Monthly Archives: July 2021

The U.S. government urged the Ninth Circuit to not revive a couple's challenge against the 2017 federal tax overhaul's repatriation provision, arguing the pair has mischaracterized the levy on foreign income as an unconstitutional direct tax on property. (Charles G. Moore et al. v. U.S., case number 20-36122, in the U.S. Court of Appeals for the Ninth Circuit).

Government attorneys asked the appellate court to uphold a Washington federal judge's November order that dismissed a tax refund suit brought by Charles and Kathleen Moore, who had contended that the Tax Cuts and Jobs Act 's repatriation provision violated the U.S. Constitution. The Moores argued that the measure was a direct tax on personal property, specifically, their shares in a foreign corporation,  that violated the U.S. Constitution's Sixteenth Amendment, which requires direct taxes to be apportioned based on state population.

In asking the Ninth Circuit to uphold the Washington court's order, the government said the measure is not a tax on property but a tax on U.S. shareholders' income from their controlled foreign corporations, or CFCs. The apportionment requirement under the 16th Amendment does not apply to income taxes, the government said.

As part of the TCJA's shift to a quasi-territorial system, which exempts some worldwide profits of U.S. corporations, Congress enacted a repatriation provision under Internal Revenue Code Section 965. Under this measure, companies would pay a one-time mandatory transition tax on deferred earnings held abroad.

According to the Moores' complaint, filed in September 2019, the Seattle-area couple paid about $15,000 in taxes under Section 965 based on their small stake in a CFC, KisanKraft Ltd., that provides affordable equipment to India's small-scale farmers. In seeking a refund, the Moores said the tax bill was based on earnings retained and invested by KisanKraft, earnings they never received.

The couple cited a U.S. Supreme Court case from 1920 called Eisner v. Macomber, that said a stock dividend was not taxable income because it didn't involve an actual gain realized by the shareholder. According to the Moores, the repatriation tax is "no different from an unapportioned tax on capital itself and equally beyond Congress' power to enact."

In dismissing the couple's case, U.S. District Judge John Coughenour in November found that "subsequent decisions dealing with foreign income have routinely departed from Macomber's realization standard."

The government told the Ninth Circuit the notion that the Constitution requires income to be "clearly realized" before it can be taxed conflicts with court decisions upholding related measures "against similar constitutional attack."

The government added, "the Constitution does not bar Congress from attributing U.S. taxpayers' foreign corporate earnings to them and taxing them on those earnings."  

The government also asked the Ninth Circuit to not revive the Moores' claim that the repatriation provision was the retroactive application of a new tax in violation of the due process clause in the Constitution's Fifth Amendment.

It was reasonable for Congress to apply Section 965 to offshore profits that accumulated after 1986, according to the government's attorneys. They noted that Judge Coughenour also found it was reasonable due to "the shift in international tax law and of the result, which would occur without a transition tax, of allowing previously undistributed CFC earnings to 'escape the imposition of U.S. taxation.'"

Read more at: Tax Times blog

The Internal Revenue Service closed the most recent filing season with more than 35 million in unprocessed tax returns, as the agency’s backlog grew markedly amid a crush of challenges related to the pandemic and economic relief efforts, a government watchdog said Wednesday.

 

Erin Collins, the National Taxpayer Advocate, said in her report that about 17 million paper tax returns are still waiting to be processed and approximately 16 million additional returns have been placed on hold because they require further review manually. Another 2.7 million amended tax returns have not been processed.

This backlog represents a fourfold increase from 2019, the most recent year before the coronavirus pandemic, when the IRS closed its filing season with 7.4 million unprocessed returns, according to the report. These numbers reflect the IRS backlog as of May, and the agency may have made progress reducing it since then. The IRS backlog amounted to 11 million at the end of the 2020 filing season, fewer than a third of the current number of unprocessed returns.

As a result of the backlog, millions of taxpayers have to wait much longer for their tax refunds. In the current filing season, 70 percent of individual income tax returns included refunds, with the average refund amounting to about $2,800. Refunds are also important for delivering tax credits to low-income Americans, while some other taxpayers need their returns to be processed to proceed with things such as mortgage applications.

 

The agency’s struggles come as President Biden and Democrats in Congress prepare to give the IRS even more major responsibilities, including implementing a new paid family leave benefit, a clean-energy tax credit program and new child-care subsidies.

“Processing delays matter greatly because most taxpayers overpay their tax during the year via wage withholding or quarterly payments and are entitled to receive refunds,” Collins, the taxpayer advocate, said in her report.

An IRS statement released late Wednesday disputed the taxpayer advocate’s methodology, arguing it does “not reflect the current situation at the IRS.” The statement said many of the returns will require further correction, but are on track to be sent. The statement also said some of the returns counted by the advocate “does not necessarily reflect unprocessed tax returns,” citing as many as 2.1 million individual and business tax returns are related to identity theft cases. Those “may or may not be legitimate tax returns,” the statement said.

IRS Commissioner Charles P. Rettig also told the Senate Finance Committee earlier this month that the agency had processed more than 137 million individual income returns and sent refunds totaling more than $281 billion.

The Overwhelming Majority of the 35 Million Unprocessed Returns are for the 2020 Filing Season That Were Filed in 2021.

The taxpayer advocate chronicled a “perfect storm” of challenges facing the IRS as it struggles to recover from the pandemic and implement a wide array of changes related to President Biden’s economic relief efforts.

Despite severe cuts over the last decade, the IRS was tasked with sending a third round of economic relief payments, changing rules around unemployment benefits, and new guidelines for eligibility around other tax credits. Many of these changes were ordered in the middle of the filing season, compounding the challenge. 

Republicans led the cuts to the IRS budget, but Biden has pushed to increase the agency’s funding by as much as $80 billion to crack down on tax cheats. A bipartisan infrastructure deal reached with the White House earlier this month includes as much as $40 billion in additional funding for the agency, although it is unclear when that may pass.

Calling for quick change, the taxpayer advocate report also stresses that the IRS took unusually long to process Americans’ 2019 income tax returns.

“We can understand and articulate the challenges the IRS faced over the past year, but for individuals and businesses that waited nine months, 12 months, or longer to receive their refunds, the reality of the long delays was incomprehensible and in many cases, financially distressing,” 

Collins writes in the report. “Taxpayers cannot experience similar challenges in future filing seasons. We cannot allow the agency to face the staffing and technology limitations it has experienced this past year.”

 Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

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Source:

The Washing Post

Read more at: Tax Times blog

On August 12, 2019 we posted DC Magistrate Ruled That Willful FBAR Regulations are Invalid, where we discussed that on July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty and that another DC court has also rejected Colliot & Wadhan and concluded that the Willful FBAR Penalty Not Limited to $100,000 in Rum, (DC FL 8/2/2019) 124 AFTR 2d ¶2019-5113

Here again the Second Circuit in Kahn, (CA 2 7/13/2021) 128 AFTR 2d ¶2021-5043, affirmed a district court decision and has held that statutory changes that increased the penalty for willful failure to file an FBAR applied, and prior regs which are still codified in the Code of Federal Regulations, imposing a smaller penalty did not.

In general, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file a FinCEN Form 114 - Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. 

Under 31 USC § 5321(a)(5)(C), as amended in 2004, the maximum penalty for the willful failure to failure to file an FBAR is the greater of $100,000 (adjusted for inflation) or 50% of the aggregate balance in the accounts that should have been reported in the FBAR at the time of that failure.

But a final reg, reflecting the statutory penalty amount in effect prior to the 2004 amendment, issued by the Treasury in 1987, says that the maximum penalty was merely $100,000 per account. (31 CFR §1010.820(g)(2)) This reg is still codified in the Code of Federal Regulations.

District courts in Texas and Colorado have held that, in view of the Treasury's failure to update the regs, penalties couldn't be imposed in excess of the amounts provided for in regs issued before the 2004 law change authorizing higher penalties. (U.S. v. Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834; U.S. v. Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208)

The Court of Appeals for the Federal Circuit has disagreed and held that the amendment to the statute superseded the regs which were thus no longer valid. (Norman, (CA Fed Cir 2019) 124 AFTR 2d 2019-6595) Connecticut and Pennsylvania district courts have also held that the penalty cap in the 2004 amended statute is the correct limitation. (U.S. v. Garrity, (DC CT 2019) 123 AFTR 2d 2019-941; U.S. v. Collins, (DC PA 2021) 127 AFTR 2d 2021-854)

A district court ruled that the penalty limitation provided in the 1987 reg was superseded by the 2004 statutory amendment increasing the penalty maximum.

The Court of Appeals for the Second Circuit affirmed the district court's decision. The Circuit Court said that the language of the 2004 amended statute was clear and thus the 1987 reg was not in harmony with the statute. Thus the reg does not apply any more. It cited Iglesias, (CA 2 1988) 61 AFTR 2d 88-1264 ("[a] regulation which does not" implement "the will of Congress as expressed by the statute" and instead "operates to create a rule out of harmony with the statute, is a mere nullity.").

Read more at: Tax Times blog

According to Procedurally Taxing, in the case of In re Bowman, No. 20-11512 (E.D. La. 2021) the Bankruptcy Court determined that it has jurisdiction to Hear Innocent Spouse Cases. The court denied the debtor’s motion for summary judgement that Ms. Bowman deserves innocent spouse relief. 

On its own, the court reviews the issue of its jurisdiction to hear an innocent spouse issue as part of her chapter 13 bankruptcy case and decides that it has jurisdiction to make such a decision.  The parties did not raise the jurisdiction issue, which is not surprising from the perspective of the plaintiff but may signal a shift in the government’s position since it had previously opposed the jurisdiction of courts, other than the Tax Court, to hear innocent spouse cases.

The court addresses the issue of its jurisdiction at the outset of the opinion.  It first cites 28 U.S.C. § 1334 and the Order of Reference from the district court before stating that this is a core proceeding.  This part of the opinion addresses the basic issue of bankruptcy courts’ jurisdiction in all issues, stemming from the litigation in the Marathon Oil case from 40 years ago (challenging the basic authority of bankruptcy courts under the then-newly-created bankruptcy code).

Moving past the bankruptcy court’s basic basis for jurisdiction, the court hones in on its ability to hear an innocent spouse case.  It first states:

Although it is true that “Section 6015(f) does not allow a bankruptcy court to exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary [of the IRS] receives the equitable power to grant innocent spouse relief under that Section,” here, it is undisputed that the Debtor sought such relief from the Secretary in July 2019 and the Secretary denied the request.  

This aspect of jurisdiction would apply to any court hearing an innocent spouse case.  In essence, the statute requires a taxpayer claiming this relief to exhaust their administrative remedies before seeking to have a court determine relief.

Next, the court turns to its specific ability to hear an innocent spouse case and cites heavily from an earlier case from Texas:

     Section 6015(e)(1) states that, in a case where an individual requests equitable relief under Section         6015(f), “[i]n addition to any other remedy by law, the individual may petition the Tax Court to             determine the appropriate relief available to the individual under this section . . . .” 26 U.S.C. §             6015(e)(1)(A). It is unambiguous that a Tax Court—and not just the Secretary—may grant relief to         an individual. Moreover, the remedy available in the Tax Court is “[i]n addition to any other remedy     provided by law.” 26 U.S.C. § 6015(e)(1)(A).

11 U.S.C. § 505 is another “remedy provided by law.” Section 505(a)(1) specifically provides bankruptcy courts with remedial power over tax liabilities and penalties . . . . This statutory language provides a bankruptcy court with the power to determine the legality of taxes and tax penalties. Pendergraft v. United States Dep’t of the Treasury IRS (In re Pendergraft), 119 A.F.T.R.2d (RIA) 2017-1229 (Bankr. S.D. Tex. Mar. 22, 2017)b

Because it determines that the tax liability directly impacts the administration of the bankruptcy case and because the IRS has filed a proof of claim seeking to have Ms. Bowman pay the liability for which she seeks relief, the court finds that it has jurisdiction while also noting that the IRS has not objected to its jurisdiction.

The opinion is important for being only the second court to deal with the issue of whether a bankruptcy court has jurisdiction to decide § 6015 relief.  The court says that it does have such jurisdiction because 6015(e)(1)(A) (giving the Tax Court jurisdiction) is only “in addition to any other remedy provided by law” and that the bankruptcy court is another such remedy.  The court cites the Pendergraft case, which is the only other opinion from a bankruptcy court on this matter.  The court conveniently doesn’t mention all the district court opinions holding that 6015 relief jurisdiction does not exist in collection suits or (in one opinion) in refund suits, but resides only in the Tax Court.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog