Yearly Archives: 2021

The Eleventh Circuit Court of Appeals, in Henco Holding Corp., (CA 11, 1/19/2021) 127 AFTR 2d 2021-362,  a published opinion, reversed and remanded a district court holding that the IRS must separately assess a transferor corporation’s tax liabilities against its transferee shareholders in order to collect the corporation’s tax liability from the transferees.

IRC Sec. 6901 provides that the liability of a transferee of a taxpayer’s property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.” The period of limitations for assessment of any such liability of a transferee is, in the case of the liability of an initial transferee, within one year after the expiration of the period of limitation for assessment against the transferor. (Code Sec. 6901(c)(1))

Generally, Code Sec. 6502(a) provides that when the assessment of any income tax has been made within the proper limitation period, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun within 10 years after the assessment of the tax. 

Three members of the Caseres (“Caseres”) family owned all the stock in Henco Holding Company (“Henco”), which was organized in Georgia as a C corporation. Henco’s sole asset was a 50.5% stake in Belca Foodservice Corp (“Belca”).  

In 1997, Henco sold its greatly appreciated stock in Belca to a third party, leaving Henco with cash and a $13 million capital gains tax liability. The Caseres then sold their stock in Henco to a separate third party in a series of transactions that resulted in Henco having a paper capital loss that completely offset its capital gain from the sale of the Belco stock.

After auditing Henco’s 1997 return, the IRS issued a deficiency notice disallowing the loss. When Henco didn’t contest the deficiency notice, the IRS assessed taxes, interest, and penalties against Henco.

Several Years Later, Without Separately Assessing The Caceres As Transferees, The IRS Filed Suit To Reduce To Judgment The Assessment Against Henco. In The Same Suit, The IRS Brought Claims Against The Caseres As Transferees Of Henco. The IRS Sought To Recoup Amounts Henco Transferred To The Caseres.

In the district court, the Caseres argued that the IRS’s suit should be dismissed because it was time-barred. The Caseres claimed that, in order to collect Henco’s tax liability from them as transferees, Code Sec. 6901(c)(1) required the IRS to separately assess Henco’s tax liability against them as transferees within one year after the statute of limitations for assessing the liability against Henco expired, which the IRS didn’t do.

In addition, while the Caceres admitted that Code Sec. 6502’s ten-year limitation period for collection of an assessed tax applied to Henco, they argued that it didn’t apply to them because the IRS never separately assessed them for Henco’s tax liability.

The IRS argued that it could proceed against the Caceres under Code Sec. 6502 based on the assessment against Henco without separately assessing them as transferees under Code Sec. 6901.

The district court held that in order to collect from the Caceres as transferees, Code Sec. 6901 required the IRS to separately assess Henco’s liability against them within one year after the statute of limitations for assessing the liability against Henco expired. Since the IRS failed to timely assess Henco’s liability against the Caceres, Code Sec. 6502 didn’t apply.

The Eleventh Circuit reversed and remanded the district court’s dismissal of the IRS’s suit against the Caceres. The Eleventh Circuit found that the district court misinterpreted Code Sec. 6901 and agreed with the IRS that it was not required to separately assess Henco’s tax liabilities against the Caceres as transferees.

The Eleventh Circuit noted that it’s the tax that is assessed, not the taxpayer, and the government timely assessed the tax liabilities against Henco.

In its holding, the Eleventh Circuit cited to Leighton v. U.S., (S Ct, 1933) 12 AFTR 62, in which the Supreme Court held that the IRS properly brought a collection suit against the shareholders of a tax delinquent corporation without making a separate assessment against them as transferees.

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The Financial Crimes Enforcement Network (FinCEN) has announced in FinCEN Notice 2020-2 that, currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. 

Generally, a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial accounts, including bank, securities, or other types of financial .accounts (“reportable accounts”) in a foreign country, must file an FBAR with the FinCEN if the aggregate value of those foreign financial accounts exceeds $10,000 at any time during the calendar year. (31 CFR §1010.350(a)) 

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. It can sometimes operate like “real” currency, i.e., the coin and paper money of the U.S. or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. However, virtual currency doesn't have legal tender status in any jurisdiction. (Rev Rul 2019-24, 2019-44 IRB 1004)

According to FinCEN's Notice, the current FBAR regulations don't recognize a foreign account holding virtual currency as a type of reportable account. Since the FBAR regulations don't consider a foreign account holding virtual currency as a "reportable account," a taxpayer is not required to file an FBAR reporting that account (unless the account holds assets besides virtual currency).

However, Fincen announced that it intends to propose to amend the regulations implementing the bank secrecy act (bsa) regarding reports of foreign financial  accounts (FBAR) to include Virtual Currency as a type of reportable account under 31 CFR 1010.350.

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In US v. Isac Schwarzbaum, US District Court, Southern District Of Florida, Case No. 18-cv-81147, a Federal government allegations that a Florida accountant willfully failed to report four foreign bank accounts can't be resolved without a trial, a Florida district court ruled. 

On October 23, 2019, the Government initiated the instant action against Kronowitz seeking to collect outstanding civil penalties for his allegedly willful failure to report his financial interest in foreign bank accounts, as required by 31 U.S.C. § 3514 for the years 2005-2010.  

Specically, the Government alleges that Kronowitz failed to properly report his financial interest in the following accounts: 

Kronowitz prepared his own tax returns for tax years 2005, 2006, 2007, 2008, 2009, and 2010. On the Schedule B forms filed with the 2007 and 2008 tax returns, in response to question 7a, Kronowitz marked "no." There were no Schedule B forms attached to the 2006, 2009, or 2010 individual tax returns. 

Question 7a on Schedule B states, "At any time during [applicable year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See page B-2 for exceptions and filing requirements for Form TD F 90-22.1." Kronowitz also prepared the tax returns for the Trust for tax years 2008, 2009, and 2010. He marked "no" in response to question 3 under the "Other Information" section on Form 1041, which states, "[a]t any time during calendar year [ ], did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country?" 

Kronowitz insists that he did not look up Form TD F 90.22.1 (the FBAR) due to a mistaken lack of knowledge, not a "desire to cheat the government." 

Kronowitz was provided notice of the FBAR penalty assessments, which remain unpaid. In addition to the amount of the assessments, interest and failure to pay penalties have accrued; and as of August 12, 2020, the balance owed on the FBAR penalties, including accruals, is $791,742.63.

in the Motion for summary judgment, the Governmen's t argues the Kronowitz's FBAR violations were willful because he recklessly failed to report his interest in foreign accounts or was willfully blind to the FBAR requirement. In support of its argument, the Government contends that the facts establish that Kronowitz recklessly opened the Cayman Island accounts to hide assets, that he recklessly managed the UBS and BKB bank accounts in Switzerland, and that his repatriation of funds into the United States and reporting of gains on the Trust tax returns formed part of a scheme to protect his foreign investment gains, which required planning, direction, and knowledge of international taxes and management of wired funds across international borders. Thus, the Government argues, "[i]t is implausible that Kronowitz could have known how to operate this process . . . without ever seeing the FBAR requirement." 

Upon review, the Government's argument itself demonstrates why summary judgment is inappropriate in this case. First, contrary the Government's suggestion, upon summary judgment, the Court views the facts in the light most favorable to Kronowitz and draws inferences from those facts in favor of Kronowitz as the non-moving party. Crocker, 886 F.3d at 1134. 

Unsurprisingly, Kronowitz disputes that his actions comprised any scheme to "cheat the government," and insists that he was simply mistaken. Significantly, in order to make the determination, the Court would be required to weigh the evidence and consider Kronowitz's credibility, which it may not do at summary judgment. Strickland, 692 F.3d at 1154. 

In arguing that summary judgment is appropriate in this case, the Government relies primarily upon the Fourth Circuit's opinion in Horowitz, in which the court stated that "willfulness based on recklessness is established if the defendant '(1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.'" United States v. Horowitz, 978 F.3d 80, 89 (4th Cir. 2020) (quoting Bedrosian, 912 F.3d at 153). 

In Horowitz, the court determined that, despite their contentions regarding their subjective intent, the defendant taxpayers' failure to file FBARs was objectively reckless. 978 F.3d at 89. However, the Government's reliance is misplaced for the simple reason that the district court in Horowitz was considering cross motions for summary judgment.

Similarly, the other cases relied upon by the Government do not support the conclusion that it urges here—that the Court may determine the issue of willfulness as a matter of law upon summary judgment. See United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311, at *1 (E.D. Va. Sept. 1, 2010) (finding no willfulness following bench trial), rev'd 489 F. App'x at 660; Bedrosian, 912 F.3d at 148 (same); Bohanec, 263 F. Supp. 3d at 888-89 (finding willfulness following bench trial). 

Moreover, whether Kronowitz was willfully blind based upon the facts in this case requires a determination of his subjective awareness and whether he purposely avoided learning the facts pointing to liability. Williams, 489 F. App'x at 658 (citation omitted). "As a general rule, a party's state of mind (such as knowledge or intent) is a question of fact for the factfinder, to be determined after trial." Chanel, Inc. v. Italian Activewear of Fla., Inc., 931 F.2d 1472, 1476 (11th Cir. 1991). 

Second, in this case, genuine issues of material fact bearing upon the issue of willfulness remain. In pertinent part, although it is undisputed that Kronowitz has been a licensed CPA for fifty-nine years, has prepared returns on behalf of both companies and individuals during the course of his career, and was required to attend CPE courses, Kronowitz testified that he did not deal with foreign tax issues for his clients, he did not remember any of the CPE courses mentioning the FBAR, and he was unaware of the FBAR until 2011. Accordingly, the Government's Motion for summary judgment was DENIED.

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The Internal Revenue Service on Jan. 25, 2021 rolled out a new online option that will help tax professionals remotely obtain signatures from individual and business clients and submit authorization forms electronically. 

Tax professionals can find the new “Submit Forms 2848 and 8821 Online” on the IRS.gov/taxpro page. Tax professionals must have a Secure Access account, including a current username and password, or create an account in advance of submitting an online authorization form.

“This online tool will allow tax professionals to safely obtain signatures from individual and business clients and upload authorization forms,” said Chuck Rettig, IRS commissioner. “This is a first step in our ongoing efforts to expand digital options for tax professionals using electronic signatures and online uploads.”

The project is a result of the Taxpayer First Act that requires the IRS to expand use of taxpayers’ electronic signatures on authorization forms. 

Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization, are two forms that allow taxpayers to authorize the IRS to disclose their tax information to third parties, such as, tax professionals.

Form 2848 is a taxpayer’s written authorization appointing an eligible individual to represent the taxpayer before the IRS, including performing certain acts on the taxpayer’s behalf. It also authorizes the representative to receive related confidential tax information of the taxpayer from the IRS. Form 8821 is a taxpayer’s written authorization designating a third party to receive and view the taxpayer’s information.

The Taxpayer And The Tax Professional Must Sign Form 2848. If The Tax Professional Uses The New Online Option, The Signatures On The Forms Can Be Handwritten Or Electronic. 

Form 8821 Needs Only The Taxpayer’s Signature.
If Using The New Online Option, The Taxpayer’s
Signature Can Be Handwritten Or Electronic.

If the tax professional uses the electronic signature option for a new client, the tax professional must first authenticate the client’s identity. For details on this process, see the “Authentication” section in the online option’s Frequently Asked Questions.

Tax professionals may also use the “Submit Forms 2848 and 8821 Online” to withdraw previous authorizations. However, the new online option cannot be used to ask questions or address other issues.

The process to mail or fax authorization forms to the IRS is still available. Signatures on mailed or faxed forms must be handwritten. Electronic signatures are not allowed.

Most Forms 2848 and 8821 are recorded on the IRS’s Centralized Authorization File (CAF). Authorization forms uploaded through this tool will be worked on a first-in, first-out basis along with mailed or faxed forms. The new online option negates the need for specific equipment (e.g., fax machines, scanners), saves tax professionals’ time in obtaining signatures, reduces person-to-person contact, and allows complete flexibility in completing the form anywhere, anytime, for both the tax professional and client.

The “Submit Forms 2848 and 8821 Online” option is a step towards to a broader IRS effort to expand options for electronic signatures on authorization forms as required by TFA.

This summer, the IRS plans to launch the Tax Pro Account. Its initial functionality will allow tax professionals to initiate a third-party authorization on IRS.gov and send it to a client’s IRS online account. Individual clients will access their online account and digitally sign the authorization, sending it to be recorded on the CAF. The IRS expects this new method will dramatically speed processing and allow for almost immediate authorization. More information about the Tax Pro Account and the extent of its initial functionality will be announced in the future.

For additional information tax professionals may review the Uploading Forms 2848 and 8821 with Electronic Signatures webinar or Fact Sheet.

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