Selected Recent Developments in Administrative Practice

ABA TAX SECTION Annual Meeting Washington, DC May 11, 2007

James Hartford Kevin Johnson Ernst & Young LLP Chamberlain, Hrdlicka, White, Williams & Martin 1225 Connecticut Ave., N.W. 300 Conshohocken State Rd. Washington, D.C. 20036 Suite 570 Phone: (202) 327-7715 W. Conshohocken, PA 19428 E-mail: [email protected] Phone: (610) 772-2330 E-mail: [email protected]

Rochelle Hodes PricewaterhouseCoopers LLP 1301 K St. NW, Suite 800 West Washington, DC 20005 Phone: (202) 312-7859 E-mail: [email protected]

1 TABLE OF CONTENTS

I. TAX SHELTERS, ABUSIVE TRANSACTIONS AND PRIVILEGE ...... 3

II. RETURN FILING, INFORMATION REPORTING, AND DISCLOSURE ...... 5

III. EXAMINATION, APPEALS, AND SPECIAL PROGRAMS ...... 10

IV. ASSESSMENT, COLLECTION, AND ENFORCEMENT ...... 14

V. OTHER NOTABLE TOPICS ...... 18

2 I. TAX SHELTERS, ABUSIVE TRANSACTIONS, AND PRIVILEGE

U.S. Supreme Court Denies Cert in Coltec and Dow.

On February 16, 2007, the U.S. Supreme Court denied to grant certiorari tin both the Dow Chemical COLI case and the Coltec Industries contingent liability cases. Both cases would have provided the Court with the opportunity to hand down a national level test for economic substance. Many observers were hopeful that the Court would agree to hear at least one of the cases due to the apparent difference in treatment that the various circuits apply to the economic substance test.

District Court Grants Summary Judgment to Government in SOS Transaction: Cemco Investors, LLC v. United States, 2007 WL 951944 (N.D. Ill. 2007).

In Cemco Investors, LLC v. United States, the District Court for the Northern District of Illinois, Eastern Division, granted the government’s motion for summary judgment that the plaintiff was a sham partnership and that certain items of the partnership should be disallowed. A grantor trust whose beneficiaries were also the plaintiff’s partners engaged in a so-called “Short Option Strategy” (“SOS”) tax shelter. Cemco argued that the IRS should have issued the final partnership administrative adjustment (“FPAA”) to a sister partnership, which, according to Cemco, had the responsibility to properly calculate the basis of foreign currency that was contributed to Cemco as part of the SOS transaction. The court rejected this argument, concluding that Cemco was required to correctly determine the basis of the currency contributed to it. The court also determined that a 40% valuation penalty for a valuation misstatement should be imposed because the language of Code section 6662 makes clear that such misstatements include highly inflated adjusted basis.

IRS Chief Counsel Determines Transaction Substantially Similar to Sale-In, Lease- Out (SILO): CCA 200712044, 2007 WL 868134

In CCA 200712044, the IRS Office of Chief Counsel concluded that the described transaction was substantially similar to the sale-in, sale-out (SILO) transactions described in Notice 2005-13, 2005-1C.B. 630. In the transaction described in the CCA, the taxpayer purports to purchase equipment from a tax-indifferent party and then lease that equipment back to the tax-indifferent party. The seller has an option to return the

3 property to the taxpayer at the end of the lease and pay a guaranteed amount or to purchase the equipment for the greater of the guaranteed amount of the market value of the property at that time. Also, the proceeds from the purported sale are transferred to entities who agree to make the rental payments on behalf of the seller. According to the CCA, the intended tax consequences of the transaction (i.e., deductions for depreciation, interest, and amortization of transaction costs) are the same as the consequences of the transaction in Notice 2005-13. In particular, the proceeds of the purported sale are set aside to satisfy the tax-indifferent party’s obligations, effectively defeasing those obligations. Moreover, the tax-indifferent party retained the market risk with respect to the property’s residual interest. Consequently, the CCA concluded that the transaction was substantially similar to the SILO in Notice 2005-13.

Return is Fraudulent Even if the Preparer, Not the Taxpayer, Committed the Fraud: Allen v. Commissioner, 128 T.C. No. 4, (March 5, 2007).

The tax return preparer, rather than the taxpayer, committed fraud with respect to the taxpayer's return. The Tax Court has held that the extended limitations period of section 6501(c)(1) for assessing taxes based on a fraudulent return applies to the taxpayer's return even though the taxpayer did not commit the fraud. The court concluded that the taxpayer has the ultimate responsibility for the return the taxpayer files.

II. RETURN FILING, INFORMATION REPORTING, AND DISCLOSURE

IRS Must Disclose Certain Documents: Tax Analysts v. IRS, No. 96-2285 (D.D.C. Feb. 7, 2007).

In its ongoing battle over disclosure of internal documents, the IRS lost another round against Tax Analysts. The District Court for the District of Columbia held that the IRS must disclose eight out of 34 technical assistance memorandums sought in a FOIA suit brought by Tax Analysts initially filed on October 2, 1996. The court, while disappointed with the IRS’s attempts at complying with past orders held that 26 documents were not disclosable, as they were subject to the deliberative process exception to FOIA.

11th Circuit Reverses and Remands District Court’s Refusal to Review Summons: Redeker-Barry v. United States, No 06-13925 (11th Cir. Jan. 30, 2007).

In a per curiam opinion, the Eleventh Circuit reversed a district court opinion refusing to review a summons, stating that it erred in denying the movant the opportunity to conduct discovery before denying her “motion to request a de novo determination.”

2nd Circuit Refuses to Quash IRS Third Party Summons: Nicole Vento Mollison, VIFX, LLC, et al. v. United States, 481 F.3d 119 (2nd Cir. 2007).

In Nicole Vento Mollison, VIFX, LLC, et al. v. United States, the Second Circuit affirmed the district court’s refusal to quash a third-party summons issued by the Service to Salomon Smith Barney. In affirming the district court’s decision, the appeals court concluded that (1) the purpose of the summons was “legitimate,” (2) the information targeted by the summons was “relevant” to the purpose, (3) the information sought was not already in the government’s possession, (4) the steps required by the Code had been followed, and (5) the issuance of the summons did not violate the taxpayers’ due process

5 rights. The bulk of the opinion focused on the taxpayers’ claim that they were Virgin Islands residents and therefore were required to file tax returns with the Virgin Islands only. The court rejected this argument, noting that even if the taxpayers were bona fide Virgin Islands residents, they still could incur U.S. tax liability. Consequently, according to the court, the Service could investigate whether such a liability exists and the summons was issued for a legitimate purpose.

District Court Rules IRS Cannot Enforce Summons against a Cayman Island Bank: Cayman Island National Bank v. United States, 2007 WL 641176 (M.D. Fla. 2007).

The U.S. district court for the middle district of Florida dismissed the United States cross- petition to enforce a summons against Cayman Island National Bank (“Cayman Bank”) for lack of subject matter jurisdiction.

The district court determined that it lacked subject matter jurisdiction to enforce the summons against Cayman Bank under Code Sections 7402(b) and 7604(a) (governing the district court’s jurisdiction in summons enforcement cases) because Cayman Bank did not “reside” nor was it “present” in the middle district of Florida. The fact that Cayman Bank did business with residents of Florida or that the Bank hired a Florida attorney to represent it in a collection proceeding did not mean that Cayman Bank was “present” in Florida for the purposes of a summons enforcement action.

IRS Provides Additional Guidance on Entities that are Required to Report Certain Penalties to the SEC: Revenue Procedure 2007-25, 2007-12 I.R.B. 761.

The IRS amplifies Rev. Proc. 2005-51, 2005-2 C.B. 296, by providing additional guidance with respect to taxpayers who are required to disclose certain penalties under Internal Revenue Code Section 6662(h) (accuracy penalty for gross valuation misstatements as applied to a reportable transaction), 6662A (accuracy penalty for reportable transaction underpayments), or 6707A (failure to include reportable transaction information with tax returns) on reports filed with the Securities Exchange Commission.

After the IRS issued Rev. Proc. 2005-51, questions arose as to whether certain entities that are required to file reports under Sections 13 or 15(d), but do not file such reports on form 10-K, were required to disclose the application of the reportable transaction penalties to the SEC. Rev. Proc. 2007-25 makes it clear that the requirement for entities to disclose that they have been subject to reportable transaction penalties applies to entities that filed reports to the SEC on a form other than Form 10-K. Specifically, Rev. Proc. 2007-25 states that the requirement applies to persons that file:

1. Form 10-KSB, Annual Report Small Business Issuers 2. Form 11-K, Annual Report of Employee Stock Purchase, Savings and Similar Plans 3. Form 20F, Annual Report of Foreign Private Issuers 4. Form 40F, Annual Report of Certain Canadian Issuers

6 5. Form N-SAR, Annual Report of Registered Investment Companies.

IRS Issues Redacted TAM Discussing Requirements for Document to Constitute a Return.

Pursuant to a court order in Tax Analyst’s Freedom of Information Act litigation against the IRS, the IRS released a 1994 Technical Advice Memorandum discussing the requirements that must be present in a document for the document to constitute a tax return.

Code Section 6011 requires any person subject to tax under title 26 to make a return according to requirements set forth by the Secretary. Generally to constitute a valid return, the document must (1) be filed on the proper form, (2) contain sufficient information to determine the tax liability, and (3) be signed by the taxpayer. The TAM points out some cases have held that the requirement that the taxpayer use the proper form is not so critical as long as the other requirements are met. Citing, Commissioner v. Lanep-Wells, 321 U.S. 219 (1944), Germantown Trust v. Commissioner, 309 U.S. 304 (1940); Zellerbach Paper v. Helvering, 293 U.S. 172 (1934).

The TAM also discusses returns prepared by the IRS pursuant to Code Section 6020. The IRS is authorized to prepare a substitute tax return on behalf of a taxpayer who does not file a return under Code Section 6020. The IRS is not required to use a standard form such as a Form 1040 in preparing substitute returns.

If the taxpayer signs the return prepared by the IRS, the IRS may accept the return as the return of that taxpayer pursuant to Code Section 6020(a). The IRS also has the authority to prepare a return on behalf of the taxpayer based on information that it obtains under Code Section 6020(b) where the taxpayer fails to file a return. Even though such a return is not signed by the taxpayer, it qualifies as the return of the taxpayer on whose behalf the return is prepared. Code Section 6020(b).

IRS announces requirements for substitute tax forms: Rev. Proc. 2007-24, 2007-11 I.R.B. 692.

Rev. Proc. 2007-24 provides guidelines for privately designed tax forms and the conditions under which the IRS will accept computer generated tax forms. Software developers and other parties generating tax forms should follow the guidelines set forth in Rev. Proc. 2007-24. Privately generated tax forms that follow certain parameters do not need pre-approval. Tax forms that deviate from the guidelines set forth in Rev. Proc. 2007-24 require prior approval from the IRS. Rev. Proc. 2007-24 provides the appropriate addresses to which the parties generating tax forms must submit the documents for approval when applicable. Rev. Proc.2007-24 supersedes Rev. Proc. 2005-74.

IRS Issues 1994 Technical Advice Memorandum Approving 90-day extension policy for tax returns.

7 Pursuant to a court order in Tax Analyst’s Freedom of Information Act litigation against the IRS, the IRS released a redacted 1994 Technical Advice Memorandum, advising that it was proper for the IRS field to grant an automatic 90-day extension to file a return in response to a taxpayer’s submission of a extension request on Form 2758. The IRS determined that the automatic 90-day extension was a reasonable period and thus, permitted under Code Section 6081 and Treas. Reg. § 1.6081-1.

IRS Issues Guidance on Disclosure Rules for Nonprofits Engaged in Prohibited Transactions: Notice 2007-18, 2007-9 IRB 1 (Feb. 7, 2007).

TIPRA 2005 brought into enactment section 4965, which requires certain tax exempt entities to pay an excise tax if they participate in a “prohibited tax shelter item.” In response to Notice 2006-65, the IRS released this notice to provide guidance regarding the circumstances under which a tax exempt entity will be considered a “party” to a prohibited tax shelter transaction. Notice 2007-18 defines “party” as (1) an entity that “facilitates the transaction by reason of its tax-exempt, tax-indifferent or tax-favored status; or (2) is identified in published guidance, by type, class or role, as a party to a prohibited tax shelter transaction.”

Service Provides Guidance on Recission Procedures for Sections 6707 and 6707A penalties: Rev. Proc. 2007-21, 1007-9 IRB 1 (Feb. 7, 2007).

The Service has issued detailed guidance for taxpayers requesting rescission of a penalty under Sections 6707 for failure to disclose a reportable transaction, other than a listed transaction. Rev. Proc. 2007-21 also provides guidance for material advisers requesting a recission of the penalty under Section 6707 for the failure to disclose a reportable transaction other than a listed transaction. In addition to describing procedures for requesting recission of these penalties, Rev. Proc. 2007-21 discusses the factors that the Service will consider when determining whether to grant the recission request. Rev. Proc. 2007-21 is effective for any rescission request relating to a Section 6707A penalty for which notice and demand, or payment, is made after October 22, 2004. The revenue procedures states that further guidance will be issued providing pre-assessment administrative appeal rights to persons against whom the IRS proposes to assess a penalty under Section 6707A.

A request for rescission of a penalty assessed under Section 6707A must be made in writing within 30 days after the date the Service sends notice and demand for payment of the penalty or if the taxpayer pays the penalty (not including interest) in full before the Service sends a notice and demand for payment within 30 days from the date of payment. A taxpayer may request rescission only after filing the complete return or statement required under Section 6011, and exhausting the administrative remedies available within the IRS Office of Appeals regarding the proposed assessment of the penalty, unless the taxpayer has agreed in writing to the penalty assessment and has agreed not to file or prosecute a claim for refund or credit of the penalty.

8 The revenue procedure details the information that must be included in the rescission request. Among the information that must be provided is a statement of the facts and circumstances relating to the violation; the reason the original return or statement was not timely or was incomplete; a description of the safeguards the taxpayer had in place to ensure the proper filing of the return or statement; any remedial measures the taxpayer has taken to prevent future violations; and any other facts or circumstances relevant to how rescission would promote compliance with the requirements of the Code and effective tax administration. The request must also include a statement of the taxpayer's history of compliance with the tax law over the past 10 years; copies of all offerings and promotional materials that the taxpayer received for the reportable transaction involved in the rescission request; and a statement providing the identity of related parties to the transaction, the identity of tax-exempt entities involved in the transaction, and parties to any designation agreement, if applicable. The request must also include a declaration made under penalties of perjury that the information in the rescission request is true, correct, and complete. The Rev. Proc. provides a list of factors that will weigh in favor of granting rescission: 1. The taxpayer, on becoming aware of its failure to disclose or report a reportable transaction, properly filed a complete and proper Form 8886; 2. The failure to properly disclose was due to an unintentional mistake of fact that existed despite the taxpayer's reasonable attempts to ascertain the correct facts for the transaction; 3. The taxpayer has an established history of properly disclosing other reportable transactions and complying with other tax laws; 4. The taxpayer demonstrates that the failure to disclose arose from events beyond the taxpayer's control; 5. The taxpayer cooperates with the Service by providing timely information on the transaction at issue that the Service may request in consideration of the rescission request; and 6. Assessment of the penalty would weigh against equity and good conscience, including whether the taxpayer demonstrates that there was reasonable cause for, and the taxpayer acted in good faith with respect to, the failure to timely file or to include on any return information required to be disclosed under Section 6011. After the request is submitted, the Service may request additional information and documents relating to the transaction, including marketing materials and tax opinions. Failure to provide the requested information within the applicable time period may weigh against rescission. The revenue procedure also provides guidance for material advisers on procedures relating to requesting rescission of a penalty imposed under Section 6707 for failure to file information regarding a reportable transaction under Section 6111.

9 III. EXAMINATION, APPEALS, AND SPECIAL PROGRAMS

IRS Announces On-Line Payment Agreement Application.

In IR-2007-68, the IRS announced enhancements to its Online Payment Agreement application at www.irs.gov. First, individuals who have not yet receive a bill may establish pre-assessed agreements in respect of current tax year Form 1040 liabilities. To establish a pre-assessed agreement, the taxpayer must provide the taxpayer’s (1) balance due shown on the return; (2) TIN (and spouse’s TIN, if applicable); (3) date of birth; (4) adjusted gross income from the prior year’s return; and (5) total tax from the prior year’s return. Second, practitioners with valid authorizations may request agreements for multiple clients while remaining in the application.

IRS Requests Industry Issue Resolution Program and Business Plan Issues: Announcement 2007-47 (March 1, 2007).

IRS asks businesses and associations to refer tax issues for the Industry Issue Resolution Program and consideration for the 2007-2008 Treasury and IRS guidance priority list.

IRS LMSB Releases Additional Information on Tiered Issues.

On March 12, 2007, the IRS Large and Medium-Sized Business (“LMSB”) Division issued additional guidance on its issue classification system. The IRS is developing a system of “tiered” issues in order to focus its enforcement efforts and provide greater consistency in settling important tax issues under its Industry Issue Focus Program.

Under the classification system, issues that IRS LMSB determines to have the highest strategic significance are classified as Tier I issues. Other issues having a somewhat lower strategic significance but a high potential for noncompliance are identified as Tier II issues.

The IRS identified the following 15 issues as Tier I issues:

10 1. Abusive capital contributions (Code Section 118) 2. Department of Justice Settlements (Section 162(f) 3. Section 936 Exit Strategies 4. Foreign tax credit generating transactions 5. Backdated stock options 6. Domestic production activities (Code Section 199) 7. Foreign earnings repatriation 8. International hybrid instrument transactions 9. Mixed service costs 10. Nonqualified deferred compensation issues (Section 409A) 11. R&E credit claims 12. Transfer of intangibles offshore/cost sharing 13. Distressed asset tax shelters 14. Optional basis tax shelters 15. Listed transactions

The IRS has stated that the goal of the IIF program is to: (i) increase consistency in resolving similar issues, (ii) improve currency, (iii) maximize the IRS’s limited resources by focusing on significant issues and non-compliant taxpayers, and (iv) provide greater oversight and accountability on important tax issues.

While the IIF approach may achieve some of its established goals, it will likely limit IRS Field Agents and Appeals Officers’ discretion in settling the identified issues. The issues will be coordinated under an LMSB “Owner” Executive, and some type of approval will likely be needed before an Agent or Appeals Officer will be permitted to settle one of the tiered issues. Although the program may achieve greater consistency, it is likely to create additional administrative burden in settling these types of issues and thus, increase taxpayer costs.

IRS Releases “Rules of Engagement” on Tier I and II Issues: IRM § 4.51.1 (Apr. 1, 2007).

The IRS released its rules of engagement for Tier I and II issues in the Internal Revenue Manual. For Tier I, the IRM (§ 4.51.1.3) provides:

Tier I issues are tax issues of high strategic importance to LMSB which have significant impact on one or more industries. Tier I issues could [affect] areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility, where [there] are established legal positions and/or LMSB direction

Tier I issues require oversight and control by an issue Owner Executive. The Issue Owner Executive is responsible for ensuring that the issue is identified, developed and resolved in a consistent manner across all LMSB cases involving

11 similarly situated taxpayers. The disposition or resolution of the issue must be in accordance with that Executive’s guidance.

The LMSB Compliance Strategy Council will Designate Tier I issues.

For Tier II issues, the same provision provides:

Tier II issues are those involving areas of potential high non-compliance and/or significant compliance risk to LMSB or and Industry.

Tier II includes emerging issues, where the law is fairly well established, but there is a need for further development, clarification, direction and guidance on LMSB's position.

Tier II issues require coordination with the Issue Owner Executive. The Executive is responsible for ensuring the disposition or resolution of issues, so as not to hinder LMSB's broader direction and/or guidance.

The LMSB Compliance Strategy Council will designate Tier II issues.

IRS Addresses Ex Parte Rules in Remanded CDP Cases: cc-2007-006 (Feb. 23, 2007).

In a Chief Counsel Notice, the IRS provided advice about the application of the ex parte communication rules as they relate to communications between Chief Counsel attorneys and Appeals when a CDP case is remanded by the Tax Court. In the memorandum, the IRS states that Rev. Proc. 2000-43 does not apply to remanded CDP cases because the case remains docked with the Tax Court, but that the Appeals officer remains independent and that he/she should follow guidelines similar to those set forth in Rev. Proc. 2000-43.

When a CDP case is remanded, the chief counsel attorney should: (1) prepare a written memo to Appeals explaining why the case was remanded, along with any special instructions imposed by the Court; including what issues the court has ordered Appeals to consider; (2) send a copy of the memorandum to the taxpayer or its representative. The memorandum should not discuss the credibility of the taxpayer or the accuracy of the facts presented by the taxpayer.

IRS Does Not Acquiesce in CDP Case Involving Ex Parte Communication with Appeals: AOD 2007-02 (February 23, 2007).

In an action on decision, the IRS announced it will not acquiesce in Moore v. Commissioner, T.C. Memo 2006-171, in which the Tax Court held that discussions among IRS employees violated ex parte communication rules. The court remanded the case to the IRS appeals office to determine a remedy to avoid prejudicing the taxpayer

12 and ordered that all references to the ex parte communication, including the Tax Court opinion, be deleted from the administrative file. IRS states in the AOD that the violation should be treated as a harmless error and that remand to Appeals was unnecessary. According to the AOD, even though the information received by Appeals was through prohibited ex parte communication, under these facts the Appeals officer cured the violation by disclosing the information to the taxpayer and providing the taxpayer with an adequate opportunity to respond.

Chief Counsel Notice Provides Guidance on Ex Parte Rules for Chief Counsel and Appeals in CDP Cases: CC-2007-006 (February 23, 2007).

In Rev. Proc. 2000-43, the Service published guidance regarding ex parte communication between Appeals and employees and other Internal Revenue Service employees. This Chief Counsel Notice provides similar guidance with respect to communication between Chief Counsel attorneys and Appeals when a collection due process case is remanded by the Tax Court.

13 IV. ASSESSMENT, COLLECTION, AND ENFORCEMENT

Estate’s Remittance was a Deposit and not a Tax Payment: Huskins v. United States, 75 Fed. Cl. 659 (2007).

In Huskins v. United States, the Court of Federal Claims concluded that an estate’s remittance to the Service was a tax deposit, rather than a tax payment. Because of ongoing litigation and difficulty valuing a mortgage interest held by the decedent’s estate, the estate was unable to file final federal and state estate tax returns by the due date. To stop the accrual of penalties and interest, the estate’s tax counsel delivered a check to the IRS. Because the estate did not file a claim for refund within the prescribed time, it could recover the earlier remittance only if the remittance were characterized as a “deposit,” rather than a “payment,” of taxes. First, because the remittance was not made in response to a proposed liability, Rev. Proc. 84-58 required that it be treated as a deposit. Second, upon examining the factors that bear on the “tenor of the business transaction,” the court concluded that the remittance was properly treated as a deposit. Among the facts considered by the court, the remittance (1) was not made in response to an assessment, proposed deficiency, or notice deficiency, (2) was not an estimate of any taxes due but rather was an interim arrangement to protect the estate from future contingencies, and (3) the estate intended the remittance to be a deposit.

Fifth Circuit Confirms Payroll Tax Liability and Penalty: Staff It, Inc. v. United States, 2007 WL 853170 (5th Cir. 2007)

In Staff It, Inc. v. United States, the Fifth Circuit affirmed the district court’s conclusion that the plaintiff-appellant corporation had failed to exercise ordinary business care and prudence in discharging its payroll tax obligations and therefore, was not entitled to an abatement of its payroll tax obligations. The company had experienced significant financial difficulties, and failed to file payroll tax returns and pay related taxes for certain periods. Applying a multi-factor test, the court determined that the company did not have a reasonable cause for its failure to file return or its failure to pay the taxes. The taxpayer continued to pay its creditors and most of its operating expenses, giving those obligations

14 preference over its payroll tax obligations. As the court noted, to not impose penalties would “sanction [the company’s] unilateral, self-execution of a government loan.”

Tax Court Rules Taxpayer Not Permitted To Contest CDP Hearing Determination: Lewis v. Commissioner, 2007 WL 927211 (TC 2007).

In Lewis v. Commissioner, the Tax Court, granting the government’s motion for summary judgment, concluded that a taxpayer could not contest the validity of a tax liability in a Collection Due Process (“CDP”) hearing or before the Tax Court if the taxpayer previously disputed the liability in a conference with IRS Appeals. The taxpayer and his wife belatedly filed their 2002 tax return, and the IRS assessed penalties accordingly. The taxpayer requested an abatement of the penalty, claiming reasonable cause because his accountant was hospitalized with stomach cancer. After the assigned Appeals officer declined to abate the penalty and the IRS issued a Notice of Intent to Levy, the taxpayer requested a CDP hearing, again requesting that the penalties be abated. The settlement officer determined that, because Appeals had already considered the taxpayer’s abatement request, the liability could not be raised at the hearing. The court determined that the statute was not intended to preclude only taxpayers whose tax liabilities had been subject to judicial review from raising the underlying liability again in a CDP hearing. According to the court, a conference with an Appeals Officer provides a meaningful opportunity for a taxpayer to dispute an underlying tax liability such that Code section 6330(c)(2)(B) prohibits the taxpayer from contesting the validity of the tax a second time in a CDP hearing.

Tax Court Rules Small Case Designation Does Not Apply: Schwartz v. Commissioner, 128 T.C. No. 2 (Feb 14, 2007).

The petitioners filed their petitions pursuant to section 6330(d) for a judicial review of a Notice of Determination Concerning Collection Amount(s). The petition was initially filed as a small case pursuant to section 7463. While the petitioners had unpaid amounts in excess of $150,000, each year’s amount was less than $50,000. Because the total amount of unpaid taxes exceeded $50,000, the Tax Court held that the case could not proceed as an “S” case due to the language in section 7463(f)(2).

Tax Court Holds Procedural Mistakes Invalidate Levy: Buffano v. Commissioner, T.C. Memo 2007-32 (Feb. 8, 2007).

The taxpayer failed to file income tax returns beginning in 2000, when he last lived in Wheaton, IL. The petitioner moved to Milford, IL, and filed a change of address with the U.S. Postal Service. Based on substitute returns, the IRS sent a final notice of intent to lien and levy to an address that was neither the taxpayer’s Wheaton address nor his Milford address. The notice was returned to the IRS as undeliverable by the Postal Service. The IRS then proceeded to levy the petitioner’s wages. It was only then did petitioner learn of the levy. Accordingly, the petitioner filed a Form 12153 well after the 30 day period had expired. He was given an opportunity for an equivalent hearing, but failed to attend. He filed the petition in Tax Court asking for the levy to be invalidated.

15 As the Tax Court found that the levy notice was not mailed to the taxpayer’s last known address, and he did not receive the levy notice, the court invalidated the final notice.

IRS Abused Discretion in Denying Innocent Spouse Relief: Van Arsdalen v. Commissioner, T.C. Memo. 2007-48 (2007).

The Tax Court held that IRS abused its discretion in denying innocent spouse relief to the taxpayer. The court also noted that it did not need to address the government's argument that the Tax Court can only consider the administrative record in deciding the case because the taxpayer prevails whether or not the court's determination was limited to the administrative record. The case was previously dismissed for lack of jurisdiction under Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006).

Attorney's Signature on Form 4549 Sufficient to Prevent Taxpayer from Challenging Assessment: Deutsch v. Commissioner, No. 06-2361, (2nd Cir. March 2, 2007).

The Second Circuit affirmed a Tax Court holding that an individual is not allowed to challenge his tax liabilities for 1995 through 1997. Taxpayer signed a Form 2848, Power of Attorney, permitting his tax attorney to represent him before the IRS. Although the Form 2848 did not authorize the attorney to sign returns, the attorney's was authorized by the Form 2848 to sign Forms 4549 on behalf of the taxpayer and waive the taxpayer's right to challenge the tax liabilities assessed by the IRS for these years.

IRS Waives Estimated Tax Penalty for U.S. Residents and Citizens Living Abroad: Notice 2007-16 (Feb. 13, 2007).

In Notice 2007-16, the IRS addressed the section 911 foreign earned income exclusion, as it was modified by the Tax increase Prevention and Reconciliation Act of 2005. The notice provides that in certain circumstances, the section 6654 penalty for underpayment of estimated taxes will be waived for individuals living abroad. As the section 911 amounts and taxable rates associated with an individual’s liability, taking into account section 911, were modified by TIPRA, the IRS waived any section 6654 penalty for 2006 for an underpayment of estimated taxes to the extent that the underpayment is attributable to the TIPRA modifications. In order to qualify for the relief, the individual must file either Form 2555 or 2555-EZ with their timely filed U.S. income tax return or amended U.S. income tax return.

IRS Provides Guidance on Offers In Compromise under TIPRA: Announcement 2007-50, (March 5, 2007).

The IRS announced a revised offer in compromise application to comport with Tax Increase Prevention and Reconciliation Act of 2005 changes and a fact sheet on these changes.

16 Installment payment regulations: (REG-100841-97) (Release Date: MARCH 02, 2007).

The IRS withdrew and reissued proposed regulations on terminating tax payment installment agreements and requesting an administrative review of an alteration, modification, or termination of the agreements. Comments and hearing requests are due by June 4, 2007.

17 V. OTHER NOTABLE TOPICS

Federal Circuit Holds Section 6229 Extends Statute of Limitations: AD Global Fund, LLC v. United States, No. 06-5046, (Fed. Cir. March 2, 2007).

The Federal Circuit has affirmed the Court of Federal Claims, finding it unambiguous that section 6229 is not a separate statute of limitations for assessing partnership items but may extend the section 6501 limitations period and rejecting a partnership's claim that a final partnership administrative adjustment was untimely.

IRS Warns Taxpayer about asserting frivolous position in tax collection matters: Revenue Ruling 2007-21.

In Rev. Rul. 2007-21, the IRS discusses a frivolous position taken by some taxpayers that the IRS must provide the taxpayer with a summary record of assessment on Form 23C before it is permitted to assess and collect taxes. Under this position, taxpayers have asserted that unless the IRS presents a Form 23C setting forth a summary of the tax assessment, its tax assessment is invalid, and the IRS cannot collect the tax.

Revenue Ruling 2007-21 points out that, since the IRS has moved to a computerized tax system, it no longer uses the Form 23C as the summary record of assessment. The IRS now uses a computerized summary known as the RACS Report 006. The ruling states that both types of reports have been recognized as summary records of assessment under Code Section 6203.

The ruling states that the IRS is not required to give the taxpayer a summary of assessment on any particular form but may choose between documents that contain the items of information listed in the applicable regulations. For example, the IRS may provide a Form 4340 “Certificate of Assessments, Payments, Other Specified Matters”, or a transcript of the taxpayer’s tax account (MFTR-X). Either such document sets forth the information required under the regulations and thus, is sufficient.

The IRS has determined a taxpayer’s assertion that the IRS must produce a Form 23C before it is permitted to collect an assessed tax is a frivolous position. In any case in

18 which the taxpayer asserts that position, the IRS will take steps to collect the assessed tax, and the taxpayer may be subject to civil and/or criminal penalties.

IRS Announces Time Expiring for $2.2 Billion in Refunds for 2003.

On March 6, 2007, the IRS announced that it was holding more than $2.2 billion in unclaimed refunds for the 2003 tax year. Most of the refunds are attributable to individuals who did not file tax returns for 2003. The individuals may have been subject to withholding in excess of their tax liabilities or may have made estimated tax payments in excess of their tax liabilities. Many of the individuals are low wage-earners that might have been eligible for the earned income tax credit.

The IRS estimates that more than half of the taxpayers who did not file returns for the 2003 tax year are entitled to a refund of more than $611. Unfortunately, the deadline for taxpayer who had not filed tax returns for 2003 and were eligible for refunds was April 17, 2007.

IRS Investigating Fraudulent Telephone Excise Tax Refund Claims: IR-2007-36 (Feb. 16, 2007).

The IRS announced that search warrants were carried out in seven cities in February by special agents. The IRS sought evidence that tax preparation businesses were preparing returns claiming “egregious amounts” in refunds of the section 4251 excise tax. In addition to the search warrants, numerous other tax preparers who had prepared “questionable” refund claims had received visits from IRS revenue and special agents. Commissioner Everson stated, “[w]e want everyone who is eligible for the telephone tax refund to claim it but not to inflate the amount requested[.]” “We have seen limited but serious instances of abuse, and we’ve sent in criminal investigators to pursue the matter accordingly.”

Interest Netting Not Allowed: ILM 200707003 (Dec. 20, 2006).

In a memorandum, the IRS determined that interest netting was not allowed between an overpayment on a consolidated return for one year and either an underpayment of a member’s income tax for a prior year or an underpayment of a member’s employment or excise tax. The memo lays out the following scenario:

For tax year 1, the corporation was not a member of a consolidated group and filed a separate 1120. In TY 2, the corporation joined a consolidated group, which filed a consolidated return for TY 2, reporting an overpayment of income taxes. Also, the corporation filed a separate employment and separate excise tax return, on both it underpaid its liabilities for TY 2.

The parent corporation requested that the Service net the interest payable to the group on the TY 2 income tax return against the interest that the member corporation owed on its employment and excise tax returns for the same period. The IRS determined because the

19 parent corporation was the taxpayer of the income tax return and that the member was the taxpayer of the employment and excise tax returns that interest could not be netted under section 6621(d).

IRS Announces Stock Option Backdating Initiative: Announcement 2007-18, 2007- 9 IRB 1 (Feb. 08, 2007).

In Announcement 2007-18, the IRS announced a compliance resolution program that permits employers to pay the additional taxes arising under Section 409A of the Internal Revenue Code due to certain employees' exercise of discounted stock options and stock appreciation rights in 2006.

The program addresses only the additional section 409A taxes for the employee’s 2006 tax year as a result of the employee exercising certain stock rights. The program does not deal with any other consequences that may arise from the grant or exercise of a stock with an exercise price less than the fair market value on the date of grant. The program is open to employers that granted stock subject to 409A.

If an employer complies with all of the requirements of the program, then the employer and employee would be entitled to relief set forth in the announcement.

Dissolved Corporation May Seek Redetermination and Sole Officer May Act on its Behalf: Lloyd T. Asbury, Attorney at Law, P.A. v. Commissioner, T.C. Memo. 2007-53 (2007).

A former officer of a dissolved corporation is an authorized officer for purposes of Tax Court Rule 24(b) and is allowed to represent the dissolved corporation in Tax Court without counsel.

IRS Releases Report on Exempt Organization Executive Compensation Compliance: www.irs.gov/pub/irs-tege/exec._comp._final.pdf

The IRS on March 1 released the results of a three-year project on exempt organizations' executive compensation compliance. The report encompasses Form 990 returns beginning in 2002, compliance notices to 1,223 organizations, and examination of 782 organizations.

IRS Extends Attributed Tip Income Program Deadline to June 30: Announcement 2007-44, (February 28, 2007).

The IRS, in response to industry requests, announced that the deadline for electing to participate in the Attributed Tip Program (ATIP) for calendar year 2007 is extended from February 28, 2007 to June 30, 2007. Under Rev. Proc. 2006-30, employers should have started to attribute tips beginning with the first payroll period on or after January 1, 2007. However, employers will be granted until June 20, 2007, to begin the tip attribution process and to make the election to participate in ATIP. Employers that have already filed Form 8027, Employer's Annual Information Return of Tip Income and Allocated

20 Tips" without electing ATIP participation can do so by filing a duplicate Form 8027 before June 30.