42 Months Sentence Upheld For Business Owner’s Second Employment Tax Violation

A taxpayer who willfully failed to remit federal employment taxes while in the process of pleading guilty to a nearly identical crime could not escape his above-the-guidelines sentence of 42 months’ imprisonment, the D.C. Circuit recently held.  In United States v. Jackson, the taxpayer committed bankruptcy fraud in 2002 by diverting $373,000 from the company he ran to another one of his businesses, instead of remitting the federal tax withholdings from the wages of the company’s employees.  For this crime, the district court imposed five years’ probation rather than imprisonment.  But the taxpayer did not learn his lesson.  While pleading guilty to this crime and before being sentenced in 2006, the taxpayer, from 2005 through 2009, failed to pay almost $600,000 in federal employment taxes that his other business had withheld from employee wages.  He instead used this money to pay for jewelry, clothing, furniture, and rent.  Caught again, the taxpayer pleaded guilty, this time to willful failure of paying federal employment taxes in violation of Code § 7202, which carries a fine up to $10,000 and up to five years’ imprisonment.

The Department of Justice (DOJ) signed a plea agreement with the taxpayer recommending a U.S. Sentencing Guidelines range of 27 to 33 months.  This agreement was not, however, binding on the district court.  At sentencing, DOJ emphasized that the taxpayer was being sentenced for stealing employment taxes a second time.  Accordingly, the district court imposed 42 months’ imprisonment—9 months more than the top recommended range in the plea agreement.  On appeal, the D.C. Circuit affirmed, reasoning that the taxpayer’s repeat offenses not only demonstrated willful violation of the law, but also proved that a lenient sentence was not sufficient to deter him from committing similar crimes in the future.

As we noted in a prior post, DOJ has been ramping up criminal prosecutions of employment tax violations.  In Jackson, DOJ appears to have prosecuted the case very aggressively by recommending a sentencing range that functioned as an anchor, and then pushing for a harsher sentence.  The district court and the D.C. Circuit ultimately agreed, which reflects not only the seriousness and audacity of the taxpayer’s repeat offenses, but also the principle that using employment taxes held in trust for the government constitutes theft.  This principle is especially noteworthy for businesses that use trust fund taxes to pay other creditors when in dire financial straits, as this practice may now lead to not only civil liability, but also criminal prosecution for those making the decision to divert the funds.  Employers are well served to recognize that trust fund taxes are not their money.

Israeli Court Threatens to Undermine FATCA Agreement

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September 8, 2016

Israel was nearing completion of the steps required to comply with the Foreign Account Tax Compliance Act (FATCA), but its attempt to comply may be in sudden jeopardy thanks to a recent Israeli court decision.  FATCA exchanges were to begin on September 1, but Justice Hanan Meltzer issued a temporary injunction that day that prevents FATCA-related regulations that would have permitted the exchange of information with the United States from going into effect.  The injunction was issued in response to a request filed August 8 by a group named Republicans Overseas Israel.  An emergency hearing is scheduled for September 12.

In July 2014, Israel signed an intergovernmental agreement with the United States to implement FATCA, under which it agreed to pass regulations to bring Israel into compliance with the agreement.  The Israeli parliament (Knesset) approved such regulations on August 2, which would have required Israeli financial institutions to report on certain accounts held by U.S. citizens to the Israel tax authority by September 20.  Financial institutions that failed to comply would face monetary penalties, in addition to the penalties that are required under FATCA, including 30% withholding on payments from the United States.

Two District Courts Rule Stock Option Income Subject to RRTA Tax

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July 14, 2016

Two more railroad companies have failed in their efforts to obtain Railroad Retirement Tax Act (RRTA) tax refunds based on the application of RRTA’s definition of “compensation” as it relates to nonqualified stock option exercises by employees.  Just a week apart, the U.S. District Courts for Nebraska in Union Pac. R.R. Co. v. United States  and for the Northern District of Illinois in Wis. Central Ltd. v. United States, agreed with the government that the term “any form of money remuneration,” as compensation is defined by RRTA, is susceptible to a broad reading analogous to that of “wages” in the Federal Insurance Contributions Act (FICA).  Both courts, in detailed memorandum opinions, concluded that the income arising from the NQSO exercises had been properly subjected to Tier 1 RRTA taxes and, consequently, the refund claims were denied.  In so doing, both courts accepted the government’s position that the Treasury regulations defining RRTA compensation by reference to the definition of FICA wages in Section 3121(a) was a reasonable one.

In the first case on this issue, the U.S. Court of Appeals for the Fifth Circuit rejected BNSF Railway Company’s claims for refund of Tier 1 RRTA taxes that had been paid in conjunction with the exercise of nonqualified stock options.  In its refund claim, BNSF had argued that the term “any form of money remuneration” meant payment in cash or other medium of government authorized exchange and, consequently, NQSOs could not qualify as money.  Therefore, according to BNSF, income arising from the exercise of NQSOs did not constitute “compensation” subject to RRTA taxes.   In analyzing the definition of “compensation” under RRTA, the Fifth Circuit applied the two step framework set out in Chevron v. Natural Res. Def. Council, Inc. and concluded that Treasury was reasonable in interpreting RRTA coextensively with the FICA tax provisions, so that it was consistent with the broad reading of the term “wages” in FICA provisions.

U.S. Supreme Court Denies Cert Petition in Case Challenging Information Reporting Requirements

The Supreme Court denied the petition for certiorari filed by two bankers associations that sought to challenge the validity of IRS regulations issued under the Foreign Account Tax Compliance Act (FATCA) that impose a penalty on banks that fail to report interest income earned by nonresident aliens on accounts in U.S. banks.

The denial leaves in place a divided D.C. Circuit panel decision holding that the Anti-Injunction Act (AIA) bars the bankers associations from challenging the validity of the regulations.  The associations argued that a recent Supreme Court decision regarding the similar Tax Injunction Act, which relates to state taxation, allowed them to file suit under the Administrative Procedure Act to enjoin certain IRS information reporting requirements when the information is not subject to domestic taxation and the noncompliance penalty does not constitute a restraint on the “assessment or collection” of a tax.  The D.C. Circuit accepted the government’s contention that because the penalties for noncompliance under Sections 6721 and 6722 are treated as a tax, the AIA bars pre-assessment challenges to the reporting requirements of the regulations.

The decision leaves those required to file information returns without recourse to challenge an information reporting requirement unless they forego the required reporting and are assessed a penalty under Section 6721 or 6722.

Additional discussion of this case can be found in our April 27 and March 1 posts.

U.S. District Court Finds Taxpayer Had Reasonable Basis for Classifying Workers as Independent Contractors

In an area IRS auditors are increasingly scrutinizing, a U.S. district court sided with the taxpayer in its claim for an employment tax refund on the grounds that the taxpayer had a reasonable basis for classifying its workers as independent contractors and thus was not liable for back employment taxes.  In Nelly Home Care, Inc. v. United States, the IRS asserted after an audit of a homecare services company that the company had misclassified its workers as independent contractors and assessed back employment taxes owed as a result of the misclassification.  Refund claims for employment taxes are within the jurisdiction of the U.S. district courts, so the taxpayer paid the taxes and filed a refund action in the U.S. District Court for the Eastern District of Pennsylvania.

The calculation of FICA and federal income tax withholding in reclassification cases is determined under the special rates of Section 3509 of the Internal Revenue Code when an employer incorrectly classifies an employee as an independent contractor but issues a Form 1099-MISC. The court noted that IRS auditors are increasingly relying on this section to scrutinize worker misclassifications.  However, Section 530 of the Revenue Act of 1978, which was never codified, provides a safe harbor for taxpayers that owe back employment taxes due to worker classification errors.  An employer may qualify for the safe harbor by showing that it had a “reasonable basis” to not classify workers as employees, provided the basis arose from reliance on one of four conditions: (i) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (ii) a past IRS audit of the taxpayer in which there was no assessment attributable to the treatment of workers in substantially similar positions to the workers at issue; (iii) longstanding recognized practice of a significant segment of the industry in which the worker was engaged; or (iv) any other factors that a court considers sufficient to establish a “reasonable basis.”

The taxpayer in Nelly Home Care argued unsuccessfully that it satisfied the second and third conditions as a basis for its reasonable belief. However, the court found that the record demonstrated that the taxpayer satisfied the fourth condition for demonstrating that it had a reasonable basis and, therefore, was relieved of the employer’s responsibility to withhold income taxes on and apply FICA taxes to the payments.  Specifically, the court considered the inquiries made of other companies’ practices, the personal experience of the taxpayer in the industry, and the IRS’s silence regarding the taxpayer’s classification during its audits of the owner’s personal tax returns.  Notably, the court warned that its decision “in no way endorses” the taxpayer’s classification of its workers as independent contractors.

Government Files Brief Opposing Supreme Court Review of Bankers Associations’ Challenge to FATCA Reporting Requirements

The government filed its brief in opposition to a petition for certiorari seeking Supreme Court review of a decision holding that the Anti-Injunction Act prevents two banking associations from challenging a Treasury regulation requiring banks to report the amount of interest earned by nonresident alien account holders.  The banks are concerned with the substantial numbers of nonresident customers that have closed their accounts out of fear that the banks will disclose their information to the customers’ home governments.  As discussed in greater detail in a previous post, the bankers associations have gained support in the form of three amicus briefs, which generally highlight the tendency of the IRS to overstep its statutory authority and the unfairness that would result if banks are required to violate the rule and expose themselves to possible civil and criminal penalties in order to legally challenge the substance of the rule.

The government’s brief in opposition argues that the Court of Appeals for the D.C. Circuit was correct to deny the challenge on the grounds that the Anti-Injunction Act prevents the suit, stating that the holding does not conflict with any existing court of appeals decision.  However, the government had to address a new argument raised by the bankers associations in its petition for certiorari—that the Anti-Injunction Act does not apply because the alternative method of judicial review, to pay the penalty and then sue for a refund, is inadequate.  The government argued that this position was not raised until the petition for rehearing, and thus the position is time-barred.

Court Dismisses Sen. Rand Paul’s Challenge to FATCA

The U.S. District Court for the Southern District of Ohio dismissed a challenge to the Foreign Account Tax Compliance Act (FATCA) brought by Senator Rand Paul and several current and former U.S. citizens living abroad on standing grounds (Crawford v. United States Department of the Treasury).  The plaintiffs had argued that FATCA’s withholding and reporting requirements imposed on individuals and foreign financial institutions (FFIs), certain intergovernmental agreements (IGAs) negotiated by the Treasury, and the requirement to file a foreign bank account report (FBAR) by U.S. persons with financial accounts that exceed $10,000 in a foreign country were unconstitutional.

The court evaluated the requirements necessary for Article III standing and concluded that none of the individuals named in the suit had suffered or was about to suffer injury under the FATCA withholding tax, and, since all were individuals, none of the named plaintiffs could be FFIs subject to the requirements imposed on such entities.  Instead of asserting concrete particularized injuries, such as penalties brought for failure to comply with FATCA or FBAR requirements, the plaintiffs argued general “discomfort” with the disclosure requirements (Senator Paul also asserted a loss of political power), which the court deemed too abstract and thus insufficient to confer Article III standing.

Tax Court Lacks Jurisdiction to Review IRS Employment Classification Determination

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April 5, 2016

Today, the U.S. Tax Court held that it lacked jurisdiction to review a Form SS-8 determination that a father was an employee, not an independent contractor, of his son. In B G Painting, Inc. v. Commissioner, the son, a painting contractor, issued Forms 1099-MISC to his workers, including the father. The father filed a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding), requesting that the IRS determine his employment status. In response, the IRS SS-8 Unit notified the parties that the father is the son’s “employee.” The son petitioned the court to review this determination.

The Tax Court held that it lacked statutory jurisdiction to review this determination because the Form SS-8 process is not an “examination.” Section 7436(a) of the Internal Revenue Code grants the Tax Court jurisdiction over employment status if “in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination.” But the Form SS-8 process is not an “audit” or “examination”; rather, it is a voluntary compliance process involving no specific tax liabilities or assessments. Therefore, the Tax Court dismissed the case for lack of jurisdiction.

Once the IRS rules that an individual is an employee on the basis of a Form SS-8 submission, the employer has no right to appeal the determination. The IRS will send a follow-up letter to the employer asking whether the employer has filed Forms 941-x to pay the applicable FICA taxes based on the determination, whether the employer is eligible for Section 530 relief, and whether the employer has reasons for believing the IRS determination is incorrect. Given the obligation to provide health insurance to employees or face a potential tax penalty, the employer should expect an increased number of Form SS-8 submissions by independent contractors and increased focus on worker classification issues by the government.

If the employer fails to treat the individual as an employee following a Form SS-8 determination, the individual may file Form 8919 to report his or her share of FICA taxes. The same form can be used while a Form SS-8 is pending for the individual or if the individual was provided both a Form 1099-MISC and a Form W-2 and believes the income reported on the Form 1099 should have been included on Form W-2.

Court Allows Foreclosure of Delinquent Taxpayer’s Home and Business Property for Employment Tax Liability

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March 18, 2016

The U.S. District Court for the District of New Mexico recently held that the government is entitled to foreclose federal tax liens against a delinquent taxpayer’s home and business property, even though the taxpayer’s wife may be a joint owner. In United States v. Fields, Samuel Fields, the sole proprietor of a dry cleaner business, owed $211,855.80 in employment and unemployment taxes from 1993 to 2009. The IRS had made assessments against Fields starting in 1995. In 2005, for no consideration, Fields executed deeds to his two real properties – his home residence and business property – located in New Mexico, stating that he and his wife were joint owners. The U.S. Department of Justice sought partial summary judgment against Fields personally and to foreclose its federal tax liens against his home and business property.

The key issue was whether the federal tax liens were superior to the wife’s interests in the properties. Under Internal Revenue Code Sections 6321 and 6322, if a person fails to pay federal taxes owed, on the day the taxes are assessed a statutory tax lien arises and attaches to all property rights owned by the person. Further, the tax liens will also defeat a third party’s interest in the property unless that third party is a certain secured interest holder, a judgment lien creditor, or a purchaser. While priority of federal tax liens is determined by federal law, property interests are determined under state law – New Mexico law, in this case.

The court held that the tax liens arising from assessments made before Fields executed the deeds encumber and are superior to the property interests of both Fields and his wife. But the tax liens arising from assessments made after Fields executed the deeds, as a matter of law, only encumber and are superior to Fields’ interests in half of the value of each property. Although the United States may ultimately be entitled to the full value of each property if the deeds were a fraudulent transfer under New Mexico law, this issue may involve a factual determination as to Fields’ intent, and so the United States did not include it in its motion for partial summary judgment. Thus, the court permitted the foreclosure, as Section 7403(c) allows district courts to order the sale of property subject to a federal tax lien regardless of homestead exemptions or other ownership interests.

This case is part of the U.S. Department of Justice’s commitment to cracking down on employment tax violations.

11th Circuit Decision Highlights the Disparity Between Regular IRS Appeals and Collection Appeals

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March 8, 2016

Although IRS Appeals personnel handle both traditional cases and collection due process (CDP) hearings, the two proceedings have vast practical differences for taxpayers. First, regular Appeals cases are conducted by Appeals Officers, who are well-versed in the law and legal authorities, whereas CDP hearings are conducted by Settlement Officers, who typically are former collection personnel that often lack the technical background of Appeals Officers. Although this difference is not critical in a case focusing solely on establishing a payment plan, it can be a significant issue if the case involves a dispute over substantive legal questions relating to the underlying tax dispute.

A recent opinion from the U.S. Court of Appeals for the Eleventh Circuit highlights the distinction between the two proceedings in a case of first impression in that circuit. In its opinion, the panel reversed the Tax Court on the issue of whether a preassessment hearing is required when a taxpayer timely protests a case involving trust fund recovery penalties but is subsequently afforded a CDP hearing. In Romano-Murphy v. Commissioner, the 11th Circuit reviewed the statute and regulations governing trust fund taxes, other applicable regulations, and the Internal Revenue Manual, and concluded that taxpayers who properly request preassessment hearings must be granted such hearings. This holding highlights the disparate opportunities available to a taxpayer in a traditional IRS Appeals hearing as compared to a CDP hearing.

Although the critical issue in Romano-Murphy is procedural in nature, the issue arose in the context of trust fund taxes. When an employer withholds federal income tax, Social Security tax, and Medicare tax on that income (known as “trust fund taxes”) but fails to deposit the withheld taxes, the Commissioner has several alternatives to collect those taxes. Section 6672(a) makes the responsible officers or employees personally liable for a penalty equal to the amount of the delinquent taxes, allowing the Commissioner to seek the tax from the individuals responsible for the collection and payment of withholding taxes on behalf of the organization, so long as the individuals willfully failed to properly pay.

The taxpayer in Romano-Murphy, Chief Operating Officer of a healthcare staffing company, was assessed nearly $350,000 in trust fund recovery penalties for her company’s failure to remit withheld taxes. The taxpayer timely and properly protested the assessment, providing all required information and identifying disputed issues, but the IRS failed to send her protest to IRS Appeals (no explanation for this failure was offered in the court’s opinion). Subsequently, the IRS served the taxpayer with a notice of intent to levy to collect the trust fund taxes, as well as a notice of federal tax lien filing. In response, the taxpayer challenged the levy and the lien in a request for a CDP hearing. At the CDP hearing, the Settlement Officer considered the taxpayer’s challenges and upheld the assessment in full. The taxpayer then challenged the CDP determination, including the legitimacy of the assessment in the Tax Court. In its decision, the Tax Court addressed the underlying liability and found the taxpayer liable for the taxes and essentially dismissed the taxpayer’s argument that she was entitled to a preassessment hearing before IRS Appeals before the assessment itself could be made.

The taxpayer’s sole argument in its appeal to the 11th Circuit was that the IRS denied her a preassessment hearing, which therefore invalidates the assessment. The IRS asserted that the absence of an explicit statutory requirement negated the need for a preassessment hearing, but the 11th Circuit panel looked to other statutory references, the regulations, the Internal Revenue Manual, and other relevant authorities to conclude that a regular IRS Appeals conference is indeed required on a preassessment basis when timely requested by the taxpayer. The court rejected the IRS’s argument that it may “simply ignore, disregard, or discard a taxpayer’s timely protest . . . if it so chooses” without establishing any rational criterion for doing so. The court went on to point out that were the IRS’s position correct, “the IRS could arbitrarily decide to shred one of every three . . . protests that arrive in the mail, or throw out all such protests received on Fridays, without any consequences whatsoever.”

In the alternative, and perhaps more importantly, the IRS argued harmless error on the grounds that the taxpayer’s challenges to the underlying tax were considered and rejected, just in the setting of a CDP hearing. Essentially, the IRS equated the opportunity afforded the taxpayer to present her case at the CDP hearing to the opportunity that she would have received at a preassessment Appeals hearing. The taxpayer argued that the denial of a preassessment conference prejudiced her because, for example, interest began accruing from the date of the assessment, the delay in hearing her claim kept her from being able to access for 18 months information that was only maintained on the IRS’s system, and the lien placed on her property harmed her credit. The court refused to rule on the issue of actual harm to the taxpayer but acknowledged that arguments exist on both sides. On one hand, it stated that the taxpayer was “not completely denied a right to be heard,” and thus her due process rights were not violated. But, the court also acknowledged the importance of enforcing procedures required by law that an agency failed to follow. The court vacated the judgment but remanded the case to the Tax Court to address whether the taxpayer was harmed by the error.

Although the 11th Circuit did not expressly address the vast differences between a taxpayer presenting its case in a preassessment Appeals hearing versus a CDP hearing, the differences in the qualifications between Appeals Officers and Settlement Officers cast a troubling shadow over the case due to the existence of substantive tax issues that require a higher degree of training, knowledge, and experience. As a result, whether a taxpayer presents its case at a preassessment Appeals hearing or a CDP hearing can significantly affect the outcome.

The court’s remand to the Tax Court will require the Tax Court to determine whether the IRS’s denial of a preassessment Appeals hearing that was ultimately held in a CDP hearing before a Settlement Officer years later caused sufficient harm to the taxpayer to warrant the invalidation of the assessment. If the taxpayer prevails, it appears that the statute of limitations may bar a reassessment by the IRS.

Tax Court Case Highlights Growing Problem of IRS Collection Activity before Taxes are Properly Assessed and Administrative Appeal Rights Exhausted

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March 5, 2016

A growing problem with the IRS’s administration of tax disputes involves the IRS initiating collection activity before it has either properly assessed the tax or before taxpayers have exhausted their administrative remedies. Generally, the IRS must observe certain procedural requirements before a tax or addition to tax is assessed against a taxpayer. Increasingly, however, the IRS has initiated collections against taxpayers before completing the assessment procedures or before the taxpayer has had the opportunity to exhaust its administrative remedies. This is particularly true with respect to certain employment tax liabilities and penalty assessments. It is important for taxpayers to avail themselves of their appeal rights timely to prevent erroneous and unsupportable assessments, which happen far more often than one would expect including against large employers.

The Tax Court recently addressed this issue in Hampton Software Development, LLC v. Commissioner. The Tax Court denied the Commissioner’s motion for summary judgment holding that a preassessment IRS Appeals conference held after the IRS issued a 30-day letter at the end of an employment tax audit did not constitute a “prior opportunity” for the taxpayer to dispute its underlying tax liability with respect to a Notice of Determination of Worker Classification (NDWC) that the taxpayer did not receive. Instead, the court held that a taxpayer will only be considered to have had a prior opportunity to dispute the underlying liability when the taxpayer actually receives the NWDC. Though this case arose in the context of worker classification, the procedures for challenging an NDWC apply in the same manner as if the NDWC were a notice of deficiency. Similar to a standard notice of deficiency in an income tax audit (as opposed to an employment tax audit, which are not within the jurisdiction of the Tax Court), section 7436 also provides for a 90-day period to file a petition in Tax Court challenging the IRS’s determination of worker classification during an IRS audit.

In this case, the taxpayer treated a maintenance worker as an independent contractor and issued Forms 1099-MISC. The IRS concluded on audit that the taxpayer should have treated the worker as an employee, thus underpaying its employment taxes for two tax years. The IRS issued a 30-day letter to the taxpayer advising the taxpayer of its right to request an IRS Appeals conference, and the taxpayer timely protested the audit findings and requested a conference with IRS Appeals. The taxpayer and the IRS Appeals Officer did not resolve the worker classification dispute, and the IRS subsequently sent an NWDC to the taxpayer by certified mail that the Postal Service was unable to deliver and returned to the IRS. Because the taxpayer was unaware of the NWDC, the taxpayer did not petition the Tax Court for redetermination of the worker classification dispute, and the IRS subsequently assessed the employment taxes and initiated collection activity by issuing a notice of levy.

Upon receiving the notice of levy, the taxpayer timely requested a collection due process (CDP) hearing before IRS Appeals. Although CDP hearings are conducted under the direction of IRS Appeals, they are not conducted by regular IRS Appeals Officers. Rather, Settlement Officers conduct CDP hearings. Generally, Settlement Officers are promoted from the ranks of Revenue Officers working for IRS Collections. Consequently, taxpayers seeking to make substantive legal challenges to an assessment in a CDP hearing can face an uphill battle. However, a taxpayer may seek judicial review of the Settlement Officer’s determination in the Tax Court if the taxpayer timely requests the CDP hearing within 30 days of the issuance of the CDP notice.

When the Settlement Officer conducted the CDP hearing in Hampton Software, the taxpayer disputed the underlying employment tax liabilities arising from the asserted misclassification of the worker, but the Settlement Officer refused to allow the taxpayer to dispute the underlying liabilities because it had previously disputed the same liabilities in a preassessment IRS Appeals conference. Soon thereafter, the Settlement Officer issued a notice of determination permitting collection activity to continue, and the taxpayer filed a Tax Court petition seeking review of the underlying employment tax liabilities.

In its motion for summary judgment, the Commissioner asserted that the taxpayer was precluded from disputing the underlying tax liabilities in the CDP hearing because it previously had an “opportunity to dispute” the underlying tax liabilities with IRS Appeals and because the IRS had issued an NWDC to the taxpayer. The Tax Court denied the Commissioner’s motion for summary judgment on both theories. With respect to the former, the court identified that the Commissioner’s argument deviated from its own regulations. In particular, the Section 6330 regulations regarding CDP hearings draw a distinction between taxes subject to the deficiency procedures and taxes not subject to the deficiency procedures. Taxes not subject to the deficiency procedures may not be challenged in a CDP hearing if the taxpayer had an opportunity to dispute the underlying liability either before or after the assessment of the tax. Conversely, the regulations provide that taxes subject to the deficiency procedures may be challenged in a CDP hearing if the taxpayer had an opportunity for a conference with IRS Appeals prior to assessment (but not a postassessment Appeals conference), meaning that in Hampton Software Development, the preassessment conference with IRS Appeals was not a “prior opportunity” for the taxpayer to be heard so the underlying liability could be raised in the Appeals conference.

Consequently, the court found that an NDWC is generally subject to the deficiency procedures, so the taxpayer was not precluded from later challenging the underlying liability in a CDP hearing, provided it did not have “actual receipt” of the NDWC. Had the taxpayer actually received the NDWC, it would have been able to petition the Tax Court within 90 days, so it would have been barred in any subsequent CDP hearing from contesting the substantive basis for the underlying liability. Because the taxpayer did not receive the NDWC and its Appeals conference was a preassessment conference, the taxpayer was not barred from raising substantive issues in its CDP hearing. The importance of actual receipt of the notice of deficiency is underscored by the requirement that the IRS send the notice by certified or registered mail. Absent evidence that the taxpayer deliberately refused delivery of the NDWC, the taxpayer’s claim that it did not receive the NDWC was sufficient to overcome the IRS’s motion for summary judgment. The Tax Court did not remand the case to the IRS Settlement Officer for further consideration. At this time, the taxpayer’s challenge has survived the Commissioner’s motion for summary judgment and presumably the Tax Court will review and rule upon the underlying worker classification dispute.

Banking Associations Challenge IRS Reporting Requirements for Foreign Account Holders

On January 29, two bankers associations filed a petition for certiorari seeking U.S. Supreme Court review of a decision from the United States Court of Appeals for the District of Columbia Circuit that the Anti-Injunction Act prevents them from challenging a Treasury regulation requiring banks to report the amount of interest earned by nonresident alien account holders.  The regulations, contained in Treas. Reg. §§ 1.6049-4 and -8, were issued pursuant to Treasury’s authority granted to it by Congress in the Foreign Account Tax Compliance Act (FATCA).  The regulations are intended to help the U.S. comply with its obligation to turn over certain information about foreign assets held in U.S. banks in exchange for other countries providing information to Treasury about U.S. assets held overseas.

The bankers associations argue that the IRS requirements will cause far more harm to banks than anticipated, asserting that the IRS violated laws mandating a cost benefit analysis of certain regulations.  Though the focus of the litigation has been a procedural hurdle preventing the lawsuit, the case could have significant implications if the bankers associations are able to challenge the regulations.  Currently, the banks claim that the regulations have caused substantial numbers of nonresident customers to close their accounts out of fear that the banks will disclose their information to the customers’ home governments.  The banks are concerned that the outflow of these deposits will outweigh the revenue benefits of the FATCA regulations, which are supposed to arise from a clampdown on U.S. tax evaders.  As a result, the bankers associations seek to overturn the appeals court decision preventing them from challenging the rule without first violating it, since violation could result in institutional fines and criminal imprisonment of their officers.  The Court of Appeals rules that the Anti-Injunction Act prevents the court from enjoining the reporting requirement because the penalty for noncompliance with the reporting obligation is the imposition of penalties under section 6721, and such penalties are treated as taxes.

In late February, the bankers associations’ request  gained support in the form of three amicus briefs.  The first, written by Minnesota Law School professor Kristin E. Hickman, argues that the IRS has a history of overstepping its statutory authority and has done so again with the regulations at issue.  The second, filed by the Cause of Action Institute, argues that more robust judicial review of IRS rulemaking is required and that a taxpayer should not be required to violate the law before having the ability to challenge the legality of the rule.  The final amicus brief, filed by the National Federation of Independent Business Legal Center and the Cato Institute, similarly argues that Treasury has strayed from the requirements of the Administrative Procedure Act and that the Supreme Court should resolve the interpretative split between the Anti-Injunction Act and the Tax Injunction Act to allow lower courts to properly adjudicate challenges to tax regulations.