Archive for the ‘Tax’ Category

Marijuana Taxation Update: State Sanctioned Marijuana Industry Must Keep the Federal Anti-Drug Trafficking Tax Code in Mind

Monday, March 3rd, 2014

As we have previously reported, despite the growing number of States that have authorized the use of marijuana in various forms, the federal government has continued to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, and here.) In addition to direct criminal prosecution for drug trafficking, federal authorities have used various other techniques in an effort to quash the growing marijuana industry. One such technique disallows marijuana dispensaries from taking business deductions on their federal income taxes pursuant to I.R.C. § 280E, and this statute remains in effect in spite of the efforts of numerous states and FinCEN to at least partially legitimize the sale of marijuana.

I.R.C. § 280E states:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

As we have previously explained, because the sale of marijuana remains listed as a controlled substance under the Controlled Substances Act (CSA), state authorized marijuana dispensaries are still deemed by federal authorities to violate federal law. Therefore, pursuant to I.R.C. § 280E, federal income tax deductions for business expenses are not available.  In fact, the United States Supreme Court has concluded that there is no medical necessity defense to the federal law prohibiting cultivation and distribution of marijuana – even in states which have created a medical marijuana exception to a comparable ban under state law. U.S. v. Oakland Cannabis Buyers Co-op., 532 U.S. 483 (2001).

In the District of Columbia and the 20 states that have either decriminalized or legalized marijuana in one form or another, state sanctioned medical marijuana dispensaries have attempted to pay their fair share of taxes to the government – federal, state and local – like any other business. However, because their business primarily involves a product deemed to be criminal under federal law, they are denied deductions for the costs of doing business that any other ordinary business can take.

When it comes to state taxation, an additional problem faced by state sanctioned marijuana dispensaries is that most of the states which have legalized the use of marijuana “piggy-back” their state corporate income tax on the federal income tax. That is, after the federal income tax has been calculated based on federal law, these states will impose a tax of a percentage of the federal corporate income tax (with certain adjustments in most instances). In those cases, not only is the federal government denying the benefits of claiming certain business deductions that any other business would have, but the state governments are equally denying these tax benefits despite the businesses being situated in a state that has legalized the use and sale of marijuana.

As we have previously reported, the effect of I.R.C. § 280E can be drastic on dispensaries. According to a 2013 CNNMoney report, the inability of dispensaries to take business deductions has resulted in dispensaries paying an effective tax rate as high as seventy-five percent (75%). The practical effect of this massive tax burden makes business operations difficult, if not impossible.

However, there is currently some hope for marijuana dispensaries in two respects. First, I.R.C. § 280E is limited to the sale of (or “trafficking in”) marijuana. Thus, if a taxpayer is engaged in selling medical marijuana and also in another business, such as care-giving to health patients, the taxpayer may be able to deduct business expenses in connection with the care-giving function. See Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 14 (2007). Note, however, that “the taxpayer’s characterization will not be accepted when it appears that the characterization is artificial and cannot be reasonably supported under the facts and circumstances of the case.”Id. Second, while I.R.C. § 280E disallows any business deduction for a marijuana seller’s ordinary and necessary business expenses, costs of goods sold – that is, the carrying value of goods sold during a particular period – are excluded from this rule. To be sure, while marijuana businesses are disallowed ordinary and necessary business expenses deductions, they are allowed a deduction for the costs incurred for the purchase, conversion, materials, labor, and allocated overhead incurred in bringing the marijuana inventories to their present location and condition. Therefore, marijuana businesses have an incentive to capitalize as inventory all costs associated to the purchase of marijuana and then in future years successfully deduct these costs as costs of goods.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax, tax litigation, administrative law, regulatory compliance, and white collar criminal defense.  They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at or by calling 305.350.5690.

Tax Litigation Update: Eleventh Circuit Reverses Tax Court in Virgin Islands EDP Residency Cases

Monday, February 24th, 2014

Disclosure: Joseph A. DiRuzzo, III of Fuerst Ittleman David & Joseph represents the taxpayers in their Tax Court litigation against the IRS.

We have written extensively about the United States Virgin Islands Economic Development Program (EDP) and the litigation it has spawned between and among the IRS, the Virgin Islands Bureau of Internal Revenue (VIBIR), and the individuals and businesses which have sought to do business in the Virgin Islands and avail themselves of the EDP; see here, here, here and here. Much of this litigation has focused on the issue of whether the various taxpayers have been bona fide residents of the Virgin Islands, which On February 20, 2014, the United States Court of Appeals for the Eleventh Circuit issued its opinion in the consolidated appeals filed by the Government of the United States Virgin Islands (“Virgin Islands”) following the Tax Court’s denial of the Virgin Islands’ motions to intervene in the Tax Court proceedings of three separate taxpayers. The Eleventh Circuit’s precedential decision, Government of the United States Virgin Islands v. Commissioner of IRS, is available here.

The Eleventh Circuit described the background of the Taxpayers’ complex tax proceedings as follows:

The Taxpayers filed returns with the BIR for calendar tax years 2002, 2003, and 2004. The Taxpayers reported their worldwide income, which consisted of income from both United States and Virgin Islands sources, and paid taxes on that income to the Virgin Islands. None of the Taxpayers filed a return with the IRS.  In 2009 and 2010, the IRS issued deficiency notices to the Taxpayers for tax years 2002, 2003, and 2004. The IRS claimed, first, that the Taxpayers were not bona fide Virgin Islands residents during those tax years and, therefore, they should have filed returns with the IRS and paid taxes to the United States on the income they reported from United States sources Second, the IRS claimed that some of the Taxpayers’ income that they classified as Virgin Islands income on their BIR returns was, in fact, United States income and, therefore, the Taxpayers should have paid taxes to the United States on that income too. Rather than crediting the Taxpayers’ federal tax liability with the taxes paid to the Virgin Islands (which the IRS claimed should have been paid to the United States), the IRS issued a deficiency notice for the full amount owed to the United States, plus penalties for failing to file an IRS return and for delinquent payment.


The Taxpayers petitioned the Tax Court, challenging the IRS’s deficiency notices as time barred and, in the alternative, as incorrect. The Virgin Islands moved to intervene in the cases, the Tax Court denied its motions, and the Virgin Islands brought these appeals.

Slip op., at 4-5.

The Eleventh Circuit also explained the reasons why the Virgin Islands moved to intervene in the Taxpayers’ Tax Court cases in the first place:

If the Tax Court eventually determines that the Taxpayers were not bona fide residents, one of three things will occur: the IRS may ask the Virgin Islands to transfer over the portion of taxes that should have been paid to the United States; the Virgin Islands may choose to voluntarily refund the “overpaid” taxes as a matter of fairness; or the Virgin Islands may be forced to accept that the Taxpayers paid taxes twice on the same income.9 Thus, the Virgin Islands has an interest in the Tax Court proceedings for the same reason the United States had an interest in the Virgin Islands District Court proceedings in V.I. Derivatives: the court’s findings have practical implications for the Virgin Islands’ taxation of the same individuals.

Slip op., at 16.

In V.I. Derivatives, the IRS moved to intervene in an ongoing tax case proceeding before the District Court of the Virgin Islands. There, the IRS was permitted to intervene, but when the Virgin Islands sought to intervene before the Tax Court on exactly the same grounds, the IRS objected to the intervention. Thus, the Eleventh Circuit slammed the IRS’s position, at one point labeling it “unpersuasive [and] bordering on disingenuous”¦” and at another describing it as a “Monday morning quarterback.”

The Eleventh Circuit also noted that the Third Circuit had already ruled on this issue, reversing the Tax Court and rejecting the same IRS arguments made in the Eleventh Circuit, but recognized that there is a circuit split.  On the one hand, the Third and Eighth Circuits have reversed the Tax Court’s denials of the Virgin Islands’ motions to intervene, but on the other the Fourth Circuit had affirmed. Ultimately, the 11th Circuit held that Federal Rule of Civil Procedure 24(a)(2)applies to the Tax Court and that the Government of the USVI may intervene as a matter of right.

The take away from this decision is that the Government of the USVI may now intervene in cases reviewable by the Third, Eighth and Eleventh Circuits, which includes Florida, Georgia, Alabama, Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, New Jersey, Pennsylvania, Delaware, and the US Virgin Islands.  But the Government of the USVI cannot intervene in the Fourth Circuit which includes Maryland, North Carolina, South Carolina, Virginia, and West Virginia. It remains an open question in other parts of the country where a federal appeals court has not addressed the matter. Additionally, the overtly hostile view the Eleventh Circuit took on the IRS litigation position bodes well for both the taxpayers whom the IRS claims have no protection under the statute of limitations and the Virgin Islands seeking to intervene in further Tax Court disputes arising from the Economic Development Program.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax litigation before the Tax Court, the District Courts, the Court of Claims, and the United States Courts of Appeal.  Additionally, the attorneys at Fuerst Ittleman David & Joseph, PL actively litigate in the United States Virgin Islands and have on-going tax litigation before the District Court of the Virgin Islands against the USVI Bureau of Internal Revenue. For more information about our United States Virgin Islands Tax Law and Litigation practice, click here. If you have any questions, an attorney can be reached by emailing us at or by calling 305.350.5690.

Criminal Tax Litigation Update: Courts are Consistently Ruling that the Act of Production Privilege Will Not Defeat Grand Jury Subpoenas Calling for Foreign Bank Account Statements

Wednesday, January 29th, 2014

On December 13, 2013, the United States Court of Appeals for the Fourth Circuit issued its decision in United States of America v. Under Seal, a copy of which is available here. On December 19, 2013, the U.S. Court of Appeals for the Second Circuit issued its decision in In Re: Grand Jury Subpoena, a copy of which is available here. In both cases, the parties found themselves on the receiving end of grand jury subpoenas demanding the production of, generally, records of his foreign bank accounts, including the names of the account holders, the banks, the account numbers, the type of the account, and the maximum value of the account all information that must by law be reported to the Commissioner of Internal Revenue. In both cases, the parties refused to comply with the subpoenas, and in both cases the government moved to compel production in federal district court.

Before the district court, the recipients of the grand jury subpoenas argued that the Fifth Amendment insulated them from producing the records demanded by the grand jury because, in short, the grand jurys subpoena requires him either to produce documents that might incriminate him or to confirm that he failed to register his foreign bank accounts, which itself could be incriminating. Thus, to the extent that the witnesss simple act of producing the documents could be used against the witness for example, in those cases when the simple fact that the witness possessed the documents would be incriminating the recipients of the subpoenas argued that the Fifth Amendment militated against compelled production. This is commonly referred to as the Fifth Amendment act of production privilege. See Fisher v. United States, 425 U.S. 391 (1976).

The act of production privilege is a serious one, but it is not without its limits. For instance, we have previously discussed the required records exception to the act of production privilege under the 5th Amendment to the U.S. Constitution here and here. As described by the Second Circuit, [t]he required records exception applies only when the Fifth Amendment privilege would otherwise allow a witness to avoid producing incriminating documents. It abrogates the protection of the privilege for a subset of thosedocuments that must be maintained by law. (emphasis added). So, in other words, if a witness receives a subpoena calling for production of documents which must be maintained by law, the witness cannot successfully assert that he is insulated by the act of production privilege. In Grosso v. United States, 390 U.S. 62, 6768 (1968), the Court established a three-factor test to determine whether documents are required records:

First, the purposes of the United States inquiry must be essentially regulatory; second, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and third, the records themselves must have assumed public aspects which render them at least analogous to public documents.

In these two cases, the Second and Fourth Circuits travelled the same analytical course and arrived at virtually identical locations: the regulations under the Bank Secrecy Act require that individuals with foreign bank account maintain those records and produce them to the government upon request.  Consequently, statements received from foreign banks are “required records” and the Fifth Amendment act of production privilege does not apply.

As of today, the Second, Fourth, Fifth, Seventh, Ninth and Eleventh Circuits have address the issue and all have sided with the government.  Given that there is no decision from a Court of Appeals siding with a taxpayer on this issue, the probability that the United States Supreme Court would take up the matter is remote.

What does this mean for taxpayers? At a minimum, it means that when seeking to enforce a grand jury subpoena calling for records of foreign financial accounts, the Government will be able to proceed with virtually no fear that it will be quashed. Taxpayers who have undisclosed foreign accounts should consult with competent counsel so as to become educated about their options, including the IRS Offshore Voluntary Disclosure Program (which we have discussed inter alia herehereherehere and here), and avoid criminal prosecution.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in civil and criminal tax litigation throughout the United States. You may contact us by calling 305.350.5690 or by emailing us at

Tax Litigation Update: Second Circuit Tweaks its Standard of Review in Tax Cases Involving Mixed Questions of Law and Fact; Decides Complex Tax Controversy Involving “Midco” Transaction

Thursday, January 23rd, 2014

On November 14, 2013, the United States Court of Appeals for the Second Circuit clarified the standard of review for mixed questions of law and fact in a case on review from the Tax Court. The case, Diebold Foundation, Inc. v. Commissioner of Internal Revenue, involved a group of shareholders who wished to dispose of the stock they owned in a corporation which in turned owned appreciated property. Further, the Second Circuit joined the First and Fourth Circuits in concluding that the two prongs of §6901, dealing with transferred assets, are independent, and that the Tax Court did not err by only addressing the second prong of that section. A copy of the decision can be found here.


Upon the disposition of appreciated property, taxpayers, including corporate entities, generally owe tax on the property’s built-in gain””that is, the difference between the amount realized from the disposition of the property and its adjusted basis. 26 U.S.C. §§ 1(h), 1001, 1221, 1222. When shareholders who own stock in a C Corp that in turn holds appreciated property wish to dispose of the C Corp, they can do so through one of two transactions: an asset sale or a stock sale. If the shareholders sell the assets, the company is liable for tax on the built-in gain of appreciated property and therefore, there is less money to distribute to the shareholders. If the shareholders sell the stock, they must sell it at a lesser value so that the buyer will be insulated from the property’s built-in gains which will trigger a tax liability when sold. For shareholders to get the benefit of selling stock at a good price and buyers to get the benefit of buying assets without built-in gains, parties engage in “Midco transactions.”

“Midco transactions” or “intermediary transactions” are structured to allow the parties to have it both ways: letting the seller engage in a stock sale and the buyer engage in an asset purchase. In such a transaction, the selling shareholders sell their C Corp stock to an intermediary entity (or “Midco”) at a purchase price that does not discount for the built-in gain tax liability, as a stock sale to the ultimate purchaser would. The Midco then sells the assets of the C Corp to the buyer, who gets a purchase price basis in the assets, as opposed to the lower basis the corporate entity formerly had. The Midco keeps the difference between the asset sale price and the stock purchase price as its fee. The Midco’s willingness to allow both buyer and seller to avoid the tax consequences inherent in holding appreciated assets in a C Corp is based on a claimed tax-exempt status or supposed tax attributes, such as losses, which allow it to absorb the built-in gain tax liability. See I.R.S. Notice 2001-16, 2001-1 C.B. 730. It is important to note that if these tax attributes of the Midco prove to be artificial, then the tax liability created by the built-in gain on the sold assets still needs to be paid. In many instances, the Midco is a newly formed entity created for the sole purpose of facilitating such a transaction, without other income or assets and thus likely judgment-proof. The IRS must then seek payment from the other parties involved in the transaction in order to satisfy the tax liability the transaction was created to avoid.


Double D Ranch, Inc., a personal holding company taxed as a C Corp., owned assets worth approximately $319 million, all of which had substantial built-in gain, such that the sale of the assets would have triggered a tax liability of approximately $81 million. The shareholders, Dorothy R. Diebold Marital Trust and Diebold Foundation, Inc., wanted to get rid of the assets of the corporation without triggering this tax liability but also without having to sell their shares at a substantial discount. Therefore, they decided to engage in a Midco transaction.

The parties to this Midco transaction all filed tax returns. On its tax return, the Midco claimed sufficient losses to offset the gain from the sale of assets, resulting in no net tax liability. The IRS issued a notice of deficiency against Double D Ranch, determining a deficiency of income tax, penalties, and interest of approximately $100 million. The deficiency resulted from the IRS’s determination that the Shareholders sale of Double D Ranch stock was, in substance, actually an asset sale followed by a liquidating distribution to the Shareholders. Double D Ranch did not contest this assessment, but the IRS was unable to find any Double D Ranch assets from which to collect the liability, as they had all been sold as part of the “Midco” transaction.

Deciding that any additional efforts to collect from Double D Ranch would be futile, the Commissioner attempted to collect from the Shareholders as transferees of Double D Ranch. Section 6901 of the Internal Revenue Code authorizes the assessment of liability against both (a) transferees of a taxpayer who owes income tax and (b) transferees of transferees. 26 U.S.C. § 6901(a)(1)(A)(I), (c)(2). The IRS issued a notice of transferee liability against Mrs. Diebold, trustee of the Marital Trust and director of Diebold Foundation, as a transferee of Double D Ranch. The Tax Court determined that she was not liable because the Marital Trust was the actual Double D Ranch shareholder, and the court saw no reason to ignore its separate existence. The Tax Court’s decision is available here.


  1. Standard of Review

The Second Circuit started its discussion by setting forth that its previous standard of review for mixed questions of law and fact was clear error. See Wright v. Comm’r, 571 F.3d 215, 219 (2d Cir. 2009). However, the Court noted that, according to statutory mandate, all Courts of Appeals are to “review the decisions of the Tax Court ”¦ in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” 26 U.S.C. §7482(a)(1). That is, all Courts of Appeal are to review decisions of the Tax Court de novo to the extent that the alleged error is in the misunderstanding of a legal standard and for clear error to the extent the alleged error is in a factual determination. Consequently, the Second Circuit acknowledged that its case law enunciating the standard of review for mixed questions of law and fact in an appeal from the Tax Court was in direct tension with this statutory mandate. Thus, because all Article III courts, with the exception of the Supreme Court, are solely creatures of statute, see U.S. Const. art. III; 28 U.S.C. §§ 1-463, the Second Circuit found that the statute must be determinative. Moreover, the Second Circuit Court held that there is no reason to review the Tax Court under a different standard than a district court, as “its relationship to us [is] that of a district court to a court of appeals.” Scheidelman v. Comm’r, 682 F.3d 189, 193 (2d Cir. 2012) (internal quotation marks omitted). Therefore, the Court held that “the Tax Court’s findings of fact are reviewed for clear error, but that mixed questions of law and fact are reviewed de novo, to the extent that the alleged error is in the misunderstanding of a legal standard.” See 26 U.S.C. § 7482(a)(1).

  1. The Merits of the Tax Controversy

In its discussion of the merits of the case, the Second Circuit Court studied IRC Section 6901, which provides that the IRS may assess tax against the transferee of assets of a taxpayer who owes income tax. The section provides that the tax liability will “be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred” and allows for the collection of “[t]he liability, at law or in equity, of a transferee of property…of a taxpayer.” A “transferee” includes a “donee, heir, legatee, devisee, [or] distributee.”

Furthermore, the Second Circuit stated that although the provision with respect to transferees is not expansive in its terms, the IRS may assess transferee liability under § 6901 against a party if two distinct prongs are met: (1) the party must be a transferee under § 6901; and (2) the party must be subject to liability at law or in equity. Rowen v. Comm’r, 215 F.2d 641, 643 (2d Cir. 1954) (discussing predecessor statute, 26 U.S.C. § 311). Under the first prong of § 6901, courts look to federal tax law to determine whether the party in question is a transferee. The second prong, whether the party is liable at law or in equity, is determined by the applicable state law, in this case, the New York Uniform Fraudulent Conveyance Act (“NYUFCA”), N.Y. Debt. & Cred. Law §§ 270-281.

The Second Circuit joined the First and Fourth Circuits in concluding that the two prongs of § 6901 are independent and that the Tax Court did not err by only addressing the liability prong. See Frank Sawyer Trust of May 1992 v. Comm’r, 712 F.3d 597, 605 (1st Cir. 2013);Starnes v. Comm’r, 680 F.3d 417, 428 (4th Cir. 2012). The Court cited Commissioner v. Stern, 357 U.S. 39 (1958) where the Supreme Court recognized that the predecessor statute to § 6901 “neither creates nor defines a substantive liability but provides merely a new procedure by which the Government may collect taxes.” The statute was enacted in order to do away with the procedural differences between collecting taxes from one who was originally liable and from someone who received property from the original tax owner.

As for the second prong, the Second Circuit Court stated that the NYUFCA defines a “conveyance” as “every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance.” N.Y. Debt. & Cred. Law § 270. Further, the NYUFCA establishes liability for a transferee if the transferor, without regard to his actual intent, (1) makes a conveyance, (2) without fair consideration, (3) that renders the transferor insolvent. See N.Y. Debt. & Cred. Law § 273; McCombs, 30 F.3d at 323. If Double D had sold its assets and liquidated the proceeds to its shareholders without retaining sufficient funds to pay the tax liability on the assets’ built-in gains, this would be a clear case of a fraudulent conveyance under § 273. However, due to the Midco form of this transaction, Double D did not actually make a conveyance to the Shareholders. If the form of the transaction is respected, § 273 is inapplicable.

The Second Circuit Court relied on HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir. 1995), where it had previously stated: “[i]t is well established that multilateral transactions may under appropriate circumstances be ”˜collapsed’ and treated as phases of a single transaction for analysis under the UFCA.” HBE Leasing described a “paradigmatic scheme” under this collapsing doctrine as one in which one transferee gives fair value to the debtor in exchange for the debtor’s property, and the debtor then gratuitously transfers the proceeds of the first exchange to a second transferee. The first transferee thereby receives the debtor’s property, and the second transferee receives the consideration, while the debtor retains nothing. Such a transaction can be collapsed if two elements are met. “First, in accordance with the foregoing paradigm, the consideration received from the first transferee must be reconveyed by the [party owing the liability] for less than fair consideration or with an actual intent to defraud creditors ”¦ Second, . . . the transferee in the leg of the transaction sought to be voided must have actual or constructive knowledge of the entire scheme that renders her exchange with the debtor fraudulent.”

The Second Circuit stated that in this case, it was clear that the first element was met. Although the transaction had an additional wrinkle””namely, an additional party serving as the conduit for the transfers””it is still the case that one transferee received Double D’s property, another transferee (the Shareholders) received the consideration for these assets, and Double D was left with neither its assets nor the value of them. Therefore, in order for there to be liability against the selling Shareholders (and their successor entities), the Shareholders “must have actual or constructive knowledge of the entire scheme that renders [the] exchange with [Double D] fraudulent.”

When applying § 273 to a single transaction, the intent of the parties is typically irrelevant; the knowledge and intent of the parties becomes relevant when, as here, a court is urged to treat multiple business deals as a single transaction. Therefore, the Court proceeded to assess whether the Shareholders had actual or constructive knowledge of the entire scheme. The facts in this case demonstrated both a failure of ordinary diligence and active avoidance of the truth. Specifically the Court noted that the Shareholders recognized the “problem” of the tax liability arising from the built-in gains on the assets held by Double D, and sought out parties to help them avoid the tax liability inherent in a C Corp holding appreciated assets. They viewed slideshow and other presentations from three different firms that purported to deal with such problems.

The Court also noted that the Shareholder representatives had a sophisticated understanding of the structure of the entire transaction, a fact that courts frequently consider when determining whether to collapse a transaction and impose liability on an entity. See HBE Leasing, 48 F.3d at 635- 36 (“The case law has been aptly summarized in the following terms: “In deciding whether to collapse the transaction and impose liability on particular defendants, the courts have looked frequently to the knowledge of the defendants of the structure of the entire transaction and to whether its components were part of a single scheme.”) quoting In re Best Products Co., 168 B.R. 35, 57-58 (Bankr. S.D.N.Y. 1994 (emphasis added).

The fact that there had been a delay of the original closing date by one day, and the Shareholders’ representatives’ corresponding intervention between Shap Acquisition Corporation II (“Shap II”), an entity created specifically to carry out the transaction  and Morgan Stanley, the ultimate buyer of Double D securities, made the conclusion of their “active avoidance of the truth” inescapable. By asking Morgan Stanley to “back off” and give Shap II extra time to provide the Double D securities so that the transactions would not be upended, the Shareholders demonstrated not only their knowledge of the structure of the entire transaction, but their understanding that Shap II did not have the assets to meet its obligation to buy equivalent shares on the open market for delivery to Morgan Stanley or pay Morgan Stanley an equivalent sum in cash. This understanding, combined with the Shareholders’ knowledge that Shap II had just come into existence for the purposes of the transaction, was more than sufficient to demonstrate an awareness that Shap II was a shell that did not have legitimate offsetting losses or deductions to cancel out the huge built-in gain it would incur upon the sale of the Double D securities.

The Second Circuit Court concluded that the Shareholders’ conduct evinced constructive knowledge, and therefore collapsed the series of transactions and found that there was a conveyance under the NYUFCA. In collapsing the transactions, the Court stated that, in substance, Double D sold its assets and made a liquidating distribution to its Shareholders, which left Double D insolvent””that is, “the present fair salable value of [its] assets [wa]s less than the amount . . . required to pay [its] probable liability on [its] existing debts as they bec[a]me absolute and matured.” N.Y. Debt. & Cred. Law § 271. With the liquidating distribution, Double D did not receive anything from the Shareholders in exchange, and thus Double D certainly did not receive fair consideration. Consequently, all three prongs of § 273 were met: Double D (1) made a conveyance, (2) without fair consideration, (3) that rendered Double D insolvent. See N.Y. Debt. & Cred. Law § 273; McCombs, 30 F.3d at 323. Because the Court determined that there was state law liability, an issue arose regarding whether Diebold New York was a transferee under I.R.C. § 6901, and subsequently, whether Diebold was a transferee of a transferee under the same statute. To answer these questions, the Second Circuit Court remanded the case to the Tax Court.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax litigation. They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us or by calling 305.350.5690.


Tax Litigation Update: The D.C. Circuit is the Proper Venue for Many Appeals of Tax Court Cases

Wednesday, January 22nd, 2014

Last month, we wrote about the uncertainty in choosing the proper appeals court in certain Tax Court cases, and described the rift between the First, Eighth and Ninth Circuits on the one hand and the D.C. Circuit on the other. More specifically, we described that the First, Eighth and Ninth Circuits had previously held that they themselves were the proper forums for appeals based solely on the residence of the taxpayer, but that the Tax Court had written that in many cases the D.C. Circuit was the proper forum, regardless of the residence of the taxpayer. As of last month, the D.C. Circuit had not opined.

On January 17, 2014, the United States Court of Appeals for the D.C. Circuit issued its opinion in Byers v. Commissioner of Internal Revenue, available
here. In Byers, as the DC Circuit described, “Appellant does not seek review of the amount of the taxes he owes. Rather, he raises a number of procedural and substantive challenges emanating from an IRS Office of Appeals Collection Due Process (“CDP”) hearing which resulted in the contested levy.” The Department of Justice, litigating on behalf of the IRS, moved the DC Circuit to transfer the case to the U.S. Court of Appeals for the Eighth Circuit, which would have been the proper forum if the case involvedthe more typical petition for a re-determination of an income tax deficiency (commonly referred to as a “Ninety Day Letter” or“Stat.Notice”).

In opposing the Government’s Motion to Transfer, the Appellant argued that because he was “not seeking a redetermination of the amount of his taxes,” venue was proper in the D.C. Circuit. As the DC Circuit described:

Appellant points the court to an illuminating article, James Bamberg, A Different Point of Venue: The Plainer Meaning of Section 7482(b)(1), 61 TAX LAW. 445 (2008), in which the author contends that [a] plain meaning reading of the [statute] instructs that the D.C. Circuit Court is the appropriate venue, the default even, for all tax cases on appeal from the Tax Court that are not expressly brought up in section 7482(b)(1). Thus, it would appear that cases dealing with  . . ”˜collection due process’ hearings . . . should all be appealed to the D.C. Circuit Court. Id. at 456-57. We agree and therefore deny the Commissioner’s motion to transfer this case to the Eighth Circuit.

Slip op. at 2; (emphasis added).

Later in its Opinion, the Court reviewed the types of tax litigation in the district courts (refund litigation), the Claims Court (refund litigation), the Tax Court (re-determination litigation and Collection Due Process litigation) and compared and contrasted the different types of tax litigation and the appropriate forum for each. The DC Circuit then delved into the history of the Tax Court and the D.C. Circuit’s default status for appeals arising from Tax Court cases.  The D.C. Circuit observed that for many years it was the “default” court for tax appeals, but in 1966 the venue provision was amended by Congress giving rise to the statutory scheme in place today:

For both corporations and individuals, the statute stated that the proper venue for appeals involving redeterminations of liability was the federal court of appeals for the circuit in which the taxpayer’s residence was located. However, for the appeal of any case not enumerated in subsection (A) and (B), it assigned venue to the D.C. Circuit. Id. In other words, in 1966, Congress deliberately made the D.C. Circuit the default venue for tax cases.

Slip op., at 6.

The Court also noted:

Between 1966 and 1997, as Congress continued to expand the jurisdiction of the Tax Court, it also amended § 7482(b)(1) to add four more subsections, § 7482(b)(1)(C)-(F), that established venue based on a taxpayer’s residency”¦After these various revisions, the D.C. Circuit remained the default venue if “for any reason no subparagraph [assigning venue to a regional circuit] applies.” 26 U.S.C. § 7482(b)(1). Unlike its approach when expanding Tax Court jurisdiction to other areas, Congress did not alter the venue provision when it created the CDP framework in 1998.

Id.; (internal citations omitted).

In rejecting the Government’s position that the case should be transferred, the D.C. Circuit stated: “The Internal Revenue Manual clearly states that ”˜none of subparagraphs (A)-(F) [in 26 U.S.C. § 7482(b)(1)] expressly mentions a decision in a CDP case.’ IRM  We agree with this characterization of the statute, which makes the Commissioner’s motion to transfer all the more puzzling.”  Slip op. at 11.

So, what does this mean for taxpayers?  In collection due process cases, and other cases not falling expressly within subparagraphs (A)-(F) of 26 U.S.C. 7482, the appropriate Court of Appeals is the D.C. Circuit.  Moreover, and perhaps more importantly, the D.C. Circuit’s jurisprudence now controls the Tax Court’s analysis.  This, in essence, means that in collection due process cases, there will only be one Court of Appeals (absent a stipulation between the parties to the contrary) that is the appropriate appellate forum, and as such, the “baby Supreme Court” just became even more important.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience in tax litigation and working with taxpayers facing tax deficiencies and IRS collection efforts.  We have litigated numerous cases before the United States Tax Court, the district courts, and the various Circuit Courts of Appeal including the DC Circuit. You can reach an attorney by calling us at 305-350-5690 or emailing us at

Tax Litigation Update: Determination Of Proper Appellate Court For Review Of Certain Tax Court Cases In Flux

Monday, December 16th, 2013


It is a bedrock principle of tax litigation that the US Tax Court is bound to following the precedent of the Circuit Court of Appeals to which its decisions are subject to appeal.  See Golsen v. Comm’r, 54 T.C. 742 (1970).  Generally, this determination is based on the residence of the taxpayer at the time the Tax Court petition is filed.  For instance, if a taxpayer residing in Miami petitions the Tax Court for review of a Statutory Notice of Deficiency, appeal of the Tax Court’s decision will be to the 11th Circuit Court of Appeals, which covers Alabama, Florida, and Georgia.  Logically, and more importantly, in adjudicating the taxpayer’s case, the Tax Court is bound by the precedents of the 11th Circuit.

However, in recent years the jurisdiction of the Tax Court has expanded from its traditional role of serving as a prepayment forum in tax deficiency cases.  For example, the Tax Court has recently been granted jurisdiction over requests for innocent spouse relief, collection due process appeals, review of IRS denials of interest abatement requests, and the review of IRS whistleblower awards, among other varieties of actions.

With the expansion of the Tax Court’s jurisdiction, an exception to the “geographic” determination of the applicable Circuit Court of Appeals precedent appears to have developed.  The source of this exception is Internal Revenue Code (hereinafter “IRC”) § 7482(b)(1).  That statute sets forth six types of Tax Court cases that are subject to the general rule, outlined above, that the taxpayer’s residence (or principal place of business for taxpayer entities) will determine which Court of Appeals is the appropriate forum for review of the Tax Court’s decision.  The cases subject to this general rule include review of determinations by the IRS of tax deficiencies alleged to be owed by individuals or entities, certain declaratory judgment actions, and partnership cases implicating TEFRA.

However, when expanding the Tax Court’s jurisdiction by statute (for example, by extending the Tax Court’s jurisdiction to collection due process appeals) Congress has not correspondingly amended IRC § 7482(b)(1) to include each new type of case the Tax Court can hear.  In other words, while the variety of cases the Tax Court has power to decide has expanded, the six varieties of cases subject to the general geographic-determinative rule of IRC § 7482(b)(1) has remained the same.

This lack of correlation appears to implicate the catchall of IRC § 7482(b)(1), which states: “If for any reason no subparagraph (listing the six type of cases subject to the general, geographic-determinative venue provision) of the preceding sentence applies, then such decisions may be reviewed by the Court of Appeals for the District of Columbia.”

A plain reading of the appellate venue statute leads to the conclusion that regardless of the taxpayer’s residence at the time the Tax Court petition is filed, if the action is of a type not expressly set forth in IRC § 7482(b)(1), the D.C. Circuit Court of Appeals is the appropriate appellate venue.  Consequently, under the Golsen rule, the D.C. Circuit’s precedents will govern these actions at the Tax Court level.

Recently, this interpretation of § 7482(b)(1) has been gaining more traction.  For instance, in Whistleblower 14106-10W v. Comm’r, 137 T.C. 183 (2011), the Tax Court indicated that an appeal of that whistleblower action would lie with the D.C. Circuit under the § 7482(b)(1) catchall.  Further, in Cohen v. Comm’r, 139 T.C. No. 12 (2012), another whistleblower case, the government sought to transfer appellate venue from the Third Circuit to the D.C. Circuit using the § 7482(b)(1) catchall (the motion was unopposed and the case is currently pending before the D.C. Circuit).  Finally, in a case pending before the D.C. Circuit, Byers v. Comm’r, the taxpayer has argued that appeal of his collection due process case should lie in the D.C. Circuit, rather than the Eighth Circuit, which would be the geographically applicable Circuit Court of Appeal, based on the § 7482(b)(1) catchall provision.


The impact of this interpretation of the statute could be wide-ranging.  First, it is important to note that the under IRC § 7482(b)(2), the parties (i.e. the taxpayer and the IRS) can stipulate to review by a Circuit Court of Appeals of their choosing.  However, in situations where the parties do not stipulate, review by the D.C. Circuit could be advantageous to a taxpayer.

A primary example of when review in the D.C. Circuit can be advantageous is a collection due process case.  In a collection due process case, the IRS serves a notice of intent to begin collection activity or to lien or levy against the taxpayer’s property.  Upon receipt of that notice, the taxpayer may invoke the review of the IRS Office of Appeals to determine whether the IRS’s proposed collection action is proper in light of the taxpayer’s financial circumstances.  The taxpayer may also request a collection alternative (such as an offer in compromise or a payment plan) and assert other rights.

If the Appeals Office upholds the IRS’s proposed collection action, the taxpayer has the right to seek review of the Appeals Office’s determination in the Tax Court.  In reviewing the determination, an issue arises as to the scope of the Tax Court’s review.  The Tax Court has held that its review of the evidence presented at trial is de novo, which means it can accept new evidence not presented at the Appeals Office level.  See Robinette v. Comm’r, 123 T.C. 85 (2004).  However, three Circuit Courts of Appeal have  held that the Tax Court is limited to review of the administrative record (so that if the taxpayer fails to present evidence at the Appeals Office level, the taxpayer will be precluded from introducing the evidence at the Tax Court level).

The D.C. Circuit Court of Appeals has not proscribed the scope of Tax Court review of a collection due process case (the three Circuit Courts that have done so are the First, Eighth, and Ninth).  For that reason, a taxpayer residing in the First, Eighth, or Ninth Circuits seeking de novo review of the evidence in a collection due process case would be wise to assert and attempt to establish appeals venue in the D.C. Circuit under the IRC § 7482(b)(1) catchall (thereby establishing de novo review of evidence at the Tax Court level under Golsen), rather than the geographically applicable Circuit Court.

However, this is a two way street and can be disadvantageous to the taxpayer.  If the DC Circuit establishes precedent that is contrary to the taxpayer’s interests, the government would be in position to ensure that the case is appealed to the D.C. Circuit, under the IRC § 7482(b)(1) catchall, thereby ensuring application of the negative precedent at the Tax Court level.


The combination of the Golsen rule and the flexible nature of appeals court venue for Tax Court cases raises another interesting issue bearing on litigation strategy: at what point does a party (and the Tax Court) become bound by a particular Circuit Court’s jurisprudence?  As stated above, the parties in a Tax Court case can stipulate to appeals venue in a particular Circuit Court of Appeals of their choosing.  By so doing, the parties presumably bind themselves to the precedents of that Circuit Court under the Golsen rule.  This indicates that the Appeals Court venue provision is not jurisdictional in nature, and the right to assert a particular appeals venue can be waived.  That, in turn, raises the issue of whether a party can bind another party to a particular Circuit Court at the pleadings stage or some other stage of the litigation.  Doing so would have the effect of cutting off the right to subsequently file a motion to transfer appeals venue.

Under Tax Court Rule 36(c), if a material allegation set forth in a petition is not expressly admitted or denied in the Respondent’s answer, the allegation is deemed admitted.  Further, Tax Court precedent generally indicates that failure by a party in Tax Court litigation to respond to an argument on a specific point results in concession of that point.  See Straight v. Comm’r,1999 WL 33587419 (U.S. Tax Court May 6, 1999).

This authority indicates that it may be beneficial in some circumstances for a litigant to assert its position regarding the proper appeals venue early in the case.  Failure by other party to directly address the issue may result in waiver of the right to assert venue in an alternative appeals court.  At the very least, raising the appeals venue issue early forces the parties to commit to a position and clarifies which Circuit’s law will govern the proceedings.


The issue of Appeals Court venue in collection due process cases is currently included in potential tax reforms being considered by Congress, a good compilation of which can be found here.  Current draft legislation would apply the general geography-based appeals venue provision to both innocent spouse cases and collection due process cases.  This legislation could have the effect of applying, on a nationwide basis, the more restrictive scope of Tax Court review currently in place in the First, Eighth, and Ninth Circuits.  This important issue will undoubtedly continue to develop, both in Congress and with the resolution of the Byers case, over the next year.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience in tax litigation and working with taxpayers facing tax deficiencies and IRS collection efforts.  We will continue to monitor the development of these issues, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at

Raminfard Guilty Plea Highlights Complexity Of International Tax Compliance, Seriousness Of Violations, Importance Of Irs Offshore Voluntary Disclosure Program

Friday, December 13th, 2013

Los Angeles Businessman, David Raminfard, pleaded guilty on November 4th, 2013 in the Federal District Court in Los Angeles to conspiring to defraud the United States, the Justice Department and Internal Revenue Service-Criminal Investigation (IRS-CI) announced.

Raminfard, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel, identified in court documents only as Bank A.  The accounts were held in the names of nominees in order to keep them secret from the U.S. government.  One of the accounts was held in the name of Westrose Limited, a nominee entity formed in the Turks and Caicos Islands.  To further ensure that his undeclared accounts remained secret, Raminfard placed a mail hold on his accounts.  Rather than having his account statements mailed directly to him, Raminfard would receive them from an international accounts manager with Bank A in Israel, who brought them to Los Angeles to review them with Raminfard during meetings at a hotel.

In 2000, Raminfard began secretly using the funds in his undeclared accounts as collateral for back-to-back loans obtained from the Los Angeles branch of Bank A.  A “back-to-back” loan is a two party arrangement in which a bank advances a loan on the basis of a loan advanced by another bank in another country. In this particular case, the “back-to-back loan” was taken out at Bank A’s Los Angeles Branch secured by funds in an account located at Bank A’s Israel Branch (the “pledged account”). The pledged account in Israel was held in a certificate of deposit, and there was usually a 1% to 2% spread between the interest earned on the certificate of deposit and the interest charged on the back-to-back loan.

Raminfard used the loan money to purchase commercial real estate in Los Angeles.  By using back-to-back loans, Raminfard was able to access his funds in Israel without the U.S. Government learning about his undeclared accounts.  These loans also enabled Raminfard to claim the interest paid on the loans as a business expense on his companies’ business tax returns, while not reporting the interest earned in Israel as income on his individual income tax returns filed with the IRS.  For tax years 2005 through 2010, Raminfard failed to report approximately $521,000 in income.  The highest balance in Raminfard’s undeclared accounts was approximately $3 million.

As we have previously explained and , federal law requires all United States persons with a financial interest in or signature authority over at least one financial account located outside of the United States, the aggregate value of which exceeded $10,000 at any time during the calendar year, to be reported to the U.S. Treasury by filing an FBAR. Failure to disclose these accounts can result in both civil and criminal liabilities. As we have further explained, the IRS has established a voluntary disclosure initiative for taxpayers who want to disclose previously undisclosed accounts and avoid being criminally prosecuted.

Consequently, using the money in an undeclared bank account exposes a person to various forms of liability, and it therefore becomes highly difficult for the U.S. person to access it from within the United States.  Back-to-back loans, then, come into the picture as a vehicle to allow the account holder in the U.S. to access the account without the federal government discovering it. However, as the Raminfard case makes clear, the United States perceives this as tax evasion and will prosecute it as such.

Raminfard is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with conspiring to defraud the United States in connection with using undeclared bank accounts in Israel to obtain back-to-back loans in the United States. He faces a potential maximum prison term of five years and a maximum fine of $250,000.  In addition, he has agreed to pay a civil penalty to the IRS in the amount of 50 percent of the high balance of his undeclared accounts for failing to file FBARs.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of international tax compliance and tax litigation.  They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at contact@fuerstlaw.comor by calling 305.350.5690.

IRS Makes Significant Changes to Innocent Spouse Relief

Friday, November 22nd, 2013

Under Internal Revenue Code (hereinafter “IRC” or “Code”) § 6013(d)(3), spouses who file joint tax returns are jointly and severally liable for all tax due and owing for the tax year, as well as any penalties or interest that accrue on the tax liability.  Because the debt is joint and several, the IRS can choose to collect the outstanding tax in its entirety from a single spouse.  Further, a divorce settlement or other state court document directing a spouse to pay the tax liability is not binding on the IRS.

In certain circumstances, imposing joint and several liability on both spouses can create inequitable results.  For instance, a spouse that is completely unaware of an item of income attributable to the other spouse, and did not benefit from the income, is still held liable for payment of tax on the income under the provisions of § 6013(d)(3).  Recognizing the potential for inequity, Congress added provisions to the Internal Revenue Code which set forth grounds upon which so-called “innocent spouses” can obtain relief from the general imposition of joint and several liability.

Recently, changes have been made to the innocent spouse provisions that make their scope and applicability more available for taxpayers.  This blog entry will first provide a general overview of the Internal Revenue Code’s innocent spouse provisions, and will then highlight the key recent modifications to those provisions.

Overview of Innocent Spouse Provisions

Innocent spouse relief is set forth in § 6015 of the Code.  Generally, three types of relief are potentially available, depending on the individual spouse’s circumstances.  Each of the three bases for relief has unique characteristics, but there are some universal conditions which must be met before any of the three types of relief can be utilized.  First, there must a valid joint return (i.e. the taxpayers’ marriage must be valid, the signature of a spouse cannot be forged or coerced).  Without a valid joint return, there is no joint and several liability.  Second, the request for relief, form 8857, must be timely filed.  In most circumstances, the deadline to file is two years from when the IRS first begins collection action.  However, as explained below, the time limit may be different depending on which basis for relief the spouse invokes in his or her request.  Third, the liability must arise out of income taxes.  Most taxes required to be included on a joint return are income taxes, so this requirement is usually not a significant obstacle.  One example of a tax that is required to be reported on a joint return but is not considered income tax is the tax imposed on domestic employment service (i.e. working in the employer’s private home) by § 3510 of the Code.  Fourth, a court cannot have rendered a judgment as to the liability of the spouse requesting relief (hereinafter “requesting spouse”).  If the requesting spouse participated in a proceeding regarding the liability and had a chance to request relief but failed to do so, relief is also precluded. 

Once these threshold requirements are met, it is necessary to determine which specific type of relief under IRC § 6015 is potentially available to the requesting spouse.

        i. Innocent Spouse Relief: IRC § 6015(b)

The first type of relief, set forth under IRC § 6015(b), is called “Innocent Spouse Relief.”  This relief is potentially available to all joint filers.  To qualify for this relief, in addition to the universal requirements set forth above, the following requirements must be met:

  1. There must be an understatement of tax, i.e. the amount stated on the return is less than the amount actually due.  This is distinguished from anunderpayment of tax, where the correct amount is stated on the return, but not enough money was paid toward the liability;
  1. The understatement must be based on an erroneous item (either unreported income or an incorrect deduction, credit, or determination of basis) attributable to the other spouse;
  1. The requesting spouse must be without knowledge of the understatement, and without a reason to know of its existence;
  1. Taking into account all facts and circumstances it would be unfair to hold the innocent spouse liable for the tax.

A determination of whether a spouse had reason to know of the understated tax, thus precluding that spouse from taking advantage of § 6015′s equitable relief, is based on factors such as the educational background of the requesting spouse, the business experience of the requesting spouse, and whether the erroneous item represents a departure from a recurring pattern in previous tax years.  This is not an all or nothing proposition””a spouse can be aware of some erroneous items (and thus remain jointly and severally liable for those items) but still gain equitable relief for other items of which he or she was not aware.

In determining whether it is unfair to hold a spouse jointly and severally liable, the IRS will look to several factors, including whether the claiming spouse benefitted from the understated tax (for instance, by living a lavish lifestyle while tax liabilities went unpaid), whether the parties were divorced, and whether one spouse deserted the other. 

It is also important to note that relief under § 6015(b) does not provide relief for underpayments of tax.  For example, if the return states a tax due of $5,000.00 and only $3,000.00 is paid, § 6015(b) would be unavailable to a spouse seeking relief from the balance of $2,000.00, regardless of any of the innocent spouse factors.

        ii. Separation of Liability Relief: IRC § 6015(c)

A distinct form of equitable relief is available to innocent spouses under IRC § 6015(c) if the spouses are divorced, legally separated or living apart.  The understated tax can be allocated based on amounts for which each spouse is responsible.  In addition to meeting the universal requirements set forth above, there are a few key points regarding relief under § 6015(c) that should be highlighted.

  1. For § 6015(c) to apply, the spouses must be divorced, legally separated, or living apart.  While the status of being divorced or legally separated is clear, “living apart” is less clear.  Based on guidance published by the IRS, spouses are living apart if they are not members of the same household during the 12-month period ending on the day innocent spouse relief is requested.  Even if spouses are separated, if the home is maintained in anticipation of the spouse’s return (for example, if one spouse is in prison or away on military service), then the spouses are not considered to be living apart.
  1. Equitable relief is not available under § 6015(c) to the extent that the requesting spouse had actual knowledge of the understatement.  This is a different standard than that set forth under 6015(b); simply having reason to know of the erroneous item is not a basis upon which a court can draw the inference that the spouse had actual knowledge of the understatement.  However, a spouse that deliberately avoids learning about the erroneous item, or if the erroneous item is the result of property that the spouses jointly owned, then a determination of actual knowledge is more likely.
  1. Equitable relief is precluded in its entirety if the IRS can prove that the spouses transferred assets to each other as part of a fraudulent scheme.  Additionally, if property is transferred to the requesting spouse in an effort to avoid the incurrence or payment of a tax liability, then the understatement of tax attributable to the requesting spouse is increased by the value of the property transferred to the requesting spouse.  If a transfer of property is made to the requesting spouse within one year before the IRS sends its first notice of the proposed deficiency, then a presumption arises that the transfer was made to avoid the incurrence or payment of tax.
  1. Like § 6015(b), this section only applies to understatements of tax.  No relief is provided under this section for underpayments of tax.
  1. In allocating liability, the requesting spouse does not have to establish his or her innocence regarding the deficiency.  If the requesting spouse proves that any part of the understatement is not attributable to him or her, relief must be granted unless the IRS can prove a condition defeating relief exists.

        iii. Equitable Relief: IRC § 6015(f)

In the event a spouse does not qualify for relief under IRC §§ 6015(b) or (c), the spouse may still pursue relief under the catchall of IRC § 6015(f), generally described as “equitable relief.” 

Equitable relief under this provision is unique in that it can provide relief from both an understatement of tax and an underpayment of tax.

In addition to meeting the universal requirements set forth above, several other conditions must be met before a spouse is eligible for relief under § 6015(f):

  1. Relief under either IRC § 6015(b) or (c) cannot be available to the requesting spouse;
  1. Assets cannot have been transferred between the spouses as part of a fraudulent scheme or in an effort to avoid tax;
  1. The requesting spouse cannot have knowingly participated in the filing of a fraudulent return;
  1. The liability at issue must be attributable to the non-requesting spouse (this requirement can be disregarded in in certain circumstances, such as when the non-requesting spouse engages in fraud, or the requesting spouse is the victim of domestic violence);
  1. The non-requesting spouse cannot have transferred “disqualified assets” to the requesting spouse.  A “disqualified asset” is one that was transferred to the non-requesting spouse with the principal purpose of the avoidance of tax or payment of tax.  A presumption arises that an asset is disqualified if it is transferred within a year of the IRS contacting the taxpayers about a proposed deficiency.    

Once the threshold requirements for relief under § 6015(f) are met, the next determination the IRS will make is whether the case is “streamlined” or not.  Under newly issued IRS guidelines, set forth in Rev. Proc. 2013-34, equitable relief cases under IRC § 6015(f) are divided into streamlined and non-streamlined categories.  If a case is streamlined, relief is generally granted.  A case is considered streamlined if all of the following conditions are met:

  1. The spouses are either divorced, legally separated, have not been members of the same household for a year or more, or one of the spouses is deceased;
  1. The requesting spouse will suffer economic hardship if the IRS does not grant the requested relief;
  1. The requesting spouse did not:
  1. Know of or have reason to know of the deficiency, or
  2. Know of or have reason to know that the non-requesting spouse would not or could not pay the underpayment

If streamlined treatment is not available, then the IRS will weigh the particular facts and circumstances applicable to the requesting spouse to determine whether it would be inequitable to hold the requesting spouse partially or wholly responsible for the at-issue liability.  The factors the IRS looks to in making this determination include:

  1. Whether the spouses are separated or divorced;
  1. Whether the requesting spouse would suffer significant economic hardship if relief is not granted;
  1. Whether one or both of the spouses has a legal obligation under a divorce decree to pay the tax;
  1. Whether the requesting spouse received a significant benefit (beyond normal support) from the underpaid tax or the item giving rise to the understatement of tax;
  1. Whether the requesting spouse has made a good faith effort to comply with the tax laws; and
  1. Whether the requesting spouse knew or had reason to know about the item that caused the understatement or that the tax would not be paid.

Recent Modifications to Equitable Relief under § 6015(f)

The determination of whether a spouse is entitled to equitable relief under IRC § 6015(f) has recently undergone significant modification.  Specifically, in Rev. Proc. 2013-34, a link to which is provided above, the IRS superseded its previous guidance (Rev. Proc. 2003-61) and modified, in a manner favorable to taxpayers, certain substantive considerations in determining whether a spouse is entitled to equitable relief.

        i. Substantive Modifications of Rev. Proc. 2013-34

Rev. Proc. 2013-34 primarily altered the substantive analysis the IRS will undertake when determining whether a requesting spouse is entitled to equitable relief.  Keep in mind that the changes set forth in Rev. Proc. 2013-34 are most relevant when a case is not “streamlined” and the IRS is therefore required to engage in a balancing test to determine whether holding the requesting spouse liable would be inequitable. 

The changes set forth in Rev. Proc. 2013-24 are almost uniformly taxpayer-friendly.  More than anything, these changes represent awareness on the IRS’s part of the severe hardship spouses in abusive or domineering relationships face.  Below is a brief summary of the significant changes:

  1. Rev. Proc. 2013-34 directs the IRS to place greater emphasis on, and grant more deference to, the issue of whether the spouse suffered from domestic abuse.  The weight given to the existence of domestic abuse is significant enough that it will negate other factors that might have weighed against a finding of entitlement to equitable relief.
  1. The determination of whether economic hardship would result if equitable relief were denied was modified to be based on minimum standards of income, expenses, and assets.  Further, a finding that economic hardship will not result from a denial of the requested relief does not, in and of itself, weigh against a granting equitable relief as it previously did. Instead, it is now treated as neutral factor. 
  1. A finding that the requesting spouse had actual knowledge of the item causing the understatement is not weighed more heavily than other factors, as it was previously.  Additionally, if the requesting spouse did not challenge the non-requesting spouse’s treatment of any tax items out of fear of retaliation, then even actual knowledge of improper treatment of an item will not preclude equitable relief. 
  1. Similarly, abused spouses, or those spouses with no control over financial decisions, will not suffer from having the “significant benefit” factor weigh against them in the determination of equitable relief.
  1. A spouse’s subsequent compliance with the tax laws will weigh in favor of a request for equitable relief.  Prior to Rev. Proc. 2013-34 it was merely a neutral factor.
  1. Whereas previously the liability from which the requesting spouse sought relief had to be attributable to the non-requesting spouse, relief under § 6015(f) is available even if the item is attributable to the requesting spouse if the tax deficiency is the result of the non-requesting spouse’s fraud.
  1. A legal obligation of the requesting spouse to pay the liability is taken into consideration.  Previously, only whether the non-requesting spouse had a legal obligation to pay the liability was taken into account.     

ii. Procedural Modifications

Additionally, recent changes to the application of IRC 6015(f) have eased time constraints on filing relief requests.  Whereas previously claims for equitable relief had to be filed within two years of the IRS’s first attempt to collect the liability (as is still the case under IRC §§ 6015(b) and (c)), in IRS Notice 2011-70, the time period was extended to match the IRS’s general collection deadline of 10 years after the assessment of the liability.  This provision was recently adopted as part of a proposed treasury regulation, and is likely to become final regulation.  We previously blogged about this change here and here


The modifications to equitable relief set forth in Rev. Proc. 2013-34 are a clear sign that the IRS is beginning to recognize the reality that its previous standards in evaluating equitable relief claims were too stringent.  Abused spouses, or those spouses who have no control over the household’s finances and fear retaliation from their spouse if any attempt to assert control is made, should not be forced to incur joint and several liability based on the actions of their spouse.  Further, the two-year deadline on filing equitable relief claims was too strict.  Given the turmoil that divorced or separated spouses often face, resolving past tax liability may, initially, be a low priority.  The extended time limit allows spouses to focus on more immediately pressing concerns before addressing their tax debt.

Innocent spouse relief under IRC § 6015 is a crucial lifeline to many taxpayers facing severe, unexpected tax burdens due to the actions of their spouse.  Reforms liberalizing the application of section 6015, like Rev. Proc. 2013-34, should be both welcomed and taken advantage of by taxpayers.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers facing tax deficiencies and IRS collection efforts.  We will continue to monitor the development of innocent spouse relief under the Internal Revenue Code, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at

Criminal FBAR Prosecutions Underscore Importance of IRS Offshore Voluntary Disclosure Program

Monday, November 18th, 2013

According to statistics compiled by Jack A. Townsend, author of the Federal Tax Crimes Blog, nearly 130 individuals have been charged with maintaining and failing to report offshore bank accounts, or enabling those who do.  Specifically, 94 taxpayers and 35 enablers have been charged with various crimes arising out of the failure to report offshore accounts, including the criminal Foreign Bank Account Report (FBAR) statute (31 U.S.C. § 5322), the tax perjury statute (I.R.C. § 7206(1)), and conspiracy (18 U.S.C § 371).

These charges have in turn led to 72 guilty pleas and 12 guilty verdicts after a trial.  Only one individual has been acquitted of the charged crimes.  Of those charged, 53 individuals have been sentenced, with 28 receiving prison time as part of their sentence.  Of those individuals receiving prison time as part of their sentence, the average period of incarceration has been over 13 months, though incarceration periods have reached as high as 10 years.

These statistics underscore the aggressiveness with which the United States is pursuing individuals who fail to properly report offshore bank accounts and offshore income.  The statistics also underscore the value of the Offshore Voluntary Disclosure Program (OVDP), which permits delinquent taxpayers to disclose their offshore financial accounts and unreported income, in exchange for a generally lower monetary penalty and a promise from the IRS to not recommend the taxpayer’s case for criminal prosecution. 

As we have previously addressed, the OVDP is not available to taxpayers whose non-compliance is discovered by the Government through the Government’s independent investigation efforts.  For that reason, and given the unrelenting efforts by the United States to root out non-compliant taxpayers with offshore assets and the potentially severe penalties they face, those considering applying to the OVDP should act sooner rather than later.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who are seeking to avail themselves of the OVDP.  We will continue to monitor the development of these issues, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at

International Tax Compliance Update: IRS to Issue ”John Doe” Summonses Seeking Information Regarding U.S. Taxpayers with Undisclosed Offshore Bank Accounts

Wednesday, November 13th, 2013

On November 7, 2013, United States District Judge Kimba M. Wood of the Southern District of New York, granted authorization to the IRS to issue John Doe summonses to Bank of New York Mellon and Citibank requiring those banks to produce records and information pertaining to US taxpayers holding accounts at Zurcher Kantonalbank and its affiliates (ZKB) in Switzerland. 

Thereafter, on November 12, 2013, U.S. District Judge Richard M. Berman, also of the Southern District of New York, granted permission for the IRS to issue John Doe summonses to Bank of New York Mellon, Citibank, JP Morgan Chase, HSBC, and Bank of America requiring those banks to produce records and information relating to accounts held by US persons at The Bank of NT Butterfield & Son, Limited, and its affiliates (Butterfield) in a number of foreign jurisdictions including the Bahamas, Barbados, the Cayman Islands, and Switzerland.  The Department of Justice’s news release on these orders is available here.

The judicial orders and the summonses that will follow represent the latest effort by the United States to root out and hold accountable US taxpayers holding accounts and financial assets abroad in an attempt to avoid US taxation.  Recently, for instance, three employees of ZKB were indicted for conspiring with US taxpayers to hide over $400 million in Swiss bank accounts.  Additionally, the United States, working together with Swiss bank regulators, has reached an agreement with certain Swiss banks encouraging those banks to disclose their US account holders in exchange for non-prosecution guarantees.  Further, Congress has enacted the Foreign Account Tax Compliance Act (FATCA), which is designed to punish foreign banks, via a withholding tax mechanism imposed on payments made to those banks from US sources, which refuse to provide information regarding their US account holders.  For more information about FATCA and the Treasury Department’s struggles to implement the law, please see our prior blog discussions herehere, and here

The issuance of John Doe summonses is a tactic the IRS has utilized previously.  For instance, last April, the IRS issued a John Doe summons to Wells Fargo seeking information concerning US persons with accounts at First Caribbean International Bank. 

The IRS will issue John Doe summons in instances where it is unsure of the precise identity of the inpiduals about whom it is seeking information.  Because the scope of a John Doe summons is necessarily broad, John Doe summonses allow the IRS to recover vast amounts of information from the banks on which they are served.  The IRS serves summonses on US banks seeking information about accountholders of foreign banks because US banks often act as correspondent banks for the foreign banks.  Under these arrangements, a US bank will hold accounts for the benefit of a foreign bank that is seeking to do business in US dollars but that otherwise does not have a US presence.  Service of the summons on the US correspondent bank is simpler and more efficient than attempting to retrieve information directly from the foreign bank.

The IRS’s efforts to crack down on offshore tax evasion have led to severe consequences for non-compliant US taxpayers.  For instance, the IRS’ focus on identifying non-compliant account holders with UBS have led to criminal convictions and the imposition of severe monetary penalties, as highlighted herehere, and here.  Further, the United States has pursued the banks and the bankers that have assisted non-compliant US taxpayers in hiding their assets, as highlighted herehere, and here.  Given the tough stance the IRS has taken on this issue, cooperation between foreign banks and the IRS regarding the production of information about US accountholders is likely to only grow in the future.  Such cooperation, in turn, will likely increase the risk that more non-compliant US accountholders are identified and prosecuted.

It is important to keep in mind that there is no prohibition against US persons holding foreign bank accounts.  However, US persons holding foreign accounts generally must disclose these interests to the IRS in any year in which the balance of the account exceeds $10,000.00, by making a Foreign Bank Account Report (FBAR).  Separate reporting requirements exist for other foreign assets held by US persons, such as stock in foreign corporations or interests in offshore trusts.  Further, US persons are taxed on their worldwide income, regardless of the source of the income.  Interest earned on foreign bank accounts, distributions from offshore trusts, and pidends paid by foreign corporations are all subject to US tax and must be reported on the US person’s annual tax return.  Failure to report the existence of overseas accounts or financial interests when required can lead to significant monetary penalties and, potentially, criminal prosecution.  For more information regarding the FBAR requirements, see our previous blog entries herehere, and here.

The IRS has re-opened the Offshore Voluntary Disclosure Program (OVDP), which permits taxpayers with undisclosed foreign income or assets from previous tax years to make a full disclosure of their previously undisclosed interests and income in exchange for generally lower penalties and a guarantee from the IRS that it will not recommend the disclosing taxpayer’s case to the Justice Department for criminal prosecution.  Read more about the most recent OVDP here.

The most recent efforts by the IRS to learn the identity of non-compliant US accountholders at ZKB and Butterfield is especially pertinent considering the limitations of the OVDP.  Specifically, once the IRS or the Department of Justice becomes aware of a taxpayer’s non-compliance through the use of a John Doe summons or similar investigatory mechanism that taxpayer becomes ineligible for participation in the OVDP.  That prohibition does not apply, however, in situations where a non-compliant taxpayer merely holds an account at a bank that is the subject of a John Doe summons””the government must learn of the specific taxpayer’s non-compliance on its own before the door to the OVDP is shut.

Given the generally beneficial nature of the OVDP, it would be wise for non-compliant US taxpayers holding accounts with ZKB or Butterfield to immediately explore their options regarding the OVDP.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who are seeking to avail themselves of the OVDP.  We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at