Sunday, September 30, 2012

Partnership Formed Without an Independant Business Purpose Are Disregaded

Sham Partnerships Are Disregarded
When a transaction is treated as a sham, the form of the transaction is disregarded in determining the proper tax treatment of the parties to the transaction. 
A transaction that is entered into primarily to reduce taxes and that has no economic or commercial objective to support it is a sham and is without effect for federal income tax purposes. Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Rice's Toyota World Inc. v. Commissioner, 752 F.2d 89, 92 (4th Cir. 1985).
 Whether a court will respect the taxpayer's characterization of the transaction depends on whether there is a bona fide transaction with economic substance, compelled or encouraged by business or regulatory realities, imbued with tax-independent considerations, and not shaped primarily by tax avoidance features that have meaningless labels attached. See Frank Lyon Co. v. United States, 435 U.S. 561 (1978); ACM Partnership v. Commissioner, 157 F.3d 231 (3rd Cir. 1998), aff'g in relevant part T.C. Memo. 1997-115; Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir. 1990); Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir. 1985), aff'g in part 81 T.C. 184 (1983); Compaq v. Commissioner, 113 T.C. 363 (1999); UPS of Am. v. Commissioner, T.C. Memo. 1999-268; Winn-Dixie v. Commissioner, 113 T.C. 254 (1999).
In ACM Partnership, the Tax Court found that the taxpayer desired to take advantage of a loss that was not economically inherent in the object of the sale, but which the taxpayer created artificially through the manipulation and abuse of the tax laws. T.C. Memo. 1997-115. The Tax Court further stated that the tax law requires that the intended transactions have economic substance separate and distinct from economic benefit achieved solely by tax reduction. It held that the transactions lacked economic substance and, therefore, the taxpayer was not entitled to the claimed deductions. Id. The opinion demonstrates that the Tax Court will disregard a series of otherwise legitimate transactions, where the Service is able to show that the facts, when viewed as a whole, have no economic substance.
 Sham the Partnership/Partners
Sham principles may also be applied to the partnership and the partners. In order for a federal tax law partnership to exist, the parties must, in good faith and with a business purpose, intend to join together in the present conduct of an enterprise and share in the profits or losses of the enterprise. The entity's status under state law is not determinative for federal income tax purposes. Commissioner v. Tower, 327 U.S. 280, 287 (1946); Luna v. Commissioner, 42 T.C. 1067, 1077 (1964). The existence of a valid partnership depends on all of the facts, including the agreement of the parties, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts shedding light on the parties' true intent. The analysis of these facts shows whether the parties in good faith and action, with a business purpose, intended to join together for the present conduct of an undertaking or enterprise. Commissioner v. Culbertson, 337 U.S. 733, 742 (1949); ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000), aff'g T.C. Memo. 1998-305.
In ASA Investerings, the Tax Court first disregarded several parties as mere agents in determining whether the parties had formed a valid partnership. T.C. Memo. 1998-305. In reaching its conclusion that the remaining parties did not intend to join together in the present conduct of an enterprise, the court found that the parties had divergent business goals.
The Tax Court's opinion was affirmed by the Court of Appeals for the District of Columbia. ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000). Although the appellate court wrote that parties with different business goals are not precluded from having the intent required to form a partnership, the court affirmed the Tax Court's holding that the arrangement between the parties was not a valid partnership, in part because "[a] partner whose risks are all insured at the expense of another partner hardly fits within the traditional notion of partnership." Id. at 515. The appellate court rejected the taxpayer's argument that the test for whether a partnership is valid differs from the test for whether a transaction's form should be respected, writing that "whether the 'sham' be in the entity or the transaction . . . the absence of a nontax business purpose is fatal." Id. at 512.

Friday, September 28, 2012

Elements of tax fraud under § 7201 § 7206(1)

(“The specific elements of conspiracy to defraud the United States [under § 371] are: (1) an agreement to defraud the United States; (2) the defendants intentionally joining the agreement; (3) one of the conspirators committing an overt act; and (4) an overt act in furtherance of the conspiracy.”); United States v. Hecht, 638 F.2d 651, 659 (3d Cir. 1981) (Weis, J., dissenting) (noting that the “elements of a § 7201 offense are (1) willfulness, (2) the existence of a tax deficiency, and (3) an affirmative act constituting an evasion or attempted evasion of the tax” (citing Sansone v. United States, 380 U.S. 343, 351 [15 AFTR 2d 611] (1965))); United States v. Hills, 618 F.3d 619, 638 [106 AFTR 2d 2010-5909] -639 (7th Cir. 2010) (instructing that the elements the government must prove to obtain a conviction for willfully filing a false tax return under 26 U.S.C. § 7206(1) include “(1) the defendant made or caused to be made a federal income tax return that []he verified was true; (2) the return was false as to a material matter; (3) the defendant signed the return willfully and knowing it was false; and (4) the return contained a written declaration that it was made under penalty of perjury”).

U.S. v. FRASE, Cite as 110 AFTR 2d 2012-XXXX, 09/13/2012

UNITED STATES OF AMERICA v. RICHARD J. FRASE a/k/a Richard Brandon Richard J. Frase, Appellant.

Case Information:

Code Sec(s):


Docket No.: No. 09-4354,

Date Decided: 09/13/2012Submitted Pursuant to Third Circuit L.A.R. 34.1(a) March 27, 2012.







On Appeal from the United States District Court for the Eastern District of Pennsylvania District Court No. 2-07-cr-00730-004 District Judge: The Honorable J. Curtis Joyner

Before: FUENTES, SMITH, and JORDAN, Circuit Judges


Judge: SMITH, Circuit Judge.


A jury convicted Richard J. Frase of one count of conspiring to defraud the United States in violation of 18 U.S.C. § 371, nine counts of tax evasion in violation of 26 U.S.C. § 7201, and three counts of filing false tax returns in violation of 26 U.S.C. § 7206(1). The United States District Court for the Eastern District of Pennsylvania sentenced Frase to,inter alia , 56 months of imprisonment. Proceeding pro se, Frase appeals from his convictions and sentence. 1 Because the parties are familiar with the facts and procedural history of this case, we recite only that which is necessary to rule on his many arguments.

Frase contends that the government failed to prove beyond a reasonable doubt that he acted “willfully,” an element required for each count of conviction. We construe this argument as a challenge to the sufficiency of the evidence. InJackson v. Virginia , 443 U.S. 307, 319 (1979), the Supreme Court instructed that the critical inquiry in reviewing the sufficiency of the evidence “is whether, after viewing the evidence in the light most favorable to the prosecution,any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” If a rational juror could have found the elements of the crime beyond a reasonable doubt, we must sustain the verdict.United States v. Cartwright , 359 F.3d 281, 286 (3d Cir. 2004). Our review of the record demonstrates that Frase's conduct over the years provides an evidentiary basis for the jury's determination that he acted willfully.

In what we construe as another sufficiency challenge, Frase argues that he was not an “employee” of the corporation TAC Automotive, Inc. (TAC), that he did not receive “wages” from TAC, and that several corporations with which he transacted business were not sham entities. We appreciate Frase's view of the evidence. Nonetheless, it does not provide a basis for setting aside his convictions because none of the offenses of conviction required the government to prove that Frase was an “employee,” that he had earned “wages,” or that a corporate entity he transacted business with had been created for an unlawful purpose. See United States v. Rigas, 605 F.3d 194, 206 [105 AFTR 2d 2010-2304] n.9 (3d Cir. 2010) (en banc)


In an effort to set aside his convictions, Frase contends that the District Court erred by allowing the admission of certain evidence, particularly a chart summarizing his access to certain funds over a period of years. “Our review of a district court's ruling to admit or exclude evidence, if premised on a permissible view of the law, however, is only for an abuse of discretion.” United States v. Sokolow, 91 F.3d 396, 402 (3d Cir. 1996). Inasmuch as Federal Rule of Evidence 1006 permits the admission of a summary or a chart, we fail to find any abuse of discretion by the District Court by allowing the use of such a chart.

Frase also asserts that his convictions cannot stand because the government did not offer into evidence tax assessments, which were a prerequisite for the government to engage in collections activities. We need not resolve the issue of whether a tax assessment is a prerequisite for collection activity because this is a criminal proceeding.

Turning to Frase's claim of prosecutorial misconduct, we acknowledge that “[a] prosecutor's comments can create reversible error if they “so infected the trial with unfairness as to make the resulting conviction a denial of due process.”” United States v. Lee, 612 F.3d 170, 194 (3d Cir. 2010) (quoting Donnelly v. DeChristoforo, 416 U.S. 637, 643 (1974)). We will not overturn a conviction “on the basis of a prosecutor's comments standing alone, for the statements or conduct must be viewed in context; only by so doing can it be determined whether the prosecutor's conduct affected the fairness of the trial.”United States v. Young , 470 U.S. 1, 11 (1985). After consideration of the single remark identified by Frase, which occurred during the prosecution's closing statement and concerned the testimony of a witness, we do not find that the prosecutor's statement affected the fairness of Frase's trial.

Furthermore, our review of the record in this matter compels the conclusion that there is no merit to Frase's contention that the District Court displayed bias towards him and negatively influenced the jury. To the contrary, the Court was patient with Frase and, mindful of the fact that he was a layman, made an effort to explain various legal matters to him during the course of the trial. The Court allowed Frase to fully present his case, and was neither demeaning nor intemperate.

The District Court, according to Frase, erred by refusing to give his requested jury instruction on his status as a nonresident alien. “We will order a new trial on account of a district court's refusal to give a proposed jury instruction only when the requested instruction was correct, not substantially covered by the instructions given, and was so consequential that the refusal to give the instruction was prejudicial to the defendant.” United States v. Hoffecker, 530 F.3d 137, 167 (3d Cir. 2008) (internal citation and quotation marks omitted). Inasmuch as there was no factual basis for the proposed instruction, we conclude that the District Court did not err by rejecting it.

Finally, Frase contends that the District Court erred at sentencing by applying a two-level enhancement under U.S.S.G. § 3C1.1 for perjury. “We review the factual findings underlying the District Court's perjury determination for clear error, while exercising plenary review over the District Court's conclusions of law.” United States v. Miller, 527 F.3d 54, 75 (3d Cir. 2008). In United States v. Dunnigan, 507 U.S. 87 (1993), the Supreme Court instructed that sentencing courts applying the perjury enhancement must “make independent findings” for “each element of the alleged perjury.” Id. at 94. The three elements are: (1) “false testimony,” (2) “concerning a material matter,” (3) “with ... willful intent to provide false testimony.” Id.

Frase asserts that the District Court erred because it did not make the requisite findings of fact and because it applied the enhancement simply because the jury did not believe his testimony. A sentencing court's failure to make explicit findings, however, is not always fatal. For example, inUnited States v. Gricco , we instructed that “express findings” are not required if false testimony is obvious from the record. 277 F.3d 339, 362 [89 AFTR 2d 2002-420] (3d Cir. 2002) (citingUnited States v. Boggi , 74 F.3d 470, 479 (3d Cir. 1996)), overruled on other grounds, as stated in United States v. Cesare, 581 F.3d 206, 208 n.3 (3d Cir. 2009). After consideration of Frase's testimony, we conclude that the District Court did not err in applying the perjury enhancement. Frase's testimony that he did not know that he was liable for taxes was obviously false, as the District Court noted, in light of his extraordinary efforts over the years to conceal the funds to which he had access.

In sum, we have carefully reviewed the record in this matter and fully considered Frase's numerous assertions in his pro se submissions. We conclude, however, that none of his arguments merit setting aside his convictions or vacating his sentence. Accordingly, we will affirm the judgment of the District Court.


  The District Court exercised jurisdiction under 18 U.S.C. § 3231. We have jurisdiction under 28 U.S.C. § 1291 and 18 U.S.C. § 3742(a). (212) 588-1113

Thursday, September 27, 2012

Frivolous Penalty pursuant to section 6673(a)(1).

I  Section 6651(a)(1) Additions to Tax  Section 6651(a)(1) provides for an addition to tax in the event a taxpayer fails to timely file a return (determined with regard to any extension of time for filing) unless the taxpayer shows that such failure is due to reasonable cause and not due to willful neglect. The amount of the addition is equal to 5% of the amount required to be shown as tax on the delinquent return for each month or fraction thereof during which the return remains delinquent, up to a maximum addition of 25% for returns more than four months delinquent. Id. With respect to both the  section 6651(a)(1) and (2) additions to tax, respondent bears the burden of coming forth with evidence that imposition of the addition is appropriate. See Higbee v. Commissioner,  116 T.C. 438, 446-447 (2001); see also sec. 7491(c).

Arnold B. Winslow v. Commissioner, 139 T.C. No. 9, Code Sec(s) 61; 6020; 6651; 7491; 6673.

Case Information:

Code Sec(s):        61; 6020; 6651; 7491; 6673
Docket: Docket No. 18177-11.
Date Issued:        09/25/2012


Reference(s): Code Sec. 61; Code Sec. 6020; Code Sec. 6651; Code Sec. 7491; Code Sec. 6673


Official Tax Court Syllabus


Arnold Bruce Winslow, pro se.
Mayer Y. Silber and Robert M. Romashko, for respondent.

HALPERN, Judge: By notices of deficiency dated May 9, 2011 (notices), respondent determined deficiencies in, and additions to, petitioner's 2005 and 2006 Federal income tax as follows: 1

Additions to tax Year Deficiency  Sec. 6651(a)(1)   Sec. 6651(a)(2) 2005 $2,706 $479 $532 2006 2,491 441 461 Petitioner assigned error to those determinations, averring only: “The true amount of the tax and interest and penalties owing is $0.00.” Petitioner did not, as required by our standing pretrial order, file a pretrial memorandum, which, among other things, would have described his view of the issues in the case. From his testimony at trial, we understand petitioner's principal objections to respondent's determinations to be that the determinations are not based on properly made substitutes for returns and that the notices are invalid because improperly issued. At trial, respondent moved for the imposition of a sanction against petitioner under  section 6673(a)(1), which, as pertinent, empowers us to sanction a taxpayer on account of instituting or maintaining a proceeding primarily for delay or for maintaining a frivolous or groundless position.

Petitioner bears the burden of proof. See Rule 142(a), Tax Court Rules of Practice and Procedure. 2


At the time the petition was filed, petitioner resided in Illinois. During 2005 and 2006 (the years in issue), petitioner was employed by Dell Medical Corp. and, in return for his services, received compensation from it of $28,630 and $27,529 for those years, respectively. During the years in issue, he also received dividend payments of $24 and $28 for those years, respectively. Because for the years in issue he received no income tax returns from petitioner, respondent, using information returns he received from third parties, made returns (substitutes for returns) for petitioner. In part, the substitutes for returns consist of an Internal Revenue Service (IRS) Form 13496, IRC Section 6020(b) Certification, executed in each case by Maureen Green, whose title is stated on the form to be “Operations Manager, Examination”. Ms. Green, whose title now may be program manager, is employed by the IRS in its Ogden, Utah, Service Center. She is a supervisory employee who supervises Small Business/Self Employed Division (SB/SE) compliance officers. The notices followed the substitutes for returns, each notice being executed for the Commissioner by Henry Slaughter, under whose signature appeared the designation “Service Center, Ogden Service Center”. Mr. Slaughter's position in the service center is “Director, Collection Area-Western”, and he serves as one of several field directors of SB/SE's collection activities.


I. Introduction Although petitioner's objections to respondent's determinations concern principally procedural aspects of those determinations, he did at trial argue that the compensation and dividends he received were not taxable. The short answer is that compensation for services and dividends are items of gross income and, as such, are taxable. See sec. 61(a)(1), (7). Petitioner's arguments to the contrary—i.e., that he is not an employee under the Internal Revenue Code unless he works for a controlled group of corporations; the attribution rules applicable to farming corporations bring into question the taxability of dividends generally—are nonsense and require no further discussion. See Crain v. Commissioner, 737 F.2d 1417, 1417 [54 AFTR 2d 84-5698] (5th Cir. 1984) (”We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.”); see also Wnuck v. Commissioner,  136 T.C. 498 (2011). Petitioner had sufficient gross income for the years in issue that, for each year, he was required to file a Federal income tax return. See  sec. 6012(a)(1).

II. Delegation of Authority Petitioner argues that the substitutes for returns were not properly made because the individual certifying them, Ms. Green, had not been delegated the authority to do so. Likewise, he argues that the notices were invalid because the individual executing them, Mr. Slaughter, had not been delegated the authority to do so.

The Secretary is responsible for collecting the taxes imposed by the internal revenue laws of the United States. See sec. 6301. Because one individual cannot be responsible for so much, Congress has enacted statutes authorizing the delegation of that authority. The delegation of authority is contained in a clear line of statutory provisions. With respect to substitutes for returns,  section 6020(b)(1) provides: “If any person fails to make any return required by any internal revenue law or regulation *** the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.” With respect to deficiencies in tax determined by the Secretary,  section 6212(a) authorizes him to send notice of the deficiency to the taxpayer. The term “Secretary” is defined as meaning “the Secretary of the Treasury or his delegate.” Sec. 7701(a)(11)(B). The term "'or his delegate' *** when used with reference to the Secretary of the Treasury, means any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the context”. Sec. 7701(a)(12)(A)(i).

Delegation Order 5-2, set forth in Internal Revenue Manual (IRM) pt. (May 5, 1997), delegates to specific agents and managers, including SB/SE tax compliance officers, the authority to “prepare or execute returns required by any internal revenue law or regulation when the person required to file such return fails to do so.” Delegation Order 4-8, set forth in IRM pt. (Feb. 10, 2004), delegates to specific managers, case leaders, reviewers and directors, including SB/SE field directors, the authority to “sign and send to the taxpayer by registered or certified mail any notice of deficiency.”

Ms. Green was authorized to prepare and execute the substitutes for returns. While her position is not among those specified in Delegation Order 5-2 as being delegated authority to prepare substitutes for returns, she supervises SB/SE tax compliance officers, who are specifically delegated that authority by Delegation Order 5-2. With respect to the delegation of authority to those in intervening positions (i.e., in positions between the delegating official and the delegated official), IRM pt. (1)(A) (Oct. 10, 2008) states the following general rule: “Every intervening line supervisory position up to and including the Commissioner has the same authority.” Because we are satisfied that Ms. Green is in an intervening line supervisory position with respect to SB/SE tax compliance officers, who are delegated authority to prepare and execute substitutes for returns, we are satisfied (and find) that she had authority to prepare and execute the substitutes for returns. While provisions of the IRM are generally considered not to have the force of law, e.g., Fargo v. Commissioner, 447 F.3d 706, 713 [97 AFTR 2d 2006-2381] (9th Cir. 2006) (citing cases from five other U.S. Courts of Appeals), aff'g T.C. Memo. 2004-13 [TC Memo 2004-13]; accord Vallone v. Commissioner, 88 T.C. 794, 807-808 (1987), we think that in this instance the IRM reasonably interprets the delegation authority of the Secretary.

Mr. Slaughter was authorized to issue the notices. Mr. Slaughter's position is “Director, Collection Area-Western”; he “serves as one of several field directors of SB/SE's collection activities”. Delegation Order 4-8 specifically delegates the authority to issue notices of deficiency to SB/SE field directors. Mr. Slaughter was delegated that authority.

The substitutes for returns were properly made and executed, and the notices were properly issued.

Respondent's account transcripts for petitioner for the years in issue indicate that he filed no Federal income tax returns for those years, and that is sufficient for us to find, and we do, that petitioner filed no return for either year. See, e.g., Green v. Commissioner, T.C. Memo. 2007-262 [TC Memo 2007-262], 2007 WL 2783107, at *5-*6. Respondent has met his burden under section 7491(c) to produce evidence that imposition of the  section 6651(a)(1) addition to tax for failure to timely file a return is appropriate. See Higbee v. Commissioner, 116 T.C. at 447. Petitioner has not come forth with evidence that his failure to file was due to reasonable cause and not due to willful neglect. Consequently, we find that petitioner is liable for the additions to tax under  section 6651(a)(1).

IV.  Section 6651(a)(2) Additions to Tax  Section 6651(a)(2) imposes an addition to tax when a taxpayer fails to pay the amount of tax shown on a return by the prescribed date unless the taxpayer shows that such failure is due to reasonable cause and not due to willful neglect. The amount of the addition is equal to 0.5% of the tax for each month or fraction thereof during which the tax remains unpaid, up to a maximum addition of 25%. Under section 6651(g)(2), a substitute for return prepared pursuant to section 6020(b) is treated as the taxpayer's return for purposes of section 6651(a)(2). 3

Petitioner filed no return for either of the years in issue, and respondent properly made substitutes for returns for him. Petitioner has not paid the tax shown on those substitutes for returns. Respondent has, therefore, met his burden under  section 7491(c) to produce evidence that imposition of the section 6651(a)(2) addition to tax for failure to timely pay tax shown on a return is appropriate. See Tilley v. Commissioner T.C. Memo. 2009-83 [TC Memo 2009-83]. Petitioner has not come forth with , evidence that his failure to pay was due to reasonable cause and not due to willful neglect. Consequently, we find that petitioner is liable for the additions to tax under  section 6651(a)(2).

V.  Section 6673(a)(1) Penalty In pertinent part, section 6673(a)(1) provides for a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or the taxpayer's position in the proceeding is frivolous or groundless. We described as nonsense petitioner's arguments that the compensation and dividends he received were not taxable. “The purpose of  section 6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate.” Takaba v. Commissioner,  119 T.C. 285, 295 (2002). “A taxpayer's position is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for a change in the law.” Goff v. Commissioner, 135 T.C. 231, 237 (2010). Petitioner's nonsensical arguments are, within that definition, frivolous. Moreover, we suspect that, in part, petitioner brought this proceeding in order to delay the collection of income tax due and owing. Principally for making frivolous arguments, we impose upon him a penalty under section 6673(a)(1) of $2,500.

VI. Conclusion For the foregoing reasons, petitioner is liable for the deficiencies,  section 6651(a)(1) additions to tax, and  section 6651(a)(2) additions to tax. Additionally, we impose a penalty on petitioner pursuant to section 6673(a)(1).

An appropriate order and decision will be entered.

  Section references are to the Internal Revenue Code of 1986, as amended and in effect for the years in issue.
  Petitioner has not raised the issue of  sec. 7491(a), which shifts the burden of proof to the Commissioner in certain situations. In any event,  sec. 7491(a) does not apply here because petitioner has not shown that he has satisfied the preconditions for its application. See sec. 7491(a)(2).
  We note in passing that, while a properly made substitute for return is necessary before a sec. 6651(a)(2) addition to tax for failure to pay the tax shown on return can be imposed on a nonfiler, a substitute for return is not a prerequisite to the Commissioner's determining a deficiency in tax. E.g., Roat v. Commissioner,  847 F.2d 1379, 1381-1382 [61 AFTR 2d 88-1254] (9th Cir. 1988) (”Deficiency procedures set out in the Internal Revenue Code *** do not require the Commissioner to prepare a return on a taxpayer's behalf before determining and issuing a notice of deficiency.”); accord, Watson v. Commissioner, T.C. Memo. 2007-146 [TC Memo 2007-146], aff'd,  277 Fed. Appx. 450 [101 AFTR 2d 2008-2109] (5th Cir. 2008). (212) 588-1113

Wednesday, September 26, 2012

Partners entitled to deductions for investment partnerships they controlled

Partners entitled to deductions for investment partnerships they controlled

Klamath Strategic Investment Fund, LLC, (DC TX 09/21/2012) 110 AFTR 2d ¶ 2012-5299

On remand from the Fifth Circuit, a district court has found that the 90% owners of two partnerships, which were formed to facilitate the partners' investment in foreign currency transactions found to be tax shelters, controlled the partnerships when various operating costs were incurred and thus were entitled to deduct them. Although an entity that served as the managing partner was in charge of the partnerships' day-to-day operations, the entity's actions were limited by the partnership agreement and it merely implemented the investment decisions made by the partners.
Background. Individuals can deduct ordinary and necessary expenses paid or incurred during the tax year for: (1) the collection or production of income, (2) the management, conservation or maintenance of property held for the production of income, or (3) the determination, collection or refund of any tax. (Code Sec. 212) To be deductible under Code Sec. 212, the taxpayer must have a profit motive. (Agro Science, (CA 5 1991) 67 AFTR 2d 91-700)
The profit motive of a partnership is determined at the partnership level. (Simon v. Comm., (CA 3 1987) 60 AFTR 2d 87-5741) In determining whether a partnership has a profit motive, the testimony of general partners and promoters is relevant since they often control the partnership's activities. (Agro Science) Where different partners have different motivations (e.g., profit motive and tax benefit), the court must determine which partner's intentions should be attributed to the partnership, which in turn depends on which partner effectively controlled the partnership's activities. (Simon)
Facts. During '99, two law partners, Charles Patterson and Harold Nix, discussed the possibility of investing in foreign currencies to diversify their investments and earn profits. They retained a partner at another firm (Sid Cohen) who found and vetted Presidio, an investment advisory firm that specialized in foreign currency trading. Cohen also faciliated several meetings between Patterson and Nix and Presidio representatives who explained its overall investment strategy including the potential to make a profit through the devaluation of pegged currencies. Nix and Patterson each paid Cohen $250,000 for his services, which they reported on their individual income tax returns.
Presidio advocated, and Patterson and Nix ultimately agreed to invest in, a complex plan involving strategic investments in foreign currencies pegged to the U.S. dollar. In 2000, Presidio formed Klamath Strategic Investment Fund, LLC (Klamath) and Kinabalu Strategic Investment Fund, LLC (Kinabalu; collectively, the partnerships), which were 90% owned by Patterson and Nix (with Presidio entities holding the remainder and acting as Managing Partner of each), in order to make these investments. Patterson and Nix each contributed $1.5 million to their respective partnership, then each company borrowed $66.7 million from National Westminster Bank (NatWest) to faciliate and provide leverage for the partnerships' investments. The loans carried an above-market interest rate of 17.97%, a $25 million “loan premium,” and provisions to protect NatWest from the possibility of early repayment.
Patterson and Nix each contributed the $66.7 million, and assigned the corresponding loan obligations, to the partnerships. The funds were ultimately used to purchase contracts on U.S. dollars and Euros, and to make small, short-term forward contract trades in foreign currencies. The partnerships also incurred other operating expenses, such as various fees and taxes. When Nix and Patterson exercised their right to withdraw from the investments and the partnerships, they received a liquidating distribution of $359,635 and approximately $63,726 worth of Euros. (For more details about the transactions, which were characterized in earlier proceedings as a tax shelter known as “Bond Linked Issue Premium Structure” (or BLIPS).
On their income tax returns for 2000, 2001, and 2002, Patterson and Nix each claimed over $25 million in losses from their respective partnerships. Patterson and Nix were able to report such high losses because when they each calculated their basis in the partnership, they did not reduce it by the $25 million loan premium amount. In other words, they computed basis equal to the $1.5 million that was individually contributed and the $66.7 million in loan proceeds, but they did not consider the loan premiums to be liabilities and thus only subtracted the remaining $41.7 million principal amount—leaving each with over $25 million in basis to support the claimed losses. (212) 588-1113

Tuesday, September 25, 2012

IRS identifies tax scams


IRS Urges Taxpayers to Avoid Becoming Victims of Tax Scams

IRS YouTube Videos:Tax Refund Scams : 
WASHINGTON — The Internal Revenue Service today encouraged taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The IRS has noted an increase in tax-return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates for which they are not really entitled. Many of these recent scams have been targeted in the South and Midwest.

Most paid tax return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities.   Unscrupulous promoters deceive people into paying for advice on how to file false claims. Some promoters may charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or IRS sponsored Volunteer Income Tax Assistance partners. In other situations, identity theft is involved.

Taxpayers should be wary of any of the following:
  • Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
  • Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
  • Unfamiliar for-profit tax services teaming up with local churches.
  • Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
  • Offers of free money with no documentation required.
  • Promises of refunds for “Low Income – No Documents Tax Returns.”
  • Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit. 
  • Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.
In some cases non-existent Social Security refunds or rebates have been the bait used by the con artists.  In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return which results in a fraudulent return.
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives.
Promoters of these scams often prey upon low income individuals and the elderly. 
They build false hopes and charge people good money for bad advice.  In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter.  Meanwhile, their money and the promoters are long gone.

Unsuspecting individuals are most likely to get caught up in scams and the IRS is warning all taxpayers, and those that help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.

Anyone with questions about a tax credit or program should visit, call the IRS toll-free number at 800-829-1040 or visit a local IRS Taxpayer Assistance Center.

For questions about rebates, credit and benefits from other federal agencies contact the relevant agency directly for accurate information. (212) 588-1113

section 6501(e) statute of limitations

Assessment limitations period wasn't extended under IRC Sec(s). 6501(c)(1) for personal tax liability of S corp. shareholder who didn't take part in fraud reflected on S corp.'s Form 1120S tax return.CCA 201238026

UIL No. 6501.04-14, 6501.05-00, 6501.05-07Limitations on assessments—fraudulent returns—extensions.

Reference(s): IRC Sec(s). 6501


Number: 201238026
Release Date: 09/21/2012
Number: 201238026 Release Date: 9/21/2012
CC:PA:01:AGriffin Third Party Communication: None
POSTF-104769-12 Date of Communication: Not Applicable
UILC: 6501.04-14, 6501.05-00, 6501.05-07
June 04, 2012
to: John C. Schmittdiel
Associate Area Counsel (St. Paul)
(Small Business/Self-Employed)
Blaise G. Dusenberry from:
Senior Technician Reviewer
(Procedure & Administration)
Assessment of Tax against S-Corporation shareholder based on a fraudulent Form subject: 1120S return
This Chief Counsel Advice responds to your request for assistance dated March 27, 2012. This advice may not be used or cited as precedent.


A = ——————
B = ——————-
Corporation: ———————————————————————


Whether a fraudulent Form 1120S S-Corporation return extends the period of limitation on assessment under  I.R.C. § 6501(c)(1) for the personal tax liability of a shareholder who did not take part in the fraud§


The period of limitations on assessment is not extended under  I.R.C. § 6501(c)(1) for the personal tax liability of an S-Corporation shareholder who did not take part in the fraud reflected on the S-Corporation's Form 1120S tax return.
All of the following facts apply to tax year 2001. The taxpayer, A and ———————, B, were each 50% owners of Corporation, an S-Corporation engaged in the business of roofing, remodeling, and repairing residential and commercial buildings. Corporation often hired subcontractors to do work for Corporation's customers, with the subcontractors billing Corporation for work they performed. The subcontractor's invoices would include the address of the relevant Corporation job site.
B contacted vendors who did work for him personally, and instructed them to falsify addresses on their invoices. It would then appear that these vendors did work for Corporation's customers, rather than for B. In addition, B changed the addresses on other personal invoices from his own address to the addresses of Corporation job sites. In this way, B caused numerous personal expenses to be falsely recorded on Corporation's corporate books and records and deducted on Corporation's 2001 Form 1120S corporate tax return as business expenses. Because the Form 1120S return overstated Corporation's deductions, it also understated the amount of income that passed through to Corporation's two shareholders, A and B. Thus both A and B omitted income from their personal tax returns for 2001.
B was ultimately convicted of one count of 18 U.S.C. § 371, Conspiracy to Commit Mail Fraud and Tax Fraud, one count of 26 U.S.C. § 7201, Tax Evasion, one count of 26 U.S.C. § 7206(1), Filing a False Individual Tax Return, and one count of 26 U.S.C. § 7206(1), Filing a False Corporate Tax Return for the year 2001. A did not sign Corporation's Form 1120S; and there is no evidence that he participated in the preparation of the return. Neither is there any evidence that A participated in, or was aware of, B's fraudulent activities with respect to Corporation. The Service would like to assess the deficiency associated with A's personal return, but it has been over 10 years since A filed his Form 1040 for tax year 2001.


 I.R.C. § 6501(a) generally requires the Service to assess any tax within three years after the return was filed. The term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction or credit).  I.R.C. § 6501(a). There are several exceptions to the three-year period for assessment.  I.R.C. § 6501(c)(1) provides for an unlimited assessment period “in the case of a false or fraudulent return with the intent to evade tax." 1 The theory behind this exception is that “[a]n extended limitations period is warranted in the case of a false or fraudulent return because of the special disadvantage to the Commissioner in investigating these types of returns.” Allen v. Commissioner,  128 T.C. 37, 40 (2007) (citing Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)). The Tax Court has stated that the definition of fraud for purposes of  § 6501(c)(1) is the same as that for the  I.R.C. § 6663 fraud penalty. Neely v. Commissioner,  116 T.C. 79, 85 (2001).
The Service has suggested that the limitations period may be held open indefinitely for As return, based on the fraudulent Form 1120S filed by B. For the reasons that follow, we conclude that  I.R.C. § 6501(c)(1) does not apply to A's return. The question whether a return is false or fraudulent with the intent to evade tax has generally focused on the intent of the taxpayer who filed the return. There are certain exceptions to this general focus, namely for cases involving (1) joint returns of husband and wife; (2) TEFRA partnerships; or (3) fraud committed by a third party such as a return prepaper. As discussed more fully below, none of these exceptions can be extended to apply a longer period of limitations to make an assessment based on A's individual tax return.
The limitations period for assessing the income tax liability of an S-Corporation's shareholder runs from the date the shareholder filed his or her return, not from the date the 1120S was filed.  I.R.C. § 6501(a); Bufferd v. Commissioner, 506 U.S. 523 (1993). Further, “the law provides that a shareholder in a Subchapter S corporation, like a partner in a partnership, is not automatically guilty of fraud by reporting his share of fraudulently understated taxable income.” Riley v. Commissioner, T.C. Memo. 1981- 705 (citing Estate of Roe v. Commissioner,  36 T.C. 939 (1961)). Thus the Tax Court has consistently examined the activities of each individual shareholder when considering cases involving S-Corporations. These cases more often deal with the question whether the individual shareholder may be held liable for the fraud penalty. See Briggs v. Commissioner, T.C. Memo. 2000-380; Prewitt v. Commissioner, T.C. Memo. 1995-487; Riley, T.C. Memo. 1981-705. However, the same principle has been applied to the question whether the statute of limitations on assessment is held open for a particular shareholder. See Snyder v. Commissioner, T.C. Memo. 1985-5 (concluding that shareholder's return was fraudulent with the intent to evade tax and therefore the statute of limitations provided in  section 6501(a) did not prohibit the assessments).
The statutory requirement of an intent to evade tax does not necessarily mean that each taxpayer who files a return must have committed fraud. For example, it is well-settled that fraud by one spouse in filing a joint return holds the assessment statute of limitations open as to the other spouse as well. See Estate of Upshaw v. Commissioner, 416 F.2d 737 (7th Cir. 1969); Vannaman v. Commissioner,  54 T.C. 1011, 1018 (1970). (“[E]ven if the joint-filing husband is the only one who committed fraud in filing the return and making any underpayment . . . the bar of the statute of limitations is still removed from the deficiencies determined against the wife.”). This conclusion is based in large part on the joint nature of the return and resulting tax liability by virtue of  I.R.C. § 6013(d)(3). See also Snyder, T.C. Memo. 1985-5 at n.18 (“[T]he fraud on the part of [the husband] is sufficient to invoke  sec. 6501(c), and once the bar of the statute of limitations is removed, [the wife] remains liable for the deficiencies by virtue of the joint and several liability provisions of  sec. 6013(d)(3).”).
On the other hand, the Tax Court has analyzed the fraudulent intent of each spouse individually when they file separate returns, even when the adjustments are based on income from the same S-Corporations. Jackson v. Commissioner, T.C. Memo. 1964-
330. In Jackson, a husband and wife were both part owners of two C-Corporations, Jackson Manufacturing Company and Cleveland Chair Company. Mr. and Mrs. Jackson each reported their income from the companies on separate tax returns. The Tax Court found that certain returns of the two C-Corporations, as well as certain of Mr. Jackson's individual returns, were false and fraudulent with the intent to evade tax. With respect to Mrs. Jackson, however, the Court stated that because husband and wife filed separate returns, “proof that [the] husband's returns were false or fraudulent . . . is not clear and convincing evidence that [the wife]'s returns were likewise false or fraudulent.” Id. (citing United Dressed Beef Co.,  23 T.C. 979 (1955). While the Service had raised a suspicion of fraud by demonstrating that Mrs. Jackson worked for the two companies, this was not sufficient to sustain a finding of fraud on her part in the absence of affirmative evidence against her, and the assessments were barred.
In the case at hand, A and B as co-owners of Corporation are not jointly and severally liable for the tax. Each shareholder in an S-Corporation is taxed separately on his individual income tax return, and A and B did in fact file their own personal returns. Their situation is more analogous to the husband and wife filing separately in Jackson, than to the situation in which a husband and wife file a joint return. As in Jackson, in this case there was fraud with respect to Corporation's corporate return. As with Mrs. Jackson, these fraudulent amounts were reflected on A's return. However, because like Mrs. Jackson A was not responsible for the fraud, the  § 6501 period of limitations should not be held open for A's return.
There are some situations in which the Service may rely on fraud committed by a third party to hold open the statute of limitations for another's return. For example, TEFRA partnership rules provide extensions of the period of limitations for any tax attributable to a partnership item with respect to which a partner has, with the intent to evade tax, signed or participated (directly or indirectly) in the preparation of a partnership return that includes false or fraudulent items.  I.R.C. § 6229(c)(1)(A). See Transpac Drilling Venture 1983-2 v. United States, 83 F.3d 1410, 1414-15 (Fed. Cir. 1996). This extension is unlimited for partners who have signed or participated in the preparation of the false or fraudulent partnership return. Id. For partners who do not sign or participate in the preparation of the return, but report items pursuant to such a return, the period of limitations is extended from three years to six years.  I.R.C. § 6229(c)(1)(B); Transpac Drilling Venture 1983-2, 83 F.3d at 1414-15.
While this case may be analogous to the TEFRA partnership situation in that fraudulent items on a corporate return were also reflected on the individual return of a non- fraudulent shareholder,  § 6229(c)(1)(B) does not allow for an assessment to be made against A. First, S-Corporations are not subject to the TEFRA partnership audit procedures for tax years beginning after December 31, 1996. Small Business Job Protection Act of 1996, Pub. L. No. 104-188,  § 1307(c)(1), 110 Stat. 1755, 1781. Further,  § 6629(c)(1)(A) extends the period of limitations for only six years for partners that did not sign or participate in the preparation of the partnership return. Even if this provision could be extended to S-Corporations in 1997 or later (and we do not think that it can), more than six years have passed since A filed his individual return.
Finally, in the recent case of Allen v. Commissioner,  128 T.C. 37 (2007), the Tax Court held that a return preparer's fraud can result in an unlimited period of limitations on assessment under  I.R.C. § 6501(c)(1). In Allen, the Tax Court agreed with the Service's position that the fraud in question does not have to be committed by the taxpayer who filed the return. This was because “the special disadvantage to the Commissioner in investigating fraudulent returns is present if the income tax return preparer committed the fraud that caused the taxes on the returns to be understated.” Allen, 128 T.C. at 40. In addition, allowing the fraud of a third person to hold the limitations period open is consistent with the general principal that statutes of limitation should be strictly construed in favor of the government. Id. at (citing Bufferd v. Commissioner, 503 U.S. at 526-27 n.6). When examining the fraud of a third party, the Tax Court has recently focused on whether that third party intended to evade tax, or whether such evasion was merely “an incidental consequence or secondary effect” of the third party's conduct. See Citywide Transit v. Commissioner, T.C. Memo. 2011-279 (appeal docketed).
In this case, B's fraud with respect to the corporate return may have “caused” tax to be understated on A's return. It is questionable, however, whether there is evidence of intent to evade tax directly associated with A's return. There is no evidence that B prepared A's individual tax return for 2001. Neither is there evidence that B intended to evade A's tax when he fraudulently filed Corporation's corporate return. It may be that he intended to evade only his own tax, and A's deficiency was merely a by-product of that intent. ——————————————————————————————————————————————————- ——————————————————————————————————————————————————————————- ——————————————————————————————————————————————————————————-Ultimately, it is doubtful that Allen can be extended to allow for an unlimited assessment statute of limitations in this case. Such an extension would require the Tax Court to focus on the fraud of a third party who did not prepare or file the return at issue, which seems an unlikely legal and factual stretch.


This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.
Please call (202) 622-4910 if you have any further questions.

   I.R.C. § 6501(e) provides for a 6 year limitations period in cases in which the taxpayer has omitted from gross income an amount in excess of 25 percent of the amount of gross income shown on the return. In this case, it has been more than 6 years since A filed his Form 1040 for tax year 2001. Therefore, the assessment statute of limitations is not open under  I.R.C. § 6501(e). (212) 588-1113

Sunday, September 23, 2012

IRS 2113 budget & priorities


IRS FY 2013 Budget Proposal Summary

FS-2012-10, February 2012
The Administration’s fiscal year (FY) 2013 budget request for the Internal Revenue Service is approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level, but only a $639.3 million increase (5.3%) from the level enacted for FY 2011. A significant portion of the increase from FY 2012 represents the Administration’s request to restore lost revenue resulting from reductions in IRS funding made over the past two years. This request is designed to provide the resources necessary to administer and enforce the current tax code, implement recent changes to the law to update the Code and serve the American taxpayer in a timely manner.
In FY 2011, the IRS collected $2.415 trillion in taxes, representing 92 percent of federal government receipts. The IRS processed more than 144.7 million individual returns during the 2011 filing season and issued almost 110 million refunds totaling $345 billion.
To collect the revenues required to fund the policies passed by Congress and meet long-term obligations to the American people, the IRS FY 2013 funding request reflects a continued commitment to improving tax compliance through the balance of quality taxpayer service with fair enforcement of the tax laws. It also supports the Administration’s strategic goal of managing the government’s finances in a fiscally responsible manner.
The IRS consistently achieves a high return on investment for its activities while running a fiscally disciplined operation. In FY 2013, the IRS expects to identify nearly $71 million in cost savings from increased use of electronic return filing, reductions in non-case related travel and streamlining operations.
Enforcement Program
The FY 2013 budget includes $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion in revenue annually at full performance, once new hires are fully trained and develop broader experience by FY 2015. This is a 4.3-to-1 return on investment. The return on investment is even greater when factoring in the deterrence value of these investments and other IRS enforcement programs, which is conservatively estimated to be at least three times the direct revenue impact.
The enforcement budget also includes $200 million in additional examination and collection programs that will generate more than $1.1 billion in additional annual enforcement revenue by FY 2015. Investments such as these in IRS enforcement programs are especially important to further the IRS’ mission of improving tax compliance.
Specific areas where the proposed FY 2013 funding will enable the IRS to continue to strengthen enforcement efforts and reduce the tax gap include:
  • Improving international compliance by individual and business taxpayers. In FY 2013, the IRS will continue to address offshore tax evasion by individuals through such efforts as increased examinations and the special offshore voluntary disclosure program. To ensure business entity compliance, the IRS will provide additional international technical specialists to increase coverage of complex international transactions;
  • Protecting revenue by expanding efforts to identify fraud and prevent issuance of questionable refunds, including tax-related identity theft. The increase in funding will help support efforts to reduce erroneous refund payments, including non-compliant and fraudulent claims by prisoners and claims for the Earned Income Tax Credit (EITC) by ineligible taxpayers;
  • Implementing tax law changes that make available the use of new information reporting requirements to help address the underreporting tax gap; and
  • Enhancing IRS oversight of complex financial situations, including transfer pricing and uncertain tax positions.
Return Preparer Initiative
The FY 2013 budget request includes $35 million to strengthen return preparer compliance. One of the most important initiatives that the IRS has undertaken in recent years is the Return Preparer Initiative, the foundation of which is mandatory registration for all paid tax return preparers. In addition, the IRS is developing requirements to establish mandatory competency testing and continuing education for preparers to ensure that taxpayers are hiring preparers who have a minimum level of competency and adhere to professional standards. This initiative is core to the IRS’ tax gap strategy and will increase government revenue, and support high-priority, preparer-related enforcement activities.
Implementation of Tax Law Changes
The request provides $128 million to support IRS efforts to implement programs that are designed to ensure compliance with a number of recent changes to the tax laws and to help taxpayers understand them. Recent tax law changes include the reporting provisions related to merchant payment cards and third party reimbursements (included in the Housing and Economic Recovery Act of 2008), basis reporting on securities sales (included in the Emergency Economic Stabilization Act of 2008) and the non-exchange related tax law changes included in the Affordable Care Act (ACA).
Infrastructure Requirements
The FY 2013 budget also requests funding for the IRS to continue the development of new information technology systems, and substantial modification and enhancement of existing systems necessary to implement the new premium assistance tax credit and other tax law provisions related to the insurance exchanges created in the Affordable Care Act.
Taxpayer Service Program
The FY 2013 request provides funding for the IRS to continue delivering services using a variety of in-person, telephone and web-based methods to help taxpayers understand their tax obligations, correctly file their returns and pay taxes due in a timely manner.
The IRS is committed to expanding the use of electronic transactions, including increasing the e-file rate and expanding taxpayer service options available through the Internet. In 2011, there were more than 319 million visits to, and more than 77.9 million taxpayers checked their refund status by accessing Where’s My Refund? in English or in Spanish on the IRS website.
Business Systems Modernization
In FY 2013, the IRS will continue the modernization of its IT systems. It will strategically invest in state-of-the-art capabilities, such as online taxpayer services, and focus on the second phase of the core taxpayer account database, known as Customer Account Data Engine 2 (CADE 2), to ensure the long-term viability of IRS tax processing systems.
In 2012, the IRS delivered the most significant update to its core tax processing system in decades. Through the deployment of the first phase of CADE 2, the IRS transitioned to a daily processing cycle from a weekly batch cycle. Also for the first time, IRS processing systems began accepting all 1040 forms electronically through a modernized e-filing capability. (212) 588-1113