnerships, each of which owns and manages a single commercial or residential property. Kushner is the general partner of each partnership and, for most, his siblings (including his brother, Murray Kushner 2) and their children are the other limited partners. These partnerships have collectively operated under the name “Kushner Companies” (“KC”). KC is not a registered entity and does not own any properties. 3 <br /><br />In the mid-1990s, Charles and Murray Kushner accused each other of taking more than his fair share out of their common businesses. During the course of the ensuing civil litigation, Murray alerted federal authorities to potential misconduct by his brother and KC. Following an investigation, Kushner pled guilty in 2004 to, among other things, assisting in the filing of false partnership tax returns and federal campaign contribution offenses. <br /><br />During the course of its investigation of Kushner, the Government indicted several other individuals, including Stadtmauer—a Certified Public Accountant, a law school graduate, and Kushner's brother-in-law. He became an employee of KC in 1985, and eventually rose to become an executive vice president. In this role, Stadtmauer oversaw the operations of KC's residential and commercial properties. Stadtmauer also held a small stake (between 1% and 7%) in many of KC's partnerships. Stadtmauer and Kushner held equal interests (50% each) in Westminster Management, an entity which collected management fees from the other partnerships. <br /><br />B. The Other Players<br />Several former KC executives testified against Stadtmauer at trial, including: (1) Chief Financial Officer (“CFO”) Stanley Bentzlin; (2) Chief Operations Officer (“COO”) Scott Zecher; and (3) Alan Lefkowitz, who succeeded Bentzlin as CFO in 2000. Of these three, only Zecher was indicted. 4 <br /><br />KC employed the accounting firm of Schonbraun, Safris, McCann, Bekritsky & Company, LLC (“SSMB”) as its main “outside” accountant. The lead SSMB accountant for KC matters was Marci Plotkin, who served as KC's CFO in the early 1990s before returning to SSMB. 5 Though Plotkin was technically an employee of SSMB, KC reimbursed SSMB for yearly bonuses it paid to Plotkin 6 and certain of Plotkin's salary increases, and reimbursed Plotkin for the cost of her son's private school tuition. Kushner did not heed Bentzlin's warning that paying Plotkin a bonus would impair her independence and preclude SSMB from issuing financial statements on behalf of KC partnerships. <br /><br />Marci Plotkin was assisted by (among others) SSMB partner Stanley Bekritsky and Anne Amici, a staff accountant who worked almost exclusively on KC matters. Plotkin, Bekritsky, and Amici were indicted along with Stadtmauer and each pled guilty to conspiring to defraud the United States. Of these three, only Bekritsky testified at Stadtmauer's trial. <br /><br />C. The Alleged Conspiracy<br />The Government charged that Stadtmauer, Bekritsky, Plotkin, and Amici conspired to file false or fraudulent tax returns for the 1998-2001 tax years for Westminster Management and eleven other KC limited partnerships: “Oakwood Garden Developers,” “Elmwood Village Associates,” “Pheasant Hollow,” “QEM,” “Mt. Arlington,” and six partnerships with variations of the name “Quail Ridge.” The Government alleged that these partnerships fraudulently claimed four categories of expenditures as fully deductible business expenses 7 on their tax returns 8: (1) charitable contributions, which generally are not deductible as business expenses; (2) expenditures incurred by one partnership but paid by a different partnership (known as “non-property” expenses); (3) capital expenditures, which generally must be amortized and depreciated over the life of the relevant asset (and thus are not immediately deductible in full); and (4) gift and entertainment expenses, which generally are not fully deductible as business expenses. <br /><br />The Government's theory was that these four types of expenditures were fraudulently deducted in full as ordinary business expenses on the partnerships' tax returns through a three-step process. First, the expenses were logged in each limited partnership's general ledger via a computer-based accounting program that broke down all revenue and expenses into categories called “accounts.” Second, KC used the general ledgers to prepare internal financial statements that automatically categorized these four types of expenditures as “expenses.” Finally, SSMB used the general ledgers and internal financial statements to prepare external financial statements and tax returns for each partnership that falsely claimed these four categories of expenditures as fully deductible business expenses. <br /><br />To illustrate, below we discuss primarily the 2000 tax return for one of the limited partnerships, Elmwood Village Associates (“Elmwood Village”). <br /><br />1. The General Ledgers<br />i. Charitable Contributions<br />Kushner and Stadtmauer frequently directed that charitable contributions be paid out of partnership funds, which were logged into the general ledger under the “contributions” account. In 2000, Elmwood Village paid approximately $186,000 to various charitable organizations, including donations to the Suburban Torah Center—the “personal synagogue” of Kushner and Stadtmauer—and to the Center's Rabbi, Stadtmauer's “rabbinical advisor.” (App. 2846–47.) <br /><br />Also logged under the “contributions” account were donations made to various political campaigns and political action committees, and $25,384 in private school tuition payments for Zecher's and Plotkin's children. Because the latter payments were logged as partnership expenses (rather than entered into the payroll system as taxable income), no taxes were withheld and no Form 1099 was issued to Zecher or Plotkin. Zecher testified that he generally left the descriptions blank on the checks for tuition payments because “[t]here was nothing [he] really could write. It was not an appropriate business expense.” (Id. at 2817.) <br /><br />ii. “Non-Property” Expenses<br />Whenever a particular KC partnership incurred an expense that it could not satisfy out of its current funds, Kushner would direct that a different partnership pay the expense. He referred to this practice as “losing a bill,” and it was a regular agenda item for upper-level management meetings held every Tuesday (referred to as “Tuesday Meetings” or “Cash Meetings”). Typically, either Kushner, the CFO, or the controller chose the source of payment; in other instances, Kushner directed Stadtmauer to choose which partnership would pay the expense. Zecher testified that it was Kushner's view that an expense could be paid by any partnership that he controlled. Sometimes Kushner would tell Zecher that the partnership actually paying the expense “didn't matter because it was all family.” (Id. at 3116.) <br /><br />For example, in 1998 various KC partnerships paid more than $1 million in expenses associated with the renovation of KC's central office building in Florham Park, New Jersey. 9 Kushner directed Bentzlin to have several different partnerships, on a rolling basis, pay portions of the total expenses incurred as a result of the renovations. These expenditures were logged in the partnerships' respective general ledgers under the “repairs and maintenance” account. Eventually, Kushner instructed Bentzlin to review with Stadtmauer the list of all bills due for the renovation work, and directed Stadtmauer to “instruct [Bentzlin] on how to lose it,” i.e., to choose “what entity to pay it out of.” (Id. at 2130.) <br /><br />In addition to one partnership paying another partnership's expenses, KC partnerships also paid for expenses that had no relation to any partnership's business. In 2000, Elmwood Village paid approximately $30,000 in “non-property” expenses that were booked to various general ledger accounts, including “advertising,” “seminars,” “legal fee-other,” and “other professional fees.” This amount included (among other things): (1) $10,000 paid to a consulting firm to research the viability of a comeback by then-former Israeli Prime Minister Benjamin Netanyahu; (2) $10,000 toward a $100,000 fee to pay Mr. Netanyahu to speak at a breakfast sponsored by NorCrown Bank (an entity not affiliated with KC in which Kushner held an interest); and (3) $3,815 toward a $50,000 fee to pay former Chairman of the Federal Reserve Paul Volcker to speak at another NorCrown Bank event. <br /><br />iii. Capital Expenditures<br />From 1998 through 2001, various KC partnerships purchased capital assets and made capital improvements to their properties. In general, these expenses were logged in the partnerships' general ledgers under the “repairs and maintenance” account rather than the capital expenditures account. As Lefkowitz explained at trial, “[t]here [were] a few instances where things might have been capitalized, but as a general rule ... everything went through expenses.” (Id. at 2604.) Bentzlin explained that, although each general ledger had a capital improvement “account,” capitalizing assets “wasn't the way it was done at Kushner Companies.” He added that <br /><br />[w]e regularly and routinely expensed [capital assets] under one of the repairs and maintenance or capital improvement accounts ... [;] that was the way they were doing it upon my arrival, and it didn't change throughout my tenure with a few—just with a few exceptions.<br />...<br />... You didn't question it. You know, it was ruled with an iron fist. They controlled pretty much everything.<br />(Id. at 2190.) <br /><br />In 2000, Elmwood Village spent $269,323 on improvements that allegedly should have been capitalized, which included adding new bathrooms and kitchens to apartments—including new cabinets and $49,318.40 worth of new appliances (such as washers and dryers)—and a new truck (for $25,126). All of these expenses were logged in the partnership's general ledger under the “repairs and maintenance” general ledger account rather than a capital account. <br /><br />iv. Gift and Entertainment Expenses<br />Kushner and Stadtmauer frequently directed various partnerships to pay gift and entertainment expenditures that had no specific connection with the partnership paying the expense. In 2000, Elmwood Village paid: (1) $12,640 to cater a brunch at the New Jersey Performing Arts Center; (2) $7,027 to a wine store for alcohol delivered to Kushner's and Stadtmauer's private homes during the holidays; (3) $5,905.23 to cater a fundraiser for former New Jersey Governor Jon Corzine; and (4) thousands of dollars for New York Yankees, New York Mets, and New Jersey Nets season tickets. Each of these expenditures was logged in Elmwood Village's general ledger under a “miscellaneous,” “gifts/entertainment,” or “travel” account. <br /><br />2. KC's Internal Financial Statements<br />KC used the general ledgers to generate internal financial statements for each partnership. The accounting template (or “skeleton”) used to produce these statements automatically grouped certain accounts from the general ledgers—including the “contributions,” “gifts/entertainment,” “miscellaneous,” and “seminars” accounts—under the category of “office expenses.” In addition, the “legal fee-other” and “other professional fees” accounts were grouped under the category of “payroll and related expenses.” Each of these categories—in addition to the “advertising” and “repairs and maintenance” 10 categories—were, in turn, grouped under the general category of “expenses,” and thus deducted in full from the partnership's revenue on the internal financial statement. 11 This violated applicable accounting standards, which required the partnerships' financial statements to be prepared on an income tax basis. <br /><br />3. SSMB's Preparation of the Partnerships' Tax Returns<br />SSMB used KC's general ledgers and internal financial statements to prepare external financial statements for each partnership. KC would submit a “Management Representation Letter” to SSMB along with its financial statements, in which KC management certified that “[t]here are no material transactions that have not been properly reflected in the financial statements.” Stadtmauer signed most of these representation letters. KC also provided SSMB with the template it used to prepare its internal financial statements. <br /><br />In preparing the partnerships' external financial statements and tax returns, SSMB used the groupings applied by KC's internal accounting software. Thus, the 2000 internal and external financial statements for Elmwood Village reflected virtually identical amounts for “office expenses” and “repairs and maintenance.” As Bekritsky testified, the tax returns were prepared “on the same basis” as the partnerships' financial statements, meaning that “if [something is] deducted on the financial statement, it is deducted on the tax return and produces income or increases the loss of the partnership.” (Id. at 3218.) <br /><br />Elmwood Village's 2000 tax return deducted a total of $496,713 in ordinary and necessary business expenses (on lines 3 through 15 of Form 8825, entitled “Rental Real Estate expenses”). Included in this amount was $211,885 in charitable contributions, political donations, and tuition payments (for, among others, Plotkin's and Zecher's children). (Line 8 of Schedule K to the return—where partnerships are required to list charitable contributions—was left blank.) The “non-property,” and gift and entertainment, expenses incurred by Elmwood Village in 2000 were similarly claimed as fully deductible business expenses (instead of listed separately as required on Schedule M-1). Finally, Elmwood Village reported no increase in capital assets in 2000. Rather, $269,323 in alleged capital expenditures were included in the $347,939 reported as “repairs” (on line 10 of Form 8825), while other alleged capital expenditures were spread among various items in Statement 10 of Schedule M-2 (entitled “Other Rental Expenses”). 12 <br /><br />Around March or April of each year, Stadtmauer met with KC's CFO and someone from SSMB—usually Plotkin, and infrequently Bekritsky—to review and sign the KC partnerships' tax returns. During these sessions, Stadtmauer sometimes reviewed SSMB's financial statements for the partnerships; indeed, he refused to “sign a tax return unless he had the financial statements next to him.” (Id. at 2958.) He would “flip through” each return, “look at certain things, and then sign it.” (Id. at 2194.) Stadtmauer only occasionally asked questions about the returns, and typically spent “30 seconds to a minute” on each. (Id. at 2283.) However, he spent more time on KC's major properties, particularly those that had large annual increases in “repairs and maintenance” expenses. (Id. at 2958.) <br /><br />Stadtmauer reviewed and signed as many as 800 tax returns in a given day. Stadtmauer signed each of the partnerships' tax returns below a legend declaring, “[u]nder penalties of perjury,” that he had “examined th[e] return, including accompanying schedules and statements,” and that, to the best of his knowledge, the return was “true, correct, and complete.” (E.g., Supp. App. 937.) Stadtmauer signed each return in his capacity as Vice-President of the corporate general partner; as Bentzlin and Zecher testified, Stadtmauer believed that by doing so he would protect himself from personal liability. (App. 2209, 2903.) <br /><br />The Government alleged that, from 1998 through 2001, the twelve KC partnerships identified in the indictment claimed more than $6 million in improper deductions. Capital expenditures that were deducted in full the year they were incurred accounted for more than half of this amount. <br /><br />D. Evidence of Stadtmauer's Knowledge<br />To establish that Stadtmauer “willfully” aided in the preparation of materially false or fraudulent tax returns—as required for a violation of 26 U.S.C. § 7206(2) 13—the Government was required to prove beyond a reasonable doubt that he voluntarily and intentionally violated “a known legal duty.”United States v. Pomponio , 429 U.S. 10, 12 [38 AFTR 2d 76-5905] (1976). Whether Stadtmauer had knowledge that the deductions claimed on the partnerships' tax returns were materially false or fraudulent was the critical issue at trial. <br /><br />At trial, Bentzlin, Zecher, and Bekritsky each testified that they never discussed with Stadtmauer the falsity of any particular deduction or tax return. Accordingly, the Government sought to meet its burden of proving that Stadtmauer acted “willfully” through various forms of circumstantial evidence (some of which have already been discussed), including: (1) evidence of Stadtmauer's intimate familiarity with the partnerships and how their general ledgers were maintained; (2) evidence that Stadtmauer made decisions on how to treat partnership expenses in the past with tax consequences in mind; and (3) other evidence suggestive of a consciousness of guilt,e.g. , evidence that Stadtmauer was aware that the partnerships were making improper expenditures. <br /><br />1. “Thursday Meetings”<br />In addition to the “Tuesday Meetings” that Stadtmauer regularly attended, for many years he ran weekly “Thursday Meetings” with the limited partnerships' property managers, as well as KC's in-house counsel, controller, Bentzlin, and sometimes Plotkin. 14 The purpose of each meeting was to conduct an in-depth review of one or two KC properties. The managers prepared presentation packages that showed the partnerships' actual expenses to date. Stadtmauer went through the presentations “line by line,” and asked “specific” questions about each. (App. 2641.) According to Zecher, “there was nothing [Stadtmauer] didn't see fit to get involved with in property management,” and he was “one of the brightest people [that Zecher had] ever met.” (Id. at 2836.) <br /><br />In 1996, certain property managers started using special letter codes on their general ledgers to identify “non-property” expenses paid for by their respective partnerships. The codes allowed property managers to identify those expenses more easily and exclude them from their Thursday Meeting presentations. According to Bentzlin, the property managers were hesitant to answer Stadtmauer's questions about such expenses during Thursday Meetings (previously listed as “miscellaneous” expenses on the presentations), because they knew the expenses were for expenses “paid out of other properties,” and “didn't want to blurt it out in front of a roomful of people.” (Id. at 2150.) <br /><br />Stadtmauer was “quite unhappy” when he learned of the codes, and directed his subordinates to end the practice. (Id. at 2186.) Stadtmauer and Bentzlin ultimately decided to lump non-property expenses together under a category called “other.” Doing so obviated the need for Stadtmauer to “interrogate or continue to question the property manager as to the nature of those expenditures” during Thursday Meetings, and made it easier during Tuesday Meetings to “figure out [how] the apartment complex on its own was really operating.” (Id. at 2185–86.) In addition, Stadtmauer directed that KC's accounting software be modified “to allow somebody to go in and change [existing] descriptions within the general ledger.” (Id. at 2187.) <br /><br />Stadtmauer also frequently instructed his subordinates to omit descriptions in check requests to avoid leaving a “trail” when KC “used one property to pay another property's expenses.” (Id. at 2628.) He admonished Zecher to “never put the descriptions in,” because he “d[idn't] want the descriptions [to show up] in the ledger.” (Id. at 2855.) Stadtmauer also “reminded [Zecher,] over and over, [to] be careful what [he] put in emails. Emails never disappear.” (Id. at 2858.) <br /><br />2. “Richard Specials” and Other Special Financial Statements<br />In certain circumstances, Stadtmauer directed that special financial statements for the partnerships be prepared for banks and other entities. These were known as “Richard Specials.” These special financial statements were often prepared when KC wanted to reduce outstanding letters of credit on particular properties. Stadtmauer would direct that “negative items” that tended to depress the partnership's profitability be removed from these statements, such as capital expenditures (that had been logged as “repair and maintenance” expenses) and “non-property” expenses. (Id. at 2077–78.) To prepare these statements, Stadtmauer was given a “detailed report” of the partnership's general ledger, which he would go through line by line and indicate the items to be removed for the financial statement. (Id. at 2077.) KC prepared both internal and external versions of every “Richard Special”; the internal version revealed the adjustments made, while the external version showed only the final numbers after adjustments. (Id. at 2225.) <br /><br />The first time Stadtmauer asked Bentzlin to create a “Richard Special,” Bentzlin objected and told Stadtmauer that he “didn't think it was the right thing to do” because they “would be sending different financials out other than the ones prepared by the accountant.” (Id. at 2079.) Stadtmauer argued it would be proper because they would call it a “statement from operations” (as opposed to a “statement of operations”), supposedly making clear that it wasn't a true financial statement. (Id. (emphasis added).) Bentzlin told Stadtmauer he thought the justification was “ridiculous,” and though Bentzlin ultimately agreed to prepare the “Richard Specials,” he “didn't want [them] ever to go out with [his] name on [them].” 15 (Id.) <br /><br />Similar to “Richard Specials,” on several occasions KC prepared special financial statements in connection with potential acquisitions and joint ventures. For example, in 1995 certain lenders agreed to finance KC's acquisition of Elmwood Village, provided that KC would commit to making $1.5 million in capital improvements to the property and secure a $1.6 million letter of credit. These expenditures were entered, as usual, under non-capital accounts on the partnership's general ledger. At the end of the year, however, KC decided to capitalize the items on the partnership's financial statement “to get the letter of credit cancelled.” (Id. at 2348.) This decision was made during a Tuesday “Cash Meeting” in which Stadtmauer participated. <br /><br />Elmwood Village's 1996 tax return accurately reported almost $1 million in capital improvements. After the letter of credit was cancelled, however, KC “went back to the usual procedures of expensing those types of expenditures.” (Id. at 2210.) Elmwood Village did not capitalize any expenditures after 1996, and its post-1996 returns treated the 1996 renovations that had been capitalized as fully deductible repairs. <br /><br />Similarly, in 2000 KC paid $280 million to acquire a company called WNY, which owned approximately 40 properties in New Jersey, Pennsylvania, Maryland, and Delaware. KC was required to obtain a $40 million letter of credit in connection with the acquisition. Stadtmauer, Plotkin, and Zecher had a “very detailed meeting” on how they would “do the accounting for the WNY properties.” (Id. at 2967.) They agreed that they would “capitalize everything and anything [they] could, instead of expensing it, like [they] always did in the other properties.” (Id.) Zecher testified that Stadtmauer was “convinced, because the transaction was so large, and the $40 million [in] letters of credit were so unusual for [KC], that the banks were going to come in and look at not only the tax returns, but ... the actual books and records.” (Id.) <br /><br />When the letters of credit were removed, Plotkin asked whether she should expense the capitalized items. Zecher responded that he and Stadtmauer had determined that the financial statements would “look very weird” if they stopped capitalizing. (Id. at 2970–71.) <br /><br />3. Other Circumstantial Evidence of Stadtmauer's Knowledge of Tax Law and Consciousness of Guilt<br />i. Rationale for Private School Tuition Payments<br />As noted, for several years KC paid the private school tuition for, among other KC employees, Plotkin's and Zecher's children. Zecher testified that Stadtmauer came up with the idea of paying the tuition directly to the school instead of increasing Zecher's year-end bonus by that amount. (Id. at 2824.) Stadtmauer told Zecher that he was “trying to be nice” by paying the tuition directly to the school, which would allow Zecher to avoid thousands of dollars in additional income taxes. (Id.) <br /><br />ii. The 1996 IRS Audit<br />In 1996, the Internal Revenue Service (“IRS”) audited the tax returns for two KC partnerships, focusing on the large deductions taken for repairs (including $850,000 to reconstruct a building's facade, which was deducted in full as a business expense). The IRS ultimately issued “no change” letters. Following the audit, however, Plotkin sent a letter to Bentzlin—on which Stadtmauer was copied—instructing Bentzlin to change the word “improvements” to “repairs” in the “tenant improvements,” “apartment renovations,” and “building improvements” general ledger accounts. (Id. at 2269–70.) Bentzlin believed the purpose was to make these categories appear as if they contained repair and maintenance expenditures rather than “potentially a capital improvement type item.” (Id. at 2270.) <br /><br />iii. Dissenting Limited Partners and Executives<br />In addition to the Kushner family and Stadtmauer, there were other individuals who held interests in various KC partnerships. As Zecher testified at trial, many of these individuals made repeated requests for information regarding the financial state of their partnership interests. In many instances, Stadtmauer and Kushner ordered Zecher to refuse those requests. <br /><br />In one instance, a partner of a KC partnership named “K & F Clinton” inquired as to certain political contributions made by that partnership and attributed to him. (Id. at 2891.) The partner denied he had ever authorized the contributions, and noted that, “had [he] been informed of the intention to make political contributions, [he] would have advised that such political contributions were inappropriate and [he] would have demanded that they not be made from K & F” funds. (Id. at 2892.) He further noted that “[n]othing in the partnership agreement authorized the disbursement of K & F funds for any unrelated purpose.” (Id. at 2892–93.) Zecher got similar responses from several other partners. (Id. at 2893.) <br /><br />Another limited partner — Stanley Greenberg—“constantly” had difficulty obtaining annual financial statements for the partnerships in which he had an interest. (Id. at 3356.) When he finally obtained and examined the partnerships' financial statements for a prior three-year period, 16 “it was obvious [to him] that the expenses [claimed for] run[ning] the[] properties were way out of line.” (Id.) Among other things, Greenberg noticed that the partnerships in which he had an interest had treated capital expenditures as ordinary expenses, and had made numerous charitable contributions to Kushner's and Stadtmauer's synagogues, as well as political contributions. (Id. at 3363.) <br /><br />When Greenberg expressed his concerns to Kushner, the latter told him that “if you don't like it, I will give you your money back.” (Id. at 3358.) Greenberg also had conversations with Stadtmauer, both in person and by phone, regarding the improper expenses being paid by the partnerships, and asked Stadtmauer to “stop [KC from] doing what they were doing.” (Id.) Though he offered no “excuse ... or any explanation” for the expenses, Stadtmauer rejected Greenberg's request, explaining that “that was the way they did business.” (Id.) Following these conversations, KC attempted to buy out Greenberg's interests in the partnerships. <br /><br />In addition to these dissenting limited partners, the Government also introduced testimony that KC executives were expected not to challenge KC's accounting practices. As Bentzlin explained, “[y]ou had to do pretty much as you were told [at KC]. [Stadtmauer] and [Kushner] often would throw tirades at any number of the meetings on a regular routine basis or in the office, you know, that you really didn't have latitude to make any changes.” (Id. at 2190.) <br /><br />Former CFO Alan Lefkowitz learned this lesson the hard way. In early 2001, he emailed Kushner to ask whether he should follow the past practice of paying a bill for a Mikvah (a Jewish ritual) with funds from one of the partnerships. Kushner was furious, and admonished Lefkowitz that he “should never write something like th[at] down.” (Id. at 2613.) According to Zecher, Kushner was angry that Lefkowitz had “put[] in an email in writing that [KC was] paying bills for a ... not-for-profit project out of ... for-profit properties.” (Id. at 2858.) Kushner printed out the email and hand-wrote: “This guy is a definite Moron. We must deal with the situation.” Kushner forwarded a copy of the email (bearing his hand-written note) to Stadtmauer, and it was later discussed among upper-level management. Stadtmauer later told Zecher: “This is a stupid thing to do and you better make sure this guy doesn't do it again.” (Id.) <br /><br />Lefkowitz was eventually barred from Tuesday Meetings and later resigned. He believed that management (including Stadtmauer) had concluded that he was not a “team ... player,” i.e., was “not willing to go along with what they want[ed] to do.” (Id. at 2613.) <br /><br />E. The Verdict and Stadtmauer's Post-Verdict Motions<br />Following a two-month trial, 17 the jury convicted Stadtmauer of one count of conspiracy and nine counts of aiding in the willful filing of materially false or fraudulent partnership tax returns. 18 The District Court denied Stadtmauer's motions for a judgment of acquittal and to dismiss the indictment. 19 In February 2009, the District Court sentenced him to 38 months' imprisonment. He timely appealed. <br /><br />II. Jurisdiction<br />The District Court had jurisdiction under 18 U.S.C. § 3231. We have appellate jurisdiction under 28 U.S.C. § 1291. <br /><br />III. Discussion<br />Stadtmauer contends that (1) the District Court erred in giving a willful blindness instruction to the jury; (2) the Court improperly admitted prejudicial lay opinion testimony by a Government witness; (3) the prosecutor violated his obligation to correct false testimony by a Government witness; (4) the Court improperly allowed an IRS agent to testify as an expert witness; and (5) the Court violated the Federal Rules of Evidence and his Sixth Amendment rights by restricting the scope of his cross-examination of Government witnesses. We address each claim in turn. <br /><br />A. Willful Blindness<br />Stadtmauer argues that the District Court erred in giving a willful blindness instruction to the jury for three reasons. Relying on Cheek v. United States, 498 U.S. 192 [67 AFTR 2d 91-344] (1991), he first argues that the “willfulness” element of criminal tax offenses—which “requires the Government to prove that the law imposed a duty on the defendant, [and] that the defendant knew of th[at] duty,” id. at 201—can never be satisfied by willful blindness. Second, he contends that the Court improperly instructed the jury that the element of intent could be satisfied through proof of willful blindness, by analogy in violation of our recent en banc decision in Pierre v. Attorney General, 528 F.3d 180 (3d Cir. 2008) (en banc). He finally argues that the trial evidence did not warrant a willful blindness instruction. <br /><br />We exercise plenary review over whether a willful blindness instruction properly stated the law. United States v. Khorozian, 333 F.3d 498, 507–08 (3d Cir. 2003);see also United States v. Wert-Ruiz , 228 F.3d 250, 255 (3d Cir. 2000). We review a district court's determination that the trial evidence justified the instruction for abuse of discretion, United States v. Flores, 454 F.3d 149, 156 (3d Cir. 2006), and “view the evidence and the inferences drawn therefrom in the light most favorable to the [G]overnment,” Wert-Ruiz, 228 F.3d at 255. <br /><br />1. Whether the District Court's Willful Blindness Instruction Applied to Stadtmauer's Knowledge of the Law<br />Before turning to Stadtmauer's first challenge to the District Court's willful blindness instruction, we address the Government's contention that the Court's instruction applied only to Stadtmauer's knowledge of facts, not his knowledge of the law. <br /><br />The Government's initial proposed willful blindness instruction plainly applied to Stadtmauer's knowledge of the law. The final sentence of that instruction stated: “You may find that [the] defendant acted knowingly ... if you find either that the defendant actually knew about the applicable IRS requirements for the prosecution years, or that the defendant deliberately closed his ... eyes to what he ... had every reason to believe.” (Supp. App. 60.) Stadtmauer submitted a brief objecting to this instruction. Though he conceded that willful blindness may be appropriate to establish knowledge of facts, he argued that, under Cheek, “willfulness” requires actual knowledge of the law, which cannot be satisfied through deliberate ignorance. <br /><br />At the charging conference, the Government submitted a revised instruction that omitted the reference to Stadtmauer's knowledge of “applicable IRS requirements.” It instead instructed the jury that the “element of knowledge” would be satisfied if the Government proved beyond a reasonable doubt “a conscious purpose by the defendant to avoid knowledge [that] the tax returns at issue were false or fraudulent as to a material matter.” (App. at 3973–74.) Though the Government revised its charge to address Stadtmauer's objections, it nonetheless made explicit its position that willful blindness could cover both knowledge of the law and knowledge of facts, arguing that “it is a little difficult to say that it can't [apply to] legal [knowledge] at all[,] because it's really kind of a mixed question of law and fact[] in many [tax] cases.” 20 (Id. at 3905.) <br /><br />In its final instructions, the District Court gave a willful blindness instruction consistent with the Government's revised instruction. In relevant part, the Court instructed the jury as follows: <br /><br />The element of knowledge on the part of the defendant may be satisfied by inferences drawn from proof that the defendant closed his eyes to what would otherwise have been obvious to the defendant. A finding beyond a reasonable doubt of a conscious purpose by the defendant to avoid knowledge that the tax returns at issue were false or fraudulent as to a material matter would permit an inference that he had such knowledge.<br />Stated another way, the defendant'sknowledge of a fact or circumstance may be inferred from his willful blindness to the existence of that fact and circumstance.<br />No one can avoid responsibility for a crime by deliberately ignoring what is obvious. Thus, you may find that the defendant knew that the tax returns at issue were false or fraudulent as to a material fact based on evidence that you find exists that proves beyond a reasonable doubt that the defendant was aware of a high probability that the tax returns at issue were false or fraudulent as to a material matter; and two, that defendant consciously and deliberately tried to avoid learning about this fact or circumstance.<br />(App. 3973–74 (emphases added).) Thus, though the Court's willful blindness instruction referred to Stadtmauer's “knowledge of a fact or circumstance,” it also instructed the jury that the Government could satisfy its burden of proof on “the element of knowledge” by proving that Stadtmauer consciously avoided learning that the returns were “false or fraudulent as to a material matter,” using language that tracks the applicable statute. See 26 U.S.C. § 7206(2). <br /><br />The Government argues that the Court's reference to Stadtmauer's knowledge that the tax returns were “false or fraudulent as to a material matter” was merely “addressed to Stadtmauer's knowledge of the contents of the returns.” (Appellee's Br. at 77.) The Government notes, for example, that regardless of Stadtmauer's knowledge of the relevant tax laws, he could have consciously avoided learning of “the fact that an expenditure from one partnership was falsely represented as a deduction of another partnership,” a question of fact that did not require proof of Stadtmauer's knowledge of tax law. (Id. at 79.) We disagree. <br /><br />The Government's charges in this case were not limited to improper deductions for “non-property” expenses (i.e., expenses paid by a partnership different than the one that actually incurred the expense). Indeed, the bulk of the allegedly improper deductions were for expenditures that should have been capitalized, and it was undisputed that these amounts were paid for work that was actually performed. Rather, for this category of deductions (and others), the Government's theory was that legitimate expenditures were deducted in a fraudulent manner on the partnerships' tax returns. <br /><br />To prove that Stadtmauer knew the partnership tax returns were “false or fraudulent as to a material matter” with respect to these deductions, the Government needed to establish two “facts” beyond a reasonable doubt: (1) that Stadtmauer knew that these expenditures were claimed as fully deductible business expenses; and (2) that he knew those deductions were impermissible under the relevant tax laws (i.e., that they rendered the tax returns “false or fraudulent as to a material matter”). Cf. United States v. Schiff, 801 F.2d 108, 113 [58 AFTR 2d 86-5795] (2d Cir. 1986) (noting that in a criminal tax case the defendant's “knowledge of tax law [is], itself, a fact to be proved as part of the government's case”) (emphasis in original). In that light, we believe a reasonable juror could have interpreted the District Court's willful blindness instruction as applying not only to Stadtmauer's knowledge of facts (i.e., which expenditures were claimed as deductible business expenses on the tax returns), but also his knowledge of the law (i.e., whether those deductions were materially “false or fraudulent” under the Tax Code). Accordingly, we turn to Stadtmauer's argument that the Court's instruction incorrectly stated the law in that regard. <br /><br />2. Willful Blindness and Cheek<br />Stadtmauer argues that a willful blindness charge that applies to a defendant's knowledge of the law is “categorically and unequivocally” inappropriate in a criminal tax case in light of the Supreme Court's decision in Cheek. (Appellant's Br. at 69.) We disagree. <br /><br />We begin with the facts of Cheek. The defendant there stopped filing federal income tax returns in 1980 and was charged with (1) willfully failing to file federal income tax returns and (2) willfully attempting to evade income taxes. 498 U.S. at 194. Cheek's defense at trial was that, as a result of “indoctrination” he received as a member of a group that believed the federal tax system is unconstitutional, he “sincerely believed that the tax laws were being unconstitutionally enforced and that his actions ... were lawful,” and thus had “acted without the willfulness required” for the offenses charged. Id. at 196. <br /><br />The trial court instructed the jury that, to satisfy the element of “willfulness,” the Government was required to “prove the voluntary and intentional violation of a known legal duty, a burden that could not be proved by showing mistake, ignorance, or negligence.” Id. However, the court also instructed the jury that only “an objectively reasonable good-faith misunderstanding of the law would negate willfulness.” Id. (emphasis added). The Seventh Circuit Court affirmed Cheek's conviction, holding that “even actual ignorance is not a defense unless the defendant's ignorance was itself objectively reasonable.” Id. at 198. <br /><br />The Supreme Court reversed. It first reaffirmed that the term “willfully,” as used in criminal tax statutes, “carv[es] out an exception to the traditional rule” that ignorance of the law is not a defense to criminal liability. Id. at 200. Second, it reaffirmed its prior decisions establishing that “the standard for the statutory willfulness requirement is the “voluntary, intentional violation of a known legal duty.””Id. at 201 (quoting Pomponio, 429 U.S. at 12); see also United States v. Bishop, 412 U.S. 346, 360 [32 AFTR 2d 73-5018] (1973). <br /><br />Turning to the jury instruction given in Cheek's trial, the Court concluded that the trial judge erred in instructing the jury that “a claimed good-faith belief must be objectively reasonable” to “negat[e] ... evidence purporting to show a defendant's awareness of the legal duty at issue.” 498 U.S. at 203. The Court explained that, in proving that a defendant had “actual knowledge” of the legal duty imposed on him by the tax laws, the Government must also <br /><br />negat[e] a defendant's claim of ignorance of the law or a claim that because of a misunderstanding of the law, he had a good-faith belief that he was not violating any of the provisions of the tax laws. This is so because one cannot be aware that the law imposes a duty upon him and yet be ignorant of it, misunderstand the law, or believe that the duty does not exist. In the end, the issue is whether, based on all the evidence, the Government has proved that the defendant was aware of the duty at issue, which cannot be true if the jury credits a good-faith misunderstanding and belief submission, whether or not the claimed belief or misunderstanding is objectively reasonable.<br />Id. at 202. The Court thus distinguished between two types of persons: (1) a person with “actual knowledge” of a legal duty, and (2) a person who, in good faith, is ignorant of the duty, misunderstands it, or believes that it does not exist. It held that criminal tax liability could not attach to a person in the latter category. <br /><br />Stadtmauer's attempt to equate a person whodeliberately avoids learning of a legal duty with a person falling within the latter category (e.g., one who is ignorant of that duty by virtue of a good-faith belief or misunderstanding) is not persuasive. The willful blindness charge, also known as a “deliberate ignorance” charge, originates from the Ninth Circuit Court's decision inUnited States v. Jewell , 532 F.2d 697 (9th Cir. 1975). See United States v. Caminos, 770 F.2d 361, 365 (3d Cir. 1985). Jewell explained that <br /><br />[t]he substantive justification for the [charge] is that deliberate ignorance and positive knowledge are equally culpable. The textual justification is that in common understanding one “knows” facts of which he is less than absolutely certain. To act “knowingly,” therefore, is not necessarily to act only with positive knowledge, but also to act with an awareness of the high probability of the existence of the fact in question. When such awareness is present, “positive” knowledge is not required.<br />Jewell, 532 F.2d at 700 (emphasis added). Thus, willful blindness is a “subjective state of mind that is deemed to satisfy a scienter requirement of knowledge,”United States v. One 1973 Rolls Royce , 43 F.3d 794, 808 (3d Cir. 1994), and “cannot become a safe harbor for culpable conduct,” Wert-Ruiz, 228 F.3d at 258. <br /><br />We see nothing in Cheek—which did not involve a willful blindness instruction—that suggests the Supreme Court intended to exempt criminal tax prosecutions from this general rule. Cf. United States v. Bussey, 942 F.2d 1241, 1249 [68 AFTR 2d 91-5405] (8th Cir. 1991) (defendant's reliance onCheek in challenging willful blindness instruction in criminal tax trial was “seriously misplaced” because “Cheek did not involve a willful blindness instruction”). The justification for requiring knowledge of the relevant tax laws is that, “in our complex tax system, uncertainty often arises even among taxpayers who earnestly wish to follow the law, and it is not the purpose of the law to penalize frank difference[s] of opinion or innocent errors made despite the exercise of reasonable care.”Cheek , 498 U.S. at 205 (internal quotation marks and citation omitted); see also Bryan v. United States, 524 U.S. 184, 195 (1998) (explaining that “[t]he danger of convicting individuals engaged in apparently innocent activity” is what “motivated [the Court's] decision[]” in Cheek); United States v. Murdock, 290 U.S. 389, 396 [13 AFTR 821] (1933) (“Congress did not intend that a person, by reason of a bona fide misunderstanding ..., should become a criminal by his mere failure to measure up to the prescribed standard of conduct.”), overruled on other grounds by Murphy v. Waterfront Comm'n, 378 U.S. 52 (1964). By definition, one whointentionally avoids learning of his tax obligations is not a taxpayer who “earnestly wish[es] to follow the law,” or fails to do so as a result of an “innocent error[] made despite the exercise of reasonable care.” Cheek, 498 U.S. at 205 (internal quotation marks and citation omitted). Rather, a person who deliberately evades learning his legal duties has a subjectively culpable state of mind that goes beyond mere negligence, a good faith misunderstanding, or even recklessness. Cf. Wert-Ruiz, 228 F.3d at 237 (“Willful blindness is not to be equated with negligence or lack of due care, for willful blindness is a subjective state of mind that is deemed to satisfy a scienter requirement of knowledge.” (internal quotation marks and citation omitted)); see also 1973 Rolls Royce, 43 F.3d at 808 (describing the “mainstream conception of willful blindness as a state of mind of much greater culpability than simple negligence or recklessness, and more akin to knowledge”). <br /><br />Several of our sister circuit courts have similarly concluded that a willful blindness instruction that applies to a defendant's knowledge of tax law does not run afoul ofCheek . See United States v. Anthony, 545 F.3d 60, 64–65 [102 AFTR 2d 2008-6745] (1st Cir. 2008); United States v. Dean, 487 F.3d 840, 851 [99 AFTR 2d 2007-2922] (11th Cir. 2007);Bussey , 942 F.2d at 1248–49. 21 The First and Eleventh Circuit Courts have interpreted Cheek as counseling that, though a belief that one is complying with the tax laws need not be “objectively reasonable” to constitute a defense, it nonetheless must be “held in good faith.”Anthony , 545 F.3d at 65; see also Dean, 487 F.3d at 851 (reasoning that the Cheek Court had, “albeit, not in so many words,” held that “the law would not countenance” willful blindness to one's tax obligations). Accordingly, “the defense that the accused did not know of his [legal] duty fails if he came by his ignorance through deliberate avoidance of materials that would have apprised him of his duty, as such avoidance undermines the claim of good faith.” Anthony, 545 F.3d at 65; see also Dean, 487 F.3d at 851 (“A willful blindness instruction is entirely appropriate where the evidence supports a finding that a defendant intentionally insulated himself from knowledge of his tax obligations.”). <br /><br />We agree with the reasoning of these Courts and join them in concluding that a willful blindness instruction that applies to a defendant's knowledge of the law in a criminal tax case (such as the instruction at issue here) does not run afoul ofCheek . <br /><br />The District Court's willful blindness instruction in this case also adhered to our precedent requiring that such an instruction ““make clear that the defendant himself was subjectively aware of the high probability of the fact in question, and not merely that a reasonable man would have been aware of the probability.”” Wert-Ruiz, 228 F.3d at 255 (quoting Caminos, 770 F.2d at 365). The Court instructed the jury that it must find beyond a reasonable doubt that Stadtmauer (1) “was aware of a high probability that the tax returns at issue were false or fraudulent as to a material matter,” and (2) “consciously and deliberately tried to avoid learning about this fact.” (App. 3974.) The Court told the jury that it could not find the element of knowledge satisfied if it found only that Stadtmauer “should have known that the tax returns at issue were false as to a material matter[,] or that areasonable person would have known of a high probability of that fact.” (Id. (emphases added).) Finally, the Court stressed that it was insufficient that Stadtmauer “may have been stupid or foolish or may have acted out of inadvertence or accident. A showing of negligence or of a good-faith mistake of law is not ... sufficient to support a finding of ... knowledge.” (Id.) <br /><br />The instruction as a whole thus belies Stadtmauer's claims that the District Court “allowed the jury to substitute a failure to inquire for evidence of actual knowledge of the tax laws”; allowed the jury to convict him simply for being “ignorant of” or “for misunderstanding” the law; and instructed the jury to apply an “objective test[]” in determining whether he had knowledge of the law. 22 (Appellant's Br. at 70–71.) Accordingly, we conclude that the Court's willful blindness instruction correctly stated the law. <br /><br />3. Whether the District Court's Willful Blindness Instruction Applied to the Element of Specific Intent<br />Though we agree with Stadtmauer that the District Court's willful blindness instruction could be interpreted as applying to his knowledge of the law, we reject his argument that the instruction also (and impermissibly) applied to the element of intent. <br /><br />In addition to requiring a “known legal duty,”Cheek requires proof that the defendant “voluntarily and intentionally violated that duty.” 498 U.S. at 201. “Willfulness” thus requires more than a general intent to accomplish an act; it requires proof that the act was done with the specific intent to do something that the law forbids. See id. at 200–01;Pomponio , 429 U.S. at 12–13;Murdock , 290 U.S. at 394–95; see also Carter v. United States, 530 U.S. 255, 268 (2000) (explaining that general intent (as opposed to specific intent) requires “that the defendant possessed knowledge [only] with respect to the actus reus of the crime”). <br /><br />The penultimate paragraph of the District Court's willful blindness instruction stated: <br /><br />[Y]ou may find that the defendant acted knowingly and willfully if you find beyond a reasonable doubt either that the defendant actually knew that the tax returns were false or fraudulent as to a material matter or that the defendant deliberately closed his eyes to what he had every reason to believe.<br />(App. 3974.) Stadtmauer argues that the Court's instruction that the jury could find that Stadtmauer “acted knowinglyand willfully ” if he “deliberately closed his eyes to what he had every reason to believe” improperly substituted willful blindness for proof of a specific intent, as the element of “willfulness” encompasses both a knowledge and intent component. In that light, Stadtmauer argues that the Court's instruction by analogy ran afoul of Pierre, where we held that, although “[w]illful blindness can be used to establish knowledge,” it “does not satisfy the specific intent requirement” under the Convention Against Torture (“CAT”). 23 528 F.3d at 190. <br /><br />Even assuming that the inclusion of these two words (“and willfully”) in the District Court's willful blindness instruction was technically an incorrect statement of the law, 24 we conclude that the Court's “instructions, taken as a whole, properly instructed the jury as to the proof required” for the element of intent.United States v. Leahy , 445 F.3d 634, 650 (3d Cir. 2006). The Court's instructions made clear that willful blindness applied only to the element of knowledge. See App. 3973 (“The element of knowledge on the part of the defendant may be satisfied by inferences drawn from proof that the defendant closed his eyes to what would otherwise have been obvious to him.” (emphasis added)). Indeed, aside from two isolated instances where the Court mentioned the words “willfully” or “willfulness,” 25 its eight-paragraph instruction referred only to the “element of knowledge,” Stadtmauer's “knowledge that the tax returns at issue were false or fraudulent,” or his “knowledge of a fact or circumstance.” It never mentioned “intent,” “purpose,” or any other language that could be reasonably interpreted as applying to the element of intent. <br /><br />In this context, we cannot agree that a reasonable juror would have concluded from the District Court's instructions that a finding of willful blindness may also satisfy the element of specific intent. See United States v. Gurary, 860 F.2d 521, 527 [62 AFTR 2d 88-5871] n.6 (2d Cir. 1988) (though the trial court “also mentioned conscious avoidance in connection with willfulness, the components of which are knowledge and intent, a fair reading of ... the charge as a whole indicate[d] that conscious avoidance was to be used only in connection with the knowledge component”). Accordingly, we reject Stadtmauer's contention that the Court's willful blindness instruction improperly charged the jury as to the element of intent. <br /><br />4. Whether Trial Evidence Warranted the Willful Blindness Instruction<br />Stadtmauer finally argues that the trial evidence did not warrant a willful blindness instruction, noting simply that “[n]ot one” of the Government's witnesses directly claimed that he “deliberately tried to shield himself from learning any fact about the tax returns.” (Appellant's Br. at 75.) We disagree. The Government need not presentdirect evidence of conscious avoidance to justify a willful blindness instruction. E.g., United States v. Singh, 222 F.3d 6, 11 (1st Cir. 2000). In any event, the District Court did not err in concluding that the instruction was warranted in this case. <br /><br />At trial, there was abundant evidence that Stadtmauer was intimately involved with the operations of the partnerships and was aware of how the partnerships characterized capital expenditures, charitable contributions, gift and entertainment expenses, and “non-property” expenses in the general ledgers and financial statements. There was also evidence that, despite this knowledge—and despite the logical inference that, as Bentzlin described, “if there is garbage in, [there's] garbage out” (App. 2281)—Stadtmauer spent very little time reviewing the partnerships' tax returns, and never asked questions of SSMB as to the propriety of the expenses deducted therein. One possible inference from this is what Stadtmauer asked the jury to draw: that he relied in good faith on his accountants to prepare the tax returns consistent with applicable law (and thus had no need to review them closely). However, another possible inference is that Stadtmauer deliberately avoided “ask[ing] the natural follow-up question[s]”—e.g., whether the deductions claimed in the tax returns were consistent with how expenses were falsely characterized in the general ledgers and reported on the financial statements—despite his awareness of a high probability of that fact. Wert-Ruiz, 228 F.3d at 257; United States v. Brodie, 403 F.3d 123, 158 (3d Cir. 2005); see also United States v. Stewart, 185 F.3d 112, 126 (3d Cir. 1999) (evidence justified willful blindness instruction in mail fraud and money laundering trial, where the defendant maintained that he “lacked the intent to defraud because he relied upon the findings of solvency reported in state examinations and audit reports,” and where the jury reasonably could have concluded that the defendant “recognized the likelihood of insolvency yet deliberately avoided learning the true facts”). <br /><br />In this context, we conclude that the Court did not abuse its discretion in giving a willful blindness instruction. 26 <br /><br />B. Lay Opinion Testimony<br />Stadtmauer next contends that the District Court admitted impermissible lay opinion testimony as to his knowledge of the falseness of the partnerships' tax returns by SSMB partner Stanley Bekritsky. We review the admission of lay opinion testimony for abuse of discretion. United States v. Hoffecker, 530 F.3d 137, 170 (3d Cir. 2008). <br /><br />1. Background<br />About one month into trial, the Government informed defense counsel that, during a recent interview in preparation for his testimony, Bekritsky had recalled a tax return signing session during which Stadtmauer asked him “whether the returns were okay to sign.” The Government disclosed that Bekritsky (1) “understood [Stadtmauer's] question [to be] about whether the IRS would be likely to detect the problems with the returns,” and (2) stated “I signed them” in response to Stadtmauer's question. (Supp. App. 1049.) <br /><br />Stadtmauer filed a motion in limine to prevent Bekritsky from testifying as to his ““understanding” of Mr. Stadtmauer's intended meaning of the question that Mr. Stadtmauer posed to Mr. Bekritsky.” (Id. at 1051.) Stadtmauer argued that such testimony would be impermissible lay opinion testimony under Federal Rule of Evidence 701. The Government opposed the motion, arguing that, as a participant in the conversation, Bekritsky should be permitted under Rule 701 to testify as to his understanding of what Stadtmauer was attempting to convey to him. The Government further noted that, unless Bekritsky was permitted to testify as to that understanding, Stadtmauer's question could be interpreted as having an exculpatory meaning (i.e., that he was seeking Bekritsky's confirmation that the tax returns were accurate 27). (Id. at 1057.) <br /><br />The District Court granted the motion in limine, reasoning that the jurors could “come to their own conclusions [about] what Mr. Stadtmauer meant” by the question. (App. 3217.) The Court nonetheless made clear that the Government was authorized to ask Bekritsky “what ... he mean[t] when he said, “I signed it[.]”” (Id.) <br /><br />At trial, Bekritsky testified on direct examination as follows: <br /><br />Q. Did [Stadtmauer] ever ask you generally about the returns?<br />...<br />A. Yes.<br />Q. What did he ask you?<br />A. On one occasion, he asked me if he could—if he should sign the returns—if the returns were okay, and—<br />...<br />A. —and I said, I signed the returns.<br />Q. What did he 28 mean by that?<br />...<br />[Defense Counsel]: Objection.<br />...<br />THE COURT: I don't want you to tell us what you thought Mr. Stadtmauer [meant] by asking you the question[.] You can testify, however, as to what you meant by your answer.<br />...<br />A. What I meant by my answer was that I knew that there were problems with these tax returns, and based upon my understanding of Richard's involvement, Richard knew—<br />[Defense Counsel]: Objection.<br />(Id. at 3262–63 (emphases added).) <br /><br />The parties then went to sidebar, where defense counsel objected to Bekritsky “testifying to what [Stadtmauer] knew or didn't know.” (Id. at 3263.) Counsel argued that Bekritsky testifying about “what [Stadtmauer] knew” was “the basis for [the] motion” in limine. (Id.) <br /><br />The District Court disagreed: <br /><br />I disagree with you that was the basis of the Court's ruling. The basis was his interpretation of a statement by Mr. Stadtmauer as to what Stadtmauer's statement meant, because those words, in my view, did not need interpretation to help the jury.<br />That is different than this witness testifying about what, based on his perception, he believed Mr. Stadtmauer knew or didn't know, so I will allow it.<br />(Id.) Bekritsky's testimony then resumed: <br /><br />THE COURT: ... [You] said, what I meant by my answer was that I knew there were problems with these tax returns, and based on my understanding of Richard's involvement. What did you mean by that?<br />A. Richard was involved with the details of the operations of the partnerships. He knew that professional expenses of one entity were being paid by another entity.<br />[Defense Counsel]: Same objection to his testimony as to what [Stadtmauer] knew or didn't know.<br />THE COURT: ... Overruled.<br />...<br />THE COURT: ... What did you intend to convey when you said you signed it?<br />A. What I intended to convey was there were problems that we both knew that existed in the returns. The returns were prepared in a way that I thought that they would get by the Government and questions would not be raised.<br />(Id. at 3264 (emphasis added).) <br /><br />Defense counsel then moved to strike Bekritsky's statement as to what Stadtmauer “knew”; in the alternative, he moved for a mistrial. Defense counsel argued that Bekritsky's testimony was “incredibly prejudicial,” had no “probative value at all,” and lacked a foundation. (Id. at 3264–65.) The District Court denied Stadtmauer's motions, reasoning that (1) Bekritsky's perception of Stadtmauer's involvement in and knowledge of the partnerships provided a sufficient foundation for his testimony as to what Stadtmauer knew; and (2) in testifying that Stadtmauer “knew that things were being expensed that shouldn't have been,” Bekritsky was merely “explaining what he meant when he said ... “I signed it.”” (Id. at 3266.) <br /><br />At the close of its summation, the Government quoted Bekritsky's testimony and emphasized that, instead of asking whether the returns were “accurate” or “a hundred percent correct,” Stadtmauer had asked whether they were “okay to sign.” (Id. at 4060.) In that context—and in light of Bekritsky's testimony regarding what he intended to convey by his answer, “I signed [them]”—the Government argued that Stadtmauer's goal was not to file “accurate[,] true returns,” but to file returns that would not raise “flags ... with the IRS.” 29 (Id.) <br /><br />By contrast, defense counsel urged the jury to draw the opposite inference from Bekritsky's testimony. Counsel argued in summation that “any reasonable person” would have interpreted Stadtmauer's question to “mean[] the returns are okay to sign, meaning that they are correct.” (Id. at 4062.) In that light, defense counsel contended that “Bekritsky's testimony [as a] whole ... exonerate[d]” Stadtmauer. (Id.) <br /><br />2. Analysis<br />Stadtmauer argues that Bekritsky's testimony that Stadtmauer “knew” there were “problems” with the tax returns was inadmissible under Federal Rule of Evidence 701. In relevant part, it limits lay testimony “in the form of opinions or inferences” to those “which are (a) rationally based on the perception of the witness, [and] (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue[.]” Fed. R. Evid. 701. <br /><br />Rule 701 represents “a movement away from ... courts' historically skeptical view of lay opinion evidence,” and is “rooted in the modern trend away from fine distinctions between fact and opinion and toward greater admissibility.”Asplundh Mfg. Div. v. Benton Harbor Eng'g , 57 F.3d 1190, 1195 (3d Cir. 1995); see also Teen-Ed, Inc. v. Kimball Int'l, Inc., 620 F.2d 399, 403 (3d Cir. 1980). The Rule is nonetheless designed to exclude lay opinion testimony that “amount[s] to little more than choosing up sides,” Fed. R. Evid. 701 advisory committee's note, or that ““merely tell[s] the jury what result to reach,”” United States v. Rea, 958 F.2d 1206, 1215–16 [69 AFTR 2d 92-918] (2d Cir. 1992) (quoting Fed. R. Evid. 704 advisory committee's note on 1972 Proposed Rules). Lay testimony in the form of an opinion about what a defendant did or did not know often comes dangerously close to doing just this. Though “we have never held that lay opinion evidence concerning the knowledge of a third party is per se inadmissible,” 30 we have explained that “this kind of evidence [is] difficult to admit” under either prong of Rule 701: <br /><br />If the witness fails to describe the opinion's basis, in the form of descriptions of specific incidents, the opinion testimony [should] be rejected on the ground that it is not based on the witness's perceptions. To the extent the witness describes the basis of his or her opinion, that testimony [should] be rejected on the ground that it is not helpful because the fact finder is able to reach his or her own conclusion, making the opinion testimony irrelevant.<br />United States v. Polishan, 336 F.3d 234, 242 (3d Cir. 2003) (internal citation omitted). <br /><br />In our case, Stadtmauer primarily argues that Bekritsky's testimony was inadmissible under the first prong of Rule 701. Bekritsky's opinion that Stadtmauer “knew” there were “problems” in the tax returns was not, according to Stadtmauer, “rationally based” on Bekritsky's perceptions because he never discussed with Stadtmauer the falseness of any specific tax return (or any deduction claimed on a return). (Appellant's Br. at 49.) We do not follow this path. <br /><br />Rule 701's “rationally based” requirement is essentially a restatement of the personal knowledge requirement necessary for all lay witness testimony. See Fed. R. Evid. 701 advisory committee's note; see also Christopher B. Mueller & Laird C. Kirkpatrick, Federal Evidence § 7:3, at 751 (3d ed. 2007). We agree with the District Court that Bekritsky's testimony that Stadtmauer “knew” there were “problems” with the partnership tax returns—specifically, that certain partnerships were claiming deductions for expenses paid on behalf of other partnerships (“non-property” expenses)—was at least “rationally based” on his perception of Stadtmauer's (1) involvement with and control over the operations of the partnerships, (2) knowledge of how certain kinds of expenditures were characterized in the partnerships' general ledgers and financial statements, and (3) knowledge that those materials were used to prepare the partnerships' tax returns. Cf. Polishan, 336 F.3d at 242 (“Lay opinion testimony may be based on the witness's own perceptions and “knowledge and participation in the day-to-day affairs of [the] business.”” (alteration in original) (quotingLightning Lube, Inc. v. Witco Corp. , 4 F.3d 1153, 1175 (3d Cir. 1993)); Rea, 958 F.2d at 1216 (“[T]here are a number of objective factual bases from which it is possible to infer ... that a person knows a given fact,” including what the person “was in a position to see or hear ..., conduct in which he engaged, and what his background and experience were.”). <br /><br />Indeed, our Court (and other circuit courts) have held far more prejudicial statements to satisfy this Rule 701 requirement (even where such statements violated Rule 701's helpfulness requirement). See United States v. Anderskow, 88 F.3d 245, 250 (3d Cir. 1996) (lay witness's testimony that defendant “must have known” of loan fraud scheme satisfied the “rationally based” requirement of Rule 701, as the testimony was based on the witness's “first-hand knowledge” of the defendant's frequent exposure to fraudulent loan schedules); see also United States v. Wantuch, 525 F.3d 505, 512–14 (7th Cir. 2008) (lay witness's testimony that defendant “knew all the time that everything that he was doing was illegal” satisfied the “rationally based” requirement of Rule 701, as the witness was “deeply involved in” the fraudulent scheme and was the defendant's “contact every step of the way”); Rea, 958 F.2d at 1217, 1219 (lay witness's testimony that defendant “had to” have known of scheme to evade taxes satisfied the “rationally based” requirement of Rule 701, as the witness testified that he repeatedly told the defendant that he lacked a license that would exempt their transactions from federal excise taxes). <br /><br />Whether Bekritsky's testimony violated the helpfulness prong of Rule 701 requires closer attention. 31 At first blush, Bekritsky's testimony that Stadtmauer “knew” there were “problems” with the returns seems unhelpful because the basis for Bekritsky's opinion—e.g., Stadtmauer's intimate knowledge of the partnerships' operations and how their books and records were maintained—was already in evidence. Cf. Rea, 958 F.2d at 1216 (“[W]hen a witness has fully described what a defendant was in a position to observe, what the defendant was told, and what the defendant said or did, the witness's opinion as to the defendant's knowledge will often not be “helpful” ... because the jury will be in as good a position as the witness to draw the inference as to whether or not the defendant knew.”). <br /><br />Bekritsky's testimony is nonetheless different in important respects from the lay opinion testimony we found inadmissible inAnderskow , the principal case on which Stadtmauer relies. In that case, a cooperating conspirator in a loan fraud conspiracy testified that he provided one of the defendants, Donald Anchors, with fraudulent loan schedules to be passed along to borrowers. 88 F.3d at 249. On direct examination, the Government asked the witness whether Anchors would have been “deceived by the information that [the witness was] sending him.” Id. The witness responded: <br /><br />Donald Anchors had probably 20 or 30 borrowers, maybe more for all I know, who had been promised millions of dollars for a long time, some as long as a year. He had never seen one dime funded or loaned, and he kept on with the business at hand. I had no reason to believe that he wasn't fully aware of what was occurring, as long as he was getting paid.<br />Id. at 250 (emphasis added). We held that this testimony was inadmissible under Rule 701's helpfulness prong, reasoning that “a witness' subjective belief that a defendant “must have known” [of the object of a conspiracy] is [not] helpful to a factfinder that has before it the very circumstantial evidence upon which the subjective opinion is based.” Id. at 251. Stated another way, the witness's testimony was not helpful—and thus inadmissible under Rule 701—because the jury was in just as good a position as the witness to infer what Anchors “must have known.” <br /><br />However, unlike the witness in Anderskow, Bekritsky did not offer his opinion as to what Stadtmauer “knew” in a vacuum. Rather, Bekritsky was responding to a question asking him to explain what he meant by his ambiguous answer (“I signed them”) to Stadtmauer's equally ambiguous questions (whether “he should sign the returns,” and whether “the returns were okay”). Rather than opining as to what Stadtmauer “must have known,” Bekritsky more specifically testified as to what he believed Stadtmauer knew at the time of this conversation (in the context of explaining why he answered Stadtmauer's questions the way he did). In that light, even if Bekritsky's opinion regarding what Stadtmauer “knew” was unhelpful to “the determination of a fact in issue” (i.e., whether Stadtmauer had guilty knowledge), it arguably was helpful to “a clear understanding of [Bekritsky's] testimony.” Fed. R. Evid. 701. Cf. United States v. De Peri, 778 F.2d 963, 977 (3d Cir. 1985) (lay witness's testimony was helpful to a clear understanding of conversations consisting of “unfinished sentences and punctuated with ambiguous references to events that [were] only clear to [the participants]”);see also United States v. Urlacher , 979 F.2d 935, 939 (2d Cir. 1992) (lay witness's testimony was helpful to a clear understanding of “statements or words [recorded] on the tape that would be ambiguous or unclear to someone who was not a participant in the conversation”); United States v. Awan, 966 F.2d 1415, 1430 (11th Cir. 1992) (same). 32 <br /><br />This question is close. However, even assuming that the District Court erred in refusing to strike Bekritsky's testimony, 33 we conclude that any error was harmless. A non-constitutional error at trial does not warrant reversal where “it is highly probable that the error did not contribute to the judgment.”United States v. Helbling , 209 F.3d 226, 241 (3d Cir. 2000) (internal quotation marks and citation omitted);see also Kotteakos v. United States , 328 U.S. 750, 764–65 (1946). This “high probability” standard “requires that we have a sure conviction that the error did not prejudice the defendant[]”; however, “we may be firmly convinced that the error was harmless without disproving every “reasonable possibility” of prejudice.”United States v. Jannotti , 729 F.2d 213, 220 n.2 (3d Cir. 1984). <br /><br />When Bekritsky's testimony is viewed in the context of the record as a whole, we conclude that it is highly probable that any error in admitting that testimony did not prejudice Stadtmauer. See, e.g., United States v. Zehrbach, 47 F.3d 1252, 1265 (3d Cir. 1995) (“The harmless error doctrine requires that the court consider an error in light of the record as a whole ....”). Though Stadtmauer challenges Bekritsky's testimony that Stadtmauer “knew” there were “problems” with the returns, he does not challenge Bekritsky's testimony that, by his answer (“I signed them”), he intended to convey that (1) “there were problems ... that existed in the returns”; and (2) “[t]he returns were prepared in a way that [Bekritsky] thought that they would get by the Government and questions would not be raised.” (App. 3264.) The plain and unmistakable implication of these unchallenged portions of Bekritsky's testimony is that he believed Stadtmauer also “knew” that there were “problems” with the return. Otherwise, Bekritsky's explanation of what he intended to convey by answering “I signed [them]” would be nonsensical. 34 <br /><br />Moreover, any error in refusing to strike Bekritsky's testimony regarding what he believed Stadtmauer “knew” was harmless in light of the “mountain of circumstantial evidence supporting the inference that” Stadtmauer knew that improper deductions were claimed in the partnerships' tax returns,Anderskow , 88 F.3d at 251, including evidence that Stadtmauer: (1) was intimately familiar with how the partnerships operated and maintained their general ledgers; (2) was involved in deciding which partnerships would pay certain expenditures; (3) was aware that certain expenditures were falsely characterized as expenses in the ledgers and financial statements; (4) mischaracterized expenditures in the partnerships' financial statements when expedient; and (5) made all of these decisions with awareness of their tax consequences (e.g., the tuition payments for Zecher's children, and the decision to continue appreciating capital expenditures for the partnerships involved in the WNY transaction). In that light, we are conviced that, regardless of Bekritsky's testimony, the jury would have rejected Stadtmauer's defense that he genuinely believed that SSMB—led by Plotkin, to whom KC was funneling yearly bonuses and private school tuition payments—was, for purposes of the partnerships' tax returns, correcting the extensive mischaracterizations of expenditures as reflected in the partnerships' general ledgers and financial statements. <br /><br />In sum, any error in admitting Bekritsky's testimony is harmless and thus does not require reversal. <br /><br />C. Prosecutorial Misconduct<br />Stadtmauer claims that the Government violated his due process rights by “improperly standing silent” when one of its witnesses, former COO Scott Zecher, made several statements during cross-examination that the lead prosecutor knew to be false. (Appellant's Br. at 41.) To succeed on this claim, Stadtmauer bears the burden of establishing that: (1) Zecher committed perjury; (2) the Government knew or should have known that Zecher committed perjury but failed to correct his testimony; and (3) there is a reasonable likelihood that the false testimony could have affected the verdict. See Hoffecker, 530 F.3d at 183. Because Stadtmauer cannot meet his burden as to the first two of these elements, we need not address the third. <br /><br />In 2005, Zecher was interviewed several times by FBI agents and prosecutors (including one of the prosecutors that tried Stadtmauer's case). During trial, defense counsel sought to impeach Zecher with his statements during these interviews, as recorded in summaries prepared by the FBI agents present (known as “Form 302s”). To take one example, defense counsel asked Zecher during cross-examination whether he recalled telling investigators that Kushner, and not Stadtmauer, had raised the idea of paying Zecher's children's private school tuition “rather than paying [Zecher] a bonus.” (App. 3045.) Zecher first stated that he did not recall making the statement, and then denied that he made such a statement. Defense counsel then showed Zecher the Form 302 to refresh his recollection, which stated: <br /><br />ZECHER stated when he was hired KUSHNER told him that he could not pay ZECHER the salary he wanted, but instead would make up the difference in bonuses in June and December. KC normally issues bonuses to employees in December, but does not issue bonuses in June. ZECHER stated that because no bonuses were paid in June, KUSHNER would pay ZECHER's ... school tuition rather than paying him a bonus.<br />(Id. at 567.) Zecher denied that the Form 302 refreshed his recollection, and was adamant that the only conversations he had regarding the issue were with Stadtmauer. (Id. at 3045.) Though the District Court permitted Stadtmauer to cross-examine Zecher on the content of his statements, it refused on several occasions to admit the Form 302s themselves as prior inconsistent statements, rulings, we note, that Stadtmauer does not challenge. The Court's reasoning was that the Form 302s contained the FBI's characterizations of what Zecher said (which Zecher had not adopted). 35 <br /><br />After both sides rested, defense counsel moved for a mistrial based on “the perjured testimony of Scott Zecher and ... the Government's failure to correct that testimony.” (Id. at 3731.) Defense counsel argued that, when considered in light of the totality of Zecher's testimony—which included numerous instances where Zecher testified that he could not recall certain events and conversations—there was enough for the District Court to determine that Zecher's testimony was demonstrably false. The Court denied the motion, explaining that it could not find that Zecher's “apparent lack of recollection in some instances ... was due to confusion or mistake or faulty memory or a willful lie.” (Id. at 3871.) <br /><br />We review a district court's factual finding that a witness's testimony was not false for clear error, and “will not disturb that finding unless it is wholly unsupported by the evidence.”Hoffecker , 530 F.3d at 183. We have little trouble concluding that the District Court's finding in this case was not clearly erroneous. As the Court noted, other than the inconsistencies between the FBI agent's notes and Zecher's recollection of his statements, there was no other evidence that Zecher perjured himself. Cf. United States v. Dunnigan, 507 U.S. 87, 94 (1993) (a witness does not commit perjury if his false testimony is the “result of confusion, mistake, or faulty memory”). <br /><br />Even assuming the District Court clearly erred in finding that Zecher's testimony was not false, Stadtmauer has not demonstrated that the Government knew or should have known that Zecher's testimony was false. See Hoffecker, 530 F.3d at 183. Stadtmauer relies on United States v. Harris, 498 F.2d 1164 (3d Cir. 1974), where the Government failed to correct a witness who falsely testified during cross-examination that prosecutors had made no promises to help her achieve a reduced sentence on pending state charges in exchange for her testimony against the defendant. In concluding the Government had violated its “duty to disclose a promise made to a Government witness,” id. at 1169, we first noted that the witness arguably had not committed perjury by her responses because she may have “believed in good faith” that the questions posed to her “only referred to specific promises concerning her sentence,” which the Government did not (and could not) make. Id. at 1168. We reasoned, however, that the prosecution's duty to disclose false testimony should not be “narrowly and technically limited to those situations where the prosecutor knows that the witness is guilty of the crime of perjury.” Id. at 1169. Rather, “when it should be obvious to the Government that the witness' answer, although made in good faith, is untrue,” it has an obligation to correct that testimony. Id. <br /><br />The circumstances of Zecher's testimony are far afield from the witness's testimony in Harris, where it was undisputed that the prosecutor had personal knowledge that the witness's answers were not correct. See id. at 1168 (prosecutor admitted that he had promised the cooperating witness that the Government would do “whatever [it] could” to get her state sentence reduced). Here, there was no way for the prosecutor to know whether Zecher was giving false testimony when he denied—or could not recall—making certain statements during the 2005 interviews. Thus, Stadtmauer's assertion that the Government's counsel refused “to speak up when he knew for a fact that Zecher had made” false statements is simply unsupported by the record. Cf. Tapia v. Tansy, 926 F.2d 1554, 1563 (10th Cir. 1991) (“Contradictions and changes in a witness's testimony alone do not constitute perjury and do not create an inference, let alone prove, that the prosecution knowingly presented perjured testimony.”). <br /><br />D. Expert Testimony<br />Over Stadtmauer's objection, the District Court permitted IRS Agent Susan Grant to testify as an expert (and summary) witness.See Fed. R. Evid. 702, 703. Stadtmauer argues that the Court erred in admitting Agent Grant's testimony because she “opined, with insufficient factual or legal foundation, that the [KC] partnership returns were false and fraudulent.” (Appellant's Br. at 51.) We review a district court's admission of expert testimony for abuse of discretion.Estate of Schneider v. Fried , 320 F.3d 396, 404 (3d Cir. 2003). <br /><br />Prior to trial, the Government disclosed the expert testimony that Agent Grant intended to provide and produced to defense counsel a set of her summary charts. Stadtmauer moved in limine to preclude Grant from testifying, arguing that her proposed testimony would improperly bear on the ultimate legal issues in the case, and would be unhelpful and unreliable. The District Court denied Stadtmauer's motion, finding that Grant's testimony had “sufficient indicia of reliability and relation to the facts of this case.” (App. 89–92.) <br /><br />In her direct testimony, Grant described how a partnership tax return is prepared, and explained where on the return different categories of deductions were reported. Grant explained how she totaled the expenses she determined were improperly deducted from each partnership return, and carried them through to a summary chart for each partnership for each tax year, illustrating how the total amount of improper deductions affected the net income reported to the IRS. Defense counsel vigorously cross-examined Grant for two days, including questions on many specific deductions, and nearly every category of deductions, she determined were improperly claimed. <br /><br />Our sister circuit courts that have addressed the issue are unanimous that “expert testimony by an IRS agent which expresses an opinion as to the proper tax consequences of a transaction is admissible evidence.” United States v. Mikutowicz, 365 F.3d 65, 72 [93 AFTR 2d 2004-1948] (1st Cir. 2004) (internal quotation marks and citation omitted); see, e.g., United States v. Bedford, 536 F.3d 1148, 1158 [102 AFTR 2d 2008-5722] (10th Cir. 2008);United States v. Pree , 408 F.3d 855, 870 [95 AFTR 2d 2005-2491] (7th Cir. 2005); United States v. Sabino, 274 F.3d 1053, 1067 [88 AFTR 2d 2001-7245] (6th Cir. 2001), modified on other grounds, 307 F.3d 446 [90 AFTR 2d 2002-6896] (6th Cir. 2002); United States v. Duncan, 42 F.3d 97, 101–02 (2d Cir. 1994); United States v. Moore, 997 F.2d 55, 58–59 [72 AFTR 2d 93-5682] (5th Cir. 1993). The “primary limitation” on such testimony is that the expert “may not testify about the defendant's state of mind when the challenged deductions were claimed.” Mikutowicz, 365 F.3d at 72; see Fed. R. Evid. 704(b) (an expert witness may not opine “as to whether the defendant did or did not have the mental state or condition constituting an element of the crime charged”); see also Sabino, 274 F.3d at 1067. <br /><br />In our case, it is undisputed that Grant did not opine on Stadtmauer's knowledge or intent. Stadtmauer nonetheless argues that the District Court impermissibly allowed her to “interpret the tax laws” and “add her unreliable and otherwise inadmissible opinion that the tax returns were false and fraudulent.” (Appellant's Br. at 51.) Stadtmauer seeks to compare Grant's testimony to expert testimony the Second Circuit Court found objectionable in United States v. Scop, 846 F.2d 135 (2d Cir. 1988). There an investigator from the Securities and Exchange Commission testified as an expert in securities trading practices, and opined, drawing “directly upon the language of the statute,” that the defendants' scheme of buying and selling securities to create artificial price levels constituted market “manipulation” and “fraud.”Id. at 140. The Second Circuit Court determined that, through this testimony, the expert had “invade[d] the province of the court to determine the applicable law and to instruct the jury as to that law.”Id. (internal quotation marks and citation omitted). In addition, the expert conceded on cross-examination that his opinion was largely based not on his expertise in securities trading, but on his “positive assessment of the trustworthiness and accuracy of the testimony of the government's witnesses.” Id. at 142. <br /><br />Agent Grant's testimony is far from the expert testimony deemed objectionable in Scop. She never used the words “false” or “fraudulent” to describe any of the deductions she concluded were improper, and did not base any portion of her testimony on her assessment of the credibility of other witnesses. Accordingly, Scop is unavailing to Stadtmauer. Cf. Hoffecker, 530 F.3d at 171 (distinguishing the testimony in Scop from testimony that defendant's commodities investment program was a “scam,” where the witness “did not couch his view ... on the language of the mail fraud statute, and did not base his opinion on the credibility or testimony of others”);see also Duncan , 42 F.3d at 101–02 (distinguishing the testimony in Scop from IRS agent's testimony that did not “use any legally specialized terms” and was “based on [the agent's] own investigation of the facts and review of the records”). <br /><br />Stadtmauer also contends that the District Court erred in admitting Grant's testimony because she made “out-and-out mischaracterizations” and “bald assertions” of the law in explaining her opinions. (Appellant's Br. at 53, 55.) The record belies these assertions. 36 In any event, all expert testimony as to the “proper tax consequences of a transaction” is bound to touch on the law to some extent,Mikutowicz , 365 F.3d at 72, and we have little trouble concluding that Grant's testimony did not improperly invade the province of the Court. Indeed, the Court not only gave extensive instructions on the applicable tax laws, and during Grant's testimony emphasized to the jury that it was “bound to follow the law as [the Court] tell[s] you it applies in this case.” (App. 3434.) The Court emphasized that only it, and not Grant, was authorized to instruct the jury as to the law. See id. at 3411 (for example, instructing the jury that “to the extent that [Agent Grant] use[s] the word “Law,” I will instruct you as to the law at the end of the case. [Agent Grant] can certainly testify as to what her understanding based on her experience as a tax expert is [and] to what the IRS' view of things is”). <br /><br />In sum, to the extent there were (as Stadtmauer contends) shortcomings in the IRS Agent's conclusions as to the propriety of specific deductions, they were “raised properly on cross-examination and went to the credibility, not the admissibility, of [her] testimony,”Kannankeril v. Terminix Int'l, Inc. , 128 F.3d 802, 809 (3d Cir. 1997), and the record in this case confirms that defense counsel had ample opportunity to cross-examine Grant on her specific conclusions, methodology, and assumptions. 37 Accordingly, we conclude that the District Court did not abuse its discretion in admitting Agent Grant's testimony. 38 <br /><br />E. Restrictions on Cross-Examination<br />We end with the argument that Stadtmauer raises first: that the District Court improperly barred him from affirmatively admitting certain exhibits into evidence during cross-examination of Government witnesses. We review a district court's rulings on the scope of cross-examination for abuse of discretion,United States v. Casoni , 950 F.2d 893, 902 (3d Cir. 1991), “but to the extent the district court's ruling turns on an interpretation of a Federal Rule of Evidence[,] our review is plenary,” United States v. Velasquez, 64 F.3d 844, 848 (3d Cir. 1995) (internal quotation marks and citation omitted). <br /><br />Stadtmauer contends that the District Court erroneously barred him from admitting several categories of exhibits during defense counsel's cross-examination of Bentzlin, Zecher, and Bekritsky. For example, during cross-examination of Zecher, defense counsel sought to introduce hundreds of advertisements bearing the name “Kushner Companies” (instead of the name of an individual partnership). Defense counsel sought to introduce the concept of “branding” through these exhibits, and thus to offer an exculpatory explanation for why expenses incurred by one partnership were frequently paid by a different partnership. 39 <br /><br />The District Court prevented Stadtmauer from admitting these documents because they were “case-in-chief materials” rather than “impeachment materials.” 40 See, e.g., App. 2405 (excluding proposed defense exhibits during cross-examination because they were “not really specifically impeachment material,” but “more akin to case-in-chief type evidence”); id. at 3002–03 (excluding proposed defense exhibits during cross-examination because Stadtmauer was limited to “impeachment material, not case-in-chief material”). Stadtmauer contends that the District Court thereby violated Federal Rule of Evidence 611(b), which provides that cross-examination “should be limited” to (1) “the subject matter of the direct examination,” and (2) “matters affecting the credibility of the witness.” Fed. R. Evid. 611(b). He argues that the Court erroneously barred him from admitting the documents on the grounds that they (1) did not “impeach” the witness (even though they pertained to the “subject matter” of the witness's direct testimony), and (2) could be introduced in Stadtmauer's case-in-chief.Cf. United States v. Segal , 534 F.2d 578, 582–83 (3d Cir. 1976) (“the fact that some of the points which defendant sought to explore could have been introduced in the defense case is not determinative” of whether the evidence is within the “subject matter” of the Government's direct examination). <br /><br />From our review of the record, however, it is apparent that the District Court was using the terms “case-in-chief materials” and “impeachment materials” as shorthand to describe those documents that it would (or would not) permit Stadtmauer to introduce during cross-examination so as to manage effectively the presentation of evidence. The Court did not rely on Rule 611(b) in its rulings, and, as it later described, the question was not the admissibility of these exhibits but “the timing of the[ir] introduction.” App. 3570;see also id. at 3322 (agreeing that proposed defense exhibit was “within the subject matter” of the Government's direct examination, but excluding it because it was more akin to a “case-in-chief document[]”). <br /><br />In that light, the more pertinent provision of Rule 611 is subsection (a), which grants district courts broad discretion to “exercise reasonable control over the mode and order of interrogating witnesses and presenting evidence.” Fed. R. Evid. 611(a); see also 28 Charles A. Wright & Victor J. Gold, Federal Practice and Procedure § 6162, at 338 (1993) (Rule 611(a) “gives trial courts broad powers to control the “mode and order” of what is otherwise admissible evidence”). In our case, we have little trouble concluding that the District Court did not abuse its discretion in postponing the admission of Stadtmauer's proposed exhibits, even if they were technically within the “subject matter” of the Government's direct examination. See, e.g., United States v. Lambert, 580 F.2d 740, 747 (5th Cir. 1978) (district court did not abuse its discretion under Rule 611(a) by excluding defendant's “proffers of voluminous documentary evidence” during cross-examination);United States v. Ellison , 557 F.2d 128, 135 (7th Cir. 1977) (district court did not abuse its discretion by excluding proposed defense exhibits during cross-examination, even assuming the documents “would have been relevant rebuttal evidence if offered during the presentation of [the defendant's] own case”). <br /><br />Finally, even assuming that the District Court relied on an erroneous interpretation of Rule 611(b) in excluding Stadtmauer's proposed exhibits, the error was harmless. For example, though the Court did not permit Stadtmauer to introduce the KC advertisements themselves, it nonetheless gave defense counsel broad leeway to use them in cross-examining Zecher. The Court allowed defense counsel to show Zecher approximately 20 advertisements, and he agreed that they refreshed his recollection that KC placed advertisements in “newspapers and professional journals” and “spent money advertising the Kushner name.” (App. 3010–11.) He also agreed that management used the name “Kushner Companies” in a “generic sense,” rather than “listing all 100 or 200 partnerships” on corporate materials. (Id. at 2999.) Through this testimony, defense counsel was able to establish the same basic point: that the partnerships often did business under the name “Kushner Companies” (rather than names of individual partnerships). 41 In this context, we conclude that any error in excluding the exhibits during defense counsel's cross-examination of the Government's witnesses did not prejudice Stadtmauer. 42 <br /><br />***** <br /><br />In summary, we conclude that a willful blindness instruction may, where warranted by the trial evidence in a criminal tax case, properly apply to a defendant's knowledge of his legal duties. The District Court did not abuse its discretion in giving such an instruction in this case, and we disagree with Stadtmauer's contention that the instruction also impermissibly applied to the element of specific intent. <br /><br />Though the question whether Bekritsky's lay opinion testimony was admissible under Rule 701 is close, we conclude that an error here, if any, was harmless. In addition, we reject Stadtmauer's prosecutorial misconduct claim based on the Government's supposed failure to “correct” Zecher's testimony that he could not recall statements he purportedly made to FBI agents (with Government counsel present) during investigatory interviews. Finally, we conclude that the District Court did not abuse its discretion in (1) admitting the expert testimony of an IRS agent in this complicated tax fraud case, and (2) preventing Stadtmauer from affirmatively admitting certain categories of exhibits into evidence during defense counsel's cross-examination of Government witnesses. <br /><br />For these reasons, we affirm the District Court's judgment of conviction. <br /><br /><br />--------------------------------------------------------------------------------<br />1<br /><br /> “As required when reviewing convictions, we recite the relevant facts in the light most favorable to the [G]overnment.” United States v. Leo, 941 F.2d 181, 185 (3d Cir. 1991). <br />--------------------------------------------------------------------------------<br />2<br /><br /> We use “Kushner” throughout this opinion to refer only to Charles Kushner. <br />--------------------------------------------------------------------------------<br />3<br /><br /> For descriptive purposes, however, we refer to KC hereafter as if it were an entity. <br />--------------------------------------------------------------------------------<br />4<br /><br /> He pled guilty to conspiring to defraud the United States. <br />--------------------------------------------------------------------------------<br />5<br /><br /> In the late 1990s, Kushner briefly replaced SSMB with the accounting firm of Richard Eisner & Company. Kushner agreed to hire Eisner & Company on the condition that it hire Plotkin as its lead accountant for KC matters. Eisner & Company agreed to hire Plotkin, but shortly thereafter Kushner decided to re-hire SSMB (after SSMB agreed to re-hire Plotkin). <br />--------------------------------------------------------------------------------<br />6<br /><br /> KC funneled to Plotkin (through SSMB) bonus payments of $15,000 in 1996, $20,000 in 1997, and $25,000 in 1998. (App. 2823–24.) <br />--------------------------------------------------------------------------------<br />7<br /><br /> The Internal Revenue Code provides that an expenditure is fully deductible as a business expense if it: “(1) was paid or incurred during the taxable year; (2) was for carrying on a trade or business; (3) was an expense; (4) was a necessary expense; and (5) was an ordinary expense.”Neonatology Assocs., P.A. v. Comm'r , 299 F.3d 221, 228 [90 AFTR 2d 2002-5442] (3d Cir. 2002) (citing I.R.C. § 162(a)). <br />--------------------------------------------------------------------------------<br />8<br /><br /> A partnership does not, itself, pay taxes. “Instead, the partners claim a pro-rata share of the partnership's profits and losses and each pays tax on his share.” Kantor v. Comm'r, 998 F.2d 1514, 1517 [72 AFTR 2d 93-5476] n.1 (9th Cir. 1993). However, partnerships are still required to file income tax returns. <br />[F]or the purpose of computing income and deductions, “the partnership is regarded as an independently recognizable entity apart from the aggregate of its partners.” It is only once the partnership's income and deductions are ascertained and reported that its existence may be disregarded and the partnership becomes a conduit through which the taxpaying obligation passes to the individual partners.<br />Brannen v. Comm'r, 722 F.2d 695, 703 [53 AFTR 2d 84-579] (11th Cir. 1984) (quoting United States v. Basye, 410 U.S. 441, 448 [31 AFTR 2d 73-802] (1973)). <br /><br /><br />--------------------------------------------------------------------------------<br />9<br /><br /> The building is owned by “Florham Park Associates,” a limited partnership controlled by Kushner and his children. <br />--------------------------------------------------------------------------------<br />10<br /><br /> Included in the “repairs and maintenance” group were the “apartment renovations” and “building improvement” accounts which, as Zecher explained, included, respectively, “capital improvements made to apartments” and “capital improvements made to the general property, [e.g., ] the outside of the buildings, the roofs, paving parking lots, things like that.” (Id. at 2923.) <br />--------------------------------------------------------------------------------<br />11<br /><br /> Bentzlin and Bekritsky believed that Plotkin had configured the software before she left KC, but neither was sure. (Id. at 2341, 3292.) <br />--------------------------------------------------------------------------------<br />12<br /><br /> Bekritsky explained that this was done so that amounts reported for repairs and maintenance “wouldn't stick out on the return[s].” (Id. at 3261.) Bekritsky admitted that he knowingly prepared and filed false tax returns on behalf of KC partnerships to avoid losing a valuable account. (Id. at 3352.) <br />--------------------------------------------------------------------------------<br />13<br /><br /> 26 U.S.C. § 7206(2) makes it a crime to <br />[w]illfully aid[] or assist[] in, or procure[], counsel[], or advise[] the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document[.]<br /><br />--------------------------------------------------------------------------------<br />14<br /><br /> Stadtmauer led these meetings until early 1999, when another KC executive began running them. (App. 2701.) <br />--------------------------------------------------------------------------------<br />15<br /><br /> Similar to the “Richard Specials,” SSMB often prepared special supplemental schedules, listing various non-property expenses and capital improvements, that were attached to the partnerships' financial statements. These supplemental schedules were called “Schedules of Non-Recurring Expenses,” but were unofficially referred to as “Schonbraun Specials.” However, as Bentzlin explained at trial, these “non-recurring” expenses were essentially “non-recurring every year,” and he feared that KC was “giving the Government a road map” on how to discover, in the event of an audit, expenses that were being improperly deducted on the tax returns. (App. 3255.) After Bekritsky raised his concerns to Plotkin, SSMB ended the practice. (Id.) <br />--------------------------------------------------------------------------------<br />16<br /><br /> Though Greenberg also requested the partnerships' general ledgers, he never received any. (Id. at 3358.) <br />--------------------------------------------------------------------------------<br />17<br /><br /> We note that Stadtmauer chose not to put on a defense. <br />--------------------------------------------------------------------------------<br />18<br /><br /> The jury acquitted Stadtmauer of six counts of aiding in the willful filing of false or fraudulent tax returns (Counts Six through Eleven), which corresponded to the 1999–2000 tax returns for three of the Quail Ridge partnerships. As the Government notes, a question asked by the jury during its deliberations suggests that it acquitted Stadtmauer on these counts because it was unable to locate a piece of evidence explaining how expenses from Quail Ridge's unitary general ledger were apportioned among the three specific Quail Ridge partnerships (i.e., “8 Quail Ridge,” “9 Quail Ridge,” and “10 Quail Ridge”). <br />--------------------------------------------------------------------------------<br />19<br /><br /> Stadtmauer moved before trial to dismiss the indictment to the extent it was based on the failure to capitalize expenditures, arguing that the law on capitalization is vague and uncertain. The District Court deferred ruling on the motion, concluding that “[a] determination of whether the tax laws in question are vague and uncertain necessarily involves a fact sensitive analysis.” (Id. at 86.) The Court denied the motion after trial, and Stadtmauer does not challenge that ruling on appeal. <br />--------------------------------------------------------------------------------<br />20<br /><br /> Stadtmauer contends that the Government sought a willful blindness instruction solely (and improperly) as a “preemptive measure.” (Appellant's Br. at 76.) He notes that when then the Government requested the instruction, it stated: “[w]e believe [Stadtmauer] has actual knowledge, but we would like to preserve the right to argue willful blindness depending on what we hear from the other side” in closing arguments. (App. 3906.) <br /><br />We disagree with this contention. As our precedent makes clear, there is nothing improper with the Government seeking a willful blindness instruction while also contending that there is sufficient evidence of actual knowledge. See, e.g., Wert-Ruiz, 228 F.3d at 255 (“[I]t is not inconsistent for a court to give a charge on both willful blindness and actual knowledge, for if the jury does not find the existence of actual knowledge, it might still find willful blindness.”). Moreover, though Stadtmauer argued in his summation that the number of tax returns he signed at a time, coupled with the brief amount of time he spent reviewing each, proved that he lacked actual knowledge of their contents (App. 4082, 4135), the Government did not make arguments based on a willful blindness theory in its summation. <br />--------------------------------------------------------------------------------<br />21<br /><br /> The Fifth and Seventh Circuit Courts have also approved of a willful blindness instruction that applies to a defendant's knowledge of the law, though those Courts did not specifically discussCheek . See United States v. Hauert, 40 F.3d 197, 203 [74 AFTR 2d 94-7004] n.7 (7th Cir. 1994) (affirming conviction for tax evasion where the facts “support[ed] the inference that the defendant was aware of a high probability of the existence of the fact in question [tax liability] and purposefully contrived to avoid learning all of the facts” (internal quotation marks and citation omitted; second alteration in original)); United States v. Wisenbaker, 14 F.3d 1022, 1027–28 [73 AFTR 2d 94-1309] (5th Cir. 1994) (willful blindness instruction was appropriate in tax evasion case in light of the defense theory, i.e., that the defendant “belie[ved] that he was not responsible for ... taxes,” and evidence that he failed to file tax returns even after his accountants “brought to his attention his duty to do so”). <br />--------------------------------------------------------------------------------<br />22<br /><br /> Stadtmauer suggests that permitting willful blindness to satisfy the element of legal knowledge will “surely alarm the many thousands of taxpayers who provide records to their accountants, let the accountants prepare the returns, and then sign them... without flyspecking the tax professionals' work.” (Appellant's Reply Br. at 39 n.23.) We cannot agree. Such a taxpayer cannot be said (without more) to be ““subjectively aware of [a] high probability”” that the returns being prepared on his behalf are false or fraudulent. Wert-Ruiz, 228 F.3d at 255 (quoting Caminos, 770 F.2d at 365). Rather, to prove willfulness beyond a reasonable doubt, the Government would have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant. Cf. Cheek, 498 U.S. at 202; Anthony, 545 F.3d at 65 n.6; see also United States v. Moran, 493 F.3d 1002, 1013 (9th Cir. 2007) (noting that “[t]he burden is on the government to negate the defendant's claim that he had a good faith belief that he was not violating the tax law,” and “[g]ood faith reliance on a qualified accountant has long been a defense to willfulness in cases of tax fraud” (internal quotation marks and citation omitted)). <br />--------------------------------------------------------------------------------<br />23<br /><br /> In Pierre, our Court rejected the petitioner's argument that he could show that he was more likely than not to be tortured if removed to Haiti through evidence that pain and suffering would be the “practically certain result” of his confinement by Haitian authorities upon returning. Id. at 189. In so holding, we rejected a dictum in an earlier precedent suggesting that “specific intent could be proven through “evidence of willful blindness.””Id. at 188, 190 (quoting Lavira v. Att'y Gen., 478 F.3d 158, 188 (3d Cir. 2007)). <br />--------------------------------------------------------------------------------<br />24<br /><br /> The Government suggests that we should review this claim for plain error, as Stadtmauer did not raise a challenge specific to the inclusion of the words “and willfully” in the Government's proposed instruction. (Appellee's Br. at 82 & n.28.) We need not decide this issue because, as explained below, we would affirm regardless of the standard of review. <br />--------------------------------------------------------------------------------<br />25<br /><br /> In the second instance, not quoted previously, the Court stated: “[A] showing of negligence or of a good-faith mistake of law is not ... sufficient to support a finding of willfulness or of knowledge.” (Id. at 3974 (emphasis added).) This was, in fact, a correct statement of the law. As discussed, the element of “willfulness” encompasses a legal knowledge component, see infra Part III.A.1, which cannot be satisfied by negligence or a good-faith mistake of law, see infra Part III.A.2. <br />--------------------------------------------------------------------------------<br />26<br /><br /> Even assuming the trial evidence did not support a finding of willful blindness, we believe that any resulting error was harmless, given that “the instruction itself contained the proper legal standard,” and in light of the “ample evidence” of Stadtmauer's “actual knowledge” of the falsity of the tax returns.Leahy , 445 F.3d at 654 n.15 (collecting cases).See infra Part III.B.2. <br />--------------------------------------------------------------------------------<br />27<br /><br /> This potential exculpatory interpretation of Stadtmauer's question is what prompted the Government—“[i]n furtherance of [its] Brady obligations”—to disclose Bekritsky's anticipated testimony to Stadtmauer. (Id. at 1049.) Indeed, Stadtmauer contended in his motion in limine that the “more plausibl[e]” meaning of his question was that he “relied on Mr. Bekritsky to prepare the tax returns and trusted Mr. Bekritsky to advise him of any concerns.” (Id. at 1052.) <br />--------------------------------------------------------------------------------<br />28<br /><br /> Stadtmauer contends that the prosecutor violated the District Court's order granting Stadtmauer's motionin limine by asking Bekritsky what Stadtmauer meant by his question. The Government maintains that the court reporter mis-transcribed the prosecutor's question, which actually asked, “What did you mean by that?” (Appellee's Br. at 52 n.18 (emphasis added).) This dispute is beside the point, as the Court immediately interceded and rephrased the question to make clear that Bekritsky was not to opine on what he thought Stadtmauer meant by the question. <br />--------------------------------------------------------------------------------<br />29<br /><br /> The prosecutor who gave the rebuttal argument on behalf of the Government also referenced Bekritsky's testimony, and argued that Stadtmauer's question itself was suggestive of a consciousness of guilt. See id. at 4148 (“If he didn't think there was anything to worry about, why did he ask?”). However, this prosecutor did not quote the portion of Bekritsky's testimony that Stadtmauer challenges on appeal (i.e., that Stadtmauer “knew” there were “problems” with the returns). <br />--------------------------------------------------------------------------------<br />30<br /><br /> We note that the mere fact that Bekritsky's testimony related to an ultimate issue to be decided by the jury—i.e., whether Stadtmauer had knowledge that the tax returns he signed were false or fraudulent as to a material matter—does not alone render Bekritsky's testimony inadmissible. See Fed. R. Evid. 704(a). <br />--------------------------------------------------------------------------------<br />31<br /><br /> We reach this issue only by construing Stadtmauer's opening brief as liberally as possible. Though he analogizes Bekritsky's testimony to the testimony we ruled impermissible in Anderskow in his opening brief, his argument appears to be limited to the first requirement of Rule 701 (a prong we held was satisfied inAnderskow ). (Appellant's Br. at 49.) Stadtmauer first makes an argument specific to the helpfulness prong in his Reply Brief. But “an issue is waived unless a party raises it in its opening brief, and for those purposes a passing reference to an issue will not suffice ....” Skretvedt v. E.I. DuPont De Nemours, 372 F.3d 193, 202–03 (3d Cir. 2004) (internal quotation marks and citation omitted). <br /><br />Moreover, plain error review is arguably appropriate in these circumstances. Though Stadtmauer claimed in his motionin limine that allowing Bekritsky to testify as to what Stadtmauer meant by his question would violate Rule 701's helpfulness prong, he raised different arguments in support of his motion to strike Bekritsky's testimony as to whathe meant by his answer to Stadtmauer's question (e.g., that the statement was unfairly prejudicial).See Fed. R. Evid. 103(a)(1) (an objection to the admission of evidence must “stat[e] the specific ground of objection”); see also United States v. Gomez-Norena, 908 F.2d 497, 500 (9th Cir. 1990) (“[A] party fails to preserve an evidentiary issue for appeal not only by failing to make a specific objection, but also by making the wrong specific objection.” (internal citations omitted) (emphasis in original)). <br /><br />However, the Government does not argue waiver or forfeiture, and, as we explain below, we would affirm in any event because any error in admitting Bekritsky's testimony was harmless. <br />--------------------------------------------------------------------------------<br />32<br /><br /> We are not asked to determine whether the District Court was correct in barring Bekritsky from testifying as to what he believedStadtmauer intended to convey by his questions. We note, however, that other courts have upheld the admission of testimony by a participant in a conversation as to what another participant intended to convey. See, e.g., United States v. Kozinski, 16 F.3d 795, 809 (7th Cir. 1994) (witness was permitted under Rule 701 to testify “about the context and meaning of conversations to which he was a party,” including his “understanding of the thoughts that were being communicated to him”). As Professors Mueller and Kirkpatrick explain: <br />[F]irsthand observers often understand the mental state of another in ways not captured in literal meanings of words spoken by the other, nor readily conveyed in close analytical accounts of what exactly transpired. The old adage that “you had to be there” makes this point, and witnesses asked to give “factual” accounts of what another said or did may be confounded by their knowledge that doing so would be misleading, and that the surface of the words carries little of their real meaning. In everyday life, personal interaction is nuanced and nonliteral, ... and knowledgeable witnesses can easily satisfy the rational basis and helpfulness criteria [of Rule 701] in providing interpretive opinions on the mental states of others.<br />Mueller & Kirkpatrick, Federal Evidence § 7:5, at 775. <br /><br /><br />--------------------------------------------------------------------------------<br />33<br /><br /> We note that even if testimony similar to Bekritsky's could satisfy the requirements of Rule 701, it may be inadmissible on other grounds, e.g., because its probative value (and helpfulness) are substantially outweighed by the potential for unfair prejudice. Fed. R. Evid. 403;see also Rea , 958 F.2d at 1216. Because Stadtmauer does not raise such an argument on appeal, we express no opinion on whether Bekritsky's testimony should have been struck under Rule 403 (assuming it satisfied the Rule 701 requirements). <br />--------------------------------------------------------------------------------<br />34<br /><br /> This conclusion is bolstered when Bekritsky's statement is viewed in light of the even more damaging testimony that defense counsel elicited during cross-examination of Bentzlin—who testified before Bekritsky—regarding why Bentzlin similarly told Stadtmauer to “just sign” the returns: <br />Q: Isn't it a fact that you didn't tell [Stadtmauer] ... that the returns were in any way incorrect?<br />A. I didn't need to tell Mr. Stadtmauer,because he was fully aware between the Richard Specials and the Tuesday signing, and the [practice of “losing” bills] and the Thursday presentations and signing the checks for all the entities, he was fully aware of the type of information that was in there, so I didn't see that there was any need to tell [him]. He was a very accomplished financial leader. He was familiar with the tax returns. So, no, I didn't feel the need to tell him, just sign it or not.<br />...<br />I kn[ew] the nature of the stuff that was in the tax returns. If you have repair and maintenance items processed on a regular basis through various entities all over the place, ... logic would dictate that that stuff is reflected somewhere in the tax return.<br />(Id. at 2478–79 (emphases added).) <br /><br /><br />--------------------------------------------------------------------------------<br />35<br /><br /> Federal Rule of Evidence 613 permits a party to examine “a witness concerning a prior statementmade by the witness , whether written or oral,” Fed. R. Evid. 613(a) (emphasis added), and permits a party to introduce “extrinsic evidence” of a witness's prior inconsistent statement as long as “the witness is afforded an opportunity to explain or deny” it, id. 613(b). Several of our sister circuit courts have affirmed the exclusion, under Rule 613, of interview memoranda prepared by law enforcement that the witness had not adopted. See, e.g., United States v. Adames, 56 F.3d 737, 744–45 (7th Cir. 1995); United States v. Saget, 991 F.2d 702, 710 (11th Cir. 1993); United States v. Almonte, 956 F.2d 27, 29 (2d Cir. 1992). <br />--------------------------------------------------------------------------------<br />36<br /><br /> To take one example, Stadtmauer contends that Grant erroneously testified that “only 50% of entertainment expenses may ever be deducted” by a business, id. at 53, despite the fact that entertainment expenses may be deducted in full when, among other things, they are made for “recreational, social, or similar activity ... primarily for the benefit of [the taxpayer's] employees generally.” 26 C.F.R. § 1.274-2(f)(2)(v). Contrary to Stadtmauer's characterization, Grant never testified that there is a per se rule that such expenses are only deductible up to 50%. Rather, in the portion of her testimony that Stadtmauer cites, Grant simply: (1) identified the line on the tax return where “travel and entertainment” expenses must be recorded (Line 4B); and (2) testified that this line was “for the 50 percent of travel and entertainment [expenses] that [are] ... not deductible by the partnership.” (App. 3411.) Moreover, Grant agreed during cross-examination that the 50% rule “has exceptions,” id. at 3548–49; see also id. at 3422, and the District Court specifically instructed the jury as to four types of exceptions to the general rule, id. at 3969. <br />--------------------------------------------------------------------------------<br />37<br /><br /> Indeed, over the Government's objections, the District Court allowed defense counsel to cross-examine Grant regarding her knowledge of specific provisions of the Tax Code, the IRS's field manual, and federal court and Tax Court decisions. This went far beyond what other courts have permitted. Cf. Mikutowicz, 365 F.3d at 72 (holding that trial court did not violate defendant's confrontation rights by refusing to allow defense counsel to question the Government's tax expert, an IRS agent, “about various judicial opinions, which [the defendant] claim[ed] would have established that the deductions were properly taken”). <br />--------------------------------------------------------------------------------<br />38<br /><br /> Stadtmauer also challenges the District Court's decision to allow the Government to admit summary charts prepared by Grant, arguing that they impermissibly summarized her “pre-trial conclusions.” (Appellant's Br. at 56 (emphasis in original).) This argument fails outright. Agent Grant—who also served as a summary witness (based on her participation in the Government's investigation of KC's partnerships)—testified that she reached her conclusions (reflected in her summary charts) based on the voluminous documentary evidence the Government introduced during trial. Cf. United States v. West, 58 F.3d 133, 140 (5th Cir. 1995) (district court did not abuse its discretion in permitting IRS agent to testify as an expert summary witness where her “specialized training and experience ... made her adequately suited to assist the jury in understanding the large amount of documentary evidence presented by the [G]overnment and the tax implications”). <br />--------------------------------------------------------------------------------<br />39<br /><br /> The general rule is that a taxpayer may not deduct expenses incurred on behalf of another taxpayer's business. See, e.g., Deputy v. du Pont, 308 U.S. 488, 494 [23 AFTR 808] (1940). An exception to this rule is where a taxpayer's payment of the business expenses of another serves to “protect or promote” his own business. See, e.g., Lohrke v. Comm'r, 48 T.C. 679, 684–85 (1967). Through the “branding” theory, Stadtmauer sought to argue that the “non-property” expenses deducted by the partnerships qualified under this exception. <br />--------------------------------------------------------------------------------<br />40<br /><br /> The Government contends that the District Court actually excluded all of the documents defense counsel sought to introduce during cross-examination because Stadtmauer had failed to comply with the Court's pre-trial order requiring the reciprocal exchange of trial exhibits. (Appellee's Br. at 29–30.) We see little in the record to support that blanket assertion. Though the Court sometimes noted in ruling on Stadtmauer's requests to introduce exhibits during cross-examination that it “could” bar their admission because they had not been produced to the Government before trial, e.g., App. 2353–54, the record reveals that the Court's rulings were ultimately not based on any violation of its pre-trial discovery order. <br />--------------------------------------------------------------------------------<br />41<br /><br /> Moreover, these advertisements were only tangentially relevant to the broader theory that defense counsel sought to establish: that non-property expenses and charitable contributions were properly paid by various partnerships because they collectively benefitted from using the KC “brand.” Even if Stadtmauer were permitted to introduce these exhibits, we fail to see how they would have meaningfully rebutted the testimony of Bentzlin, Lefkowitz, and Zecher that they never discussed the concept of “branding” as a justification for certain partnerships paying the expenses of other partnerships. (Id. at 2224, 2608, 2841.) <br />--------------------------------------------------------------------------------<br />42<br /><br /> For these reasons, we also reject Stadtmauer's claim that the District Court's exclusion of these exhibits violated his Sixth Amendment right of confrontation.See Delaware v. Van Arsdall , 475 U.S. 673, 679 (1986) (though the Sixth Amendment “guarantees anopportunity for effective cross-examination,” it does not guarantee “cross-examination that is effective in whatever way, and to whatever extent, the defense might wish” (internal quotation marks and citation omitted) (emphasis in original)). <br /> © 2010 Thomson Reuters/RIA. All rights reserved.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-31548752143408178722010-09-15T10:45:00.000-04:002010-09-15T10:46:04.286-04:006 year statute of limitations for tax fraud§ 7202 Willful failure to collect or pay over tax.<br />________________________________________<br />Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.<br />§ 6531 Periods of limitation on criminal prosecutions.<br />________________________________________<br />No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years— <br /> (1) for offenses involving the defrauding or attempting to defraud the United States or any agency thereof, whether by conspiracy or not, and in any manner; <br /> (2) for the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof; <br /> (3) for the offense of willfully aiding or assisting in, or procuring, counseling, or advising, the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a false or fraudulent return, affidavit, claim, or document (whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document); <br /> (4) for the offense of willfully failing to pay any tax, or make any return (other than a return required under authority of part III of subchapter A of chapter 61) at the time or times required by law or regulations; <br /> (5) for offenses described in sections 7206(1) and 7207 (relating to false statements and fraudulent documents); <br /> (6) for the offense described in section 7212(a) (relating to intimidation of officers and employees of the United States); <br /> (7) for offenses described in section 7214(a) committed by officers and employees of the United States; and <br /> (8) for offenses arising under section 371 of Title 18 of the United States Code , where the object of the conspiracy is to attempt in any manner to evade or defeat any tax or the payment thereof. <br />The time during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code , shall not be taken as any part of the time limited by law for the commencement of such proceedings. (The preceding sentence shall also be deemed an amendment to section 3748(a) of the Internal Revenue Code of 1939, and shall apply in lieu of the sentence in section 3748(a) which relates to the time during which a person committing an offense is absent from the district wherein the same is committed, except that such amendment shall apply only if the period of limitations under section 3748 would, without the application of such amendment, expire more than 3 years after the date of enactment of this title, and except that such period shall not, with the application of this amendment, expire prior to the date which is 3 years after the date of enactment of this title.) Where a complaint is instituted before a commissioner of the United States within the period above limited, the time shall be extended until the date which is 9 months after the date of the making of the complaint before the commissioner of the United States. For the purpose of determining the periods of limitation on criminal prosecutions, the rules of section 6513 shall be applicable.<br />U.S. v. BLANCHARD, Cite as 106 AFTR 2d 2010-XXXX, 08/30/2010 <br />________________________________________<br />UNITED STATES of America, Plaintiff-Appellee, v. Richard Blanchard, Defendant-Appellant. <br />Case Information: <br />Code Sec(s): <br />Court Name: UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT, <br />Docket No.: No. 09-1284,<br />Date Argued: 08/05/2010<br />Date Decided: 08/30/2010.<br />Disposition: <br />OPINION<br />Judge: COLE, Circuit Judge. <br />RECOMMENDED FOR FULL-TEXT PUBLICATION <br />Pursuant to Sixth Circuit Rule 206 <br />Appellant Richard Blanchard (“Blanchard”) was convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287. He was sentenced to a term of imprisonment of twenty-two months, plus thirty-six months of supervised release, restitution of $195,852.60, and a special assessment of $1,800. He now argues that (a) several of the § 7202 counts should have been dismissed because they are barred by a three-year statute of limitations; (b) that the district court erred in admitting evidence of his discretionary expenditures, which were unduly prejudicial; (c) that the court erred in failing to instruct the jury that an ability to pay the taxes due is an element of the offense under 8 U.S.C. § 7202; (d) that the court also erred in failing to instruct the jury on the defense theory of the case; and (e) that his convictions for violating § 287 must be vacated because they are not supported by sufficient evidence. In the alternative, he argues that resentencing is required because the district court erred in calculating the amount of restitution it imposed. For the reasons below, we AFFIRM Blanchard's conviction and sentence of imprisonment but VACATE the restitution order and REMAND for further proceedings consistent with this opinion. <br /> <br />II. ANALYSIS<br />A. Limitations period for offenses under 26 U.S.C. § 7202<br />Blanchard argues that counts 6 through 17 of the indictment, charging him with violating § 7202 for failing to truthfully account for and pay over taxes from March 31, 1999 through January 31, 2002, must be dismissed because they are time-barred by the three-year limitations period under 26 U.S.C. § 6531. The applicability of a statute of limitations is a question of statutory interpretation that we review de novo. See SEC v. Mohn, 465 F.3d 647, 650 (6th Cir. 2006). <br />Blanchard contends that we should look to versions of 26 U.S.C. §§ 6531 and 7202 enacted in 1939 in order to interpret the current version of the statutory text. While the Government has argued persuasively that the evolution of the statutory scheme supports the rejection of Blanchard's interpretation, the language of the current statute provides the starting point and the ending point of our analysis if the plain meaning of that language is clear. See Chrysler Corp v. Comm'r of Internal Revenue, 436 F.3d 644, 654 [97 AFTR 2d 2006-937] (6th Cir. 2006). Only when the plain language results in ambiguity or leads to an unreasonable result do we look to the statute's legislative history. Id. Because we find that the plain language of § 6531 supports the application of a six-year period of limitations, we need not consider Blanchard's arguments regarding prior iterations of the statute. <br /> Section 7202 provides that “any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax” shall be guilty of a felony. 26 U.S.C. § 7202. The periods of limitation for prosecuting a violation of the tax laws are set out in § 6531, which provides in relevant part: <br />No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years--<br />...<br />(4) for the offense of willfully failing to pay any tax, or make any return ... at the time or times required by law or regulations ....<br />26 U.S.C. § 6531. Blanchard argues that a willful failure “to pay over” withheld tax is different than a willful failure “to pay” tax, and therefore the six-year limitations period under § 6531(4) does not apply to violations of § 7202. <br />Two district courts have found that offenses under § 7202 are not subject to § 6531(4)'s longer limitations period.See United States v. Brennick , 908 F. Supp. 1004 [79 AFTR 2d 97-1210] (D. Mass 1995); United States v. Block, 497 F. Supp. 629 [48 AFTR 2d 81-5634] (N.D. Ga. 1980). These courts argue that each of the enumerated exceptions to the three-year limitations period in § 6531 tracks the language of a particular criminal offense set out in § 7201 and following sections. See Brennick, 908 F. Supp. at 1018; Block, 497 F. Supp. at 632. For instance, the court in Brennick argued,see 908 F. Supp. at 1018, that the language in § 6531(4) regarding “failing to pay any tax, or make any return” seems to correspond to the language in § 7203 providing that it is a misdemeanor for “[a]ny person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information” to “willfully fail[] to pay such estimated tax or tax, make such return, keep such records, or supply such information.” 26 U.S.C. § 7203. By contrast, “the key words of [§] 7202, “collect, account for, and pay over” are entirely absent from the subsections of [§] 6531 which establish the longer six-year period of limitations.” Block, 497 F. Supp. at 632. Thus, “it seems unlikely ... that Congress [would] omit use of the key words of [§] 7202 if it had intended to make a failure to “pay over” third-party taxes subject to the six-year statute of limitations.” Id. Moreover, the two courts argue, § 6531(4) refers to an “offense,” not “offenses,” suggesting that Congress had in mind a particular violation. See Brennick, 908 F. Supp. at 1019; Block, 497 F. Supp. at 632. <br />By contrast, all of the circuit courts to have considered this question have held that the six-year limitations period applies.See United States v. Adam , 296 F.3d 327, 332 [89 AFTR 2d 2002-3075] (5th Cir. 2002); United States v. Gilbert, 266 F.3d 1180, 1186 [88 AFTR 2d 2001-6009] (9th Cir. 2001); United States v. Gollapudi, 130 F.3d 66, 70 [80 AFTR 2d 97-7861] (3d Cir. 1997); United States v. Musacchia, 900 F.2d 493, 499–500 [71A AFTR 2d 93-3762] (2d Cir. 1990),vacated in part on other grounds , 955 F.2d 3 [69 AFTR 2d 92-770] (1991),reaff'd , United States v. Evangelista, 122 F.3d 112, 119 [80 AFTR 2d 97-6085] (2d Cir. 1997); United States v. Porth, 426 F.2d 519, 521–22 [25 AFTR 2d 70-961] (10th Cir. 1970). Our sister circuits have looked to the plain language of § 6531 in concluding that a willful failure “to pay” taxes includes a willful failure “to pay over” withheld taxes. In the words of the Third Circuit, <br />[u]nder a plain reading of this statute, we find it clear that violations of § 7202 are subject to a six-year statute of limitations under § 6531(4). Specifically, 26 U.S.C. § 7202 makes it an offense for an employer to willfully fail to “account for and pay over” to the IRS taxes withheld from employees. Given that § 6531 pertains to “failing to pay any tax,” the District Court correctly found that the failure to pay third-party taxes as covered by § 7202 constitutes failure to pay “any tax,” and thus, is subject to the six-year statute of limitations under § 6531(4).<br />Gollapudi, 130 F.3d at 70. The Third Circuit also reasoned that “it would be inconsistent for Congress to have prescribed a six-year limitation period for the misdemeanor offense defined in 26 U.S.C. § 7203 ... while providing only a three-year limitation period for the felony offense defined in § 7202.” Id. at 71. But cf. id. at 75 (Cowen, J., dissenting) (arguing that a longer limitations period for § 7203 offenses may be explained by the greater difficulty involved in uncovering them). <br />The rationale offered in Brennick andBlock might be more persuasive if the language of § 6531(4) better matched that of § 7203. However, several actions criminalized under § 7203—including the willful failure to keep required records or supply required information—are not listed under § 6531(4). In the absence of a more perfect correspondence between § 6531(4) and § 7203, we hesitate to create an intercircuit split on this issue. Moreover, we find the Third Circuit's reasoning convincing. The scope of “willfully failing to pay any tax” under § 6531(4) plainly encompasses the offense of “willfully failing to pay over a tax” under § 7202, and it indeed would be odd for Congress to have imposed a longer limitations period for misdemeanor offenses under § 7203 than for felony offenses under § 7202. Accordingly, we hold that offenses under § 7202 are covered by § 6531(4)'s six-year limitations period. <br />B. Admission of evidence regarding discretionary expenditures<br />Blanchard next argues that the district court erred in denying his motions in limine to exclude evidence regarding his discretionary spending, including records of leasing two Cadillac automobiles, gambling losses at the MGM Grand Casino in Detroit, and the purchase of firearms and a CD player. We review the district court's decision to admit evidence for an abuse of discretion. See United States v. Dietz, 577 F.3d 672, 688 (6th Cir. 2009). The district court's discretion in balancing the probative value of evidence against its potential for unfair prejudice is very broad; indeed, we have emphasized that, ““[i]f judicial self-restraint is ever desirable, it is when a Rule 403 analysis of a trial court is reviewed by an appellate tribunal.”” Id. at 689 (quoting United States v. Zipkin, 729 F.2d 384, 390 (6th Cir. 1984)). Consequently, when reviewing for an abuse of discretion, we view ““the evidence in the light most favorable to its proponent, giving the evidence its maximum reasonable probative force and its minimum reasonable prejudicial value.”” Id. at 688 (quoting United States v. Jackson, 473 F.3d 660, 668 (6th Cir. 2007)). The prejudice to be weighed “is the unfair prejudice caused by admission of the evidence. Evidence that is prejudicial only in the sense that it paints the defendant in a bad light is not unfairly prejudicial.” Id. (internal quotation marks omitted). <br />Blanchard's argument to the contrary notwithstanding, evidence regarding a defendant's ability to pay taxes is pertinent to whether an offense has been committed under § 7202, since it bears on the willfulness of the defendant's failure to pay over withheld tax to the government. If a defendant has made discretionary purchases in lieu of meeting his tax obligations, this is probative of his guilt. 4 While Blanchard contends that the evidence presented was of limited utility in this regard—since the gambling records over-represented the amount of money he gambled and the other expenses demonstrated that he had a “lower middle class standard of living”—these considerations go to the weight of the evidence, not its admissibility. <br />Blanchard also argues that admission of the gambling evidence created a “manifest danger of undue prejudice,” given its potential to confuse the jury and the risk that members of the jury had negative views of the propriety and morality of gambling. At trial, however, Blanchard's counsel argued at length that the gambling records did not accurately reflect the amount of money Blanchard had lost, alleviating the concern that the jury might have been confused by the higher amount reflected in the casino records. And while there is some possibility that jurors may have had negative opinions regarding gambling, it is difficult to conclude that the district court abused its considerable discretion in admitting this evidence.Dietz , 577 F.3d at 688. Giving the gambling records their “maximum reasonable probative force” and “minimum reasonable prejudicial value,” the relevance of Blanchard's spending a comparatively large amount of money on his own entertainment in lieu of paying over taxes to the IRS substantially outweighs the potential for prejudice arising from admission of this evidence. <br />The cases that Blanchard cites in support of his position are readily distinguishable, as the evidence in those cases had no bearing on the elements of the offense charged. See United States v. Masters, 450 F.2d 866, 867 (9th Cir. 1971) (testimony that defendant occasionally smoked marijuana had no bearing on charge of aiding and abetting a marijuana smuggling scheme); United States v. Dean, 435 F.2d 1, 2 (6th Cir. 1970) (defendant's possession of $5,000 in genuine currency served only to “give color” to the charge of possessing and passing counterfeit notes); South v. United States, 368 F.2d 202, 205–06 (5th Cir. 1966) (admission of tax returns had no bearing on the charge of using interstate commerce to promote or facilitate illegal gambling). By contrast, in cases where evidence of gambling is probative of the commission of the crime, courts routinely admit such evidence, albeit while evincing some concern as to its prejudicial effect. See, e.g., United States v. Griffin, 524 F.3d 71, 82 [101 AFTR 2d 2008-1815] (1st Cir. 2008) (upholding admission of evidence of gambling and other spending as highly probative as to whether the defendant's tax returns were false and noting the district court issued cautionary instructions regarding the gambling evidence, “which held the greatest potential to prejudice the defendant unfairly”); United States v. Jackson-Randolph, 282 F.3d 369, 376–79 (6th Cir. 2002) (admitting evidence of extensive gambling and other lavish spending as relevant to the defendant's need to commit fraud but noting that “appeals to class prejudice are highly improper and cannot be condoned”);United States v. Abodeely , 801 F.2d 1020, 1026 [59 AFTR 2d 87-567] (8th Cir. 1986) (upholding admission of gambling activity in tax evasion case which, “while having less direct probative value” than evidence regarding income from prostitution, also was “much less prejudicial,” since, “having been shown that [the defendant] ran a bar and a brothel, even the most straightlaced Iowa jury could hardly have been adversely affected by a showing of his participation in the legal, though perhaps sinful and worldly in the eyes of a midwestern jury, activity of gambling”). <br />Accordingly, we find the district court did not err in admitting this evidence. <br />C. Failure to instruct the jury that an ability to pay is an element of 8 U.S.C. § 7202<br />At trial, Blanchard's counsel asked the court to instruct the jury that, in order to establish that an offense had been committed under § 7202, the Government had to demonstrate beyond a reasonable doubt that the defendant (1) had a duty to truthfully account for and pay over federal income tax withheld from employees' wages, (2) failed to account for truthfully and to pay over these taxes, (3) acted willfully, and (4) at the time the taxes were due either (i) possessed sufficient funds to meet this obligation or (ii) lacked such funds because of a voluntary and intentional act without justification. The district court accepted the Government's argument that an inability to pay taxes on the date they are due is pertinent to the third element of the offense, the willfulness of the act, but is not itself an element of the offense that the Government must prove beyond a reasonable doubt. Blanchard now challenges this decision. We review the legal accuracy of jury instructions de novo. United States v. Simons, 150 F. App'x 428, 435 (6th Cir. 2005) (citing United States v. Maliszewski, 161 F.3d 992, 1014 (6th Cir. 1998)). <br />Blanchard principally relies on United States v. Poll, 521 F.2d 329 [36 AFTR 2d 75-5470] (9th Cir. 1975), in which the Ninth Circuit, reasoning that willfulness under § 7202 must include “some element of evil motive and want of justification,” held that “to establish willfulness the Government must establish beyond a reasonable doubt that at the time payment was due the taxpayer possessed sufficient funds to enable him to meet his obligations or that the lack of sufficient funds ... was created by ... a voluntary and intentional act without justification.” Id. at 333. However, as the Ninth Circuit recently recognized in a case rejecting the argument Blanchard makes here, the evil motive requirement on which Poll rests is inconsistent with the Supreme Court's later decision in United States v. Pomponio, 429 U.S. 10 [38 AFTR 2d 76-5905] (1976). See United States v. Easterday, 564 F.3d 1004, 1008 [103 AFTR 2d 2009-1916] (9th Cir. 2009) (noting that the “evil motive” formulation of willfulness was “repudiated” inPomponio ). Accordingly, “insofar asPoll may be interpreted as requiring the government ... to prove that defendant had the money to pay taxes when due ... Poll is inconsistent withPomponio .” Id. at 1010. Under the Supreme Court's decision, “willfulness” “simply means avoluntary, intentional violation of a known legal duty.” Pomponio, 429 U.S. at 1012. Thus, in order to secure a conviction under § 7202, the Government must demonstrate that such a violation occurred, but there is no additional requirement that it show beyond a reasonable doubt that a defendant has sufficient funds to meet his obligations. <br />The Ninth Circuit went on to argue that requiring the Government to prove this element “is also inconsistent with common sense, for we think it unlikely that ... a defendant could succeed in arguing that he did not willfully fail to pay because he spent the money on something else.” 564 F.3d at 1010; see also United States v. Evangelista, 122 F.3d 112, 119 [80 AFTR 2d 97-6085] (2d Cir. 1997) (rejecting argument that defendants were entitled to a jury instruction that the Government had to prove they had sufficient funds to meet their legal obligations when the defendants had spent their funds on luxury items). InUnited States v. Ausmus , 774 F.2d 722, 724 [56 AFTR 2d 85-6179] (6th Cir. 1985), we adopted similar reasoning in holding that it was not error for the district court to instruct the jury that a defendant's financial ability to pay federal income taxes was not a defense under 26 U.S.C. § 7203. The district court had instructed the jury: <br />The defendant asserts that his failure to pay his taxes ... was not willful because he did not have enough money to pay them. However, every United States citizen has an obligation to pay his income tax when it comes due. A taxpayer is obligated to conduct his financial affairs in such a way that he has cash available to satisfy his tax obligations on time. As a general rule, financial inability to pay the tax when it comes due is not a defense to criminal liability for willfully failing to pay income taxes.<br />Id. While Ausmus is distinguishable, both factually (the defendant there admitted to intentionally spending his income in order to prevent the IRS from seizing it) and legally (the defendant was charged with violating § 7203, not § 7202), our holding that an inability to pay taxes when due generally is not a defense—let alone an affirmative element the Government has to prove beyond a reasonable doubt—further weighs against Blanchard's claim. <br />Consequently, we find no error here. While a defendant's inability to pay taxes when due bears on the willfulness of his act, it is not an element of the offense under 26 U.S.C. § 7202. <br />D. Failure to instruct the jury on the defense's theory of the case<br />Blanchard's counsel also proposed several other instructions, detailing the defense's theory of the case. For the violations of 26 U.S.C. § 7202, the proposed instruction read: <br />That concludes the part of my instructions explaining the elements of the crimes alleged in Counts 6 through 20. Next I will explain the defendant's position.<br />The defendant states that he did not act willfully but acted and believed in good faith. Defendant asserts that he was unaware that employment tax returns were not filed and that employment tax returns had not been fully paid. Defendant disclosed the failures to his accountant / return preparer and believed that they had been dealt with. He asserts that the filing and payment of Michigan withholding on the same wages demonstrates his good faith and lack of willfulness.<br />Similarly, counsel's proposed instruction for the violations of 18 U.S.C. § 287 also stated Blanchard's position that he had acted in good faith: <br />That concludes the part of my instructions explaining the elements of the false claim crime. Next I will explain the defendant's position.<br />The defendant states that he did not act willfully and did not knowingly submit false claims. He asserts that he relied upon his accountant / return preparer, who knew that employment taxes had not been paid over to the Internal Revenue Service on behalf of R. Blanchard Construction Company and who prepared each individual income tax return claiming a refund, using information provided, following instructions provided by the Internal Revenue Service and using Forms W-2 which the payroll service had prepared.<br />The district court declined to offer these instructions, reasoning that they did not instruct the jury on a legal theory distinct from its instruction on willfulness, but rather represented Blanchard's view of the facts of the case. Blanchard now claims this decision was in error. <br />We review the district court's refusal to give a proposed jury instruction for an abuse of discretion. United States v. Adams, 583 F.3d 457, 468–69 (6th Cir. 2009). Refusal is considered reversible error only if the instruction “is (1) correct, (2) not substantially covered by the actual jury charge, and (3) so important that failure to give it substantially impairs defendant's defense.” United States v. Heath, 525 F.3d 451, 456 [101 AFTR 2d 2008-2238] (6th Cir. 2008) (internal quotation marks omitted). We therefore will reverse a judgment based on a claim of error “only if the instructions, viewed as a whole, were confusing, misleading and prejudicial.” Id. (internal quotation marks omitted). <br />We find that the proposed instructions were substantially covered by the actual jury charge. The legal theory animating Blanchard's proposed instructions is that he did not knowingly or willfully violate 18 U.S.C. § 287 or 26 U.S.C. § 7202, but rather acted in good faith. The court's instructions on mens rea were clear: <br />The word willfully means a voluntary, intentional violation of a known legal duty. In other words, the Defendant must have acted voluntarily and intentionally and with a specific intent to do something the law forbids. That is to say with a purpose either to disobey or to disregard the law. And omission or a failure to act is willfully done if it's done voluntarily and intentionally and with the specific intent to fail to do something the law requires to be done. That is to say with a purpose either to disobey or disregard the law. In determining the issue of willfulness you are entitled to consider anything done or admitted to be done by the Defendant and all facts and circumstances in evidence that may aid in the determination of his state of mind.<br />(R. 160, Trial Tr. Aug. 21, 2007, at 1114–15 ( § 7202 instruction); see also id. at 1121 (“The term knowing means voluntary [sic] and intentionally and not because of mistake or some other reason.”) ( § 287 instruction).) The same is true of the court's instruction on good faith: <br />The good faith of the defendant is a complete defense to the tax charges in the indictment because good faith is inconsistent with willfully failing to account for and pay over employment taxes. While the term good faith has no precise definition it means among other things an honest belief that is subjectively held, a lack of malice, and the intent to perform all lawful obligations. A person who acts on a belief or on an opinion honestly held is not punishable under this statute merely because that honest belief turns out to be incorrect or wrong. The tax laws are subject to criminal punishment only for those people who willfully fail to account for and pay over employment taxes.... In determining whether or not the Government has proved that the defendant willfully failed to account for and pay over employment taxes or whether the Defendant acted in good faith the jury must consider all of the evidence received in the case bearing on the Defendant's state of mind. The burden of proving good faith ... does not rest with the Defendant because the Defendant has no obligation to prove anything to you. The Government has the burden of proving to you beyond a reasonable doubt that the Defendant acted willfully.<br />(Id. at 1115–17 ( § 7202 instruction);id. at 1121–22 ( § 287 instruction).) <br />The court also emphasized that, under § 7202, “[i]n considering the Defendant's intent and whether or not he acted in good faith negating willfulness, you may consider Defendant's action in filling [sic] state withholding tax returns with full payment.” (Id. at 1115–16.) Even though it found that an ability to pay taxes when due was not a separate element of a § 7202 offense, the court further instructed the jury that “[t]he good faith belief subjectively held by the Defendant that at the time payment was due that he lacked sufficient funds to enable him to meet his obligation to pay employment taxes may be considered by you in determining if the Defendant acted willfully.” (Id. at 1117.) Similarly, in the § 287 instruction on good faith, the court emphasized that “[p]roof of intent is negated where it is established that a Defendant relied in good faith upon the advice and actions of a qualified tax preparer or professional after disclosure of all information in submitting a tax return or tax returns claiming a refund or refunds.” (Id. at 1122.) <br />These instructions substantially covered the legal arguments set out in Blanchard's proposed jury instructions. While the district court did not cover a few details that were contained in the instructions—for instance, in the § 7202 instruction, that the defendant had disclosed his late returns to his accountant—these details represent Blanchard's view of the facts, which the court was under no obligation to present to the jury. See United States v. Vassar, 346 F. App'x 17, 26 (6th Cir. 2009) (citing United States v. Chowdhury, 169 F.3d 402, 407 (6th Cir. 1999)). In sum, there was no error here. 5 <br />E. Sufficiency of the evidence under 18 U.S.C. § 287<br />Blanchard next claims that there was insufficient evidence to support his convictions under § 287. After his trial, he sought a judgment of acquittal on this ground, which the district court denied. We review de novo the denial of a motion for acquittal based on sufficiency of the evidence. United States v. Acierno, 579 F.3d 694, 698 (6th Cir. 2009). The district court's decision must be affirmed “if the evidence, viewed in the light most favorable to the government, would allow a rational trier of fact to find the defendant guilty beyond a reasonable doubt.” Id. (internal quotation marks omitted). “The appellate court must view all evidence and resolve all reasonable inferences in favor of the government,” but may not “independently weigh the evidence nor substitute its judgment for that of the jury.” Id. at 699 (internal quotation marks omitted) (citing Jackson v. Virginia, 443 U.S. 307, 319 (1979)). “This standard is a great obstacle to overcome, and presents the appellant in a criminal case with a very heavy burden.” Id. (internal quotation marks omitted). <br />Blanchard argues that evidence presented at trial demonstrated that the Company paid him only net wages. As a result, he claims, he was entitled to claim a tax credit on his tax return whether or not he knew that the Company never paid over the withheld taxes to the IRS, since, “[o]nce net wages are paid to the employee, the taxes withheld are credited to the employee regardless of whether they are paid by the employer, so that the IRS has recourse only against their employer for their payment.” Slodov v. United States, 436 U.S. 238, 243 [42 AFTR 2d 78-5011] (1978). By consequence, he argues, the district court should have granted a judgment of acquittal because it was “a legal impossibility” for him to have made a false claim regarding the withheld tax. <br />Blanchard draws support for this argument from United States v. Creamer, 370 F. Supp. 2d 715 [95 AFTR 2d 2005-2507] (N.D. Ill. 2005),vacated in part on other grounds , No. 04 CR 281-1, 2006 WL 2037326 (N.D. Ill. Apr. 4, 2006). The defendant in that case—who was the employee, the employer, and the person responsible for paying over withheld taxes to the IRS—was charged under 26 U.S.C. § 7206 with submitting false personal tax returns. Id. at 733. Even though evidence was introduced that the defendant knew the returns he filed in his personal capacity were incorrect, since he had never paid over the withheld funds to the IRS in his official capacity, the court found that he could not be convicted under § 7206.Id. at 734. In the court's eyes, such a result would “confuse[] the different capacities in which defendant allegedly acted.... The failure to pay over is by the employer. The employee, without any reference to his knowledge, is entitled to the credit if the tax has been withheld.”Id. <br />The Third Circuit reached the opposite conclusion inGollapudi. The defendant, charged under § 7206 with filing a false personal tax return, argued inter alia that the return was technically correct, even though he (in his official capacity as president of his company) had never paid over the funds to the IRS. See 130 F.3d at 68, 72. Rejecting the argument that the technical accuracy of the information on a tax return is a complete defense, the Third Circuit concluded that there was “ample” evidence to find that the defendant had filed a false return, including testimony that the defendant admitted that the forms were false and that the alleged withholding was never submitted to the IRS, but rather was left in the corporate checking account.Id. at 72. Thus, the court held, the defendant had violated § 7206, “in that he misstated the amount of his withholdings. Despite the fact that he understood his obligations, he submitted a form which he did not believe was true and accurate as to every material matter.”Id. <br />Similarly, in United States v. May, 174 F. App'x 877 [97 AFTR 2d 2006-1911] (6th Cir. 2006), we held that there was sufficient evidence to convict the defendant for tax evasion under § 7201. InMay , the defendant operated and controlled the finances of Maranatha, a company in which he was the majority shareholder and president. Id. at 878. Although he filed individual income tax returns, May failed to pay over the taxes he reported withholding from his own salary and that of his employees; instead, the funds remained in the corporate bank account. Id. Nonetheless, he argued that the evidence at trial was insufficient for a conviction for tax evasion, pointing to pay stubs (produced by Paychex) that showed taxes had been deducted from his wages. Id. at 879. <br />Acknowledging that an employee properly may credit taxes when they are actually withheld from his wages, even if the company does not subsequently pay them over to the IRS, we held that sufficient evidence had been presented that the wages were not “actually withheld” from the defendant: <br />Evidence at trial ... established that neither Paychex nor May, acting on behalf of Maranatha, actually withheld the taxes from May's wages. May gave Paychex funds covering only the employees' wages; Paychex never received or possessed the gross pay sums. May, moreover, retained those corporate funds (the difference between the gross and net pay due employees) in Maranatha's corporate bank account, an account May personally controlled and accessed for personal expenditures. Because the evidence supports a finding that May did not actually withhold the taxes from his wages as reflected on his Paychex pay stub, May cannot claim a credit for those taxes.<br />Id. Accordingly, we affirmed the district court's denial of the defendant's motion for a judgment of acquittal. Id. <br />Although May is an unpublished decision and involves a conviction for tax evasion under § 7201, not a conviction for making a false claim for a tax refund under § 287, we find its reasoning persuasive. Rather than creating an overly formalistic division between the personal and official capacities of an individual operating as both employer and employee, which would permit the corporate form to serve as a shield to individual liability, we find it more consonant with the purposes of § 287 to conduct a functional inquiry into whether funds due the government left the defendant's control and so may be deemed “actually withheld” from his wages.See id. Here, like in May, considerable evidence was presented to indicate that the funds remained in Blanchard's control. As the district court reasoned in denying Blanchard's motion for a judgment of acquittal: <br />Like May, Defendant Richard Blanchard controlled and operated the company that was his employer, R. Blanchard Construction, Inc. Defendant Blanchard, like May, also utilized Paychex, a payroll processing company, to prepare the company's employees' paychecks. Also like May, Blanchard affirmatively refused to allow Paychex to handle the payment of taxes and provided Paychex with only the net pay of his employees. As a result of this payroll processing arrangement, the corporate funds allegedly representing the withholdings remained in the corporate accounts that were controlled by defendants May and Blanchard, respectively. Also just like in May, Defendant then used these funds for personal expenditures.<br />(R. 132, Order Den. Mot. for New Trial and Mot. for J. of Acquittal After Return of Jury Verdict.) By consequence, we find that the funds due the IRS were not “actually withheld” from Blanchard's wages, and so he cannot escape liability on this basis. <br />While Blanchard argues that his testimony that he had no involvement with the financial side of the business demonstrates that he did not knowingly file a false claim, the jury was free to reject this testimony as incredible and instead credit the testimony of Fox and Amon that he was well aware of the delinquent taxes when he filed his tax returns. Similarly, although Blanchard argues that the jury could not reasonably have found that he knowingly claimed false claims because he relied on Fox's professional advice as his accountant, this argument is undermined by the testimony indicating that the Blanchards misled and withheld pertinent information from Fox. Since a reasonable trier of fact could have concluded beyond a reasonable doubt that Blanchard knowingly filed false claims for tax refunds, we hold that sufficient evidence supported his convictions under § 287. <br />F. Amount of restitution<br />As part of Blanchard's sentence, the district court imposed restitution in the amount of $195,852.60, pursuant to 18 U.S.C. §§ 3663 and 3663A, which stipulate that restitution is required for victims of offenses under Title 18 of the United States Code. See 18 U.S.C. §§ 3663, 3663A(c)(1)(A)(ii) (providing for mandatory restitution to victims of any offense against property under Title 18, including any offense committed by fraud or deceit). Blanchard argues that the amount of restitution imposed erroneously includes both the Federal Insurance Contributions Act (FICA) taxes for which he is personally liable under 26 U.S.C. § 3101(a) and the FICA taxes for which the Company is liable under 26 U.S.C. § 3111(a). The Government agrees that the restitution figure includes taxes that the Company owes the IRS, for which Blanchard is not liable, and argues that the total amount of restitution that can be ordered is $91,669. <br />However, while §§ 3663 and 3663A require that restitution be made to victims of offenses against property under Title 18, these provisions do not authorize restitution for offenses under Title 26. Blanchard was convicted of three counts of making false claims in violation of 18 U.S.C. § 287, for which restitution of $11,639 was due. But the remainder of the proposed restitution amount, $80,030, is attributable to Blanchard's failure to account for and pay over taxes under 26 U.S.C. § 7072, so is not authorized by §§ 3663 and 3663A. <br />As the Government correctly notes, the district court also may impose restitution as a condition of supervised release.See 18 U.S.C. § 3583(d) (providing that a court may order as a condition of supervised release “any condition set forth as a discretionary condition of probation in section 3563(b)”); id. § 3563(b) (providing that a court may require as a condition of probation that the defendant “make restitution to a victim of the offense under section 3556 (but not subject to the limitation of section 3663(a) or 3663A(c)(i)(A))”). Nonetheless, we do not find it appropriate to uphold the imposition of the additional $80,030 without knowing whether the district court would have done so had it not thought itself bound by §§ 3663 and 3663A. On remand, the district court should determine whether some or all of the $80,030 previously imposed pursuant to these provisions should be reimposed as a condition of Blanchard's supervised release. <br />III. CONCLUSION<br />For the reasons presented above, we AFFIRM the conviction and sentence of imprisonment but VACATE the restitution order and REMAND for further proceedings consistent with this opinion. <br />________________________________________<br />* <br /> The Honorable David A. Katz, United States District Judge for the Northern District of Ohio, sitting by designation. <br />________________________________________<br />1 <br /> “Any person who wilfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall ... be guilty of a felony ....” 26 U.S.C. § 7201. <br />________________________________________<br />2 <br /> “Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall ... be guilty of a felony ....” 26 U.S.C. § 7202. <br />________________________________________<br />3 <br /> “Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title.” 18 U.S.C. § 287. <br />________________________________________<br />4 <br /> Indeed, Blanchard's argument that this evidence is not relevant is difficult to reconcile with his contention that a defendant's inability to pay taxes when they are due is an element of the offense under § 7202. See Section II.C, infra. <br />________________________________________<br />5 <br /> Blanchard also claims that the district court erred in refusing to give his proposed instructions for the charges in counts one to five under § 7201. Since he was acquitted of these charges, any such error is harmless.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-10804142558577760642010-09-08T09:17:00.001-04:002010-09-08T09:17:42.334-04:00UNCERTAIN POSITION REGULATIONSProposed reg would permit IRS to require reporting of uncertain tax positions<br />Preamble to Prop Reg 09/07/2010 ; Prop Reg § 1.6012-2 <br />IRS has issued a proposed reg giving it the regulatory underpinning to require certain corporations to attach to their returns Schedule UTP (Uncertain Tax Position Statement), or any successor form, in accordance with forms, instructions, or other appropriate guidance issued by IRS. <br />Background. In Ann. 2010-9, 2010-7 IRB , IRS announced that it was developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns and requested comments by Mar. 29, 2010 (see Weekly Alert ¶ 10 01/28/2010 ). The proposed schedule would require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information on the maximum amount of potential Federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer's risk analysis regarding its likelihood of prevailing on the merits). It would be filed with the Form 1120, U.S. Corporation Income Tax Return or other business returns. <br />In addition to positions for which a tax reserve must be established under FIN 48 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48, now codified in FASB ASC Topic 740-10 Income Taxes. Income Taxes, Accounting Standards Codification Subtopic 740-10, Fin. Accounting Standards Bd. 2010) or other accounting standards, uncertain tax positions would include any position related to the determination of any U.S. Federal income tax liability for which a taxpayer or a related entity hasn't recorded a tax reserve because (i) the taxpayer expects to litigate the position, or (ii) the taxpayer has determined that IRS has a general administrative practice not to examine the position. <br />In March, IRS released draft schedule UTP accompanied by draft instructions, along with Ann. 2010-30, 2010-19 IRB . The draft schedule and instructions provide that, beginning with the 2010 tax year, the following taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million will be required to file Schedule UTP if they or a related party issued audited financial statements: <br />... Corporations required to file a Form 1120, U.S. Corporation Income Tax Return; <br />... Insurance companies required to file a Form 1120 L, U.S. Life Insurance Company Income Tax Return or Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and <br />... Foreign corporations required to file Form 1120 F, U.S. Income Tax Return of a Foreign Corporation. <br />For 2010 tax years, IRS won't require a Schedule UTP from Form 1120 series filers other than those identified above (such as real estate investment trusts or regulated investment companies), pass-through entities, or tax-exempt organizations. IRS says it will determine the timing of the requirement to file Schedule UTP for these entities after comments have been received and considered. <br />IRS received a substantial number of public comments regarding its UTP proposal, much of it critical (see, e.g., Weekly Alert ¶ 4 06/03/2010 ). <br />Justification for Schedule UTP. Preamble to Prop Reg 09/07/2010 , carries a justification for IRS's proposal for affected corporations to file Schedule UTP with their returns. In essence, IRS's position is that to discharge its obligation to fairly and uniformly administer the tax laws, it must be able to quickly and efficiently identify those returns, and the issues underlying those returns, that present a significant risk of noncompliance with the Code. Currently, corporations aren't required to separately identify and explain the uncertain tax positions that are identified in the process of complying with generally accepted accounting principles (GAAP). Instead, IRS must select a return for audit and its agents must expend a substantial amount of effort to determine what uncertain tax positions might relate to the return. <br />IRS position is that corporations that prepare financial statements already are required by GAAP to identify and quantify all uncertain tax positions as described in FIN 48. Other corporations that file returns of income in the U.S. may be subject to other requirements regarding accounting for uncertain tax positions (e.g., International Financial Reporting Standards and country-specific generally accepted accounting standards). <br />Congress, through the Code, gives IRS broad authority and discretion to specify the form and content of returns, so long as it promulgates regs requiring persons made liable for a tax to file those returns. <br />New proposed regs. New Prop Reg § 1.6012-2(a)(4) essentially would provide the underpinning for IRS to require affected corporations to attach to their returns Schedule UTP (or any successor form), in accordance with forms, instructions, or other appropriate guidance issued by IRS. Prop Reg § 1.6012-2(a)(4) is proposed to apply for returns filed for tax years beginning after Dec. 15, 2009, and ending after the date that final regs are published. <br />REG-119046-10. Requirement of a Statement Disclosing Uncertain Tax Positions<br />AGENCY: Internal Revenue Service (IRS), Treasury. <br />ACTION: Notice of proposed rulemaking and notice of public hearing. <br />SUMMARY: This document contains proposed regulations allowing the IRS to require corporations to file a schedule disclosing uncertain tax positions related to the tax return as required by the IRS. This document also provides notice of a public hearing on these proposed regulations. <br />DATES: Written or electronic comments must be received by [INSERT DATE 30 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. <br />Outlines of topics to be discussed at the public hearing scheduled for October 15, 2010, at 10 a.m., must be received by [INSERT DATE 30 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. <br />ADDRESSES: Send submissions to: CC:PA:LPD:PR (), room 5205, <br />Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. <br />Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent 2 electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS ). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, D.C. <br />FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Kathryn Zuba at (202) 622-3400; concerning submissions of comments, the public hearing, and to be placed on the building access list to attend the public hearing, Oluwafunmilayo Taylor of the Publications and Regulations Branch at (202) 622-7180 (not toll-free numbers). <br />SUPPLEMENTARY INFORMATION: <br />Background <br />This document contains proposed amendments to the Income Tax Regulations () under section 6012 relating to the returns of income corporations are required to file. Section 6011 provides that persons liable for a tax imposed by Title 26 shall make a return when required by regulations prescribed by the Secretary of the Treasury according to the forms and regulations prescribed by the Secretary. requires every person liable for income tax to make such returns as are required by regulation. Section 6012 requires corporations subject to an income tax to make a return with respect to that tax. sets out the corporations that are required to file returns and the form those returns must take. <br />In Announcement 2010-9, 2010-7 I.R.B. 408 , and Announcement 2010-17 , 2010- 13 I.R.B. 515, the IRS announced it was developing a schedule requiring certain taxpayers to report uncertain tax positions on their tax returns. The IRS released the draft schedule, Schedule UTP, accompanied by draft instructions that provide a further explanation of the IRS's proposal in conjunction with Announcement 2010-30, IRB 2010-19 . That announcement invited public comment by June 1, 2010, on the draft schedule and instructions, which would be finalized after the IRS received and considered the comments regarding the overall proposal and the draft schedule and instructions. <br />The draft schedule and instructions provide that, beginning with the 2010 tax year, certain corporations with both uncertain tax positions and assets equal to or exceeding $10 million will be required to file Schedule UTP if they or a related party issued audited financial statements. The draft schedule and instructions stated that, for 2010 tax years, the IRS will require corporations filing the following returns to file Schedule UTP: Form 1120, U.S. Corporation Income Tax Return; Form 1120 L, U.S. <br />Life Insurance Company Income Tax Return; Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and Form 1120 F, U.S. Income Tax Return of a Foreign Corporation. The draft schedule and instructions do not require a Schedule UTP from any other Form 1120 series filers, pass-through entities, or taxexempt organizations in 2010 tax years. <br />A substantial number of public comments have been received regarding the draft schedule. The IRS and Treasury Department are currently reviewing the comments and anticipate publishing a final Schedule UTP in sufficient time to allow taxpayers to comply with the proposed effective date of these regulations. <br />Explanation of Provisions <br />These proposed regulations require corporations to file a Schedule UTP consistent with the forms, instructions, and other appropriate guidance provided by the IRS. As explained in Announcement 2010-9 , the United States federal income tax system relies on taxpayers to make a self-assessment of tax and to file returns that show the facts upon which tax liability may be determined and assessed. Section 601.103 of the Procedure and Administration Regulations. To discharge its obligation to fairly and uniformly administer the tax laws, the IRS must be able to quickly and efficiently identify those returns, and the issues underlying those returns, that present a significant risk of noncompliance with the Internal Revenue Code. <br />Existing corporate tax returns do not currently require that taxpayers separately identify and explain the uncertain tax positions that are identified in the process of complying with generally accepted accounting principles. Instead, to identify uncertain tax positions the IRS must select a return for audit and expend a substantial amount of effort by revenue agents to determine what uncertain tax positions might relate to the return. <br />Corporations that prepare financial statements are required by generally accepted accounting principles to identify and quantify all uncertain tax positions as described in Financial Accounting Standards Board, Interpretation No. 48, Accounting for Uncertainty in Income Taxes (June 2006) (FIN 48). FIN 48 is now codified in FASB ASC Topic 740-10 Income Taxes. Income Taxes, Accounting Standards Codification Subtopic 740-10 (Fin. Accounting Standards Bd. 2010). Other corporations that file returns of income in the United States may be subject to other requirements regarding accounting for uncertain tax positions. For example, corporations may be subject to other generally accepted accounting standards, including International Financial Reporting Standards and country-specific generally accepted accounting standards. <br />Congress, through the Internal Revenue Code, has given the IRS broad authority and discretion to specify the form and content of returns, so long as the IRS promulgates regulations requiring persons made liable for a tax to file those returns. <br />This regulation will authorize the IRS to require certain corporations, as set out in forms, publications, or instructions, or other guidance, to provide information concerning uncertain tax positions concurrent with the filing of a return. This information will aid the IRS in identifying those returns that pose the most significant risks of noncompliance and in selecting issues for examination. The IRS intends to implement the authority provided in this regulation initially by issuing a schedule and explanatory publication that require those corporations that prepare audited financial statements to file a schedule identifying and describing the uncertain tax positions, as described in FIN 48 and other generally accepted accounting standards, that relate to the tax liability reported on the return. <br />Proposed Effective/Applicability Date <br />When adopted as a final regulation, this rule will apply to returns filed for tax years beginning after December 15, 2009, and ending after the date of publication of these rules as final regulations in the Federal Register. <br />Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. <br />This regulation will only affect taxpayers that prepare or are required to issue audited financial statements. Small entities rarely prepare or are required to issue audited financial statements due to the expense involved. It is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). Accordingly, a regulatory flexibility analysis is not required. <br />Pursuant to , this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. <br />Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department request comments on the substance of the proposed regulations, as well as on the clarity of the proposed rules and how they can be made easier to understand. All comments submitted by the public will be made available for public inspection and copying. A public hearing has been scheduled for October 15, 2010, beginning at 10 a.m. in the IRS Auditorium, of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, D.C. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identifications to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. <br />For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble. <br />The rules of apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by [INSERT DATE 30 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. <br />Copies of the agenda will be available free of charge at the hearing. <br />Drafting Information <br />The principal author of these regulations is Kathryn Zuba of the Office of the Associate Chief Counsel (Procedure and Administration). <br />List of Subjects in <br />Income taxes, Reporting and recordkeeping requirements. <br />Proposed Amendments to the Regulations <br />Accordingly, is proposed to be amended as follows: <br />PART 1—INCOME TAXES <br />Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: <br />Authority: 26 U.S.C. 7805 *** <br />Section 1.6012-2 is also issued under the authority of 26 U.S.C. 6011 and 6012. <br />Par. 2. Section 1.6012-2 is amended by adding paragraphs (a)(4) and (a)(5) to read as follows: <br />Proposed Amendment 1.6012-2. <br />§1.6012-2 Corporations required to make returns of income. <br />(a) *** <br />(4) Disclosure of uncertain tax positions. A corporation required to make a return under this section shall attach Schedule UTP, Uncertain Tax Position Statement, or any successor form, to such return, in accordance with forms, instructions, or other appropriate guidance provided by the IRS. <br />(5) Effective/applicability date. Paragraph (a)(4) of this section applies to returns filed for tax years beginning after December 15, 2009, and ending after the date of publication of the adoption of these rules as final regulations in the Federal Register. <br />***** <br />Steven T. Miller <br />Deputy Commissioner for Services and Enforcement. <br />[FR Doc. 2010-22624 Filed 09/07/2010 at 4:15 pm; <br />Publication Date: 09/09/2010]Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-45820763459829431232010-09-03T17:52:00.000-04:002010-09-03T17:53:40.189-04:00section 7206 - case involving filing false tax returns.S. v. KOTTWITZ, Cite as 106 AFTR 2d 2010-XXXX, 08/19/2010 <br /><br />--------------------------------------------------------------------------------<br />UNITED STATES OF AMERICA, Plaintiff-Appellee, v. THERESA L. KOTTWITZ, GERARD MARCHELLETTA, JR., GERARD MARCHELLETTA, SR., Defendants-Appellants.<br />Case Information: <br />Code Sec(s): <br /> Court Name: IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT, <br />Docket No.: No. 08-13740; D. C. Docket No. 07-00107-CR-TCB-3-1, <br />Date Decided: 08/19/2010. <br />Disposition: <br /><br />HEADNOTE <br />. <br /><br />Reference(s): <br /><br />OPINION <br />IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT, <br /><br />Appeals from the United States District Court for the Northern District of Georgia <br /><br />Before EDMONDSON and BIRCH, Circuit Judges, and HODGES, * District Judge. <br /><br />Judge: PER CURIAM: <br /><br />[PUBLISH] <br /><br />Defendants Theresa L. Kottwitz [“Kottwitz”], Gerard Marchelletta, Sr. [“Senior”], and Gerard Marchelletta, Jr. [“Junior”] appeal their convictions and sentences for tax fraud-related charges. We find the evidence sufficient to support the jury's verdict regarding their conspiracy convictions and that the general good faith jury instruction that was provided by the district court fully encompassed Kottwitz and the Marchellettas' theory of defense on this charge. We find, however, that the district court erred in refusing to give Kottwitz's and the Marchellettas' requested special instruction to the jury on their good faith reliance on their accountant's advice. Because the evidence was sufficient for a properly instructed jury to convict on the charges of filing materially false personal income tax returns for 2000 as to Junior and Senior and for evading taxes as to Senior, we vacate and remand for retrial in light of the jury instruction error. Because the evidence was insufficient for a properly instructed jury to convict on the charge of aiding and assisting in the filing of a materially false corporate tax return for 2001, we reverse the convictions of Kottwitz, Junior, and Senior and remand with directions to enter a judgment of acquittal on this count. <br /><br />I. BACKGROUND<br />Nastasi & Associates [“Nastasi”] is a carpentry union subcontractor in Garden City, New York which installs and finishes drywall. R20 at 438. It was formed by Frank Nastasi [“Frank”] and Senior in 1993, and was owned by Frank and Tom Nastasi, Hughey White, and Senior. In 2002, Nastasi's president was Frank's son, Anthony Nastasi [“Anthony”]. 1 Id. at 437, 439–42, 473. At Nastasi, Senior served as the Executive Vice President and was in charge of estimating. Id. at 442. Nastasi owned a majority interest in Circle Industries [“Circle”], a commercial drywall contracting business in Atlanta, Georgia formed by Junior in the early 1990s. 2 R17 at 95; R18 at 224; R20 at 370–71, 474. During the first few years after Circle began working in Atlanta, Circle was often short of cash, including what was necessary for payroll, and regularly obtained loans from Nastasi. Id. at 392, 430, 435, 521. <br /><br />In 1998, Circle was awarded a construction project working on the Atlantis hotel and casino in Nassau, Bahamas. R18 at 224–25, 228. Because Bahamian employment law required that employees working in the Bahamas work for Bahamian companies, Circle organized Circle Industries, Ltd. as a Bahamian company to pay its employees. Id. at 239; R20 at 415. <br /><br />About the same time, Senior decided that he wanted to retire from Nastasi and move to Atlanta to help Junior run Circle. On 31 December 1998, Senior and Frank entered into a stock swap agreement with the assistance of Nastasi's tax attorney, William Bernard, in which Senior exchanged his interest in Nastasi for the stock held by Nastasi in Circle, and Nastasi agreed to repay a $700,000 loan from Senior. 3 R20 at 444–45, 448–49, 478, 499–521; R27 at 1102–03; Govt. Exhs. 458–60. The stocks transfer was to have been completed prior to 1 January 2000. R26 at 289. At the time of the stock swap agreement, the Nastasi stock was owned 70 percent by Frank and 30 percent by Senior; the Circle stock was owned 80 percent by Nastasi. R20 at 448. Senior's 30 percent share of Nastasi stock was valued at $1,300,000; Nastasi's 80 percent share of Circle stock was valued at $1,050,000. Id. at 502–03; Exh. 473. As part of the consideration, Nastasi agreed to make an additional $250,000 payment to Circle. Id. at 503; Exhs. 456. 473, 473.1. The stock exchange was recorded in Nastasi's general ledger. R20 at 501. The $250,000 was wired from Nastasi to Circle on 11 February 1999, and was received and recorded in Circle's operating account where it was co-mingled with other monies in that account. Id. at 501–04; R24 at 198–207; R26 at 280–82. Schleger, who was performing accounting and auditing services for both Nastasi and Circle in 1999, considered the $250,000 transfer a loan and entered it on Nastasi's records as an “advance against cost to affiliate” [Circle] and on Circle's books as an advance from a shareholder [Nastasi]. R20 at 503–04, 505–07, 522–24; R24 at 199–200, 202–03; R26 at 280–82; Govt. Exh. 473.1. The $250,000 was spent from that account by the end of February 1999. R26 at 282–84. After the stock swap, Senior had no ownership interest in Nastasi and owned about a 75 percent interest in Circle; Junior served as President of Circle and owned about 25 percent. R18 at 153; R20 at 500; R26 at 288; Govt. Exhs. 5 at 2, 458–60. Senior devoted 75 percent of his time to Circle, while Junior devoted 100 percent of his time to Circle. Govt. Exh. 5 at 2. For tax year 2000, Circle had approximately $26 million in gross revenue, principally from large commercial projects such as dormitories, hospitals, hotels, nursing homes, and resorts. R18 at 224–25; R20 at 373; Govt. Exh. 5 at 1. <br /><br />Senior's estimating expertise and the estimating software that he developed were “critical” to Nastasi's business, and he continued to work for Nastasi until he retired in 2000. R20 at 450. While working for Nastasi, Senior's W-2 statements were prepared by the Nastasi bookkeeping department and reviewed by their accountants. Id. at 518. Upon Senior's retirement, he entered into an agreement not to compete with Nastasi for construction work. The agreement also provided that Senior and Circle were employed as advisors and consultants to Nastasi, with payment to Circle, Senior or any company either or both of them owned. By separate agreement, Senior or his designee was guaranteed $1,300,000, to be paid in 213 weekly installments of $6,000 and one $4,000 installment as consulting payments, effective 1 January 2000. Id. at 450–51, 453–57, 508; R26 at 294; R27 at 1102–03; Govt. Exhs. 459, 460. Much of the consultation estimation work took place between the information technology departments of Nastasi and Circle working with Senior's estimating software, which both Nastasi and Circle used. R20 at 451, 458–59. On a weekly basis, Circle sent an invoice to Nastasi for Senior's consulting work, Nastasi paid Circle $6,000, and Circle deposited the $6,000 into its bank account. Id. at 459–62, R24 at 218; Exhs. 461–63, 465.1-.44, 466.1-.42, 467.1-.13. Nastasi recorded the payments as “consulting fees” and Circle recorded them as “other income.” R20 at 458–61, 509, 545, 555–60; R22 at 163; R24 at 215. No other checks or monies were posted to the “other income” account. R20 at 557. The payments were included on Nastasi & Associates' corporate income tax return, which were audited by the IRS, as consulting fees. Id. at 510, 530–31. <br /><br />Kottwitz was employed as a bookkeeper/controller for Nastasi. Id. at 504. While at Nastasi, Kottwitz worked with Nastasi's outside accountant, Gary Schwartz [“Schwartz”], while he was working with the Stanley Schleger independent accounting firm 4 and after he had opened his own practice. Id. at 424–25, 497, 513, 521; R22 at 30–33, 36–38, 156. Schwartz performed work on the Nastasi tax returns at both the Nastasi and Schleger accounting offices. Id. at 35. <br /><br />Kassandra Logan [“Logan”] began working for Circle in 1994 and, beginning in 1995, performed data entry for accounts payable and estimating. R20 at 370–72. She learned Circle's Emque accounting program from Kottwitz during a trip to New York and spoke to her on the telephone if she had any questions. Id. at 370, 374. Logan explained that, when an invoice for goods or services was received at Circle, it was opened by the receptionist and sent to an accounts payable clerk, who then matched it to a shipping or delivery ticket to insure that the materials had been received, and entered the job name and number and general ledger information onto the invoice. Id. at 375, 383, 422–23. Circle received between 50 and 100 invoices each day. Id. at 423; R26 at 312. The job name reflected the project and the job number was assigned by year and the historical order of the awarded job. Id. at 376–377. The standard job number consisted of five digits: the first two represented the year that the project began, and the last three were assigned consecutively in chronological job order. Id. The accounts payable clerk determined what job and general ledger number to assign to each invoice, entered the invoice data into the Emque program, and filed the invoice into an unpaid invoice file. R20 at 388–89, 423; R26 at 312–13. Circle accounts employees made about 2000 entries to the Emque program per month. Id. at 315. If journal entries or reclassifications were made on the Circle books, they were done under the instruction of Kottwitz or Schwartz. R20 at 408–09. About once a month, an accounts payable report of unpaid invoices was printed and given to Junior for the selection of invoices to be paid. Id. at 389–90, 423–24. Junior had signature authority for Circle; Logan and other accounts payable employees had a signature stamp that they frequently used. Id. at 395–96. Logan provided copies of the job management (“JM”) reports, accounts payables reports, and general ledgers to Schleger and Schwartz, and discussed the general ledger revisions with them. Id. at 377, 424–25, 431. The JM reports provided information on a job's overall cost, the company's profits and losses, the progress of the job, and the percentage of the job that had been completed. Id. at 377. The JM reports could show both the active and inactive accounts, and both reports were routinely given to Junior. Id. at 378, 380. <br /><br />Beginning in 1999, Schwartz was “engaged by Circle to prepare their audited financial statements and the related tax returns.” R22 at 39, 45, 125, 185. His engagement letter provided that he would “reasonably obtain information” from the accounts, and assess whether the accounts were free from material misstatements to insure that each was reconciled and valid. Id. at 39, 41, 48. Although Schwartz received much of the information for tax return preparation by mail, he also traveled from New York to Atlanta for the audits and spent two and one-half days reviewing Circle's books and records each June from 1999 through 2003. 5 Id. at 41–43, 45, 84, 89. When he noticed any mislabeled entries, Schwartz made journal entries and advised Logan, Kottwitz, or Kenya Diggs, an accounts receivable clerk, so that the entries could be correctly labeled. 6 R20 at 431, 563–64, 581–82, 584; R22 at 32, 107, 162. Schwartz completed the audits at his New York home office. Id. at 36, 41, 43. <br /><br />Schwartz conducted Circle's audits for their bonding insurance, and used the audits to prepare Circle's corporate tax return and the Marchellettas' personal tax returns. Id. at 47, 83–84, 90. Schwartz explained that it was “quite difficult” to perform the audits of “the company's internal control,” but that the audits were done “only to the extent to assess the control risk” and not to “uncover certain types of irregularities.” Id. at 46, 49, 171. Schwartz testified that no one at Circle limited his time in Atlanta or his audit analysis in any way, and that they provided him with as much time and information as he needed to prepare the audits. R22 at 47, 60, 154, 161–62. Schwartz reviewed Circle's general ledgers, payroll and salary schedules, and the JM report. Id. at 57–58, 60–61, 63–64; Govt. Exh. 431.1. He also had access to Circle's computer and could run any needed additional reports. R20 at 424–25; R22 at 146. He prepared a “work-in-progress” schedule that listed all pending jobs with their actual billings and expenses and compared it to Circle's estimate of the expected profit from that job to determine whether the expenses and the revenues matched. Id. at 79. <br /><br />In preparing the audits, Schwartz required that Circle provide “reasonable, rather than absolute, assurance that the financial statements [we]re free of material misstatement, whether caused by error or fraud” and explained that “a material misstatement m[ight] remain undetected.” Govt. Exh. 425 at 1. He further explained that “an audit is not designed to detect error or fraud that is immaterial to the financial statements” and that “a material fraud may occur and not be detected.” Id. Each tax year, Junior signed a document, prepared by Schwartz, confirming that, to the best of his knowledge and belief, he had given Schwartz all of the relevant documentation and information, including Circle's financial records, related data, and minutes of any stockholder or directors' meetings, that was necessary for Schwartz to audit Circle's books and to prepare Circle's and the Marchellettas' personal income tax returns. Id. at 50–54; 140; Govt. Exh. 427.10. One of the items that Junior agreed to disclose was any “[r]elated party transactions.” Govt. Exh. 427.10 at 2. The personal tax returns were due on 15 April each year; the corporate tax return was due on 15 September because Circle operated on a fiscal year that began on 1 April and ended on 31 March. R22 at 90–91; R24 at 106–07. <br /><br />Schwartz eventually prepared Circle's 31 March 2000 financial statement, its tax returns for 1 April 1999–31 March 2000 and 1 April 2000–31 March 2001, and the Marchellettas' personal tax returns for 1999–2000. R22 at 7, 83–87, 102–03; Govt. Exhs. 1–2, 5, 7.3, 475, 485. In preparing the Marchellettas' personal returns, Schwartz requested extensions for each of them. R22 at 91, 125, 174. Junior's 2000 tax return reported $145,000 in salary from Circle. Id. at 85–87; Govt. Exh. 3. Senior's 1999 and 2000 tax returns reflected income from his W-2s, small capital gains, interest, and a pension. 7 R22 at 100–03. Senior's 2000 tax return reported $176,000 in salary from Circle but did not include any income from Nastasi or from the payment of personal expenses by Circle. Id. at 102–03; R24 at 232–34; Govt. Exh. 4. When Schwartz “generated” a tax return, he signed the original that was sent to the IRS, sent his clients an unsigned copy of the return, and kept an unsigned copy in his files. R22 at 92–93, 119. <br /><br />In late 1999 or early 2000, Kottwitz moved to Atlanta to replace Logan as Circle's accounting manager and controller. R20 at 391, 420, 504, 563. Schwartz testified that, after he was retained to work with Circle, he spoke to Kottwitz a few times by telephone and then, after 1999, when he arrived in Atlanta for the audits, he sat down with Kottwitz to review the documents that had been assembled for the audits and to advise her regarding what other necessary information needed to be pulled. 8 R22 at 37, 43, 54–55, 57, 158, 160. Although Kottwitz was “very wbusy” in her position as Circle's bookkeeper, comptroller, and office manager, she provided him with “as much information as possible,” assisted him in locating other needed information both while he was in Atlanta and after he had returned to New York, and was “there to help.” 9 R20 at 583–84; R22 at 32, 9 43, 56, 73, 156, 159, 161–62, 187. Schwartz did not generally ask Junior or Senior for information, but relied on Kottwitz. Id. at 32. Kottwitz provided Schwartz with the JM Reports, which listed all of Circle's projects including Crabapple and Newport Bay. Id. at 60–61, 63–64. Schwartz did not review every record on each construction job, but had access to the job ledgers for every job and selected certain jobs at random to review. Id. at 59–60, 146. Schwartz commented that Kottwitz was “always” “reclassifying entries” to get them right on the books, and would ask his advice on where to classify an entry. Id. at 98, 162. Senior was aware that Schwartz and Kottwitz worked on the audits together, and that Schwartz relied upon Kottwitz for information and documentation. Id. at 185–86. <br /><br />Schwartz, who explained that he was unaware of Senior's separation agreement with Nastasi, noticed that Circle's “other income” account had a large balance of around $300,000, and asked Kottwitz about it. 10 R20 at 101, 103; R22 at 164–65. Kottwitz explained that “it was income from Nastasi & Associates that when the two former owners split up the company [Nastasi & Associates], money was owed to — as commission income to the corporation [Circle].” Id. at 103; also see id. at 120–21 (Schwartz explained that “what happened was [the Nastasi payments] w[ere] first put into income and then [Kottwitz] told me that it was a return of capital), id. at 164 (Schwartz answered “[c]orrect” when asked whether Kottwitz had “said that it was her understanding that this money was a result of negotiations between Senior and ... Nastasi concerning the split-up”); id. at 165 (Schwarz answered “[c]orrect” when asked whether Kottwitz “was just telling [Schwartz] what she was told.”); id. at 180–81 (Schwartz testified that Kottwitz explained that the “money owed” to Senior after the company breakup was deposited into Circle's accounts and “should” have been credited to Senior). Schwartz asked Kottwitz for “documentation” regarding the income but Kottwitz did not have the documents. Id. at 104, 165, 184–85. Schwartz did not ask Senior for the documents and never received any documentation for this income. 11 Id. at 104, 165, 184. At the close of Circle's fiscal year 2000, the “other income” account was reclassified under the “note payable officer, loan to officer” account. 12 Id. at 107–08, 120, 177–82. 13 Schwartz explained that he suggested the reclassification because he understood that “it was a return of capital, because of the breakup of the two companies, ... Senior was owed a lot of money. So, that's what ... brought me to say that it should have been in note payable rather than income.” Id. at 120–21. Schwartz made a journal entry regarding the discrepancy and where the monies should be properly logged. Id. at 122–23, 177–78. After the reclassification of the monies as loans payable to Senior, Circle paid three items on Senior's behalf which were “charged as offset” to what Circle owed Senior: his 2000 New York personal taxes, his 2000 federal personal taxes, and construction costs owed to Seay Construction Services. 14 R24 at 119–23; Govt. Exh. 600. <br /><br />Schwartz and Kottwitz conferred on other issues when necessary, and Schwartz provided Kottwitz with advice regarding the reporting of personal expenses paid by Circle. 15 R22 at 98, 185. Schwartz basically relied on Kottwitz for all information and documentation, and did not generally confer with the Marchellettas because they “didn't want to get involved” and were unable to provide him with answers when he did ask them questions. Id. at 185–87. Schwartz recognized that Senior was not interested in the technicalities of books or records, and did not review financial information or even his personal tax returns with him. Id. at 174–75, 186. If Schwarz had questions while he was preparing Senior's personal tax return, he communicated with Senior's wife. Id. at 174. <br /><br />In March 1999, Junior purchased a residential lot on which he planned to build a home. R18 at 186. In April 1999, 16 Junior obtained a $250,000 loan from C&G Enterprises, Ltd., 17 and used it to purchase the lot located on Tullamore Way in Alpharetta, Georgia [“Crabapple”]. Id. at 262; R20 at 553–54; R21 at 851–53; R26 at 248–49, 252. This purchase was not entered on Circle's records. 18 Id. at 248–49. Soon thereafter, Junior found a suitable lot for a home for Senior, and, in September 1999, Senior signed an agreement for the purchase of the property located in Newport Bay Cove, Alpharetta, Georgia [“Newport Bay”] for $270,000. R18 at 321–24; Govt. Exh. 75.1. In October 1999, 19 Senior assigned the contract to Circle and Circle purchased the Newport Bay property for $270,006; the deed was recorded with Circle's name as owner. 20 R18 at 321–22, 358–60; R22 at 75–76; R24 at 200–01; R26 at 284; Govt. Exhs. 24, 75.2, 75.4. The land purchase, which totaled $280,963 with “other amounts,” was recorded in Circle's books as a “note payable to officer” meaning that their officer owed Circle $280,963; it was never shown on Circle's books as an asset. R22 at 75–76; R24 at 201–02; R26 at 285, 355. The property was transferred to Senior in March 2002 for $10. Govt. Exh. 25. A certificate of occupancy was issued to Senior for the Newport Bay residence on 10 May 2002, thus permitting Senior to occupy the home. Govt. Exh. 33. <br /><br />Junior's home construction began in January 2000, after builder Bob Seay had received a deposit for a house on the Crabapple property. R18 at 272, 277–78; Govt. Exh. 114. Seay referred Junior to Robert Frederick, mortgage loan originator at First Colony Bank where Junior subsequently sought a $650,000 construction loan. R18 at 136–37, 141, 278. In January 2000, Senior contracted with builder Allen Dorman, Inc. for the construction of a house on the Newport Bay property. Id. at 338–43; Govt. Exh. 125. Marc Dorman, one of the owners of Allen Dorman, Inc., understood that Senior was the owner of the property and, in the Newport Bay construction contract, Senior was identified as “Owner”; there was no reference to Circle. R18 at 339–43; Govt. Exh. 125. <br /><br />Beginning in April 2000, the first month of Circle's 2001 fiscal year, Circle began paying many of the contractor bills for the Crabapple and Newport Bay homes. 21 R18 at 207–08, 214–21; R24 at 233. Some of the contractors were paid by Kottwitz or dealt with her regarding their payments. 22 In an affidavit submitted in an arbitration proceeding between Junior and Seay, Kottwitz indicated that she had made payments on the Marchellettas' homes as “compensation” to the Marchellettas. R18 at 312–13. At other times, contractors' payments were approved by Senior or with a Circle check handled by Senior. 23 Circle also paid some of the vendors who worked on the Marchellettas' homes after the 2001 corporate fiscal year ended. 24 <br /><br />Junior understood that the payments to the contractors from Circle were shown on Circle's books as employee loans but he did not investigate how they were booked. R18 at 306. Senior's home construction project was assigned the name “Newport Bay” for its subdivision and the number 00998; Junior's home construction project was assigned the name “Crabapple” for its subdivision and the number 00999. R20 at 380–81, 553–54; R26 at 243–44. The Marchelletta home construction costs appeared in Circle's books and records as “expenses” and categorized as “cost of goods sold,” 25 and were provided to Schwartz during his audits. R22 at 60, 64–65, 141–145; R24 at 144, 159; R26 at 268, 276, 315–16; Govt. Exh. 328. For Circle's fiscal year ending on 31 March 2001, the home construction jobs listed no income but substantial costs. R20 at 431–32; R22 at 64–65; 144–46. The payments for the Newport Bay residence were made directly to the contractors; no payments were made to Senior. 26 R26 at 316–18. <br /><br />Although both the Newport Bay and Crabapple expenses were recorded in the JM reports, Schwartz did not include them on his 2001 work-in-progress schedule, and did not discuss them with Kottwitz. R22 at 79–80; R26 at 144–45. The JM reports showed that both the Newport Bay and Crabapple jobs contained large expenses and no income. R22 at 65–66. Schwarz noted some of the consulting fees for the home construction jobs in his audit but did not follow-up with a letter to verify their work. 27 R22 at 175–77. The Marchellettas' construction costs were not treated for accounting purposes until after the end of Circle's accounting year on 31 March. R24 at 156–57; R26 at 278. At that time, the costs could be treated as shareholder distribution, straight income or compensation, or as a loan to a shareholder. R22 at 70; R24 at 157–58; R26 at 278–79. Schwartz, however, did not adjust Circle's books regarding the home-related projects and the distributions were reported as cost-of-goods-sold on the 2001 tax return, and did not include the reported distributions as income on the Marchellettas' personal income tax returns. Id. at 62–65, 76, 78. Schwartz also testified that he was unaware of the construction of the Marchellettas' residences; he explained that Circle's construction of personal residences for the Marchellettas would have been “related party transactions” but that he was never told that Circle was paying for the Marchellettas' construction expenses. Id. at 63, 65–66. He further testified that he “may not have noticed” the project costs on the JM reports and thus the costs, with no related billings, did not constitute a “red flag” for him. R22 at 53–54, 63, 65–66, 69, 71. He claimed that, if he had noticed the costs and realized that Circle had paid for the personal residence construction costs, he would have booked the costs as compensation or as a loan to the Marchellettas when he adjusted the entries in June 2002. R22 at 69–71. Circle also paid for Senior's Alpharetta, Georgia apartment in 2000 and for lawn care at Senior's Long Island, New York home during 2000 and 2001. R21 at 694, 698, 733–35; R24 at 228–32; Govt. Ex. 522, 531. These expenses were booked on Circle's records, respectively, as “office rent” and “consulting fees.” R24 at 229–31; R26 at 241–42. <br /><br />Circle also paid for Junior's visits with business associates to the Gold Club, an Atlanta adult entertainment venue, and clothing purchases. The Gold Club charges appeared on the credit card statements as “Mike's Sports Bar” or “MSB, Inc.,” and were recorded on the Circle accounting system as miscellaneous office or vehicle expenses. R21 at 785–88, 791–92; R26 at 253–54, 257; Govt. Ex. 518. His clothing purchases, from Hong Kong Tailors, Elegant Fashions of Hong Kong, in Atlanta, appeared on Circle's credit card. R20 at 588, 590–91, 597–98; R26 at 257; Govt. Exhs. 518, 520, 529. These expenses were recorded on Circle's books as “vehicle” and “miscellaneous office” expenses. R26 at 259–62. <br /><br />During the summer of 2002, Schwartz visited Circle to conduct his audit and prepared tax returns for Circle and the Marchellettas. R22 at 45, 89–93. In the tax return that Schwartz prepared for Junior, $183,231 was reported as salary from Circle. R22 at 93; R24 at 100; Govt. Exh. 487. In the tax return that Schwartz prepared for Senior, $176,000 was reported as salary from Circle. R24 at 129–30; Govt. Exh. 497. Neither draft tax return reflected any personal expenses paid by Circle for either Junior or Senior nor did Senior's tax return include any income from Nastasi. R24 at 104–05, 109–10, 113, 132. In September 2002, following a United States Custom agent's investigation of Circle's Bahamian construction project and a subsequent investigation by the Internal Revenue Service, 28 the Marchellettas were advised not to file any additional tax returns until their previous returns were reviewed. R25 at 925, 927–30, 959–61. Thus, the 2001 returns prepared by Schwartz were never signed nor filed. R22 at 92; R24 at 96–98, 100–02; Govt. Exhs. 487, 497. The investigations, however, continued. R25 at 965–71, 978. <br /><br />In 2004, the Marchellettas hired CPA Randy Brown, who then met with their attorney and Ted Robertson, a forensic accountant and former IRS agent. R24 at 93, 95. Brown reviewed Circle and the Marchellettas' records, including drafts of unfiled 2001 returns prepared by Schwartz. R24 at 98–99, 102. Brown then prepared and filed 2001 returns for the Marchellettas. Brown included the income from Nastasi in Senior's return, and treated as income the expenses for the houses, credit cards, weekly expense payments, and automobile use for Senior and Junior. Id. at 103, 163; Govt. Exhs. 491, 504. He explained that he reported the payments that Senior received from the “Nastasi stock installment sale” in both 2000 and 2001 and treated the payments as “[l]ong term capital gain” because they were “directly related to the sale of the stock, the exchange of the stock, and not to any consulting services that were provided.” R24 at 136, 138–44. He observed that both the Newport Bay and Crabapple home construction costs were shown on the JM reports, which reported less than “a hundred” jobs, but that, since there was “no contract amount for these jobs,” it was “obvious” that “something's screwy” because “it doesn't look right.” R24 at 168–69. Before the returns were filed, the Marchellettas submitted their estimated tax payments to the IRS. Id. at 149, 162–63. <br /><br />An indictment issued against Junior, Senior, and Kottwitz in April 2007, and was followed by a superseding indictment against each of them in July 2007. R1-1, 42. Nine felony charges were set forth in the superseding indictment: (1) Junior, Senior and Kottwitz were charged with conspiracy to defraud the United States by impeding the Internal Revenue Service in the collection of revenue, in violation of 18 U.S.C. § 371 (Count One) 29; Junior was charged with filing materially false personal income tax returns for 1999 (Count Two) and for 2000 (Count Three) in violation of 26 U.S.C. § 7206(1) 30; Senior was charged with filing a materially false personal income tax return for 2000 in violation of 26 U.S.C. § 7206(1) (Count Four) and in evading taxes in violation of 26 U.S.C. § 7201 (Count Five) 31; Junior, Senior, and Kottwitz were charged with aiding and assisting in the filing of a materially false corporate tax return for 2001 (Count Six), and Kottwitz was charged with aiding and assisting in the filing of a materially false tax return for Junior for 1999 (Count Seven) and for 2000 (Count Eight), and for Senior for 2000 (Count Nine), in violation of 26 U.S.C. 7206(2). 32 <br /><br />After the jury was selected, the district court provided the jury with initial instructions. The district court advised the jury that they should not consider the lawyers' statements, arguments, questions, and objections as evidence. R17 at 4. Later, during the same instructions, the district court again reminded the jury that the “[o]pening statements are neither evidence nor arguments” and explained that the government's “opening statement ... is simply an outline to help you understand the evidence as it comes in.” Id. at 7. <br /><br />At trial, the government claimed that Kottwitz and the Marchellettas conspired to file false tax returns in 2000 and 2001. During its opening statement, the government argued that the Marchellettas “knew the tax rules” but chose not to follow them in order to live a lifestyle unattainable by the jurors. R17 at 10, 27. It argued that the Marchellettas “conspired with each other and their long[]time loyal employee, ... Kottwitz, the bookkeeper” to hide money from taxes by “cooking the books” and “through accounting tricks,” and by filing false tax returns. 33 R17 at 10–11, 23. It claimed that their crimes were “against the United States and its taxpayers” and provided the Marchellettas with lifestyles replete with “mansions,” “custom clothes,” and nightclub trips. Id. at 10–11, 28. <br /><br />During Senior's attorney's opening statement, he explained that Senior offered Schwartz the opportunity to work with Circle in Atlanta because he had seen Schwartz's work with Schleger for Nastasi, and Schwartz “held himself out as a ... New York CPA, ... experienced ... in the construction industry and ... an auditor, preparing financial statements.” R17 at 55–56. Senior's attorney emphasized that Schwartz was given “complete access to all the books of Circle,” and conceded that, although Senior's home construction costs were kept on Circle's books, Senior “had nothing to do with instructing anybody in the business over where to classify the [home construction] invoices, ... to conceal any facts, [or] to bury the cost[s].” Id. at 56–57, 59. He further explained that Senior was “not a book person, ... d[id not] have that background,” but was a “blue-collar worker who started out as a young man working hard, ... an estimator,” who “relied on professionals, people who wear the suits ....” Id. at 59. Kottwitz's attorney also argued that Schwartz was hired for his tax expertise and to make sure the financial records were correct or to make changes if needed, that Kottwitz did not prepare, review, sign, or file any of the tax returns, and that Kottwitz knew so little about taxes that she also asked Schwartz to do hers. Id. at 65–66, 71–73. <br /><br />IRS revenue agent John Lesso calculated that the Marchellettas' and Circle's transactions resulted in Junior having tax deficiencies of $103,616 for 1999, $56,480 for 2000, and $319,041 for 2001; Senior having personal tax deficiencies of $132,858 for 2000 and $319,832 for 2001; and Circle having corporate tax deficiencies of $105,050 for the fiscal year ending in March 2001, and $510,667 for the fiscal year ending in March 2002. R24 at 236, 247, 258, 260, 262, 268, 271. He explained that the Nastasi payments constituted income to Senior because (1) Anthony Nastasi and Schleger testified that these payments were for services rendered to Nastasi, (2) Circle invoiced Nastasi every week, and (3) Nastasi deducted the payments as expenses. Id. at 210–12. Lesso, however, never examined the separation, payment guarantee, or consulting agreements. Id. at 209. He explained that the reclassification of these payments to the “notes payable officer” account was not inconsistent with his analysis, and that, based on the reclassification of these payments as a loan to Senior, it permitted Senior tax-free use of the income. Id. at 217–18, 220. By tracing the $250,000 received by Circle from Nastasi in February 1999, he believed that the money was used in the purchase of the property for Senior's home in October 1999. Id. at 198–207. <br /><br />Lesso confirmed that, from 1 January until 1 March, 2000, the $6,000 payments were entered on Circle's books as “other income” and that Circle paid tax on this as income to Circle. R24 at 216–17; Govt. Exh. 7.3. He explained that Junior had about $150,506.97 in unreported income and owed a tax deficiency of $56,480 in 2000 as a result of the expenses for the Crabapple home construction and suits, and that he had $798,295.97 in unreported income and owed a tax deficiency of $319,041 for 2001 as a result of the expenses for the Crabapple home construction and other personal expenses. R26 at 258–62. <br /><br />Lesso believed that the monies that Circle paid for Senior's apartment and landscaping work constituted unreported personal income taxable to Senior because the expenses were unrelated to Circle's business. R24 at 228–32; R26 at 242. He explained that, although temporary housing was a possible business expense, it was limited to a short-term period. R24 at 231. He agreed, however, that the Newport Bay property was an asset of Circle's during 2001. R26 at 316–17. Although he explained that Circle's expenditures on behalf of Junior and Senior were “taxable when the individual receives an economic benefit,” he later testified that the construction expenses on Circle's books could be characterized at the end of the corporation's fiscal year either as loans or income to the shareholders, and that such a determination was not made in this case until Schwartz closed Circle's books, adjusted entries, and prepared and filed Circle's tax returns during June through September 2001. R26 at 275–80, 354. <br /><br />Robert Hishon, an attorney and CPA who specializes in tax matters, testified on behalf of Junior and Senior. R27 at 1111–13. Hishon opined that Senior's “receipt of $6,000 a week would be proceeds from the sale or exchange ... of his shares in Nastasi.... that would be classified under the Internal Revenue Code as a capital asset, [and] taxed as [long-term] capital gain ... [and] would qualify ... as an installment sale.” R28 at 1132–33. He explained that, as a capital gain, the “transaction would be taxed by taking the total value of what was received minus the basis” and paid all at once, but that under the Internal Revenue Code, the tax could be paid over a period of time if the payments on the sale were over a period of time. Id. at 1133. He noted that Circle appeared to maintain an “open account” for both shareholders, where things were charged and credited, and that such an account was “not unusual.” Id. at 1134. He observed that Circle's payments of the apartment rental for Senior were “ordinary and necessary business expenses ... as sort of a working condition fringe” benefit to help Senior move from New York to Atlanta. Id. at 1138. He believed that the lodging expenses were either excludable from Senior's gross income as “ordinary and necessary” expenses or deductible because they were temporary, necessary for the employee to participate with the business, and an ordinary and necessary expense for a person who lived in New York and was employed by a Georgia corporation. Id. at 1141–42. He stated that the 2000 home construction costs for Senior were “tax neutral” because Circle owned the land and, at that time, was building the house. Id. at 1142. He said that the construction costs were taxable to Senior at the end of Circle's 2001 tax year when he obtained the house title as compensation, and observed that Senior then paid the tax. Id. at 1143–44. Hishon believed that the lawn maintenance expenses were incorrectly charged to Circle and should have been booked as part of the shareholders' open account. Id. at 1144–45. <br /><br />At the close of the evidence, the government dismissed Count Seven against Kottwitz. R2 at 94; R27 at 1020. Kottwitz and the Marchellettas jointly moved for an acquittal on all of the remaining counts, arguing that there was no evidence that they intended to violate the tax laws, and that their due process rights were violated by the government's improper references during trial to their wealth. Id. at 1022–23, 1027, 1035, 1037, 1039–45, 1047–48. These motions were denied. R2 at 94; R27 at 1049. <br /><br />Kottwitz and the Marchellettas requested a “reliance on accountant” jury instruction. 34 R1-81 at 26; R5 at 81, Exh. A at 15; R28 at 1199–1200. Based on its interpretation of United States v. Johnson, 730 F.2d 683 (11th Cir. 1984), the district court denied the instruction, finding that the good faith reliance instruction required that the defense “show, one, that [the defendants] fully disclosed all relevant facts to the expert and, two, that [the defendants] relied in good faith on the expert's advice.” R22 at 1200. It commented that “there [wa]s no evidence that the defendant[s] supplied all relevant information to their accountant or accountants and relied in good faith on accountant's opinion” and that the instruction was not appropriate as it was not “adjusted to the facts.” Id. at 1199–1200. Junior's counsel responded that, as to the 2001 returns initially drafted by Schwartz and ultimately prepared by Brown, he did not want to be foreclosed from arguing that they had presented “testimony through Brown and through Hishon that the defendants believed that what they did in filing the 2001 returns fixed the problem, if you will. And that is reliance on the advice of an expert.” R28 at 1200–01. The government objected that it did not “think the [c]ourt should put its imprimatur on Randy Brown's advice” and that the defendants were asking that the court “essentially ignore their contemporaneous intent to ... look to what they did after the fact.” Id. at 1201–02. When the district court asked whether it was not sufficient for the government “just to make that argument to rebut [Junior's attorney's] point,” the government responded that was “what [it] would do,” to which Junior's attorney replied, “[t]hat's all I need.” Id. at 1202. <br /><br />During closing arguments, the government claimed that Kottwitz was “central” to the tax scheme, and characterized Kottwitz's statement, to wit, that she understood Circle's payments for the Marchellettas' residences as “income” to the Marchellettas, as a “lie[] ... under oath.” R29 at 1265; see also R18 at 312–13. It suggested that Kottwitz was liable for the conspiracy and the tax fraud because she failed to disclose to Schwartz that Circle was paying for the Marchellettas' residences. R29 at 1256. The government also maintained that, because the Marchellettas did not direct allocation of their home construction costs to any specific account, the “payables clerks ... had no idea” how the Marchellettas would treat the income shown on their home job ledgers or whether or not they would actually declare it as income. Id. at 1268. It suggested that the defense argument that “Schwartz was supposed to know about” the inclusion of the Marchellettas' personal expenses in Circle's expense logs was “nonsense” since he only reviewed the accounts on “one day.” Id. at 1329–30. Senior's attorney's closing argument emphasized that there was no evidence that he had any knowledge of how entries were booked on Circle's accounting records, that certain entries should have alerted Schwartz to potential problems and the need to file amended returns, and that Senior had no criminal intent to violate the tax laws. Id. at 1303–04. <br /><br />The district court instructed the jury to base its verdict only on the evidence and the court's instructions on the law, and not on the lawyers' statements. Id. at 1214–16; see also R6-113 at 2–3. The court provided the jury with a general instruction on the elements of a good faith defense to the charge of intent to defraud and on willfullness. 35 R29 at 1228–30; R6-113 at 19–21. After closing arguments, the jury was excused for lunch, instructed to begin deliberations when they returned to the jury room, and advised that they would be provided with the admitted exhibits and a copy of the indictment and verdict form. Id. at 1340. With the jury out of the courtroom, Junior's attorney notified the district court that he had prepared a written objection to court's denial of the requested jury instructions; the district court instructed him to “[j]ust file it.” Id. at 1343–44. In the written objection, Junior observed that the district court had “refused to give the Defendants' proposed Jury Instruction Number 15, concerning “Good Faith Reliance Upon ... Accountant Failure of Accountant to Exercise Due Care”” and argued that “the district court should have granted the [good faith reliance] instruction.” R2-95 at 4. <br /><br />Following deliberations, the jury found Kottwitz not guilty of Counts Eight and Nine (aiding and abetting Junior and Senior in the filing of materially false personal returns for 2000), and found Junior not guilty of Count Two (filing a materially false personal return for 1999). R2-109 at 2–4. Kottwitz was convicted on Counts One and Six; Junior was convicted on Counts One, Three and Six; and Senior was convicted on Counts One, Four, Five, and Six. Id. at 3. <br /><br />Kottwitz and the Marchellettas jointly moved for an acquittal on all of the counts of conviction, arguing that there was no evidence to support a finding of intent to violate the tax laws, and that the government's improper references during the trial to their wealth violated due process rights. R2-106; R2-127 at 4–5, 24–26. They argued, inter alia, that “many, if not all, of the government's specific items of alleged omitted income were not required to be reported as income for [the] year in question.” R2-127 at 9. The district court denied the motion, finding that there was substantial evidence from which a reasonable jury could have found criminal intent to violate the tax law and that the government properly introduced evidence of the defendants' wealth because the evidence of their failure to report a high volume of income was relevant to their willfulness. R2-134. <br /><br />At sentencing, Senior objected to the probation officer's determination as to the amount of the tax loss. R30 at 21–24, 32–37, 39–42, 45. The district court overruled Senior's objections and found that the loss amount was between $1,000,000 and $2,500,000. Id. at 54–55. Kottwitz was sentenced to twenty-four months of imprisonment on each of the two counts of conviction, to run concurrently, and three years of supervised release on each count, to run concurrently. R30 at 147. She was also fined $2500 and assessed $200. Id.; see also R10-156. Junior was sentenced to thirty-six months of imprisonment on each of the three counts of conviction, to run concurrently, thirty-six months of supervised release on Count One and twelve months of supervised released on each of Counts Three and Six, to run concurrently. R30 at 146. He was also fined $50,000 and was assessed $300. Id.; see also R3-154. Senior was sentenced to thirty-three months of imprisonment on each of the four counts of conviction, to run concurrently and thirty-six months of supervised release on each count of conviction, to run concurrently. R30 at 145–46. He was also fined $50,000 and was assessed $400. Id. at 146. Kottwitz and the Marchellettas were each released on bond pending appeal. R10-186. <br /><br />II. DISCUSSION<br />On appeal, Kottwitz, Junior, and Senior argue that the evidence was insufficient to support their convictions and that the district court erred in refusing to give the jury a good faith reliance on accountant instruction. 36 <br /><br />A. Insufficiency of the Evidence<br />Kottwitz, Junior, and Senior contend that the trial evidence was insufficient to show the existence of a tax conspiracy, that they knowingly participated in any conspiracy that may have existed, or that they aided and abetted in the filing of a false tax return for Circle in 2001. Senior maintains that, because he was owed $250,000 at the end of 1999 from the assignment of the loan made by Nastasi to Circle and the stock swap, any personal expenditures made by Circle for him should have been credited against the notes payable, thus reducing Circle's debt to him. As such, the expenditures were properly accounted for and did not result in any taxable income to him. Senior also argues that the evidence was insufficient to show that he knowingly evaded taxes or filed a false tax return for 2000. Kottwitz maintains that the evidence showed she consistently tried to do the right thing and never saw any of the tax returns at issue or had any expectation that the filed returns would be materially false. She contends that there is no trial evidence showing that she knew of any conspiracy that would result in the filing of false tax returns or that she agreed to join any such conspiracy. Junior and Senior also argue that the district court erred by denying their motion for judgment of acquittal because, under Boulware v. United States, 552 U.S. 421, 128 [101 AFTR 2d 2008-1065] S. Ct. 1168 (2008), distributions made to a shareholder of a closely-held corporation cannot be classified for tax purposes until the final date of the corporation's fiscal year. <br /><br />We review both a challenge to the sufficiency of the evidence and the denial of a Rule 29 motion for judgment of acquittal de novo. United States v. Mercer, 541 F.3d 1070, 1074 (11th Cir. 2008) (per curiam); United States v. Descent, 292 F.3d 703, 706 (11th Cir. 2002) (per curiam). “[W]e view the evidence in the light most favorable to the government,” making all reasonable inferences and credibility choices in the government's favor, and then “determine whether a reasonable jury could have found the defendant guilty beyond a reasonable doubt.” Mercer, 541 F.3d at 1074. We will uphold a Rule 29 motion denial if we “determine that a reasonable fact-finder could conclude that the evidence established the defendant's guilt beyond a reasonable doubt.” Descent, 292 F.3d at 706 (quotation marks and citation omitted). <br /><br />1. Conspiracy<br />A conspiracy to defeat the Internal Revenue Service's (“IRS”) lawful functioning and victimize the IRS is known as a Klein conspiracy. United States v. Adkinson, 158 F.3d 1147, 1154 [82 AFTR 2d 98-6984] (11th Cir. 1998) (citing United States v. Klein, 247 F.2d 908 [52 AFTR 614] (2d Cir. 1957)). The government must show not only (1) the requisite act of a failure to properly report income but also (2) an agreement between at least two conspirators to impede the IRS' functioning and (3) knowing participation in such a conspiracy. Adkinson, 158 F.3d at 1153. Although the requisite act requirement is established by the failure to properly report income, such, without more, is insufficient to establish a conspiracy. Id. at 1154. The requisite acts must be considered under “the objective economic realities of a transaction rather than ... the particular form the parties employed.” Boulware, 552 U.S. at 429, 128 S. Ct. at 1175 (quotation marks and citation omitted). The agreement requirement must be established by evidence of actual knowledge by each participant that a conspiracy between at least two participants intending to obstruct the IRS's collection of owed tax revenue was in progress and by evidence of each participant's knowing and voluntary intentional participation in it. Adkinson, 158 F.3d at 1153–54. The evidence must show a “common agreement” to violate the law. Id. at 1155 (quotation marks and citation omitted). The evidence of such an agreement may be circumstantial or direct, and may be inferred from the parties' concerted actions, overt acts, relationship, and the entirety of their conduct. United States v. Schwartz, 541 F.3d 1331, 1361 (11th Cir. 2008). If the conspiracy evidence is circumstantial, it must warrant a jury finding that the conspirators operated with a “common design with unity of purpose to impede the IRS” based on “reasonable inferences, and not mere speculation.” Adkinson, 158 F.3d at 1154, 1159 (quotation marks and citation omitted); United States v. Perez-Tosta, 36 F.3d 1552, 1557 (11th Cir. 1994). See also Ingram v. United States, 360 U.S. 672, 678–79 [4 AFTR 2d 6128], 79 S. Ct. 1314, 1319–20 (1959) (knowledge of tax liability is essential); United States v. Gurary, 860 F.2d 521, 524 [62 AFTR 2d 88-5871] (2d Cir. 1988) (stating that the government must present “evidence from which the jury could infer that defendants knew their scheme would result in the filing of false ... tax returns, and deliberately proceeded with their scheme in the face of that knowledge”). A conspiracy conviction cannot stand without evidence showing a meeting of the minds to commit the illegal act. Adkinson, 158 F.3d at 1155. Circumstantial evidence that income has been disguised as non-taxable proceeds is not sufficient; the government must also show statements of co-conspirators manifesting a desire to impede the IRS. United States v. Pritchett, 908 F.2d 816, 822 [66 AFTR 2d 90-5609] (11th Cir. 1990). <br /><br />The knowledge requirement must be established by evidence that each alleged conspirator knew that the scheme would culminate in the filing of false tax returns. Adkinson, 158 F.3d at 1155. Evidence of a conspiracy or that a defendant acted in a way that would have furthered “a conspiracy if there had been one” is insufficient; there must also be independent evidence that the defendants knew of the conspiracy in progress and knowingly and voluntarily joined it. Id. (citation omitted). Due to the complexity of the tax laws, specific intent or “willful” conduct is a necessary element of tax offenses. Cheek v. United States, 498 U.S. 192, 200 [67 AFTR 2d 91-344], 111 S. Ct. 604, 609 (1991). “This tax purpose [to interfere with the IRS's lawful functions in collecting taxes] must be theobject of a Klein conspiracy, and not merely a foreseeable consequence of some other conspiratorial scheme.” Adkinson, 158 F.3d at 1155. The Klein conspiracy to impede the IRS must be the object, or at least an object in a conspiracy with multiple objectives; it is not adequate if the act of impeding the IRS is “only a collateral effect of an agreement.” Id. (quotation and citation omitted). Evidence that owners directed their accountant to refer any questions to them and failed to disclose to their accountant payments to some employees or unreported revenue was sufficient to support a conspiracy conviction for IRS fraud. United States v. Useni, 516 F.3d 634, 650 (7th Cir. 2008). <br /><br />Despite the lack of direct evidence that Kottwitz and the Marchellettas conspired to impede the IRS, the circumstantial evidence was sufficient for the jury to have concluded beyond a reasonable doubt that they had entered into the charged conspiracy (Count One). Kottwitz oversaw the accounting books and knew where the various home and personal expenses of the Marchellettas were booked on the Circle accounts. She communicated with Schwartz concerning theses expenses in conjunction with both the Circle and Marchelletta tax returns. Kottwitz, Junior, and Senior had a long-standing employment relationship and were not distant. <br /><br />2. Filing of a False Income Tax Return<br />Junior and Senior contend that the home construction costs were the only basis for the jury's verdict related to Junior's 2000 tax return. The jury rejected the prosecution's accusation that Junior had understated his income on his 1999 tax return by failing to include the $250,000 loan from C&G enterprises or the clothing and entertainment expenditures (which were omitted from both the 1999 and 2000 returns) (Count Two). They assert the Boulware objective characterization rule requires consideration of (1) the timing or tax year of the recognition of the distribution and (2) the classification of the transaction as compensation, loans, dividends, returns of capital, or gains from the exchange or sale of property. They reason that Junior's home construction cost distributions could not be assigned to him as income in 2000 because it was impossible for Circle to classify the distributions paid after 1 April 2000 until its fiscal year closed in March 2001 and that the deposit made in January 2000 was de minimis and, therefore, not a material matter. They suggest that Boulware's holding as to 26 U.S.C. § 7206(1) extends to § 7206(2) since both contain similar language regarding the truthfulness of the tax return: “every material matter” in § 7206(1) and “any material matter” in § 7206(2). They maintain that the only expense paid by Circle on Junior's home before 1 April 2000 was the general contractor's deposit paid in January 2000. <br /><br />The government responds that the evidence was sufficient to sustain the convictions because it showed that the Marchellettas skimmed over $1,000,000 from their company to fund personal expenses, failed to disclose this information to their accountant, and signed false tax returns omitting this income. They also maintain that Kottwitz facilitated the Marchellettas' actions by writing checks and supervising Circle's books which showed the expenditures as business expenses. <br /><br />Randy Brown, a certified public accountant who prepared amended 2001 tax returns and subsequent returns for Circle and the Marchellettas, explained that Circle's 2001 tax year began on 1 April 2000 and ended on 31 March 2001. R24 at 106–07. Circle spent $144,000 during the 2000 calendar year and $908,000 during the 2001 tax year on Junior's home construction costs. Id. at 106, 108, 111. Brown stated that the construction costs were not due to be reported as income to Junior until the costs were “expensed” by Circle, and could “be treated as an officer loan until the point that the company takes it as a deduction.” Id. at 107. Brown prepared Junior's 2001 personal tax return in 2004, and explained that Junior's income of $1,330,546 was a result of his wages, dividends, and various “officer advances” which he received from Circle including the home construction costs in 2000 and 2001 and personal credit card and auto use expenses. Id. at 115–16. He stated that the advancement of monies from a company to a shareholder “happens a lot” such as loans or personal credit card expenses. Id. at 117. He explicated that “it depends on the internal accounting of the company” as to when or whether an expense was initially “treated as an officer advance” or was “buried” in other expenses such that the classification of the expense would have to wait until the company's financial statement adjustments “at the end of the year.” Id. at 117–18; see also IRS Agent John W. Lesso's testimony that “nothing's final until the financial statements are prepared.” R26 at 278. Junior testified that he understood the construction expenses to be “an employee loan.” R18 at 306. <br /><br />Circle paid a $36,456 deposit, due five days within the commencement of construction, on Junior's home in January 2000. R18 at 27–78. No other expenses were paid on behalf of Junior's home construction until April 2000. Id. <br /><br />For a conviction under 26 U.S.C. § 7206(1), the government must prove that the defendants: (1) filed a tax return with a written declaration made under the penalty of perjury; (2) did not believe the return to be true and correct as to every material matter; and (3) acted willfully and not merely negligently. United States v. Edwards, 777 F.2d 644, 651 [57 AFTR 2d 86-833] (11th Cir. 1985). A conviction under § 7201 requires that the government show that the defendants (1) acted willfully; (2) deficiently paid their taxes; and (3) affirmatively acted to evade or attempted to evade their taxes. Sansone v. United States, 380 U.S. 343, 351 [15 AFTR 2d 611], 85 S. Ct. 1004, 1010 (1965). Therefore, the specific intent of willfullness is a requirement in both offenses. United States v. Lankford, 955 F.2d 1545, 1550 [70 AFTR 2d 92-5087] (11th Cir. 1992) ( § 7206(1); Sansone, 380 U.S. at 351, 85 S. Ct. at 1010. The willfulness standard requires ““the voluntary, intentional violation of a known legal duty”” and can be “negated by a good-faith misunderstanding of the law[,] a good-faith belief that one is not violating the law, regardless of whether or not the belief is reasonable,” or a good-faith reliance on a professional's advice. United States v. Morris, 20 F.3d 1111, 1114–15 [73 AFTR 2d 94-2111] (11th Cir. 1994) (citing Cheek, 498 U.S. at 202, 111 S. Ct. at 610–11). <br /><br />In Boulware, the Supreme Court noted that tax classifications mandated consideration of “the objective economic realities of a transaction rather than ... the particular form [of classification] that the parties employed.” Boulware, 552 U.S. at 429, 128 S. Ct. at 1175. The Court held that intent is irrelevant to the timing of objective tax classifications and IRS reporting requirements for distributions to shareholders of closely held corporations; objective application of the Internal Revenue Code Sections 301 and 316 apply. Id. 424–25, 434, 439, 128 S. Ct. at 1173, 1179, 1182. Specifically, it stated that a criminal tax “defendant ... does not need to show a contemporaneous intent to treat diversions as returns of capital before relying on [ Sections 301 and 316] to demonstrate that no taxes are owed.” Id. at 439, 128 S. Ct. 1182. The Supreme Court applied Boulware to 26 U.S. C. § 7206(1) cases noting that “[a]lthough ... § 7206(1) does not require the prosecution to prove the existence of a tax deficiency, ... the nature and character of the funds received can be critical in determining whether ... § 7602(1) has been violated.” Id. at 433 n. 9, 128 S. Ct. 1178 n.9 (internal quotation marks and citations omitted). The Court noted that classifications of transactions between closely-held corporations and shareholders may be difficult because “a corporation and its shareholders have a common objective-to earn a profit for the corporation to pass onto its shareholders,” that a “corporation ... wholly owned by one shareholder ... becomes the alter ego of the shareholder in his profit making capacity,” and that, by “passing corporate funds to himself as shareholder,” the owner-shareholder “is acting in pursuit of these common objectives.” 37 Id. at 438 n.13, 128 S. Ct. 1181 n.13 (citing Truesdell v. Comm'r, IRS Non Docketed Service Advice Review, 1989 WL 1172952 (Mar. 15 1989)) (internal quotations omitted). “[E]conomic substance remains the right touchstone for characterizing funds received when a shareholder diverts them before they can be recorded on the corporation's books” as the diverted funds may be treated as “dividends or capital distributions” based on the benefit received by the shareholder. Id. at 430, 128 S. Ct. 1176. If it is unclear, however, whether the corporation will have sufficient funds to cover distributions to its shareholders at the end of its tax year, it must report the distributions as dividends even if the distribution will later be treated as a capital gain or a return on capital. Id. at 434 n.11, 128 S. Ct. 1179 n.11. <br /><br />“[A] distribution of property ... made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).” 38 26 U.S.C. § 301(a). Subsection (c) provides that, if the amount of the distribution constitutes a dividend, it should “be included in gross income;” if the amount which is not a dividend, it should “be applied against and reduce the adjusted basis of the stock;” and, if the amount “which is not a dividend ... exceeds the adjusted basis for the stock,” it should “be treated as gain from the sale or exchange of property.” § 301(c)(1)–(3)(a). Income should be included in an individual's gross income during the year that it is received by the taxpayer. 39 26 U.S.C. § 451(a); 26 C.F.R. § 1.301-1 (a dividend becomes taxable when it is “unqualifiedly made subject to [the shareholders'] demands.”); Avery v. Comm'r of Internal Revenue, 292 U.S. 210, 215 [13 AFTR 1168], 54 S. Ct. 674, 676 (1934) (a dividend becomes taxable to the shareholder upon actual receipt). The receipt of income can be actual or “constructive.” “Constructive receipt” of income occurs when it is “is credited” to the taxpayers account and he can draw upon it. 26 C.F.R. § 1.451-2(a). Constructive receipt does not occur, however, “if the taxpayer's control of [the received income] is subject to substantial limitations or restrictions.” Id. A constructive dividend is a corporate disbursement for the benefit of a shareholder and must be reported by the shareholder as income. 40 United States v. Mews, 923 F.2d 67, 68 [67 AFTR 2d 91-529] (7th Cir. 1991). <br /><br />Although the personal expense entries in Circle's books could not have been characterized as dividends or balanced in relation to Junior's and Senior's shareholder interests until the end of Circle's accounting year, the jury possessed sufficient evidence to convict on Counts Three, Four and Five. Circle's payment of $5,000 for suits and $8,000 for night-club visits for Junior, which were erroneously labeled on Circle's books and not reported by Junior as personal income, provided sufficient substantive evidence of the understatement of income. Circle's payments of New York landscaping fees for Senior, which were not reported by Senior as personal income, provided sufficient substantive evidence of the understatement of income. Further, if the jury determined that Circle's payment of the landscaping fees constituted personal income to Senior, the objective element of a tax deficiency was met to satisfy the charge that Senior evaded taxes. Viewing the evidence in the light most favorable to the government, the jury could find sufficient circumstantial evidence to support a finding of intent and willfulness on these counts. <br /><br />3. Aiding and Abetting the Filing of a Materially False Income Tax Return<br />To prove a charge under 26 U.S.C. § 7206(2), the government must show that the defendant “(1) willfully and knowingly aided or assisted (2) in the preparation or filing of a federal income tax return (3) that contained material statements that the defendant knew to be false.” United States v. Parker, 277 Fed. Appx. 952, 957 [101 AFTR 2d 2008-2244] (11th Cir. 2008) (per curiam) (citing United States v. Searan, 259 F.3d 434, 441 [88 AFTR 2d 2001-5213] (6th Cir. 2001)). Although the defendant's preparation of the returns is not essential, the government must prove that the defendant knowingly provided false documentation with the expectation that it would be used in the filing of a tax return. United States v. Wolfson, 573 F.2d 216, 225 [42 AFTR 2d 78-5098] (5th Cir. 1978); United States v. Aracri, 968 F.2d 1512, 1524 [70 AFTR 2d 92-6305] (2nd Cir. 1992) (convictions under § 7602(2) upheld where the “defendants knew that their scheme would result in the filing of false tax returns.”). <br /><br />In this case, no evidence suggests that Kottwitz or the Marchellettas knew that Circle would file a false 2001 tax return. Kottwitz and the Marchellettas never saw the tax return before it was filed or took any action in preparation of it with an expectation that it would be filed with materially false statements. Their convictions on Count Six are reversed. <br /><br />B. Failure to Give the Requested Good Faith Reliance Jury Instruction<br />Kottwitz and the Marchellettas argue that the district court erred by failing to give their proposed jury instruction regarding good faith reliance on Schwartz's accounting advice and his failure to exercise due care in his audit of Circle. They maintain that the district court misapprehended the law regarding what the jury needed to decide in order for a defendant to succeed as opposed to when they should be instructed for their ultimate determinations as to guilt or innocence. They contend that there was overwhelming evidence that Schwartz failed to exercise due care of diligence in discharging his duties. <br /><br />The government responds that Kottwitz and the Marchellettas were not entitled to a good faith reliance instruction because Schwartz never advised them how to record and report the personal expenditures on their tax returns, they never told Schwartz about the payments, and they gave him false books that disguised the payments. It maintains that the charge would have confused the jury and was unnecessary because the court provided an instruction regarding the high standard of criminal intent and that “good faith is a complete defense.” Finally, it asserts that we should review this issue for only plain error because Junior never articulated any specific evidentiary grounds in support of the charge and did not object to its omission until after the jury had retired. <br /><br />We review de novo the issue of whether a requested jury instruction is supported by sufficient evidence, United States v. Calderon, 127 F.3d 1314, 1329 (11th Cir. 1997), and review the district court's refusal to give such an instruction for abuse of discretion, United States v. Morris, 20 F.3d 1111, 1114 [73 AFTR 2d 94-2111] (11th Cir. 1994). A district court abuses its discretion in denying a requested jury instruction if: (1) the instruction is correct; (2) the instruction was not substantially covered by the given charge; and (3) the defendant's ability to present an effective defense was seriously impaired by the failure to give the instruction. United States v. Sirang, 70 F.3d 588, 593 (11th Cir. 1995). “The district court has broad discretion in formulating jury instructions as long as those instructions are a correct statement of the law.” United States v. Garcia, 405 F.3d 1260, 1273 (11th Cir. 2005) (per curiam). Further, because “[a] confused jury can give as improper a verdict as one which has failed to receive some significant instruction, ... the charge should be direct and focus the jury's attention on the evidence given at trial.” United States v. Blair, 456 F.2d 514, 520 (3d Cir. 1972). <br /><br />In objecting to a district court's failure to provide a requested jury instruction, the objecting party must advise the court before the jury retires to deliberate of its specific objection and the evidentiary grounds upon which the objection was based. Fed. R. of Crim. Proc. 30(d). The objection must be specific and timely, United States v. Wright, 392 F.3d 1269, 1277 (11th Cir. 2004), as “a general objection ... will not suffice,” United States v. Gallo-Chamorro, 48 F.3d 502, 507 (11th Cir. 1995). An objection is timely even if made after the jury has been excused as long as the jury was told not to begin deliberations until further notice. See United States v. Eiland, 741 F.2d 738, 742 (5th Cir. 1984). Although “we do not insist on an extremely technical reading of Rule 30, the objection should be sufficient to give the district court the chance to correct errors before the case goes to the jury.” Sirang, 70 F.3d at 594 (citations omitted). Objections to the district court's erroneous belief that the requested instruction was an “incorrect statement of the law,” United States v. Yeager, 331 F.3d 1216, 1223 (11th Cir. 2003), objections “as a matter of form” to the denial of all of the requested instructions, United States v. Flynt, 15 F.3d 1002, 1006 (11th Cir. 1994) (per curiam) (quotation marks omitted), and objections that do not address the district court's explanation for its denial of the instruction because it was “not tailored to the evidence,” are inadequate to preserve the issue on appeal, Sirang, 70 F.3d at 594 (quotation marks omitted). A non-preserved objection to a court's failure to give a requested jury instruction is reviewed under the more stringent standard of plain error. Fed. R. Crim. P. 52(b). As we have explained, a plain error is one that is clear, is obvious under current law, and that affects substantial rights. United States v. Eckhardt, 466 F.3d 938, 948 (11th Cir. 2006). <br /><br />A trial court is not free to determine the existence of the defendant's theory of defense as a matter of law; it is established by the defendant's presentation of an evidentiary and legal foundation and, once established, the defendant is entitled to jury instructions on that defense theory. United States v. Ruiz, 59 F.3d 1151, 1154 (11th Cir. 1995); United States v. Williams, 728 F.2d 1402, 1404 (11th Cir. 1984). The requested jury instruction should “precisely and specifically, rather than merely generally or abstractly, point [] to the theory of ... defense.” Morris, 20 F.3d at 1117 (quotation marks and citations omitted). The law is clear that the defendant's burden is light as “any foundation in the evidence” is sufficient even if that evidence is of doubtful credibility, frivolous, imprudent, inconsistent, insufficient, unbelievable, or weak. United States v. Opdahl, 930 F.2d 1530, 1535 (11th Cir. 1991) (citation omitted); United States v. Middleton, 690 F.2d 820, 826 (11th Cir. 1982); Strauss v. United States, 376 F.2d 416, 419 [19 AFTR 2d 1397] (5th Cir. 1967). “[I]t is reversible error to refuse to charge on a defense theory for which there is an evidentiary foundation and which, if believed by the jury, would be legally sufficient to render the accused innocent.” United States v. Edwards, 968 F.2d 1148, 1153 (11th Cir. 1992) (quotation marks and citation omitted). <br /><br />“The defense of good faith reliance on expert advice is designed to refute the government's proof that the defendant intended to commit the offense.” United States v. Johnson, 730 F.2d 683, 686 (11th Cir. 1984) (internal quotation marks omitted). Such a defense is successful when the defendants establish that they (1) fully disclosed all relevant facts to the expert and (2) relied in good faith on the expert's advice. 41 Id. Once the defendant charged with willful income tax evasion presents evidence that he disclosed all of the relevant facts to a competent tax advisor and relied on the advisor's advice based on his disclosures, he is entitled to a jury instruction on the defense of good faith reliance on the advice of his advisor. United States v. Eisenstein, 731 F.2d 1540, 1543–44 (11th Cir. 1984) (citing Bursten v. United States, 395 F.2d 976, 981–82 [21 AFTR 2d 1403] (5th Cir. 1968)). If the expert provides no advice or acts as a co-conspirator and not as an expert, good faith reliance is not established. Johnson, 730 F.2d at 686; United States v. Miles, 290 F.3d 1341, 1354 (11th Cir. 2002) (per curiam). A reliance instruction is also not required if the defendant failed to disclose “material facts related to [the defendant's] misrepresentations.” 42 United States v. Condon, 132 F.3d 653, 657 (11th Cir. 1998) (per curiam). <br /><br />The defendant bears an “extremely low” threshold to justify the good faith reliance instruction and does not need to prove good faith. Ruiz, 59 F.3d at 1154; see also Morris, 20 F.3d at 1114 n.2. Whether the defendant fully disclosed the relevant facts, failed to disclose all relevant facts, or concealed information from his advisor, and relied in good faith on his advisor are matters for the jury—and not the court—to determine, under proper instruction. 43 See United States v. Baldwin, 307 F.2d 577, 579 [10 AFTR 2d 5290] (7th Cir. 1962); United States v. Walters, 913 F.2d 388, 392 (7th Cir. 1990). A jury is entitled to the opportunity to believe or disbelieve even fragile evidence in support of a defense. Strauss, 376 F.2d at 419; Eisenstein, 731 F.2d at 1545. Defendants are entitled to the good faith defense instruction if it <br /><br />(1) was correct, (2) was not substantially covered by the court's charge to the jury, and (3) dealt with some point in the trial so important that failure to give the requested instruction seriously impaired the defendant's ability to conduct his defense[,]<br />and where there is any evidence, regardless of how dubious, inconsistent or weak it may have been, to support their good faith claim. Morris, 20 F.3d at 1116 (punctuation and citation omitted). The instruction is appropriate even where the evidence might lead the jury to conclusions that would not benefit the defendant because refusing the charge withdraws the point from the jury's consideration and a jury should be given the opportunity to resolve all questions of fact. United States v. Platt, 435 F.2d 789, 792–93 [26 AFTR 2d 70-5829] (2nd Cir. 1970). Such an instruction was proper where the defendants' books were kept internally and reviewed by outside accountants, and their tax returns were prepared by outside accountants, 44 see Morris, 120 F.3d at 1114, where the only evidence in support of the instruction is the defendant's own testimony, see Strauss, 376 F.2d at 419 (citing Tatum v. United States, 190 F.2d 612, 617 (D.C. Cir. 1951), and where the defendant failed to testify, see Lindo, 18 F.3d at 356. The reliance instruction is also proper even if the outside accountant was a co-defendant. United States v. Duncan, 850 F.2d 1104, 1105 [62 AFTR 2d 88-5069], 1117 (6th Cir. 1988), overruled on other grounds, Schad v. Arizona, 501 U.S. 624, 111 S. Ct. 2491 (1991). The denial of the instruction may prejudice the defendants where they have contested that they lacked the specific intent to commit tax fraud; such prejudice is “amplified” when the evidence against them was circumstantial and limited, and the evidence in their favor was substantial. 45 Morris, 20 F.3d at 1118. The instruction may be properly denied, however, if: (1) there is evidence that the defendant personally failed to record receipts, provide his accountant with the underlying records, or inform his accountants of additional income, see United States v. Garavaglia, 566 F.2d 1056, 1059–60 [41 AFTR 2d 78-381] (6th Cir. 1977); (2) there is no evidence that the defendant sought, received, or followed the advice of an advisor in good faith or informed the advisor of all of the facts, see United States v. Brimberry, 961 F.2d 1286, 1290 [69 AFTR 2d 92-1153] (7th Cir. 1992); United States v. Durnin, 632 F.2d 1297, 1301 (5th Cir. 1980); (3) such theory of defense is based merely upon speculation, see Condon, 132 F.3d at 656; or (4) the issue of the defendant's reliance on advice for given conduct is not before the jury on the charges of conviction, United States v. Snipes, __ F.3d __, __, 2010 WL 2794190 [106 AFTR 2d 2010-5256] at 9 (11th Cir. July 16, 2010). The reliance instruction is also not necessary where the district court's instructions regarding the defendant's honest, good faith belief that his actions were legitimate negates the specific intent required for conviction, United States v. Tannehill, 49 F.3d 1049, 1058 (5th Cir. 1995), adequately covered the substance of the defendant's theory of defense and permitted defense counsel to present adequate argument on the defendant's good faith misunderstanding of the law, Snipes, __ F.3d at __, 2010 WL 2794190 [106 AFTR 2d 2010-5256] at 10; United States v. Kouba, 822 F.2d 768, 771 [60 AFTR 2d 87-5405] (8th Cir. 1987), or required that the jury rule out good faith in order to convict the defendant. United States v. Martinelli, 454 F.3d 1300, 1316 (11th Cir. 2006). <br /><br />The requested good faith reliance jury instruction was based on our pattern jury instructions and was, therefore, a correct statement of the law. 46 <br /><br />We must first determine whether Kottwitz and the Marchellettas preserved the issue of the good faith reliance instruction through their objection in the district court. The good faith defense theory was presented throughout the trial. The theory was set out in the opening statements, during Schwartz's cross-examination, and in closing arguments that Kottwitz, Junior, and Senior, none of whom were trained or experienced in taxes, relied on Schwartz for his advice in classifying entries made in Circle's books and in preparing correct tax returns. They specifically requested the instruction and objected both orally and in writing to the district court's refusal to grant the instruction before jury deliberations commenced. We, therefore, review the district court's refusal to give the instruction for abuse of discretion. <br /><br />Whether it was necessary to provide the good faith reliance instruction depends on whether (1) a juror could find any evidence to conclude that Kottwitz and the Marchellettas provided all material facts to their accountant, and (2) a juror could find any evidence that Kottwitz and the Marchellettas relied in good faith on that accountant's advice and decisions. The evidence demonstrated that the Marchellettas hired Schwartz to prepare Circle's audited financial statements and tax returns, and that Kottwitz worked closely with him during his yearly audits. In a letter dated 21 August 2001, Junior confirmed to Schwartz that he had “to the best of my knowledge and belief ... made available to you all ... [f]inancial records and related data [and] [m]inutes of the meetings of stockholders, directors ....” Govt. Ex. 427.10. Schwartz explained that he conducted the audits but relied on Kottwitz for “mostly everything” because neither Junior nor Senior wanted to be involved or provided him with clear answers regarding “the technicalities of the books and records.” R22 at 185–86. He stated that Senior would walk through but did not participate and did not seem to care about the numbers. Id. at 185–87. Kottwitz did not limit Schwartz's audit in any manner, provided him with requested documentation, and relied on his accounting advice to insure the propriety of Circle's accounting. Schwartz testified that Kottwitz made her best efforts to assure that Circle's accounting was correct and to make appropriate changes. Logan and Diggs both testified that Schwartz was given access to Circle's books and records and to any other requested documents, and that he directed the correction of misclassified entries. Schwartz admitted that neither the time that he spent on the audit nor his access to the documents was limited, and made no changes to the time that he allocated after he found it “difficult” to perform the audit in two days. Schwartz not only reclassified the monies Circle received from Nastasi as a loan, but he failed to inform Senior of the reclassification or its effect on his previously filed tax return and took no steps to correct that tax return. Schwartz admitted reviewing the JM reports, which included the Crabapple and Newport Bay costs of, respectively, about $1 million and $800,000, and reflected no income. <br /><br />Based on this evidence, the Marchellettas were entitled to have the jury instructed on their good faith reliance on Schwartz's advice and on Schwartz's failure to exercise due care. The requested instruction properly placed the determination with the jury as to whether they acted in good faith in seeking advice, fully and completely reporting to their accountant, and acting strictly in accordance with the advice. The district court's refusal to deliver the requested instruction, which addressed the defense's theory of the case on Counts Three, Four, and Five was not substantially covered by other instructions seriously impaired Kottwitz and the Marchellettas' defense. The district court's refusal to deliver the requested instruction did not, however, impair Kottwitz and the Marchellettas' defense as to the conspiracy charge (Count One). The defense's theory of the case as to the conspiracy charge was fully encompassed by the good faith instruction given by the district court because the conspiracy was consummated before any reliance upon the advice of an accountant. <br /><br />Before we resolve this issue, however, we must look again to our review of the sufficiency of the evidence as the counts in question because “[o]nly if the evidence is sufficient for a properly instructed jury to have convicted [the defendants of the charged offenses] do we have to determine whether the district court's erroneous jury instruction constituted ... error requiring reversal and remand for a new trial.” United States v. Mount, 161 F.3d 675, 678 (11th Cir. 1998) (citation omitted). “If the record does not contain sufficient evidence under which a properly instructed jury could have convicted [the defendants of the charged offenses], then double jeopardy principles mandate that we vacate the conviction and remand to the district court with directions to enter a judgment of acquittal on the count in question.” Id. (quotation marks and citation omitted). <br /><br />Because we have determined that the evidence was sufficient to support Junior's and Senior's convictions for filing materially false personal income tax returns for 2000 (Counts Three and Four), and Senior's conviction for evading taxes (Count Five), we reverse their convictions on these counts and remand for a new trial. Because the evidence was, however, insufficient to support Kottwitz's, Junior's, and Senior's convictions for aiding and assisting in the filing of a materially false corporate return for 2001 (Count Six), we need not address whether the district court's instruction would have constituted plain error requiring a new trial if the evidence had been sufficient. See Mount, 161 F.3d at 680 n.4. We reverse their convictions on this count and remand with directions to enter a judgment of acquittal on this count and for resentencing for Kottwitz. 47 <br /><br />III. CONCLUSION<br />For the reason stated above, we AFFIRM Kottwitz's, Junior's, and Senior's convictions for conspiracy to defraud the Internal Revenue Service (Count One). We VACATE Junior's and Senior's convictions for filing materially false personal income tax returns for 2000 (Counts Three and Four), and Senior's conviction for evading taxes (Count Five), and REMAND for a new trial. We REVERSE Kottwitz's, Junior's, and Senior's convictions for aiding and assisting in the filing of a materially false corporate return for 2001 (Count Six) and REMAND with directions to enter a judgment of acquittal on this count and for resentencing of Kottwitz on Count One. <br /><br />Judge: BIRCH, Circuit Judge, concurring in part and dissenting in part: I fully concur with the majority's analysis of and ruling on the district court's failure to properly charge the jury. With regard to the majority's conclusion that the record reflects adequate evidence to sustain the prosecution's burden on the conspiracy charges, I respectfully dissent. Mindful of the prosecution's burden to prove guilt beyond a reasonable doubt, a review of the record manifests that there was no direct or circumstantial evidence presented that Kottwitz and the Marchellettas conspired to impede the IRS. There was no evidence that showed that Kottwitz knew how the Marchellettas would treat any of the Circle expenses which benefitted them personally on their tax returns, had any in put in the preparation of their tax returns, or ever saw their tax returns. There was no evidence presented showing that Kottwitz ever even saw the Consulting Agreement or the Payment Guarantee between Senior and Nastasi & Associates, had any direct knowledge of the terms of those documents, or had any information as to their tax treatment. As Senior maintains, the documents – and the IRS's acceptance of Circle's taxes on the first three months' payments of the $6,000 consulting fees — support a conclusion that the payments were income to Circle and not to Senior. The written consulting agreement provided that Nastasi was retaining the services of Senior and Circle, and Nastasi's IT people consulted with Circle's IT people. Senior was a salaried employee of Circle and paid income taxes based on a W-2 that he received from Circle. The Nastasi monies were reclassified by Schwartz so as not to be recognizable as taxable income to Circle and Schwartz failed to inform Senior of the adjustment or to advise him that his 2000 tax returns needed to be amended to reflect the adjustment. There was no evidence that (1) Kottwitz directed the readjustment of Senior's payments as taxable income to Senior, (2) attempted to cover up the original classification of the payments, or (3) Senior knew of the readjustment of these payments. There was no evidence presented that either Junior or Senior directed any account entries into Circle's accounts. The construction costs for Crabapple and Newport Bay were set up as separate accounts in Circle's books, and all expenses were tracked within those accounts. There was no evidence that Kottwitz made any decisions regarding the Newport Bay property or how it was, or was not, treated on Circle's books or by Senior. There was no evidence that Kottwitz ever saw Circle's tax returns or had any input other than providing documentation for Schwartz. There was no evidence that Kottwitz had any involvement in the preparation, execution or submission of Junior's or Senior's tax returns or knew how Circle's payments for the home construction and other expenses were treated in Junior and Senior's personal tax returns. There was no evidence that suggests that Kottwitz or the Marchellettas knew that Circle would file a false 2001 tax return. Kottwitz and the Marchellettas never saw the tax return before it was filed or took any action in preparation of it with an expectation that it would be filed with materially false statements. Moreover, the personal expense entries in Circle's books could not have been characterized as dividends or balanced in relation to Junior's and Senior's shareholder interests until the end of Circle's accounting year. The determination of these expenses from 1 April 2000 until 31 March 2001 as taxable income could also not occur until the end of Circle's fiscal year, after 31 March 2001, and the adjusted entries were made in September 2001. At that time, the Marchellettas recognized their constructive income and paid their respective taxes. Those determinations could not be made for the 2000 tax year. The conspiracy convictions should be reversed. Because the government did not show that Kottwitz or the Marchellettas knew of a tax conspiracy or that Kottwitz or the Marchellettas voluntarily and knowingly agreed to impede the IRS's collection of taxes, it failed on its burden of proof with respect to the convictions on Count One. <br /><br /><br />--------------------------------------------------------------------------------<br />*<br /><br /> Wm. Terrell Hodges, United States District Judge for the Middle District of Florida, sitting by designation. <br />--------------------------------------------------------------------------------<br />1<br /><br /> Frank and his brother, Tom Nastasi, established Nastasi Brothers in the 1950s. R20 at 468–69. Senior started working for the Nastasi Brothers while he was in high school, and was eventually promoted to a job estimator in the front office. Id. at 469. In the late 1950s or early 1960s, Nastasi Brothers merged with another subcontractor to form Nastasi White. Id. at 438, 468, 470. Nastasi & White was owned, in part by Frank, Tom, and Senior, and installed drywall work in the World Trade Center. Id. at 471–72. <br />--------------------------------------------------------------------------------<br />2<br /><br /> Junior had worked as an employee of Nastasi predecessor, Nastasi White. R20 at 474; R17 at 95. In 1984, Nastasi White purchased New York's “biggest” drywall business, Circle Industries. R20 at 471–72. <br />--------------------------------------------------------------------------------<br />3<br /><br /> The stock exchange agreement was also reviewed by Stanley Schleger [“Schleger”], an independent accountant who performed Nastasi's audits. R20 at 499, 524–25. <br />--------------------------------------------------------------------------------<br />4<br /><br /> Schleger worked with the Nastasis, in their various businesses, for over 40 years until 2004. R20 at 498. <br />--------------------------------------------------------------------------------<br />5<br /><br /> Circle's fiscal year ended on 31 March each year, and Schwartz waited about two and one-half months for the books to close before performing the audit. R22 at 43. <br />--------------------------------------------------------------------------------<br />6<br /><br /> Diggs was in charge of Circle's accounts receivable department from October 2001 until December 2004. R20 at 545. <br />--------------------------------------------------------------------------------<br />7<br /><br /> Senior was a salaried employee of Nastasi in 1999, and a salaried employee of Circle in 2000. R20 at 518; R26 at 295, 306. <br />--------------------------------------------------------------------------------<br />8<br /><br /> In a separate matter, Kottwitz testified that she did not perform audits for Circle and that Circle's audits were handled by “an outside CPA firm.” R18 at 309. <br />--------------------------------------------------------------------------------<br />9<br /><br /> Diggs also obtained documents for Schwartz, whom she understood to be Circle's independent CPA and not an employee of Circle. R20 at 563, 583. <br />--------------------------------------------------------------------------------<br />10<br /><br /> Other witnesses also testified that Circle's books reflected these payments as “other income.” Circle's CPA Randy Brown testified that the $6,000 payments were “originally ... booked as other income.” R24 at 215. Circle accounts receivable clerk Kenya Diggs said that Kottwitz told her to post the payments as other income. R20 at 556–57, 559–60. IRS Agent Lesso testified that the $6,000 payments were recorded as “other income.” R24 at 216–17. <br />--------------------------------------------------------------------------------<br />11<br /><br /> Schwartz understood that the documents were at Nastasi's attorney's office. R22 at 184. <br />--------------------------------------------------------------------------------<br />12<br /><br /> Despite the reclassification in Circle's accounting, Schwartz did not correct Senior's personal income tax return which did not reflect the missing $300,000 in income. R22 at 182–83; R24 at 232–34. Schwartz admitted that he knew that the tax return needed to be revised, but did not have the necessary legal documents to appropriately account for the unreported income. R22 at 183. Schwartz knew that Senior “never reviewed ... any of the tax returns” and relied on Schwartz to correctly calculate his taxes. Id. at 174, 185. <br />--------------------------------------------------------------------------------<br />13<br /><br /> Lesso confirmed that the $6000 payments were reclassified as “notes payable officer” account and that Schwartz's explanation for the reclassification was consistent with his analysis. R24 at 217. <br />--------------------------------------------------------------------------------<br />14<br /><br /> Seay Construction was actually the builder of Junior's, and not Senior's, residence. R18 at 270, 272, 300. <br />--------------------------------------------------------------------------------<br />15<br /><br /> When Kottwitz asked how to document monies borrowed by an individual from the company in 2003, Schwartz explained that she should set up a note receivable from the company showing a loan receivable. R22 at 185. <br />--------------------------------------------------------------------------------<br />16<br /><br /> Kottwitz was not working for Circle at this time. R20 at 391, 420. <br />--------------------------------------------------------------------------------<br />17<br /><br /> C&G Enterprises, Ltd., was a Bahamian company owned by George Gorman, one of Junior's close business associates. R18 at 227. <br />--------------------------------------------------------------------------------<br />18<br /><br /> According to Internal Revenue Service [“IRS”] Agent John W. Lesso, this transaction did not go “through the books” of Circle. R26 at 248. <br />--------------------------------------------------------------------------------<br />19<br /><br /> Again, this transaction occurred before Kottwitz began working for Circle. <br />--------------------------------------------------------------------------------<br />20<br /><br /> Lesso testified that the Circle check was made payable to Bank of America. R24 at 201. Lesso and building contractor Marc Dorman acknowledged that Newport Bay was actually owned by Circle during the construction. R18 at 358–60; R26 at 316–17. <br />--------------------------------------------------------------------------------<br />21<br /><br /> See R18 at 217 (Cameron Padgett architect Charles Cameron received a Circle check as down payment on the Newport Bay house which he understood was to be Senior's residence; “most of the checks [came] from Circle”); id. at 285–86 (Seay's subcontractors on the Crabapple house were paid by Circle); id. at 319 (Seay subcontractor Lummus Supply's owner Brandon Underwood was paid by Circle); id. at 338, 349–350, 360 (builder Marc Dorman was instructed by Senior to pick up his draw checks at Circle and was paid by Circle for work on the Newport Bay house); R20 at 600–01, 603, 610–16 (although Diversified Cabinet Distributors' employee Jay Moore had contracted with Junior and Senior, she was paid by Circle for work at the Crabapple and Newport Bay houses); R21 at 631–33, 636 (Gilmore Drywall co-owner Dennis Gilmore was paid by Circle for work on the Crabapple residence); id. at 645–47, 649–50 (Marvin Young, the owner of Shamrock Doors, was paid by Circle for work on the Crabapple residence); id. at 666–67, 669 (Christian Crawford, the owner of Crawford Landscaping was paid by Circle for work on the Crabapple residence); id. at 703, 705–06, 710, 712, 714, 716–17 (Jennifer Testa, an employee of Testa Marble Creations, was paid by Circle for work on the Crabapple residence); id. at 819, 822–23 (Dennis Rose, an employee with Spacemaker Closet Interiors, was paid by Circle for work on a Marchelletta residence); id. at 828, 833 (Angelo Viale, the owner of Iron Works International, was paid by Circle for work on a Marchelletta residence); id. at 835, 839–40 (David Whitcomb, the Chief Financial Officer for Capitol Materials, was paid by Circle for materials used at the Marchellettas' residences); and R23 at 912, 916–18 (Thierry Francois, the owner of Stone Age Designs, was paid by Circle for work on the Crabapple residence). <br />--------------------------------------------------------------------------------<br />22<br /><br /> See R18 at 349–350 (Dorman received a check from Kottwitz “every once in awhile” and may have seen her write one check); R20 at 615 (Moore received a Circle check air-billed by Kottwitz and spoke with her regarding a check); and R21 at 840 (Whitcomb knew that Kottwitz was Circle's comptroller, and he dealt with her for payments). <br />--------------------------------------------------------------------------------<br />23<br /><br /> See R18 at 281, 283–84 (Seay discussed the Lummus and Williams Brothers' invoices with Junior and heard Senior approve payments); id. at 349–50 (Dorman received a check from Senior “[e]very once in a while” and may have seen him write one check). <br />--------------------------------------------------------------------------------<br />24<br /><br /> See R21 at 652–56 (Oscar Hadizadeh, the owner of Allgreen Landscape, worked with Dorman on the Crabapple residence and was paid by Circle); id. at 659, 661, 663 (David White, a co-owner of Specialty Fountains, was paid by Circle for work at the Crabapple residence); id. at 674–76, 679 (Dan Bartlett with Bartlett Heating & Cooling was paid by Circle for work on the Marchellettas' residences); id. at 686, 690–91 (Jim Rast, owner of Jim Rast Drywall Company, was paid by Circle for work on the Newport Bay residence); id. at 720, 726, 728–29 (Edmond Capozzi, the owner of Modern Industries, was paid by Circle for work on the Crabapple residence); id. at 762, 766, 768 (Charlene Lott, a co-owner of American Landmark Fence, was paid by Circle for work on the Crabapple residence); R25 at 1008–09 (Louis Buckman, who installed floor tile and granite countertops, was paid by Circle for work on the Crabapple residence). <br />--------------------------------------------------------------------------------<br />25<br /><br /> The Marchellettas' homes' construction costs were tracked on a “JM” Report, which reflected jobs in progress as project numbers 00998 (“Newport Bay”) and 00999 (“Crabapple”). R20 at 381, 552–54; R26 at 277. Schwartz testified that, during his audits, Kottwitz provided him with boxes of materials relating to each of Circle's jobs. R22 at 60. Schwartz acknowledged that he had made handwritten notations on pages of a JM Report that listed expenses for both the Newport Bay and Crabapple jobs, but made no notations as to either job and was unsure whether he had spoken to Kottwitz about them. Id. at 65, 141–45. He explained that he “may not have noticed” the absence of income. Id. at 65. <br />--------------------------------------------------------------------------------<br />26<br /><br /> Circle's records reflected over 99% of the expenses paid on the Newport Bay house. R26 at 316. <br />--------------------------------------------------------------------------------<br />27<br /><br /> Specifically, Schwartz noted the fees paid to the architectural firm Cameron Padgett and to Crawford Landscaping. R22 at 175–77. <br />--------------------------------------------------------------------------------<br />28<br /><br /> The Immigration and Customs Enforcement agent who investigated the Bahamian project notified the IRS of Circle's attorney's “unusual” and “out of left field” concerns as to whether the IRS would be contacted. R25 at 925, 931–33, 955–57. <br />--------------------------------------------------------------------------------<br />29<br /><br /> Under 18 U.S.C. § 371, an individual must have been part of a conspiracy with at least one other person “to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose ....” <br />--------------------------------------------------------------------------------<br />30<br /><br /> “Any person who–[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter ... shall be guilty of a felony ....” 26 U.S.C. § 7206(1). <br />--------------------------------------------------------------------------------<br />31<br /><br /> “Any person who willfully attempts in any manner to evade or defeat any tax imposed ... or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony ....” 26 U.S.C. § 7201. <br />--------------------------------------------------------------------------------<br />32<br /><br /> “Any person who—[w]illfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document shall be guilty of a felony ....” 26 U.S.C. § 7206(2). <br />--------------------------------------------------------------------------------<br />33<br /><br /> Outside the presence of the jury, the government explained that “Kottwitz form[ed] the hub” with Junior and Senior as the spokes, and “[t]hat the unreported income related to Crabapple flow[ed] through [her].” R27 at 1025. <br />--------------------------------------------------------------------------------<br />34<br /><br /> The Marchellettas' requested instruction read: <br />Good faith is a complete defense to the charges in the indictment since good faith on the part of the Defendant is inconsistent with the existence of intent to defraud or willfulness which is an essential part of the charge.Specific intent to defraud or willfulness “may be negated by a good-faith misunderstanding of law or a good-faith belief that one is not violating the law ...” The burden of proof is not on the Defendant to prove good faith, of course, since the Defendant has no burden to prove anything. The Government must establish beyond a reasonable doubt that the Defendant acted willfully and with specific intent as charged in the indictment.<br />“Good faith reliance on a qualified accountant ... [is] a defense to willfullness in cases of tax fraud.” So, a Defendant would not be “willfully” doing wrong if, before taking any action with regard to the alleged offense, the Defendant consulted in good faith an ... accountant whom the Defendant considered competent, made a full and accurate report to that ... accountant of all material facts of which Defendant had the means of knowledge, and then acted strictly in accordance with the advice given by that ...accountant.<br />Whether the Defendant acted in good faith for the purpose of seeking advice concerning questions about which the Defendant was in doubt, and whether the Defendant acted strictly in accordance with the advice received, are all questions for you to determine.<br />Also a complete defense to the charges in the indictment is where the tax violation was the result of a failure of an accountant to exercise due care or diligence, and not the result of the Defendants' actions. Title 26, Code of Federal Regulations, Section 16694-1 provides that an accountant or tax preparer who prepares taxes for a person “may not ignore the implications of information furnished to the preparer or actually known to the preparer. The preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete ... The preparer must make appropriate inquiries to determine the existence of facts and circumstances required by a[n] [Internal Revenue] Code section or regulation as a condition to claiming the deduction.”<br />Article V, Section 56 of the American Institute of Certified Public Accountants Code of Professional Conduct and Article V of the New York State Society of CPA's Principles of Professional Conduct provide, in relevant part, that “[d]ue care requires [an accountant] to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member's ability with concern for the best interest of those for whom services are performed and consistent with the [accounting] profession's responsibility to the public.” “[Accountants] should be diligent in discharging responsibilities to clients ... Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.<br />If you find that an accountant or tax preparer ignored any information, did not make reasonable inquiries as to whether any information provided to him was complete and correct, or otherwise was not diligent, thorough or careful to the best of his ability, and that the failure to exercise due care caused the tax violations charged in the indictment, you must acquit the Defendants.<br />R5-81, Exh. A at 15 (italics are the Marchellettas' additions to the Eleventh Circuit Pattern Jury Instructions). <br /><br /><br />--------------------------------------------------------------------------------<br />35<br /><br /> The court's good faith instruction provided: <br />Good faith is a complete defense to the charges in the indictment since good faith on the part of the defendant is inconsistent with intent to defraud or willfulness[,] which is an essential part of the charges. While the term “good faith” has no precise definition, it means an honest belief, a lack of malice, and the intent to perform all lawful obligations. The burden of proof is not on the defendant to prove good faith, of course, since the defendant has no burden to prove anything. The Government must establish beyond a reasonable doubt that the defendant acted with specific intent to defraud as charged in the Indictment.<br />One who expresses an honestly held opinion, or an honestly formed belief, is not chargeable with fraudulent intent even though the opinion is erroneous or the belief is mistaken; and, similarly, evidence which establishes only that a person made a mistake in judgment or an error in management, or was careless, does not establish fraudulent intent.<br />R29 at 1228–29. <br /><br /><br />The district court's willfullness instruction stated: <br />The word “willfully,” ... means that the act was committed voluntarily and purposely, with the specific intent to do something the law forbids; that is with bad purpose either to disobey or disregard the law....<br />So, if you find beyond a reasonable doubt that the acts constituting the crime charged were committed by a defendant voluntarily as an intentional violation of a known legal duty; that is, with specific intent to do something the law forbids, then the element of “willfulness” as defined in these instructions has been satisfied.<br />On the other hand, if you have a reasonable doubt as to whether a defendant acted in good faith, sincerely believing that the tax returns in question were true and correct as to every material matter and that no additional tax was owed, then the defendant did not intentionally violate a known legal duty; that is, the defendant did not act “willfully”--and that essential part of the offense would not be established. It is not the purpose of the tax laws to penalize innocent errors made despite the exercise of reasonable care, and it is not enough to show merely that a lesser tax was paid than was due. Nor is a negligent, careless, or unintentional understatement of income sufficient.<br />Id. at 1229–30. <br /><br /><br />--------------------------------------------------------------------------------<br />36<br /><br /> Junior adopted Senior's sufficiency argument; Senior adopted Junior's argument on this issue regarding the timing and tax consequences of the home construction expenses, and application of Boulware v. United States, 552 U.S. 421, 128 [101 AFTR 2d 2008-1065] S. Ct. 1168 (2008). <br /><br />Kottwitz adopted Junior's and Senior's arguments regarding the reliance on accountant instruction, and both Junior and Senior adopted each other's arguments on this issue. <br /><br />Junior and Senior also raised the issue of prosecutorial misconduct, and Senior raised an issue regarding sentencing. Because we reverse, we will not address these issues. <br />--------------------------------------------------------------------------------<br />37<br /><br /> In United States v. Williams, 875 F.2d 845 (11th Cir. 1989), we held that the government was not required to “characterize diverted income in criminal tax cases” by determining whether the income was properly classified as a “constructive dividend” based on sufficient corporate earning and profits to cover the income as a “dividend.” Id. at 851–52. In Boulware's discussion of the circuit split “over the application of §§ 301 and 316(a) to informally transferred or diverted corporate funds in criminal tax proceedings,” the Supreme Court observed that, in Williams, we had taken the position that §§ 301 and 316(a) were “altogether inapplicable in criminal tax cases involving informal distributions.” Boulware, 552 U.S. at 428 n.6, 128 S. Ct. at 1175 n.6. <br />--------------------------------------------------------------------------------<br />38<br /><br /> For tax purposes, ““property” means money, securities, and any other property;” it “does not include stock in the corporation making the distribution.” 26 U.S.C. § 317(a). <br /><br />[T]he term “dividend” means any distribution of property made by a corporation to its shareholders—(1) out of its [retained] earnings and profits ..., or (2) out of its earnings and profits of the tax year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year) without regard to the amount of the earnings and profits at the time the distribution was made. 26 U.S.C. § 316(a). <br />--------------------------------------------------------------------------------<br />39<br /><br /> “[T]he time of actual receipt of the dividend govern[s] its inclusion in taxable income.” Dynamics Corp. of America v. United States, 392 F.2d 241, 248 [21 AFTR 2d 942] (Ct. Cl. 1968). <br />--------------------------------------------------------------------------------<br />40<br /><br /> Further, distributions are “regarded as dividends where a corporation makes a loan to a shareholder and later cancels the indebtedness, or sells property to a shareholder for a purchase price for below its fair market value, or pays compensation to an officer-shareholder in an amount in excess of the value of his services.” Dynamics Corp., 392 F.2d at 246. “It is not the intent of the parties that governs the characterization of the distribution, but rather the economic and consequent legal effect of their actions.” Id. at 247. Intent, however, may be considered in the determination of whether or not a distribution was a loan to a shareholder. Haber v. Comm'r of Internal Revenue, 52 T.C. 255, 266 (1969). In such a determination, the intent of the parties at the time of the distribution is key: the shareholder's intent to repay the loan and the corporation's intent to enforce such an obligation. Id. Evidence of such intent may be shown by notes of indebtedness, collateral or other security provided for repayment of the loan, agreements as to the time of the repayment and the amount of interest to be paid, or corporate resolutions regarding the loan. Id. <br /><br />If there is insufficient evidence of a shareholder loan, a shareholder's receipt of corporate receipts is “treated as a constructive distribution ... taxable as a dividend to the extent of corporate earnings and profits for the corporate fiscal year in which it occurred.” Midwest Stainless, Inc. v. Comm'r of Internal Revenue, T.C.M. 2000-314, 4 n.5 (2000). <br />--------------------------------------------------------------------------------<br />41<br /><br /> Where the accountant “possesse[s] all of the relevant facts concerning [the transactions at issue] from the outset,” it is not necessary that the defendant show “that he personally disclosed all pertinent facts to the accountant.” United States v. Lindo, 18 F.3d 353, 356 (6th Cir. 1994). <br />--------------------------------------------------------------------------------<br />42<br /><br /> A taxpayer who fails to disclose material information from his accountants or takes affirmative steps to mislead his accountants is not entitled to argue reliance. United States v. Lisowski, 504 F.2d 1268, 1272 [34 AFTR 2d 74-6116] (7th Cir. 1974). <br />--------------------------------------------------------------------------------<br />43<br /><br /> The trial court's evaluation of the evidence supporting a reliance defense and denial of such a charge “dilutes” the defendants' trial and acts as an “impermissible” directed verdict against the defendants. Bursten, 395 F.2d at 981 (quotation marks and citation omitted). <br />--------------------------------------------------------------------------------<br />44<br /><br /> The good faith reliance instruction was proper when the defendant: (1) had been advised by an accountant that extensions had been requested, Platt, 435 F.2d at 790–92; (2) was merely a ““walk-in customer”” who provided only oral information rather than a regular customer whose business activity was continuously overseen by an accountant, United States v. Kim, 884 F.2d 189, 193–94 [65 AFTR 2d 90-495] (5th Cir. 1989); (3) had signed a tax return prepared by an accountant from records recorded by the defendant's bookkeeper, Berkovitz v. United States, 213 F.2d 468, 470 [45 AFTR 1581], 472–73, 476 (5th Cir. 1954); and (4) had signed tax returns prepared by an accountant from records in which entries were classified by the bookkeeper and the defendant neither concealed anything nor refused the accountant any information, United States v. Pechenik, 236 F.2d 844, 845–47 [50 AFTR 221] (3rd Cir. 1956) (a jury was entitled to accept or reject evidence that the defendant relied on his bookkeeper to determine how various expenses should be entered into his books and on his accountant to audit the corporation's books and prepare its tax returns). See also United States v. Head, 641 F.2d 174,180 (4th Cir. 1981) (such an instruction was proper where the defendant “relied upon accountants to prepare tax returns and did nothing to obstruct the flow of information necessary to prepare those returns”). <br />--------------------------------------------------------------------------------<br />45<br /><br /> The prejudice from a district court's failure to give the good faith reliance instruction is not abated by counsel's presentation of the theory of defense during closing argument. With no instruction on the legal effect of good faith reliance, a jury is left with no lawful or legitimate alternative for the explanation for the defendant's conduct. See Ruiz, 59 F.3d at 1155. <br />--------------------------------------------------------------------------------<br />46<br /><br /> The additions to the pattern jury instructions included language consistent with the regulations under the Internal Revenue Code. “The tax return preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete ... [and] to determine the existence of facts and circumstances required by a Code section or regulation as a condition of the claiming of a deduction or credit.” 26 C.F.R. § 1.6694-1(e). <br />--------------------------------------------------------------------------------<br />47<br /><br /> Kottwitz did not appeal her sentence and the record of her sentencing is not before us. We note, however, that because the sentencing on multiple counts may reflect interdependence of the counts of conviction, resentencing is appropriate. See United States v. Watkins, 147 F.3d 1294, 1296 n.3, 1297 (11th Cir. 1998). <br /> © 2010 Thomson Reuters/RIA. All rights reserved.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-46664264024327220862010-08-31T19:37:00.000-04:002010-08-31T19:38:07.310-04:00substantiation caseMyrtis Stewart v. Commissioner, TC Memo 2010-184 , Code Sec(s) 162; 166; 167; 212; 274; 6662; 7491. <br /><br />--------------------------------------------------------------------------------<br />MYRTIS STEWART, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . <br />Case Information: Code Sec(s): 162; 166; 167; 212; 274; 6662; 7491 <br /> Docket: Docket No. 10376-08. <br />Date Issued: 08/16/2010 <br />Judge: Opinion by VASQUEZ <br /><br /><br />HEADNOTE <br />XX. <br /><br />Reference(s): Code Sec. 162 ; Code Sec. 166 ; Code Sec. 167 ; Code Sec. 212 ; Code Sec. 274 ; Code Sec. 6662 ; Code Sec. 7491 <br /><br />Syllabus <br />Official Tax Court Syllabus<br />Counsel <br />Myrtis Stewart, pro se. <br />Shawna A. Early and Robert A. Baxer, for respondent. <br /><br />Opinion by VASQUEZ <br /><br />MEMORANDUM FINDINGS OF FACT AND OPINION <br />For 2004 and 2005 respondent determined deficiencies in petitioner's Federal income taxes and section 6662(a) 1 accuracy-related penalties as follows: <br /><br />Penalty <br /> Sec. 6662(a) <br /><br />Deficiency <br />Year <br />2004 $9,240 $1,848.00 2005 12,447 2,489.40 <br /><br />The issues for decision are whether petitioner is: (1) Entitled to deductions for losses of $25,000 for rental expenses claimed on Schedule E, Supplemental Income and Loss, for each year; (2) entitled to deductions for theft losses of $12,093 and $23,525.75 claimed on Schedules A, Itemized Deductions, for 2004 and 2005, respectively; (3) entitled to carryover losses of $1,521.13 and $1,521 for 2004 and 2005, respectively; and (4) liable for the section 6662(a) accuracy-related penalties. <br /><br />FINDINGS OF FACT <br />Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in New York when the petition was filed. <br /><br />Petitioner has worked for the Internal Revenue Service (IRS) as an international examiner, i.e., a revenue agent, for over 21 years, including 2004 and 2005. Through her work, which includes examining tax returns, she has acquired a general knowledge of the Federal income tax laws and the substantiation requirements of the Code and the regulations thereunder. She also made several business investments before or during 2004 and 2005 (discussed infra). I. 116 Highland Lake (Highland Lake property), Highland, N.Y. and 112 Hillside (Hillside property), Barryville, N.Y. <br /><br />A. Background <br /><br />Petitioner and Mary Anastasio (Ms. Anastasio) invested in several properties together. They acquired the Hillside property sometime before the years in issue. The Hillside property covers 4 to 5 acres of land and has a New England style double Cape Cod house with an adjoining garage. Petitioner used the Hillside property as her headquarters for the management of her real estate. <br /><br />Petitioner and Ms. Anastasio purchased the Highland Lake property in or around 1995 for about $200,000 with a $25,000 downpayment. Petitioner paid $12,500 of the downpayment. According to petitioner, Ms. Anastasio acquired the Highland Lake property in her name because petitioner, 2 an African American, was not “able to purchase this property *** in this town.” The Highland Lake property is a 22-room Victorian style house with a wraparound porch, which petitioner and Ms. Anastasio renovated. They purchased it because they planned to operate a bed and breakfast out of the house. But they sometimes rented it out. <br /><br />A first mortgage on the Highland Lake property of about $100,000 was held by First National Bank of Jeffersonville (FNB), and a second mortgage of about $100,000 was held by the seller of the Highland Lake property. Petitioner and Ms. Anastasio each made mortgage payments of $788.62 3 per month until Ms. Anastasio became ill in 2000 and could not work. Thereafter, petitioner paid both mortgages. <br /><br />Petitioner used both properties to store her collectibles. B. Collectibles Kept at the Highland Lake and Hillside Properties <br /><br />1. Stamps, Coins, and Currency Sheets Petitioner has been collecting stamps and coins for over 50 years. As a young child she started collecting stamps and Lincoln wheat pennies, Indian head pennies, and buffalo nickels. In her teen years she started buying uncirculated and proof coins from the Mint. In her twenties she started buying coins and proof coins at coin shows and from coin shops. She usually purchased stamps at trade shows or stamp shops. She recorded her purchases in books (inventory records). <br /><br />Petitioner accumulated a large coin collection: she had rolls of coins, unopened bags of Mint nickels and dimes, and uncut currency sheets of various denominations, including a ($777.67 and $799.56 for the first and second mortgage, respectively); $788.62 represents their equal share of both payments. Hawaiian dollar bill. She kept the less valuable coins at her Manhattan apartment and kept the more valuable coins at her Highland Lake and Hillside properties. She stored the coins in closets in plastic containers that were on rollers like toolboxes at her Highland Lake property. At the Hillside property, petitioner stored her coins in a glass curio cabinet and in a glass display cabinet with some stamps on a wall in her library. <br /><br />2. Books <br /><br />Petitioner also collected books for her libraries at the Highland Lake and Hillside properties. She purchased a set of 20 books on financial rating services with yearly updates for her professional library at the Highland Lake property and entire collections of books from auctions for her library at the Hillside property. <br /><br />3. Artwork Petitioner also collected art. Specifically, she owned a 2- by 3-foot painting that depicts Custer's Last Stand at the Battle of the Little Bighorn in 1876 and was signed by the artist. She kept this painting at the Hillside property. <br /><br />C. Falling Out and Thefts <br /><br />Petitioner and Ms. Anastasio's business relationship fragmented and eventually, in or around 2004, petitioner stopped doing business with Ms. Anastasio. <br /><br />Ms. Anastasio filed for bankruptcy and allowed the Highland Lake property to go into foreclosure. Petitioner filed a notice of pendency 4 for the Highland Lake property in Ms. Anastasio's bankruptcy proceeding because Ms. Anastasio allegedly did not comply with the terms of a settlement agreement and because petitioner wanted to protect her interest in the Highland Lake property. Ms. Anastasio sold the Highland Lake property in 2001 or 2002 without petitioner's knowledge. Petitioner did not receive any proceeds from the sale. <br /><br />Petitioner's collectibles allegedly were stolen from the Hillside and Highland Park properties at some point. She discovered the thefts from the Hillside and Highland Park properties in 2004 and 2005, respectively, when she went to the properties and discovered that the items were gone. Neither property had been broken into or forcibly entered. The items were purportedly stolen by an acquaintance of Ms. Anastasio to whom Ms. Anastasio had given the keys to both properties. Petitioner filed police reports in New Jersey for the thefts. 5 <br /><br />D. Deductions Claimed for the Highland Lake and Hillside properties <br /><br />1. Legal Expenses and Bad Debt Deduction Petitioner claimed on her 2004 Schedule E a deduction for legal expenses of $768 for the Highland Lake property. She provided a copy of a settlement agreement and a complaint for another lawsuit that she filed against Ms. Anastasio as substantiation of her legal expenses. The settlement agreement provides in pertinent part that Ms. Anastasio will allow petitioner to remove “clothing, books, shoes, furniture, toys, and other collectibles” from the Highland Lake property. <br /><br />Petitioner concluded that she had suffered a loss for a bad debt in 2004 and 2005 after she had exhausted all legal avenues against Ms. Anastasio. She claimed on her 2004 and 2005 Schedules E deductions for bad debts of $18,926.76 and $18,328.62, respectively, for the Highland Lake property. She reconstructed her mortgage payments from 1996 to 2000 and for each of the years 2004 and 2005 deducted as a bad debt 2 years of mortgage payments as her “basis” in the Highland Lake property. <br /><br />Petitioner provided an account statement from FNB for February 2 to May 1, 1996, to substantiate her basis. The account statement shows that three mortgage payments of $777.67 were drawn from petitioner and Ms. Anastasio's joint account. 2. Theft Loss Deduction Petitioner was not compensated by insurance or otherwise for the thefts of her collectibles, and she deducted the purchase prices of the items as the amounts of her theft losses. <br /><br />Petitioner claimed on her 2004 Schedule A a deduction for theft losses of $12,093 for the Hillside property. Her deduction for the theft loss relates to coins, paintings, antiques, furniture, her library, and appliances. 6 <br /><br />Petitioner claimed on her 2005 Schedule A a deduction for theft losses of $18,525.75 for the Highland Lake property. Her deduction for the theft loss relates to coins, paintings, antiques, furniture, her professional library, and appliances. 7 II. 229 East 29th Street (East 29th Street property), New York, <br /><br />N.Y. <br /><br />A. Background <br /><br />Petitioner, Ms. Anastasio, and another coinvestor purchased the East 29th Street property in 2003. They paid $3,000 and assumed the $21,000 or $27,000 8 debt to which the East 29th Street property was subject. Ms. Anastasio and the other coinvestor purchased the East 29th Street property in their names because, according to petitioner, she was not allowed to purchase that property in her name. The East 29th Street property is a co-op apartment that was occupied by tenants. Petitioner, Ms. Anastasio, and the other coinvestor invested in the East 29th Street property to obtain the benefits of appreciation and tax deductions. Petitioner reported rental income received of $2,304 for 2004 and 2005. <br /><br />B. Deductions Claimed for the East 29th Street Property Petitioner claimed on each of her 2004 and 2005 Schedules E deductions for management fees of $2,652.06 and property taxes of $2,114.31 for the East 29th Street property. The management fees include about $50 per month for maintenance. The property taxes include some special assessments that were billed at the end of each year. She paid $309.01 per month for the management fees, maintenance fees, and property taxes. 9 She made the payments by checks drawn from her account. <br /><br />Petitioner provided carbon copies of checks of $309.01 for November 2004 and May 2005 payable to "229 E. 29th St. Owners Corp.” to substantiate some of her payments. She also provided copies of bank statements for the period November 2003 to November 2004 that show checks of $309.01 were drawn from her account. <br /><br />III. Tighe Avenue (Tighe Ave. property) and Brookside Lots (Brookside property), Newburgh (Newburgh) and Harriman, N.Y. <br /><br />A. Background <br /><br />Petitioner purchased the Tighe Ave. and Brookside properties for investment purposes with the intent to develop them. She purchased the Tighe Ave. property in 2003 for $500 at an auction. The Tighe Ave. property is undeveloped land. She rented the Tighe Ave. property to a person who resided at the Tighe Ave. property in an “RV” trailer or mobile home. The record is unclear as to how and when petitioner acquired the Brookside property. The Brookside property consists of two undeveloped, “buildable”, and nonadjoining lots in a development. Petitioner reported rental income received of $1,000 and $1,015 for 2004 and 2005, respectively. <br /><br />B. Deductions Claimed for the Tighe Ave. and Brookside Properties Petitioner claimed the following deductions for her Tighe Ave. and Brookside properties: <br /><br /> Auto./ Auto. Cleaning<br />Year Travel Ins. Maint. Supplies Mail <br />Rent<br /> 2004 $1,500.00 $816.00 -0- -0- -0- <br />$3,048<br /> 1 <br /> 2005 1,526.01 916.23 $489.62 $525.36 $120.02 <br />3,168<br /> <1><br /> Petitioner explained that her $916.23 deduction for<br /> automobile insurance was erroneously reported as an other<br /> interest expense on Schedule E.<br /> 1. Automobile and Travel Expenses<br />Petitioner kept a car in Newburgh to travel to, from, or between her Tighe Ave. and Brookside properties. Her deductions for automobile insurance, automobile expenses, and travel expenses are based on her actual costs, not mileage. Her actual costs include amounts she paid for automobile insurance, travel to, from, and between her properties with her car; bus fare from her New York apartment to Newburgh, and taxi fare for travel between the Tighe Ave. or Brookside properties and the taxi stand at a Newburgh bus stop. She did not keep a mileage log for the use of her car, and other than her testimony she did not provide any written evidence to substantiate her expenditures. <br /><br />2. Rent Expenses <br /><br />Petitioner deducted payments of $254 per month to Uncle Bob's Storage as rent, of which she paid $52 per month for the storage of her car and $202 per month for the storage of office furniture, filing cabinets, and files. 10 She moved the office furniture, filing cabinets, and files from the Hillside property to the Newburgh area. <br /><br />Petitioner provided copies of account statements for the period November 2003 to November 2004 to substantiate her rent payments. The account statements show that checks of $254 per month were drawn from her account in 2004. <br /><br />3. Cleaning and Maintenance Expenses <br /><br />Petitioner paid $489.62 in cash to a company to cut back and clear the Tighe Ave. property because of downed power lines caused by a storm. <br /><br />4. Supplies and Mail Expenses <br /><br />Petitioner deducted supplies expenses of $525.36 and mail expenses of $120.02 for 2005. The supplies expenses were paid in cash. <br /><br />IV. Other Real Property <br /><br />A. Background <br /><br />Petitioner and a coinvestor also invested in other real property that they later sold. When the property was purchased, it had a factory located on it that contained gold-spinning machines from the 1700s to the 1800s. The gold-spinning machines made gold threads for clothing from spools of gold. Petitioner and the coinvestor agreed that petitioner could remove half of the gold-spinning machines before the sale. The coinvestor, however, locked the property, and petitioner could not remove her half of the gold-spinning machines. Petitioner filed a lawsuit against the coinvestor, and while the lawsuit was pending, the gold-spinning machines disappeared from the property. <br /><br />B. Deductions Claimed for the Other Real Property Petitioner claimed on her 2005 Schedule A a theft loss deduction of $5,000 for the theft of her gold-spinning machines. She testified that her gold-spinning machines were worth a lot of money and that her basis in them was $5,000. She explained that she deducted only $5,000 because she was being conservative, and the fair market value of her gold-spinning machines was uncertain. According to petitioner, the purchase price of the gold-spinning machines was included in the purchase price of the real property, but it might have been separately listed. She filed a police report in New Jersey for the theft, but she was not compensated by insurance or otherwise for the theft. <br /><br />V. Carryover Losses Petitioner reported on Schedules E carryover losses of $1,521.13 11 and $1,521.23 12 for 2004 and 2005, respectively, that would carryover to 2005 and 2006. Respondent disallowed the carryover losses in the notice of deficiency because petitioner had not provided any information to substantiate her expenses. <br /><br />OPINION <br />Deductions are a matter of legislative grace, and taxpayers bear the burden of proving that they are entitled to any 11 $26,521.13 (claimed Schedule E losses) - $25,000 ( sec. 469(i) limitation for individuals). 12 $26,521.23 (claimed Schedule E losses) - $25,000 ( sec. 469(i) limitation for individuals). deductions claimed. 13 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79 [69 AFTR 2d 92-694] (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435 [13 AFTR 1180] (1934). In addition, taxpayers bear the burden of substantiating the amount and purpose of the item Hradesky v. Commissioner, 65 T.C. 87, 90 claimed as a deduction. (1975), affd. per curiam 540 F.2d 821 [38 AFTR 2d 76-5935] (5th Cir. 1976). Taxpayers are also required to maintain records that are sufficient to enable the Commissioner to determine their correct tax liability. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. <br /><br />When taxpayers establish that they have incurred deductible expenses but are unable to substantiate the exact amounts, we can estimate the deductible amounts, but only if the taxpayers present sufficient evidence to establish a rational basis for making the estimates. See Cohan v. Commissioner, 39 F.2d 540, 543-544 [8 AFTR 10552] (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). In estimating the amount allowable, we bear heavily upon the taxpayer whose inexactitude is of his or her own making. See Cohan v. Commissioner, supra at 544. We may not use the Cohan doctrine, however, to estimate expenses covered by section 274(d). See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 [24 AFTR 2d 69-5021] (2d Cir. 1969); sec. 13 <br /><br />Petitioner does not claim or show that sec. 7491(a) applies. Accordingly, she bears the burden of proof. See Rule 142(a). 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). <br /><br />Generally, we find petitioner's testimony and that of her witness, Nelson Abrahante 14 (Mr. Abrahante), honest and credible. They testified credibly as to the investment purpose of many of the deductions claimed on petitioner's returns. For some of those deductions, petitioner recalled the amounts of her expenses. Where petitioner's testimony provided a sufficient basis for the Court to estimate the amounts of her expenditures, we have done so, taking account of her inexactitude where appropriate. Where the original documents were lost, but where petitioner presented credible reconstructions of her expenses, we have allowed the claimed amounts. 15 <br /><br />I. Section 165 and 166 Theft Loss and Bad Debt Deductions Section 165(a) provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated by insurance or otherwise. Section 165(c) limits the loss deduction for individuals to losses incurred in a trade or business, losses incurred in a transaction entered into for profit, and certain other losses including those arising from a theft. Petitioner has the burden of proving that she sustained a loss during the taxable year. <br /><br /> Section 166(a) generally provides that a taxpayer may deduct a debt that become worthless during the taxable year. A bona fide debt is a debt that arises from a debtor-creditor relationship reflecting an enforceable and unconditional obligation to repay a fixed sum of money. Sec. 1.166-1(c), Income Tax Regs. The existence of a bona fide debt is a factual inquiry, and the taxpayer bears the burden of proving that a bona Dixie Dairies Corp. v. Commissioner, 74 T.C. fide debt existed. 476, 493 (1980); Litton Bus. Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973). 15 (...continued) her lawsuits against Ms. Anastasio. <br /><br />A. Highland Lake Property <br /><br />As stated supra, petitioner claimed on her 2004 and 2005 Schedules E deductions for bad debts of $18,926.76 and $18,328.62, respectively, for the Highland Lake property. <br /><br />Respondent asserts that to the extent petitioner has realized a gain or loss on the Highland Lake property, the gain or loss is capital and was incurred upon the disposition of the property in 2001 or 2002, not during either of the years in issue. Therefore, according to respondent, petitioner is not entitled to her deductions for bad debts. <br /><br />Petitioner's testimony on this issue was less than clear. She testified that she had initiated lawsuits against Ms. Anastasio, which she later withdrew, and that ownership of the Highland Lake property was being negotiated as part of a settlement. She also testified, however, that she was occupying the Hillside property and had exchanged her interest in the Highland Lake property for Ms. Anastasio's interest in the Hillside property. But, according to petitioner, Ms. Anastasio breached their settlement agreement; and she initiated another lawsuit against Ms. Anastasio, which she also withdrew. She testified further that Ms. Anastasio sold the Highland Lake property without her knowledge in either 2001 or 2002, and she did not receive any of the proceeds. She explained that she deducted 2 years of mortgage payments as her basis in the Highland Lake property as a bad debt in 2004 and 2005 after she exhausted her legal remedies and concluded that she had sustained a loss. <br /><br />Petitioner has not established that a debt owed to her by Ms. Anastasio became worthless during either year in issue or that she otherwise sustained a loss during either year with respect to the Highland Lake property. Petitioner's testimony on this issue and her records are confused, uncertain, and ambiguous. She has not substantiated a basis in the Highland Lake property or in a purported debt owed to her by Ms. Anastasio. See secs. 165(b), 166(b); Whitaker v. Commissioner, T.C. Memo. 1988-418 [¶88,418 PH Memo TC]. Consequently, respondent's disallowance of the bad debt deductions claimed in respect of the Highland Lake property is sustained. <br /><br />B. Antiques, Artwork, Coins and Currency Sheets, Libraries, <br /><br />Gold-Spinning Machines, Furniture, and Appliances As stated supra, petitioner claimed deductions for theft losses of $12,093 and $23,525.75 16 for 2004 and 2005, respectively. She deducted her bases and not the fair market values of her artwork, coins and currency sheets, libraries, gold-spinning machines, furniture, and appliances as the amount of her theft losses. <br /><br />Petitioner has not substantiated the items' fair market values immediately before the alleged theft. See secs. 1.165- 7(b)(1), 1.165-8(c), Income Tax Regs. (in the case of property held for personal use the amount of the theft loss is the lesser of the property's fair market value immediately before the theft or its adjusted basis). She also has not substantiated the See Hubert Enters., Inc. v. Commissioner, T.C. items' bases. Memo. 2008-46 (the basis of property, under section 1012, is generally defined as cost and that cost is adjusted pursuant to section 1016); see also Kikalos v. Commissioner, T.C. Memo. 1998-92 [1998 RIA TC Memo ¶98,092] (it is settled that the deductible amount of a theft loss may not exceed basis), revd. on other grounds 190 F.3d 791 [84 AFTR 2d 99-5933] (7th Cir. 1999). Neither the items' fair market values nor their bases can be determined from the record with any degree of certainty. Therefore, we cannot apply the Cohan rule to determine a reasonable allowance for the theft losses. Consequently, petitioner is not entitled to her claimed theft losses, and respondent's determinations in that respect are sustained. <br /><br />II. Section 212 Expenses Section 212 allows an individual to deduct all of the ordinary and necessary expenses paid or incurred: (1) For the production of income; (2) for management, conservation, or maintenance of property held for the production of income; or <br /><br />(3) in connection with the determination, collection, or refund of a tax. <br /><br />A. Legal Expenses <br /><br />We apply the origin of the claim test to determine whether a taxpayer's legal expenses are personal, for the production of income, or capital. The ascertainment of a claim's origin and character is a factual determination that must be made on the basis of the facts and circumstances of the litigation. United States v. Gilmore, 372 U.S. 39, 47-49 [11 AFTR 2d 758] (1963). The most important factor to consider is the circumstances out of which the litigation arose. Boagni v. Commissioner, 59 T.C. 708 (1973). <br /><br />Petitioner testified that she initiated the lawsuit against Ms. Anastasio because Ms. Anastasio breached a settlement agreement allowing petitioner to remove “clothing, books, shoes, furniture, toys, and other collectibles” from the Highland Lake property. <br /><br />Petitioner has not established that her claim against Ms. Anastasio, out of which her legal expenses arose, has its origin in a profit-seeking activity as distinct from a personal one. Petitioner, therefore, is not entitled to her claimed deductions for legal expenses, and respondent's determination, in that respect, is sustained. <br /><br />B. Management Fees and Property Taxes <br /><br />Petitioner credibly testified about the amounts of and the purposes for her deductions for management fees and property taxes for 2004 and 2005 for the 229 East 29th Street property. She also provided additional substantiation for some of her 2004 payments with copies of her account statements and carbon copies of checks. Petitioner is entitled to her claimed deductions for management fees of $2,652.06 and property taxes of $2,114.31 for 2004 and 2005. <br /><br />C. Cleaning and Maintenance Expenses <br /><br />Petitioner credibly testified that she paid $489.62 in 2005 to a company to cut back and clear the Tighe Ave. property because of downed power lines caused by a storm. Petitioner is entitled to her claimed deduction for cleaning and maintenance expenses of $489.62 for 2005. <br /><br />D. Supplies and Mail Expenses <br /><br />Petitioner credibly testified that she paid $525.36 for supplies expenses and $120.02 for mail expenses in 2005 for the Tighe Ave and Brookside properties. Petitioner is entitled to her claimed deductions for supplies and mail expenses. <br /><br />E. Rent Expenses <br /><br />Petitioner credibly testified that she paid about $202 per month in 2004 and 2005 for the cost of storing office furniture, filing cabinets, and files (we discuss the storage of her car infra). She also provided additional substantiation for some of her 2004 payments with copies of her account statements. Petitioner is entitled to deductions of $202 per month for rent expenses for 2004 and 2005. 17 <br /><br />III. Section 212 Expenses Subject to Section 274 <br /><br />In addition to satisfying the criteria for deductibility under section 212, certain expenses must also satisfy the strict substantiation requirements of section 274(d). Section 274(d) and , section 1.274-5T(a), (b)(2), and (6), Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985), provide that no deduction or credit shall be allowed for travel or automobile expenses unless the taxpayer substantiates his or her expenses with adequate records or other corroborating evidence. <br /><br /> A. Travel Expenses<br />For travel away from home expenses, section 274(d) and the regulations thereunder require the taxpayer to substantiate: (1) The amount of each expenditure; (2) the time of the travel; <br /><br />(3) the place of the travel; and (4) the business purpose of the travel. Sec. 1.274-5T (b)(2), Temporary Income Tax Regs., supra. <br /><br />As stated supra, petitioner's travel expenses include her actual costs of travel by taxi between her properties and a taxi stand and travel by bus to Newburgh. It is unclear from the record whether petitioner's travel to Newburgh was travel away 17 <br /><br />See supra note 10. from home—that is, overnight trips in which the exigencies of her investment activity required her to sleep or rest before returning home. See United States v. Correll, 389 U.S. 299 [20 AFTR 2d 5845] (1967); Lackey v. Commissioner, T.C. Memo. 1977-213 [¶77,213 PH Memo TC]; see also I.T. 3395, 1940-2 C.B. 64. To the extent, however, that petitioner's travel was travel away from home, she has not complied with the substantiation requirements of section 274(d). Petitioner is not entitled to deduct her travel expenses under section 212, and respondent's determination, in that respect, is sustained. See Lackey v. Commissioner, supra. <br /><br />B. Automobile Expenses <br /><br />For automobile expenses, section 274(d) and the regulations thereunder require the taxpayer to substantiate: (1) The amount of each expenditure or use; (2) the time of the expenditure or use; and (3) the business or investment purpose of the expense or use. See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., supra. <br /><br />As stated supra, petitioner's automobile expenses include her actual costs for automobile insurance, travel with her car to, from, or between her properties, and $52 per month for the storage cost of her car. <br /><br />Other than the $52 per month petitioner paid for the storage of her car, she did not substantiate the amounts of her expenditures. She also did not substantiate the amounts or the times of the automobile's use. Consequently, petitioner is not entitled to her deductions for automobile expenses or the deductions claimed for storage costs attributable to her car. The Cohan rule is not applicable, see Sanford v. Commissioner, 50 T.C. at 827, and respondent's determinations, in that respect, are sustained. <br /><br />IV. Carryover Losses As stated supra, petitioner reported on Schedules E losses of $1,521.13 and $1,521.23 for 2004 and 2005, respectively, that would carry over to 2005 and 2006. <br /><br />The section 469 passive activity loss rules generally disallow the current deduction of losses and credits from activities in which the taxpayer does not materially participate. Rental activity is generally treated as a per se passive activity regardless of whether the taxpayer materially participates. Sec. 469(c)(2). Section 469(i)(1), however, permits a passive activity loss up to $25,000 attributable to a rental real estate activity in which an individual actively participates (subject to certain phaseouts not applicable here). Amounts disallowed may be carried forward to subsequent years. Sec. 469(b); sec. 1.469-1(f)(4), Income Tax Regs. <br /><br />Petitioner reported on Schedules E rental income totaling $3,304 and $3,319 for 2004 and 2005, respectively. We have allowed petitioner Schedule E deductions of $7,190.37 18 and $8,325.37 19 for 2004 and 2005, respectively, which result in losses of only $3,886.37 20 and $5,006.37 21 for 2004 and 2005, respectively. Petitioner, therefore, does not have any carryover loss for either year. <br /><br />V. Section 6662(a) Accuracy-Related Penalties Section 7491(c) provides that the Commissioner will bear the burden of production with respect to the liability of any individual for additions to tax and penalties. The Commissioner's burden of production under section 7491(c) is to produce evidence that it is appropriate to impose the relevant penalty, addition to tax, or additional amount. Higbee v. Commissioner, 116 T.C. 438, 446 (2001); see also Swain v. Commissioner, 118 T.C. 358, 363 (2002). Once the Commissioner satisfies this burden of production, the taxpayer must persuade the Court that the Commissioner's determination is in error by 18 $2,652.06 (management fees) + $2,114.31 (property tax) + $2,424 (rent expense). 19 $2,652.06 (management fees) + $489.62 (cleaning and maintenance expense) + $525.36 (supplies expense) + $120.02 (mail expense) + $2,114.31 (property tax) + $2,424 (rent expense). 20 $3,304 (total rental income) - $7,190.37 (total rental expenses). 21 $3,319 (total rental income) - $8,325.37 (total rental expenses). supplying sufficient evidence of an applicable exception. Higbee v. Commissioner, supra at 446. <br /><br />Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be liable for a penalty of 20 percent on the portion of an underpayment of tax due to negligence or disregard of rules or regulations or a substantial understatement of income tax. 22 The term “negligence” includes any failure to make a reasonable attempt to comply with the Code and any failure to keep adequate books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. <br /><br />Petitioner failed to provide respondent with any records and was unable to substantiate her deductions at the administrative level. Accordingly, respondent has met his burden of production. See sec. 1.6662-3(b)(1), Income Tax Regs.; see also Smith v. Commissioner, T.C. Memo. 1998-33 [1998 RIA TC Memo ¶98,033]. <br /><br />The accuracy-related penalty, however, is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable cause and in good faith. Sec. 6664(c)(1). The decision as to whether the taxpayer acted with reasonable cause and in good faith depends upon all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most important factor is the extent of the taxpayer's effort to assess his or her proper tax liability. Id. Petitioner argues she has shown reasonable cause or good faith on account of her medical illness and/or lost or stolen records. <br /><br />Although we sympathize with petitioner's circumstances (i.e., her alleged illnesses), we are reluctant to rely on her self-serving and uncorroborated testimony about her illness. Moreover, she continued to work for the IRS and to participate in her investment activity during the years in issue. Consequently, petitioner's illness does not support a reasonable cause or good faith defense. <br /><br />In certain circumstances, however, the loss or theft of a taxpayer's records may support a reasonable cause or good faith defense to an accuracy-related penalty. See Allemeier v. Commissioner, T.C. Memo. 2005-207 [TC Memo 2005-207]; Brown v. Commissioner, T.C. Memo. 1997-418 [1997 RIA TC Memo ¶97,418]; Burkart v. Commissioner, T.C. Memo. 1984-429 [¶84,429 PH Memo TC]; Cavell v. Commissioner, T.C. Memo. 1980-516 [¶80,516 PH Memo TC]. <br /><br />As stated supra, petitioner claimed deductions for bad debts and legal expenses for the Highland Lake property that she was not able to substantiate. Petitioner credibly testified that she maintained records, but that Ms. Anastasio took some of the records, some records were submitted to other courts in her lawsuits against Ms. Anastasio, and in either case, petitioner was unable to retrieve the records. She also attempted to reconstruct her records for the Highland Lake property. We find that petitioner has a reasonable cause or good faith defense for the portions of the underpayments attributable to her claimed deductions for bad debts and legal expenses attributable to the See Irving v. Commissioner, T.C. Memo. Highland Lake property. 2006-169; Lyons v. Commissioner, T.C. Memo. 1991-84 [¶91,084 PH Memo TC]; Haley v. Commissioner, T.C. Memo. 1977-348 [¶77,348 PH Memo TC]. <br /><br />Petitioner's claimed deductions for theft losses related to coins and uncut currency sheets, paintings, antiques, furniture, her libraries, appliances, and the gold-spinning machines. She credibly testified that she maintained records of her purchases of her coins and uncut currency sheets and that her inventory records were stolen with her coin collections and uncut currency sheets. It is unclear from the evidence, however, whether she maintained records of her purchases for the other stolen items. The evidence also provides no mechanism for allocating the amounts of her theft losses among the stolen items. 23 In addition, she did not attempt to reconstruct the records of her purchases for any of the stolen items. Consequently, petitioner does not have a reasonable cause or good faith defense for the portions of the underpayments attributable to her claimed deductions for theft losses. See Kolbeck v. Commissioner, T.C. Memo. 2005-253 [TC Memo 2005-253]; Cherry v. Commissioner, T.C. Memo. 1998-360 [1998 RIA TC Memo ¶98,360]; Smith v. Commissioner, supra; Cook v. Commissioner, T.C. Memo. 1991-590 [1991 TC Memo ¶91,590]. <br /><br />Similarly, there is no evidence that petitioner maintained records during the years in issue sufficient to meet the strict substantiation requirements of section 274(d) for travel and automobile expenses. Moreover, even if such records existed, there is no evidence that those records were lost or stolen. And except for the amounts of her parking expenses, she did not attempt to reconstruct those records. Consequently, petitioner does not have a reasonable cause or good faith defense for the portions of the underpayments attributable to her claimed deductions for travel and automobile expenses. See Makspringer v. Commissioner, T.C. Memo. 1994-468 [1994 RIA TC Memo ¶94,468]; Robbins v. Commissioner, T.C. Memo. 1981-449 [¶81,449 PH Memo TC]. <br /><br />In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit. <br /><br />To reflect the foregoing, Decision will be entered under Rule 155. <br /><br /><br />--------------------------------------------------------------------------------<br />1<br /><br /> Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. <br />--------------------------------------------------------------------------------<br />2<br /><br /> Petitioner has purchased several properties in her name or in a coinvestor's name. <br />--------------------------------------------------------------------------------<br />3<br /><br /> The mortgage payments amounted to $1,577.23 per month <br />--------------------------------------------------------------------------------<br />4<br /><br /> A notice of pendency informs others about a lawsuit affecting the title to or an interest in property. See, e.g., Debral Realty, Inc. v. DiChiara, 420 N.E.2d 343 (Mass. 1981). <br />--------------------------------------------------------------------------------<br />5<br /><br /> Petitioner testified that she filed police reports in New Jersey because the New York police would not allow her to file police reports since the alleged perpetrators resided in New Jersey. <br />--------------------------------------------------------------------------------<br />6<br /><br /> Petitioner's testimony about the items stolen in each theft loss was less than clear. <br />--------------------------------------------------------------------------------<br />7<br /><br /> Petitioner did not describe the antiques, furniture, appliances, and paintings. <br />--------------------------------------------------------------------------------<br />8<br /><br /> Petitioner could not recall the exact amount of the debt. <br />--------------------------------------------------------------------------------<br />9<br /><br /> Ms. Anastasio and/or the other coinvestor gave petitioner their portions of the expenses, and petitioner paid the payments in whole. The $309.01 per month did not include amounts paid for additional amounts owed at the end of each year, including amounts paid for special assessments. <br />--------------------------------------------------------------------------------<br />10<br /><br /> Petitioner's rent expense increased by $120 in 2005. It is unclear from the record how much, if any, of the $120 is attributable to the storage of her car. <br />--------------------------------------------------------------------------------<br />11<br /><br /> <br />--------------------------------------------------------------------------------<br />12<br /><br /> <br />--------------------------------------------------------------------------------<br />11<br /><br /> <br />--------------------------------------------------------------------------------<br />12<br /><br /> <br />--------------------------------------------------------------------------------<br />13<br /><br /> <br />--------------------------------------------------------------------------------<br />14<br /><br /> Mr. Abrahante is a coinvestor and a former coworker of petitioner. <br />--------------------------------------------------------------------------------<br />15<br /><br /> It is well established that the Court may permit a taxpayer to substantiate deductions through secondary evidence where the underlying documents have been unintentionally lost or destroyed. Boyd v. Commissioner, 122 T.C. 305, 320-321 (2004); Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); Furnish v. Commissioner, T.C. Memo. 2001-286 [TC Memo 2001-286]; Joseph v. Commissioner, T.C. Memo. 1997-447 [1997 RIA TC Memo ¶97,447]; Watson v. Commissioner, T.C. Memo. 1988-29 [¶88,029 PH Memo TC]. Moreover, even though Congress imposed heightened substantiation requirements for certain deductions by enacting sec. 274, the regulations thereunder allow a taxpayer to substantiate a deduction by reasonable reconstruction of his or her expenditures when records are lost through no fault of the taxpayer. Sec. 1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985). <br /><br />Petitioner testified that Ms. Anastasio took some of her records and that other records were submitted to other courts in <br />--------------------------------------------------------------------------------<br />15<br /><br /> <br />--------------------------------------------------------------------------------<br />16<br /><br /> As stated supra, $18,525.75 is attributable to the theft of her coins, paintings, antiques, furniture, her professional library, and appliances, while $5,000 is attributable to the theft of her gold-spinning machines. <br />--------------------------------------------------------------------------------<br />17<br /><br /> <br />--------------------------------------------------------------------------------<br />17<br /><br /> <br />--------------------------------------------------------------------------------<br />18<br /><br /> <br />--------------------------------------------------------------------------------<br />19<br /><br /> <br />--------------------------------------------------------------------------------<br />20<br /><br /> <br />--------------------------------------------------------------------------------<br />21<br /><br /> <br />--------------------------------------------------------------------------------<br />18<br /><br /> <br />--------------------------------------------------------------------------------<br />19<br /><br /> <br />--------------------------------------------------------------------------------<br />20<br /><br /> <br />--------------------------------------------------------------------------------<br />21<br /><br /> <br />--------------------------------------------------------------------------------<br />22<br /><br /> Because we find that petitioner was negligent, we need not discuss whether she substantially understated her Federal income taxes. See sec. 6662(b); Ochsner v. Commissioner, T.C. Memo. 2010-122 [TC Memo 2010-122]; Fields v. Commissioner, T.C. Memo. 2008-207 [TC Memo 2008-207]. <br />--------------------------------------------------------------------------------<br />23<br /><br /> On her 2004 Schedule A, petitioner only wrote “Orange Co. The”, and on her 2005 Form 4684, Casualties and Thefts, petitioner only wrote “Su-Berryvil Prop.” <br /> © 2010 Thomson Reuters/RIA. All rights reserved.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com1tag:blogger.com,1999:blog-1828490773850268894.post-3271021758872841922010-08-27T01:03:00.000-04:002010-08-27T01:04:30.401-04:00reasonable cause and substantial authorityNPR INVESTMENTS, LLC v. U.S., Cite as 106 AFTR 2d 2010-XXXX, 08/10/2010 <br />Code Sec(s): <br />Court Name: IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS TEXARKANA DIVISION, <br />Docket No.: CV 5:05-CV-219-TJW,<br />Date Decided: 08/10/2010.<br />Disposition: <br />B. The Accuracy Related Penalties<br /> There are two accuracy-related penalties asserted by the Government that are still in dispute in this case: 9 a 20% penalty for substantial understatement of income tax under Section 6662(b)(2) and (d) and a 20% penalty for negligence or disregard of rules and regulations under Section 6662(b)(1). The Court now addresses the applicability of the penalties. <br />1. Substantial Understatement of Income Tax<br />In the August 15, 2005 FPAA, the IRS imposed a penalty for substantial understatement of income tax. The Court now turns to this penalty. <br />a. Legal Principles<br /> Section 6662(b) imposes a 20% penalty to “[a]ny substantial understatement of income tax.” 26 U.S.C. § 6662(a), (b)(2). “For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of (i) 10 percent of the tax required to be shown on the return for the taxable year, or (ii) $5,000.” 26 U.S.C. § 6662(d)(1)(A). The amount of the substantial understatement used to compute the penalty does not include any item for which there was substantial supporting authority. 26 U.S.C. § 6662(d)(2)(B)(i); Treas. Reg. § 16662-4(a). <br />“The substantial authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts. The substantial authority standard is less stringent than the more likely than not standard (the standard that is met when there is a greater than 50-percent likelihood of the position being upheld), but more stringent than the reasonable basis standard.” Treas. Reg. § 1.6662-4(d)(2). For substantial authority to exist, “the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.” Treas. Reg. § 1.6662-4(d)(3)(i). Opinions rendered by tax professionals are not authority. Treas. Reg. § 1.6662-4(d)(3)(iii). The authorities underlying such opinions, if applicable to the facts of a particular case, may give rise to substantial authority for the tax treatment of an item.Id. In addition, in a case involving a tax shelter, the “substantial authority” exception does not apply unless the “taxpayer reasonably believed that the tax treatment of such item by the taxpayer was more likely than not the proper treatment.” 26 U.S.C. § 6662(d)(2)(C)(i)(II). 10 A “tax shelter” includes, among other things, a partnership or an investment plan “if a significant purpose of such ... is the avoidance or evasion of Federal income tax.” 26 U.S.C. § 6662(d)(2)(C)(iii). <br />c. Analysis<br />This Court may assume, arguendo, that the NPR partnership was a tax shelter within the definition. The record, however, supports a finding that substantial authority existed. The Taxpayers obtained comprehensive opinions of counsel before they filed their returns. The Sidley Austin opinions relied on the relevant authority at the time. Cohen went over the opinions with the Taxpayers and confirmed that they were reasonable. Further, Mr. Stuart Smith (“Smith”) provided expert opinion and testimony that substantial authority supported the tax treatment at issue in this case. Smith's experience includes over 40 years as a tax lawyer, both as Tax Assistant to the Solicitor General in the Department of Justice and now in private practice. (Tr. II at 60–61.) After examining the material issues identified in the opinions, Smith concluded that the opinions provided “objectively reasonable tax advice” because they “discussed all of the authorities in an even-handed balanced way, taking into account all possible challenges in a thorough and complete manner.” (Tr. II at 77.) He further concluded that the opinions were the “quality and character upon which a taxpayer could rely in good faith.” (Id.) The Court agrees with Smith's opinions and concludes that the Sidley Austin opinions provided “substantial authority” for the Taxpayers' treatment of their basis in their respective partnerships. The record also supports a finding that the Taxpayers reasonably believed that the tax treatment applied to the transactions was “more likely than not” the proper treatment. Although they are experienced attorneys, the Taxpayers are not tax lawyers. Based on all of the record evidence, the Court finds that the Taxpayers were not aware of any financial agreements between Cohen and DGI when they decided to enter the transactions and when they filed their returns. (Tr. II at 8–9.) The Taxpayers believed that Cohen was properly discharging his duties as their fiduciary. The Taxpayers sought advice from Cohen before deciding to enter these transactions and relied heavily upon his advice. The Taxpayers sought to make a profit from the investment plan when they entered the pertinent transactions, even if NPR did not. Accordingly, the Court finds that the substantial understatement penalty does not apply. <br />2. Negligence<br />In the August 15, 2005 FPAA, the IRS also imposed a penalty for negligence. The Court now turns to this penalty. <br />a. Legal Principles<br />The 20% negligence penalty applies to the extent that an understatement of the tax was attributable to the taxpayer's “negligence or disregard of rules or regulations.” 26 U.S.C. § 6662(b)(1). “For purposes of this section, the term “negligence” includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard” of the tax laws. 26 U.S.C. § 6662(c). Negligence includes the “failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.” Treas. Reg. § 1.6662-3(b)(1). “Negligence is strongly indicated where ... [a] taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion on a return which would seem to a reasonable and prudent person to be “too good to be true” under the circumstances.” Treas. Reg. § 1.6662-3(b)(1)(ii). Disregard for the “rules or regulations is “careless” if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation.” Treas. Reg. § 1.6662-3(b)(2). The Fifth Circuit defines negligence as “any failure to reasonably attempt to comply with the tax code, including the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances.” Heasley v. Comm'r, 902 F.2d 380, 383 [66 AFTR 2d 90-5068] (5th Cir. 1990). <br />A taxpayer is not negligent where there is a reasonable basis for the position taken. Treas. Reg. § 1.6662-3(b)(1). “Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.” Treas. Reg. § 1.6662-3(b)(3). Reasonable basis requires reliance on legal authorities and not on opinions rendered by tax professionals. Id.; Treas. Reg. § 1.6662-4(d)(3)(iii). The Court may, however, examine the authorities relied upon in a tax opinion to determine if a reasonable basis exists. See Treas. Reg. § 1.6662-4(d)(3)(iii). “If a return position is reasonably based on one or more of the authorities set forth in [the substantial authority section] ... the return position will generally satisfy the reasonable basis standard even though it may not satisfy the substantial authority standard as defined in § 1.6662-4(d)(2).” Treas. Reg. § 1.6662-3(b)(3). <br />c. Analysis<br />The reasonable basis standard is less stringent than the substantial authority standard; if the substantial authority defense is applicable to the substantial understatement penalty, the reasonable cause defense will also be applicable.See Treas. Reg. § 1.6662-4(d)(2); Treas. Reg. § 1.6662-3(b)(3). As discussed above, the Court finds that there was “substantial authority” to rely on the Sidley Austin opinions. Id. Therefore, the “reasonable basis” standard has also been met. Accordingly, a penalty for negligence is not applicable in this case. <br />C. Reasonable Cause and Good Faith Defense<br />Finally, the Court turns to the reasonable cause and good faith issues. Notwithstanding the specific requirements of the penalties discussed above, a taxpayer may defeat the imposition of any of those penalties if he demonstrates reasonable cause. <br />1. Legal Principles<br /> Section 6664(c)(1) provides an absolute defense to any accuracy-related penalty. A taxpayer that would otherwise be subject to a twenty-percent accuracy-related penalty under § 6662(b) is not liable if the taxpayer can demonstrate that the underpayment was made with reasonable cause and the taxpayer acted in good faith. 26 U.S.C. 6664(c)(1); Treas. Reg. § 1.6664-4(a). The plaintiffs bear the burden of production and proof on their reasonable cause defenses. Klamath Strategic Investment Fund v. U.S., 568 F.3d 537, 548 [103 AFTR 2d 2009-2220] (5th Cir. 2009); see Montgomery v. Commissioner, 127 T.C. 43, 66 (2006). Although each instance requires a case-by-case determination of all pertinent facts and circumstances, generally the most important factor in assessing the applicability of the exception is the amount of effort the taxpayer spent to determine the proper tax liability in light of all the circumstances. Treas. Reg. § 1.6664-4(b). When considering the taxpayer's effort to determine the proper tax liability, the taxpayer's reliance on the advice of a professional tax adviser may not be sufficient to demonstrate reasonable cause and good faith. Treas. Reg. § 1.6664-4(b)(1). Rather, the validity of the reliance turns on “the quality and objectivity of the professional advice which they obtained.” Klamath, 568 F.3d at 548, citing Swayze v. U.S., 785 F.2d 715, 719 [57 AFTR 2d 86-1050] (9th Cir. 1986). “Reliance on ... professional advice, or other facts, however, constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.” Treas. Reg. § 1.6664-4(b)(1). To determine if reliance on a tax professional's advice was reasonable and in good faith, all facts and circumstances must be taken into account. Treas. Reg. § 1.6664-4(c). “For example, the taxpayer's education, sophistication and business experience will be relevant in determining whether the taxpayer's reliance on tax advice was reasonable and made in good faith.” Id. “Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances, including the experience, knowledge, and education of the taxpayer.” Treas. Reg. § 1.6664-4(b)(1). A taxpayer is not required to challenge the advisor's conclusions, seek a second opinion, or check the advice himself. U.S. v. Boyle, 469 U.S. 241, 250–51 [55 AFTR 2d 85-1535] (1985). “To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.” Id. at 251. <br />In order to establish reasonable reliance in good faith on the advice of a tax professional, a taxpayer must establish that all facts and circumstances were considered, and no unreasonable assumptions were made. Treas. Reg. § 1.6664-4(c)(1)(i)–(ii). For the advice to be based on “[a]ll the facts and circumstances,” it must include all pertinent facts and circumstances, including “the taxpayer's purposes (and the relative weight of such purposes) for entering into a transaction and for structuring a transaction in a particular manner.” Treas. Reg. § 1.6664-4(c)(1)(i). Additionally, “[t]he advice must not be based on unreasonable factual or legal assumptions (including assumptions as to future events) and must not unreasonably rely on the representations, statements, findings, or agreements of the taxpayer or any other person.” Treas. Reg. § 1.6664-4(c)(1)(ii). “The fact that these requirements are satisfied, however, will not necessarily establish that the taxpayer reasonably relied on the advice (including the opinion of a tax advisor) in good faith.” Treas. Reg. § 1.6664-4(c)(1). <br />. <br /> <br />In short, the Taxpayers acted reasonably and in good faith in relying on their tax advisors' advice with respect to their investments in the underlying transactions. As aptly stated by Mr. Nix at trial, “at every step, we followed the advice of people we relied on, people who were supposed to have known what they were doing and did know what they were doing. And what else could we have done except follow their advice?” (Tr. II at 32–33.) The Court finds that the Taxpayers have proven, by a preponderance of the evidence, their good faith in relying on the advice of qualified tax accountants and tax lawyers. Accordingly, the criteria under the reasonable cause exception of 26 U.S.C. § 6664(c) is satisfied, and the Taxpayers are not liable for accuracy-related penalties.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-62201981428809010482010-08-23T08:17:00.001-04:002010-08-23T08:17:53.581-04:00LEEDS LP v. U.S., Cite as 106 AFTR 2d 2010-XXXX, 08/05/2010 <br />________________________________________<br />LEEDS LP, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. <br />Case Information: <br />Code Sec(s): <br />Court Name: UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA, <br />Docket No.: Case No. 08cv100 BTM (BLM),<br />Date Decided: 08/05/2010.<br />Disposition: <br />HEADNOTE <br />. <br />Reference(s): <br />OPINION <br />UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA, <br />ORDER RE CROSS-MOTIONS FOR SUMMARY JUDGMENT AND MOTION TO AMEND COMPLAINT<br />Judge: Honorable Barry Ted Moskowitz United States District Judge <br />Plaintiff and Defendant have each filed motions for summary judgment on a variety of claims [Docs. 58, 59]. Also pending is Plaintiff's motion to file a Second Amended Complaint [Doc. 74]. For the following reasons, the Court GRANTS the United States's motion for summary judgment and DENIES Plaintiff's motion for summary judgment. The Court DENIES Plaintiff's motion to file a Second Amended Complaint as moot. <br />I. BACKGROUND<br />This is a quiet-title suit challenging tax liens placed by the United States on real property at 3207 McCall Street, San Diego, CA 92106 (the “McCall Property”). The Internal Revenue Service (“IRS”) placed liens on the property because Don and Susanne Ballantyne, who owe the IRS substantial income taxes, are allegedly its true owners. Plaintiff contends that it is the only owner and that the Ballantynes have no interest in it. This is the core dispute in this case. <br />1. The IRS Files Tax Liens Against Don and Susanne Ballantyne<br />Don and Susanne Ballantyne owe income taxes to the IRS. Although they owe income taxes for several tax years, the tax years for which they owe the most money are 1985 and 1986. They filed a petition with the United States Tax Court challenging notices of income tax deficiency sent by the IRS for those two years. The court held a trial in May 1995, and on October 10, 1996, the court filed an opinion stating the Ballantynes owed deficiencies of $388,937.00 for 1985, and $931,970.00 for 1986. On appeal, the Ninth Circuit affirmed the judgment of the Tax Court. <br />After trial, on June 30, 1997 the IRS made assessments against the Ballantynes for those two years in the amounts of $388,937.00 (1985) and $931,970 (1986). Notice and demand for payment was made on the same day. 1 The IRS has made other assessments against the Ballantynes: one on January 2, 1995 for $25,164.00, plus interest (1990 tax year) and the other on November 16, 1998 for $11,515.00, plus interest (1997 tax year). <br />On November 14, 1997, the IRS recorded with the San Diego County Recorder's office a Notice of Federal Tax Lien in the amount of $5,539,789.51 against the Ballantynes for tax years 1985 ($1,743,607.49) and 1986 ($3,796,182.02). Several years later, on July 17, 2006, the IRS recorded another Notice of Federal Tax Lien against the McCall Property in the amount of $5,212,494.62, identifying Plaintiff Leeds as the nominee/alter ego of Susanne C. Ballantyne. Plaintiff has now filed this quiet-title action to remove the lien. <br />2. History of the McCall Property and Its Owners<br />Susanne Ballantyne's parents built the McCall Property around 1929 and they raised her there. The Property was owned by the Susan T. Cramer Trust (“STC Trust”), named after Ms. Ballantyne's mother. After her parents died, Ms. Ballantyne and her brother became the co-beneficiaries of the STC Trust. Her brother took his apportioned distribution of the STC Trust in 1979, leaving Ms. Ballantyne as its only trustee and beneficiary. The STC Trust still owned the McCall Property at that time. <br />In 1987, Susanne Ballantyne formed an intervivos trust, of which she was the sole settlor, trustee and beneficiary, called the Susanne C. Ballantyne Trust, and she placed the entire corpus of her mother's trust, including the McCall Property, into it. Then, on June 21, 1995, the STC Trust transferred legal title to the McCall Property to Leeds LP (the Plaintiff here) in exchange for a 99% limited partnership interest in Leeds. The STC Trust later transferred its 99% interest in Leeds to the Susanne C. Ballantyne Trust in July 1995. Leeds still holds legal title to the McCall Property. <br />Leeds was created in May 1995 by its 1% general partner, B&B Business Services, Inc. Soon thereafter, in June 1995 B&B withdrew as the general partner, and was replaced by Rhodes Investment Corporation. Rhodes is still the 1% general partner of Leeds. Rhodes itself was owned by the Susanne C. Ballantyne Trust; the trust was Rhodes's sole shareholder. And Susanne Ballantyne was Rhodes's president, secretary-treasurer, and director. Clark L. Ballantyne, her son, later took over her roles in Rhodes on November 26, 1997, a month after the Susanne C. Ballantyne Trust sold its interest in Rhodes to the Children's Trusts (defined infra). <br />To summarize the McCall Property's history up until this point, it was originally owned by Susanne Ballantyne's mother's trust, the STC Trust. The STC Trust was later placed in the Susanne C. Ballantyne Trust. The STC Trust then sold the property to Leeds, whose general partner was Rhodes. And Rhodes was owned by the Susanne C. Ballantyne Trust, and operated by Susanne Ballantyne herself. So, in effect, Susanne Ballantyne indirectly owned entities on both sides of the transaction: she indirectly owned the STC Trust, which sold the property, and also indirectly owned Leeds LP, which bought the property. <br />This complicated history continues. In January 1996, a limited partnership called Hemet C bought a 1% limited partnership interest in Leeds. About a year later, the Susanne C. Ballantine Trust transferred the remaining 98% limited partnership interest in Leeds to Hemet C. So, as of February 1997, Hemet C owned about 99% of Leeds as the limited partner, and Rhodes about 1% as general partner. <br />But who owns Hemet C? Hemet C is a limited partnership. Its 99% limited partners are trusts named after Don and Susanne Ballantyne's children, the Clark Lindsay Ballantyne Trust and the Laura Ballantyne Trust (collectively “Children's Trusts”). They each hold a 49.5% interest in Hemet C. A company called Snow Valley Holdings, Inc. holds Hemet C's remaining 1% as the general partner. <br />Snow Valley, Hemet C's general partner, is a corporation whose shares are owned by the Children's Trusts. So, the Children's Trusts are the 99% limited partners in Hemet C, and also own its 1% general partner. At the time Snow Valley became the general partner of Hemet C in December 1995, Don and Susanne Ballantyne were among its officers and directors. Don Ballantyne was a vice president and director, and Susanne Ballantyne was the secretary-treasurer and a director. They resigned their positions in November 1997. <br />In summary, when Leeds purchased the McCall Property from the STC Trust, Leeds's 1% general partner was Rhodes (owned by the Susanne C. Ballantyne Trust) and its 99% limited partner was the Susanne C. Ballantyne Trust. Although Rhodes retained its 1% general partnership interest, Hemet C purchased the 99% limited partnership from the Susanne C. Ballantyne Trust. And Hemet C itself is owned by the Children's Trusts (limited partners) and Snow Valley (general partner), which at the time counted Don and Susanne Ballantyne among its officers and directors. <br />II. LEGAL STANDARD<br />Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure if the moving party demonstrates the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute is genuine if a reasonable jury could return a verdict for the nonmoving party.Anderson , 477 U.S. at 248. <br />A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to establish an essential element of the nonmoving party's case on which the nonmoving party bears the burden of proving at trial.Id. at 322–23. “Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment.” T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987). <br />Once the moving party establishes the absence of genuine issues of material fact, the burden shifts to the nonmoving party to set forth facts showing that a genuine issue of disputed fact remains. Celotex, 477 U.S. at 314. The nonmoving party cannot oppose a properly supported summary judgment motion by “rest[ing] on mere allegations or denials of his pleadings.” Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, the court must view all inferences drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). <br />III. DISCUSSION<br />1. The Basis of the United States's Claimed Interest in the Property<br />In this quiet-title action, the Court must resolve the parties' competing claims against the McCall Property. Plaintiff Leeds believes that the lien imposed by the IRS is improper because the IRS seeks assets of the Ballantynes, and the Ballantynes have no interest in Leeds or the McCall Property. The United States claims that Leeds is merely the nominee of the Ballantynes, and that they are its true owners. <br />“A nominee is one who holds bare legal title to property for the benefit of another.” Scoville v. United States, 250 F.3d 1198, 1202 [87 AFTR 2d 2001-2347] (8th Cir. 2001) (citingBlack's Law Dictionary (7th ed. 1999)). “Property held by a nominee is subject to a tax lien attaching to the property of the true owner.” United States v. Beretta, 2008 WL 4862509 [102 AFTR 2d 2008-6955], at 7 (N.D. Cal. 2008) (citingG.M. Leasing Corp. v. United States , 429 U.S. 338, 351 [39 AFTR 2d 77-475] (1977)); see also 26 U.S.C. § 6321 (If a person fails to pay federal tax after a demand, a lien automatically attaches to “all property and rights to property, whether real or personal, belonging to such person.”). Nominee claims require two levels of analysis, one applying state law and the other applying federal law. A court must “look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as “property” or “rights to property” within the compass of the federal tax lien legislation.” United States v. Craft, 535 U.S. 274, 278 [89 AFTR 2d 2002-2005] (2002) (internal quotation marks and citations omitted). <br />In the first step, a court must determine whether a purported true owner of the property has a state-law interest in the property. United States v. Overman, 424 F.2d 1142, 1144 [25 AFTR 2d 70-1024] (9th Cir. 1970). The purported owner must have an interest in the property on or after the date of the assessment.See 26 U.S.C. § 6322; Rice Inv. Co. v. United States, 625 F.2d 565, 568 [46 AFTR 2d 80-5682] (5th Cir. 1980) (citingGlass City Bank v. United States , 326 U.S. 265 [34 AFTR 1] (1945)). Plaintiff challenges primarily this first step, arguing that the Ballantynes have no state-law property interest in the McCall Property. Plaintiff addresses several forms of state-law ownership, arguing that each is inapplicable or otherwise foreclosed to the United States. The Court addresses each of them below. <br />2. State-Law Property Rights<br />A. Nominee Ownership<br />Plaintiff first claims that California does not recognize a nominee theory of ownership. Although the parties agree that federal law recognizes a nominee theory of ownership, they dispute whether California law recognizes it. The Court holds that it does. <br />Several California courts have discussed or mentioned nominee ownership. Lewis v. Hankins, 214 Cal. App. 3d 195, 201–02 (1989) (affirming trial court judgment which allowed creditor to levy and sell real property owned by debtor's nominees because debtor was beneficial owner);Parkmerced Co. v. City and County of San Francisco , 140 Cal. App. 3d 1091, 1095 (1983) (noting that one general partner held real property as nominee for partnership);Baldassari v. United States , 79 Cal. App. 3d 267, 272 (1978) (“The validity of the tax liens depends upon whether plaintiffs are the bona fide owners of the properties or are only nominees.”); Baumann v. Harrison, 46 Cal. App. 2d 84, 91 (1941) (stating that “appellant took title as the nominee of [another party] but did not assume or agree to pay the indebtedness secured by the deed of trust”);see also McColcan v. Walter Magee, Inc. , 172 Cal. 182, 186 (1916) (alluding to nominee ownership and stating “one cannot by any disposition of his own property put the same or the income thereof beyond the reach of his creditors, so long as he himself retains the right to receive and use it”). And federal courts have said that California recognizes nominee ownership. United States v. Dubey, 1998 WL 835000 [82 AFTR 2d 98-7050], at 98–7055 (E.D. Cal. Oct. 21, 1998) (“Under the “nominee” doctrine in California, “a person cannot place his property ... beyond the reach of his creditors so long as he himself retains the right to ... use it.””) (quoting In re Camm's Estate, 76 Cal. App. 2d 104 (1946));see Cal Fruit Int'l, Inc. v. Spaich , 2006 WL 2711664 [98 AFTR 2d 2006-6806], at 4 (E.D. Cal. September 21, 2006). <br />Although California law recognizes the theory of nominee ownership, it appears that no California court has ever identified the factors involved in a nominee analysis.Cal Fruit , 2006 WL 2711664 [98 AFTR 2d 2006-6806], at 4 (“There appear to be no reported California decisions which address the issue of what factors are relevant in determining whether an individual is a nominee of a taxpayer.”) In the absence of state-law guidelines, federal courts in California have used the guidelines of federal common law. E.g., United States v. Beretta, 2008 WL 4862509 [102 AFTR 2d 2008-6955], at 7 (N.D. Cal. Nov. 11, 2008);United States v. Lang , 2008 WL 2899819 [102 AFTR 2d 2008-5367], at 5 (S.D. Cal. July 25, 2008); Sequoia Prop. & Equip. Ltd. P'ship v. United States, 2002 WL 31409620 [90 AFTR 2d 2002-6728], at 12 (E.D. Cal. Sept. 19, 2002). Federal courts in other states use the same approach. E.g., Scoville v. United States, 250 F.3d 1198, 1202 [87 AFTR 2d 2001-2347] (8th Cir. 2001) (“A nominee is one who holds bare legal title to property for the benefit of another. Under Missouri law, one who holds such title has no actual interest in the property, which remains with the beneficial owner. No Missouri court has delineated a precise test for determining whether a property holder is a nominee. Missouri courts have, however, provided a test for determining whether a conveyance is fraudulent. In such instances, Missouri courts look to “badges of fraud”.... These elements parallel those we have looked to in determining whether a property holder is in fact merely a nominee.... We think that faced with a similar situation, a Missouri court would likely apply this body of law.”). <br />But at this stage, it does not matter what the specific factors of nominee ownership are. Plaintiff does not argue that the United States has failed to produce evidence showing nominee ownership. Instead, it only argues that nominee ownership does not exist under California law. And because the Court holds that it does, that ends the inquiry. The Court need not analyze whether there is a genuine dispute regarding the nominee factors. <br />Plaintiff argues that because the nominee doctrine is not fleshed out in California, the Court should not borrow from federal common law for its analysis. Instead, the Court should apply an analogous California doctrine, the law of resulting trusts, which has been fleshed out. In support of this argument, Plaintiff cites two cases from other circuits. The first isSpotts v. United States , 429 F.3d 248, 253 [96 AFTR 2d 2005-7101] (6th Cir. 2002), also a federal tax-lien case. The district court, in applying the nominee theory, did not look to Kentucky nominee law because its nominee law is unclear. See id. at 252–53. Instead, it looked to the law of other courts.Id. at 253. The Sixth Circuit reversed, holding that even though Kentucky nominee law was unclear, the district court should have applied an analogous Kentucky state-law doctrine, that of constructive trust. See id. at 253. The second case, Holman v. United States, 505 F.3d 1060 [100 AFTR 2d 2007-6217] (10th Cir. 2007), has a very similar holding. The district court had borrowed another jurisdiction's law regarding nominee ownership, and the Tenth Circuit remanded the case, requiring the IRS to “identify the theory or theories under which it asserts that Mr. Holman has a beneficial interest in the Centerville property under Utah law.” Id. at 1068. <br />These two cases are not binding precedent on this Court. And as the Court has already explained, California law does recognize the nominee theory of ownership. It even gives some general guidance on how to apply it. See Baumann, 46 Cal. App. 2d at 91–92 (taking title to property but not assuming debts, control and possession of the property, and receiving rents from property contributed to nominee status);Lewis , 214 Cal. App. 3d at 201 (analysis focuses on who is the beneficial owner). The Court can supplement these general guidelines with federal common law as many other courts in this circuit have done. E.g., Lang, 2008 WL 2899819 [102 AFTR 2d 2008-5367], at 5 (S.D. Cal. July 25, 2008). <br />Plaintiff's motion for summary judgment on the issue of whether the United States can use a nominee theory of ownership is denied. <br />B. Resulting Trust<br />Plaintiff also claims that the United States cannot use the theory of resulting trust. “A resulting trust arises from a transfer of property under circumstances showing that the transferee was not intended to take the beneficial interest.” 11 Witkin, Summary of Cal. Law, Trusts § 297 (9th ed. 1990). It “is based on the manifestation of the person creating it.” Majewsky v. Empire Constr. Co., Ltd., 2 Cal. 3d 478, 485 (1970). “The trust arises because it is the natural presumption in such a case that it was their intention that the ostensible purchaser should acquire and hold the property for the one with whose means it was acquired.”Id. <br />Plaintiff Leeds assumes (for the purposes of summary judgment only) that when it purchased the McCall Property from the STC Trust in 1995, a resulting trust was created, with Leeds as the trustee and Susanne Ballantyne as the beneficiary. But Plaintiff argues that Susanne Ballantyne sold or repudiated her interest in the resulting trust when Hemet C purchased 99% of Leeds. (Rhodes, a corporation owned by the Susanne C. Ballantyne Trust, retained the remaining 1% of Leeds as general partner.) <br />Resulting trusts can be repudiated. In re Estate of Yool, 151 Cal. App. 4th 867, 875 (2007) (repudiation occurs when demand “has been made upon the trustee and the trustee refuses to account or convey”). Plaintiff claims that Susanne Ballantyne repudiated her interest in the resulting trust when Hemet C purchased most of Leeds. But it is generally the trustee that must repudiate the trust. 2 See, e.g., Yool, 151 Cal. App. 4th at 875. And in this case, the trustee of any resulting trust would be Plaintiff. Yet Plaintiff has failed to produce any evidence showing that it repudiated a resulting trust. A mere change in Plaintiff's ownership, especially when the new owner is a partnership largely owned by the Ballantyne's Children's Trusts and controlled by a corporation which counts the Ballantynes among its officers and directors, does not qualify as repudiation. Plaintiff itself, even with new owners, could still hold the McCall Property in trust for the benefit of the Ballantynes. <br />Moreover, Plaintiff's general partner, Rhodes, was never replaced. Hemet C only bought the limited partnership interest, leaving Rhodes as Plaintiff's general partner. And the Ballantynes owned and controlled Rhodes until 1997. Given the Ballantynes' continued interest and control of Plaintiff through Rhodes and the lack of any act of repudiation, the Court denies summary judgment for Plaintiff on the repudiation issue. <br />Plaintiff also argues that Susanne Ballantyne sold her interest in the resulting trust when Hemet C purchased all of the Susanne C. Ballantyne Trust's interest in Plaintiff. This argument also lacks merit. Plaintiff has not produced any documents referencing the sale of a resulting trust. And although the Susanne C. Ballantyne Trust sold its interest in Plaintiff, Susanne C. Ballantyne herself may still be the beneficiary of a resulting trust. She sold her ownership stake in Plaintiff, not in the resulting trust. Moreover, as discussed above, the Ballantynes still owned Plaintiff's general partner, even after the sale. <br />But even if there was a repudiation, taxpayers cannot simply disclaim interests in property to avoid tax liens. See Drye v. United States, 528 U.S. 49, 60–62 [84 AFTR 2d 99-7160] (1999) (holding that debtor's disclaiming of inheritance according to state law, which generally prohibits creditors from reaching the inheritance under state law, did not defeat federal tax liens);United States v. Mitchell , 403 U.S. 190, 204 [27 AFTR 2d 71-1457] (1971) (holding wife's renouncement of interest in community property under state law could not avoid attachment of federal tax lien to property). Plaintiff's interest in the Fourth Avenue Property would therefore survive any purported repudiation. <br />Lastly, Plaintiff is wrong that the four-year statute of limitations for a resulting trust claim has run. Plaintiff argues that a party must sue within four years of repudiation, and since the purported repudiation happened over four years before the United States filed suit, the resulting trust claim has expired. But “[t]he mere lapse of time, without repudiation, does not affect the beneficiary's rights” under a resulting trust. Yool, 151 Cal. App. 4th at 876. Here, there has been no repudiation, so Plaintiff has not shown anything beyond a “mere lapse of time.” Id. And even if the statute of limitations has run, state-law statutes of limitations are “inapplicable to bar the claims of the United States.” Bresson v. Commissioner of Internal Revenue, 213 F.3d 1173, 1175 [85 AFTR 2d 2000-1901] (9th Cir. 2000). <br />For these reasons, the Ballantynes may have had an interest in the McCall Property on the date of the assessment, and there is a genuine dispute regarding the existence of a resulting trust. But there is no genuine dispute regarding repudiation, and the Court grants the United States motion for summary adjudication on the repudiation issue. <br />C. The United States May Use a Fraudulent Transfer Theory of Ownership<br />Plaintiff believes that the United States cannot use a fraudulent transfer theory to assert an interest in the McCall Property. Plaintiff gives two reasons: (1) the 1997 Notice of Federal Tax Lien did not mention fraudulent transfer, and (2) the United States has not pled a fraudulent transfer claim in its Answer or as a counterclaim. 3 <br />Plaintiff cites no case law in support of its arguments. The United States did not have to specifically plead, or give notice of, a fraudulent transfer claim. The United States has given notice that it proceeds under a nominee theory. The United States can impose a lien on property if the owner of the property is the nominee of the taxpayer. See 26 U.S.C. §§ 6321;see G.M. Leasing Corp. v. United States , 429 U.S. 338, 350–51 [39 AFTR 2d 77-475] (1977) (holding that § 6321 allows the government to impose a lien on property in the hands of a third party straw man). And although the nominee theory requires showing some type of interest in property based on a state-law theory, there is no authority supporting Plaintiff's belief that each state-law theory must be specifically pled. Cf. In re Krause, 386 B.R. 785, 833–34 [101 AFTR 2d 2008-1943] (Bankr. D. Kan. 2008), aff'd, 2009 WL 5064348 [105 AFTR 2d 2010-731] (D. Kan. Dec. 16, 2009) (distinguishing between bringing direct fraudulent conveyance action as a stand alone action, and using fraudulent conveyance law as the basis for finding a state-law interest under a nominee claim). In the absence of support for Plaintiff's argument, the Court holds that the United States has adequately pled its nominee claim and may use a fraudulent transfer theory, either under California common law or statutory law, to show that the Ballantynes have an interest in the Fourth Avenue Property and Plaintiff is merely their nominee. <br />D. The United States May Use an Alter-Ego Theory of Ownership<br />In its reply brief, Plaintiff argues that the United States cannot use an alter-ego theory of ownership for two reasons. 4 First, Plaintiff argues that an alter-ego claim has not been pled. The Court rejects this argument for the same reason it rejected Plaintiff's fraudulent-transfer arguments. The United States only had to plead a nominee claim, not the several theories of state-law property rights that might support such a claim. <br />Second, Plaintiff argues that the United States has said it will not assert an alter-ego claim, and should be precluded from doing so. The United States, in its proposed pretrial order, said that it “is not asserting claims under the theory of alter ego or under the California Fraudulent Conveyance Act.” But the United States has consistently maintained it is asserting a nominee claim, which can use a variety of state-law claims as support. See, e.g., Dalton v. Comm'r of Internal Revenue, 2008 WL 2651424 [TC Memo 2008-165], at 8 (U.S. Tax Ct. 2008) (In actions involving nominee claims, “various theories have been used to support the existence of an interest under State law, depending upon the jurisdiction and particular facts involved. Examples include resulting trust doctrines, constructive trust principles, fraudulent conveyance standards, and concepts drawn from State jurisprudence on piercing the corporate veil.”). Although the United States said it was not asserting alter-ego or California Fraudulent Conveyance Act claims, it may still use alter ego and fraudulent-transfer theories to show a property interest under state law. There is a distinction between asserting an alter-ego or fraudulent-transfer claim directly, and using those theories to support a nominee claim. The United States therefore is not precluded from using the alter-ego theory to support its nominee claim. <br />E. The Constructive Trust Theory of Ownership<br />Plaintiff argues for the first time in its reply brief that the United States may not use a theory of constructive trust in support of its nominee claim. The Court will not grant summary judgment on the constructive-trust theory until the United States has had an opportunity to respond. El Pollo Loco, Inc. v. Hashim, 316 F.3d 1032, 1040–41 (9th Cir. 2003) (court may not grant summary judgment on claims only raised in reply unless opposing party has opportunity to respond). <br />Under California law, a constructive trust is an equitable remedy, not a substantive claim. Batt v. City and County of San Francisco, 155 Cal. App. 4th 65, 82 (2007) (“A constructive trust is not an independent cause of action but merely a type of remedy, and an equitable remedy at that.”) (internal quotations marks and citations omitted); 11 Witkin,Summary of Cal. Law , Trusts § 305 (9th ed. 1990). In order to establish a constructive trust, the purported beneficiary of the trust must have a substantive right to receive the property. United States v. Pegg, 782 F.2d 1498, 1500 (9th Cir. 1986) (“Because a constructive trust is a specific remedy, the plaintiff must have some interest that can be returned to it.”) Whether or not the Ballantynes are beneficiaries, and whether Plaintiff is the trustee, of a constructive trust is not properly before the Court on this motion and may be argued after the trial. <br />3. The United State May Address Adequacy of Consideration and the Ballantynes' Intent<br />Plaintiff argues that the United States cannot rely on lack of consideration or intent in proving its nominee claim. The Court rejects this argument, as it is entirely without merit. Plaintiff cites no relevant case law supporting its argument. If adequacy of consideration and intent are relevant to establishing the Ballantynes' alleged state-law interest in the McCall Property, or if they are relevant to the nominee factors, the United States may address them. <br />Regarding other factors that are part of the nominee analysis, it appears that the parties recognize that different factors are appropriate depending on the facts of each case, and that there is no fixed number of nominee factors. When this case goes to trial, the parties can make arguments about the relevant nominee factors. <br />4. There Is a Genuine Dispute of Material Fact About Whether Plaintiff Was a Subsequent Purchaser<br />Under 26 U.S.C. § 6323, tax liens are not effective against third-party purchasers of property until the IRS has filed notice of the lien. Gorospe v. Comm'r of Internal Revenue, 451 F.3d 966, 967 [97 AFTR 2d 2006-2305] (9th Cir. 2006); 26 U.S.C. § 6323(a). Purchasers must have paid “adequate and full consideration” for the property, and must not have “actual notice” of the lien. 26 U.S.C. § 6323(h)(6). <br />Plaintiff argues that the liens are ineffective against it because they were filed after it got legal title to the McCall Property. The United States does not dispute the timing of the notice, but it argues that the statutory lien is effective against Plaintiff as the Ballantyne's nominee. <br />The Court agrees with the United States. If the United States establishes that Plaintiff is the Ballantyne's nominee, then Plaintiff is not entitled to the protections of 26 U.S.C. § 6323(a). See United States v. Clark, 2007 WL 3347515 [100 AFTR 2d 2007-6370], at 1 (M.D. Fla. Sept. 12, 2007) (“April E. Clark holds the subject property as a nominee of Alphonso J. Clark and thus is not entitled to the protection afforded by 26 U.S.C. § 6323.”). Moreover, Plaintiff only gets the protections of § 6323 if it meets the definition of purchaser. And a purchaser must have paid “adequate and full consideration” for the property. 26 U.S.C. § 6323(h)(6). So if the United States shows that Plaintiff did not pay full consideration for the McCall Property, this provision will not protect it. The Court holds that on the present record, there is a genuine dispute regarding whether Plaintiff is a subsequent purchaser under § 6323. <br />A. Rhodes And Hemet C Are Not Subsequent Purchasers<br />Plaintiff also argues that its two partners, Rhodes and Hemet C, are not subject to the tax lien. But § 6323 only applies to purchasers of property who paid full consideration without actual notice. Id. Rhodes and Hemet C did not buy the McCall Property; Plaintiff did. They only purchased an interest in Plaintiff, which is not covered by § 6323.See id. at 6323(h)(6). Moreover, Rhodes and Hemet C had actual notice of the assessments. Susanne Ballantyne herself controlled Rhodes at the time it purchased an interest in Plaintiff. And in January 1996, when Hemet C purchased an interest in Plaintiff, the Ballantynes held director and officer positions in Hemet C's general partner. Because the Ballantynes had actual notice of the assessments before January 1996 (they challenged the assessments in July 1994), that knowledge is imputed to Rhodes and Hemet C. Bank of N.Y. v. Fremont Gen. Corp., 523 F.3d 902, 911 (9th Cir. 2008) (“Generally, the knowledge of a corporate officer within the scope of his employment is the knowledge of the corporation.”) (quotingMeyer v. Glenmoor Homes, Inc. , 246 Cal. App. 2d 242 (1966)). Section 6323 therefore does not apply to Rhodes and Hemet C because they were not purchasers and they had actual knowledge of the assessments. <br />The Court grants the United States's motion for summary adjudication and finds that Rhodes and Hemet C are not subsequent purchasers under § 6323. <br />5. Notice of the Assessment and Demand for Payment Was Proper<br />Plaintiff challenges the tax assessments against the Ballantynes because of alleged procedural defects. Plaintiff, however, lacks standing to challenge the assessments. The assessment is against the Ballantynes, not Plaintiff. And a “third-party, non-delinquent taxpayer” may not attack a tax assessment based on procedural grounds. See Graham v. United States, 243 F.2d 919, 922 [51 AFTR 213] (9th Cir. 1957) (“We believe that only the taxpayer may question the assessment for taxes, and assert noncompliance by the Commissioner in sending the taxpayer a notice of deficiency by registered mail.”);Macatee, Inc. v. United States , 214 F.2d 717, 720 [45 AFTR 1818] (5th Cir. 1954) (“If there is cause for complaint for failure to give the notice required by 26 U.S.C.A. [6303], that cause belongs to the taxpayer.”). Plaintiff cites no cases contradicting the holding in Graham. But even if Plaintiff did have standing, the evidence establishes that there were no procedural defects in the assessments. <br />The IRS assessed taxes against the Ballantynes several times between 1995 and 1998. 5 In order for those assessments to be valid, the IRS must send notice of the assessment and demand for payment within 60 days to the taxpayer's dwelling, place of business, or last known address. 26 U.S.C. § 6303(a). There is no requirement that the taxpayer actually receive the notice, only that it is sent to the taxpayer's last-known address. United States v. Zolla, 724 F.2d 808, 810 [53 AFTR 2d 84-652] (9th Cir. 1984). Plaintiff argues that the Ballantynes have no recollection of receiving notices of the assessment or demands for payment, and that there is no evidence establishing that they received notice. Because notice and demand for payment are conditions precedent for the creation of a tax lien, see 26 U.S.C. § 6321, if notice was defective, then the liens would be invalid. <br />But here there was no defect. The United States has submitted and properly authenticated four Form 4340's, which show that the IRS properly sent notice and demand for payment. See Hansen v. United States, 7 F.3d 137, 138 [72 AFTR 2d 93-5922] (9th Cir. 1993) (per curiam) (“Form 4340 is probative evidence in and of itself and, in the absence of contrary evidence, shows that notices and assessments were properly made.”). The Form 4340's all state that on a particular date, the IRS sent a “statutory notice of balance due.” (See Black Decl. Exs. A–D.) Although the Ballantynes state that they have no recollection of receiving the notice of tax assessment, that is insufficient to raise a genuine issue as to whether notice was sent.Id. (declaration by taxpayers that they never received notice and demand “does not show the notice was not sent” and “fails to raise a genuine issue of material fact”). Hansen squarely rejected the same argument Plaintiff makes here. <br />Plaintiff relies on several Ninth Circuit cases that precedeHansen to argue that Form 4340, or some other evidence, must show the address to which the IRS sent a demand for payment. In those cases, the Ninth Circuit noted that the Form 4340 contained the taxpayer's correct address. See, e.g., United States v. Zolla, 724 F.2d 808, 810 [53 AFTR 2d 84-652] (9th Cir. 1984). The Form 4340 submitted here does not show the address to which the demands were mailed. But Hansen does not require that a Form 4340 state the address. The presumption that the IRS sent a demand arises when the Form 4340 notes that demand was sent. See United States v. Scott, 290 F. Supp. 2d 1201, 1206 [92 AFTR 2d 2003-6946] (S.D. Cal. 2003) (citing Hansen, 7 F.3d at 138) (“Where a Form 4340 indicates that notice and demand were timely given, it is sufficient in the absence of contrary evidence to establish that such notice and assessment were made.”) And here, the Form 4340's note exactly that. <br />The Court holds that there is not a genuine issue of fact regarding whether the IRS sent the notice and demand. The evidence establishes that notice and demand was proper under 26 U.S.C. § 6303(a). Because Plaintiffs lack standing and the notices and demands were proper, the Court grants the United States's motion for summary adjudication on the issue of proper notice and demand. Plaintiffs cannot challenge this at trial. <br />6. Plaintiff's Equitable Defenses<br />Actions to levy property subject to a tax lien generally must be brought within ten years of the original assessment. 26 U.S.C. § 6502(a)(1). Although over ten years passed without the United States levying the McCall Property, the United States argues that the statute of limitations was tolled by the Ballantyne's submission of an offer in compromise (“OIC”) to settle their tax liability. While an OIC is pending, the applicable statute of limitations is sometimes tolled.See United States v. McGee , 993 F.2d 184, 186 [71 AFTR 2d 93-1967] (9th Cir. 1993) (citing United States v. Holloway, 798 F.2d 175, 176 [58 AFTR 2d 86-5641] (6th Cir. 1986). In response, Plaintiff asserts that the United States is equitably estopped from arguing tolling of the statute of limitations. Plaintiff points to misconduct and delay in the OIC process as grounds for estoppel. The United States moves for summary adjudication on Plaintiff's estoppel claim. 6 <br />A. Motion for Leave to File Second Amended Complaint<br />The First Amended Complaint does not plead equitable estoppel. Seizing on this, the United States argues that Plaintiff cannot assert equitable estoppel at trial. So Plaintiff has filed a motion for leave to file a Second Amended Complaint, which adds the estoppel claim. The Court denies Plaintiff's motion because, as set forth below, Plaintiff cannot establish estoppel.See Gompper v. VISX, Inc. , 298 F.3d 893, 898 (9th Cir. 2002) (court may deny amendment based on futility). <br />B. Plaintiff Cannot Prove Equitable Estoppel<br />The elements of equitable estoppel are “(1) [t]he party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former's conduct to his injury.”Watkin v. United States Army , 875 F.2d 699, 709 (9th Cir. 1989) (citing United States v. Wharton, 514 F.2d 406, 412 (9th Cir. 1975). When a party asserts equitable estoppel against the United States, two more elements must be met: (1) “affirmative conduct going beyond mere negligence;” and (2) the “government's act will cause a serious injustice and the imposition of estoppel will not unduly harm the public interest.” Purcell v. United States, 1 F.3d 932, 932 [72 AFTR 2d 93-5821], 940 (9th Cir. 1993) (quotingS & M Inv. Co. v. Tahoe Regional Planning Agency , 911 F.2d 324, 329 (9th Cir. 1990)). The two additional elements are threshold requirements and the Court should consider them first. Purcell v. United States, 1 F.3d 932, 939 [72 AFTR 2d 93-5821] (9th Cir. 1993). <br />Unreasonable delay and errors in the OIC process do not establish “affirmative conduct going beyond mere negligence,” which is a necessary element of equitable estoppel. Watkin, 875 F.2d at 709. At most, Plaintiff's evidence would show that the IRS was negligent in handling Plaintiff's case, and negligence is insufficient.Id. Plaintiff also cannot show that the “imposition of estoppel will not unduly harm the public interest.” Id. In fact, permitting Plaintiff to assert equitable estoppel might frustrate the legitimate attempts of the IRS to collect on taxes owed by the Ballantynes. <br />Not only can Plaintiff not meet the special requirements for estoppel claims against the government, Plaintiff cannot meet the traditional elements of estoppel, which deal with detrimental reliance on misrepresentations of fact. There must be some “affirmative misrepresentation or affirmative concealment of a material fact by the government.” United States v. Ruby Co., 588 F.2d 697, 703–04 (9th Cir. 1978). Here, there is simply no misrepresentation or concealment that Plaintiff relied on to its detriment. <br />In fact, the Ninth Circuit has already rejected a very similar claim by a taxpayer in United States v. McGee, 993 F.2d 184 [71 AFTR 2d 93-1967](9th Cir. 1993) Although the taxpayer in that case did not raise equitable estoppel specifically, he argued that because the IRS had abandoned his OIC, tolling should have stopped. The Ninth Circuit disagreed, holding that tolling only stops when the OIC is “terminated, withdrawn or formally rejected by the government.” Id. at 186. The Ninth Circuit emphasized that the taxpayer “was also not left unprotected; he could have withdrawn his offer at any time” and restarted the statute of limitations clock. Id. McGee stands for the proposition that if consideration of the OIC takes too long, the taxpayer has a simple remedy: withdraw the OIC. The Ballantynes chose instead to see the OIC process to its conclusion, and even appealed the IRS's rejection of their OIC. If they wanted to restart the clock, they could have. <br />Therefore, the Court enters summary adjudication against Plaintiff on its equitable estoppel claim. <br />7. The Statutes of Limitations on the Tax Assessments Has Not Expired<br />Plaintiff wants to argue at trial that the statute of limitations on collection of the Ballantynes' tax liabilities has expired. The United States moves for summary judgment on this issue, arguing that the evidence proves the statute of limitations has not run. <br />The statute of limitations on collecting tax liabilities is ten years, starting on the day of the assessment. 26 U.S.C. § 6502. Here, the tax assessments were made in January 1995, June 1997, and November 1998. The parties agree the statute of limitations on all three assessments would have already expired absent tolling. <br />The statute of limitations on tax collection can be tolled. When an OIC is pending, the statute of limitations is tolled until the OIC is “terminated, withdrawn, or formally rejected by the government.” United States v. McGee, 993 F.2d 184, 186 [71 AFTR 2d 93-1967] (9th Cir. 1993) (citing United States v. Holloway, 798 F.2d 175, 176 [58 AFTR 2d 86-5641] (6th Cir. 1986). But due to changes in the law, tolling during the pendency of an OIC did not apply from December 21, 2000 through March 8, 2002. See Staso v. United States, 538 F. Supp. 2d 1335, 1347 [101 AFTR 2d 2008-1100] (D. Kan. 2008) (discussing changes to law regarding tolling during OIC process). <br />Here, the Ballantynes submitted an OIC with respect to the assessments made in 1995, 1997, and 1998. The IRS accepted the OIC for processing on October 24, 2000, which begins the tolling period. See United States v. Bourger, 2008 WL 4424810 [102 AFTR 2d 2008-6343], at 3 (D.N.J. Sept. 24, 2008) (“An offer to compromise becomes pending when it is accepted for processing.”) (quoting I.R.S. Revenue Procedure 2003–71 (2003). On October 23, 2007, the IRS Appeals Office finally rejected the Ballantyne's amended OIC, which terminated the OIC process. Although the OIC was pending during this entire time, there was no tolling from December 21, 2000 through March 8, 2002. Staso, 538 F. Supp. 2d at 1347. So to find the total number of days tolled, the Court starts with the total number of days the OIC was pending and subtracts the days that tolling did not apply: 2555 minus 443 equals 2,112 days. The Court adds 2,112 days, plus the normal 10-year limitations period, to the original expiration dates of the three assessments: January 2, 1995 assessment expires on or about October 15, 2010; June 30, 1997 assessment expires on or about April 12, 2013; November 16, 1998 assessment expires on or about August 28, 2014. <br />None of the statutes of limitation for the three tax assessments have expired. Plaintiff does not dispute these dates, but instead argues that the United States is equitably estopped from asserting tolling. The Court has already rejected that argument. Plaintiff also argues that tolling is only available if the OIC is considered in due course. But Plaintiff relies on a case in which the specific tolling agreement between the IRS and the taxpayer required the IRS to review the OIC in “due course.” United States v. Cooper-Smith, 310 F. Supp. 479, 482 [25 AFTR 2d 70-1063] (E.D.N.Y. 1970). Here, there is no similar language in the Ballantynes' OIC. <br />Plaintiff has failed to show a disputed fact and the Court enters summary adjudication against Plaintiff on the statute of limitations issue. <br />8. Plaintiff Cannot Limit the Value of the Tax Lien<br />Plaintiff argues that if it loses this quiet title action, the Court should limit the value of the tax lien against the McCall Property to the property's value on the date Plaintiff got title. Plaintiff first raised this argument in its Addendum to the Pretrial Order. It has not been pled. <br />Moreover, Plaintiff gives no support for its argument. It only cites California's Uniform Fraudulent Transfer Act, which states that if a creditor succeeds in a fraudulent transfer action, it may get a judgment against transferees “equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.” Cal. Civ. Code § 3439.08(c). First, this provision only addresses claims made under California's fraudulent transfer law, not nominee claims, which is what the United States asserts here. Second, the provision only applies when the creditor seeks a monetary judgment against a transferee of the avoided transfer. See id. It does not apply when the creditor seeks to attach the property or only seeks to avoid the transfer and obtain relief directly from the debtor. See id. <br />The Court enters summary adjudication in favor of the United States on the issue of limiting the value of the tax lien. <br />IV. CONCLUSION<br />The Court GRANTS the United States's motion for summary judgment [Doc. 58]. The Court grants summary adjudication in favor of the United States on the following claims and issues: equitable estoppel, statute of limitations, proper notice and demand, Rhodes' and Hemet C's status as subsequent purchasers, repudiation of a resulting trust, and limiting the value of the tax lien. The Court, however, holds that there is a genuine dispute of material fact regarding Plaintiff's status as a subsequent purchaser. <br />The Court DENIES Plaintiff's motion for summary judgment in its entirety [Doc. 59]. The Court DENIES as moot Plaintiff's motion for leave to file a Second Amended Complaint [Doc. 74]. <br />IT IS SO ORDERED. <br />DATED: August 5, 2010 <br />Honorable Barry Ted Moskowitz <br />United States District Judge <br />________________________________________<br />1 <br /> There is a dispute regarding whether notices and demands regarding the assessments were proper. The Court finds they were proper, as discussed in detail infra. <br />________________________________________<br />2 <br /> The Court is unable to find any cases where the beneficiary has repudiated a trust. That is presumably because the resulting trust is generally used to protect the beneficiary's interest in the property.See 11 Witkin, Summary of Cal. Law, Trusts § 297 (9th ed. 1990) <br />________________________________________<br />3 <br /> Plaintiff originally had a third argument, claiming that the United States's fraudulent transfer claim had been extinguished. Plaintiff has withdrawn this argument based on Bresson v. Commisioner of Internal Revenue, 213 F.3d 1173 [85 AFTR 2d 2000-1901] (9th Cir. 2000), which held that the extinguishment provisions of the California Uniform Fraudulent Transfer Act are inapplicable to actions by the IRS to collect income taxes. <br />________________________________________<br />4 <br /> Normally, courts should only address arguments first raised in a reply if the opposing party has had the chance to respond to them. El Pollo Loco, Inc. v. Hashim, 316 F.3d 1032, 1040–41 (9th Cir. 2003). Nevertheless, since the Court rejects Plaintiff's arguments, the Court finds it unnecessary to have the United States respond. <br />________________________________________<br />5 <br /> Plaintiff objects to evidence regarding the tax assessments as irrelevant, hearsay, and lacking foundation. The Court overrules the objections. The evidence regarding the assessments are public records attached to a declaration by John Black, an IRS Revenue Officer who is assigned to the Ballantynes case and who reviewed their IRS file. They are obviously relevant to the question of whether the assessments were made, Mr. Black's declaration establishes a proper foundation, and they fall within the public records hearsay exception. Fed. R. Evid. 803(8); see Hughes v. United States, 953 F.2d 531, 539–40 [69 AFTR 2d 92-472] (9th Cir. 1991). <br />________________________________________<br />6 <br /> The United States also moved for summary adjudication on Plaintiff's purported laches defense, but Plaintiff states that it is not asserting a laches defense. <br /> © 2010 Thomson Reuters/RIA. All rights reserved.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-72957269982682893552010-08-10T10:19:00.000-04:002010-08-10T10:20:07.314-04:00Indemnity Agreement was disregardedCanal Corporation and Subsidiaries v. Commissioner, 135 T.C. No. 9, Code Sec(s) 707; 752; 6662. <br />________________________________________<br />CANAL CORPORATION AND SUBSIDIARIES, FORMERLY CHESAPEAKE CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . <br />Case Information: <br />Code Sec(s): 707; 752; 6662<br />Docket: Dkt No. 14090-06<br />Date Issued: 08/5/2010 . <br />Judge: Opinion by KROUPA<br />HEADNOTE <br />XX. <br />Reference(s): Code Sec. 707 ; Code Sec. 752 ; Code Sec. 6662 <br />Syllabus <br />Official Tax Court Syllabus<br />Counsel <br />Clifton B. Cates III, Robert H. Wellen, and David D.Sherwood, for petitioner. <br />Curt M. Rubin, Matthew I. Root, and Steven N. Balahtsis, for respondent. <br />KROUPA, Judge <br />Respondent determined a $183,458,981 1 deficiency in petitioner's (Chesapeake) 2 Federal income tax for 1999, the year at issue. Respondent asserts in his amended answer that Chesapeake owes a $36,691,796 substantial understatement of income tax penalty under section 6662(a) 3 for 1999. We must determine whether Chesapeake's subsidiary's contribution of its assets and most of its liabilities to a newly formed limited liability company and the simultaneous receipt of a $755 million distribution should be characterized as a disguised sale, requiring Chesapeake to recognize a $524 million gain in 1999, the year of contribution and distribution. We hold that the transaction was a disguised sale, requiring Chesapeake to recognize the gain. We must also determine whether Chesapeake is liable for the substantial understatement penalty under section 6662(a). We hold Chesapeake is liable for the penalty. <br />FINDINGS OF FACT <br />Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts and the accompanying exhibits by this reference. Chesapeake's principal place of (Code), and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. business at the time it filed the petition was Richmond, Virginia. Background of Chesapeake and WISCO <br />Chesapeake is a Virginia corporation organized as a corrugated paper company in 1918. Chesapeake's business has expanded over time into several paper industry segments, including merchandising and specialty packaging, tissue, and forest and land development. Chesapeake eventually became a publicly traded company and served as the common parent of a group of subsidiary corporations filing consolidated Federal income tax returns. Each subsidiary managed its own assets and liabilities. Chesapeake received dividends from the subsidiaries and made loans to the subsidiaries as needed. <br />Chesapeake's largest subsidiary was Wisconsin Tissue Mills, Inc. (WISCO). Chesapeake purchased WISCO's stock from Philip Morris in 1985 in a leveraged buyout transaction. WISCO manufactured commercial tissue paper products, including napkins, table covers, towels, place mats, wipes, and facial and bathroom tissue. WISCO sold its products to commercial and industrial businesses such as restaurants, hotels, schools, offices, hospitals and airlines. WISCO accounted for 46 percent of Chesapeake's sales and 94 percent of Chesapeake's earnings before interest and tax for 1998. Chesapeake and WISCO shared most of the same executive officers. <br />WISCO incurred significant environmental liabilities during the 1950s and 1960s. The Environmental Protection Agency (EPA) determined that a mill WISCO operated contaminated the Fox River in Wisconsin with polychlorinated biphenyls (PCBs). The EPA designated the Fox River area as a Superfund site and held five companies, including WISCO, involved in the contamination jointly and severally liable for the cleanup costs (Fox River liability). Philip Morris indemnified Chesapeake for any Fox River liability costs up to the purchase price of WISCO. Approximately $120 million of the Phillip Morris indemnity remains. Chesapeake also purchased $100 million of environmental remediation insurance to pay costs beyond those covered by the indemnity. Chesapeake's management estimated that WISCO's remaining Fox River liability costs varied between $60 million and $70 million in 1999. In addition to the Fox River liability, WISCO and other Chesapeake subsidiaries also guaranteed a $450 million credit facility enabling Chesapeake to acquire another company in 2000. Tissue Business Tissue is a capital intensive commodities business, and only the largest companies have the ability to make the investment needed to compete in the industry. In the late 1990s, the tissue business experienced much consolidation. Fort Howard Corporation merged with James River Corporation to form Fort James Corporation. Kimberly-Clark Corporation purchased Scott Paper Company. These consolidations put smaller tissue businesses at a strategic disadvantage. <br />Chesapeake, through WISCO and Chesapeake's Mexican subsidiary, Wisconsin Tissue de Mexico, S.A. de C.V. (WISMEX), was a second tier player in the tissue industry. Chesapeake sold its retail tissue business to the Fonda Group, Inc. in 1995. WISCO and WISMEX serviced only commercial accounts and lacked the large timber bases needed to support a retail business. Chesapeake had only two paper mills, one in Wisconsin and one in Arizona, and thus was at a significant logistical disadvantage in servicing the Southeast and Northeast. Restructuring of Chesapeake Chesapeake hired Tom Johnson as its chief executive officer and chairman in 1997. Mr. Johnson sought to restructure Chesapeake. He wanted to move Chesapeake away from its historic commodity products business and focus on specialty packaging and merchandising services. Chesapeake's speciality packaging business involved producing high-value custom packaging for such goods as perfume, liquor and pharmaceuticals. To that end, Chesapeake sold certain assets, including a mill, corrugated box plants, a building products business and substantial land. Chesapeake acquired other businesses and assets to further its specialty packaging business. <br />Commercial tissue did not fit the new specialty packaging strategy. Chesapeake examined several options for the future direction of WISCO's tissue business. Chesapeake considered maintaining the status quo. Management concluded, however, that WISCO would be too small to compete. Management further determined that internal expansion would be too difficult and costly. Management also considered selling Chesapeake and all its subsidiaries. Management surmised that no one would buy all the diverse subsidiary businesses for an acceptable price. <br />Pete Correll, chief executive officer of Georgia Pacific (GP), made overtures to Mr. Johnson regarding GP purchasing WISCO. GP's primary business was the manufacture and distribution of building products, timber, and paper products. GP also had a small profitable tissue business that accounted for 5 to 6 percent of its total sales. GP wanted to expand its tissue business but questioned whether GP's business could grow internally. GP viewed the purchase of WISCO as a strategic piece in advancing its tissue business. <br />Chesapeake considered selling WISCO to generate capital for Chesapeake's new specialty packaging business. Given Chesapeake's low tax basis in WISCO, however, the after-tax proceeds would have been low compared to the pre-tax proceeds. This tax differential caused Chesapeake to decide a direct sale of WISCO would not be advantageous. <br />Chesapeake thereafter engaged Salomon Smith Barney (Salomon) and PricewaterhouseCoopers (PWC) to explore strategic alternatives for the tissue business. Salomon recommended to Chesapeake's management that the best alternative for maximizing shareholder value would be a leveraged partnership structure with GP. 4 The leveraged partnership structure required WISCO to first transfer its tissue business assets to a joint venture. GP would then transfer its tissue business assets to the joint venture. Next, the joint venture would borrow funds from a third party and distribute the proceeds to Chesapeake (special distribution). Chesapeake would guarantee the third-party debt through a subsidiary. WISCO would hold a minority interest in the joint venture after the distribution, and GP would hold a majority interest. Salomon presented the leveraged partnership structure as tax advantageous to Chesapeake because it would allow Chesapeake to get cash out of the business yet still protect Chesapeake from recognizing a gain when the partnership distributed to Chesapeake the proceeds from the third-party loan. <br />Chesapeake's board liked the leveraged partnership idea and thought GP seemed like a good fit as a partner. Chesapeake made clear to PWC and Salomon that the asset transfer and special distribution had to be nontaxable for it to approve the “Project Odyssey” after Homer's “The Odyssey” and identified Chesapeake as “Calypso” and GP as “Zeus.” transaction. Tax deferral enabled Chesapeake to accept a lower price. <br />GP's executives accepted the leveraged partnership structure to expand its tissue business. GP did not have any interest in Chesapeake receiving a tax deferral. GP recognized, however, that it was a necessary part of bridging the purchase price gap. Chesapeake agreed to a lower up-front valuation of WISCO, 5 $775 million, because of the tax deferral benefit. <br />PWC assisted Salomon in negotiating and structuring the joint venture. PWC examined the transaction from both an accounting and a tax perspective. PWC had served as Chesapeake's auditor and tax preparer for many years. Donald Compton (Mr. Compton), a partner in PWC's Richmond office, managed the Chesapeake account and had given Chesapeake advice on different David Miller (Mr. Miller) 6 worked with tax matters in the past. Mr. Compton on the Chesapeake and GP joint venture. PWC advised that Chesapeake did not need to guarantee the debt but needed only to provide an indemnity to the guarantor to defer tax. PWC also determined that the transaction should be treated as a sale for accounting purposes. Mr. Miller helped structure the indemnity agreement and aided in writing the partnership agreement. Indemnity Agreement GP agreed to guarantee the joint venture's debt and did not require Chesapeake to execute an indemnity. Mr. Miller advised Chesapeake, however, that an indemnity was required to defer tax on the transaction. Chesapeake's executives wanted to make the indemnity an obligation of WISCO rather than Chesapeake to limit the economic risk to WISCO's assets, not the assets of Chesapeake. The parties to the transaction agreed that GP would guarantee the joint venture's debt and that WISCO would serve as the indemnitor of GP's guaranty. <br />WISCO attempted to limit the circumstances in which it would be called upon to pay the indemnity. First, the indemnity obligation covered only the principal of the joint venture's debt, due in 30 years, not interest. Next, Chesapeake and GP agreed that GP had to first proceed against the joint venture's assets before demanding indemnification from WISCO. The agreement also provided that WISCO would receive a proportionately increased interest in the joint venture if WISCO had to make a payment under the indemnity obligation. <br />No provision of the indemnity obligation mandated that WISCO maintain a certain net worth. Mr. Miller determined that WISCO had to maintain a net worth of $151 million to avoid taxation on the transaction. GP was aware that WISCO's assets other than its interest in the joint venture were limited. GP nonetheless accepted the deal and never invoked the indemnity obligation. Joint Venture Agreement Chesapeake, WISCO, and GP executed the joint venture The two members (partners) 7 of the joint venture were agreement. WISCO and GP. The agreement provided that GP would reimburse WISCO for any tax cost WISCO might incur if GP were to buy out WISCO's interest in the joint venture. PWC Tax Opinion Chesapeake hired PWC to issue an opinion on the transaction's Federal tax implications. In fact, Chesapeake conditioned the transaction's closing upon PWC's issuing a “should” tax opinion. Instead of Mr. Compton, the PWC partner with the long-term relationship to Chesapeake, PWC assigned Mr. Miller to write the opinion. In effect, Mr. Miller's job was to review the transaction he helped structure. Mr. Miller considered three issues: (1) whether the joint venture qualified as a partnership for tax purposes, (2) whether WISCO was a partner in the joint venture, and (3) whether the distribution toChesapeake should be treated as part of a sale or qualifies under the debt-financed distribution exception. <br />Chesapeake agreed to pay PWC an $800,000 fixed fee for issuing the opinion. The payment did not depend on time spent or expenses incurred by PWC. A letter PWC sent to Chesapeake stated that PWC would bill Chesapeake “at the closing of the joint venture financing.” Chesapeake's board informed Mr. Miller that as a condition to closing the transaction PWC would need to issue the opinion that the special distribution should not be currently taxable. A “should” opinion is the highest level of comfort PWC offers to a client regarding whether the position taken by a taxpayer will succeed on the merits. <br />Mr. Miller and his PWC team reviewed the transaction's structure and approved each item that could affect the tax consequences. Mr. Miller crafted an “all or nothing” test for allocating the joint venture debt. Either all the liability would be allocated to WISCO or none of it would. Mr. Miller reasoned that the transaction would not be characterized as a sale provided the entire liability was allocated to WISCO. Mr. Miller found no legal authority for such a test. He created the test using his own analysis of then existing rulings and procedures. <br />Mr. Miller based his opinion on WISCO's indemnification of GP's guaranty being respected. Mr. Miller assumed that WISCO had the ultimate legal liability for the full amount of the debt if the joint venture became wholly worthless. Mr. Miller concluded that WISCO could defer gain until it sold its remaining assets, paid off the debt, or sold its partnership interest. Mr. Miller advised that WISCO maintain assets of at least 20 percent of its maximum exposure under the indemnity. Mr. Miller did not have direct authority requiring this percentage. He merely made this determination based on Rev. Proc. 89-12, 1989-1 C.B. 798, which was declared obsolete by Rev. Rul. 2003-99, 2003-2 C.B. 388. 8 Moreover, Rev. Proc. 89-12, supra, makes no reference to allocation of partnership liabilities. <br />Chesapeake also sought to transfer the assets of WISMEX to the joint venture. PWC informed Chesapeake that neither the United States nor Mexico could tax (1) the transfer of WISMEX's assets to WISCO or (2) the asset transfer from WISCO to the joint venture. Chesapeake caused WISMEX to transfer its assets to WISCO as advised by PWC. <br />Mr. Miller wrote and signed the “should” opinion before issuing it to Chesapeake. The parties effected the transaction on the same day PWC issued the “should” opinion. The Transaction GP and WISCO formed Georgia-Pacific Tissue LLC (LLC) as the vehicle for the joint venture. GP and WISCO treated the LLC as a partnership for tax purposes. Both partners contributed the assets of their respective tissue businesses to the LLC. GP transferred to the LLC its tissue business assets with an agreed value of $376.4 million in exchange for a 95-percent interest in the LLC. WISCO contributed to the LLC all of the assets of its tissue business with an agreed value of $775 million in exchange for a 5-percent interest in the LLC. The LLC borrowed $755.2 million from Bank of America (BOA) on the same day it received the contributions from GP and WISCO. The LLC immediately transferred the loan proceeds to Chesapeake's bank account 9 as a special cash distribution. 10 GP guaranteed payment of the BOA loan, and WISCO agreed to indemnify GP for any principal payments GP might have to make under its guaranty. <br />The LLC had approximately $400 million in net worth based on the parties' combined initial contribution of assets ($1.15 1 billion) less the BOA loan ($755.2 million), and it had a debt to equity ratio of around 2 to 1. The LLC assumed most of WISCO's liabilities but did not assume WISCO's Fox River liability. Chesapeake and WISCO both indemnified GP and held it harmless for any costs and claims that it might incur with respect to any retained liabilities of WISCO, including the Fox River liability. <br />WISCO used a portion of the funds from the special distribution to repay an intercompany loan to Cary Street, Chesapeake's finance subsidiary. WISCO also used portions of the funds to pay a dividend to Chesapeake, repay amounts owed to Chesapeake and lend $151.05 million to Chesapeake in exchange for a note (intercompany note). The intercompany note was a 5-year note with an 8-percent interest rate. Chesapeake used the loan proceeds to repay debt, repurchase stock and purchase additional specialty packaging assets. <br />WISCO's assets following the transaction included the intercompany note with a face value of $151 million and a corporate jet worth approximately $6 million. WISCO had a net worth, excluding its LLC interest, of approximately $157 million. This represented 21 percent of its maximum exposure on the indemnity. WISCO remained subject to the Fox River liability. Refinancing the Debt The LLC refinanced the BOA loan in two parts soon after the transaction closed. First, the LLC borrowed approximately $491 million from a GP subsidiary, Georgia-Pacific Finance LLC (GP Finance) to partially retire the BOA loan. This transaction occurred about a month after the closing date. Then the LLC borrowed $263 million from GP Finance the following year to repay the balance on the BOA loan. <br />The GP Finance loans had terms similar to those of the BOA loans. GP executed a substantially identical guaranty in favor of the new lender, and WISCO executed a substantially identical indemnity obligation. PWC issued another opinion finding that the refinancing was tax free as well. Characterization of the Transaction for Tax and Non-Tax Purposes Chesapeake timely filed a consolidated Federal tax return for 1999. Chesapeake disclosed the transaction on Schedule M of the return and reported $377,092,299 book gain but no corresponding tax gain. Chesapeake treated the special distribution as non-taxable on the theory that it was a debt- financed transfer of consideration, not the proceeds of a sale. <br />Unlike its treatment for tax purposes, Chesapeake treated the transaction as a sale for financial accounting purposes. Chesapeake did not treat the indemnity obligation as a liability for accounting purposes because Chesapeake determined that there was no more than a remote chance the indemnity would be triggered. Despite Chesapeake's characterization for tax purposes, PWC and Salomon each referred to the transaction as a sale. <br />Standard & Poor's, Moody's and stock analysts also treated the transaction as a sale. Chesapeake executives represented to Standard & Poor's and Moody's that the only risk associated with the transaction came not from WISCO's agreement to indemnify GP but from the tax risk. Moody's downgraded Chesapeake after the announced joint venture because of Chesapeake's readjusted focus, the monetization of WISCO, and the resulting loss of operating income. Standard & Poor's kept its rating of Chesapeake the same because Chesapeake generated significant cash by divesting itself of WISCO for $755 million and of its timberlands for $186 million. End of the Joint Venture The joint venture operated for only a full year. It ended in 2001 when GP sought to acquire the Fort James Corporation. The Department of Justice required GP to sell its LLC interest for antitrust purposes. GP contacted Svenska Cellulosa Aktiebolaget (SCA), a Swedish company, about purchasing its LLC interest. SCA informed GP that it was interested in purchasing only the entire LLC, not just GP's interest in the LLC. Therefore, GP needed to buy WISCO's interest in the joint venture. WISCO agreed to sell its minority interest in the LLC to GP for $41 million, which represented a gain of $21.2 million from its initial valuation of $19.8 million. GP also paid Chesapeake $196 million to compensate Chesapeake for any loss of tax deferral. WISCO declared a $166,080,510 dividend to Chesapeake payable by cancelling Chesapeake's promissory note in 2001. <br />Chesapeake reported a $524 million capital gain on its consolidated Federal tax return for 2001. Chesapeake determined that the termination of the indemnity resulted in WISCO receiving a deemed distribution under section 752. Chesapeake also reported the $196 million tax cost payment it received from GP as ordinary income on its consolidated Federal tax return for 2001. <br />Respondent issued Chesapeake the deficiency notice for 1999. In the deficiency notice, respondent determined the joint venture transaction to be a disguised sale that produced $524 million of capital gain includable in Chesapeake's consolidated income for 1999. Chesapeake timely filed a petition. Respondent asserted in an amended answer a $36,691,796 accuracy-related penalty under section 6662 for substantial understatement of income tax. <br />OPINION <br />We are asked to decide whether the joint venture transaction constituted a taxable sale. Respondent argues that Chesapeake structured the transaction to defer $524 million of capital gain for a period of 30 years or more. Specifically, respondent contends that WISCO did not bear any economic risk of loss when it entered the joint venture agreement because the anti-abuse rule disregards WISCO's obligation to indemnify GP. See sec. 1.752-2(j), Income Tax Regs. Respondent concludes that the transaction should be treated as a taxable disguised sale. <br />Chesapeake asserts that the transaction should not be recast as a sale. Instead, Chesapeake argues that the anti-abuse rule does not disregard WISCO's indemnity and that the LLC's distribution of cash to WISCO comes within the exception for debt-financed transfers. We disagree and begin with the general rules on disguised sales. <br />I. Disguised Sale Transactions The Code provides generally that partners may contribute capital to a partnership tax free and may receive a tax free return of previously taxed profits through distributions. See secs. 721, 731. 11 These nonrecognition rules do not apply, however, where the transaction is found to be a disguised sale of See sec. 707(a)(2)(B). 12 property. <br />A disguised sale may occur when a partner contributes property to a partnership and soon thereafter receives a distribution of money or other consideration from the A transaction may be deemed a sale if, based partnership. Id. on all the facts and circumstances, the partnership's distribution of money or other consideration to the partner would not have been made but for the partner's transfer of the property. Sec. 1.707-3(b)(1), Income Tax Regs. (emphasis added). Such contribution and distribution transactions that occur within two years of one another are presumed to effect a sale unless the facts and circumstances clearly establish otherwise (the 2-year presumption). Sec. 1.707-3(c)(1), Income Tax Regs. <br />Here, WISCO transferred its assets with an agreed value of $775 million to the LLC and simultaneously received a cash distribution of $755.2 million. After the transfer and distribution, WISCO had a 5-percent interest in the LLC. Its assets included only its interest in the LLC, the intercompany note and the jet. We therefore view the transactions together and presume a sale under the disguised sale rules unless the facts and circumstances dictate otherwise. <br />Chesapeake contends that the special distribution was not part of a disguised sale. Instead, it was a debt-financed transfer of consideration, an exception to the disguised sale rules. See sec. 1.707-5(b), Income Tax Regs. Chesapeake argues that the debt-financed transfer of consideration exception to the disguised sale rules limits the applicability of the disguised sale rules and the 2-year presumption in this case. <br />A. Debt-Financed Transfer of Consideration We now turn to the debt-financed transfer of consideration exception to the disguised sale rules. The regulations except certain debt-financed distributions in determining whether a partner received “money or other consideration” for disguised sale purposes. 13 See id. A distribution financed from the proceeds of a partnership liability may be taken into account for disguised sale purposes to the extent the distribution exceeds the distributee partner's allocable share of the partnership liability. See sec. 1.707-5(b)(1), Income Tax Regs. Respondent argues that the entire distribution from the LLC to WISCO should be taken into account for purposes of determining a disguised sale because WISCO did not bear any of the allocable share of the LLC's liability to finance the distribution. We turn now to whether WISCO had any allocable share of the LLC's liability to determine whether the transaction fits within the exception. <br />B. Partner's Allocable Share of Liability 14 <br />In general a partner's share of a recourse partnership liability equals the portion of that liability, if any, for which the partner bears the economic risk of loss. See sec. 1.752- 1(a)(1), Income Tax Regs. A partner bears the economic risk of loss to the extent that the partner would be obligated to make an unreimbursable payment to any person (or contribute to the partnership) if the partnership were constructively liquidated and the liability became due and payable. Sec. 1.752-2(b)(1), Income Tax Regs.; see IPO II v. Commissioner, 122 T.C. 295, 300- 301 (2004). Chesapeake contends that WISCO's indemnity of GP's guaranty imposes on WISCO the economic risk of loss for the LLC debt. Respondent concedes that an indemnity agreement generally is recognized as an obligation under the regulations. Respondent asserts, however, that WISCO's agreement should be disregarded under the anti-abuse rule for allocation of partnership debt. <br />C. Anti-Abuse Rule Chesapeake counters that WISCO was legally obligated to indemnify GP under the indemnity agreement and therefore WISCO should be allocated the entire economic risk of loss of the LLC's liability. We assume that all partners having an obligation to make payments on a recourse debt actually perform those obligations, irrespective of net worth, to ascertain the economic risk of loss unless the facts and circumstances indicate a plan to circumvent or avoid the obligation. Sec. 1.752-2(b)(6), Income Tax Regs. The anti-abuse rule provides that a partner's obligation to make a payment may be disregarded if (1) the facts and circumstances indicate that a principal purpose of the arrangement between the parties is to eliminate the partner's risk of loss or to create a facade of the partner's bearing the economic risk of loss with respect to the obligation, or (2) the facts and circumstances of the transaction evidence a plan to circumvent or avoid the obligation. See , sec. 1.752-2(j)(1), (3), Income Tax Regs. Given these two tests, we must review the facts and circumstances to determine whether WISCO's indemnity agreement may be disregarded as a guise to cloak WISCO with an obligation for which it bore no actual economic risk of loss. See IPO II v. Commissioner, supra at 300-301. 1. Purpose of the Indemnity Agreement We first consider the indemnity agreement. The parties agreed that WISCO would indemnify GP in the event GP made payment on its guaranty of the LLC's $755.2 million debt. GP did not require the indemnity, and no provision of the indemnity mandated that WISCO maintain a certain net worth. WISCO was chosen as the indemnitor, rather than Chesapeake, after PWC advised Chesapeake's executives that WISCO's indemnity would not only allow Chesapeake to defer tax on the transaction, but would also cause the economic risk of loss to be borne only by WISCO's assets, not Chesapeake's. Moreover, the contractual provisions reduced the likelihood of GP invoking the indemnity against WISCO. The indemnity covered only the loan's principal, not interest. In addition, GP would first have to proceed against the LLC's assets before demanding indemnification from WISCO. In the unlikely event WISCO had to pay on the indemnity, WISCO would receive an increased interest in the LLC proportionate to any payment made under the indemnity. We find compelling that a Chesapeake executive represented to Moody's and Standard & Poor's that the only risk associated with the transaction was the tax risk. We are left with no other conclusion than that Chesapeake crafted the indemnity agreement to limit any potential liability to WISCO's assets. 2. WISCO's Assets and Liabilities We now focus on whether WISCO had sufficient assets to cover the indemnity regardless of how remote the possibility it would have to pay. Chesapeake maintains that WISCO had sufficient assets to cover the indemnity agreement. WISCO contributed almost all of its assets to the LLC and received a special distribution and a 5-percent interest in the LLC. Moreover, Chesapeake contends that WISCO did not need to have a net worth covering the full amount of its obligations with respect to the LLC's debt. See sec. 1.752-2(b)(6), Income Tax Regs. WISCO's assets after the transfer to the LLC included the $151.05 million intercompany note and the $6 million jet. WISCO had a net worth, excluding its LLC interest, of approximately $157 million or 21 percent of the maximum exposure on the indemnity. The value of WISCO's LLC interest would have been zero if the indemnity were exercised because the agreement required GP to proceed and exhaust its remedies against the LLC's assets before seeking indemnification from WISCO. <br />We may agree with Chesapeake that no Code or regulation provision requires WISCO to have assets covering the full indemnity amount. We note, however, that a partner's obligation may be disregarded if undertaken in an arrangement to create the appearance of the partner's bearing the economic risk of loss when the substance of the arrangement is in fact otherwise. See sec. 1.752-2(j)(1), Income Tax Regs. WISCO's principal asset after the transfer was the intercompany note. The indemnity agreement did not require WISCO to retain this note or any other asset. Further, Chesapeake and its management had full and absolute control of WISCO. Nothing restricted Chesapeake from canceling the note at its discretion at any time to reduce the asset level of WISCO to zero. In fact WISCO's board, which included many Chesapeake executives, did cancel the note and issued an intercompany dividend to Chesapeake in 2001. We find WISCO's intercompany note served to create merely the appearance, rather than the reality, of economic risk for a portion of the LLC debt. <br />In addition, WISCO remained subject to the Fox River liability, and WISCO and other Chesapeake subsidiaries guaranteed a $450 million credit line obtained by Chesapeake in 2000. This guaranty and the Fox River liability further reduced WISCO's net worth. GP neither asked for nor received any assurances that WISCO would not further encumber its assets. We find that WISCO's agreement to indemnify GP's guaranty lacked economic substance and afforded no real protection to GP. 3. Anti-Abuse Rule Illustration Chesapeake seeks to distinguish the transaction in this case from the transaction illustrated in the anti-abuse rule. See sec. 1.752-2(j)(4), Income Tax Regs. (illustrating when payment obligations may be disregarded). The illustration considers a consolidated group of corporations that use a thinly capitalized subsidiary as a partner in a general partnership with a recourse debt payment guaranteed by the other partner. The circumstances are deemed indicative of a plan enabling the corporate group to enjoy the losses generated by the partnership's property while avoiding the subsidiary's obligation to restore any deficit in its capital account. Chesapeake argues WISCO was not a newly- created entity, as was the subsidiary in the illustration, but had been in business before the transaction. We find WISCO's preexistence insufficient to distinguish this transaction from the illustration. <br />A thinly capitalized subsidiary with no business operations and no real assets cannot be used to shield a parent corporation with significant assets from being taxed on a deemed sale. Chesapeake intentionally used WISCO, rather than itself, to limit its exposure under the indemnity agreement. It further limited its exposure only to the assets of WISCO. We refuse to interpret the illustration to provide additional protection. Moreover, this appears to be a concerted plan to drain WISCO of assets and leave WISCO incapable, as a practical matter, of covering more than a small fraction of its obligation to indemnify GP. We find this analogous to the illustration because in both cases the true economic burden of the partnership debt is borne by the other partner as guarantor. Accordingly, we do not find that the anti- abuse rule illustration extricates Chesapeake, but rather it demonstrates what Chesapeake strove to accomplish. 4. Rev. Proc. 89-12 Does Not Apply to Anti-Abuse Rule Chesapeake also argues that it would be found to bear the economic risk of loss if the Court would apply a 10-percent net worth requirement. In so arguing, Chesapeake relies on Rev. Proc. 89-12, 1989-1 C.B. 798, which stated that a limited partnership would be deemed to lack limited liability for advance ruling purposes if a corporate general partner of the partnership had a net worth equaling 10 percent or more of the total contributions to the partnership. We decline Chesapeake's invitation to extend the 10-percent net worth test. Requirements for advance ruling purposes have no bearing on whether a partner will be treated as bearing the economic risk of loss for a partnership's liability. There are no mechanical tests. The anti-abuse rule mandates that we consider the facts and circumstances. We decline to establish a bright-line percentage test to determine whether WISCO bore the economic risk of loss with respect to the LLC's liability. 5. Speculative Fraudulent Conveyance Claims Chesapeake argues alternatively that WISCO bore the economic risk of loss because GP had a right to make fraudulent conveyance claims against Chesapeake and Chesapeake's financial subsidiary Cary Street. Chesapeake contends that such potential claims exposed WISCO to a risk of loss in excess of WISCO's net worth. This argument is flawed on many points. First, a fraudulent conveyance is simply a cause of action, not an obligation. See La Rue v. Commissioner, 90 T.C. 465, 478-480 (1988); see also Long v. Commissioner, 71 T.C. 1, 7-8 (1978), supplemented by 71 T.C. 724 (1979), affd. in part and remanded on other grounds 660 F.2d 416 [48 AFTR 2d 81-5912] (10th Cir. 1981). The Court may consider obligations only in allocating recourse liabilities of a partnership. See sec. 1.752-2(b)(3), Income Tax Regs. Next, Chesapeake's fraudulent conveyance argument connotes that Chesapeake engaged in a plan to circumvent or avoid the obligation. This argument completely undercuts and overrides Chesapeake's attempt to create an obligation on behalf of Chesapeake and Cary Street. Finally, we would render the anti-abuse rule meaningless by creating an automatic exception for speculative fraudulent conveyance claims. Accordingly, we reject this argument. <br />We have carefully considered the facts and circumstances and find that the indemnity agreement should be disregarded because it created no more than a remote possibility that WISCO would actually be liable for payment. Chesapeake used the indemnity to create the appearance that WISCO bore the economic risk of loss for the LLC debt when in substance the risk was borne by GP. We find that WISCO had no economic risk of loss and should not be allocated any part of the debt incurred by the LLC. <br />Consequently, the distribution of cash to WISCO does not fit within the debt-financed transfer exception to the disguised sale rules. Instead, we find Chesapeake has failed to rebut the 2- year presumption. The facts and circumstances evince a disguised sale. Accordingly, we conclude that WISCO sold its business assets to GP in 1999, the year it contributed the assets to the LLC, not the year it liquidated its LLC interest. <br />II. Whether Chesapeake Is Liable for an Accuracy-Related Penalty Under Section 6662(a) We now turn to respondent's determination that Chesapeake is liable for the accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of income tax. Respondent bears the burden of proof for a penalty asserted in an amended answer. See Rule 142(a). <br />A substantial understatement of income tax exists for a corporation if the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return, or $10,000. Sec. 6662(d)(1); sec. 1.6662-4(b)(1), Income Tax Regs. Chesapeake's correct tax for 1999 is $217,576,519, which includes the $183,458,981 deficiency determined in the deficiency notice. Respondent has established the understatement of income tax is substantial as it exceeds both 10 percent of the correct tax ($21,757,651) and $10,000. <br />The accuracy-related penalty under section 6662(a) does not apply, however, to any portion of an underpayment if a taxpayer shows that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, that portion. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. We consider the pertinent facts and circumstances, including the taxpayer's efforts to assess his or her proper tax liability, the taxpayer's knowledge and experience and the reliance on the advice of a professional in determining whether the taxpayer acted with reasonable cause and in good faith. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the extent of the taxpayer's effort to assess the proper tax liability. Id. <br />Reasonable cause has been found when a taxpayer selects a competent tax adviser, supplies the adviser with all relevant information and, in a manner consistent with ordinary business care and prudence, relies on the adviser's professional judgment as to the taxpayer's tax obligations. Sec. 6664(c); United States v. Boyle, 469 U.S. 241, 250-251 [55 AFTR 2d 85-1535] (1985); sec. 1.6664- 4(b)(1), Income Tax Regs. A taxpayer may rely on the advice of any tax adviser, lawyer or accountant. United States v. Boyle, supra at 251. <br />The right to rely on professional tax advice, however, is not unlimited. Neither reliance on the advice of a professional tax adviser nor reliance on facts that, unknown to the taxpayer, are incorrect necessarily demonstrates or indicates reasonable cause or good faith. See Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122, 205-206 [94 AFTR 2d 2004-5666] (D. Conn. 2004), affd. 150 Fed. Appx. 40 [96 AFTR 2d 2005-6344] (2d Cir. 2005). The advice must not be based on unreasonable factual or legal assumptions and must not unreasonably rely on representations, statements, findings, or agreements of the taxpayer or any other person. Sec. 1.6664- 4(c)(1)(ii), Income Tax Regs. Courts have repeatedly held that it is unreasonable for a taxpayer to rely on a tax adviser actively involved in planning the transaction and tainted by an inherent conflict of interest. See e.g., Mortensen v. Commissioner, 440 F.3d 375, 387 [97 AFTR 2d 2006-1229] (6th Cir. 2006), affg. T.C. Memo. 2004-279 [TC Memo 2004-279]; Pasternak v. Commissioner, 990 F.2d 893 [71 AFTR 2d 93-1469] (6th Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo. 1991-181 [1991 TC Memo ¶91,181]; Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000), affd. 299 F.2d 221 (3d Cir. 2002). A professional tax adviser with a stake in the outcome has such a conflict of interest. See Pasternak v. Commissioner, supra at 903. <br />Chesapeake claims it reasonably relied in good faith on PWC's tax advice and “should” opinion and therefore no penalty should be imposed. Respondent contends that Chesapeake unreasonably relied on an opinion riddled with improper assumptions written by a tax adviser with a conflict of interest. We look to whether PWC's advice was reasonable and inquire whether PWC's advice was based on all pertinent facts and circumstances and not on unreasonable factual or legal assumptions. See Long Term Capital Holdings v. United States, supra at 205-206. <br />A. PWC Based Its Advice on Unreasonable Assumptions We now focus on whether PWC's advice was reasonable. Chesapeake contends that it relied on legal analysis prescribed in PWC's “should” opinion. Chesapeake submitted a draft, not the original, of the “should” opinion into evidence. We therefore look to the draft opinion to determine whether PWC's advice was reasonable. <br />Chesapeake paid PWC an $800,000 flat fee for the opinion, not based on time devoted to preparing the opinion. Mr. Miller testified that he and his team spent hours on the opinion. We find this testimony inconsistent with the opinion that was admitted into evidence. The Court questions how much time could have been devoted to the draft opinion because it is littered with typographical errors, disorganized and incomplete. Moreover, Mr. Miller failed to recognize several parts of the opinion. The Court doubts that any firm would have had such a cavalier approach if the firm was being compensated solely for time devoted to rendering the opinion. <br />In addition, the opinion was riddled with questionable conclusions and unreasonable assumptions. Mr. Miller based his opinion on WISCO maintaining 20 percent of the LLC debt. Mr. Miller had no case law or Code authority to support this percentage, however. He instead relied on an irrelevant revenue procedure as the basis for issuing the “should” opinion. A “should” opinion is the highest level of comfort PWC offers to a client regarding whether the position taken by the client will succeed on the merits. 15 We find it unreasonable that anyone, let alone an attorney, would issue the highest level opinion a firm offers on such dubious legal reasoning. <br />We are also nonplused by Mr. Miller's failure to give an understandable response when asked at trial how PWC could issue a “should” opinion if no authority on point existed. He demurred that it was what Chesapeake requested. The only explanation that makes sense to the Court is that no lesser level of comfort would have commanded the $800,000 fixed fee that Chesapeake paid for the opinion. <br />We are also troubled by the number of times the draft opinion uses “it appears.” For example, it states, "[i]n focusing on the language of the 752 regs, it appears that such regulation adopts an all or nothing approach.” Mr. Miller had no basis for that position other than his interpretation of the regulations. Further, Mr. Miller assumed that the indemnity would be effective and that WISCO would hold assets sufficient to avoid the anti-abuse rule. PWC assumed away the very crux of whether the transaction would qualify as a nontaxable contribution of assets to a partnership. In so doing PWC failed to consider that the indemnity lacked substance. Neither the joint venture agreement nor the indemnity agreement included provisions requiring WISCO to maintain any minimum level of capital or assets. WISCO and Chesapeake could also remove WISCO's main asset, the intercompany note, from WISCO's books at any time and for any reason. This possibility gutted any substance for the indemnity. <br />We find that Chesapeake's tax position did not warrant a “should” opinion because of the numerous assumptions and dubious legal conclusions in the haphazard draft opinion that has been admitted into the record. Further, we find it inherently unreasonable for Chesapeake to have relied on an analysis based on the specious legal assumptions. <br />B. Chesapeake Lacked Good Faith Moreover, Chesapeake did not act with reasonable cause or in good faith as it relied on Mr. Miller's advice. Chesapeake argues that it had every reason to trust PWC's judgment because of its long-term relationship with the firm. PWC crossed over the line from trusted adviser for prior accounting purposes to advocate for a position with no authority that was based on an opinion with a high price tag—$800,000. <br />Any advice Chesapeake received was tainted by an inherent conflict of interest. We would be hard pressed to identify which of his hats Mr. Miller was wearing in rendering that tax opinion. There were too many. Mr. Miller not only researched and drafted the tax opinion, but he also “audited” WISCO's and the LLC's assets to make the assumptions in the tax opinion. He made legal assumptions separate from the tax assumptions in the opinion. He reviewed State law to make sure the assumptions were valid regarding whether a partnership was formed. In addition, he was intricately involved in drafting the joint venture agreement, the operating agreement and the indemnity agreement. In essence, Mr. Miller issued an opinion on a transaction he helped plan without the normal give-and-take in negotiating terms with an outside party. We are aware of no terms or conditions that GP required before it would close the transaction. We are aware only of the condition that Chesapeake's board would not close unless it received the “should” opinion. Chesapeake acted unreasonably in relying on the advice of PWC given the inherent and obvious conflict of interest. See New Phoenix Sunrise Corp. & Subs. v. Commissioner, 132 T.C. 161, 192-194 (2009) (reliance on opinion by law firm actively involved in developing, structuring and promoting transaction was unreasonable in face of conflict of interest); see also CMA Consol., Inc. v. Commissioner, T.C. Memo. 2005-16 [TC Memo 2005-16] (reliance not reasonable as advice not furnished by disinterested, objective advisers); Stobie Creek Invs., LLC v. United States, 82 Fed. Cl. 636, 714-715 [102 AFTR 2d 2008-5442] (2008), affd. ___ Fed. 3d ___ (June 11, 2010). <br />We also find suspect the exorbitant price tag associated with the sole condition of closing. Chesapeake essentially bought an insurance policy as to the taxability of the transaction. PWC received an $800,000 fixed fee for its tax opinion. PWC did not base its fee on an hourly rate plus expenses. The fee was payable and contingent on the closing of the joint venture transaction. PWC would receive payment only if it issued Chesapeake a “should” opinion on the joint venture transaction. PWC therefore had a large stake in making sure the closing occurred. <br />Considering all the facts and circumstances, PWC's opinion looks more like a quid pro quo arrangement than a true tax advisory opinion. If we were to bless the closeness of the relationship, we would be providing carte blanche to promoters to provide a tax opinion as part and parcel of a promotion. Independence of advisers is sacrosanct to good faith reliance. We find that PWC lacked the independence necessary for Chesapeake to establish good faith reliance. We further find that Chesapeake did not act with reasonable cause or in good faith in relying on PWC's opinion. We sustain respondent's determination that Chesapeake is liable for the accuracy-related penalty under section 6662(b)(2) for 1999. 16 <br />We have considered all remaining arguments the parties made and, to the extent not addressed, we find them to be irrelevant, moot, or meritless. <br />To reflect the foregoing, Decision will be entered for respondent. <br />________________________________________<br />1 <br /> All monetary amounts are rounded to the nearest dollar. <br />________________________________________<br />2 <br /> Chesapeake Corporation changed its name to Canal Corporation in June 2009. We refer to the corporation as Chesapeake in this Opinion. <br />________________________________________<br />3 <br /> All section references are to the Internal Revenue Code <br />________________________________________<br />4 <br /> Salomon referred to the leveraged partnership deal as <br />________________________________________<br />5 <br /> Salomon had valued WISCO between $800 and $900 million in 1998. <br />________________________________________<br />6 <br /> Mr. Miller is a licensed attorney. He practiced law with the law firm Jenkens & Gilchrist before joining Coopers & Lybrand's, now PWC's, Washington National Tax practice in 1996. He was not a practicing attorney at the time he gave the legal opinion here. <br />________________________________________<br />7 <br /> We use the terms “partners,” “partnership,” and “LLC” for narrative convenience only as these are the terms used by the parties to the transaction. No inference should be drawn from our use of such terms regarding any legal status or relationship. <br />________________________________________<br />8 <br /> Rev. Proc. 89-12, sec. 4.07, 1989-1 C.B. 798, 801, states that the Internal Revenue Service will generally rule that an organization lacks limited liability if the net worth of the corporate general partners equals at least 10 percent of the total contributions to the limited partnership and is expected to continue to equal at least 10 percent throughout the life of the partnership. <br />________________________________________<br />9 <br /> Chesapeake maintained the bank accounts for its subsidiaries. <br />________________________________________<br />10 <br /> The value of WISCO's assets contributed ($775 million) less the distribution ($755.2 million) equals the initial value of WISCO's 5-percent LLC interest ($19.8 million). <br />________________________________________<br />1 <br /> <br />________________________________________<br />11 <br /> Sec. 731 concerns distributions to a partner acting in his capacity as a partner. Neither party asserts that sec. 731 applies in this case. Moreover, sec. 731 does not apply if a partner contributes property to a partnership and the partnership distributes property to the partner within a short period to effect an exchange of property between two or more partners or between the partnership and a partner. Sec. 1.731-1(c)(3), Income Tax Regs. We will not therefore consider the effect of sec. 731 on the transaction. See sec. 1.707-1(a), Income Tax Regs. <br />________________________________________<br />12 <br /> Transfers described in sec. 707(a)(2)(B) are treated as occurring between a partnership and a non-partner or partner acting outside his capacity as a member of the partnership. Sec. 707(a)(1), (2)(B). <br />________________________________________<br />13 <br /> A distribution qualifies as a debt-financed transfer if it meets certain requirements. See sec. 1.707-5(b)(1), Income Tax Regs. We consider only the requirements at issue. <br />________________________________________<br />14 <br /> A partner's allocable share of a partnership's recourse liability equals the partner's share of liability pursuant to sec. 752 and its regulations, multiplied by a fraction of which the numerator is the portion of the liability that is allocable to the distribution under sec. 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), and the denominator is the total amount of the liability. See secs. 1.707-5(b)(2)(i), 1.752-1(a)(1), 1.752-2, Income Tax Regs. The parties agree that the LLC's liability to BOA was recourse. The parties do not dispute that the special distribution to WISCO and the BOA loan were both $755.2 million. We need only determine WISCO's share of the LLC's liability under sec. 752 and its regulations. <br />________________________________________<br />15 <br /> Mr. Miller testified that tax practitioners render different levels of opinion based on their comfort that the legal conclusions contained in the opinion are correct as a matter of law assuming the factual representations and assumptions set forth in the opinion are also correct. A “reasonable basis” opinion has a 33-percent chance of success on the merits. See sec. 1.6662-3(b)(3), Income Tax Regs. A “substantial authority” opinion has a 40-percent chance of success on the merits. See sec. 1.6662-4(d)(2), Income Tax Regs. A “more likely than not” opinion has a 51-percent chance of success on the merits. See id. Mr. Miller did not give an exact percentage regarding a “should” opinion, but he testified that it is materially higher than that of a “more likely than not” opinion. <br />________________________________________<br />16 <br /> This holding should not be interpreted as requiring taxpayers to obtain a second tax opinion to qualify for the reasonable reliance exception under sec. 6664(c). Rather, we hold that taxpayers may not reasonably rely on an adviser tainted by an inherent conflict of interest the taxpayer had reason to know of. <br /> © 2010 ThomsonReturn Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-25338543943443368362010-08-09T06:02:00.000-04:002010-08-09T06:03:05.035-04:00constructive dividendTransfer of home to closely held shareholders was constructive dividend; penalties imposed<br />RVJ Cezar Corporation et al, TC Memo 2010 –173<br />A new Tax Court decision illustrates the need for closely held corporations to be wary of constructive dividends when dealing with their owners. A closely held construction company's transfer of a home to its shareholders resulted in dividend/capital gain income to them, and taxable gain to the corporation. What's more, both the shareholders and the corporation were held liable for accuracy related penalties. <br />Background. A dividend is a distribution of property from a corporation to its shareholders out of the corporation's earnings and profits. ( Code Sec. 316(a) ) The amount of the distribution equals the fair market value of the distributed property on the distribution date. ( Code Sec. 301(b)(1) , Code Sec. 301(b)(3) ) For dividends received before 2011, qualified dividend income is taxed at the same rates as long-term capital gain. ( Code Sec. 1(h)(11) ) After 2010, unless Congress changes the rules, dividend income will be taxed as ordinary income. The amount of a distribution that exceeds earnings and profits, and is therefore not a dividend, is taxable capital gain to the recipient. ( Code Sec. 301(c)(3) ) Under long-established case law, dividends may be formally declared or they may be constructive. A constructive dividend arises when a corporation confers a benefit on a shareholder by distributing available earnings and profits without expectation of repayment. <br />A corporation that distributes appreciated property to a shareholder recognizes gain as if the property were sold to the shareholder at its fair market value. ( Code Sec. 311(b)(1) ) Gain is recognized to the extent that the property's fair market value exceeds the corporation's adjusted basis in the property. <br />Taxpayers are liable for an accuracy-related penalty for any portion of an underpayment of income tax attributable to negligence or disregard of rules and regulations, unless they establish that there was reasonable cause for the underpayment and that they acted in good faith. ( Code Sec. 6662(a) , Code Sec. 6662(b)(1) , Code Sec. 6664(c)(1) ) Under Code Sec. 6662(b) , an accuracy related applies for a substantial understatement of income tax, i.e., the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return, or $10,000. <br />Facts. Mr and Mrs. Cezar were the sole shareholders of RVJ Cezar Corporation, which built “spec” houses that it sold to the public. They paid $500 for their stock. Mr. Cezar, a general contractor, was the sole employee of the corporation. In 2001, Cezar Corp paid $150,000 for a lot, financing part of the purchase price with a mortgage, and spent $502,000 building an amenity-rich home approximately twice the size of its usual spec homes. Cezar Corp was listed as the sole owner of the spec home on the blueprints, permit, and notice of completion. Some of the construction materials were paid with a credit card issued in both Mr. Cezar's name and Cezar Corp, and the Cezars were unable to document most of the labor costs of building the home. <br />The home was finished in 2004 and was offered for sale, but there were no takers. That year, Cezar Corp transferred the lot and improvements to the Cezars by quitclaim deed; they assumed the outstanding mortgage of $57,227. At the time of the transfer the lot and improvements had a total fair market value of $920,000. The transfer of ownership report filed with the Assessor's Office did not indicate that the property interest transferred to the Cezars was a partial interest. The Cezars did not report the receipt of the lot or the improvements on their return for 2004, nor did the corporation report the distribution of the lot and the improvements on its return for 2004. <br />On audit, IRS determined that the distribution of the lot and the improvements was a constructive dividend from the corporation. It determined that the Cezars received a qualified dividend up to the amount of the corporation's earnings and profits, and treated the balance of the distribution, less their $500 initial capital contribution, as long-term capital gain. IRS also determined that both the Cezars and their corporation were liable for the accuracy related penalty. <br />Tax Court sides with IRS. The Cezars conceded that they received the lot as a constructive dividend from the corporation. However, they argued that the improvements were not a constructive dividend because they owned the improvements by having paid for the construction materials and having done all the work to construct the improvements. The Tax Court agreed with IRS's assessment that improvements are built on land that one owns or else there would be an agreement identifying the rights and responsibilities of the parties. The Cezars failed to show that there was an agreement between them and the corporation that would have allowed them to construct a home on the corporation's property. Their ownership argument also was directly contradicted by Mr. Cezar's statements during the audit that the lot and the improvements were both corporate assets. Moreover, there was no credible evidence to support the Cezars' claim that they owned the improvements by paying the construction costs and personally completing the labor. The only records the Cezars produced to establish that they paid the construction costs were insufficient. Furthermore, the corporation was the sole owner of the lot as well as the improvements from the start of construction until the distribution to the Cezars. The corporation received property tax bills for both the lot and the improvements and did not protest that it had been billed for improvements that it did not own. The Tax Court also find it compelling that the corporation, which was in the business of building and selling homes, offered the lot and the improvements for sale without obtaining any transfer of interest from the Cezars. No prospective buyer would buy only the improvements and not the lot or vice versa. The Tax Court also noted that no other spec home that the corporation sold before or since was owned by the Cezars individually. Rather, all the homes and lots were owned and offered for sale by the corporation. <br />As a result, the Tax Court found that the Cezars didn't establish that they owned the improvements, and sustained IRS's determination that the Cezars must include the distribution of the lot and the improvements in gross income as a constructive dividend from the corporation. The Tax Court also found that treatment of the home as a constructive dividend to the Cezars caused the corporation to recognize taxable income to the extent that the fair market value of the lot and improvement exceeded its adjusted basis. <br />The Tax Court also hit the Cezars with an accuracy related penalty for the underpayment of income tax attributable to negligence or disregard of rules and regulations. It also hit Cezar Corp with an accuracy related penalty for substantial understatement of its income tax.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-42915036158822022752010-08-06T09:19:00.000-04:002010-08-06T09:20:44.777-04:00nominee/alter ego fraudulent transfer caseU.S. v. BLACK, Cite as 106 AFTR 2d 2010-XXXX, 07/16/2010 <br /><br />--------------------------------------------------------------------------------<br />UNITED STATES of America, Plaintiff, v. Daniel R. BLACK, et al., Defendants.<br />Case Information: <br />Code Sec(s): <br /> Court Name: United States District Court, E.D. Washington, <br />Docket No.: No. CV-07-355-RHW, <br />Date Decided: 07/16/2010. <br />Disposition: <br /><br />HEADNOTE <br />. <br /><br />Reference(s): <br /><br />OPINION <br />Michael G. Pitman, Alexis Andrews, US Department of Justice, Washington, DC, for Plaintiff. <br /><br />Daniel R. Black, Chelan, WA, pro se. <br /><br />Maire E. Black, Chelan, WA, pro se. <br /><br />Eowen S. Rosentrater, Law Office of Eowen Rosentrater PLLC, George Roy Guinn, George R. Guinn PS, Spokane, WA, Gary Alan Riesen, Chelan County Prosecuting Attorney, Wenatchee, WA, for Defendants. <br /><br />United States District Court, E.D. Washington, <br /><br />ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT; DENYING THE BLACK DEFENDANTS' AND DEFENDANT HOPE SPRINGS MOTIONS FOR SUMMARY JUDGMENT<br />Judge: ROBERT H. WHALEY, District Judge. <br /><br />Before the Court are Plaintiff's Motion for Summary Judgment (Ct.Rec.121); Defendant Hope Springs Corporation Sole's Motion for Summary Judgment (Ct.Rec.129); and the Black Defendants' Motion for Summary Judgment (Ct.Rec.133). The motions were heard without oral argument. <br /><br />The United States commenced this action on November 2, 2007, in order to reduce to judgment federal income tax assessments against Defendants Daniel R. Black and Maire E. Black, and to foreclose federal tax liens against the following Subject Properties: <br /><br />(1) Parcel A<br />Parcel A is a 160-acre parcel identified by Chelan County Tax # 272201-100000. The address for Parcel A is 56 Union Valley Loop Road, Chelan, Washington. The legal description of Parcel A is as follows: <br /><br />Lots 1 and 2 and the South half of the Northeast quarter; and the Northwest quarter of the Southeast quarter of Section 1, Township 27 North, range 22 East of the Willamette Meridian.<br />(2) Parcel B<br />Parcel B is a 27-acre parcel identified by Chelan County Tax # 272201-230025. A mobile home permanently affixed to the land is located on this property. The legal description of Parcel B is as follows: <br /><br />The Southwest quarter of the Northwest quarter and that portion of Government Lot 4 lying South of Union Valley Road # 38 right of way in Section 1, “township 27 North, Range 22, E.W.M. Chelan County, Washington; except the East 575 feet thereof.<br />(3) Parcel C<br />Parcel C is an 8-acre parcel identified by Chelan County Tax # 272201-200050. Parcel C is commonly known as both 56 Valley Loop Road, Chelan, Washington, and 96 Valley Loop Road, Chelan, Washington. The legal description of Parcel C is as follows: <br /><br />Beginning at the Southwest corner of the Northwest quarter of the Southeast quarter of Section 1, Township 27 North, range 22 East of the Willamette Meridian; thence North to the Northwest corner of the Northeast quarter of said Section 1; thence West 60 feet; thence South 980 feet; thence Southwesterly to a point 174 feet West of a point 320 feet South; thence South 50 feet; thence Southwesterly to a point of 127 feet East of a point 180 feet South; thence South to the South line of the Northeast quarter of the Southwest quarter of the above described in Section 1; thence East 60 feet to the point of beginning. Except right of way for the Union Valley Loop Road.<br />(4) Parcel D<br />Parcel D is a 20-acre parcel identified by Chelan County Tax # 272201-42000 and referred to as orchard property. The legal description of Parcel D is as follows: <br /><br />The North half of the Northwest quarter of the Southeast quarter of Section 1, Township 27 North, Range 22 East of the Willamette Meridian.<br />Defendants Daniel and Maire Black maintain that they are not taxpayers and have no obligation to pay income taxes. From 1981 to 2000, Daniel Black did not file any income tax returns. Sometime prior to 1981, the Blacks formed Summer Hill Freedom Trust. Maire Black served as trustee for Summer Hill Freedom Trust from the time of its creation throughout its existence. Bill Shoenmaker was also a Trustee during this entire time. Sometime prior to 1981, the Blacks also formed B.C. Trust. Maire Black served as a trustee for B.C. Trust from the time of its creation throughout its existence. Bill Shoenmaker was also a Trustee during this entire time. <br /><br />In 1981, Summer Hill Freedom Trust entered into a contract to acquire Parcels A, C, and D. These parcels are contiguous parcels of land. The purchasing contract was signed by Daniel and Maire Black as Trustees. The Blacks reside in a home located on the real property purchased in the name of Summer Hill Freedom Trust. They have resided in this home, on this property, since 1981. The Blacks' daughter and son-in-law live on a mobile home situated on one of the parcels, for which they pay rent. <br /><br />In 1989, Maire Black and Bill Shoenmaker, acting as Trustees for B.C. Trust, purchased Parcel B by warranty deed. The Blacks operate an engineering business on Parcel B. This business was originally known as Techni-Systems Trust, but is now operating under the name of Techni-Systems, LLC. Technic-Systems Trust was controlled by trustee Maire Black. A caretaker lives in a mobile home on Parcel B, next to the office building. The caretaker is not compensated for his caretaker duties and does not pay rent. <br /><br />In March, 1999, the Internal Revenue Service filed Notices of Federal Tax Lien against the Blacks. On June 4, 1999, the Blacks created Hope Springs, Corporation Sole. At the time of Hope Springs' creation, Daniel Black was serving as overseer. He held this position until March, 2009. During this time, he had complete authority over all aspects of Hope Springs. Since its creation, Hope Springs has held office space in the Blacks' residence. <br /><br />On June 9, 1999, Maire Black, as Trustee for Summer Hill Freedom Trust, transferred all its assets-Parcels A, C, and D-to Hope Springs, Corporation Sole by quit claim deed, for no consideration. Bill Schoenmaker did not sign the quit claim deed. On that same day, Maire Black, as Trustee for B.C. Trust, transferred all its assets-Parcel B-to Hope Springs, Corporation Sole by quit claim deed, for no consideration. No one moved on or off the property as a result of the transfer. The engineering business-Techni-Systems Trust-was also unaffected. <br /><br />Summer Hill Freedom Trust made no payments toward the purchase price of Parcels A, C, and D since 1981, but had made payments toward interest. <br /><br />In 2000, the Blacks created Summerhill Supply, LLC. Summerhill Supply, LLC began leasing Parcels A, B, C, and D from Hope Springs in 2001. Summerhill Supply is completely controlled by Daniel and Maire Black, who serve as managers. They receive $500 annually as compensation for the duties they perform as managers. Also in 2000, the Blacks created Techni-Systems, LLC to replace Techni-Systems Trust. Shortly after its formation, Techni-Systems, LLC began leasing property from Summerhill Supply, LLC. Techni-Systems, LLC is controlled by manager Daniel Black. He receives $500 annually as compensation for his role as manager. Technic-Systems, LLC is virtually identical to Technical-Systems Trust. <br /><br />Summary of Transfers and Leases for Parcel A, C, and D<br /> Date Action<br />---------------------------------------------------------------------------<br />1981 Summerhill Freedom Trust entered into contract to purchase<br />---------------------------------------------------------------------------<br />March, 1999 Notice of Federal Tax Lien filed<br />---------------------------------------------------------------------------<br />June 9, 1999 Summerhill Freedom Trust transferred parcels to Hope<br /> Springs, Corporation Sole<br />---------------------------------------------------------------------------<br />2001 Summerhill Supply, LLC leased parcels from Hope Springs<br />Summary of Transfers and Leases for Parcel B<br /> Date Action<br />---------------------------------------------------------------------------<br />1999 B.C. Trust purchased parcel by warranty deed<br />---------------------------------------------------------------------------<br />March, 1999 Notice of Federal Tax Lien filed<br />---------------------------------------------------------------------------<br />June 9, 1999 B.C. Trust transferred parcels to Hope Springs, Corporation<br /> Sole<br />---------------------------------------------------------------------------<br />2001 Summerhill Supply, LLC leased parcels from Hope Springs<br />---------------------------------------------------------------------------<br />2001 Techni-Systems leased parcels from Summerhill Supply, LLC<br />Throughout all these property transfers, leases, and sub-leases, the Blacks continue to live on the property. They run their engineering business out of the property and also operate an orchard on part of the land. They pay no rent. <br /><br />In March 2009, Daniel Black transferred the title of overseer of Hope Springs to Greg Hanks. Mr. Hanks was given no ledger or bank records for Hope Springs when he assumed the title of overseer, and had no knowledge of Hope Springs' affairs prior to his appointment as overseer. There is no evidence that Hope Springs has ever interfered with the Blacks' use of the property. The Blacks own no assets whatsoever. They have not held property in their own names since 1981. <br /><br />Summary of Tax Assessments against Defendant Daniel R. Black<br />Beginning in 1998, a delegate of the Secretary of the Treasury made assessments of federal income taxes, penalties and interest, and other statutory additions against Defendant Daniel R. Black on the dates, in the amounts, and for the taxable periods set forth below: <br /><br /> Tax Year Assessment Date Amount Assessed Total, including assessed<br /> penalties & interest,<br /> as of 6/1/2010<br />--------------------------------------------------------------------------<br />1987 1/12/98 $944.22 $1,137.58<br />--------------------------------------------------------------------------<br />1993 1/12/98 $23,946.40 $332,046.75<br />--------------------------------------------------------------------------<br />1994 1/12/98 $198,133.00 $611,126.50<br />--------------------------------------------------------------------------<br />1995 1/12/98 $153,623.00 $437,054.16<br /> 8/12/02<br />--------------------------------------------------------------------------<br />Total $1,381,364.99<br />Summary of Tax Assessments against Defendant Maire E. Black<br />Beginning in 1998, a delegate of the Secretary of the Treasury made assessments of federal income taxes, penalties and interest, and other statutory additions against Defendant Maire E. Black on the dates, in the amounts, and for the taxable periods set forth below: <br /><br /> Tax Year Assessment Date Amount Assessed Total, including assessed<br /> penalties & interest,<br /> as of 6/1/2010<br />--------------------------------------------------------------------------<br />1989 1/5/98 $1,075.00 $1,502.31<br />--------------------------------------------------------------------------<br />1993 1/5/98 $81,331.15 $351,702.86<br />--------------------------------------------------------------------------<br />1994 1/5/98 $169,969.00 $522,796.42<br />--------------------------------------------------------------------------<br />1995 1/5/98 $129,770.50 $368,021.81<br /> 8/12/02<br />--------------------------------------------------------------------------<br />Total $1,244,023.40<br />Summary of Tax Assessments against Defendants Daniel R. Black and Maire E. Black<br />Beginning in 2001, a delegate of the Secretary of the Treasury made assessments of federal income taxes, penalties and interest, and other statutory additions against Defendants Daniel R. Black and Maire E. Black on the dates, in the amounts, and for the taxable periods set forth below: <br /><br /> Tax Year Assessment Date Amount Assessed Total, including assessed<br /> penalties & interest,<br /> as of 6/1/2010<br />--------------------------------------------------------------------------<br />1996 3/19/01 $392,402.17 $1,030,587.11<br /> 8/12/02<br />--------------------------------------------------------------------------<br />1997 3/26/01 $264,508.07 $639,274.67<br /> 8/12/02<br />--------------------------------------------------------------------------<br />1998 4/2/01 $407,488.77 $919,291.86<br /> 8/12/02<br />--------------------------------------------------------------------------<br />1999 3/05/01 $224,353.90 $459,004.15<br /> 8/12/02<br />--------------------------------------------------------------------------<br />Total $3,048,157.79<br />These assessments have resulted in the creation of federal tax liens upon all property and rights to property belonging to the Blacks. The Chelan County Auditor recorded a Notice of Federal Tax Lien with respect to the assessments in Chelan County, as follows: <br /><br /> Date Notice Filed Against Tax Years<br />--------------------------------------------------------------------------<br />3/17/1999 Daniel R. Black 1987, 1993, 1994, and 1995<br />--------------------------------------------------------------------------<br />3/17/1999 Maire E. Black 1989, 1993, 1994, and 1995<br />--------------------------------------------------------------------------<br />8/22/2002 Daniel R. Black and Maire E. Black 1996, 1997, 1998, and 1999<br />--------------------------------------------------------------------------<br />10/24/2000 B.C. Trust Summer Hill Freedom 1987, 1993, 1994, and 1995<br /> Trust, and Hope Springs<br /> Corporation Sole, as nominees of<br /> Daniel R. Black<br />--------------------------------------------------------------------------<br />10/24/2000 B.C. Trust Summer Hill Freedom 1989, 1993, 1994, and 1995<br /> Trust, and Hope Springs<br /> Corporation Sole, as nominees of<br /> Maire E. Black<br />--------------------------------------------------------------------------<br />8/22/2002 Hope Springs Corporation Sole 1996, 1997, 1998, and 1999<br /> as nominee of Daniel R. Black<br /> and Maire E. Black<br />On June 12, 2009, the Court entered an Order whereby it determined that by default B.C. Trust and Summer Hill Freedom Trust were the nominees and/or alter egos of Daniel and Maire Black (Ct.Rec.63). It specifically ruled that to the extent that B.C. Trust and Summer Hill Freedom Trust purported to hold title to the subject property, it did so as the nominee and/or alter ego of Daniel and Maire Black. Id. <br /><br />STANDARD OF REVIEW<br />Plaintiff, Defendant Hope Springs, Corporation Sole, and the Black Defendants all move for summary judgment. Summary judgment is appropriate if the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). There is no genuine issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party has the initial burden of showing the absence of a genuine issue of fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the moving party meets it initial burden, the non-moving party must go beyond the pleadings and “set forth specific facts showing that there is a genuine issue for trial.” Id. at 325; Anderson, 477 U.S. at 248. <br /><br />In addition to showing that there are no questions of material fact, the moving party must also show that it is entitled to judgment as a matter of law. Smith v. University of Washington Law School, 233 F.3d 1188, 1193 (9th Cir.2000). The moving party is entitled to judgment as a matter of law when the nonmoving party fails to make a sufficient showing on an essential element of a claim on which the nonmoving party has the burden of proof. Celotex, 477 U.S. at 323. <br /><br />When considering a motion for summary judgment, a court may neither weigh the evidence nor assess credibility; instead, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.”Anderson , 477 U.S. at 255. <br /><br />MOTIONS FOR SUMMARY JUDGMENT<br />Each party has filed a motion and has asserted various arguments in support of their positions. The positions are somewhat inter-related. At the crux of the issue is whether the Hope Springs Corporation Sole is the nominee or alter ego of the Black Defendants. Defendants also challenge the Court's jurisdiction to hear this matter. Below is a summary of the positions of the respective parties' with regard to their motions for summary judgment. <br /><br />1. Plaintiff's Motion for Summary Judgment<br />Plaintiff argues that it has satisfied its initial burden of proving the valid tax assessments. It also asserts that Hope Springs is merely the Blacks' nominee or alter ego and the Blacks are the true beneficial owners of the properties. As such, the tax liens can be enforced against the properties owned by Hope Springs just as though the Blacks were the record title holders. Plaintiff asks the Court to set aside the purported conveyances of the property between Summerhill Freedom Trust and Hope Springs Corporation based on the fact that those transfers were fraudulent. Finally, Plaintiff asks the Court to foreclose the federal tax liens as to Parcels A, B, C, and D (Subject Properties). <br /><br />2. The Black Defendants' Motion for Summary Judgment<br />The Black Defendants assert that any Internal Revenue debts were discharged in their 2001 Chapter 7 bankruptcy proceedings, due to the fact that at no time during the proceedings did the Internal Revenue Service file an appearance as a creditor or make any appearance at any creditor's meetings, made no attempt to oppose their petition, and made no effort to set aside the final judgment. <br /><br />Defendants maintain that at no time during the tax years alleged did they voluntarily elect to operate through any legal form of organization that would have vested the Internal Revenue Service with lawful jurisdiction to impose and assess any federal income tax. Specifically, Defendants maintain that the Internal Revenue Service reliance on 26 U.S.C. § 7401 is misplaced because the implementing regulation to that section relates to Alcohol, Tobacco, and Firearms related activities and they never were engaged in such activities. <br /><br />Defendants assert that the Notice of Assessment and Demand were defective as they were not prepared on Form 17, as required by Treasury Decision 1995. <br /><br />Defendants also assert that the tax assessments are merely “naked assessments” which are void as a matter of law and constitute only self-serving declarations. <br /><br />Defendants allege that the Internal Revenue Service knowingly prepared false entries on Defendants' Individual Master File for the purpose of creating a legal fiction to facilitate the preparation of false assessments, and false Federal Tax liens. <br /><br />Defendants maintain that they have never purchased an interest in or conveyed an interest in the parcels. Specifically, they argue that they have never appeared as owners in the chain-of-title to the parcels. Also, they assert that the court is without subject matter jurisdiction to attribute ownership to the Defendants when the public record, which is conclusive evidence, clearly establishes the Defendants have never enjoyed an ownership interest in the parcels. <br /><br />3. Defendant Hope Springs Corporation Sole's Motion for Summary Judgment<br />Defendant Hope Springs Corporation Sole asserts that it acquired the parcels by purchase for value. It is the bona fide purchaser for value of Parcels A, C, and D, by assuming the debt of the previous property owner. It argues that the public record in Chelan County is conclusive evidence of title ownership and because the Black Defendants never appear in the chain-of-title, Plaintiff is without legal authority to lien the real property owned by Defendant Hope Springs. Defendant asserts that it is not a mere nominee of Daniel R. Black and Maire E. Black, and it is entitled to equitable subrogation and is the first-position lien holder for parcels A, C, and D. Defendant seeks attorneys' fees against Plaintiff, asserting that Plaintiff's claim against Defendant Hope Springs is unreasonable and without foundation. Additionally, Defendant Hope Springs challenges the failure of the Internal Revenue Service to prepare and serve written notice notifying Defendant Hope Springs Corporation Sole of the existence of any federal tax liens and notice of collections due process hearing. <br /><br />Defendant Hope Springs also asserts that the tax lien against the parcels are void because it is a tax-exempt entity and asserts that Plaintiff's action is time-barred. Finally, Defendant argues that because Plaintiff has failed to adequately plead supplemental jurisdiction, allegations referencing Washington law is a nullity. <br /><br />CHALLENGES TO THE COURT'S JURISDICTION<br />Defendants have asserted various challenges to the Court's jurisdiction over this action. Each of these arguments will be addressed. <br /><br />The Black Defendants argue that the Court lacks jurisdiction because the taxes at issue are “direct taxes without apportionment.” This argument is frivolous. See In re Becraft, 885 F.2d 547, 548 [64 AFTR 2d 89-5656] (9th Cir.1989) (“We hardly need comment on the patent absurdity and frivolity of such a proposition [that direct nonapportioned income taxes are unconstitutional].”). They argue that the Court lacks jurisdiction because the taxes at issue are “not indirect taxes in the nature of an excise.” This argument is also frivolous. See Philips v. C.I.R., 1996 WL 593497 [78 AFTR 2d 96-6997] (9th Cir.1996). Their argument that they are immune from taxation because they did not engage in “alcohol, tobacco and firearms activities” during the years in question is frivolous. See Walter v. I.R.S., 1994 WL 760812 [74 AFTR 2d 94-6936] (E.D.Cal.1994). <br /><br />It is not necessary that the notice of demand letters be sent on Form 17. See Hanson v. United States, 7 F.3d 137, 138 [72 AFTR 2d 93-5922] (9th Cir.1993) (per curiam). An IRS Form 5340 is admissible evidence and sufficient proof that notice of deficiency was properly served and assessment of deficiency properly made.Id. The Black Defendants allegation that the Internal Revenue Service knowingly prepared false entries on the Blacks' Individual Master File is a conclusory argument that is not supported by the record. Notably, the Black Defendants have failed to identify any specific alleged inaccuracy. <br /><br />Naked Assessments<br />Defendants argue that the United States is relying upon “naked assessments” to support its claims. The Court disagrees. Rather, the Government has introduced substantive evidence that the Blacks received unreported income. According to the Declaration of Alfred Ramos, the IRS determined the Blacks' income for the 1987, 1993, 1994, and 1995 tax years by analyzing bank deposits for the various trusts Daniel Black controlled, as well as a evaluation of real estate transactions entered into by one of those trusts. The income determined by the IRS for the years 1993, 1994, and 1995 tax years was very similar to, or lower than, the income reported by the Blacks in joint tax returns they submitted for 1993, 1994, and 1995, in 2000. A Notice of Deficiency was prepared and issued to the Blacks, and no petition was filed with the Tax Court within the 90-day statutory period for challenging the IRS's determination prior to assessment. The Government has established that the Blacks' individual assessments were based on well-founded determinations, many of which were subsequently confirmed by tax returns submitted by the Blacks, and the Blacks' joint assessments were based on information provided in tax returns submitted by the Blacks. <br /><br />Discharge in Bankruptcy<br />The Black Defendants argue that their tax liabilities were discharged in their 2001 Chapter 7 bankruptcy. Pursuant to 11 U.S.C. § 523(a)(1) provides that taxes are non-dischargeable where a return, if required was either (i) not filed, or (ii) filed late and “after two years before the date of the filing of the bankruptcy petition.” All of the taxes at issue in this case fall under one of these two exceptions. <br /><br />Summary of Tax Returns for Daniel R. Black<br /> Year Filed by Black Dischargeable<br />----------------------------------------------------------------<br />1987 no no § 523(a)(1)(B)(i)<br />----------------------------------------------------------------<br />1993 11/2000 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1994 11/2000 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1995 11/2000 no § 523(a)(1)(B)(ii)<br />Summary of Tax Returns for Maire E. Black<br /> Year Filed by Black Dischargeable<br />----------------------------------------------------------------<br />1989 no no § 523(a)(1)(B)(i)<br />----------------------------------------------------------------<br />1993 11/2000 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1994 11/2000 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1995 11/2000 no § 523(a)(1)(B)(ii)<br />Summary of Tax Returns for Daniel R. Black and Maire E. Black<br /> Year Filed by Blacks Dischargeable<br />----------------------------------------------------------------<br />1996 2001 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1997 2001 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1998 2001 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />1999 2001 no § 523(a)(1)(B)(ii)<br />----------------------------------------------------------------<br />Pursuant to 11 U.S.C. § 523(a)(7)(b), penalties assessed with respect to a transaction or event that occurred three years before the date of the filing of the bankruptcy petition are dischargeable, even if the underlying tax is not. The United States concedes that the Estimated Tax Penalities, Late Filing Penalities, and Failure to Pay Tax Penalties assessed against the Blacks for each of the tax years at issue except 1998 and 1999 were discharged in their bankruptcy because there were triggered by events occurring prior to July 1998, three years before the date of the filing of the Blacks' bankruptcy petition in 2001. 1. <br /><br />Accuracy penalties were assessed against the Blacks jointly in response to returns they submitted in 2001 for tax years 1996, 1997, 1998, and 1999. The IRS determined that these returns substantially understated the tax they owed. Because the Blacks' inaccurate returns were filed after July 1998, three years before the date of the filing of the Blacks' bankruptcy petition in July 2001, the Accuracy Penalties for 1996, 1997, 1998, and 1999 are not discharged. <br /><br />This relief affects the personal liability of the Blacks only. A discharge in bankruptcy prevents the I.R.S. from taking any action to collect the debt as a personal liability of the debtor. In re Isom, 901 F.2d 744, 745 [67 AFTR 2d 91-314] (9th Cir.1990). The debtor's property, however, remains liable for a debt secured by a valid lien, including a tax lien. Id. The bottom line, then, is that while the bankruptcy discharge may have relieved the Blacks of personal liability for certain penalties, it does not invalidate the tax liens securing those penalties, and those liens can still be enforced against the Blacks' prepetition property, such as the Subject Property. <br /><br />Defendant Hope Springs Arguments<br />Defendant Hope Spring asserts that the United States has violated 26 U.S.C. § 6320 by failing to notify Hope Springs of the federal tax liens. Section 6320 requires only that notice of federal tax liens be given to the individual who is liable for the tax at issue. The United States is not required to provide notice to third parties, such as Hope Springs. See 26 U.S.C. §§ 6320(a)(1), 6321. Defendant's argument that the claim is time-barred because Hope Springs did not receive proper notice of the assessments fails as well because Hope Springs is not personally liable for the taxes at issue. Likewise, regardless of whether Hope Springs is a tax exempt entity, the United States is not seeking to impose any tax against Hope Springs. <br /><br />Plaintiff is not asserting a state law claim, notwithstanding the fact that state law may be relevant to the ultimate determination of the United States' claim seeking to foreclose federal tax liens on certain real property. Even so, Plaintiffs are not required to explicitly plead and invoke supplemental jurisdiction. <br /><br />NOMINEE / ALTER EGO<br />The United States maintains that Hope Springs is the nominee of the Blacks. It also maintains that Hope Springs is the alter ego of the Blacks. <br /><br />There is no direct statutory authority for nominee lien. Sections 6321 and 6322 support the creation of federal tax liens; however, they do not refer to nominee liens or the alter ego doctrines. Nevertheless, it is well-established that the United States may collect a taxpayer's unpaid taxes from the assets of its nominee, instrumentality, or alter ego. G.M. Leasing Corp. v. United States, 429 U.S. 338, 350–351 [39 AFTR 2d 77-475], 97 S.Ct. 619, 50 L.Ed.2d 530 (1977). If the Court finds that Hope Springs is the Blacks' nominee or alter ego, the IRS can properly regard Hope Springs' assess as the Blacks' property subject to the lien under 26 U.S.C. § 6321 and the IRS would be empowered, under § 6331, to levy upon assets held by Hope Springs in satisfaction of the Blacks' income tax liability.Id. <br /><br />Case law instructs that the court consider the following factors in determining whether a particular entity is a nominee of a taxpayer: <br /><br />((1)) Whether the nominee paid no or inadequate consideration; <br />((2)) Whether the property was placed in the name of the nominee in anticipation of litigation or liabilities; <br />((3)) Whether there is a close relationship between the transferor and the nominee; <br />((4)) Whether the parties to the transfer failed to record the conveyance; <br />((5)) Whether the transferor retained possession; and <br />((6)) Whether the transferor continues to enjoy the benefits of the transferred property. <br />See Towe Antique Ford Foundation v. I.R.S., 791 F.Supp. 1450, 1454, aff'd, 999 F.2d 1387 [72 AFTR 2d 93-5495] (9th Cir.1993); United States v. Secapure, 2008 WL 820719 [101 AFTR 2d 2008-1495] (N.D.Cal.2008) (noting that courts throughout the Ninth Circuit rely on the Towe factors to determine nominee status). <br /><br />Washington law determines whether an alter ego exists from whom the Government can satisfy the tax obligation of the tax payer. Aquilino v. United States, 363 U.S. 509, 512–23 [5 AFTR 2d 1698] (1960); Wolfe v. United States, 806 F.2d 1410, 1411 (9th Cir.1986). Under this theory, a corporate entity is disregarded when the corporation has been intentionally used to violate or evade a duty owed to another. Morgan v. Burks, 93 Wash.2d 580, 585, 611 P.2d 751 (1980). This may occur where the liable party has been “gutted” and left without funds by those controlling it in order to avoid actual or potential liability. Id. <br /><br />Under either theory, it is clear from the facts in this case that the Blacks used the artificial legal entity of the trust to insulate themselves from their tax liabilities. 2. Here, it is undisputed that the Blacks have retained complete control of the property held by Hope Springs. Hope Springs paid no consideration to anyone for the parcels of land it received. Hope Springs was created and purportedly acquired title to the properties shortly after the filing of Notices of Federal Tax Lien regarding the properties. Both the transferors-B.C. Trust and Summer Hill Freedom Trust-and Hope Springs are wholly controlled by the Blacks. Hope Springs' office is located in the Blacks' home. The Blacks controlled the entities that own (Hope Springs), lease, (Summer Hill) and sublease (Techni-Systems) the properties. While the Blacks did record the transfers to Hope Springs, they have retained actual possession. They live and work on the properties since 1981. They continue to enjoy the benefits of the properties in the same way regardless of who holds purported title. <br /><br />The Court also notes that the Blacks are vocal advocates of tax avoidance. The transfer to the trusts, and ultimately to Hope Springs, occurred at a time when the Blacks evinced clear intent to stop paying their taxes and avoid IRS collection efforts. <br /><br />The Court finds that there are no material questions of fact and that a reasonable jury could only come to one conclusion-that the Blacks are the true beneficial owners of the properties as a matter of law. Defendant Hope Springs Corporation Sole is the nominee and/or alter ego of Defendants Daniel R. Black and Maire E. Black, and therefore, to the extent that Defendant Hope Springs Corporation Sole purports to hold title to the Subject Property, it does so as the nominee and/or alter ego of Defendants Daniel R. Black and Maire E. Black. <br /><br />FRAUDULENT TRANSFERS<br />The United States alleges that the transfers to Hope Springs were fraudulent. <br /><br />Under Washington law, transfers of property made with actual intent to hinder, delay, or defraud any creditor is prohibited. Wash. Rev.Code § 19.40.041(a)(1). To establish fraud, the United States must show actual intent by clear and satisfactory evidence. Creditors can establish that a transfer was fraudulent if the transfer was made: (1) with actual intent to hinder, delay, or defraud, or (2) without receiving a reasonably equivalent value in exchange for the transfer and the debtor (i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (ii) intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due. A future creditor-creditors whose claims rose after the transfer-must show actual intent to defraud. § 19.40.051. <br /><br />Actual intent may be established either by direct or circumstantial evidence. Circumstantial evidence can be used to establish the existence of “badges of fraud.” Washington law sets forth the nonexclusive badges or factors the Court may consider in determining the existence of actual intent to hinder, delay, or defraud: <br /><br />((1)) The transfer or obligation was to an insider; <br />((2)) The debtor retained possession or control of the property transferred after the transfer; <br />((3)) The transfer or obligation was disclosed or concealed; <br />((4)) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; <br />((5)) The transfer was of substantially all the debtor's assets; <br />((6)) The debtor absconded; <br />((7)) The debtor removed or concealed assets; <br />((8)) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; <br />((9)) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; <br />((10)) The transfer occurred shortly before or shortly after a substantial debt was incurred; and <br />((11)) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. <br />Wash. Rev.Code § 19.40.041(b). <br /><br />Here, the facts reveal that Daniel Black stopped filing income tax returns in 1980. This coincided with the creation of the Summer Hill Freedom Trust, which was under the control of the Blacks and which took nominal title to much of the Subject Property. 3. The Blacks also created B.C. Trust, another entity under their control, which took nominal title to the remainder of the Subject Property. The Blacks retained full control and possession of the Subject Property during the time it was purportedly owned by Summer Hill Freedom Trust and B.C. Trust. <br /><br />The Court finds that the transfers of the subject properties were to an insider. Specifically, the transfers were from the Blacks' nominees/alter egos to another of the Blacks' nominee/alter ego. The Court finds that the Blacks transferred the Subject Property in anticipation of a collection action and future debts. In 1999, after the IRS filed Notices of Federal Tax Lien against the Subject Property, the Blacks created Hope Springs, and transferred all their property from their nominee/alter ego trusts (B.C. Trust and Summer Hill Freedom Trust) into its name. The only reasonable explanation is that each quit-claim transfer took place with the express purpose of shielding assets from tax collection. <br /><br />According to the Blacks, they own no assets whatsoever. They have not held property in their own names since 1981. They received only nominal payments as compensation for the duties they performed for the entities they control. The record supports the inference that the Blacks attempted to strip any evidence of their ownership of anything of value-by acquiring the Subject Property in the name of nominee/alter ego trusts-at the same time they ceased filing tax returns and were incurring tax liabilities. When the IRS filed Notices of Federal Tax Lien as to the Subject Property, the Blacks took further efforts to avoid ownership and shield their assets from the IRS by transferring those assets to Hope Springs. Moreover, no consideration was ever provided for the transfers to Hope Springs. <br /><br />The Court finds that there is sufficient evidence in the record for a reasonable jury to conclude that the Blacks actually intended to defraud and the transfers of substantially all of the Blacks' assets to Hope Springs in exchange for no consideration rendered the Blacks insolvent. As such, the Court finds that there are no genuine issues of material fact and a reasonable jury could find one conclusion-that is, the transfers of the Subject Property to Hope Springs was fraudulent. As such, the transfers are voidable pursuant to Wash. Rev.Code § 19.40.041(1) and § 19.40.051(a). <br /><br />FORECLOSURE OF FEDERAL TAX LIENS<br />26 U.S.C. § 6321 provides: <br /><br />If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that ma accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.<br />This statute does not create a property right, “but merely attaches consequences, federally defined, to rights created under state law.” United States v. Craft, 535 U.S. 274, 278 [89 AFTR 2d 2002-2005], 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002). Courts “look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as “property” or “rights to property” within the compass of the federal tax lien legislation.”Id. , (quoting Drye v. United States, 528 U.S. 49, 58 [84 AFTR 2d 99-7160], 120 S.Ct. 474, 145 L.Ed.2d 466 (1999). <br /><br />As set forth above, the Court finds the Blacks hold a cognizable property right to the Subject Property, and therefore, the federal tax liens attached to the Subject Property are proper and valid. <br /><br />26 U.S.C. § 7403 provides: <br /><br />(a) In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability.<br />*** <br />(c) The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the-United States. If the property is sold to satisfy a first lien held by the United States, the United States may bid at the sale such sum, not exceeding the amount of such lien with expenses of sale, as the Secretary directs.<br />For the reasons set forth above, foreclosure on the Subject Property is proper. <br /><br />Accordingly, IT IS HEREBY ORDERED: <br /><br />(1.) The United States' Motion for Summary Judgment (Ct.Rec.121) is GRANTED. <br />(2.) The Black Defendants' Motion for Summary Judgment (Ct.Rec.133) is DENIED. <br />(3.) Hope Springs Motion for Summary Judgment (Ct.Rec.129) is DENIED. <br />(4.) Within ten days from the date of this Order, the United States is directed to file a Proposed Judgment that accurately reflects the amount of judgment that should be entered against Defendant Daniel R. Black and Maire E. Black consistent with this Order (less the Estimated Tax Penalties, Late Filing Penalties, and Failure to Pay Tax Penalties for each of the tax years at issue except 1998 and 1999 discharged in bankruptcy). <br />(5.) The United States has valid and subsisting liens in the amount of $4,429,522.78, plus interest accruing after June 1, 2010, pursuant to 26 U.S.C. §§ 6601, 6621 & 6622, and 28 U.S.C. § 1961(c) until paid, on all property and rights to property belonging to Defendant Daniel R. Black including, without limitation, the Subject Property. <br />(6.) The United States has valid and subsisting liens in the amount of $4,292,181.19, plus interest accruing after June 1, 2010, pursuant to 26 U.S.C. §§ 6601, 6621 & 6622, and 28 U.S.C. § 1961(c) until paid, on all property and rights to property belonging to Defendant Maire E. Black including, without limitation, the Subject Property. <br />(7.) The federal tax liens against Defendant Daniel R. Black and Maire E. Black are foreclosed upon their interest in the Subject Property. The Subject Property is ordered to be sold and the proceeds from such sale be applied to the United States' liens on all property and rights to property belonging to Defendants Daniel R. Black and Maire E. Black. <br />IT IS SO ORDERED. The District Court Executive is directed to enter this Order and forward copies to counsel. <br /><br /><br />--------------------------------------------------------------------------------<br />1.<br /><br /> The Estimated Tax Penalties, Late Filing Penalties, and Failure to Pay Tax Penalties for tax years 1998 and 1999 accrued after July 1998, and are consequently non-dischargeable. <br />--------------------------------------------------------------------------------<br />2.<br /><br /> InUnited States v. Bryce W. Townley, et al (CV-020384-RHW), the Court applied the Washington doctrine of “corporate disregard” or the “alter ego” theory in the context of a trust being used to avoid creditors. The Court concluded the doctrine is applicable where the parties was using the artificial legal entity of a trust to insulate themselves from debt because in that regard, it closely mirrors situations where the Washington courts have imposed the doctrine to hold corporations accountable for an individual's liabilities where the facts of the case suggest the individual and the corporation are one and the same. <br />--------------------------------------------------------------------------------<br />3.<br /><br /> In a previous order, the Court ruled that Summer Hill Freedom Trust and B.C. trust are the nominee and/or alter ego of Daniel and Maire Black (Ct.Rec.63).Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-2353688762903233512010-08-04T21:30:00.000-04:002010-08-04T21:31:18.583-04:00section 7206 preparing false tax returnsU.S. v. MORSE, Cite as 106 AFTR 2d 2010-XXXX, 07/23/2010 <br /><br />--------------------------------------------------------------------------------<br />UNITED STATES of America, Plaintiff - Appellee, v. Kevin J. Morse, Defendant - Appellant.<br />Case Information: <br />Code Sec(s): <br /> Court Name: United States Court of Appeals FOR THE EIGHTH CIRCUIT, <br />Docket No.: No. 08-3425, <br />Date Decided: 07/23/2010Submitted: June 10, 2009. <br />Disposition: <br /><br />HEADNOTE <br />. <br /><br />Reference(s): <br /><br />OPINION <br />United States Court of Appeals FOR THE EIGHTH CIRCUIT, <br /><br />Appeal from the United States District Court for the District of Minnesota. <br /><br />Before COLLOTON, JOHN R. GIBSON, and BEAM, Circuit Judges. <br /><br />Judge: JOHN R. GIBSON, Circuit Judge. <br /><br />Kevin J. Morse was indicted on five counts of filing false tax documents pursuant to 26 U.S.C. § 7206(1), and a jury returned guilty verdicts on each count. Morse appeals his convictions on several grounds. He first argues that the district court 1 erred by failing to dismiss the indictment based on theories of estoppel and a due process violation. He also alleges that the court violated his constitutional rights by refusing to provide him with a copy of the signed indictment. In addition, he argues that insufficient evidence was introduced at trial to convict him and that the court abused its discretion by improperly excluding evidence. Finally, he asserts that the district court did not use the correct loss calculations in sentencing him under the Guidelines. We affirm. <br /><br />I.<br />Kevin J. Morse is a farmer. In 1999, he was convicted of four counts of filing false tax returns for the years 1991 through 1994 and sentenced to eighteen months' imprisonment and a year of supervised release. Despite these convictions, Morse did not timely file the tax returns for the years 1996 through 2000, the years at issue in this case. <br /><br />In 2001, Morse hired Ron Urbanski, a former Internal Revenue Service (IRS) criminal investigator and revenue agent, to prepare his tax returns for the years 1996 through 2000. Morse's income consisted of profit on grain sales, the proceeds from renting land to other farmers, rental income from a house, and government agriculture subsidies. Urbanski listed Morse's income on lines 17 and 18 of each year's federal form to show net real estate rental and farming income, respectively. On the return for 2000, Urbanski also listed interest and dividend income. He did not list wages on any of the 1040 forms because Morse did not identify having received any. Urbanski's analysis concluded that Morse's taxable income during this period was $448,039 and that Morse owed $142,827 in taxes. During the time he was working on his tax forms with Urbanski, Morse tried to discuss some theories with Urbanski about reducing or avoiding tax liability, but Urbanksi “didn't want to hear about it.” Morse did not file the returns that Urbanksi prepared. <br /><br />Morse next contacted Joseph Saladino, the head of an organization called the Freedom and Privacy Committee, to “assist him with his tax liability.” The Freedom and Privacy Committee performed the calculations and prepared income tax returns for the years 1996 through 2000, and Morse signed and mailed them to the IRS. Unlike on the returns that Urbanski prepared, Morse did not report his farming and rental income on lines 17 and 18 as his principal sources of income on these returns. Morse instead reported his income on line 7, as “wages, salaries, tips, etc.” Morse then deducted all the “wages” as “AN UNRESTRICTED CLAIM OF CLAIM FOR COMPENSATION FOR PERSONAL LABOR FOUNDED ON 26 USC SECTION 1341.” In affidavits attached to each return, Morse stated that “[t]he amount being claimed [as a deduction] is compensation for personal labor that was received as repayment of a debt that was owed to Affiant.” Morse reported no income tax due for four of the five years and only $968 for tax year 2000. Morse also claimed he was entitled to an aggregate net refund of $6410. <br /><br />On January 24, 2003, after Morse filed his 1996–2000 tax returns, he filed a prose petition for a writ of habeas corpus in federal district court, seeking a declaration that his wages were not taxable. Saladino prepared the petition as part of the services for which Morse paid him. The government opposed the petition and filed a declaration of Susan Gudde, a paralegal at the IRS. She indicated that, according to IRS records, Morse had not filed income tax returns for the years at issue. The case was dismissed without prejudice for lack of subject matter jurisdiction. The district court sustained the government's objection to Morse's attempts to introduce any of the filings or orders from that civil action during Morse's criminal jury trial. <br /><br />In September 2003, IRS Agent Bosshart sent a letter to notify Morse that she was going to conduct an examination of his returns. She also tried to schedule an appointment with him. In response, Morse sent Agent Bosshart a fax requesting an extension until November because, as Morse testified, it was harvest time. Morse also granted Saladino a power of attorney so that Saladino could speak with Agent Bosshart, but he was denied. Agent Bosshart explained at trial that the IRS does not typically grant extensions to begin an audit for the length of time that Morse had requested. Agent Bosshart attempted to contact Morse by telephone and by letter to schedule a mutually agreed upon time. She never heard from Morse again. Ultimately, Agent Bosshart conducted an investigation without Morse's assistance, by contacting Morse's bank and individuals who had paid him. <br /><br />Following its investigation, the IRS calculated that Morse owed a total of $205,237. On June 27, 2007, a grand jury issued a five-count indictment against Morse. The indictment charged that Morse willfully made and subscribed to federal income tax returns that he did not believe to be true and correct as to every material matter for five years. <br /><br />On September 24, 2007, Morse filed various pretrial motions, including a Motion to Dismiss Based on Estoppel and Due Process, and a Motion to Dismiss Due to an Unsigned Indictment. After a hearing, Magistrate Judge Jeanne J. Graham filed an order denying Morse's motion for disclosure of the signed indictment and ruling on the remaining pretrial matters. She concommitantly filed a Report and Recommendation recommending denial of all of Morse's dispositive motions. On appeal, Judge Paul A. Magnuson affirmed the Magistrate Judge's order and adopted her recommendations. <br /><br />On December 18, 2007, a superceding five-count indictment was handed up. On February 6, 2008, Morse filed another motion requesting disclosure of the signed superceding indictment, which the district court denied. <br /><br />At trial, Morse argued that he held a good faith belief that he properly filed his tax documents. In essence, he argued that the government failed to prove that he acted willfully in making false statements to the IRS. The jury convicted him on all five counts. The district court then found that the applicable amount of potential tax loss attributable to Morse's conduct was less than $200,000 but more than $80,000. The district court sentenced him to concurrent thirty month sentences on each count, one year of supervised release on each count to run concurrently, and a special assessment of $500. Morse appeals. <br /><br />II.<br />A.<br />Morse first challenges the district court's ruling to deny his motion to dismiss the indictment based on the doctrine of estoppel. He argues that in his 2003 civil action prepared by Saladino, the government claimed that Morse had not filed tax returns and therefore should not be allowed to change its position in this case to allege that Morse filed false tax returns. “We have not previously articulated the proper standard of review when reviewing a district court's application of the judicial estoppel doctrine. A majority of our sister circuits that have addressed the issue apply the abuse of discretion standard.” Stallings v. Hussmann Corp., 447 F.3d 1041, 1046 (8th Cir. 2006) (citations omitted). <br /><br />The doctrine of judicial estoppel “prohibits a party from taking inconsistent positions in the same or related litigation.” United States v. Grap, 368 F.3d 824, 830 (8th Cir. 2004) (internal quotations and citations omitted). The Supreme Court has recognized three considerations that “typically inform the decision whether to apply the doctrine in a particular case”: 1) “a party's later position must be clearly inconsistent with its earlier position”; 2) whether the party “succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled”; and 3) “whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” New Hampshire v. Maine, 532 U.S. 742, 750–51 (2001) (internal quotations and citations omitted). <br /><br />While we have recognized that estoppel defenses may, at times, be asserted against the government, we have not used estoppel to bar a criminal prosecution. See Grap, 368 F.3d at 830. The Supreme Court has recognized that “the Government may not be estopped on the same terms as any other litigant” because “[w]hen the Government is unable to enforce the law because the conduct of its agents has given rise to an estoppel, the interest of the citizenry as a whole in obedience to the rule of law is undermined.” Id. at 830–31 (quoting Heckler v. Cmty. Health Servs. of Crawford County, Inc., 467 U.S. 51, 60 (1984)). The Supreme Court has “repeatedly indicated that an estoppel will rarely work against the government ..., and we recently stated that a private party trying to estop the government has a heavy burden to carry.” Id. at 831 (internal citations omitted). <br /><br />Morse has not met this heavy burden. Recognizing the traditional reluctance to allow criminal defendants to estop the government based on the conduct of its agents, we are convinced that the district court did not err in denying Morse's motion to dismiss the indictment based on the doctrine of judicial estoppel. See id. at 830–31. It is true that in response to Morse's 2003 civil action prepared by Saladino, the government claimed that Morse had not filed tax returns, and the government is now alleging instead that Morse filed false tax returns. However, we do not believe that the government's statement in the 2003 litigation was an effort to manipulate the court. The government provided a reasonable explanation for its position: Morse's tax returns were filed at the end of 2002 and had not been entered into the IRS computer system at the time the jurisdictional issue was litigated. This is not a case in which the difference is in the position a party takes in a lawsuit; the difference is the result of changing facts. Accordingly, the district court did not err in denying Morse's motion to dismiss the indictment based on the doctrine of judicial estoppel. <br /><br />B.<br />Morse next recasts the above judicial estoppel argument as a violation of due process. He argues that submitting Susan Gudde's declaration of the unfiled tax returns and then indicting him for filing false tax returns for those same years is “outrageous and contrary to basic principles of fairness and governmental integrity.” <br /><br />“Outrageous government conduct that shocks the conscience can require dismissal of a criminal charge, but only if it falls within the narrow band of the most intolerable government conduct.” United States v. Boone, 437 F.3d 829, 841 (8th Cir. 2006) (internal quotations omitted). “Whether particular government conduct was sufficiently outrageous to meet this standard is a question of law which we review de novo.” Id. (citations omitted). <br /><br />Morse cites Smith v. Groose, 205 F.3d 1045 (8th Cir. 2000), to support his argument. In Smith, we granted habeas relief to a petitioner because the prosecutor had relied upon factually inconsistent theories to obtain murder convictions in separate trials to convict two different people for the same murder. Id. at 1052–53. The appellate court found that the contradictory prosecution violated the criminal defendants' due process rights. Smith, 205 F.3d at 1052. <br /><br />Morse's reliance on Smith misses the mark. Unlike Smith, this case does not involve two or more defendants being prosecuted for the same offense. See Smith, 205 F.3d at 1052. Next, Susan Gudde's declaration can be reasonably explained. Morse filed his tax returns in late 2002. Gudde's March 2003 declaration stated that the IRS database did not show that Morse had filed his returns. His returns indicate that they were routed to the agency's “Accounts Management,” “Frivolous Returns” or “Exam” departments based on correspondence or controversial arguments. The government submitted an affidavit of an IRS special agent who testified that, unlike most returns, returns routed in this manner may not be processed completely. The inconsistent positions of which Morse complains can be reasonably explained and are not “outrageous” or “contrary to basic principles of fairness.” See id. Accordingly, Morse's due process rights were not violated because he was not subject to contradictory prosecution. <br /><br />C.<br />Morse next contends that the court erred in denying his motion to dismiss the indictment, arguing that the failure to give him a signed copy of the indictment violated his due process rights. Morse had asked the government to produce a duly executed copy of the indictment for his inspection so that he could “see and personally confirm the existence of the actual charging instrument against him.” The Fifth Amendment provides that “[n]o person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury ....” U.S. Const. amend. V. Morse argues that this clause would be rendered meaningless if an accused cannot see and personally confirm the existence of the actual charging instrument against him. <br /><br />The Federal Rules of Criminal Procedure state that indictments are to be signed by both the foreperson of the grand jury and by an attorney for the government. See Fed. R. Crim. P. 6(c) (“The foreperson ... will sign all indictments.”); Fed. R. Crim. P. 7(c)(1) (“The indictment ... must be signed by an attorney for the government.”). When considering a district court's ruling regarding a rule of criminal procedure, “we review the district court's legal conclusions de novo.” United States v. Shepard, 462 F.3d 847, 861 (8th Cir. 2006) (citation omitted). The signatures on the indictment, however, are a formality, and even the lack of signatures would not render an indictment invalid. United States v. Willaman, 437 F.3d 354, 360 (3d Cir. 2006) (terming lack of signature as a technical deficiency); United States v. Irorere, 228 F.3d 816, 830–31 (7th Cir. 2000) (same). <br /><br />Here, the Magistrate Judge inspected the superseding indictment filed under seal and was satisfied that it was properly signed by the foreperson and by the prosecuting attorney. The Magistrate Judge found that there was “good cause to keep the original, signed indictment sealed.” The court had received documents threatening judicial officials and law enforcement personnel involved in the case. The documents referred to the judges as “BAR TERRORIST[S]” and also suggested “eye for an eye” punishment. In another communication in September 2007, Morse reiterated the threats, confirmed his involvement in the earlier filing, and identified judicial officers in his case as guilty of sedition and treason. Thus, good cause existed to keep the indictment sealed, and the district court did not err in denying Morse's motion. <br /><br />D.<br />Morse next contends that the government did not prove that his conduct was willful because there was evidence of his good faith belief that he was not violating the tax laws. We review the sufficiency of the evidence to sustain a conviction de novo. United States v. Grimaldo, 214 F.3d 967, 975 (8th Cir. 2000). The standard of review concerning sufficiency of the evidence “is very strict, and a jury verdict will not be overturned lightly.” United States v. Ellefson, 419 F.3d 859, 862 (8th Cir. 2005). We view the evidence in the light most favorable to the verdict, “giving the government the benefit of all reasonable inferences that may logically be drawn from the evidence.” United States v. Suppenbach, 1 F.3d 679, 681–82 (8th Cir. 1993). Evidence is sufficient “if any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” United States v. Boesen, 491 F.3d 852, 856 (8th Cir. 2007) (citation omitted). <br /><br />Morse was charged with filing false tax returns under 26 U.S.C. § 7206(1), which provides that any person who “[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter” is guilty of a felony. Willfulness requires proof of a voluntary, intentional violation of a known legal duty. Cheek v. United States, 498 U.S. 192, 201 [67 AFTR 2d 91-344] (1991). “The issue is whether, based on all the evidence, the [g]overnment has proved that [Morse] was aware of the duty at issue, which cannot be true if the jury credits a good-faith misunderstanding and belief submission, whether or not the claimed belief or misunderstanding is objectively reasonable.” Id. at 202. <br /><br />Testimony from IRS agents, a banker, farmers who rented farmland from Morse, others in the farming industry, and Morse himself, combined with the tax returns and Morse's 1999 conviction of filing false tax returns, established that Morse knowingly and significantly underreported his income on his tax returns. Importantly, the jury heard evidence that Morse knew from his 1999 conviction that he had to be truthful when he filed these five tax returns. See id. at 202. Viewing the evidence in the light most favorable to the government, the evidence shows that Morse voluntarily and intentionally violated this duty. Specifically, the jury learned that Morse was a farmer with farm income who rented out some of his land for rental income. The testimony of Morse and Urbanski provided sufficient evidence that Morse knew that he received farm and rental income and that the returns he filed did not reflect this income. The evidence showed that Urbanski prepared returns based on accurate information and that these returns showed that Morse owed substantial taxes. Morse, however, did not file these returns. Instead, he claimed to have been compensated “for personal labor” in “repayment of a debt” owed to him when he had no wages, did not work for anyone, and even was in prison in 2000 and could not have been performing labor for compensation in that year. Further, Morse also agreed that the consequence of his claim on our society would be that virtually everyone would be free of taxes. Accordingly, any rational trier of fact could have found beyond a reasonable doubt that Morse voluntarily and intentionally filed false tax returns. <br /><br />E.<br />Morse next challenges a number of the district court's evidentiary rulings. He argues that the district court improperly excluded the following evidence that he asserts is probative because it showed his good faith that he was not violating the tax laws: (1) documents relating to Morse's civil declaratory judgment; (2) a note to Agent Bosshart, which he asserts explained that he could not meet with her because he was busy with the harvest; (3) an explanation by Patrick Lynch, a former tool and die worker who worked for the Freedom and Privacy Committee, of the IRS individual master file system; and (4) documentation of Saladino's and the Freedom Privacy Committee's operations. 2 The district court excluded these documents as either not relevant or lacking foundation. “We review evidentiary rulings for abuse of discretion. Even when an evidentiary ruling is improper, we will reverse a conviction on this basis only when the ruling affected substantial rights or had more than a slight influence on the verdict.” United States v. Gustafson, 528 F.3d 587, 590–91 [101 AFTR 2d 2008-2613] (8th Cir. 2008) (citations omitted). <br /><br />It was proper for the district court “to exclude evidence having no relevance or probative value with respect to willfulness.” Cheek v. United States, 498 U.S. 192, 203 [67 AFTR 2d 91-344] (1991). To the extent that any of the excluded documents may have been relevant, they were cumulative, and the district court did not abuse its discretion by denying their admission. See Fed. R. Evid. 403; United States v. Willis, 277 F.3d 1026, 1033 [89 AFTR 2d 2002-627] (8th Cir. 2002). Morse “had been permitted to explain the source of his beliefs and to introduce other exhibits on which he relied.” Id. Specifically, Morse presented evidence that he corresponded with Saladino to assist him with his tax liability. Morse testified that Saladino had filed the federal habeas action seeking “a determination if the tax returns were acceptable or not.” He testified that the litigation concluded without receiving a decision and that Saladino filed a second federal lawsuit in an effort to get a ruling on his returns. <br /><br />Next, contrary to Morse's assertion, the district court did not exclude from evidence the letter he sent to Agent Bosshart about a potential meeting. The exhibit was offered and received. The district court also acted within its discretion when it refused to permit Lynch, a tool and diemaker, to interpret internal IRS records based on a lack of foundation. The district court allowed Lynch to testify about conversations he had with Saladino, Morse, and other members of the Freedom and Privacy Committee. Further, Morse testified and explained how he learned about the Freedom and Privacy Committee. He testified about phone calls with those associated with the Freedom and Privacy Committee and about documents he obtained, describing their theories and services. In describing one conversation he had with people at the Freedom and Privacy Committee concerning his tax situation, Morse said: <br /><br />Yeah, I told them where I got my income from. I told them I didn't want any problems, because I had a problem before, and I was kind of assured that there wouldn't be a problem. And if there was, they could handle the litigation, if there was any. And that was that.<br />Morse also described Saladino as the source of his “claim of right” tax returns, although Saladino himself did not testify because he exercised his Fifth Amendment right against self-incrimination. Lastly, as discussed above, the evidence of Morse's guilt was substantial, and we do not believe that the verdict would have been different had the documents been admitted. Accordingly, the district court did not err in its evidentiary rulings. <br /><br />F.<br />Lastly, Morse argues that the district court erred by failing to reduce tax loss calculations to exclude tax losses already assessed against him in the sentence he received in his earlier conviction. Morse argues that including the tax losses from 1996 and 1997 “punish[ed] Morse twice for the same conduct, thereby violating the Fifth Amendment constitutional prohibition against double punishment.” 3 We review the application of the Guidelines to the facts de novo and factual findings underlying the calculation of the Guidelines for clear error. United States v. Gomez, 271 F.3d 779, 781 (8th Cir. 2001). The ultimate sentence is reviewed for abuse of discretion. United States v. Hayes, 518 F.3d 989, 995 (8th Cir. 2008). <br /><br />“Relevant conduct which has been considered in a prior sentencing can be a basis for subsequent prosecution without violating the double jeopardy clause so long as the earlier sentence was within the statutory or legislatively authorized punishment range.” United States v. Abboud, 273 F.3d 763, 766 (8th Cir. 2001). As long as the sentence previously imposed was within the authorized statutory limits for that earlier crime, enhancing a sentence for a separate crime with the same conduct does not constitute punishment for that conduct within the meaning of the Double Jeopardy Clause. Witte v. United States, 515 U.S. 389, 398–99 (1995). <br /><br />Here, the district court did not err. First, in Morse's 1999 conviction, the district court added to the 1991 through 1994 tax loss approximately $83,000 in estimated unpaid taxes for the years 1996 and 1997, putting Morse at offense level 15 under the Guidelines then in effect. Morse's 1999 sentence of eighteen months was well within this range. IRS Agent Bosshart then computed a total tax loss of $205,237 for the years pertaining to this case. Using this figure, under § 2T4.1, the government argued for offense level 18 and a range of 30 to 37 months given Morse's previous criminal history. U.S. Sentencing Guidelines Manual § 2T4.1 (2009). Urbanski prepared a tax loss analysis that Morse submitted at his sentencing. Urbanski calculated the tax loss to be $179,840. Consistent with Urbanski's analysis, the district court found the tax loss to be less than $200,000 but greater than $80,000, putting Morse at offense level 16 with a Guidelines range of 24 to 30 months. The court sentenced Morse within this range. Punishment in this case for conduct that was taken into account in Morse's 1999 sentence cannot be a violation of the Fifth Amendment because the earlier sentence was within the statutorily authorized punishment range. See Witte, 515 U.S. at 398–99. Accordingly, the district court did not err in failing to reduce tax loss calculations to exclude tax losses already assessed against Morse. <br /><br />III.<br />For the reasons set forth, we affirm the judgment of the district court. <br /><br /><br />--------------------------------------------------------------------------------<br />1<br /><br /> The Honorable Paul A. Magnuson, United States District Judge for the District of Minnesota. <br />--------------------------------------------------------------------------------<br />2<br /><br /> Morse mentions in his brief that it was also error to exclude evidence of a letter written to the U.S. Department of Justice by a lawyer on Morse's behalf. But, Morse does not cite to the transcript, and our review of the record does not reveal that the letter was either offered into or excluded from evidence. <br />--------------------------------------------------------------------------------<br />3<br /><br /> Morse also argues that the district court did not deduct all legal expenses at sentencing. This argument is without merit. The district court agreed that “the loss amount attributable to [Morse] should be less than $200,000, to reflect the legitimate legal fees [Morse] paid. The Court lowered [Morse's] offense level to a level 16 as a result of this determination.” This determination is consistent with the loss calculation that Urbanski prepared on Morse's behalf to give Morse full credit for those expenses.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-32602564709928311172010-08-03T08:06:00.001-04:002010-08-03T08:16:56.855-04:00Charitable deduction - qualified appraisalHENDRIX, ET AL. v. U.S., Cite as 106 AFTR 2d 2010-XXXX, 07/21/2010 <br /><br />--------------------------------------------------------------------------------<br />JAMES HENDRIX, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.<br />Case Information: <br />Code Sec(s): <br /> Court Name: UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO EASTERN DIVISION, <br />Docket No.: Case No. 2:09-cv-132, <br />Date Decided: 07/21/2010. <br />Disposition: <br /><br />HEADNOTE <br />. <br /><br />Reference(s): <br /><br />OPINION <br />UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO EASTERN DIVISION, <br /><br />OPINION AND ORDER<br />Judge: JUDGE GREGORY L. FROST <br /><br />Judge: Magistrate Judge E.A. Preston Deavers <br /><br />This matter is before the Court for consideration of the following filings: <br /><br />((1)) Plaintiffs' motion for summary judgment (Doc. # 22), Defendant's memorandum in opposition (Doc. # 26), and Plaintiff's reply memorandum (Doc. # 29); <br />((2)) Defendant's motion for summary judgment (Doc. # 23), Plaintiffs' memorandum in opposition (Doc. # 27), and Defendant's reply memorandum (Doc. # 28); and <br />((3)) a joint motion to amend the scheduling order (Doc. # 31). <br />For the reasons that follows, the Court DENIES Plaintiffs' motion (Doc. # 22), GRANTS Defendant's motion (Doc. # 23), and DENIES AS MOOT the joint motion to amend (Doc. # 31). <br /><br />I. Background<br />Since 2000, Plaintiffs, James and Lori Hendrix, have owned the lot located at 2580 Sherwin road in Upper Arlington, Ohio. After a number of years, Plaintiffs decided to demolish the house that existed on that lot and to construct a new house. They obtained two estimates for conducting the demolition, each of which was approximately $10,000.00. Plaintiffs declined to accept either bid and instead contacted Lyndon Nofziger of the Upper Arlington Fire Division to discuss the city using their house for training and then demolishing the house. Plaintiffs had retained the accounting firm of Deloitte & Touche regarding a possible donation of the house to the city that would result in the city demolishing the structure and then returning the real estate back to Plaintiffs. In a March 2004 report, a Deloitte & Touche advisor analyzed the possible transaction and concluded, among other things, that “[d]onation of property to a fire department is aggressive and not explicitly sanctioned by the Internal Revenue Code.” (Doc. # 23-6, at 6.) <br /><br />Plaintiffs obtained an appraisal of the Sherwin Road property and the house on that real estate. Ann Ciardelli prepared the appraisal, which she signed on June 11, 2004. Her appraisal indicated a value of $520,000.00 and included a provision that “[t]he intended use of this appraisal is to assist the owner in estimating the fair market value of the subject property.” (Doc. # 23-4, at 2–3.) <br /><br />On June 29, 2004, Plaintiffs then entered into a contract with Upper Arlington. This agreement provided that Plaintiffs granted the city permission “to use” the Sherwin Road property and the house for purposes of Fire Division training. The contract also provided that “[t]he structure is to be burned and/or demolished as seen fit by the Fire Division for said training.” (Doc. # 23-1, at 1.) Another provision provided that “[t]he City of Upper Arlington does not express any opinion regarding the tax consequences of this transaction” and advised Plaintiffs to consult with a tax advisor “regarding the availability of and requirements for taking any tax deduction.” (Doc. # 23-1, at 2.) <br /><br />The city used the house from June 29, 2004, until October 29, 2004, at which time the house was demolished. Plaintiffs then proceeded to construct a new, larger house on their lot. Plaintiffs also reported a charitable contribution on their 2004 income tax return, claiming a deduction for the house in the amount of $287,400.00. The Internal Revenue Service disallowed the deduction and proceeded to assess a tax deficiency of $100,590.00. Plaintiffs unsuccessfully filed for a refund and then filed this 26 U.S.C. § 7422 action for a tax refund against Defendant, the United States of America, on February 24, 2009. (Doc. # 2.) <br /><br />Both sides have moved for summary judgment. (Docs. # 22, 23.) After the parties resolved a mutual failure to submit proper summary judgment evidence, the motions are now ripe for disposition. The parties have also jointly filed a contingent motion to amend the case scheduling order, noting that should the Court conclude that Plaintiffs can take the claimed deduction, then a period of discovery on the value of the deduction is necessary. (Doc. # 31.) <br /><br />II. Discussion<br />A. Standard Involved<br />Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2). The Court may therefore grant a motion for summary judgment if the nonmoving party who has the burden of proof at trial fails to make a showing sufficient to establish the existence of an element that is essential to that party's case. See Muncie Power Prods., Inc. v. United Tech. Auto., Inc., 328 F.3d 870, 873 (6th Cir. 2003) (citingCelotex Corp. v. Catrett , 477 U.S. 317, 322 (1986)). <br /><br />In viewing the evidence, the Court must draw all reasonable inferences in favor of the nonmoving party, which must set forth specific facts showing that there is a genuine issue of material fact for trial. Id. (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)); Hamad v. Woodcrest Condo. Ass'n, 328 F.3d 224, 234 (6th Cir. 2003). A genuine issue of material fact exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Muncie Power Prods., Inc., 328 F.3d at 873 (quotingAnderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248 (1986)). Consequently, the central issue is “ “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.”” Hamad, 328 F.3d at 234–35 (quoting Anderson, 477 U.S. at 251–52). <br /><br />B. Analysis<br />The parties' dispute presents four core issues, each of which is arguably potentially dispositive of this litigation. The first issue is whether Plaintiffs have met the requirement of submitting a sufficient qualified appraisal. The second issue is whether Plaintiffs filed a sufficient contemporaneous acknowledgment of the purported donation. The third issue is whether the Internal Revenue Code precludes a deduction for the conduct involved here. The fourth issue is whether Plaintiffs have otherwise established that they are entitled to a deduction. Because the first two of these issues prove dispositive, this Court need not and does not reach the remaining issues. <br /><br />Defendant argues that it is entitled to summary judgment because Plaintiffs failed to obtain a qualified appraisal by the due date of their 2004 income tax return. To support this argument, Defendant relies upon 26 U.S.C. § 170, which provides that “no deduction shall be allowed under subsection (a) for any contribution of property for which a deduction of more than $500 is claimed unless such person meets the requirements of subparagraphs (B), (C), and (D), as the case may be, with respect to such contribution.” 26 U.S.C. § 170(f)(11)(A)(I). The referenced subparagraph (C) in turn provides: <br /><br />In the case of contributions of property for which a deduction of more than $5,000 is claimed, the requirements of this subparagraph are met if the individual, partnership, or corporation obtains a qualified appraisal of such property and attaches to the return for the taxable year in which such contribution is made such information regarding such property and such appraisal as the Secretary may require.<br />26 U.S.C. § 170(f)(11)(C). Defendant is therefore correct in its threshold assertion that Plaintiffs were required to obtain a qualified appraisal and attach it to the 2004 tax return. <br /><br />The statutory scheme addresses what constitutes the required “qualified appraisal” as follows: <br /><br />The term “qualified appraisal” means, with respect to any property, an appraisal of such property which-- <br />((I)) is treated for purposes of this paragraph as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and <br />((II)) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I). <br />26 U.S.C. § 170(f)(11)(E)(I). This definition features two components. First, the appraisal must be treated as a qualified appraisal by incorporated-by-reference Secretary of the Treasury regulations or guidance. Second, a qualified appraiser must have conducted the appraisal using generally employed standards and in compliance with incorporated-by-reference Secretary regulations or guidance. <br /><br /> Section 170 also defines “qualified appraiser,” providing: <br /><br />[T]he term “qualified appraiser” means an individual who– <br />((I)) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, <br />((II)) regularly performs appraisals for which the individual receives compensation, and <br />((III)) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance. <br />26 U.S.C. § 170(f)(11)(E)(ii). This definition similarly incorporates by reference regulations and requirements set forth by the Secretary. <br /><br />The Code of Federal Regulations contains the relevant regulations. For example, 26 C.F.R. § 1.170A-13(c)(3)(i)(C) provides that in order to constitute a qualified appraisal, an appraisal document must include information required by 26 C.F.R. § 1.170A-13(c)(3)(ii). Among this required information is “[t]he date (or expected date) of contribution to the donee.” 26 C.F.R. § 1.170A-13(c)(3)(ii)(C). Also required are <br /><br />[t]he terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of the donor or donee that relates to the use, sale, or other disposition of the property contributed, including, for example, the terms of any agreement or understanding that-- <br />((1)) Restricts temporarily or permanently a donee's right to use or dispose of the donated property, <br />((2)) Reserves to, or confers upon, anyone (other than a donee organization or an organization participating with a donee organization in cooperative fundraising) any right to the income from the contributed property or to the possession of the property, including the right to vote donated securities, to acquire the property by purchase or otherwise, or to designate the person having such income, possession, or right to acquire, or <br />((3)) Earmarks donated property for a particular use[.] <br />26 C.F.R. § 1.170A-13(c)(3)(ii)(D). Additional information mandated for inclusion is “[t]he qualifications of the qualified appraiser who signs the appraisal, including the appraiser's background, experience, education, and membership, if any, in professional appraisal associations,” 26 C.F.R. § 1.170A-13(c)(3)(ii)(F), as well as “[a] statement that the appraisal was prepared for income tax purposes,” 26 C.F.R. § 1.170A-13(c)(3)(ii)(G). These and other components constitute the qualified appraisal, which “must be received by the donor before the due date (including extensions) of the return on which a deduction is first claimed ... under section 170 with respect to the donated property ....” 26 C.F.R. § 1.170A-13(c)(3)(iv)(B). <br /><br />Defendant points out that the appraisal submitted by Plaintiffs does not contain the expected date of contribution, the terms of the agreement between Plaintiffs and the city, the qualification of Plaintiffs' appraiser (including Ann Ciardelli's background, experience, education, and any membership in professional appraisal associations), and the required statement that the appraisal was prepared for income tax purposes. Defendant's evaluation of the appraisal's deficiencies is accurate. See Doc. # 23-4. In fact, in addition to failing to contain any of the identified, specifically required information, one provision of the appraisal arguably disavows by omission that the appraisal was prepared for income tax purposes. The appraisal indicates its “purpose and scope” by providing that “[t]he intended use of this appraisal is to assist the owner in estimating the fair market value of the subject property.” (Doc. # 23-4, at 3.) Moreover, the argument that the inclusion of Ciardelli's license number on the appraisal implicitly represents her qualifications is simply without merit. See Bruzewicz v. United States, 604 F. Supp. 2d 1197, 1205 [103 AFTR 2d 2009-1428] (N.D. Ill. 2009). <br /><br />The end result of the foregoing omissions is that Ciardelli's appraisal fails to meet the regulations incorporated into the statutory scheme, which means that by both the regulation and statutory definitions, the appraisal fails to constitute a “qualified appraisal.” This, in turn, means that Plaintiffs failed to satisfy the 26 U.S.C. § 170(f)(11)(C) requirements of obtaining a qualified appraisal of their property and attaching to the 2004 return requisite information required by the Secretary. Such deficiencies result in violation of 26 U.S.C. § 170(f)(11)(A)(i), which, as noted, provides that “no deduction shall be allowed under subsection (a) for any contribution of property for which a deduction of more than $500 is claimed unless such person meets the requirements of subparagraphs (B), (C), and (D), as the case may be, with respect to such contribution.” The ends result is that Plaintiffs are not entitled to the claimed deduction. <br /><br />Plaintiffs contest this result, although they concede that their appraisal lacks several areas of content. They argue that they substantially complied with the regulations and statutory scheme, however, and point to components of the appraisal that did include required information. Defendant counters that it does not appear that the Sixth Circuit has recognized the substantial compliance doctrine in regard to taxpayer deductions and that, even if this Court were to assume that the doctrine could apply here, Plaintiffs have failed to demonstrate substantial compliance. <br /><br />This Court agrees that the substantial compliance doctrine cannot salvage Plaintiffs' case. Contemplated application of the doctrine in this Circuit to Internal Revenue Code provisions has previously arisen in the context of statutory language that specifically provides for substantial compliance. See, e.g., Grable & Sons Metal Products, Inc. v. Darure Engineering & Mfg., 377 F.3d 592, 596 [94 AFTR 2d 2004-5268] (6th Cir. 2004) (addressing a possible narrow application of the doctrine in light of 26 U.S.C. § 6339(b)(2)'s language permitting proceedings “substantially in accordance with the provisions of law”). Although the Court is reluctant to read much if anything into such limited consideration of the doctrine by the court of appeals, the Court does note that the statute and regulations involved in the instant case do not similarly provide for substantial compliance. <br /><br />Assuming arguendo that the doctrine indeedcould apply in such taxpayer actions, the Court finds that the appraisal at issue wholly lacks even a modicum of content in critical areas to say that it substantially complies with numerous statutory and regulation mandates. The substantial compliance doctrine is not a substitute for missing entire categories of content; rather, it is at most a means of accepting a nearly complete effort that has simply fallen short in regard to minor procedural errors or relatively unimportant clerical oversights. The required content Plaintiffs neglected does not constitute such instances of technicalities. <br /><br />Much of the content provides necessary context permitting the Internal Revenue Service to evaluate a claimed deduction. Without, for example, the appraiser's education and background information, it would be difficult if not impossible to gauge the reliability of an appraisal that forms the foundation of a deduction. The simple inclusion of an appraiser's license number does not suffice given that there are distinctions between appraisers that the required information targets. Another district court judge aptly summarized why the inclusion of only an appraiser's license number hardly constitutes substantial compliance: <br /><br />[The] contention that the license numbers of [the appraisers] suffice to establish that they were experienced and qualified appraisers misses the mark. If an appraiser's license number alone were adequate evidence of his or her qualifications, the Treasury Department's regulations would not specify, in addition to the license numbers (required by Reg. § 1.170A-B(c)(3)(ii)(E)), the need for qualitative information about the appraiser's background (separately specified in Reg. § 1.170A-13(c)(3)(ii)(F)). That qualitative requirement is hardly surprising, for it provides the IRS with some basis on which to determine whether the valuation in an appraisal report is competent and credible evidence to support what in some cases may be a very large tax saving.<br />Bruzewicz, 604 F. Supp. 2d at 1205. An absolute dearth of information concerning substantive content is not coming “close enough” to warrant invocation of the equitable doctrine. Nor does Plaintiffs' notably belated submission as part of this litigation of Ciardelli's qualifications serve to repair her earlier appraisal. Ciardelli may well be qualified now—the document attached to Plaintiffs' memorandum in opposition includes education obtained well after 2004—and she may have been qualified in 2004. (Doc. # 27-1.) But the submitted document does not speak to the issues involved in this litigation (or, as Defendant correctly summarizes, it “does not satisfy the requirements of the statute, its regulations, or its purpose”). (Doc. # 28, at 3.) The issues are what Plaintiffs were required to do and submit as part of the deduction process and what theyactually did, not what they could have done or what wishfully reparative steps they have taken years after the fact. <br /><br />Plaintiffs' wholesale noncompliance in regard to select categories of mandated information thus does not evince procedural missteps. Their failure to obtain an appraisal containing required content not only goes to the substantive essence of the deduction statute involved, but in fact defeats the essential or fundamental purpose of that statute–a shortcoming that necessarily defeats Plaintiffs' successful reliance on the substantial compliance doctrine. Cf. F.E. Schumacher Co., Inc. v. United States, 308 F. Supp. 2d 819, 832 [93 AFTR 2d 2004-829] (N.D. Ohio 2004) (declining to apply substantial compliance doctrine in tax case where the plaintiff failed to comply with the substantive purpose of the Internal Revenue Code statute involved). Nowhere is it more apparent that Plaintiffs' actions negate the equitable safe haven they pursue than in recognizing that the purpose of the qualified appraisal is to present an understandable rationale for the claimed deduction, and the deduction of $287,400.00 claimed here hardly matches the $520,000.00 appraisal offered. <br /><br />One might reasonably be able to speculate why such a difference might exist. Plaintiffs explain that they subtracted the value of the land, which is a likely explanation even if the auditor website upon which Plaintiffs rely values the house at much less than $287,400.00. But speculation aside, the purpose of the qualified appraisal is to “show the work” so as to obviate the injection of unfounded guessing into the tax scheme. The facts sub judice are therefore closer to the Tax Court case of Friedman v. Commissioner, T.C. Memo 2010-45 [TC Memo 2010-45] (Mar. 11, 2010), than to that court's case ofBond v. Commissioner , 100 T.C. 32 (1993). <br /><br />Even assuming its potential application here as opposed to requiring strict compliance, the substantial compliance doctrine cannot equitably apply. Plaintiffs' appraisal is insufficient and precludes their claimed deduction. Additionally, even if this first ground did not resolve the litigation, the Court concludes that Defendant is still entitled to summary judgment under its second rationale: that Plaintiffs failed to file a contemporaneous acknowledgment as required by 26 U.S.C. § 170. <br /><br />That statute provides that “[n]o deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).” 26 U.S.C. § 170(f)(8)(A). The referenced subparagraph (B) in turn requires that the acknowledgment include: <br /><br />((i)) The amount of cash and a description (but not value) of any property other than cash contributed. <br />((ii)) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i). <br />((iii)) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. <br />26 U.S.C. § 170(f)(8)(B)(i)–(iii). Additionally, the statutory scheme explains that “an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of ... the date on which the taxpayer files a return for the taxable year in which the contribution was made, or ... the due date (including extensions) for filing such return.” 26 U.S.C. § 170(f)(8)(C)(i)–(ii). <br /><br />Plaintiffs argue that they met this requirement of a quid pro quo disclosure because there was no such exchange, while Defendant again asserts dispositive deficiencies in Plaintiffs' conduct. Defendant directs this Court to various depositions on the contemporaneous written acknowledgment issue, and Plaintiffs' depositions indeed support that they may not have been aware of this requirement despite employing Deloitte & Touche. What matters is not whether Plaintiffs understood the label assigned to the requirement, however, but whether they met the requirement. And it does not matter whether Plaintiff actually did receive any goods or services. What matters is whether, as required, they disclosed whether the city provided any goods or services in consideration. <br /><br />Here, again, Bruzewicz v. United States, 604 F. Supp. 2d 1197 [103 AFTR 2d 2009-1428], proves instructive. In that case, as here, the taxpayers failed to receive a contemporaneous written acknowledgment that stated whether they had received any goods or services, in whole or in part, for their contribution and, if so, that also provided a good faith estimate of the value of these goods or services. The Bruzewicz district court judge explained: <br /><br />Is the requirement of a written acknowledgment “either an unimportant requirement or one unclearly or confusingly stated in the regulations or the statute,” so that the [taxpayers”] purported compliance can even be considered “substantial,” let alone strict? Simply to state that question compels a “no” answer.<br />First, the statute is neither unclear nor confusing about the need for a written acknowledgment. It explicitly defines the situations in which a contemporaneous written acknowledgment is required (for any contribution of $250 or more), and it spells out chapter and verse as to what must be included in the acknowledgment and as to when the acknowledgment must be received ( Section 170(f)(8)(A)–(C)).<br />Nor can it be said that the statutory requirement is “unimportant.” To begin with, its very inclusion in the Code provision itself, rather than in accompanying regulations promulgated by the Treasury Department, signals a negative answer to that inquiry. And that result is underscored by the nature of the statutorily stated consequence: “No deduction shall be allowed ... unless the taxpayer substantiates the contribution” by the specified contemporaneous written acknowledgment by the donee organization. Lacking that, the IRS is faced with the absence of even a prima facie showing of the existence of a substantial charitable contribution. Even though our tax system is basically one of self-reporting, the statutory establishment of a watershed–$250–beyond which validation is required in addition to a taxpayer's self-declaration cannot be said to be unimportant.<br />Id. at 1204–05. Similarly, because none of the documents produced in this case, including the June 29, 2004 contract between Plaintiffs and the city, satisfies 26 U.S.C. § 170(f)(8)(B), Plaintiffs in turn have failed to avoid the 26 U.S.C. § 170(f)(8)(A) bar on their claimed deduction. <br /><br />Either of the foregoing grounds ends this litigation. Thus, as noted, the Court declines to reach the remaining moot issues involved in the parties' dispute. The consequent result of the foregoing analysis is that, regardless of whether taxpayers may be able to claim a deduction for the type of donation involved in this case–a question this Court need not ultimately answer today—the deficient manner in which Plaintiffs pursued such a donation here proves dispositive. Defendant is therefore entitled to summary judgment, while Plaintiffs are not. <br /><br />III. Conclusion<br />This Court DENIES Plaintiffs' motion for summary judgment (Doc. # 22), GRANTS Defendant's motion for summary judgment (Doc. # 23), and DENIES AS MOOT the joint motion to amend (Doc. # 31). The Clerk shall enter judgment accordingly and terminate this case upon the docket records of the United States District Court for the Southern District of Ohio, Eastern Division, at Columbus. <br /><br />IT IS SO ORDERED. <br /><br />GREGORY L. FROST <br /><br />UNITED STATES DISTRICT JUDGEReturn Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-40838188502657338762010-08-02T09:01:00.001-04:002010-08-02T09:04:13.720-04:00classification rules for employee vs subcontractor statusDaniel Feaster v. Commissioner, TC Memo 2010-157 , Code Sec(s) 3121. <br />________________________________________<br />DANIEL FEASTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . <br />Case Information: <br />Code Sec(s): 3121<br />Docket: Docket No. 2296-09.<br />Date Issued: 07/22/2010<br />Judge: Opinion by COHEN<br /><br /><br />Accountant was employee, not independent contractor<br />Feaster, TC Memo 2010-157 <br />The Tax Court has determined that an accountant was an employee, not an independent contractor. As a result, he could not deduct business expenses on Schedule C. <br />Background. An individual performing services as an employee may deduct expenses incurred in the performance of services as an employee as miscellaneous itemized deductions on Schedule A, Itemized Deductions, to the extent the expenses exceed 2% of the taxpayer's adjusted gross income. ( Code Sec. 62(a)(2) , Code Sec. 63(a) , Code Sec. 63(d) , Code Sec. 67(a) , and Code Sec. 67(b) ) Itemized deductions may result in alternative minimum tax because miscellaneous itemized deductions aren't taken into account in computing alternative minimum taxable income under Code Sec. 56(b)(1)(A)(i) . <br />On the other hand, an individual who performs services as an independent contractor is entitled to deduct expenses incurred in the performance of services on Schedule C and is not subject to limitations imposed on miscellaneous itemized deductions. Income and deductions attributable to the trade or business are shown on a Schedule C, and the resultant net profit or loss is taken into account in computing adjusted gross income. ( Code Sec. 62(a)(1) ) <br />Under the common law rules (so-called because they originate from court cases rather than from the Code), an individual generally is an employee if the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. In general, the factors used to determine if an individual is a common law employee are: <br />(1) The degree of control exercised by the principal; <br />(2) which party invests in work facilities used by the individual; <br />(3) the opportunity of the individual for profit or loss; <br />(4) whether the principal can discharge the individual; <br />(5) whether the work is part of the principal's regular business; <br />(6) the permanency of the relationship; <br />(7) the relationship the parties believed they were creating; and <br />(8) the provision of employee benefits. <br />Facts. From 2002 to 2009, Daniel Feaster was an accountant performing field auditing services for Wm. Langer & Associates, Inc., of the Carolinas (Langer), a company engaged in the business of insurance premium audits and inspections. On Dec. 18, 2002, he provided to Langer a completed Form W-4, Employee's Withholding Allowance Certificate. On Dec. 20, 2002, he signed an acknowledgment statement that was part of a Langer employee job description. The signed statement indicated that Feaster had read the employee job description and understood the company's expectations in regard to the job. <br />During 2006, Langer paid Feaster $29,615 in wages and withheld $1,915 for Federal income tax, $1,836.13 for Social Security tax, and $429.42 for Medicare tax. Langer reimbursed Feaster $6,764 for expenses. <br />On his 2006 Form 1040, Feaster reported $30,155 of gross receipts and $19,739.01 of net profits on Schedule C, Profit or Loss From Business. The gross receipts included the wages received from Langer. Feaster deducted car and truck expenses, office expenses, travel and meals expenses, and expenses for business use of his home in arriving at net profit. He reported $76.30 in self-employment tax and attached an explanatory statement that only part of his self-employment income was subject to self-employment tax because one of his clients “deducted fully-matched social security and Medicare tax, from the payments for my services” as shown on the W-2 attached to his return. <br />IRS determined a deficiency of $1,387 in Feaster's 2006 income tax on the ground that he was an employee. IRS said that he had to include the income as wages and claim any allowable related expenses on Form 2106, Employee Business Expenses, as an itemized deduction on Schedule A. <br />Accountant was an employee. Before the Tax Court, Feaster argued that in 2006 he was entitled to deduct business expenses on Schedule C because he was an independent contractor. IRS contended that Feaster was a common law employee in 2006. <br />Applying the common law rules, the Tax Court sided with IRS. The Court noted that Feaster signed his job description, acknowledging his agreement to follow guidelines established by Langer with respect to time limits for cases to be completed, frequency of submissions of completed work to the office, quality of work, charges to the customer, communication with Langer, status or progress reports, submission of itineraries, and closing cases. Feaster testified that he was not very good about complying with his obligations under the agreement to communicate with Langer. Nonetheless, the Tax Court concluded that Langer exercised, or had the right to exercise, control over Feaster in the performance of his services for it. <br />Feaster testified that he had to provide his own Internet service and that he worked out of his home, incurring office expenses. He acknowledged that he was offered hotel, meal, and vehicle mileage reimbursement and that he was reimbursed for some trip expenses during 2006. He was paid on an hourly basis, and his pay was subject to increase or decrease depending on Langer's assessment of his performance. The Court said that there was nothing to indicate that he had an opportunity for profit or risk of loss from his activities. On balance, none of these factors supported a conclusion that Feaster was an independent contractor. <br />The Court also stressed that Langer considered Feaster a common law employee, as evidenced by the job description that he signed and the tax reporting by Langer. Based on that evidence and the other factors present in the case, the Court concluded that Feaster was an employee. <br /> EXP ¶34,014.37 Employee and employment relationship in general.<br />Withholding may be required by an employer as to wages paid to an employee. The term wages for withholding purposes is explained at ¶34,014.01 et seq. and categories of wages excluded from withholding requirements are covered at ¶34,014.13 et seq. ¶34,014.16 et seq. The question of whether payments for services are made to an employee in the scope of an employment relationship is dealt with in the paragraphs that follow, categorized by type of services involved. <br />The term “employee” in general covers a person who performs services within the scope of a common-law employee. Reg §31.3401(c)-1 . It normally doesn't include persons who offer services as part of their own business, independent contractors (see below), or professional persons who offer services to the public. The most important factor that indicates an employment relationship is the right of the employer to control or supervise the employee's manner of performing the job, rather than to merely require a particular result or work product. Also see Federal Payroll Comparison chart at ¶35,014.07 . Employers in doubt as to whether a particular class of workers are employees can get a ruling by filing Form SS-8 . <br />Federal judges are treated as employees for purposes of income taxes. Sec. 10103, PL 100-203, 12/22/87 reproduced in Footnote to Code Sec. 219 . <br />Employee or independent contractor? <br />The answer makes a lot of difference tax wise. Here is why: If a worker is an “employee,” the employer has to withhold taxes on the wages, and there is liability for Social Security and Federal Unemployment taxes placed on both the employer and employee. But an independent contractor has to pick up the self-employment tax tab on his or her own—and it's a healthy bite (almost twice the amount that would have been withheld if he were an employee). See ¶14,014 . <br />The following is a list of discussions regarding this issue: <br />• Directors, partners, and corporate officers. ¶34,014.39 . <br />• Managerial and supervisory personnel. ¶34,014.40 . <br />• Clerical and office workers. ¶34,014.41 . <br />• Workers in industry, construction, and other fields. ¶34,014.42 . <br />• Janitorial and security work. ¶34,014.43 . <br />• Sales reps, distributors, and vendors. ¶34,014.44 . <br />• Drivers, pilots, and trucking personnel. ¶34,014.45 . <br />• Barbers and beauticians. ¶34,014.46 . <br />• Attorneys and other legal services. ¶34,014.47 . <br />• Medical and scientific services. ¶34,014.48 . <br />• Architects and designers. ¶34,014.49 . <br />• Accountants and bookkeepers. ¶34,014.50 . <br />• Entertainers, artists, and writers. ¶34,014.51 . <br />• Athletes and athletic officials. ¶34,014.52 . <br />• Fiduciaries. ¶34,014.53 . <br />• Teachers and students. ¶34,014.54 . <br />• Domestics and baby sitters. ¶34,014.55 . <br />• Individuals involved in the farming, fishing, and logging industries. ¶34,014.56 . <br />• Services performed for unions. ¶34,014.57 . <br />• Governmental services. ¶34,014.58 . <br />For classification of workers as independent contractors under Section 530 of the Revenue Act of 1978, see ¶34,014.375 . <br />Realtors and direct sellers. <br />The law classifies licensed real estate agents and individuals who are direct sellers as self-employed independent contractors for federal income and employment tax purposes. But, two conditions are attached. First, substantially all of their income for services as real estate agents or direct sellers must be directly related to sales or other output. Second, their services are performed under a written contract that provides they will not be treated as employees for federal tax purposes. ¶35,084 . <br />For information reporting requirements on payments to independent contractors and direct sellers, see ¶60,41A4 . <br />Moratorium on certain IRS reclassifications. <br />As in the past, the employee v. independent contractors battle will generally be waged on a case-by-case basis. However, a moratorium on IRS reclassifications of individuals as employees has been extended indefinitely until Congress passes appropriate legislation. Except with respect to certain technical services workers (as explained below), Treasury and IRS are prohibited from issuing regulations or rulings with respect to the employment status of any individual for purposes of the employment taxes (i.e., income tax withholding, social security taxes, and federal unemployment taxes), until Congress enacts legislation on the classification of workers as independent contractors or employees. Sec. 530(b), PL 95-600, 11/6/78 reproduced in full at ¶34,015.38(5) . See Committee Report at ¶35,081.10 . Instructions for implementing Act Sec. 530 are in Rev. Proc. 85-18, 1985-1 CB 518 . <br /><br />No moratorium for certain technical service personnel. <br />The moratorium on regulations and rulings described above does not apply with respect to individuals retained by any taxpayer to provide for other persons services as engineers, designers, drafters, computer programmers, systems analysts, and other similarly skilled personnel. Sec. 530(d), PL 95-600, 11/6/78 as added by Act Sec. 1706, PL 99-514, 10/22/86 . Act Sec. 530(d) is reproduced in full at ¶34,015.38(5) . <br /><br />Factors for determining employee status. <br />Under Reg §31.3401(c)-1 , a person is an employee if the person for whom services are performed has “the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which the result is accomplished.” Rev. Rul. 87-41, 1987-1 CB 296 , describes 20 factors that are used in determining whether an individual is an employee under the common-law standards and how they apply to technical service specialists in three factual situations. <br />Computation of employer liability for mistakes. <br />Suppose an employer makes a mistake. Say a worker has been treated as an independent contractor, and is then reclassified as an employee. Under prior law, there were problem situations. The law now provides a special formula to compute the employer's liability. ¶35,094 . <br />COMMON LAW RULES to determine whether the taxpayer is an employee. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-325 (1992); Weber v. Commissioner, 103 T.C. 378, 386 (1994), affd. 60 F.3d 1104 [76 AFTR 2d 95-5782] (4th Cir. 1995). Whether an individual is an employee must be determined on the basis of the specific facts and circumstances involved. Weber v. Commissioner, 60 F.3d at 1110; Profl. & Exec. Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987), affd. 862 F.2d 751 [63 AFTR 2d 89-427] (9th Cir. 1988); Simpson v. Commissioner, 64 T.C. 974, 984 (1975). Relevant factors include: (1) The degree of control exercised by the principal; (2) which party invests in the work facilities used by the worker; (3) the opportunity of the individual for profit or loss; (4) whether the principal can discharge the individual; (5) whether the work is part of the principal's regular business; (6) the permanency of the relationship; (7) the relationship the parties believed they were creating; and (8) the provision of employee benefits. See Weber v. Commissioner, 60 F.3d at 1110, 1114; Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001). We consider all of the facts and circumstances of each case, and no single factor is determinative. Weber v. Commissioner, 60 F.3d at 1110; Ewens & Miller, Inc. v. Commissioner, supra at 270. <br />Although not the exclusive inquiry, the degree of control exercised by the principal over the worker is the crucial test in determining the nature of a working relationship. See Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440, 448 (2003); Leavell v. Commissioner, 104 T.C. 140, 149-150 (1995). To retain the requisite degree of control over a worker, the principal need not direct the worker's every move; it is sufficient if the right to do so exists. Weber v. Commissioner, 60 F.3d at 1110; see sec. 31.3401(c)-1(b), Employment Tax Regs. <br />The fact that a worker provides his or her own tools, or owns a vehicle that is used for work, is indicative of independent contractor status. Ewens & Miller, Inc. v. Commissioner, supra at 271 (citing Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 53 [65 AFTR 2d 90-1133] (5th Cir. 1990)). Additionally, maintenance of a home office is consistent with independent contractor status, although alone it does not constitute sufficient basis for a finding of independent contractor status. See Colvin v. Commissioner, T.C. Memo. 2007-157 [TC Memo 2007-157], affd. 285 Fed. Appx. 157 [102 AFTR 2d 2008-5301] (5th Cir. 2008). <br />Benefits such as health insurance, life insurance, and retirement plans are typically provided to employees. Weber v. Commissioner, 103 T.C. at 393-394. The availability of the benefits suggests employee status.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-26374988226755090922010-07-30T09:15:00.001-04:002010-07-30T09:15:41.565-04:00Charitable deduction substantiationARNOLD FREEDMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . <br />Case Information: Code Sec(s): 67; 170; 213; 6103; 7491 <br /> Docket: Docket No. 7471-08. <br />Date Issued: 07/21/2010 <br />Judge: Opinion by WELLS <br /><br /><br />HEADNOTE <br />XX. <br /><br />Reference(s): Code Sec. 67 ; Code Sec. 170 ; Code Sec. 213 ; Code Sec. 6103 ; Code Sec. 7491 <br /><br />Syllabus <br />Official Tax Court Syllabus<br />Counsel <br />Arnold Freedman, pro se. <br />Michelle L. Maniscalco, for respondent. <br /><br />Opinion by WELLS <br /><br />MEMORANDUM FINDINGS OF FACT AND OPINION <br />Respondent determined a deficiency of $2,025 1 in petitioner's Federal income tax for his 2005 tax year. After concessions, 2 the issues for decision are: (1) Whether the Court may look behind the notice of deficiency to determine whether it is valid; (2) whether petitioner or respondent bears the burden of proof pursuant to sections 7491(a) 3 and 6201(d); (3) whether petitioner is entitled to deductions, pursuant to section 213, for medical and dental expenses of $9,871, subject to the 7.5- percent-of-adjusted-gross-income limitation of section 213(a), as itemized deductions for tax year 2005; (4) whether petitioner is entitled to deductions, pursuant to section 170, for charitable contributions of $3,314 as itemized deductions for tax year 2005; and (5) whether petitioner is entitled to a deduction, pursuant to section 67(b), for miscellaneous expenses of $3,791 as a miscellaneous itemized deduction, subject to the 2-percent adjusted gross income limitation of section 67(a), for tax year 2005. <br /><br />FINDINGS OF FACT <br />Some of the facts and certain exhibits have been stipulated. The stipulations of fact are incorporated in this opinion by reference and are found accordingly. 4 <br /><br />Petitioner is employed by respondent as a taxpayer service contact representative in respondent's Brookhaven Service Center. At the time he filed the petition, petitioner lived in Holtsville, New York. <br /><br />Petitioner filed his 2005 Federal income tax return and claimed deductions on Schedule A, Itemized Deductions, totaling $21,504. During 2007 respondent audited petitioner's 2005 return. On September 20, 2007, Revenue Officer Robles (Ms. Robles) requested information regarding petitioner's deductions for medical and dental expenses, charitable contributions, and other itemized deductions. On September 27, 2007, petitioner responded stating that he would need a month to gather information from his insurance company. On October 17, 2007, Ms. Robles sent petitioner Form 8111, Employee Notification Regarding Union Representation. Petitioner never provided any of the “evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” We find that the examining officer's activity report and petitioner's letter meet the threshold definition of relevant evidence because they explain Ms. Robles' investigation of petitioner's 2005 tax return, an issue in the instant case, and therefore, are admissible. requested documentation to Ms. Robles, and on November 20, 2007, she closed the case. <br /><br />Petitioner worked in the same building as Ms. Robles, knew of Ms. Robles, but did not have a personal relationship with Ms. Robles. <br /><br />On January 11, 2008, respondent issued petitioner a notice of deficiency disallowing petitioner's deductions claimed on Schedule A for medical and dental expenses of $9,871, charitable contributions of $3,314, and miscellaneous expenses of $3,791. Petitioner timely filed a petition with this Court. <br /><br />OPINION <br />Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer has the burden of proving Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] it incorrect. (1933). <br /><br />Deductions are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to the deductions they claim. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79 [69 AFTR 2d 92-694] (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435 [13 AFTR 1180] (1934). Taxpayers are required to maintain records that are sufficient to enable the Commissioner to determine their correct tax liabilities. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs. In addition, taxpayers bear the burden of substantiating the amounts and purposes of their claimed deductions. See Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 [38 AFTR 2d 76-5935] (5th Cir. 1976). <br /><br />Petitioner argues that respondent failed to follow proper procedures outlined in the Internal Revenue Manual (IRM) for Internal Revenue Service (IRS) employees and therefore that his notice of deficiency is invalid. Petitioner also cites Scar v. Commissioner, 814 F.2d 1363 [59 AFTR 2d 87-950] (9th Cir. 1987), revg. 81 T.C. 855 (1983), for the proposition that failure to follow IRM procedures invalidates a notice of deficiency. Finally, petitioner cites section 7491(a) and section 6201(d), contending that respondent's “failure” to follow IRM procedures shifts the burden of proof on all issues to respondent. Respondent argues that the notice of deficiency is proper, that Scar is not applicable, and that petitioner bears the burden of proof on all issues. <br /><br />As a general rule, the Court will not look behind a notice of deficiency to examine the evidence used, the propriety of the Commissioner's motives, or administrative policy or procedure used in making the determination. Riland v. Commissioner, 79 T.C. 185, 201 (1982); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). This Court has recognized an exception to the general rule when there is substantial evidence of unconstitutional conduct on the Commissioner's part and the integrity of the judicial process would be impugned if we were to let the Commissioner benefit from such conduct. Greenberg's Express, Inc. v. Commissioner, supra at 328. However, in the circumstances where the exception applies, the Court will not declare the notice of deficiency null and void. Id.; Lamport v. Commissioner, T.C. Memo. 1983-629 [¶83,629 PH Memo TC]. <br /><br />The IRM sets forth procedures that should be followed during audits of IRS employees. IRM pt. 4.2.6.2 (June 1, 2007). Standard procedures relating to examinations will apply to IRS employees to the same extent that they apply to all other taxpayers. Id. Additionally, IRS employees should not be given preferential treatment, nor held to a higher standard. Id. pt. 4.2.6.2.5(1). Employee audits differ from regular audits in that employee files are separated using an orange folder, the examiner attaches an employee information sheet, and Form 8111 is included with the initial letter contacting the employee. Id. pt. 4.2.6.2.5(3). Additionally, examiners must ensure independence and impartiality when examining an employee return, and examiners should discuss any concerns with their immediate supervisors for possible reassignment. Id. pt. 4.2.6.2.2(1). Finally, there is a prohibition of the classification of employee returns by subordinates, associates, or coworkers in the same post of duty. 5 Id. pt. 1.2.13.1.7(4) (May 3, 1994). 5 “Classification is the process of determining whether a return should be selected for examination, what issues should be examined, and how the examination should be conducted.” IRM pt. 4.1.5.1(2) (Oct. 24, 2006). <br /><br />Petitioner alleges that Ms. Robles' examination of his return violated the IRM, as she is his coworker at the Brookhaven Service Center. Additionally, petitioner argues that Ms. Robles' “failure” to provide Form 8111 with the notice of deficiency voids the notice of deficiency. <br /><br />Petitioner testified that Ms. Robles “may have known me,” but “she may not have known me.” Ms. Robles did not testify. If Ms. Robles felt that her impartiality and independence were in question, she should have spoken with her supervisor to determine whether she should be removed from the case. See IRM pt. 4.2.6.2.2(1). However, a reassignment is not automatic. Id. Moreover, the section of the IRM prohibiting subordinates, associates, or coworkers from dealing with an employee return goes to the classification of a return, not an examination, as occurred in the instant case. See id.; id. pt. 1.2.13.1.7(4) (May 3, 1994). Petitioner did have the opportunity for union representation. While Form 8111 was not sent with Ms. Robles' initial contact letter as required by the IRM, petitioner did receive a Form 8111 before the case was closed. The record does not establish that respondent's conduct rose to the level of a constitutional violation or impugned the integrity of the judicial process. See Greenberg's Express, Inc. v. Commissioner, supra at 328. Accordingly, we will not look behind the notice of deficiency. <br /><br />Scar v. Commissioner, supra, is distinguishable. In Scar, the Commissioner sent the taxpayer a notice of deficiency that had no direct connection with the taxpayer and was not based on an inspection of the taxpayer's Federal income tax return. The notice of deficiency was held to be invalid on its face because the Commissioner did not determine a deficiency as required under Id. at 1368-1369. The facts of the instant section 6212(a). case are distinguishable from those of Scar. In the instant case, the adjustments in the notice of deficiency all relate to petitioner's 2005 income tax return. Moreover, petitioner claims that Ms. Robles reviewed his return but did not follow proper procedures. Finally, Scar involved a violation of a statutory provision, while petitioner alleges a violation of the IRM, which does not have the force and effect of law. See Valen Manufacturing Co. v. United States, 90 F.3d 1190, 1194 [78 AFTR 2d 96-5778] (6th Cir. 1996); United States v. Horne, 714 F.2d 206, 207 [52 AFTR 2d 83-5912] (1st Cir. 1983). Accordingly, Scar v. Commissioner, supra, does not apply to the instant case. <br /><br /> Section 7491(a)(1) provides that, if, in any court proceeding, the taxpayer introduces credible evidence with respect to factual issues relevant to ascertaining the taxpayer's liability for a tax (under subtitle A or B), the burden of proof with respect to those factual issues will be placed on the Commissioner. For the burden to be placed on the Commissioner, however, the taxpayer must comply with the substantiation and recordkeeping requirements of the Internal Revenue Code. See sec. 7491(a)(2)(A) and (B). Additionally, section 7491(a) requires that the taxpayer cooperate with reasonable requests by the Commissioner for “witnesses, information, documents, meetings, and interviews”. Sec. 7491(a)(2)(B). The taxpayer has the burden of establishing that the requirements of section 7491(a)(2) have been met. See sec. 7491(a); Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001). <br /><br />Petitioner has not offered credible evidence regarding his claimed deductions. “Credible evidence is evidence that, after critical analysis, a court would find constituted a sufficient basis for a decision on the issue in favor of the taxpayer if no contrary evidence were submitted.” Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. 105, 114 (2009). Petitioner offered only a theory that Ms. Robles might have known him and therefore she did not follow proper procedures. Moreover, petitioner offered no testimony and insufficient documentation regarding his claimed deductions, as discussed below. Because petitioner failed to offer evidence that “a court would find constituted a sufficient basis for a decision on the issue in favor of the taxpayer”, we conclude that the burden has not shifted pursuant to section 7491. See Ocmulgee Fields, Inc. v. Commissioner, supra at 114. Consequently, petitioner bears the burden of proof on all issues. 6 <br /><br />As to petitioner's claimed deductions for tax year 2005 for medical expenses pursuant to section 213, petitioner submitted a statement from his health insurance company. It is unclear from that statement whether petitioner made any payments. Petitioner offered no testimony regarding that statement and conceded at trial that respondent's determination was correct. Accordingly, we sustain respondent's deficiency determinations regarding the medical expenses petitioner claimed for tax year 2005. <br /><br />As to petitioner's claimed deduction for charitable contributions, section 170(a) allows a deduction for charitable contributions made by a taxpayer. A taxpayer claiming a charitable contribution of money is generally required to <br /><br />In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary *** by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return. See Arberg v. Commissioner, T.C. Memo. 2007-244 [TC Memo 2007-244]. The deficiency in the instant case is based on disallowed deductions, not on items of income reported on third-party information returns. Accordingly, sec. 6201(d) is not applicable. maintain for each contribution a canceled check, a receipt from the donee charitable organization showing the name of the organization and the date and amount of the contribution, or other reliable written records showing the name of the donee, the date, and amount of the contribution. Sec. 1.170A-13(a)(1), Income Tax Regs. Factors that indicate reliability include, but are not limited to, the contemporaneous nature of the writing, the regularity of the taxpayer's recordkeeping procedures, and the existence of any other evidence from the donee charitable organization evidencing receipt. Sec. 1.170A-13(a)(2), Income Tax Regs. In addition, no deduction is allowed, for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment by a qualified donee organization. 7 Sec. 170(f)(8)(A). <br /><br />Pursuant to sec. 170(f)(17), as enacted in 2006, no deduction for a contribution of money in any amount is allowed unless the donor maintains a bank record or written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. This provision is effective for contributions made in tax years beginning after Aug. 17, 2006. Pension Protection Act of 2006, Pub. L. 109-280, sec. 1217, 120 Stat. 1080. <br /><br />Petitioner submitted a list of purported donations made during tax year 2005. 8 Petitioner offered no testimony regarding the contemporaneous nature of the document, the regularity of his recordkeeping activities, or other evidence from the donee charitable organization showing receipt of funds. See sec. 1.170A-13(a)(2), Income Tax Regs. Accordingly, we do not find petitioner's records reliable. Moreover, petitioner conceded at trial that respondent's determinations were correct. Consequently, we sustain respondent's deficiency determinations regarding petitioner's claimed charitable contributions for tax year 2005. <br /><br />As to petitioner's claimed deduction for tax year 2005 for miscellaneous expenses, petitioner conceded at trial that he had no documentation of any of his claimed expenses aside from those respondent conceded; and petitioner offered no proof of such expenses. Accordingly, except as conceded by respondent, we sustain respondent's deficiency determinations regarding the miscellaneous itemized expenses petitioner claimed for tax year 2005. <br /><br />The Court has considered all other arguments made by the parties and, to the extent we have not addressed them herein, we consider them moot, irrelevant, or without merit. To reflect the foregoing, <br /><br />Decision will be entered under Rule 155. <br /><br /><br />--------------------------------------------------------------------------------<br />1<br /><br /> All amounts have been rounded to the nearest dollar. <br />--------------------------------------------------------------------------------<br />2<br /><br /> Respondent concedes that petitioner is entitled to deduct $1,833 in unreimbursed employee expenses related to education costs for taxable year 2005. <br />--------------------------------------------------------------------------------<br />3<br /><br /> Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code, as amended and in effect for the year in issue. <br />--------------------------------------------------------------------------------<br />4<br /><br /> Respondent reserved relevancy and materiality objections to the examining officer's activity report and a letter sent by petitioner to Ms. Robles, the examining officer. Fed. R. Evid. 402 provides the general rule that all relevant evidence is admissible, while evidence which is not relevant is not admissible. Fed. R. Evid. 401 defines relevant evidence as <br />--------------------------------------------------------------------------------<br />5<br /><br /> <br />--------------------------------------------------------------------------------<br />5<br /><br /> <br />--------------------------------------------------------------------------------<br />6<br /><br /> Sec. 6201(d) also does not shift the burden of proof to respondent. Sec. 6201(d) provides: <br />--------------------------------------------------------------------------------<br />7<br /><br /> Separate contributions of less than $250 are not subject to the requirements of sec. 170(f)(8), regardless of whether the sum of the contributions made by a taxpayer to a donee organization during a taxable year equals $250 or more. Sec. 1.170A-13(f)(1), Income Tax Regs. <br />--------------------------------------------------------------------------------<br />8<br /><br /> Respondent did not stipulate the truth of petitioner's list of purported charitable contributions.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-91418007130475015592010-07-29T17:47:00.001-04:002010-07-29T17:47:40.203-04:00Function of IRS Office of AppealsLARRY E. TUCKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent . <br /> 135 T.C. No. 6, July 26, 2010<br /><br /><br />In the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub. L. 105-206, 112 Stat. 685, Congress enacted provisions that directly addressed the appeals function. One of the four required features of the plan of reorganization that the IRS was to undertake was that it “ensure an independent appeals function within the Internal Revenue Id., sec. 1001(a)(4), 112 Stat. 689. Explicit Service”. reference to the Office of Appeals was added to the Code not only in the new CDP procedures in sections 6320 and 6330 but also in sections 6015(c)(4)(B)(ii)(I), 7122(d)(2) (now designated (e)(2)), 7123, 7430(c)(2) and (g)(2)(A), and 7612(c)(2)(A). <br />Fourth, the National Taxpayer Advocate or her delegate can issue a Taxpayer Assistance Order (TAO) requiring the IRS to “release property of the taxpayer levied upon” or to “cease any action, take any action as permitted by law, or refrain from taking any action” with respect to its collection activities. See sec. 7811(b); 26 C.F.R. sec. 301.7811-1(c), Proced. & Admin. Regs.; see also IRM pt. 13.1.20.3(1) (Dec. 15, 2007) (”A TAO may be issued for either of two purposes: A. To direct the OD/Function [to] take a specific action, cease a specific action, or refrain from taking a specific action; or B. To direct the IRS to review at a higher level, expedite consideration of, or reconsider a taxpayer's case”). <br /><br />Fifth, by its nature a collection determination could be binding only until there has been a change in the taxpayer's circumstances. The collection issues that the officer or employee may address in the agency-level CDP hearing involve the financial circumstances of the taxpayer that, by their nature, may change after the hearing. See sec. 6330(d)(2)(B); 26 C.F.R. sec. 301.6330-1(e)(1), Proced. & Admin. Regs.; Rev. Proc. 2003-71, sec. 4.03, 2003-2 C.B. 517, 518. To decide whether the IRS ought to proceed with collection, the officer or employee is instructed by agency regulations to request and obtain detailed financial information about the taxpayer during the hearing, and to make a determination on the basis of that information. See 26 C.F.R. sec. 301.6330-1(e)(1), Proced. & Admin. Regs. (”Taxpayers will be expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing”). However, if and when a taxpayer later becomes ill or loses a job, or when a previously ill or unemployed taxpayer is healed or gets a job, then the position of the tax collector may well change. This reality is reflected explicitly in section 6330(d)(2)(B), which contemplates “a change in circumstances with respect to such person which affects such determination.” Thus, an appeals officer's collection judgments reflected in a notice of determination issued after a CDP hearing are not necessarily the last word, even for the Office of Appeals itself—nor should they be. Instead, the Office of Appeals retains jurisdiction to continue to consider collection issues over time. This flexibility helps to ensure that, on a continuing basis, the IRS will tailor its collection activities to the taxpayer's current circumstances and that the IRS will not take collection action that is arbitrary or which creates unnecessary hardship for the taxpayer. <br />Sixth, if the taxpayer appeals an adverse determination to the Tax Court, then, as we have noted in part II.C. 2 above, the appeals officer's collection decisions are reviewed in litigation. In that context, the determination is of course not binding on the Tax Court, which reviews for abuse of discretion. More important for evaluating “finality”, however, is the fact that even the IRS as a litigant is not bound by the position in the Office of Appeals' notice of determination. In defending against that CDP appeal, the IRS (acting through its attorneys under the Chief Counsel) may re-think the appeals officer's collection decisions and may take a position—in the litigation or in the settlement of it—that is different from the position reflected in the Office of Appeals's CDP determination. See 26 C.F.R. sec. 601.106(a)(1)(i), (d), Statement of Procedural Rules; Rev. Proc. 87-24, 1987-1 C.B. 720; General Counsel Order No. 4. (Jan. 19, 2001). It is the experience of this Court that the Office of Chief Counsel sometimes does not defend the Office of Appeals' determination but rather admits an abuse of discretion and moves the Court to remand the case to the Office of Appeals for a supplemental CDP hearing. In those instances the agency's position (as taken by Chief Counsel) contradicts the notice of determination, to <br />Consequently, the CDP determination of the Office of Appeals is not necessarily the agency's last word on collection issues. b. Underlying liability As we noted above in part II.C.2, a taxpayer who did not have a previous opportunity to dispute the amount of his underlying tax liability may raise such a dispute in the agency- level CDP hearing, pursuant to section 6330(c)(2)(B). In such a circumstance, the officer or employee conducting the hearing for the Office of Appeals will determine the IRS's position on that taxpayer's liability. Respondent explains that, in practice, a settlement officer will conduct the CDP hearing and will refer the case to an appeals officer to consider the issue of underlying liability. When the appeals officer makes a determination with respect to the liability issue, the case is returned to the settlement officer, who addresses any collection issues and makes an initial determination that is subsequently approved or overruled by a team manager, who makes the final determination on behalf of the Office of Appeals. The settlement officer will not reconsider the appeals officer's determination with respect to the liability issue, and generally, neither will anyone else within the Office of Appeals. <br />We noted in Lewis v. Commissioner, 128 T.C. 48, 59 (2007) (quoting 26 C.F.R. sec. 601.106(a)(1)(ii), Statement of Procedural Rules), that "[t]he Appeals officer has the `exclusive and final authority' to determine the liability.” 59 On the other hand, it is clear that such determinations are not absolutely “final”. See Jackson v. Commissioner, T.C. Memo. 1988-143 [¶88,143 PH Memo TC] (”Determinations by the Commissioner are not judicial in nature, but rather are administrative determinations, and are not res judicata to bind him for subsequent years, or for that matter, the same taxable year”); 1B J. Moore, Moore's Federal Practice, par. 0.422[2], at 3403 (2d ed. 1974) (”It is axiomatic to the doctrines of res judicata and collateral estoppel that only judicial decisions are given conclusive force in subsequent legal proceedings. Thus determinations made by the Commissioner of Internal Revenue are not judicial in nature but administrative and are not res judicata to bind him for the same taxable year or for subsequent years”). We must therefore discern the sense in which the CDP determination of underlying liability may be said to be “final”. i.If the liability determination is favorable to the taxpayer <br />If the liability determination made by the Office of Appeals in the CDP context is favorable to the taxpayer, then the CDP process generally ends with a unilateral agency determination not to proceed with collection. 60 Although the team manager in charge of the case has the authority to execute a closing agreement with the taxpayer under section 7121, see IRS Deleg. Order 97 (Rev. 34), IRM pt. 1.2.47.6 (Aug. 18, 1997), generally no closing agreement is executed, and no litigation ensues. Respondent states that, as with a liability determination in a notice of deficiency, “an underlying liability determination in a CDP case is also binding on the Examination function. The Examination function generally has no opportunity to review Appeals' determination”; and we assume arguendo that this is correct. 61 However, this binding character is limited. <br />First, if it is true (as section 6330(d)(2) provides) that the Office of Appeals “shall retain jurisdiction with respect to any determination” (emphasis added), then it would seem that the Office of Appeals itself must have jurisdiction to reconsider its pro-taxpayer liability determination. <br />Second, if the taxpayer had paid all or part of the liability that had been at issue in a CDP hearing and thereafter sought a refund of it through litigation, no collateral estoppel or res judicata effect to govern the outcome of the refund suit would arise from the prior CDP determination. See Jackson v. Commissioner, supra. The case would be defended not by the IRS but by attorneys of the Department of Justice, see 28 U.S.C. sec. 61 <br />It is not clear why Examination would necessarily be bound by the CDP determination of a liability issue. A liability determination in a notice of deficiency (whether issued by the Office of Appeals or another IRS function) may acquire a quasi- binding character within the agency because section 6212(c) restricts the determination of further deficiencies (though section 6214(a) permits an increased deficiency if the matter is challenged in Tax Court); but the CDP determination may arise in the absence of a notice of deficiency (as when a taxpayer disputes tax assessed pursuant to his own return) and does not result in the issuance of a notice of deficiency—so that section 6212(c) is not implicated. Amicus observes that the point has not been litigated but concludes that the liability determination in a CDP hearing is probably not binding elsewhere, citing Botany Worsted Mills v. United States, 278 U.S. 282, 289 [7 AFTR 8847] (1929). 516 (2006), 62 which also has settlement authority in such cases, see sec. 7122. 63 But even in refund suits handled by the Department of Justice the IRS must request any counterclaim, see sec. 7403, must give a defense recommendation, see 28 U.S.C. sec. 520 (2006), and must give its views on proposed settle- ments. 64 In that context, it is the Office of Chief Counsel, and not the Office of Appeals, that speaks for the IRS; and Chief Counsel is not bound by the appeals officer's CDP determination. IRM pt. 34.8.2.11.5(4) (Aug. 11, 2004). The Government might therefore resist the refund claim—and might even plead a counterclaim—by asserting liabilities that the Office of Appeals did not sustain, taking its cue not from the Office of Appeals but from the Office of Chief Counsel, which must be independent and impartial. 65 <br />Thus, a pro-taxpayer CDP determination on underlying liability has at most a limited “finality” within the agency. ii.If the liability determination is not favorable to the taxpayer <br />If the liability determination made by the Office of Appeals in the CDP context is not favorable to the taxpayer, then there are several contexts in which the IRS may take a position different from that reflected in the CDP determination. (A). CDP litigation The taxpayer may appeal the adverse CDP liability determination to the Tax Court, pursuant to section 6330(d). If the taxpayer does appeal, then the Tax Court reviews the liability issues de novo. Davis v. Commissioner, 115 T.C. at 39. In Tax Court proceedings the IRS is represented by the Office of Chief Counsel, see sec. 7452, which may re-think the liability issues and may take a position different from that reflected in the notice of determination. See IRM pt. 1.1.6.1 (quoted supra note 65). In addition, the Office of Chief Counsel—not the Office of Appeals—has the authority to settle CDP cases that reach litigation, see sec. 601.106(a)(2)(i), Statement of Procedural Rules; Rev. Proc. 87-24, 1987-1 C.B. 720, and it has the authority to settle CDP cases without the concurrence of the Office of Appeals, see Rev. Proc. 87-24, supra; IRM pt. 35.5.1.4.3(2), 35.5.2.7(2), 35.5.2.14(2)(B) (Aug. 11, 2004). <br />If the taxpayer who receives an adverse notice of determination reflecting the officer's or employee's decision about underlying liability decides not to appeal to the Tax Court, then the IRS may nonetheless meet this taxpayer again in a variety of other circumstances in which, again, the CDP liability determination will not be binding on the IRS: (B). Audit reconsideration Audit reconsideration is a substantive review of the taxpayer's liability that may result in the abatement of an assessed tax liability. Specifically, audit reconsideration “is the process the IRS uses to reevaluate the results of a prior audit where additional tax was assessed and remains unpaid, or a tax credit was reversed.” IRM pt. 4.13.1. 2 (Oct. 1, 2006). The IRS's authority to conduct an audit reconsideration is grounded in section 6404(a), which provides that "[t]he Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which—(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitations properly applicable thereto, or (3) is erroneously or illegally assessed.” <br />Audit reconsideration is not precluded by a prior CDP determination. See IRM pt. 4.13.1. 8 (Oct. 1, 2006) (listing circumstances in which “a request for [audit] reconsideration will not be considered”; prior CDP hearing is not listed). Therefore, a taxpayer who has received an adverse CDP determination with respect to his underlying liability could nonetheless have his liability redetermined in the course of an audit reconsideration. (C). District Court collection suit If the taxpayer does not pay the tax, the IRS may request the Department of Justice to file a collection suit against the taxpayer in Federal District Court. See sec. 7403(a) (”the Attorney General *** , at the request of the Secretary, may direct a civil action to be filed in a district court”). It is the Office of Chief Counsel, and not the Office of Appeals, that decides for the IRS whether to make that request, and the Chief Counsel is not bound by the appeals officer's CDP determination of liability. See General Counsel Order No. 4 (rev. Jan. 19, 2001). (D). Request for abatement, refund claim, and refund litigation <br />The taxpayer may request an abatement of tax, or he may pay the tax and claim a refund. We are aware of no reason or rule requiring that, when the IRS then considers administratively that request for abatement or claim for refund, it is bound by the appeals officer's adverse CDP determination. If the IRS denies a refund claim, the taxpayer may file a refund suit in Federal District Court or the Court of Federal Claims. As we noted above, the IRS will be asked for its defense recommendation and for its views on proposed settlements. In that context, it will be the Office of Chief Counsel, and not the Office of Appeals, that will speak for the IRS, and the Chief Counsel will not be See supra part bound by the appeals officer's CDP determination. II.C.3.b.i. <br />In sum, the collection and liability determinations made in CDP hearings by officers and employees of the Office of Appeals are an important aspect of the agency's administration of the tax law, and they affect to a greater or lesser extent the agency's ultimate position with regard to the tax liability and the collection of it. But there are numerous circumstances in which those determinations may not be the IRS's last word. <br />4. The tax administration context of the CDP “officer or employee” <br />The IRS personnel who are appointed by the President or the Secretary of the Treasury are the Commissioner, see sec. 7803(a)(1), the Chief Counsel, see sec. 7803(b)(1), members of the Internal Revenue Service Oversight Board, see sec. 7802(b)(1), and the National Taxpayer Advocate, see sec. 7803(c)(1). See also supra note 47. Personnel to fill other positions in the IRS are hired by the Commissioner pursuant to section 7804(a). <br />These hired, non-appointed positions include (i) the Deputy Commissioner for Services and Enforcement, who is delegated the authority to oversee the four primary operating divisions of the IRS, see IRM pt. 1.1.5.3 (Oct. 28, 2008); (ii) the Deputy Commissioner for Operations Support, who is delegated the authority to oversee the integrated support functions of the IRS, see IRM pt. 1.1.5.4 (Oct. 28, 2008); (iii) the Commissioners of the Wage and Investment Division, the Small Business/ Self-Employed Division, the Tax-Exempt and Government Entities Division, and the Large and Mid-Size Business Division, who are delegated the authority to supervise and manage those divisions, see IRM pt. 1.1.13.1 (Sept. 1, 2005), 1.1.16.1 (March 1, 2007), 1.1.23.2 (Feb. 1, 2007), 1.1.24.1 (Nov. 1, 2006); (iv) the Deputy Chief Counsel (Technical), who serves as the principal deputy to the Chief Counsel, acts as Chief Counsel when that office is vacant, maintains jurisdiction over legal issues arising in published guidance, letter rulings, technical advice, and other processes, and participates in the interpretation and development of internal revenue laws, see IRM pt. 1.1.6.2 (Dec. 16, 2009), (v) the Deputy Chief Counsel (Operations), who maintains jurisdiction over issues arising in litigation nationwide and participates in the formulation of tax litigation policy, see IRM pt. 1.1.6.3 (Dec. 16, 2009), and (vi) the Chief of the Office of Appeals, who is delegated the authority to plan, manage, direct, and execute the nationwide activities of that office, see IRM pt. 1.1.7.1 (Feb. 5, 2008). 66 <br />Lower in the IRS hierarchy, these hired positions include revenue officers (at or above the rank of GS-9 67 ), who are delegated the authority (i) to issue, serve, and enforce summonses, to set the time and place for appearance, to take testimony under oath of the person summoned, and to receive and examine data produced in compliance with the summons, see IRS Deleg. Order 25-1 (formerly IRS Deleg. Order 4 (Rev. 23), 55 Fed. Reg. 7626); (ii) to issue notices of levy, see IRS Deleg. Order 5-3 (Rev. 1), IRM pt. 1.2.44.3 (Nov. 8, 2007); and (iii) to issue notices of Federal tax lien, see Delegation Order 5-4 (Rev. 1), IRM pt. 1.2.44.4 (Sept. 23, 2005). That is, revenue officers §3132(a)(2) (emphasis added))”). have the power—unless the CDP process intervenes—to effect the actual collection of tax. <br />5. The administrative law context of the CDP “officer or employee” <br />Today the Federal Government employs a corps of about 5,000 hearing officers who adjudicate cases for dozens of its agencies. Raymond Limon, Office of Admin. Law Judges, Office of Pers. Mgmt., “The Federal Administrative Judiciary, Then and Now, A Decade of Change” 1992-2002, at 3 (Dec. 23, 2002). Fewer than a third of those positions are classified as administrative law judges (ALJs) under the Administrative Procedure Act (APA), and the remainder of those positions are commonly referred to as non- ALJ hearing officers. 68 Over 80 percent of ALJs are currently employed by the Social Security Administration (SSA). OPM Report (showing the SSA employed 1,128 of 1,388 ALJs in June 2008). None of the SSA's ALJs are appointed by the Commissioner of the SSA, who serves as the department head. See Soc. Sec. Admin., ODAR Redelegations of Personnel and Equal Employment Opportunity Authorities (September 2006). Instead, the authority to appoint ALJs for the SSA is delegated to the Deputy Commissioner for the Office of Disability Adjudication and Review of the SSA. Id. Therefore, the great majority of ALJs are not appointed pursuant to the Appointments Clause. <br />ALJs are hired pursuant to 5 U.S.C. sec. 3105 (2006). An agency may appoint an individual as an ALJ only after the Office of Personnel Management certifies that individual as eligible for the position. 5 C.F.R. sec. 930.204 (2008). The APA generally requires that an ALJ preside over “every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing”. 5 U.S.C. sec. 554 (2006). If the adjudication is a so-called “on the record” hearing, then the hearing is a “formal adjudication” that must adhere to the formal hearing procedures of the APA, which provide, inter alia, that each party is entitled to present oral or documentary evidence, submit rebuttal evidence, and conduct cross- examination. 5 U.S.C. secs. 554-557. When presiding over an “on the record” hearing, ALJs have the authority to require attendance at the hearing, to administer oaths and affirmations, to issue subpoenas, to rule on offers of proof and receive evidence, and to order depositions. Id. <br />However, if the relevant statute does not require an “on the record” hearing, then the formal hearing procedures of the APA do not apply and a non-ALJ hearing officer may preside over the adjudication. See id. Sections 6320 and 6330 do not require an “on the record” CDP hearing, see Davis v. Commissioner, 115 T.C. at 41-42 (citing 26 C.F.R. sec. 601.106(c), Statement of Procedural Rules); and thus even apart from section 6330(b)(3) (allowing a CDP hearing before “an officer or employee”), APA procedures would not require the IRS to use ALJs to conduct CDP hearings. Therefore, the appeals officer who conducts and adjudicates a CDP hearing is more comparable to a non-ALJ hearing officer than to an ALJ. <br />The CDP hearing officer, hired and not constitutionally “appointed”, is by no means unique in the context of administrative adjudication. <br />III. The status of the CDP “officer or employee” and “appeals officer” under the Appointments Clause In order to determine whether the “officer or employee” (or the “appeals officer”) of section 6330 is an “inferior Officer” who must be appointed in compliance with the Appointments Clause, we consider the two issues prompted by the text of the clause. <br />A. Whether the position is “established by Law” "[T]he threshold trigger for the Appointments Clause” is that an office be `established by Law.” Landry v. FDIC, 204 F.3d at 1133. We hold that there is no CDP hearing officer position “established by Law” under sections 6320 and 6330 whose incumbent could be an officer subject to the Appointments Clause. <br />1. Creation by statute <br />Where “the `duties, salary, and means of appointment' for the office were specified by statute”, that is considered “a factor that has proved relevant in the [Supreme] Court's Id. (quoting Freytag v. Appointments Clause jurisprudence.” Commissioner, 501 U.S. at 881). If there were a statutory provision to the effect that “There shall be, within the Internal Revenue Service Office of Appeals, officers designated as Appeals Officers, who shall conduct CDP hearings”, etc., then that would be some indication that the Appeals Officer position was “established by Law”. There is no such statute, and this lack is some indication that the position in question is not an office “established by Law”. <br />The IRS Office of Appeals was not, in its current form, initially created by the Internal Revenue Code, 69 nor were its “Appeals Officers”. Congress did explicitly “establish” in the Internal Revenue Code certain officers who are to be appointed by the President, with the advice and consent of the Senate—i.e., the Commissioner, sec. 7803(a)(1), the Chief Counsel, sec. 7803(b)(1), and members of the Internal Revenue Service Oversight Board, sec. 7802(b)(1)—and the National Taxpayer Advocate ( sec. 7803(c)(1)), who is appointed by the Secretary of the Treasury. 70 Otherwise, the employment of “Other Personnel” is authorized in Section 7804(a), which, as we noted above, simply provides that “the Commissioner of Internal Revenue is authorized to employ such number of persons as the Commissioner deems proper”. Congress thus left to the Executive Branch almost the entire personnel structure of the IRS and refrained from establishing other particular offices within it. <br />As is shown above in part II.B, it was the Executive Branch that created the IRS Office of Appeals and its personnel structure, pursuant to that authority in section 7804(a). When Congress enacted in 1998 the CDP provisions in sections 6320 and 6330, it employed that pre-existing Office of Appeals and Secs. 6320(b)(1), committed the new CDP function to that office. 6330(b)(1), (d)(2). Mr. Tucker contends that the RRA established the pre-existing Appeals Officer position as the CDP hearing officer. The statute does refer to an “appeals officer” as the person who “obtain[s] verification *** that the requirements of any applicable law or administrative procedure have been met”, sec. 6330(c)(1), and who makes the “determination” whether to proceed with collection, sec. 6330(c)(3). However, for the following reasons we conclude that section 6330 uses the term “appeals officer” interchangeably with the term “officer or employee”: <br />First, the provisions in the lien statute, section 6320(b)(3), and in the levy statute, section 6330(b)(3), that actually state who shall conduct the hearing state that “the hearing *** shall be conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax”. (Emphasis added.) This is the first and only mention of an individual in the lien statute and the first mention of an individual in the levy statute. The caption of each paragraph is “Impartial officer”, thereby explicitly indicating that it might be an “officer or employee” who serves as the “Impartial officer”. (Emphasis added.) This shows that Congress did not use the term “officer” in any specialized sense. The phrase “or employee” is so contrary to Mr. Tucker's position that he is forced to declare the phrase “mere surplusage”. However, we decline to read words out of the statute; rather, we attempt to give meaning to every word that Congress enacted, and here that is best accomplished by taking at face value the phrase “officer or employee” in sections 6320(b)(3) and 6330(b)(3) (emphasis added), and by understanding the phrase “appeals officer” in section 6330(c)(1) and (3) as shorthand for an officer or employee in the Office of Appeals. If Congress had intended to assign CDP duty to a particular rank of “Appeals Officer”, it would not have added the phrase “or employee”; and it could have used language like that which it used simultaneously in RRA section 3105 where it provided that a bond issuer could appeal an adverse ruling “to a senior officer of the Internal Revenue Service Office of Appeals”. (Emphasis added.) Second, the conference report describing the provision does on one occasion use the designation “appeals officer” but almost immediately thereafter uses the designation “appellate officer”. H. Conf. Rept. 105-599, at 264 (1998), 1998-3 C.B. 747, 1018 (emphasis added). 71 <br />Neither the statute itself nor the legislative history shows that Congress intended to ascribe any particular importance or significance to the term “appeals officer”. We hold that, for purposes of section 6330(c)(1) and (3), an “appeals officer” is any “officer or employee” in the IRS Office of Appeals to whom is assigned the task of conducting a CDP hearing under section 6330(b)(3). 72 <br />The statute thus does not create any positions for the personnel who would perform the CDP function but rather refers to them in a most diffuse manner (”conducted by an officer or employee”). After the enactment of this statute, it was not possible to point to a position responsible for conducting CDP hearings and to question whether the person in that position was an “inferior Officer”; instead the hearings would be conducted by “employees” yet to be designated, from time to time, within the Office of Appeals. 73 Thus, the mere mention of an “officer or employee” or an “appeals officer” in sections 6320 and 6330 presumes but does not establish any position. 74 In addition to sections 6320 and 6330, however, Mr. Tucker points to a reference to “appeals officer” in a provision of the RRA that has not been codified in the Code. 75 RRA section 3465(b), 112 Stat. 768, 1998-3 C.B. 228, provides: <br />The Commissioner of Internal Revenue shall ensure that an appeals officer is regularly available in each State. [Emphasis added.] This provision, however, has little to do with the CDP hearing or (Emphasis added.) The its presiding “officer or employee”. statute certainly does not establish (or even imply) a CDP hearing officer “in each State”. That is, even if the statute were read to mean that “There shall be, and is hereby established, an IRS official known as `Appeals Officer' in each State”, the Congress would not, by creating such an official, establish a CDP hearing officer, as Mr. Tucker's argument would require. Whatever that “appeals officer *** in each state” might be tasked with doing, Congress made clear in sections 6320(b)(3) and 6330(b)(3) that a CDP hearing can be staffed by an “officer or employee”. (Emphasis added.) We therefore hold that the RRA did not establish the position of a CDP “appeals officer”. <br />2. Creation by regulation <br />However, Mr. Tucker contends, in effect, that proper Appointments Clause analysis must consider both statute and regulations. We therefore consider whether an office might be “established” by the RRA taken together with the regime for the Office of Appeals that is established in the regulations. It is true that the case law does not posit a bright-line rule that would require an explicit statutory creation of an office before there can be an “officer” for purposes of the Appointments Clause. Opinions of the Courts of Appeals for the Third, Fifth, and Sixth Circuits seem to tend to the contrary: 76 <br />The Administrative Review Board (ARB) of the Department of Labor, composed of three “members” appointed by the Secretary of Labor, “issu[es] final agency decisions on questions of law and fact arising in review or on appeal' in whistleblower cases.” Willy v. Admin. Review Bd., 423 F.3d 483, 491 (5th Cir. 2005) (quoting 61 Fed. Reg. 19 978 (May 3, 1996)). The ARB was created not by statute but by an order of the Secretary of Labor, `regulations' or by `statute,” for which he cites United States v. Mouat, 124 U.S. 303, 307-308 (1888) (”there is no statute authorizing the secretary of the navy to appoint a pay-master's clerk, nor is there any act requiring his approval of such an appointment, and the regulations of the navy do not seem to require any such appointment or approval for the holding of that position. The claimant, therefore, was not an officer” (emphasis added)). pursuant to 5 U.S.C. sec. 301 (2006), which provides that "[t]he head of an Executive department *** may prescribe regulations for the government of his department, the conduct of its employees, [and] the distribution and performance of its business”. Both the Courts of Appeals for the Fifth Circuit, see Willy v. Admin. Review Bd., 423 F.3d at 491-492, and the Sixth Circuit, see Varnadore v. Sec. of Labor, 141 F.3d 625, 631 (6th Cir. 1998), and Holtzclaw v. Sec. of Labor, 172 F.3d 872 (6th Cir. 1999), approved the creation of the ARB as being within the general authority granted to the Secretary of Labor under 5 U.S.C. sec. 301 (2006), analyzed the position of member on the ARB under the Appointments Clause and found it to be an “inferior Officer”, and held that Congress, by 5 U.S.C. sec. 301, had authorized the Secretary to make the appointments, which satisfied the requirements of the Appointments Clause. <br />Similarly, the Appeals Board of the Department of Health and Human Services (HHS), composed of members appointed by the Secretary of HHS, resolves disputes under the Child Support Enforcement Act, 42 U.S.C. secs. 651-669(b) (2006). Pennsylvania v. HHS, 80 F.3d 796, 800 (3d Cir. 1996). The Appeals Board was created not by statute but by regulation, 45 C.F.R. Pt. 16 (1981), promulgated by the Secretary of HHS, pursuant to 42 U.S.C. sec. 913 (2006), which provides: “The Secretary is authorized to appoint and fix the compensation of such officers and employees, and to make such expenditures as may be necessary for carrying out the functions of the Secretary under this chapter.” The Court of Appeals for the Third Circuit approved the creation of the Appeals Board as being within the general authority granted to the Secretary of HHS under 42 U.S.C. sec. 913, analyzed the position of member on the Appeals Board under the Appointments Clause and found it to be an “inferior Officer”, and held that Congress, by 42 U.S.C. sec. 913, had authorized the Secretary to make the appointments, which satisfied the requirements of the Appointments Clause. Pennsylvania v. HHS, 80 F.3d at 804-805. <br />None of these opinions suggests that any party had argued that the positions under review were not “established by Law”. Rather, the parties and the courts seem to have assumed that if the positions existed, then the positions were “established by Law”. 77 If this assumption is correct, then it would seem that any “Office” that actually exists in the Federal Government is arguably “established by Law”. <br />The Supreme Court has not so held, and the assumption is problematic, in that it risks reading out of the Constitution the phrase “established by Law”, if the Appointments Clause would mean the same thing with or without that phrase. One could argue instead that only a position created by a statute can be “established by Law” for purposes of the Appointments Clause. If a position is created not by Congress but by the Executive, then by definition there is no possibility that Congress both created and filled that position, which is the chief danger against which the clause is a safeguard. <br />However, if the phrase “established by Law” were construed to mean that the Appointments Clause can apply only to a position expressly created by a statute, then abuses could arise. For example, Congress could take a pre-existing low-level position (which had been created by the Executive Branch pursuant to a general authorization like section 7804(a), and which was not subject to appointment by the President or a Head of a Department) and could invest it with significant additional power, thus evading the Appointments Clause by seeming to avoid “establishing” the office. 78 Where such a pattern existed, the courts would have to see through the subterfuge and enforce the Appointments Clause. Mr. Tucker argues that the CDP provisions involve just this problem—i.e., that Congress took the existing Appeals Officer position and invested it with the “significant authority” (discussed below in part II.B.2) of the CDP process. <br />The argument fails, however, because Congress has assigned the CDP hearing function not to a particular rank or title of “Appeals Officer” nor to any other identifiable office-holder but generally to the Office of Appeals and, within it, to any “officer or employee”, secs. 6320(b)(3), 6330(b)(3), from among the “number of persons” who are employed in that Office “as the Commissioner deems proper for the administration and enforcement of the internal revenue laws”, sec. 7804(a). Likewise, even under the regulations the CDP responsibility does not inhere in any specific office or position. Pursuant to the administrative arrangements of the Office of Appeals, 250 employees are designated to perform that CDP function, but it is within the agency's authority under section 6330 to allocate the function as it will among its 1,100 settlement officers and Appeals Officers. The Appointments Clause applies only when an office is “established by Law”, but there is no office established by statute or regulation to which Congress committed the CDP function. <br />B. Whether the CDP function could constitute an “office” If, however, a position is “established by Law”, the second question in an Appointments Clause inquiry is whether that position constitutes an office of the United States. Only “offices” are subject to the requirements of the clause, and not every position that is “established by Law” is an office. 79 See Freytag v. Commissioner, 501 U.S. at 880-881. Assuming arguendo that the CDP function prescribed under sections 6320 and 6330 and the regulations thereunder is committed to a position “established by Law”, we must determine whether that position could constitute an “office”. <br />The Supreme Court has articulated two essential characteristics that a position must have in order to constitute an office: A position is an office if (i) it is invested with “significant authority pursuant to the laws of the United States”, Buckley v. Valeo, 424 U.S. at 126, and (ii) it is “continuing”, Auffmordt v. Hedden, 137 U.S. 310, 326-328 (1890); United States v. Germaine, 99 U.S. at 511-512, United States v. Hartwell, 73 U.S. 385, 393 (1868). Whether a position possesses these characteristics and thus constitutes an office “is determined by the manner in which Congress has specifically provided for the creation of the several positions, their duties Burnap v. United States, 252 U.S. 512, and appointment thereto.” 516 (1920). Therefore, we examine the specific features of the “officer or employee” position within the CDP function to determine whether it is a “continuing” office invested with “significant authority”. <br />1. Whether the CDP provisions created a “continuing” position A position is “continuing” if it possesses “tenure, duration, emolument, and duties” that are “continuing and permanent, not occasional or temporary.” Auffmordt v. Hedden, 137 U.S. at 327 (quoting United States v. Germaine, 99 U.S. at 511-512). A position is most clearly “continuing” if it is permanently assigned sovereign authority that does not expire, inter alia, upon the passage of time or the completion of a discrete task. See Auffmordt v. Hedden, 137 U.S. at 326-328; United States v. Germaine, 99 U.S. at 511-512; United States v. Hartwell, 73 U.S. at 393. Respondent concedes that, if the CDP “appeals officer” is a position “established by Law”, then it is a “continuing” position; and we therefore proceed to consider whether that position is given “significant authority”, so that the person holding that position would be an officer (i.e., an “inferior Officer”) rather than a non-officer employee. <br />2. Whether the CDP hearing officer has “significant authority” <br />In Buckley v. Valeo, 424 U.S. at 126, the Supreme Court held that a position invested with “significant authority” is an office: <br />We think that the term “Officers of the United States” as used in Art. II, defined to include “all persons who can be said to hold an office under the government” in United States v. Germaine, supra, is a term intended to have substantive meaning. We think its fair import is that any appointee exercising significant authority pursuant to the laws of the United States is an “Officer of the United States,” and must, therefore, be appointed in the manner prescribed by § 2, cl. 2, of that Article. In that case the Supreme Court examined the powers of the eight- member Federal Election Commission (FEC) established under the Federal Election Campaign Act of 1971 (1971 Act), Pub. L. 92-225, 86 Stat. 3, as amended by the Federal Election Campaign Act Id. 137-141. Amendments of 1974, Pub. L. 93-443, 88 Stat. 1263. The Supreme Court concluded that none of the FEC's commissioners were appointed in conformity with the clause, and thus, none of them were constitutionally permitted to exercise “significant authority”. Id. at 137. It then sorted the FEC's statutorily authorized powers into three categories in order to determine whether the powers in each category constituted significant authority: [T]he Commission's powers fall generally into three categories: functions relating to the flow of necessary information—receipt, dissemination, and investigation; functions with respect to the Commission's task of fleshing out the statute— rulemaking and advisory opinions; and functions necessary to ensure compliance with the statute and rules—informal procedures, administrative determinations and hearings, and civil suits. The Supreme Court held that it was constitutionally Id. permissible for the unappointed commissioners to exercise their investigatory and informative powers, because in so doing they were merely aiding Congress in performing its legislative function. Id. at 137-138. Since Congress could delegate those powers to its own committees, the Supreme Court stated “there can be no question” that Congress could delegate them to the FEC by statute. Id. <br />However, the Supreme Court held that it was not permissible for the unappointed commissioners to exercise their “more substantial [enforcement and interpretive] powers”. Id. at 138. First, the Supreme Court held that only “Officers of the United States” could exercise the commissioners' power to bring suit to enforce the 1971 Act, because that power “is the ultimate remedy for a breach of the law” and belongs to the Executive—not Legislative—Branch. Id. at 138-140. Second, the Supreme Court held that only “Officers of the United States” could exercise the commissioners' power to interpret the entire 1971 Act through rulemaking, advisory opinions, and determinations—without supervision from either Congress or the Executive Branch—because that power “represents the performance of a significant Id. at governmental duty exercised pursuant to a public law.” 140-141. From Buckley we therefore draw the general principle that only an “officer” may perform “significant” enforcement and See id. at 124-141. In particular, the interpretive functions. powers (i) to bring suit to enforce an Act of Congress and (ii) to issue regulations, advisory opinions, and determinations without supervision under an Act of Congress both constitute “significant authority”. <br />The Supreme Court has yet to fully define the term “significant authority” 80 ; and “ascertaining the test's real meaning requires a look at the roles of the employees whose status was at issue in other cases.” Landry v. FDIC, 204 F.3d at 1133. In the two cases most analogous to our facts, the Supreme Court in Freytag and the Court of Appeals for the District of Columbia Circuit in Landry analyzed whether different adjudicative positions constituted “offices”. In Freytag the Supreme Court faced the question whether a Special Trial Judge (STJ) of the Tax Court is an “inferior Officer”; and it observed that in some matters the STJ will “only hear the case and prepare proposed findings and an opinion” while in other matters the STJ may be assigned “not only to hear and report on a case but to decide it”. Freytag v. Commissioner, 501 U.S. at 873. In deciding that STJs are “inferior Officers”, the Supreme Court relied on the authority of STJs to render the final decision of this Court in some of the matters that come before them. See id. at 882. <br />In contrast, in Landry v. FDIC, 204 F.3d at 1134, the Court of Appeals decided that ALJs for the Federal Deposit Insurance Corporation (FDIC) are not inferior officers. Both the ALJs in Landry and the STJs on this Court “take testimony, conduct trials, rule on the admissibility of evidence, and have the power 80 (...continued) or disobedience of their commands is punishable by court-martial. See 10 U.S.C. sec. 891 (2006). Thus, the issue here is not whether appeals officers are unimportant, but whether they are “Officers of the United States”. to enforce compliance with discovery orders.” Id. (quoting Freytag v. Commisioner, supra at 881-882). However, unlike the STJs, the ALJs lacked the power to make final decisions. Id. at 1133. Instead, ALJs file a recommended decision, 12 C.F.R. sec. 308.38 (1996), which the FDIC's board of directors reviews de novo before it issues the final decision of the agency, id. sec. 308.40(a), (c). This lack of finality led the Court of Appeals to conclude that the ALJs in question are not officers. Landry v. FDIC, 204 F.3d at 1134. <br />This focus in Landry on final decision-making power is an appropriate application of the Supreme Court's earlier analysis of the FEC's interpretive powers in Buckley v. Valeo, 424 U.S. at 140-141, which held that the power to interpret the 1971 Act “free from day-to-day supervision of either Congress or the Executive Branch” constitutes significant authority. The power to make a final decision, which the Supreme Court described as “independent authority” in Freytag v. Commissioner, 501 U.S. at 882, is a species of the power to act without supervision. See Buckley v. Valeo, 424 U.S. at 141. Therefore, a position that is invested with broad adjudicative powers, like the position of STJ, may be an office if the incumbent can act free of supervision or has the final say within the agency. See Freytag v. Commissioner, 501 U.S. at 882. However, such a position is not an office if the incumbent and her determinations are subject to supervision. See Landry v. FDIC, 204 F.3d at 1133-1134. <br />Determinations by settlement officers and Appeals team managers are not “final” in the sense that is relevant to the Appointments Clause. They review only a particular collection episode—a given notice of lien or notice of proposed levy. As is discussed above in part II.C.3.a, in the absence of a written agreement with the taxpayer, the Office of Appeals (not the appeals officer) retains jurisdiction to reconsider and overturn its personnel's determinations with respect to collection action. Sec. 6330(d)(2). . <br />Even determinations with respect to underlying liability by the personnel of the Office of Appeals are not binding on the IRS and may be overturned during audit reconsideration or overruled by the IRS Office of Chief Counsel in taking litigation positions See supra part II.C.3.b. The Office of Chief or settling cases. Counsel, not the Office of Appeals, has authority to "[n]egotiate or make a settlement in any case docketed in the Tax Court if the *** determination was issued by Appeals officials”. 26 C.F.R. sec. 601.106(a)(2)(i), Statement of Procedural Rules. Here, the Office of Chief Counsel was free to contest or settle Mr. Tucker's case, notwithstanding the team manager's determinations to uphold the tax lien at issue. <br />No position within the Office of Appeals is invested, in the CDP context, with the “final” decision-making power that may be exercised only by an “officer of the United States”. For that reason, settlement officers, appeals officers, and team managers are more analogous to the ALJs in Landry than to the STJs in Freytag . <br />Moreover, non-officer ALJs have the authority to conduct “on the record” hearings, to require attendance at those hearings, to administer oaths and affirmations, to issue subpoenas, to rule on offers of proof and receive evidence, and to order depositions. <br />5 U.S.C. secs. 554-557. Despite this authority, the Court of Appeals for the District of Columbia Circuit held that the ALJs in Landry are not officers because they lack final decision- <br />Landry v. FDIC, 204 F.3d at 1133-1134. 81 making power. In contrast, settlement officers, appeals officers, and team managers lack not only final decision-making power but also these formal powers granted to ALJs under the Administrative Procedure Act. See 26 C.F.R. sec. 301.6330-1(d)(2), Q&A-D6, Proced. & Admin. Regs. CDP hearings are “informal in nature” and do not even require a face-to-face meeting. Id. <br />Since we find persuasive the reasoning of the Court of Appeals for the District of Columbia Circuit in its determination that ALJs for the FDIC do not exercise “significant authority”, we hold that the lesser position of CDP “appeals officer” (”or employee”) within the Office of Appeals likewise does not exercise “significant authority”. We therefore hold that the positions of settlement officer, appeals officer, and team manager are not invested with “significant authority” under Buckley v. Valeo, 424 U.S. at 126. <br />Conclusion <br />An “officer or employee” of the IRS Office of Appeals who conducts CDP hearings has neither a position “established by Law” nor “significant authority” that is characteristic of an “officer of the United States” for purposes of the Appointments Clause. Without at all minimizing the importance of conducting a CDP hearing, that function does not involve an authority more “significant” than the authority exercised by other personnel important to tax administration (whether the Chief of the Office of Appeals (their superior), other high-ranking officials in the IRS, or many internal revenue collection personnel over the past 200 years) or as significant as the authority exercised by ALJs in many other agencies. To survey these thousands of employees important to the administration of law and single out IRS “appeals officers” as somehow requiring constitutional appointment would be unwarranted. They are instead properly hired, pursuant to section 7804(a), under the authority of the Commissioner of Internal Revenue. <br />To reflect the foregoing, <br />An appropriate order will be issued. <br />CONTENTS <br />Background .......................... 6 Discussion ......................... 10 <br />I. The Appointments Clause .............. 10 <br />________________________________________<br />10 <br /> <br />________________________________________<br />13 <br /> <br />________________________________________<br />19 <br /> <br />________________________________________<br />21 <br /> <br />________________________________________<br />33 <br /> <br />________________________________________<br />36 <br /> <br />________________________________________<br />36 <br /> <br />________________________________________<br />37 <br /> <br />________________________________________<br />39 <br /> <br />________________________________________<br />65 <br /> <br />________________________________________<br />65 <br /> <br />________________________________________<br />76 <br /> <br />________________________________________<br />87 <br /> <br />________________________________________<br />1 <br /> Unless otherwise indicated, all section references are to the Internal Revenue Code (”Code”, 26 U.S.C.). <br />________________________________________<br />2 <br /> In addition to the motion to remand that we address in this Opinion, there are also pending before us both respondent's motion for summary judgment asking the Court to sustain the supplemental notice of determination and Mr. Tucker's cross- motion for summary judgment asking that we hold that the supplemental notice reflected an abuse of discretion by the Office of Appeals. Those cross-motions address the merits of the CDP determination, and we do not decide them in this Opinion. <br />________________________________________<br />3 <br /> The Constitutional Convention did not accept a proposal by James Madison that “Superior Officers below Heads of Departments ought in some cases to have the appointment of the lesser offices.” Freytag v. Commissioner, 501 U.S. 868, 884 [68 AFTR 2d 91-5025] (1991) <br />________________________________________<br />4 <br /> See also Edmond v. United States, 520 U.S. 651, 663 (1997) the quality of the individuals they appoint; and *** they are directly answerable to the President, who is responsible to his constituency for their appointments and has the motive and means to assure faithful actions by his direct lieutenants”). <br />________________________________________<br />5 <br /> See Jerry L. Mashaw, “Recovering American Administrative Law: Federalist Foundations, 1787-1801”, 115 Yale L. J. 1256, 1268 (2006) (”these Federalist-era state builders were not operating with a twenty-first-century kit of administrative understandings either. The idea of `office,' for example, was highly ambiguous—an unsettled blend of public and private stations. This ambiguity made the legal structure of office- holding problematic along multiple dimensions, from the way <br />________________________________________<br />6 <br /> Officers of the United States are also “employees” for some purposes—e.g., employment taxes. See sec. 3401(c). However, the case law interpreting the Appointments Clause uses the term <br />________________________________________<br />7 <br /> As one mundane example, Article I, Section 5, Clause 3 of the Constitution requires each House to keep and publish “a Journal of its Proceedings,” a function hard to imagine Congress accomplishing without staff. <br />________________________________________<br />8 <br /> See “List of Civil Officers of the United States, Except Judges, With Their Emoluments, For the Year Ending October 1, 1792”, at 59 (Feb. 27, 1793), printed in I Documents, Legislative and Executive, of the Congress of the United States, at 57-58 list to the President with the statement that it was “the list of the several officers of Government *** as compiled in this or received from the other Departments.” President Thomas Jefferson transmitted it to Congress and called it “a roll of the persons having office or employment under the United States.” <br />________________________________________<br />9 <br /> See U.S. Office of Personnel Management, Federal Employment Statistics, http://www.opm.gov/feddata/html/2009/March/table2.asp. <br />________________________________________<br />10 <br /> <br />________________________________________<br />11 <br /> Id. secs. 3, 5, 1 Stat. 73, 75; Act of Sept. 29, 1789, ch. 21, sec. 2, 1. Stat. 93. <br />________________________________________<br />10 <br /> <br />________________________________________<br />12 <br /> <br />________________________________________<br />13 <br /> For purposes of the Appointments Clause, a department is a “freestanding, self-contained entity in the Executive Branch”. Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. <br />________________________________________<br />14 <br /> See Edmond v. United States, 520 U.S. at 660 (”The prescribed manner of appointment for principal officers is also the default manner of appointment for inferior officers”); see also Weiss v. United States, 510 U.S. 163, 187 (1994) (Souter, J., concurring) (”any decision to dispense with Presidential appointment and Senate confirmation is Congress's to make”). <br />________________________________________<br />15 <br /> In the early years of the Republic, external and internal revenue employees were more than half the Federal civilian workforce. See Leonard D. White, The Federalists: A Study in Administrative History 123 (1948). Revenue statutes make up, by pages, roughly 40 percent of the first volume of Statutes at Large. “The revenue statutes were the most complexly articulated administrative system devised by the early Congresses”. Mashaw, supra at 1278. <br />________________________________________<br />16 <br /> Act of Sept. 2, 1789, ch. 12, 1 Stat. 65 (1789). Except for the Assistant to the Secretary, who was to “be appointed by the said Secretary”, the statute is not explicit as to who appoints these officers, so the default rule of the Appointments clause applied. The position of Assistant to the Secretary was later replaced by the Commissioner of the Revenue, who was made responsible for “collection of the other revenues of the United States” (i.e., other than “duties on impost and tonnage”). See Act of May 8, 1792, ch. 37, sec. 6, 1 Stat. 280. <br />________________________________________<br />17 <br /> See Act of Sept. 11, 1789 (”An Act for establishing the Salaries of the Executive Officers of the Government, with their Assistants and Clerks”), ch. 13, sec. 2, 1 Stat. 68; Act of May 8, 1792, ch. 37, sec. 11, 1 Stat. 281 (”the Secretary of the Treasury be authorized to have two principal clerks”). Consistent with this statutory authorization, the 1792 Roll, at 57-58, lists the officials whose offices were named in the organizing statute, and also lists several “messengers” and “office-keepers”. <br />________________________________________<br />18 <br /> Act of Sept. 2, 1789, ch. 12, sec. 2, 1 Stat. 65; see also Act of June 5, 1794, ch. 48, sec. 4, 1 Stat. 376, 378 (”the duties aforesaid shall be received, collected, accounted for, and paid under and subject to the superintendence, control and direction of the department of the treasury, according to the authorities and duties of the respective offices thereof”); Act of May 8, 1792, ch. 37, sec. 6, 1 Stat. 280 (”the Secretary of the Treasury shall direct the superintendence of the collection of the duties on impost and tonnage as he shall judge best”). <br />________________________________________<br />19 <br /> <br />________________________________________<br />19 <br /> <br />________________________________________<br />21 <br /> Act of July 31, 1789, Ch. 5, sec. 1, 1 Stat. 29. The statute does not state by whom the “naval officer, collector and surveyor” would be appointed. However, the preamble to the 1802 Treasury Roll, at 261, describes "[t]he officers employed in the collection of the external revenue” as falling into three groups, one of which consisted of “collectors, naval officers, [and] surveyors” who are said to have been “appointed by the President”. The statute also allowed for “other person[s] specially appointed by either” the naval officer, collector, or surveyor to search, seize, and secure concealed goods. Act of July 31, 1789, Ch. 5, sec. 24, 1 Stat. 43 (emphasis added). However, we infer that those “special” appointments were occasional and temporary; and if so then they did not constitute “offices”. See infra part III.B.1. <br />________________________________________<br />22 <br /> That position of “principal officer” was established a month later as Secretary of the Treasury. See also, to the same effect, Act of Mar. 2, 1799, ch. 22, sec. 21, 1 Stat. 642. Consistent with the 1789 statute, the preamble to the 1802 Treasury Roll states that “port inspectors, weighers, and gaugers” are “appointed by the collectors, with the approbation of the Secretary of the Treasury”. We assume that, by virtue of this required “approbation” of the Secretary, these appointments satisfied the Appointments Clause as among those appointments that Congress “vest[ed] *** in the Heads of Departments”. See 4 Op. Atty. Gen. 162 (1843) (”approbation” of the Secretary required for “inspectors of the customs” in Act of Mar. 3, 1815, ch. 94, sec. 3, 3 Stat. 232, constituted appointment by the Secretary for purposes of the Appointments Clause). <br />________________________________________<br />23 <br /> <br />________________________________________<br />24 <br /> The collector, naval officer, and surveyor were also authorized to name a “deputy” who would serve “in cases of occasional and necessary absence, or of sickness, and not otherwise”, id. sec. 7, 1 Stat. 155, and would serve in the case of their disability or death “until successors shall be duly appointed”, id. sec. 8. See also, to the same effect, Act of June 5, 1794, ch. 49, secs. 1, 12, 1 Stat. 378, 380; Act of Mar. 2, 1799, ch. 22, sec. 22, 1 Stat. 644. Because the deputies' positions were only temporary, we assume that they were not “offices” within the meaning of the Appointments Clause, see infra part II.B.1, and that the clause is therefore not implicated even where those non-appointed deputies were (temporarily) given substantial authority and discretion. <br />________________________________________<br />25 <br /> Act of March 2, 1799, ch. 22, secs. 97 and 98, 1 Stat. 699. <br />________________________________________<br />23 <br /> <br />________________________________________<br />26 <br /> Id. sec. 99, 1 Stat 700. The preamble to the 1802 Roll, at 261, describes "[t]he officers employed in the collection of the external revenue” as falling into three groups, one of which consisted of, inter alia, “masters and mates of revenue cutters” who are said to have been “appointed by the President”. <br />________________________________________<br />27 <br /> Id. sec. 101, 1 Stat. 700. The statute also authorized the collectors to hire temporary and occasional inspectors. Id., secs. 14, 19, 38, 53, 1 Stat. 636, 640, 658, 667. <br />________________________________________<br />28 <br /> Id., secs. 97 and 98. The 1802 Roll does not list “non- commissioned officers, gunners and mariners” but does refer, at 261, to “bargemen employed by collectors”. We infer that the 1802 Roll's “bargemen” are these employees named in the statute. <br />________________________________________<br />29 <br /> <br />________________________________________<br />30 <br /> Id. sec. 18, 1 Stat. 203 (emphasis added); see also Act of June 5, 1794, ch. 48, sec. 3, 1 Stat. 377 (referring to “the several officers of inspection acting under” the supervisors). <br />________________________________________<br />31 <br /> <br />________________________________________<br />32 <br /> <br />________________________________________<br />33 <br /> Act of July 11, 1798, ch. 71, sec. 2, 1 Stat. 592; see also Act of Apr. 6, 1802, ch. 19, sec. 5, 2 Stat. 150. In 1805 the Secretary was authorized to employ clerks to serve under the direction of the supervisor of the district of South Carolina. See Act of Jan. 30, 1805, ch. 11, sec. 1, 2 Stat. 311. <br />________________________________________<br />34 <br /> Act of July 14, 1798 (”An act to lay and collect a direct tax within the United States”), ch. 75, secs. 1 and 2, 1 Stat. 597, 598. Section 8 of Article I of the Constitution permits Congress “To lay and collect Taxes”; but before the ratification of the 16th Amendment, “No capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.” <br />________________________________________<br />32 <br /> <br />________________________________________<br />35 <br /> <br />________________________________________<br />36 <br /> <br />________________________________________<br />36 <br /> <br />________________________________________<br />37 <br /> <br />________________________________________<br />36 <br /> <br />________________________________________<br />37 <br /> <br />________________________________________<br />38 <br /> <br />________________________________________<br />39 <br /> Act of Jan. 2, 1800, ch. 3, sec. 2, 2 Stat. 4 (emphasis added). See also, to the same effect, Act of May 10, 1800, ch. 53, sec. 2, 2 Stat. 72. <br />________________________________________<br />40 <br /> <br />________________________________________<br />41 <br /> See Lucius A. Buck, “Federal Tax Litigation and the Tax Division of the Department of Justice”, 27 Va. L. Rev. 873, 875-877 (1941). <br />________________________________________<br />40 <br /> <br />________________________________________<br />42 <br /> See Act of July 22, 1813, ch. 16, secs. 3, 8, 20-22, 3 Stat. 26, 27, 30, 31 (Assistant Assessors could correct fraudulent property lists without any taxpayer appeal right; Deputy Collectors could seize and sell personal and real property). <br />________________________________________<br />43 <br /> See Act of Aug. 5, 1861, ch. 45, secs. 11, 34, 51, 12 Stat. 296, 303, 310 (Assistant Assessors are described with less detail; Assistant Collectors could levy upon property and could arrest and imprison taxpayers who refused to testify); Act of July 1, 1862, ch. 119, secs. 3, 5, 9, 12 Stat. 433-435 (Assistant Assessors and Deputy Collectors with powers similar to those in 1813); Act of June 30, 1864, ch. 173, secs. 8, 10, 13, 14, 52, 118 13 Stat. 224-227, 242, 282 (Assistant Assessors and Deputy Collectors were given powers similar to those in 1862 (but arrest power was replaced with summons authority and power to apply to a judge for arrest for contempt), and both could also administer oaths and take evidence; Assistant Assessor could adjust taxable income upward “if he shall be satisfied” that income was understated, with appeal of any such increase to the assessor); Act of Mar. 3, 1865, ch. 78, 13 Stat. 480 (Assistant Assessor can adjust taxable income upward “if he has reason to believe” that income is understated); Act of July 13, 1866, ch. 184, secs. 4, 9, 14 Stat. 99, 126, (Assistant Assessors could give permits for cigar-making; Deputy Collectors could hold cotton until tax on it had been paid); Act of Mar. 2, 1867, ch. 169, secs. 19, 20, 14 Stat. 482 (any internal revenue officer could be authorized to seize property and could seize barrels if they had reason to believe that taxes on them had not been paid); Act of July 14, 1870, ch. 255, sec. 36, 16 Stat. 271 (weighers, gaugers, measurers, and inspectors). <br />________________________________________<br />44 <br /> See Act of Oct. 3, 1913, ch. 16, 38 Stat. 169, 179 (a Deputy Collector could demand that a taxpayer show cause why the income amount on the return should not be increased and, if no return or a false or fraudulent return had been provided, could make a return based on the best information he could obtain, which return was then to be held prima facie good and sufficient for all legal purposes). <br />________________________________________<br />45 <br /> See Act of Sept. 8, 1916, ch. 463, secs. 16-22, 39 Stat. 774-776 (Deputy Collector had powers similar to those in 1913); Act of Feb. 24, 1919, ch. 18, sec. 1317, 40 Stat. 1146-1148 (Deputy Collector had powers similar to those in 1913 and 1916, and could administer oaths and take evidence). <br />________________________________________<br />46 <br /> <br />________________________________________<br />47 <br /> One exception to this general rule is present in 5 U.S.C. section 9503(a) (2006), which authorizes the Secretary of the Treasury to appoint up to 40 individuals to critical administrative, technical, and professional positions in the IRS before July 23, 2013, provided that such individuals were not IRS employees before June 1, 1998, and that their appointments are limited to no more than 4 years. <br />________________________________________<br />48 <br /> According to the Internal Revenue Manual (IRM), “The Appeals Mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.” IRM pt. 8.1.1.1(1) (Oct. 23, 2007). <br />________________________________________<br />49 <br /> The Committee on Appeals and Review was abolished on June 2, 1924, in favor of creating the Board of Tax Appeals because it was thought that a judicial tribunal would better serve taxpayers. IRS Document 7225, History of Appeals, 60th Anniversary Edition 3 (Nov. 1987). However, in response to the rapidly growing docket of the Board of Tax Appeals, the Special Advisory Committee was formed as a part of the Commissioner's office to reprise the role of the Committee on Appeals and Review. Id. This Court is the successor to the (statutory) Board of Tax Appeals, and the Office of Appeals is the successor to the Special Advisory Committee. See id. <br />________________________________________<br />50 <br /> Today both CAP and the CDP regime (discussed below) are administered by the Office of Appeals. IRM pt. 8.24.1.1.1 (May 27, 2004). As a result, a taxpayer may be eligible to request either a CAP or CDP hearing with respect to a lien or levy. Id. However, taxpayers are eligible for CAP hearings in more circumstances than CDP hearings. Publication 1660, Collection Appeal Rights 3 (rev. 03-2007). For example, a taxpayer is eligible for a CAP hearing when a CDP hearing is unavailable because the taxpayer already had a CDP hearing or failed to timely request such a hearing. IRM pt. 8.24.1.1.1(6) (May 27, <br />________________________________________<br />50 <br /> <br />________________________________________<br />51 <br /> Although this case involves only an Office of Appeals determination to sustain a notice of lien and not a determination to proceed with a levy, the function of the “appeals officer” that pertains to levies should be considered in determining the nature of that position. Cf. Freytag v. Commissioner, 501 U.S. at 882 (”The fact that an inferior officer on occasion performs duties that may be performed by an employee not subject to the Appointments Clause does not transform his status under the Constitution. If a special trial judge is an inferior officer for purposes of *** [some of his duties], he is an inferior officer within the meaning of the Appointments Clause and he must be properly appointed”). <br />________________________________________<br />52 <br /> The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub. L. 105-206, 112 Stat. 685, also included three references to “appeals officers” that are not codified in the Internal Revenue Code. RRA Section 3465(b), 112 Stat. 768, 1998-3 C.B. 228, provides: “The Commissioner of Internal Revenue shall ensure that an appeals officer is regularly available within each State”; RRA section 1001(a)(4), 112 Stat. 689, 1998-3 C.B. 149, provides that the reorganization plan should prohibit “ex parte communications between appeals officers and other Internal Revenue Service employees”; and RRA section 3465(c), 112 Stat. 768, 1998-3 C.B. 228, provides that the IRS should “consider the use of the videoconferencing of appeals conferences between appeals officers and taxpayers seeking appeals in rural or remote areas.” (Emphasis added.) <br />________________________________________<br />53 <br /> <br />________________________________________<br />54 <br /> Mr. Tucker did not challenge his underlying liabilities (which were, in fact, the liabilities that he himself had reported on his late returns). However, as we observed supra note 51, in order to determine the nature of the “appeals officer” position, we should consider all of its functions, not only those that were operative in this case. <br />________________________________________<br />55 <br /> even lower pay grade person who the IRS used to call a <br />________________________________________<br />55 <br /> even lower pay grade person who the IRS used to call a <br />________________________________________<br />56 <br /> In addition, if an agreement embodied in Form 870-AD, “Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment”, is accepted by the IRS and executed with the taxpayer, equitable estoppel may apply to make that agreement binding on all functions of the IRS. See Kretchmar v. United States, 9 Cl. Ct. 191, 198 [57 AFTR 2d 86-306] (1985). <br />________________________________________<br />4 <br /> <br />________________________________________<br />13 <br /> <br />________________________________________<br />1 <br /> <br />________________________________________<br />2 <br /> <br />________________________________________<br />57 <br /> If the taxpayer challenges the validity of a lien in an action to quiet title under 28 U.S.C. section 2410 in Federal District Court, the Government will be represented not by the IRS attorneys in the Office of Chief Counsel but by the Department of Justice, pursuant to 28 U.S.C. section 516. If the Department of Justice concludes that the lien is not valid, then there is no apparent basis for arguing that the Government is bound by the Office of Appeals' contrary determination sustaining the lien. <br />________________________________________<br />58 <br /> See also H. Conf. Rept. 105-599 at 289 (1998), 1998-3 C.B. 747, 1020 (”A taxpayer could apply for consideration of new information, make an offer-in-compromise, request an installment agreement, or raise other considerations at any time before, during, or after the Notice of Intent to Levy hearing”). <br />________________________________________<br />2 <br /> <br />________________________________________<br />59 <br /> This provision in the regulations does not actually create “exclusive and final authority” but rather presumes such authority on the part of “the regional commissioner” and then provides that Appeals personnel “represent” the regional commissioner in that authority. It is a provision generally applicable when the Office of Appeals has jurisdiction over a determination of liability. It does apply when underlying liability is properly at issue in the CDP context, but its most frequent application must be in the non-CDP cases that come to the Office of Appeals for a deficiency determination. If the delegated authority to make the IRS's “exclusive and final” determination of a taxpayer's liability caused the Office of Appeals personnel to be “inferior Officers”, then it would pose questions about the necessity of appointing even the Appeals personnel who handle non-CDP matters and the regional commissioners who possess this authority in the first instance and from whom the Office of Appeals receives this authority only derivatively. <br />________________________________________<br />60 <br /> If a taxpayer in a CDP hearing proposes not a complete concession by the IRS but an offer-in-compromise (OIC) based on doubt as to liability, and if the Office of Appeals accepts the OIC, then the resulting agreement is binding on the IRS. However, that binding effect is not unique to the CDP process; rather, the OIC accepted in the CDP context has the same effect (no more, and no less) as an OIC accepted in any context. In the absence of an OIC or a closing agreement, the non-liability determination is simply reflected in the notice of determination, see IRM pt. 8.22.3.9(1) (Oct. 19, 2007) (”Abatement of Tax”), and then is effectuated either by Office of Appeals personnel directly, see IRM pt. 8.22.3.9.3.1 (Oct. 19, 2007) (”APS [Appeals Processing Services] will input adjustments to tax”), 8.22.3.9.3.1.1(2) (Oct. 19, 2007) (”APS will abate the SFR/ASFR assessment and reverse withholding as requested by the hearing officer”), or by collection personnel, see IRM pt. 5.1.9.3.10(6) (Dec. 15, 2003), 5.19.8.4.9(2) (Nov. 1, 2007), 5.19.8.4.14(1) (Nov. 1, 2007) (”CDP `back-end' work”). <br />________________________________________<br />61 <br /> <br />________________________________________<br />62 <br /> By regulation, 28 C.F.R. sec. 0.15 (2007), it is the Deputy Attorney General (not one of the “Heads of Departments”, in Appointments Clause parlance) who hires Department of Justice trial attorneys. <br />________________________________________<br />63 <br /> An Assistant Attorney General heads the Tax Division and hires the Chiefs of the litigating sections in the Tax Division. See Memorandum of Dec. 29, 1999, to Heads of Department Components from then-Deputy Attorney General Eric Holder, available at http://www.usdoj.gov/jmd/ps/sesdelegmemo.htm. Settlement authority is delegated to those Chiefs. See Tax Division Directive No. 135, reprinted in 28 C.F.R. pt. O, subpt. Y, app. <br />________________________________________<br />64 <br /> See id. (delegating settlement authority only in cases in which the agency agrees, and thereby requiring solicitation of IRS views to settle tax cases); see also “Department of Justice Tax Division Settlement Reference Manual” at 5-6, 16, available at http://www.usdoj.gov/tax/readingroom/foia/tax.htm. <br />________________________________________<br />65 <br /> See IRM pt. 1.1.6.1 (July 29, 2005) (”Counsel must interpret the law with complete impartiality so that the American pubic will have confidence that the tax law is being applied with integrity and fairness”). <br />________________________________________<br />2 <br /> <br />________________________________________<br />8 <br /> <br />________________________________________<br />66 <br /> Justice Breyer would evidently characterize many of these personnel as “officers”. See Free Enter. Fund v. PCAOB, supra, 561 U.S. at ___ (dissenting op. at 29) (Breyer, J., dissenting) (”by virtually any definition, essentially all SES [Senior Executive Service] officials qualify as `inferior officers,' for their duties, as defined by statute, require them to `direc[t] the work of an organizational unit,' carry out high-level managerial functions, or `otherwise exercis[e] important policy-making, policy-determining, or other executive functions.' <br />________________________________________<br />67 <br /> The General Schedule, abbreviated “GS”, is the basic pay schedule for employees of the Federal Government. See 5 U.S.C. sec. 5332 (2006). <br />________________________________________<br />68 <br /> Id. at 1-4 (showing that the Federal Government employed 1,351 ALJs and 3,370 non-ALJ hearing officers in 2002); see also Office of Pers. Mgmt., Federal Administrative Law Judges, By Agency and Level, CDPF Status Report as of June 2008 (OPM Report) (showing the Federal Government employed 1,388 ALJs in June 2008). Justice Breyer determined that there are currently 1,584 ALJs. See Free Enter. Fund v. PCAOB, 561 U.S. at ___ (dissenting op. at 30) (Breyer, J., dissenting). <br />________________________________________<br />5 <br /> <br />________________________________________<br />5 <br /> <br />________________________________________<br />5 <br /> <br />________________________________________<br />69 <br /> Although the Office of Appeals was originally a creature of regulation, the multiple references to it that were added to the Code in 1998, see part II.B above, make it at least arguable that the Office of Appeals is now required by statute. However, there is no constitutional issue as to whether the Office of Appeals itself was “establish[ed] by Law”; rather, the issue is whether there are, within the Office of Appeals, personnel who are “officers” whose positions are “established by Law”. <br />________________________________________<br />70 <br /> The National Taxpayer Advocate's predecessor, the Taxpayer Advocate, was appointed by the Commissioner of Internal Revenue, pursuant to former section 7802(d)(1). <br />________________________________________<br />71 <br /> See also S. Rept. 105-174, at 68 (1998), 1998-3 C.B. 537, 604 (”The determination of the appeals officer”; “the determination of the appellate officer”; the appellate officer's determination” (emphasis added)). <br />________________________________________<br />72 <br /> See Powers v. Commissioner, T.C. Memo. 2009-229 [TC Memo 2009-229]; Reynolds v. Commissioner, T.C. Memo. 2006-192 [TC Memo 2006-192]. <br />________________________________________<br />73 <br /> Mr. Tucker sets out an elaborate hypothetical circumstance, intended to show the importance of appeals officers, in which an appeals officer could end up holding jurisdiction over the three major U.S. car manufacturers and thereby “effectively become the United States `Car Czar”; “she could effectively end the United States domestic automobile industry”; “She could be in charge of the companies' fates for years”. Among the reasons that we are not influenced by this possibility is that it is the Office of Appeals, and not an individual officer or employee, that retains jurisdiction under section 6330(d)(2). <br />________________________________________<br />74 <br /> The mere mention of an office in the Code evidently does not establish that office or guarantee its continuance. Other administratively created IRS positions have been mentioned from time to time in sections of the Code but have thereafter been abolished by agency restructuring and their functions delegated to other personnel. See, e.g., sec. 6334(e)(2)(A) (mentioning “district director”); sec. 7611(b)(3)(C) (mentioning “regional commissioner”). <br />________________________________________<br />75 <br /> For the two other uncodified references to “appeals officers” in the RRA, see supra note 52. <br />________________________________________<br />76 <br /> In Free Enter. Fund v. PCAOB, 561 U.S. at ___ (dissenting op. at 27) (Breyer, J., dissenting), Justice Breyer asserts explicitly that an “office” can be “created either by <br />________________________________________<br />77 <br /> For a defense of this position, see Stephen G. Bradbury, “Officers of the United States Within the Meaning of the Appointments Clause”, 31 Op. Off. Legal Counsel, at *36-38, 2007 OLC LEXIS 3, *117-123 (Apr. 16, 2007). <br />________________________________________<br />78 <br /> An analogous abuse via “indirection” was hypothesized in Springer v. Govt. of the Philippine Islands, 277 U.S. 189, 202 (1928), when the Court stated: “the legislature cannot ingraft executive duties upon a legislative office, since that would be to usurp the power of appointment by indirection”. The Court did go on to observe that “the case might be different if the additional duties were devolved upon an appointee of the executive”, id., but it did not elaborate on this scenario. <br />________________________________________<br />79 <br /> The requirements of the Appointments Clause are not implicated unless an “office” exists. Freytag v. Commissioner, 501 U.S. at 880 (citing Buckley v. Valeo, 424 U.S. 1, 126 at n.162 (1976)). Even if the position of a non-officer employee is clearly established by law, i.e., “the duties, salary, and means of appointment *** are specified by statute”, id., at 881, appointments to that position need not conform to the Appointments Clause, id. at 880-881. In Freytag, the Supreme Court noted that the position of Special Trial Judge on this Court is “established by Law”, but nonetheless stated that Special Trial Judges “need not be selected in compliance with the strict requirements of [the clause]" “if we *** conclude that a special trial judge is only an employee”. Id. Likewise, in Landry v. FDIC, 204 F.3d 1125, 1133-1134 (D.C. Cir. 2000), the Court of Appeals for the District of Columbia Circuit noted that the position of ALJ for the Federal Deposit Insurance Corporation is “established by Law”, but held that the position does not constitute an office. Moreover, the history of internal revenue collection in the United States is replete with officials whose positions were specified by statute, but were not appointed pursuant to the requirements of the clause. See supra pt. II.C.2.c. <br />________________________________________<br />80 <br /> While “significant authority” is an essential character- istic of an “office”, Buckley v. Valeo, 424 U.S. at 126, this proposition cannot be construed to mean that non-officer employees of the Federal Government are insignificant or trivial. Mr. Tucker suggests that treating “appeals officers” as non- officer employees not subject to the Appointments Clause is to regard them as “unimportant”. We disagree. For example, military ranks reflect the same distinction between officers who are appointed in compliance with the Appointments Clause, see 10 U.S.C. secs. 531, 571, 624 (2006), and non-officers who are not. However, those non-officers include “noncommissioned officers” (sergeants, corporals, and petty officers) who are promoted (not appointed) from among enlisted personnel. See, e.g., Army Regulation 600-8-19 (”Enlisted Promotions and Reductions”), ch. 3 (”Semicentralized Promotions (Sergeant and Staff Sergeant)”), sec. 3.1. No one could reasonably call the role of noncommissioned officers “insignificant”. They have command of the enlisted personnel under them, and insubordination <br />________________________________________<br />80 <br /> <br />________________________________________<br />26 <br /> <br />________________________________________<br />81 <br /> The status of ALJs as employees or “Officers of the United States” is “disputed”. Free Enter. Fund v. PCAOB, 516 U.S. at ___ n.10, slip op. at 26 (citing Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000)). In Landry v. FDIC a divided panel of the Court of Appeals for the D.C. Circuit held that ALJs for the FDIC are not officers. However, in Free Enter. Fund v. PCAOB, dissenting Justice Breyer apparently indicates that he would hold that all ALJs are officers. 516 U.S. at ___(dissenting op. at 28) (Breyer, J., dissenting) (citing Freytag v. Commissioner, 501 U.S. at 910 (Scalia, J., concurring in part and concurring in judgment)). No court has held contrary to Landry, and we follow it. However, even assuming arguendo that ALJs are “Officers of the United States”, it does not follow that CDP hearing officers are likewise “officers”. CDP hearing officers lack not only final decision-making power but also the formal powers granted to ALJs. Whether or not the position of ALJ constitutes an “Office[] of the United States”, the lesser position of CDP “appeals officer” is not an “office”. <br />________________________________________<br />6Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-63802136555377095332010-07-27T09:53:00.000-04:002010-07-27T09:54:15.640-04:00economic substanceSALA v. U.S., Cite as 106 AFTR 2d 2010-XXXX, 07/23/2010 <br />________________________________________<br />CARLOS E. SALA; TINA ZANOLINI-SALA, Plaintiffs - Appellees, v. UNITED STATES OF AMERICA, Defendant - Appellant. <br />Case Information: <br />Code Sec(s): <br />Court Name: UNITED STATES COURT OF APPEALS TENTH CIRCUIT, <br />Docket No.: No. 08-1333,<br />Date Decided: 07/23/2010.<br />Disposition: <br /> <br />UNITED STATES COURT OF APPEALS TENTH CIRCUIT, <br />APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. NO. 1:05-cv-00636-LTB-KLM) <br />DISCUSSION<br />The Government's primary argument is that the transaction giving rise to Sala's claimed tax loss had no economic substance. When considering a district court's economic substance determination, this court reviews findings of fact for clear error and any legal determinations de novo. See Keeler v. Comm'r, 243 F.3d 1212, 1217 [87 AFTR 2d 2001-1224] (10th Cir. 2001). The ultimate determination of whether a transaction lacks economic substance is a question of law. James v. Comm'r, 899 F.2d 905, 909 [65 AFTR 2d 90-1045] (10th Cir. 1990) (“[W]e review de novo the ultimate characterization of the transactions as shams.”);see also Frank Lyon Co. v. United States , 435 U.S. 561, 581 [41 AFTR 2d 78-1142] n.16 (1978) (“The general characterization of a transaction for tax purposes is a question of law ....”).But see Nicole Rose Corp. v. Comm'r , 320 F.3d 282, 284 [90 AFTR 2d 2002-7702] (2d Cir. 2003) (treating the ultimate determination of whether a transaction lacks economic substance as a question of fact). <br /><br />*<br />``````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````` “we consider both the taxpayers' subjective business motivation and the objective economic substance of the transactions.” Jackson v. Comm'r, 966 F.2d 598, 601 [70 AFTR 2d 92-5024] (10th Cir. 1992) (quotation and alteration omitted). <br />A taxpayer is not permitted to deduct losses resulting from a transaction that lacks economic substance. Keeler, 243 F.3d at 1217. “[T]ransactions lacking an appreciable effect, other than tax reduction, on a taxpayer's beneficial interest will not be recognized for tax purposes.”James , 899 F.2d at 908. That a transaction has some profit potential does not necessarily compel the conclusion the transaction has economic substance. Keeler, 243 F.3d at 1219. Rather, “tax advantages must be linked to actual losses.” Id. at 1218; Coltec Indus., Inc., 454 F.3d at 1352 (explaining the economic substance doctrine requires “disregarding, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality”); Rogers v. United States, 281 F.3d 1108, 1116 [89 AFTR 2d 2002-1115] (10th Cir. 2002) (explaining the economic substance doctrine applies where “the transaction lacks economic reality”). We have also recognized “correlation of losses to tax needs coupled with a general indifference to, or absence of, economic profits may reflect a lack of economic substance.” Keeler, 243 F.3d at 1218. <br />In light of these well-established standards, this court concludes Sala's participation in Deerhurst GP lacked economic substance. Most compelling is that the claimed loss generated by the program was structured from the outset to be a complete fiction. It is clear the transaction was designed primarily to create a reportable tax loss that would almost entirely offset Sala's 2000 income with little actual economic risk. By acquiring a series of long and short options that largely offset one another, contributing them to Deerhurst GP in exchange for a partnership interest, and then almost immediately liquidating the partnership, Krieger was able to ensure that a tax loss nearly equivalent to Sala's income would be achieved in just a few weeks. This is because, if the rule in Helmer controlled, the short options would not be treated as liabilities when calculating Solid's partnership basis. 34 T.C.M. (CCH) 727 [¶75,160 PH Memo TC] (1975). Through this mechanism, the generated loss was designed to be entirely artificial. Indeed, rather than suffering any actual financial loss through Deerhurst GP, Sala actually profited from the transaction. Sala does not contest that the loss is fictional, but rather protests that the rule fromHelmer should control. This argument does not, however, address the claimed loss's absence of economic reality. The absence of economic reality is the hallmark of a transaction lacking economic substance. See Keeler, 243 F.3d at 1218–19; Coltec Indus., Inc., 454 F.3d at 1352; Rogers, 281 F.3d at 1116. <br />The pre-determined nature of the Deerhurst GP stage further highlights the transaction was structured mainly to create a tax loss. The district court noted Sala's participation in Deerhurst GP involved a $728,000 investment, which it found had the potential to produce a 45% profit, net of fees, over the course of the year. Before Sala invested, however, he was aware Deerhurst GP would exist for only a short time and would have to be liquidated before the end of the 2000 tax year in order to generate a tax loss large enough to offset his income. Consequently, liquidation was set to occur irrespective of any profits or losses, and would have happened even if market conditions indicated it would be more profitable not to dispose of the long and short options at that point. Though a taxpayer is permitted to structure a transaction in a way that minimizes his tax liability, the transaction must nevertheless have economic substance. Keeler, 243 F.3d at 1218. The pre-determined nature of the liquidation indicates a lack of economic substance. <br />Additionally, while the district court found the long and short options had a potential to earn profits of $550,000 over the course of one year, 3 the expected tax benefit was nearly $24 million. That expected tax benefit dwarfs any potential gain from his participation in Deerhurst GP such that “the economic realties of [the] transaction are insignificant in relation to the tax benefits of the transaction.” Rogers, 281 F.3d at 1116. The existence of some potential profit is “insufficient to impute substance into an otherwise sham transaction” where a “common-sense examination of the evidence as a whole” indicates the transaction lacked economic substance.Keeler , 243 F.3d at 1219 (quotation omitted). <br />The district court also found Sala provided plausible business explanations for various components of the Deerhurst GP stage, including his use of an S Corporation, the creation and almost immediate liquidation of the Deerhurst GP partnership, and the selection of the particular foreign currency options he acquired. Any anticipated economic benefit from participating in Deerhurst GP for a few weeks, and then quickly liquidating the partnership before year's end, however, is negligible in comparison to the $24 million tax benefit which would not have been achieved but for this pre-determined course of action. Likewise, the district court's finding that Sala entered into the Deerhurst Program primarily for profit does not alter our conclusion. “[W]e have never held that the mere presence of an individual's profit objective will require us to recognize for tax purposes a transaction which lacks economic substance.”Jackson , 966 F.2d at 601 (quotation omitted). More importantly, the district court's findings on this issue were based on its consideration of the five-year Deerhurst Program as a whole. As noted above, only the Deerhurst GP phase is relevant to the economic substance analysis. 4 <br />Presented with a transaction specifically designed to produce a massive tax loss devoid of economic reality, we hold Sala's participation in Deerhurst GP lacks objective economic substance. As a result, the district court's decision must be reversed. As this conclusion resolves the Government's appeal, we need not reach any of the other issues it presented. <br />IV. CONCLUSION<br />For the foregoing reasons, this court REVERSES and REMANDS to the district court with instructions to vacate its judgment and enter judgment in favor of the United States. <br />________________________________________<br />* <br /> Honorable M. Christina Armijo, U.S. District Judge, District of New Mexico, sitting by designation. <br />________________________________________<br />1 <br /> Because Carlos Sala and his wife, Tina Zanolini-Sala, jointly filed their tax return and refund claims, Zanolini-Sala is also a party to this lawsuit. For ease of reference, this opinion refers only to Carlos Sala. <br />________________________________________<br />2 <br /> In Helmer v. Comm'r, the Tax Court ruled that a contingent obligation should not be treated as a liability when calculating a partner's basis in his partnership interest. 34 T.C.M. (CCH) 727 [¶75,160 PH Memo TC] (1975). This is because no liability arises until the obligation becomes fixed, which might never occur. Id. The short options purchased by Sala and contributed to Deerhurst GP are contingent obligations. <br />Though Sala argues the Helmer rule should control the tax treatment of the Deerhurst GP transaction, it should be noted that prior to Sala's participation in the Deerhurst Program, the IRS challenged the sort of offsetting-options structure employed by Deerhurst GP. On August 13, 2000, the IRS released Notice 2000-44 explaining its position that transactions involving the transfer of property and offsetting contingent liabilities to a partnership, followed by the taxpayer's exit from the partnership to achieve a non-economic loss, do not give rise to an allowable tax deduction. I.R.S. Notice 2000-44, 2000-2 C.B. 255. The Notice states that “purported losses resulting from ... [such] transactions ... do not represent bona fide losses reflecting actual economic consequences as required for purposes of [26 U.S.C. § 165].”Id. It also informed taxpayers that the IRS would challenge such transactions and seek penalties.Id. <br />________________________________________<br />3 <br /> The district court found the transaction had a $550,000 profit potential over one year. As noted, however, it was pre-determined that Deerhurst GP would only exist for approximately one month. <br />________________________________________<br />4 <br /> It should also be noted the district court's finding that Sala entered into the Deerhurst Program primarily for profit was not part of its economic substance analysis. Rather, this finding was made in the district court's analysis of whether the claimed tax loss was deductible under 26 U.S.C. § 165(c)(2), which limits deductibility of an individual's losses to those “incurred in any transaction entered into for profit.” <br /> © 2010 Thomson Reuters/RIA. All rights reserved.Return Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0tag:blogger.com,1999:blog-1828490773850268894.post-42205224127228992842010-07-26T08:55:00.000-04:002010-07-26T08:56:35.527-04:00return preparer injunctionU.S. v. CRUZ, Cite as 106 AFTR 2d 2010-XXXX, 07/16/2010 <br />________________________________________<br />UNITED STATES OF AMERICA, Plaintiff-Appellant, v. ABELARDO ERNEST CRUZ, NATIONS BUSINESS CENTER, INC., NATIONS TAX SERVICES, INC., RUTH REAL, RUTH REAL & ASSOCIATES, INC., Defendants-Appellees. <br />Case Information: <br />Code Sec(s): <br />Court Name: IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT, <br />Docket No.: No. 09-11418; D. C. Docket No. 07-61003-CV-WJZ,<br />Date Decided: 07/16/2010.<br />Disposition: <br />HEADNOTE <br />. <br />Reference(s): <br />OPINION <br />IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT, <br />Appeal from the United States District Court for the Southern District of Florida <br />Before O'CONNOR, * CARNES and ANDERSON, Circuit Judges. <br />Judge: O'CONNOR, Associate Justice (Ret.): <br />[PUBLISH] <br /> Section 7407 of Title 26 of the United States Code permits the United States to seek, and a district court to issue, an injunction prohibiting tax preparers from engaging in certain deceptive or fraudulent practices. 26 U.S.C. § 7407. The district court may specifically enjoin a tax preparer from engaging in a variety of deceptive practices, including misrepresenting his eligibility to practice before the Internal Revenue Service (“IRS”). § 7407(b)(1)(A)–(D), (b)(2). If the district court finds that the tax preparer has continuously engaged in offensive conduct, and that an injunction specifically prohibiting such conduct would not be effective at preventing further abuses, “the court may enjoin such person from acting as a tax return preparer” altogether. § 7407(b)(2). <br />In this case, the Government brought a suit against Abelardo Ernest Cruz and four co-defendants seeking to enjoin them from operating as tax return preparers. The complaint alleged that the defendants engaged in a fraudulent tax preparation scheme in which they would intentionally overstate deductions and credits on their clients' tax returns in an effort to reduce their clients' tax liabilities and increase their refunds. It further alleged that the defendants made various misrepresentations regarding their eligibility to practice before the IRS. <br />The District Court found that the defendants had engaged in deceptive practices in preparing tax returns and issued an injunction specifically prohibiting them from further engaging in any such conduct. It declined to completely bar them from operating as tax return preparers, as the Government requested, finding such an extreme measure was unwarranted under the circumstances of the case. The District Court also denied a post-judgment motion filed by the Government seeking to require the defendants to notify their clients of the Court's injunction. <br />The Government now brings this appeal. It argues that the District Court abused its discretion when (1) it did not completely enjoin defendants from acting as tax return preparers, and (2) it refused to require defendants to notify their customers of the injunction. We find that the District Court was within its discretion in finding that such a broad injunction was not warranted under the facts of this case. But because the District Court failed to give any reasons for rejecting the request to compel defendants to notify their customers of the Court's injunction, we remand for consideration of that proposal. <br />I<br />Abelardo Ernest Cruz is a tax preparer in Miami, Florida. He is the manager of Nations Business Center, Inc. (“NBC”), a company that was primarily engaged in tax return preparation through the end of 2004. In 2003, IRS Agent Alice Denny requested a full investigation of Cruz and NBC. As support for her request, Agent Denny alleged that NBC's clients were receiving refunds and claiming earned-income tax credits at rates far exceeding the national average. Agent Denny's request was eventually approved and the investigation was assigned to IRS Agent Joann Leavitt in September, 2004. Leavitt notified Cruz of the investigation and held an initial meeting with him on September 27, 2004. <br />Shortly after this meeting, Cruz formed Nations Tax Service, Inc. (“NTS”), and it replaced NBC as Cruz's main tax preparation service entity. In addition to her initial investigation of Cruz and NBC, Agent Leavitt's investigation eventually broadened to cover NTS, Ruth Real (an employee of both NBC and NTS), and Ruth Real and Associates (“RRA”), a small tax-return company owned and operated by Real. During the investigation, the IRS audited and analyzed 224 returns prepared by the defendants from tax years 2003 through 2006 (46 from 2003, 86 from 2004, 61 from 2005, and 31 from 2006). See United States v. Cruz, 618 F. Supp. 2d 1372, 1383 [102 AFTR 2d 2008-7410] (S.D. Fla. 2008). 1 A few of the returns were selected for examination at random, but a majority of them were selected because they featured large or questionable deductions or exclusions. <br />Based on the results of the audits, which revealed numerous and repeated understatements of tax liability, the Government asked the District Court to enjoin the defendants from: (1) preparing, filing, or assisting in the preparation or filing of any federal income tax return for any other person or entity; (2) providing tax advice or services for compensation; (3) engaging in conduct subject to penalty under 26 U.S.C. §§ 6694 or 6701; and (4) engaging in any conduct that interferes with the proper administration and enforcement of the internal revenue laws through the preparation or filing of false tax returns. It also asked the District Court to require defendants, at their own expense, to mail a certified copy of the Court's final injunction to their customers from previous years. <br />After a nine-day bench trial, the District Court determined that defendants had in fact prepared income tax returns that included unjustifiable deductions and credits, thereby artificially inflating the returns owed to their clients. The District Court focused on eleven distinct types of violations that recurred, albeit with decreasing frequency, over the four-year span covered by the investigation, as represented by the following chart: 2 <br /> --------------------------------------------------------------------------<br /> Number of Number of Number of Number of<br /> returns in 2003 returns in returns in returns in<br /> sample (percent 2004 sample 2005 sample 2006 sample<br /> of total) (percent of (percent of (percent of<br /> total) total) total)<br />--------------------------------------------------------------------------<br />Total returns 46 86 61 31<br />--------------------------------------------------------------------------<br />Schedule C 23 (50%) 23 (27%) 4 (6.6%) 0 (0%)<br />depreciation<br />--------------------------------------------------------------------------<br />Schedule C 24 (52%) 37 (43%) 17 (29%) 5 (16%)<br />expenses<br />--------------------------------------------------------------------------<br />Earned income 10 (22%) 18 (21%) 11 (18%) 1 (3.2%)<br />credit<br />--------------------------------------------------------------------------<br />Child tax credit 11 (24%) 14 (16%) 6 (9.8%) 1 (3.2%)<br />--------------------------------------------------------------------------<br />Add'l child tax 7 (15%) 20 (23%) 10 (16%) 1 (3.2%)<br />credit<br />--------------------------------------------------------------------------<br />Education credit 7 (15%) 7 (8.1%) N/A 0 (0%)<br />--------------------------------------------------------------------------<br />Casualty/theft N/A N/A 17 (28%) 4 (13%)<br />loss<br />--------------------------------------------------------------------------<br />Foreign-earned N/A 10 (12%) 6 (9.8%) 0 (0%)<br />income exclusion<br />(Sec. 911)<br />--------------------------------------------------------------------------<br />Employee business 8 (17%) 16 (17%) 7 (11%) 0 (0%)<br />expenses<br />--------------------------------------------------------------------------<br />Schedule E expenses 13 (28%) 15 (17%) 4 (6.6%) N/A<br />or flow-through<br />--------------------------------------------------------------------------<br />Form 4797 loss 3 (6.5%) 5 (5.8%) 2 (3.2%) 0 (0%)<br />--------------------------------------------------------------------------<br />The District Court concluded that many of these errors directly contravened the Internal Revenue Code, and that the defendants “knew or should have known” that they were claiming improper deductions. Id. at 1387. The District Court also found that the defendants had “misrepresented their eligibility to practice before the IRS.” Id. at 1389. <br />The District Court concluded that the repeated violations warranted an injunction under 26 U.S.C. §§ 7402(a), 7407, and 7408, but that the requested injunction, barring defendants from preparing any tax returns or providing any tax advice, amounted to “the business death penalty” and was not warranted under the circumstances. Id. at 1392. In declining to issue the requested injunction, the District Court found that the evidence did not support the allegation that defendants were engaged in an ongoing pattern of fraudulent conduct, and that defendants had “clearly made a good faith effort toward eliminating the kinds of errors” they had made in the past. Id. at 1391. <br />The District Court particularly focused on the various new policies Cruz had implemented at NTS, created just after Cruz learned of the IRS investigation into his tax preparation practices, all targeted at improving quality control and tax compliance. For instance, NTS required the person who prepared each tax return to sign it as the tax preparer, in contrast to NBC's policy of having Cruz sign each return, including those he did not personally prepare. This change, according to Cruz, would help trace errors back to their original source. NTS required its employees to complete an online tax course each semester, and Cruz himself began to personally attend annual education seminars sponsored by the IRS. NTS required each of its clients to attest that their returns were prepared using information supplied by them, and acknowledge that it was the taxpayer's responsibility to provide accurate information. The taxpayer was also required to sign every page of the return. According to the District Court, these safeguards went beyond those typically used by tax return preparers. Id. at 1386. <br />The District Court's judgment enjoined defendants from engaging in various types of fraudulent or deceptive conduct in their work as tax preparers and authorized the Government to continue to monitor the defendants' compliance with the injunction through post-trial discovery motions. The District Court found this injunction was “sufficient to prevent further unlawful conduct.” Id. at 1374. It concluded its opinion with a warning: “Should Defendants engage in the conduct enjoined by the Court, not only will they be in violation of the law, they will be in violation of this Court's Order. Different facts will surely make for a different outcome.”Id. at 1392. <br />The Government filed a post-judgment motion asking the District Court to amend its judgment to require the defendants to mail a copy of the Court's injunction to every customer who had used their tax preparation services in the previous five tax years, and the District Court denied the motion without comment. <br />II<br />The Government now brings this appeal, arguing that the District Court abused its discretion when it failed to completely enjoin defendants from operating as tax return preparers and when it denied the post-judgment motion seeking to have defendants notify their clients of the Court's injunction. We address each of these claims in turn. <br />A. Failure to Issue the Requested Injunction<br />The Government argues that the District Court abused its discretion when it failed to completely enjoin the defendants from operating as tax return preparers. While the Government filed its suit under 26 U.S.C. §§ 7402(a), 7407, and 7408, it focuses this first claim of error on § 7407, which explicitly authorizes district courts to completely enjoin tax return preparers from operating if certain conditions are met. To understand the preconditions § 7407 places on issuing such a far-reaching injunction, we briefly review the statute. <br /> Section 7407(b)(1)(A) provides that a district court may issue an injunction if it finds that a tax return preparer has “engaged in any conduct subject to penalty under section 6694 or 6695 [of title 26], or subject to any criminal penalty provided by this title.” 26 U.S.C. § 7407(b)(1)(A). The District Court in this case found that the defendants did engage in conduct in violation of 26 U.S.C. § 6694(a), which bars a tax preparer from understating tax liability based on unrealistic or unreasonable positions, a finding that no party contests here. Similarly, § 7407(b)(1)(B) provides that a district court may issue an injunction if it finds that a defendant “misrepresented his eligibility to practice before the Internal Revenue Service, or otherwise misrepresented his experience or education as a tax return preparer.” 26 U.S.C. § 7407(b)(1)(B). The District Court found that the defendants did misrepresent their eligibility to practice before the IRS and, again, no party contests that finding here. <br />Once a district court determines that a defendant has violated one of the prohibitions contained in § 7407(b)(1)(A)–(D) (and the defendants in this case indisputably violated two of those prohibitions), the question turns to the appropriate relief, which is addressed in § 7407(b)(2). This provision provides that a district court may enjoin a tax preparer “from further engaging in [the offensive] conduct” if the court finds that “injunctive relief is appropriate to prevent the recurrence of such conduct.” 26 U.S.C. § 7407(b)(2). That is precisely the relief the District Court granted in this case when it issued an injunction prohibiting the defendants from engaging in specific types of deceptive and fraudulent conduct. <br />This section further provides the following, which is at the center of the dispute here: <br />If the court finds that a tax return preparer has continually or repeatedly engaged in any conduct described in subparagraphs (A) through (D) of this subsection and that an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration of this title, the court may enjoin such person from acting as a tax return preparer.<br />Id. (emphasis added). The District Court declined to enjoin defendants from operating as tax return preparers under this provision because it found that its more limited injunction was sufficient to prevent any further violations. It stressed the good faith efforts of defendants to reform their practice, as evidenced by the notable decline in the number and rate of errors in each of the eleven problem areas highlighted in the chart above. <br />In attacking this ruling the Government acknowledges that this Court reviews the scope of a district court's injunction for an abuse of discretion. See Angel Flight of Ga., Inc. v. Angel Flight Am., Inc., 522 F.3d 1200, 1208 (11th Cir. 2008). The Government posits that the District Court based its decision to deny its requested injunction upon three clearly erroneous factual findings. See United States v. Frazier, 387 F.3d 1244, 1276 n.12 (11th Cir. 2004) (“An abuse of discretion arises when the district court's decision rests upon a clearly erroneous finding of fact.” (quotation and citation omitted)). The three purported clearly erroneous findings are: (1) the District Court's finding that defendants' conduct was improving, (2) the finding that improved procedures and educational efforts would prevent future errors, and (3) that a specific-conduct injunction would be sufficient to thwart future violations. In our view, none of these three findings was clearly erroneous. <br />First, the District Court correctly relied upon the fact that each of the eleven errors outlined in the chart above decreased dramatically from 2003 to 2006, after the defendants realized the IRS was investigating them and after NTS implemented new quality control measures. The only errors that the District Court determined were based on unreasonable positions, in violation of § 6694(a), were occurring with decreasing frequency. The District Court appropriately concluded from this evidence that the defendants had significantly reformed their deceptive practices. <br />The Government argues that the rate of these specific errors is of little import because the average tax loss on the audited returns, i.e., the average amount of understated tax liability, actually increased during most of the years immediately following the initiation of the IRS investigation. Those average losses were $7,659 in 2003, $7,859 in 2004, $9,711 in 2005, and $5,621 in 2006. But the problem with looking to the average tax loss, rather than the decline in the rate of certain errors, is that the relevant inquiry for the District Court was whether the defendants' violations under § 7407(b)(1) had abated. And, as described above, § 7407(b)(1)(A) only proscribes understatements of tax liability that are based on a tax preparer's unreasonable positions (or those that it knows to be wrong). So while there was evidence that the defendants continued to understate their clients' tax liabilities in the years immediately following the initiation of an IRS investigation, the Government cannot directly tie those understatements to unreasonable positions as prohibited by the statute. And the Government does not point to any error attributable to an unreasonable position taken by the defendants that increased during the course of its investigation. Nor does it point to a new type of scheme that only appeared after the investigation started. <br />Absent such direct evidence, it was not clearly erroneous for the District Court to conclude that the defendants' violations under § 7407(b)(1) had abated, even when the average tax loss was not on the decline. This is especially true where, as here, the average tax losses in tax returns prepared by the defendants approximated the average tax losses in all tax returns audited nationally during the relevant years, as the District Court pointed out. Cruz, 618 F. Supp. 2d at 1381–83. While it is quite possible that the continued underreporting in the defendants' tax returns is attributable to some unreasonable position, the District Court did not clearly err in failing to draw such an inference absent evidence to that effect. <br />Second, the Government claims that the District Court clearly erred when it found that the improved procedures and educational efforts by the defendants would prevent future errors, because such procedures could not logically alleviate intentional errors. In other words, because intentional errors cannot be attributed to ignorance of the law, no amount of education will cure such errors. This argument relies on a misreading of the District Court's opinion, which concluded that the defendants “knewor should have known that they were claiming” improper deductions, id. at 1388 (emphasis added), and there is clearly nothing illogical about finding that educational efforts could lessen the number of negligent errors. While the District Court also stated, in the introduction to its opinion, that the defendants “have knowingly taken unreasonable positions on tax returns,” id. at 1374, this single reference cannot bear the weight the Government seeks to place on it. In the body of its opinion, the District Court found that the defendants violated § 6694(a), proscribing the understatement of tax liability due to unrealistic positions; it never found any violation of § 6694(b), which proscribes willful, reckless, and intentional understatements of liability. And even if we agreed with the Government's reading of the District Court's opinion, there is nothing illogical in finding that educational programs could curb negligent misconduct while relying on the added sanctions of the District Court's limited injunction to curb any excess of intentional misconduct. <br />Third, the Government argues that it was clearly erroneous to conclude that the specific-conduct injunction entered in this case would be sufficient to thwart future violations by the defendants. It would be at least somewhat odd to rule that a district court's prediction about a party's future behavior in response to a court order is clearly erroneous, so it is unsurprising that the Government's argument on this third point boils down to a legal claim: that the “District Court in this case improperly considered the traditional equitable factors in considering whether and to what extent to grant injunctive relief.” Brief for the United States at 57. In other words, the Government argues that “if the statutory requirements [of § 7407] are met then a court should issue an injunction without applying traditional equitable factors.”Id. This argument is untenable under § 7407(b)(2)'s plain language, which states that a district court “may enjoin” persons from acting as tax return preparers if the statutory prerequisites are satisfied, not that it “shall” or “must” issue such an injunction. The argument has also been squarely rejected by several of this Court's cases addressing parallel statutory provisions.See United States v. Ernst and Whinney , 735 F.2d 1296, 1301 [54 AFTR 2d 84-5472] (11th Cir. 1984) (“[T]he decision to issue an injunction under § 7402(a) is governed by the traditional factors shaping the district court's use of the equitable remedy.”); Klay v. United Healthgroup, Inc., 376 F.3d 1092, 1098 (11th Cir. 2004) (“[W]hen Congress authorizes injunctive relief, it implicitly requires that the traditional requirements for an injunction be met in addition to any elements explicitly specified in the statute.”). <br />The District Court acted within its discretion when, based on its conclusion that its limited injunction will be effective at preventing future violations, it declined to issue the broader injunction requested by the Government. It did not rely on any clearly erroneous factual finding in exercising that discretion. <br />B. Failure to Require Defendants to Notify Their Customers of the Injunction<br />In both its initial complaint and in its post-judgment motion to amend, the Government asked the District Court to require defendants to notify their customers of the Court's final injunction. The District Court did not mention this request in its initial opinion, and it denied the defendants' post-judgment motion to amend without comment. We cannot say that the District Court properly exercised its discretion in denying this request, nor can we say that it abused its discretion, given the District Court's lack of stated reasons for denying the request. We therefore vacate the judgment in part and remand the case to the District Court to reconsider this request, make appropriate findings, and explain the reasoning behind the decision it reaches on remand. See Gilmere v. City of Atlanta, 864 F.2d 734, 742 (11th Cir. 1989) (vacating and remanding where district court's failure to explain reasoning in awarding fees made informed review impossible). In our view, the reasons in favor of requiring defendants to notify their customers of the injunction are substantial and merit full consideration by the District Court in the first instance. <br />III<br />The District Court's judgment is Affirmed in part, and Vacated and Remanded in part. <br />________________________________________<br />* <br /> Honorable Sandra Day O'Connor, Associate Justice of the United States Supreme Court (Ret.), sitting by designation pursuant to 28 U.S.C. § 294(a). <br />________________________________________<br />1 <br /> The District Court's opinion repeatedly states the number of audited returns as 149, in an apparent reference to Government exhibits 81 and 82, which were admitted during Agent Leavitt's direct testimony. But the District Court's analysis clearly focuses on the updated spreadsheets introduced during the cross-examination of Agent Leavitt, defense exhibits 23–26, which included 224 audits. See 618 F. Supp. 2d at 1383 (synthesizing and citing to defense exhibits 23–26 in drawing its conclusions). <br />________________________________________<br />2 <br /> This chart is reproduced from the District Court's opinion in this case, and as indicated tReturn Preparer Tax Lawhttp://www.blogger.com/profile/16567115080572346289noreply@blogger.com0