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ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 17 Mar 2010 19:49:00 +0000

Small Business/Self-Employed Interim Guidance for Calculation of Future Income in Offer in Compromise Cases, SBSE 05-0310-012, (Mar. 16, 2010)
2010ARD 052-5
Internal Revenue Service: Compromises: Future income
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE Washington, DC 20224
March 10, 2010
SMALL BUSINESS / SELF-EMPLOYED DIVISION
SB/SE Control No: SBSE 05-0310-012
Expires: 3/10/2011
Impacted IRM 5.8.5
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTORS, CAMPUS COMPLIANCE OPERATIONS AND CHIEF, APPEALS
FROM: Frederick W. Schindler /s/ Frederick W. Schindler Director, Collection Policy
SUBJECT: Interim Guidance for Calculation of Future Income in Offer in Compromise Cases
The purpose of this memorandum is to provide revised guidance in the computation of the taxpayer's future income value during the evaluation of an offer in compromise.
Internal Revenue Manual (IRM) 5.8.5 defines future income as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer. In general, a taxpayer's current income will be used in the analysis of future ability to pay.
Attached to this memorandum is a revision to sections of IRM 5.8.5, Financial Analysis which discuss the calculation of future income and the use of collateral agreements.
The revisions include specific examples of when the use of income averaging and/or a collateral agreement is appropriate.
These procedures are effective upon the date of issuance and should be applied to any offer currently under consideration. Additionally, these procedures may be applied to offers previously rejected which are currently in their appeal period or where the taxpayer has requested appeals consideration. These procedures will be incorporated into the next revision of IRM 5.8 Offers in Compromise.
If you have any questions, you may contact me, or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst. Territory or Campus personnel should direct any questions, through their management staff, to the appropriate Area or Campus contact.
Attachment
cc: Commissioner, Small Business/Self-Employed Division
National Chief, Appeals
Chief Counsel
National Taxpayer Advocate
5.8.5.6 Future Income
(1) Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.
(2) As a general rule, the taxpayer's current income will be used in the analysis of future ability to pay. This includes situations where the taxpayer's income is recently reduced based on a change in occupation or employment status.
(3) Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.
(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer's earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.19 and IRM 5.8.6, Collateral Agreements.

If… Then…

Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.

A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.
Example: Unemployed - The taxpayer is a construction worker and between jobs. A review of the taxpayer's previous annual income and/or income averaging may be the appropriate method to determine taxpayer's income for calculation purposes.
Example: Underemployed - If a taxpayer is a teacher but recently moved and is currently at a lesser paying job until a teaching position becomes available, or has been hired and does not begin work until the school season begins, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.

A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

A taxpayer is long-term unemployed Use of income averaging is not required; the taxpayer's current income may be used in the future income calculation.
Example: Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer's current income with a future income collateral agreement is appropriate.

A taxpayer is long-term underemployed Do not income average; use the taxpayer's current income.
Example: The taxpayer was previously employed in a manufacturing plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.

A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example: The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note: This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example: Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer's current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.

A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer's future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example: The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer's current income until the taxpayer's anticipated retirement date, then adjust the taxpayer's income to reflect the amount expected in retirement.
Example: The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer's current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.

A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what would be recoverable through a bankruptcy proceeding. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 5.8.10.2.

(5) Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example: Taxpayer's spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example: Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer's future ability to pay.
Example: The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example: The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
(6) In situations where the taxpayer's income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/representative and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. Telephone contact is recommended to expedite case processing.
Example: The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example: The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example: The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example: The collection information statement (CIS) submitted by the taxpayer included $ 3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $ 4,000.00 of expenses. An additional $ 1,000.00 should not be added to the taxpayer's income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
(7) Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
Currently 5.8.5.6(7) Future Income Collateral Agreements
(1) In some instances, it may be difficult to calculate the taxpayer's anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer's income provides a reasonable calculation of the taxpayer's future earnings potential, it may also be appropriate to use the taxpayer's current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government's interest in any substantial increase in the taxpayer's earnings.
(2) A future income collateral agreement is most appropriate in situations where the taxpayer's future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
(3) A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example: A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example: A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example: A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement in lieu of income averaging.
Example: A taxpayer's RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.

ab@irstaxattorney.com (www.irstaxattorney.com) — Tue, 16 Mar 2010 21:19:00 +0000

The IRS and Treasury Department have provided revised guidance to Small Business/Self-Employed Division directors and the IRS Appeals chief on the computation of a taxpayer's future income value during the evaluation of an offer in compromise. The guidance revises sections of IRM 5.8.5, Financial Analysis, which discuss the calculation of future income and the use of collateral agreements. The revisions include specific examples of when the use of income averaging or a collateral agreement is appropriate.

The procedures apply to future offers and any offer currently under consideration. In addition, the procedures may be applied to offers previously rejected that are currently in their appeal period or where the taxpayer has requested appeals

IRS Small Business/Self-Employed Interim Guidance for Calculation of Future Income in Offer in Compromise Cases, SBSE 05-0310-012, (Mar. 16, 2010)
2010ARD 052-5
Internal Revenue Service: Compromises: Future income
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE Washington, DC 20224
March 10, 2010
SMALL BUSINESS / SELF-EMPLOYED DIVISION
SB/SE Control No: SBSE 05-0310-012
Expires: 3/10/2011
Impacted IRM 5.8.5
MEMORANDUM FOR DIRECTORS, COLLECTION AREA OPERATIONS DIRECTORS, CAMPUS COMPLIANCE OPERATIONS AND CHIEF, APPEALS

FROM: Frederick W. Schindler /s/ Frederick W. Schindler Director, Collection Policy
SUBJECT: Interim Guidance for Calculation of Future Income in Offer in Compromise Cases

The purpose of this memorandum is to provide revised guidance in the computation of the taxpayer's future income value during the evaluation of an offer in compromise.
Internal Revenue Manual (IRM) 5.8.5 defines future income as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer. In general, a taxpayer's current income will be used in the analysis of future ability to pay.
Attached to this memorandum is a revision to sections of IRM 5.8.5, Financial Analysis which discuss the calculation of future income and the use of collateral agreements.
The revisions include specific examples of when the use of income averaging and/or a collateral agreement is appropriate.
These procedures are effective upon the date of issuance and should be applied to any offer currently under consideration. Additionally, these procedures may be applied to offers previously rejected which are currently in their appeal period or where the taxpayer has requested appeals consideration. These procedures will be incorporated into the next revision of IRM 5.8 Offers in Compromise.
If you have any questions, you may contact me, or a member of your staff may contact Thomas B. Moore, OIC Senior Program Analyst. Territory or Campus personnel should direct any questions, through their management staff, to the appropriate Area or Campus contact.
Attachment
cc: Commissioner, Small Business/Self-Employed Division
National Chief, Appeals
Chief Counsel
National Taxpayer Advocate

5.8.5.6 Future Income

(1) Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

(2) As a general rule, the taxpayer's current income will be used in the analysis of future ability to pay. This includes situations where the taxpayer's income is recently reduced based on a change in occupation or employment status.

(3) Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.

(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer's earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.19 and IRM 5.8.6, Collateral Agreements.

If… Then…

Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.

A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

Example: Unemployed - The taxpayer is a construction worker and between jobs. A review of the taxpayer's previous annual income and/or income averaging may be the appropriate method to determine taxpayer's income for calculation purposes.

Example: Underemployed - If a taxpayer is a teacher but recently moved and is currently at a lesser paying job until a teaching position becomes available, or has been hired and does not begin work until the school season begins, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.

A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.

A taxpayer is long-term unemployed Use of income averaging is not required; the taxpayer's current income may be used in the future income calculation.
Example: Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer's current income with a future income collateral agreement is appropriate.

A taxpayer is long-term underemployed Do not income average; use the taxpayer's current income.
Example: The taxpayer was previously employed in a manufacturing plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.

A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example: The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note: This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example: Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer's current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.

A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer's future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example: The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer's current income until the taxpayer's anticipated retirement date, then adjust the taxpayer's income to reflect the amount expected in retirement.
Example: The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer's current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.

A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what would be recoverable through a bankruptcy proceeding. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 5.8.10.2.

(5) Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example: Taxpayer's spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example: Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer's future ability to pay.
Example: The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example: The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
(6) In situations where the taxpayer's income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/representative and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. Telephone contact is recommended to expedite case processing.
Example: The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example: The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example: The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example: The collection information statement (CIS) submitted by the taxpayer included $ 3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $ 4,000.00 of expenses. An additional $ 1,000.00 should not be added to the taxpayer's income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
(7) Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
Currently 5.8.5.6(7) Future Income Collateral Agreements
(1) In some instances, it may be difficult to calculate the taxpayer's anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer's income provides a reasonable calculation of the taxpayer's future earnings potential, it may also be appropriate to use the taxpayer's current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government's interest in any substantial increase in the taxpayer's earnings.
(2) A future income collateral agreement is most appropriate in situations where the taxpayer's future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
(3) A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example: A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example: A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example: A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement in lieu of income averaging.
Example: A taxpayer's RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.

ab@irstaxattorney.com (www.irstaxattorney.com) — Mon, 15 Mar 2010 13:31:00 +0000

If the IRS takes the position that something is a sham trust, they cannot take an inconsistent position that it is not a sham trust.

BEMONT INVESTMENTS, LLC v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
________________________________________
BEMONT INVESTMENTS, LLC, by and through its Tax Matters Partner, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.

Case Information:

Code Sec(s):
Court Name: IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION,
Docket No.: CASE NO. 4:07cv9 (consolidated with 4:07cv10),
Date Decided: 03/09/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION,
MEMORANDUM OPINION AND ORDER REGARDING MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING INAPPLICABILITY OF VALUATION MISSTATEMENT PENALTY
Judge: DON D. BUSH UNITED STATES MAGISTRATE JUDGE

Before the Court is Plaintiffs' Motion for Partial Summary Judgment Regarding Inapplicability of Valuation Misstatement Penalty (Dkt. 137). The Court has considered the motion, as well as the response filed by the United States. The motion is GRANTED.

Plaintiffs, the partnerships herein, filed this suit contesting the determination by the Internal Revenue Service that the transactions which created partnership losses were sham transactions to create sham losses. The United States calls these tax shelters Son of Boss transactions.

The very narrow issue presented here is whether the United States can impose a penalty for valuation misstatements. The United States contends that the value of the currency swaps as reported results in a misstatement of over 8000%.
Section 6662 of the Internal Revenue Code allows an imposition of a penalty for underpayment of taxes when any one of the following factors is demonstrated: (1) negligence or disregard of rules or regulations; (2) any substantial understatement of income tax; (3) any substantial valuation misstatement under chapter 1; (4) any substantial overstatement of pension liabilities; or (5) any substantial estate or gift tax valuation understatement. 26 U.S.C. § 6662 (b)(1–5). Section 6662(h)(2) allows for a 40% penalty, if the substantial valuation misstatement is 400% or more. 26 U.S.C. § 6662(h)(2).

In October 2006, the I.R.S. sent both partnerships a Notice of Final Partnership Administrative Adjustment, or FPAA. Curiously, the notice states that, if the partnerships do nothing and do not enter into a binding settlement, they will be billed for any additional tax plus interest that they may owe under the FPAA. Nothing is said about penalties. However, the notice states that, if the partnerships accept the FPAA and sign the required form, then they are signing on for any additional penalties as determined by the I.R.S. This begs the question, why settle?

In the form 886-A, Explanation of Items, attached to the FPAA the I.R.S. notes a number of factors for its decision to disallow the transaction. First, the I.R.S. questions whether BPB Investments is a partnership as a matter of fact. Second, the I.R.S. states that the partnership was formed solely for the purposes of tax avoidance by artificially overstating basis in the partnership interests of its purported partners. Third, the transaction was noted by the I.R.S. as an economic sham with no business purpose. The I.R.S. makes the determination that the foreign currency swaps were acquired directly by the partners and not BPB Investments, LLC. The I.R.S. also concludes that the swap assumed by BM Investments, LLC is disregarded and any gains or losses on the swap is treated as having been realized by the partners. The I.R.S. then determines that the partners of BPB Investments are not to be treated as partners. It is also determined by the I.R.S. that obligations under the short positions transferred to BM Investments LLC are liabilities which reduce the purported partners' bases in BM Investments, LLC in the amount of $202,5000,000. The I.R.S. determines that there was no profit motive with this transaction and that any losses were not at risk. The I.R.S. also determines that none of the partners of BM Investments, LLC or PBP Investments, LLC established an adjusted basis in their respective interests in an amount greater than zero (0). The I.R.S. also determines that the sale, liquidation, or exchange of the above noted partnerships failed to establish a basis above zero for the partners' partnership interest.

Plaintiffs contend that, under well settled Fifth Circuit law, the I.R.S.'s determination that the transaction was a sham — and thus disallowed — forecloses assessment of the 40% penalty. The United States responds that current Fifth Circuit law either (1) does not apply to this transaction because the transaction is distinguishable or has been superseded by changes in the law and Treasury Regulations, or (2) precedent binding decisions were incorrectly decided. The United States points out that, when considering these type of tax shelters, most of the Circuits have upheld the 40% penalty provision. The United States concedes that the case law in the Ninth Circuit and Fifth Circuit reaches a contrary result.
Therefore, the task before the Court is relatively simple. If Fifth Circuit law operates in Plaintiffs' favor, there is little else to do than grant the motion. This Court is bound by precedent, not policy.
Plaintiffs contend that, under Todd v. Comm'r, 862 F.2d 540, 541–42 [63 AFTR 2d 89-523] (5th Cir. 1988), Heasley v. Comm'r, 902 F.2d 380, 382–83 [66 AFTR 2d 90-5068] (5th Cir. 1990), and their progeny, these penalties are not applicable if the I.R.S.'s disallowance of tax benefits is not “attributable to” a valuation misstatement. See Klamath Strategic Inv. Fund v. United States, 472 F. Supp.2d 885, 899–900 [99 AFTR 2d 2007-850] (E.D.Tex. 2007) aff'd in part, 568 F.3d at 553 (holding that a disallowance was not “attributable to” a valuation misstatement when the I.R.S. disallowed a transaction as lacking economic substance). In Todd, the Fifth Circuit held that, because deductions and credits were disallowed for a reason totally unrelated to any valuation overstatement, the resulting underpayment could not be “attributable to a valuation overstatement” and misstatement penalties should not apply.Todd, 862 F.2d at 542.

In Heasley, the Fifth Circuit determined:
Whenever the I.R.S. totally disallows a deduction or credit, the I.R.S. may not penalize the taxpayer for a valuation overstatement included in that deduction or credit. In such a case, the underpayment is not attributable to a valuation overstatement. Instead, it is attributable to claiming an improper deduction or credit.

Heasley, 902 F.2d at 383. The Fifth Circuit has reaffirmed the validity of the Todd/Heasley reasoning. See Weiner v. U.S., 389 F.3d 152, 160–62 [94 AFTR 2d 2004-6518] (5th Cir. 2004) (citing Todd/Heasley with approval); see also Southgate Master Fund, LLC ex rel. Montgomery Capital LLC v. United States, 651 F.Supp. 2d 596, 664 [104 AFTR 2d 2009-6053] (N.D. Tex. 2009) (noting that the Fifth Circuit reaffirmed the validity of Todd/Heasley in the 2004 opinion in Weiner).
Here, the Court must take into account the I.R.S.'s rationale for disallowing the transactions entered into by Plaintiffs. First and foremost, the transaction is not disallowed because of a substantial valuation misstatement. The I.R.S. determined that the transaction was created for no business purpose other than for tax avoidance. Accordingly, the I.R.S. disregards the partnerships and transactions in full. The I.R.S. goes on to hold that the transaction lacked economic substance and was an economic sham. All losses are not allowed. All increase in basis of assets are not allowed to eliminate gain, and increases to the adjusted basis of partnership interests are not allowed. In essence, the I.R.S. rips the whole transaction apart.
But, there is no finding in the explanation of benefits that the reason for doing so is because of a gross valuation misstatement. In fact, in its explanation of Accuracy - Related Penalties, the I.R.S. once again states that the tax shelter was created without substantial authority for the position taken and that there was no reasonable belief by the partners that the position taken was more likely than not the correct treatment of the shelter and related transactions.
The I.R.S. then “hedges its bet”, noting that, in addition, all underpayments of tax are due to, at a minimum, substantial understatements of income tax, gross valuation misstatement(s); or negligence or disregarded rules or regulations.
The United States argues that the earlier Fifth Circuit cases noted above dealt with shelters from the 1980s involving penalty provisions that are no longer in effect. However, the Fifth Circuit's decision in Weiner forecloses this argument. See Weiner, 389 F.3d at 161. Further, the United States's argument that Treas. Reg. Section 1.6662-5(g) mandates a finding that, when the basis is determined to be zero, the deemed valuation misstatement is considered to be a gross valuation statement is vain. As Plaintiffs point out, this section is only applicable when any portion of the underpaymentis attributable to a substantial valuation misstatement. See Treas. Reg., Section 1.6662-5(a).
Are Todd, Heasley and Weiner distinguishable? Although the degree of sophistication or motivation on the part of the taxpayers in the above cases might generate a more sympathetic treatment, the principle relied upon by Plaintiffs and cited above does not appear to hinge on the motives of the taxpayers, but rather how the United States treats the transaction. Therefore, although the United States invites this Court to ignore binding precedent, the Court will not and cannot do so. Any distinctions that might exist as to taxpayer motives, if such exist, are a matter of concern for the Fifth Circuit. Any attempt by the United States to establish a 40% penalty is foreclosed by its own actions in this case.
SO ORDERED.
SIGNED this 9th day of March, 2010.
DON D. BUSH
UNITED STATES MAGISTRATE JUDGE

ab@irstaxattorney.com (www.irstaxattorney.com) — Fri, 12 Mar 2010 13:07:00 +0000

Wilfulness” for trust fund penalty found both before and after actual knowledge of delinquency
Frohnaple v. U.S., (DC NC 3/8/2010) 105 AFTR 2d ¶ 2010-577
A district court's Magistrate Judge has concluded that the president of a failing company was liable for the trust fund penalty because he “wilfully” failed to pay over payroll taxes under Code Sec. 6672 , for periods both before and after he actually knew that payroll taxes hadn't been paid. His knowledge of the company's inability to meet its debts and cash flow problems, as well as red flags raised as to the integrity of financial information, imposed an affirmative duty on him to ensure that the payroll taxes were being paid.
Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. ( Code Sec. 6672(a) )
In determining whether there is “willfulness” for purposes of Code Sec. 6672 liability, courts have focused on whether the taxpayer had knowledge of non-payment or reckless disregard of whether the payments were being made. Thus, IRS can show willfulness by showing either actual knowledge of non-payment or reckless disregard as to non-payment. Courts have held that although mere negligence isn't enough to establish reckless disregard, gross negligence is. (Thomsen v. U.S. (CA 1 1989), 64 AFTR 2d 89-5752 )
IRS assessed a Code Sec. 6672 penalty against Frohnaple for the tax periods ending June 30, 2000, Sept. 30, 2000, Dec. 31, 2000, Mar. 31, 2001, and June 30, 2001, in the amount of roughly $515,600.

Willfulness found. The Magistrate Judge initially concluded that Frohnaple acted willfully for four of the five quarters at issue—the portion of the last two quarters of 2000 and the first two quarters of 2001—when he was specifically made aware that the payroll taxes had not been paid. On learning of Boling Group's failure to remit payroll taxes, he had an absolute duty to use all corporate funds to pay the currently accruing tax liability, as well as the outstanding tax liability. However, Frohnaple did nothing to ensure that the taxes were paid and, instead, made payments to other creditors. From August 2000 through January 2001, Boling Group's bank deposits totaled more than $1.7 million, none of which was used to pay the payroll taxes. Instead it was used to pay other creditors, as well as employee salaries, including Frohnaple's own salary. Frohnaple's failure to ensure that the delinquent taxes were paid with these funds meets the willful standard of Code Sec. 6672 as a matter of law.
The Magistrate Judge concluded that Frohnaple's reliance on statements by Boling Group's Controller Phyllis Younts (who started in September 2000) that she was “dealing with” the payroll taxes, without doing anything more to investigate and ensure that they were being paid, was simply more than mere negligence. By the time Younts was hired Frohnaple already knew that Boling Group was delinquent in its payment of the taxes and that it was floundering financially. By December 2000, he had questioned Younts' reliability; and he could have examined Boling Group's books to confirm the payments. The Magistrate Judge found that after Frohnaple became aware that the payroll taxes had not been paid by Dizon, he had a duty to exercise greater oversight over the finance department to independently ensure that the payroll taxes were being paid, and his failure to do so during Younts' tenure with Boling Group amounted to careless disregard.
Further, the Magistrate Judge also concluded that for the time period before Frohnaple became aware that the payroll taxes weren't being paid, Frohnaple's failure to confirm whether Boling Group was current with its tax obligations and his failure to take remedial action amounted to reckless disregard for the purpose of finding willfulness. Even if he was never specifically told until August 2000 that Boling Group was delinquent in paying employment taxes, his knowledge of the company's inability to meet its debts and its severe cash flow constraints before August 2000, as well as the red flags that had already been raised about Dizon by the outside accountant as to the integrity of the financial information, gave rise to a duty to confirm that Boling Group was meeting its payroll tax obligations. Frohnaple knew that Boling Group had ongoing financial difficulties, and as a result, Frohnaple extended numerous personal loans to Boling Group for more than $200,000. At least once, Frohnaple personally loaned Boling Group money to meet payroll, and he also knew that the ability to pay suppliers to keep up with production was an ongoing problem.

BARRETT, JR. v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 03/09/2010
________________________________________
CHARLES W. BARRETT, JR., Petitioner-Appellant, v. UNITED STATES OF AMERICA, Respondent-Appellee.
AFFIRMED.
________________________________________

§ 6672 Failure to collect and pay over tax, or attempt to evade or defeat tax.
________________________________________
(a) WG&L Treatises General rule.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
(b) Preliminary notice requirement.
(1) In general.
No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.
(2) Timing of notice.
The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.
(3) Statute of limitations.
If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph ), the period provided by such section for the assessment of such penalty shall not expire before the later of—
(A) the date 90 days after the date on which such notice was mailed or delivered in person, or
(B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.
(4) Exception for jeopardy.
This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.
(c) Extension of period of collection where bond is filed.
(1) In general.
If, within 30 days after the day on which notice and demand of any penalty under subsection (a) is made against any person, such person—
(A) pays an amount which is not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty,
(B) files a claim for refund of the amount so paid, and
(C) furnishes a bond which meets the requirements of paragraph (3) ,

no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until a final resolution of a proceeding begun as provided in paragraph (2) . Notwithstanding the provisions of section 7421(a) , the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2) .
(2) Suit must be brought to determine liability for penalty.
If, within 30 days after the day on which his claim for refund with respect to any penalty under subsection (a) is denied, the person described in paragraph (1) fails to begin a proceeding in the appropriate United States district court (or in the Court of Claims) for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the 30-day period referred to in this paragraph .
(3) Bond.
The bond referred to in paragraph (1) shall be in such form and with such sureties as the Secretary may by regulations prescribe and shall be in an amount equal to 11/2 times the amount of excess of the penalty assessed over the payment described in paragraph (1) .
(4) Suspension of running of period of limitations on collection.
The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court.
(5) Jeopardy collection.
If the Secretary makes a finding that the collection of the penalty is in jeopardy, nothing in this subsection shall prevent the immediate collection of such penalty.
(d) Right of contribution where more than 1 person liable for penalty.
If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person's proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with—
(1) an action for collection of such penalty brought by the United States, or
(2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.
(e) Exception for voluntary board members of tax-exempt organizations.
No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member—
(1) is solely serving in an honorary capacity,
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.

The preceding sentence shall not apply if it results in no person being liable for the penalty imposed by subsection (a) .

ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 10 Mar 2010 02:22:00 +0000

Offer in compromise - abuse of discretion issue

Gregg Bartl, et ux. v. Commissioner, TC Memo 2010-43 , Code Sec(s) 6320; 6330; 7122.
________________________________________
GREGG BARTL AND BETH FEINSTEIN-BARTL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 6320; 6330; 7122
Docket: Docket No. 22866-07L.
Date Issued: 03/4/2010
Judge: Opinion by LARO
Discussion
I. Overview Petitioners argue that Appeals was required to let them pay $50,000 to compromise their $83,755 in Federal income tax liability on the basis of (i) doubt as to collectibility; and (ii) effective tax administration. Our review is limited to those issues petitioners raised at the hearing. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007). At the hearing, petitioners raised only the appropriateness of their offers-in- compromise to be accepted. Accordingly, we limit our analysis to the propriety of Appeals' rejection of petitioners' $50,000 offer-in-compromise, the higher of their two offers.
II. Standard of Review Where, as here, petitioners' underlying tax liability is not at issue, we review the determination solely for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). In deciding whether Appeals' rejection of an offer-in-compromise was an abuse of discretion, we decide whether the rejection was arbitrary, capricious, or without sound basis in fact or law. See Cox v. Commissioner, 126 T.C. 237, 255 (2006), revd. 514 F.3d 1119 [101 AFTR 2d 2008-685] (10th Cir. 2008); Murphy v. Commissioner, 125 T.C. 301, 308 (2005), affd. 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). We do not substitute our judgment for that of Appeals, and we do not prescribe the amount we believe would be an acceptable offer-in-compromise. See Murphy v. Commissioner, supra at 320; see also Fowler v. Commissioner, T.C. Memo. 2004-163 [TC Memo 2004-163].
III. Petitioners' Offers-in-Compromise
A. Overview
A taxpayer may offer to compromise a Federal tax liability. Sec. 7122; see also sec. 6330(c)(2)(A)(iii). The Commissioner has specified guidelines for determining when a taxpayer's offer- in-compromise should be accepted. See sec. 301.7122-1(b), Proced. & Admin Regs. These guidelines permit the Commissioner to accept an offer-in-compromise on the following grounds: “Doubt as to liability”, “Doubt as to collectibility”, and to “Promote effective tax administration”. Id. Petitioners argue that Appeals was required to accept the compromise of their tax liability on the latter two grounds.
B. Doubt as to Collectibility
1. Overview Petitioners argue that Appeals abused its discretion in failing to accept their $50,000 offer-in-compromise on the basis of doubt as to collectibility because their “limited assets do not enable them to pay their tax debt.” We disagree that Appeals abused its discretion.
2. No Abuse of Discretion in Rejecting Petitioners' Doubt as to Collectibility Claim The guidelines for evaluating offers-in-compromise on the basis of doubt as to collectibility are set forth in regulations under section 7122. See , sec. 301.7122-1(b)(2), (c)(2), Proced. & Admin. Regs.; see also IRM pt. 5.8.4.4 (Sept. 1, 2005). Under this guidance, the Commissioner may generally compromise a tax liability on the basis of doubt as to collectibility where the taxpayers' assets and income are less than the full liability. See sec. 301.7122-1(b)(2), Proced. & Admin. Regs. An offer-in- compromise based on doubt as to collectibility will be acceptable only if the offer reflects the taxpayer's reasonable collection potential (i.e., the amount less than the full liability that the Commissioner could collect through alternative remedies such as administrative and judicial proceedings). See Murphy v. Commissioner, supra at 309. A taxpayer's reasonable collection potential is determined, in part, using published guidelines that establish national and local allowances for necessary living expenses. Income and assets in excess of those needed for necessary living expenses are treated as available to satisfy Federal income tax liabilities. See IRM exhs. 5.15.1-3, 5.15.1- 8, 5.15.1-9 (Jan. 1, 2005).
Before the hearing, petitioners submitted Form 433-A on which they set forth their income, expenses, assets, and liabilities. Appeals reviewed petitioners' Form 433-A and adjusted petitioners' income, expenses, assets, and liabilities as prescribed by the IRM, determining that $308,285 could reasonably be collected from petitioners. On that basis, Appeals determined that petitioners possessed sufficient assets and income to satisfy in full the subject tax debts owed to the Government. Among the assets included by Appeals in its determination of petitioners' reasonable collection potential was the $92,000 in equity of petitioners' rental property. We find no reason to disturb Appeals' reliance on the rental property equity as an asset available to satisfy petitioners' outstanding tax liabilities. 8
3. No Abuse of Discretion in Respect of the Bank of America Home Equity Line or the Reich Mortgage Petitioners contend that Appeals failed to adjust their net realizable equity to include all encumbrances on the primary residence. We do not agree. Appeals noted in its report that even if petitioners' encumbrances were recognized, the net realizable equity ($183,800) less the encumbrances ($91,667) resulted in $92,133 in equity remaining to satisfy outstandingtax liabilities. 9 Appeals also considered whether the value of the rental property should be further reduced from its original $125,000 value to reflect (i) hurricane damage; and (ii) a generally depressed real estate market in South Florida. Appeals determined that no further adjustment was necessary because the rental property could be either sold or rented and the proceeds from either of those prospects would be sufficient to satisfy petitioners' outstanding tax liabilities.
4. Recalculation of Reasonable Collection Potential
Petitioners ask us to find that respondent should have adjusted their reasonable collection potential for the following items: (1) Bank of America home equity line; (2) Reich mortgage; (3) $3,226 owed to the State of New Jersey; and (4) $5,363 to satisfy Mr. Bartl's unpaid medical expenses. We note further that an additional amount for petitioners to satisfy the outstanding loan of $4,907 on the 2003 Chevrolet should have also been included in the calculation of petitioners' reasonable collection potential. Even if Appeals took into account each of the above-mentioned items, however, petitioners still have $197,198 with which to satisfy their tax liabilities, calculated as follows:
Amount
Net Realizable Equity Value of primary residence (discounted) $100,000 Value of rental property (discounted) 92,000 Value of vehicles (for sale) 480 Less Bank of America primary mortgage (9,604) 1 Less Reich mortgage (41,667) Less Bank of America home equity line (55,000) Total 86,209
Retired Debt Relief 47,445 Future Income Potential 77,040 Miscellaneous Liabilities State of New Jersey liabilities 3,226 Medical expenses 5,363 Balance on 2003 Chevrolet after sale 4,907 Total 13,496
Reasonable Collection Potential Net realizable equity 86,209 Retired debt relief 47,445 Future income potential 77,040 Less miscellaneous adjustments (13,496) Total 197,198 1 Although petitioners contend that respondent should have accounted for the Reich mortgage as $50,000, the mortgage deed only makes petitioners liable for $41,667. We decline to find that respondent should have accounted for any portion of the Reich mortgage in excess of the amount petitioners were personally liable. Accordingly, even if we treat as fact all of petitioners' assertions regarding the value of their assets and the accompanying encumbrances, petitioners will still realize $197,198 with which to satisfy their tax liabilities.
5. Summary of Doubt as to Collectibility Appeals' decision to reject petitioners' $50,000 offer-in- compromise was not arbitrary, capricious, or without a sound basis in fact or law, and it was not abusive or unfair to petitioners. The settlement officer's determination was based on a reasonable application of the guidelines which we decline to call into question. See Speltz v. Commissioner, 124 T.C. 165 (2005), affd. 454 F.3d 782 [98 AFTR 2d 2006-5364] (8th Cir. 2006); Sullivan v. Commissioner, T.C. Memo. 2009-4 [TC Memo 2009-4].
C. Effective Tax Administration
1. Overview The Commissioner may compromise a tax liability for promotion of effective tax administration where: (i) Collection in full, while achievable, would cause the taxpayer economic hardship; or (ii) compelling public policy or equity considerations provide a basis for compromising the liability. See Speltz v. Commissioner, supra at 172-173. Petitioners argue that their physical and psychological frailties coupled with an inability to maintain steady employment required Appeals to compromise their tax liability. We disagree.
2. Economic Hardship
Petitioners argue that Mr. Bartl's stroke and Ms. Feinstein- Bartl's tumors require that their $50,000 offer-in-compromise be accepted or else undue economic hardship will result. To this end, petitioners state that Appeals ignored their medical and psychological issues and that forcing the sale of their rental property would cause petitioners to be “homeless”, turning them into “public charges”. Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., states that economic hardship occurs when a taxpayer is “unable to pay his or her reasonable basic living expenses.” Section 301.7122-1(c)(3), Proced. & Admin. Regs., sets forth factors to consider in evaluating whether collection of a tax liability would cause economic hardship, as well as some illustrative examples. One example involves a taxpayer who provides fulltime care to a dependent child with a serious long-term illness. A second example involves a retired taxpayer who would lack adequate means to pay his basic living expenses were his only asset, a retirement account, to be liquidated. A third example involves a disabled taxpayer with a fixed income and a modest home specially equipped to accommodate his disability, who is unable to borrow against his home because of his disability. See sec. 301.7122-1(c)(3)(iii), Proced. & Admin. Regs. Petitioners' situation is not comparable to that of the taxpayers described in the regulations—they own two homes, four cars, and are easily meeting their basic living expenses. See Speltz v. Commissioner, 454 F.3d at 786. The record is clear that Appeals' settlement officer, in making his determination, took into account petitioners' claims of mental and employment difficulties. We find those claims to be speculative such that Appeals was not required to arbitrarily decrease petitioners' income potential to reflect them. See, e.g., Fargo v. Commissioner, 447 F.3d 706, 710 [97 AFTR 2d 2006-2381] (9th Cir. 2006), affg. T.C. Memo. 2004-13 [TC Memo 2004-13].
As to petitioners' claim that sustaining the lien action against them would turn them into public charges, we note that even after the payment of their tax liabilities, petitioners will have a surplus of approximately $113,443 ($197,198 - $83,755) with which to continue to develop their funds for retirement.
Appeals' analysis took into account, inter alia, petitioners' $83,755 uncontested liability and petitioners' net realizable equity in the rental property of $92,000, an amount that exceeds by a considerable margin petitioners' offer of $50,000. Appeals also examined articles published in South Florida newspapers in determining that Ms. Feinstein-Bartl continued to generate business income despite her contrary contentions. We do not consider Appeals to have abused its discretion by rejecting petitioners' claim that they will suffer economic hardship if required to pay more than their $50,000 offer.
3. Compelling Policy or Equity Considerations
Petitioners argue that their physical and mental illnesses entitle them to forgiveness of their tax liabilities as a matter of equity. However, petitioners present no convincing argument that requiring them to pay more than $50,000 would undermine public confidence that tax laws are being administered fairly. 10 To the contrary, if Appeals accepted petitioners' proposal that they pay less than all of their tax liabilities and of their reasonable collection potential under the facts of this case, then taxpayers in similar situations who lose a job or suffer health issues, but dutifully pay their taxes, might lose confidence in a system that excuses others when they fail to comply. See Sullivan v. Commissioner, supra.
IV. Conclusion Petitioners have not shown that Appeals' rejection of their $50,000 offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law. Accordingly, we hold that Appeals' determination was not an abuse of discretion. In so holding, we express no opinion as to the amount of any compromise that petitioners could or should be required to pay, or that Appeals is required to accept. The only issue before us is whether Appeals abused its discretion in refusing to accept petitioners' specific offer-in-compromise of $50,000. See Speltz v. Commissioner, 124 T.C. at 179-180.
In reaching our decision, we have considered all arguments made, and to the extent that we have not specifically addressed them, we conclude that they are without merit. To reflect the foregoing,
Decision will be entered for respondent.
________________________________________
1
Unless otherwise indicated, section references are to the applicable version of the Internal Revenue Code. Some dollar amounts are rounded.
________________________________________
2
The extent of her medical expenses is not discernible from the record.
________________________________________
3
The first offer initially asserted doubt as to liability as the reason for compromise. On June 26, 2006, respondent received petitioners' revised offer-in-compromise, which removed doubt as to liability as the reason for compromise and substituted doubt as to collectibility and effective tax administration. The original and revised offers were otherwise unchanged. We refer collectively to the first offer dated June 11, 2006, and the revised offer dated June 26, 2006, as the “first offer”.
________________________________________
4
Petitioners support the Reich mortgage with a mortgage deed dated Oct. 18, 2006, which was recorded with Broward County on Oct. 20, 2006. That mortgage calls for monthly payments of $277.78 and a maturity date of Oct. 18, 2021. The mortgage states that it does not bear interest, and the total payments equal $41,667 over the life of the mortgage, which is $8,333 less than the face amount of the mortgage. On Jan. 19, 2007, Ms. Reich drafted a letter to petitioners in which she threatened to foreclose on petitioners' primary residence in repayment of the mortgage. The record does not indicate whether any such foreclosure action was initiated.
________________________________________
5
The sum of individual expenses does not equal the total expenses because of rounding.
________________________________________
6
Mr. Bartl owed $5,970 in past-due medical expenses, but apparently $607 of that debt was forgiven.
________________________________________
7
Appeals apparently located at least seven articles published during January and

ab@irstaxattorney.com (www.irstaxattorney.com) — Fri, 05 Mar 2010 18:32:00 +0000

ADVANCE RELEASE Documents, R.P. Fairlamb, U.S. Tax Court, (Feb. 5, 2010)
Dec. 58,126(M)
Code Sec. 6330, Code Sec. 7122

Collection: Proposed levy: Offer in compromise (OIC): Doubt as to collectibility: Calculation of future income: Abuse of discretion

T.C. Memo. 2010-22

REMINGTON P. FAIRLAMB, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
UNITED STATES TAX COURT. Docket No. 19122-07L. Filed February 4, 2010.
Tony Mankus , for petitioner.

Derek W. Kaczmarek , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Pursuant to section 6330(d) , petitioner seeks judicial review of respondent's determination to proceed with a proposed levy to collect petitioner's unpaid Federal income tax liabilities for 2002, 2003, and 2004. 1 The issue for decision is whether respondent abused his discretion in rejecting petitioner's proposed offer-in-compromise.

FINDINGS OF FACT
The parties have stipulated some facts, which we so find. When he petitioned the Court, petitioner resided in Illinois.

Petitioner, born in 1942, has worked for many years as an independent sales representative in the paint industry. In March 2005 he incorporated his business activities, forming Phoenix Sales & Service, L.L.C. (the LLC), in which he and his wife each owned a 50-percent interest.

Petitioner did not timely file Federal income tax returns for taxable years 1998 through 2004. After making substitutes for returns, on September 13, 2004, respondent assessed petitioner's income taxes for 1998 through 2001. On April 9, 2005, respondent sent petitioner notices of intent to levy with respect to his tax years 1998, 1999, 2000, and 2001. Insofar as the record shows, petitioner submitted no request for a collection due process hearing with respect to these notices.

On or about April 29, 2005, petitioner filed amended Federal income tax returns for the years 1998 through 2002 and original Federal income tax returns for 2003 and 2004. He did not pay the taxes reported on these returns. On October 6, 2005, respondent sent petitioner a Letter 1058, Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing, with regard to petitioner's 2002, 2003, and 2004 income taxes, showing an unpaid balance of $108,486 for these years. 2 On October 14, 2005, petitioner submitted a timely Form 12153, Request for a Collection Due Process Hearing, on which he indicated that enforcement action would create a hardship on him and that he intended to submit an offer-in-compromise.

Petitioner's First Offer-in-Compromise
On December 29, 2005, respondent received from petitioner Form 656, Offer in Compromise (the first offer), offering to pay $150,000 to compromise his Federal income tax liabilities for taxable years 1998 through 2004, which exceeded $400,000. Petitioner proposed to pay $1,389 per month for 108 months. This offer indicated that it was based on doubt as to collectibility; i.e., petitioner represented that he had insufficient assets to pay the full amount of his tax liability. As required, petitioner submitted with the first offer Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, with respect to the LLC.

Respondent accepted petitioner's offer-in-compromise for processing. By letter dated April 25, 2006, however, respondent's offer-in-compromise specialist (the first OIC specialist) rejected the proposed terms of the first offer, determining that any acceptable offer should be at least $372,949, calculated as the sum of $18,755 of total net equity in assets and $354,194 of total future income.

By letter dated May 5, 2006, petitioner's counsel took exception to the determinations made by the first OIC specialist. Petitioner's counsel asserted, among other things, that petitioner was elderly and in poor health and planned to retire by age 70 if his health permitted him to work that long. Petitioner's counsel contended that petitioner's future income should be measured by reference to the 59 months that he said remained until petitioner reached age 70.

By letter dated May 11, 2006, the first OIC specialist agreed that petitioner's future income should be measured by the months remaining until he reached age 70 but asserted that the correct number of these remaining months was 69 rather than 59, as petitioner asserted. Using 69 months of future income, the first OIC specialist lowered the minimum acceptable offer to $149,286, an amount that was slightly less than petitioner's original $150,000 offer. In a phone call with the first OIC specialist, petitioner's counsel indicated that he agreed with most of the recalculations, except he contended that petitioner's future income should be calculated using 67 months instead of 69 months, because it would take about 2 months to have the offer accepted, and that this adjustment would reduce the offer by about $4,000.

Petitioner's Second Offer-in-Compromise
This position was memorialized in petitioner's amended offer-in-compromise (the second offer), which respondent received on May 22, 2006. Petitioner offered to pay $145,433 to compromise his Federal income tax liabilities for taxable years 1998 through 2004. He proposed to pay $16,332 within 30 days of the second offer's acceptance and $1,927 per month for the next 67 months, until he reached age 70. In a report dated May 24, 2006, the first OIC specialist recommended to her group manager that petitioner's second offer be accepted because it represented “the most that can be expected to be paid by this taxpayer” taking into account “Special circumstance[s] due to the taxpayers [sic] age and health”. 3

On June 22, 2006, a different offer-in-compromise specialist (the second OIC specialist) reviewed the second offer and determined that it should be rejected. By letter dated June 28, 2006, the second OIC specialist informed petitioner that, notwithstanding the contrary recommendation of the first OIC specialist, he would recommend that the second offer not be accepted because “it is not in the best interests of the government”. As grounds for this conclusion, the second OIC specialist asserted that petitioner had a long history of not filing and not paying income taxes and had formed the LLC in 2005 to reduce his self-employment taxes. The letter stated that petitioner should make any response within 2 days because the second OIC specialist would be retiring then. By letter dated August 21, 2006, respondent's territory manager formally notified petitioner that the second offer had been rejected because it was determined not to be in the Government's best interests.

In a letter dated September 13, 2006, petitioner's counsel disputed the rejection of the second offer and requested that the case be transferred to respondent's Appeals Office.

Petitioner's Third Offer-in-Compromise
Petitioner's case was assigned to a settlement officer in respondent's Appeals Office. After discussions with petitioner's counsel, the settlement officer indicated by letter dated May 14, 2007, that she had determined petitioner's reasonable collection potential to be $241,356. She indicated that she had calculated petitioner's future income assuming that he would work for 60 more months and retire at age 70. The letter stated that “there are still no guarantees of acceptance since we need the approval of my Territory Manager and Counsel approval.”

Petitioner accepted most of the settlement officer's calculations. On June 12, 2007, respondent received a second amended offer-in-compromise (the third offer) from petitioner that was based on doubt as to collectibility and that proposed to pay $241,356 to compromise his income tax liabilities for taxable years 1998 through 2004. He proposed to pay $4,023 within 30 days of the third offer's acceptance and $4,023 per month for the next 59 months.

The third time was not a charm. By letter dated June 20, 2007, the settlement officer informed petitioner that his third offer had not been approved. Citing provisions of the Internal Revenue Manual (IRM), the letter indicated that petitioner's reasonable collection potential had been recalculated to be $523,958, by projecting his future income over the 107 months asserted to remain in the collection period. The letter proposed that petitioner's liabilities could be resolved in one of two ways: (1) By a long-term deferred offer-in-compromise to pay $4,897 for 107 months; or (2) by a part-payment installment agreement, which would require petitioner to liquidate certain assets and to make monthly payments of $4,053, apparently for 167 months (the 107 months alleged to remain in the collection period plus 5 years), with the possibility that the monthly amount “could be adjusted to a lesser amount when you retire if your income is reduced.”

By letter dated July 2, 2007, petitioner's counsel disagreed with the settlement officer's application of the IRM provisions and requested that the settlement officer and her manager reconsider the third offer.

Notice of Determination
On August 6, 2007, respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, with respect to petitioner's tax years 2002, 2003, and 2004, sustaining the proposed levies for those years (the notice). The notice states in part:

[T]he Appeals Team Manager confirmed that the offer could not be accepted because the offer was a deferred payment offer which is to be paid over the life of the collection statute. Your offer stipulated a payment term of 59 months (your remaining projected work life until retirement) rather than the 107 months remaining on the collection statute. Consequently, your offer is considered a deferred payment offer with special circumstances.

IRM 5.8.11.2(2) states taxpayers can have an offer accepted under Doubt as to Collectibility with special circumstances when their reasonable collection potential is less than their liability, but there are economic hardship factors that would justify accepting the offer for an amount less than the reasonable collection potential. Economic hardship is further defined in IRM 5.8.11.2.(2) as unable to pay reasonable basic living expenses. Since you are able to meet your basic living expenses, economic hardship does not apply to your situation. Therefore, your offer could not be accepted.

* * * * * * *

Offer Discussion and Analysis

Based on the financial data you provided, you are currently unable to pay the entire liability. Therefore an offer-in-compromise based on doubt as to collectibility would initially appear to be a more appropriate and less intrusive means of collection. However, your offer amount does not equal or exceed your Reasonable Collection Potential (RCP) of $523,988.00. Calculation of your RCP in the amount of $523,958.00 was based on Net Realizable Equity (NRE) in assets totaling $90,287.00 and Future Income Potential (FIP) of 433,671.00. For a long term deferred offer, future income is projected over the life of the collection statute.

OPINION
A. Collection Procedures
Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before making a levy on the person's property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. The person may challenge the existence or amount of the underlying tax liability for any period only if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B) ; Sego v. Commissioner , 114 T.C. 604, 609 (2000). Once the Commissioner's Appeals Office issues a notice of determination, the person may seek judicial review in this Court. Sec. 6330(d)(1) .

Because petitioner has not challenged his underlying liability, our review is for abuse of discretion. Sego v. Commissioner , supra at 610. Under this standard of review, the question is whether respondent's rejection of petitioner's offers-in-compromise was arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner , 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006). On brief the parties focus primarily on respondent's rejection of the third and final offer as the precipitating event for the notice. We shall do the same.

B. Offers-in-Compromise
Section 7122(a) authorizes the Secretary to compromise any civil or criminal case arising under the internal revenue laws. 4 The regulations set forth three grounds for compromising a liability: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1(b) , Proced. & Admin. Regs. Petitioner based each of his three offers-in-compromise on doubt as to collectibility.

For purposes of evaluating an offer-in-compromise, doubt as to collectibility exists “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122-1(b)(2) , Proced. & Admin. Regs. An offer-in-compromise based on doubt as to collectibility “will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the Service could collect through other means * * * This amount is the reasonable collection potential of a case.” Rev. Proc. 2003-71 , sec. 4.02(2) , 2003-2 C.B. 517, 517. In some cases, the Commissioner will accept an offer-in-compromise of less than the reasonable collection potential if there are “special circumstances.” Id.

The IRM describes procedures for analyzing a taxpayer's financial condition to determine reasonable collection potential. See IRM pt. 5.8.5 (Sept. 1, 2005). 5 The IRM defines reasonable collection potential as net equity plus future income. IRM pt. 5.8.11.2 (Sept. 1, 2005). “Future income” is defined as “an estimate of the taxpayers [sic] ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.” IRM pt. 5.8.5.5(1). For a deferred payment offer, the general rule is that future income should be projected for “the number of months remaining on the statutory period for collection.” Id. The IRM also instructs the offer-in-compromise examiner to “Consider the taxpayers [sic] overall general situation including such facts as age, health, marital status, number and age of dependents, highest education or occupational training, and work experience.” IRM pt. 5.8.5.5(3). More specifically, the IRM states: “Some situations may warrant placing a different value on future income than current or past income indicates”. IRM pt. 5.8.5.5(5). By way of illustration, the IRM states that if “A taxpayer is elderly, in poor health, or both and the ability to continue working is questionable”, then the offer-in-compromise examiner should “Adjust the amount or number of payments to the expected earnings during the appropriate number of months. Consider special circumstance situations when making any adjustments”. Id.

The IRM also describes procedures for processing offers-in-compromise in the Commissioner's Appeals Office. See IRM pt. 8.23.3 (Oct. 16, 2007). It states: “IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance.” IRM pt. 8.23.3.3(1).

C. Analysis of Respondent's Determination
Respondent's settlement officer followed the just-cited IRM directives in initially recommending that petitioner's third offer be accepted. In determining petitioner's reasonable collection potential, she projected his future income for 60 months, which she noted was his “remaining working life until 70”. She noted in her case activity report:

Determination is made to recommend the offer for acceptance. Tp [taxpayer] owns no realty and only has minimal personal assets. His most important asset is his income as an independent paint sales manufacturing representative. This income is the source that will fund the offer of $241,356.00. Distraint action against this income could be a possibility but would not provide any more funds into the Treasury than is provided via monthly payments of $4,022.60 via the offer. Also continued levy could result in tp's dismissal. If the taxpayer maintains the offer, he will liquidate the back taxes and remain compliant with current taxes as well. Tp is now 65 years old. The older he becomes, the less likely the Service is to collect the liability or enforce collection.

Ultimately, the settlement officer was overruled by her superiors, and petitioner's third offer was rejected. The reasons articulated in the notice are somewhat cryptic. The notice cites IRM pt. 5.8.11.2(2) for the proposition that “[t]axpayers can have an offer accepted under Doubt as to Collectibility with special circumstances when their reasonable collection potential is less than their liability, but there are economic hardship factors that would justify accepting the offer for an amount less than the reasonable collection potential.” Applying this standard, the notice concludes that petitioner did not qualify for an offer-in-compromise based on doubt as to collectibility with special circumstances because “you are able to meet your basic living expenses”.

This rationale is deficient for at least two reasons. First, the notice misstates IRM pt. 5.8.11.2(2), which states that an offer-in-compromise based on doubt as to collectibility with special circumstances may be accepted where there are “economic hardship or public policy/equity factors that would justify accepting the offer”. (Emphasis added.) More fundamentally, according to the IRM an offer-in-compromise is to be evaluated as based on doubt as to collectibility with special circumstances (as opposed to plain-vanilla doubt as to collectibility) only if it is “for an amount less than the reasonable collection potential”. Id.

Petitioner's third offer was for the exact amount that the settlement officer had initially calculated to be his reasonable collection potential. Addressing this issue obliquely, the notice states (without citation of authority): “For a long term deferred offer, future income is projected over the life of the collection statute.” The notice fails to take into account, however, IRM pt. 5.8.5.5(5), which, as previously discussed, directs that in computing a taxpayer's future income, adjustments should be made for a taxpayer who is elderly or in poor health and whose ability to continue working is questionable. Following this directive, the settlement officer initially calculated petitioner's future income under the assumption that he would work until age 70. There is no indication in the record that any determination was ever made that petitioner would be able to work beyond age 70. Rather, the record strongly suggests that the determination in the notice was based on a misapplication of the IRM directives.

The Commissioner's internal procedures, as reflected in the IRM, do not have the force of law, and deviation from them does not necessarily render the Commissioner's action invalid. Vallone v. Commissioner , 88 T.C. 794, 807-808 (1987). Nevertheless, the determination in this case, which was based wholly on misapplication of internal procedures, cannot be said to have a sound basis in law or fact.

On brief respondent argues that the offer-in-compromise was properly rejected because of petitioner's alleged “long history of non-compliance and his affirmative tax avoidance actions”. 6 In making this argument, respondent cites section 301.7122-1(b)(3)(iii) , Proced. & Admin. Regs., which provides: “No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.” (Emphasis added.) Because petitioner's various offers were all based on doubt as to collectibility rather than effective tax administration, this regulatory provision is not, by its terms, applicable. 7 In any event, we do not believe that respondent's ultimate determination, as explained in the notice, can fairly be construed as predicated on this rationale. In initially recommending petitioner's third offer, the settlement officer expressed no concern about this issue, and there is no indication in the record that this consideration played any role in the decision to overturn the settlement officer's initial recommendation.

In the light of the inadequacy of the reasons given in the notice for rejecting petitioner's third offer, which the settlement officer, with seemingly more soundly reasoned analysis, had initially recommended accepting, we are unable to conclude whether it was an abuse of discretion for respondent to determine to proceed with the proposed collection action for petitioner's 2002, 2003, and 2004 tax liabilities. We will remand the case to respondent's Appeals Office for further consideration and clarification and to allow petitioner, if he wishes, to propose a new collection alternative.

D. Evidentiary Issues
At trial the Court received into evidence a number of petitioner's exhibits over respondent's objection that they are outside the administrative record. On similar grounds respondent objected to petitioner's testimony and, in a motion in limine, to the testimony of petitioner's witness, a business associate. On brief respondent has renewed his objections.

Petitioner suggests that the disputed documents should be considered part of the administrative record because most of them are IRS documents and the others were sent to petitioner by the IRS. 8 Petitioner complains that respondent evinces a double standard in that, while insisting that judicial review should be limited to the administrative record, respondent seeks to raise in these proceedings for the first time issues and arguments that were never raised in the administrative hearings. 9 Petitioner states on brief: “The Petitioner cannot help but further wonder whether Respondent's strenuous efforts to limit the judicial review to the administrative file is not an effort to generally hamstring the tax courts and the taxpayers in order to avoid having its procedural missteps brought to light.”

The Tax Court does not follow the administrative record rule. See Robinette v. Commissioner , 123 T.C. 85 (2004), revd. 439 F.3d 455 (8th Cir. 2006). In any event, in reaching our decision we have not relied upon any of the disputed documents or their contents or any of the trial testimony. The portions of the record as to which respondent has raised no objection are sufficient to sustain our decision.

To reflect the foregoing,

An appropriate order will be issued .

Footnotes

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar.

2 In addition to proposing the levy, on Oct. 24, 2005, respondent filed a notice of Federal tax lien with respect to petitioner's tax years 2002, 2003, and 2004. Petitioner did not file a Form 12153, Request for a Collection Due Process Hearing, in response to this notice of Federal tax lien, and it is not at issue in this proceeding.

3 The report indicates that petitioner had provided verification from two physicians regarding his health and states that petitioner “has coronary artery disease, hypertension, hyperlipidemia and problems with recurring sinusitis and pneumonia.”

4 Sec. 6331(k) generally prohibits the IRS from making a levy on a taxpayer's property while an offer-in-compromise is pending with the IRS. An offer-in-compromise becomes pending when it is accepted for processing. Rev. Proc. 2003-71 , sec. 5.01 , 2003-2 C.B. 517, 518.

5 The parties have stipulated the relevant provisions of the Internal Revenue Manual (IRM) referenced in this opinion.

6 Petitioner contests these assertions as unfounded in the record.

7 In Oman v. Commissioner , T.C. Memo. 2006-231, this Court found that IRS directives as contained in IRM pt. 5.8.7.6(5) (Nov. 15, 2004) and policy statement P-5-100 (Jan. 30, 1992) were inconsistent as to whether doubt as to future compliance is a sufficient reason to reject an offer-in compromise. The Court remanded for further consideration and clarification the Commissioner's determination rejecting on this ground the taxpayer's proposed offer-in-compromise based on doubt as to collectibility.

8 Evaluation of the parties' competing claims in this regard is complicated by the fact that respondent has not offered into evidence a certified copy of the entire administrative record. Although the parties have stipulated numerous documents that might properly appear in an administrative record, they have not filed with the Court the entire administrative record, stipulated as to its genuineness. Cf. Rule 217 (describing procedures for disposing of a declaratory judgment action on the administrative record). From the absence of certain documents cross-referenced in the stipulated exhibits, it is apparent that the entire administrative record is not in evidence.

9 For instance, on brief respondent disputes whether petitioner's health would necessitate his retirement by age 70. Insofar as the record shows, however, respondent's officers who examined petitioner's offers-in-compromise were satisfied with the documentary evidence petitioner submitted in this regard, and the notice of determination does not suggest that this issue played any role in the ultimate rejection of petitioner's offer-in-compromise.

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METADATA
title R.P. Fairlamb
search-title Case: ADVANCE RELEASE Documents, R.P. Fairlamb, U.S. Tax Court, (Feb. 5, 2010)
primary-class case-law/case
wk-da number WKUS_TAL_1432
CCH PubVol adc01
language http://psi.oasis-open.org/iso/639/#eng
region United States [http://wk-us.com/meta/regions/#US]
publisher http://wk-us.com/meta/publishers/#CCH
publishing-status new
publishing-dates available-date:
modified-date:
revised-date:
sort-date: 2010-02-05

key-phrase Collection
key-phrase Proposed levy
key-phrase Offer in compromise (OIC)
key-phrase Doubt as to collectibility
key-phrase Calculation of future income
key-phrase Abuse of discretion
document-transformation-history SOURCE-CRC: 931114030
G2I-VERSION: Group2Interchange-RELEASE-03-14-0012
G2I-TRANSFORMATION-DATE: 2010-02-26
I2A-VERSION: I2A-03-15-0006
I2A-TRANSFORMATION-DATE: 2010-02-26

wkcase-law:metadata parties in-re:R.P. Fairlamb

case-abbrev-name R.P. Fairlamb
court U.S. Tax Court [http://wk-us.com/meta/courts/#US-FJ-TAX]
document-date , precision: day
2010-02-05

ab@irstaxattorney.com (www.irstaxattorney.com) — Thu, 04 Mar 2010 13:48:00 +0000

BORITZ v. U.S., Cite as 105 AFTR 2d 2010-XXXX, 02/23/2010
________________________________________
PETER BORITZ, Plaintiff, v. UNITED STATES OF AMERICA and INTERNAL REVENUE SERVICE, Defendants.
Case Information:
Code Sec(s):
Court Name: UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA,
Docket No.: Civil Action No. 09-542 (CKK),
Date Decided: 02/23/2010.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA,
MEMORANDUM OPINION
Judge: COLLEEN KOLLAR-KOTELLY United States District Judge
Pro se Plaintiff Peter Boritz brings this action against the United States and the Internal Revenue Service (“IRS,” collectively with the United States, “Defendants”) 1 regarding allegedly unlawful tax collection and assessment activity. Plaintiff complains that Defendants have wrongfully held him liable for certain unpaid tax liabilities for tax years 1994 and 1995 and have issued a procedurally improper Notice of Federal Tax Lien and Notice of Levy on his property. He primarily seeks relief pursuant to the Taxpayer Bill of Rights, 26 U.S.C. §§ 7432 and 7433, which permit a taxpayer to bring a suit for damages against the United States for failure to release a lien and for certain unauthorized collection actions, respectively. In addition, Plaintiff asserts a claim for declaratory and injunctive relief pursuant to the Administrative Procedures Act, (“APA”), 5 U.S.C. § 706, and seeks to quiet title to the property that is the subject of the Notice of Federal Tax Lien and the Notice of Levy pursuant to 28 U.S.C. § 2410.
Currently pending before the Court is Defendants' [7] Motion to Dismiss or in the Alternative Motion for Summary Judgment. Defendants argue that the United States is the only proper defendant in this action and that Plaintiff's claims should be dismissed under Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6) or alternatively that Defendants should be granted summary judgment pursuant to Federal Rule of Civil Procedure 56. Upon consideration of Defendants' motion and the parties' responsive briefings as well as attachments thereto, as may be appropriate, the relevant case law and statutory authority, and the record of this case as a whole, the Court GRANTS Defendants' [7] Motion to Dismiss or in the Alternative Motion for Summary Judgment, for the reasons set forth below.
Specifically, the Court holds as follows. First, Defendants' Motion to Dismiss Plaintiff's claims against the IRS is GRANTED as conceded. Second, Defendants' Motion to Dismiss Count I (quiet title action pursuant to 28 U.S.C. § 2410) and Count IX (APA) for lack of jurisdiction pursuant to Rule 12(b)(1) is GRANTED. Third, Defendants' Motion to Dismiss Count II (failure to issue notice of deficiency in violation of §§ 6212 and 6213), Count III (failure to make assessment in violation of § 6203), Count IV (failure to make assessment in violation of § 6303), Count V (failure to release lien in violation of § 7342), Count VII (unauthorized disclosure in violation of § 6103(b)(6)), and Count VIII (failure to issue certificate of release in violation of § 6325), for failure to state a claim pursuant to Rule 12(b)(6) is GRANTED. Fourth and finally, Defendants' Motion for Summary Judgment as to Count VI (failure to issue notice of levy in violation of § 6331(d)) is GRANTED.
I. BACKGROUND
Plaintiff filed his Complaint on March 19, 2009. Plaintiff's Complaint represents one of dozens of lawsuits brought in this jurisdiction by tax protestors — allegedly proceedingpro se — asserting a variety of forms of misconduct by the IRS. See Pollinger v. United States, 539 F. Supp. 2d 242, 245 [101 AFTR 2d 2008-1383] & n. 3 (D.D.C. 2008) (citing cases). Unlike the majority of the complaints in those other actions, however, Plaintiff's Complaint includes at least some particularized facts specifically pertaining to Plaintiff Peter Boritz. See generally Compl.
Although the allegations contained in Plaintiff's Complaint are somewhat nebulous in nature, Plaintiff appears to primarily complain about a Notice of Levy and a Notice of Federal Tax Lien issued by the IRS for the tax years 2004 and 2005. The former was issued on November 9, 2007, by the IRS against Plaintiff's bank account in the amount of $12,558.73 for tax years 1994 and 1995.Id. ¶ 8 & Ex. D (IRS Notice of Levy). The latter was filed shortly thereafter on November 13, 2007, with the County Auditor in King County, Washington in the amount of $21,485.89 for the tax years 1994 and 1995. Id. ¶ 9 & Ex. C (IRS Notice of Federal Tax Lien).
Plaintiff now seeks to challenge the validity of both the Notice of Levy and Notice of Federal Tax Lien. At heart, Plaintiff disputes the underlying tax assessment issued against him for tax years 1994 and 1995, alleging that he “is the sole owner of his physical and mental labor” and that he “does NOT owe the UNITED STATES, or any employees working on its behalf, the fruit of his labor property.” Id. ¶¶ 2, 6 (emphasis in original). Plaintiff further claims that he has “filed all returns required to be filed for tax years 1994 and 1995 and fully satisfied and paid allincome taxes Plaintiff was made liable for and required to pay regarding the years in dispute.”Id. ¶ 7 (emphasis in original).
Despite Plaintiff's unequivocal denial of any substantive liability for tax years 1994 and 1995 and his clear attack on the validity of the underlying tax assessments, Plaintiff has — in an apparent effort to avoid many of the same pitfalls that have befallen previous tax protester lawsuits — attempted to frame his lawsuit as asserting only procedural, rather than substantive, challenges to the Notice of Levy and Notice of Federal Tax Lien. Specifically, Plaintiff asserts the following nine causes of action in his Complaint:
• Count I: seeks to quiet title to the property that is the subject of the Notice of Levy and Notice of Federal Tax Lien pursuant to 28 U.S.C. § 2410;
• Count II: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to send a notice of deficiency to Plaintiff's last known address prior to issuance of the Notice of Levy in violation of 26 U.S.C. §§ 6212(a) and 6213(a);
• Count III: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to make a timely assessment in violation of 26 U.S.C. § 6203;
• Count IV: alleges a claim for monetary damages pursuant to 26 § U.S.C. § 7433 based upon Defendants' alleged failure to provide a timely notice of assessment in violation of 26 U.S.C. § 6303;
• Count V: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7432 based upon Defendants' alleged failure to release the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6325(a)(1);
• Count VI: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to serve him with a notice of levy in violation of 26 U.S.C. § 6331(d)(2);
• Count VII: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' allegedly unauthorized public disclosure of his social security number on the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6103(b)(6);
• Count VIII: alleges a claim for monetary damages pursuant to 26 U.S.C. § 7433 based upon Defendants' alleged failure to issue a certificate of release with respect to the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6325(a)(1); and
• Count IX: alleges that Defendants acted in excess of their statutory authority and seeks non-monetary declaratory and injunctive relief pursuant to the Administrative Procedures Act, 5 U.S.C. § 706(2).
See generally Compl.
As set forth in his Complaint, Plaintiff states that he previously submitted an administrative claim with the IRS and filed this lawsuit only after exhausting his administrative remedies. See id. ¶¶ 11–13 & Ex. A. Now before the Court is Defendants' Motion to Dismiss or in the Alternative Motion for Summary Judgment. See Defs.' Mot., Docket No. [7]. Plaintiff has filed his opposition to Defendants' Motion, see Pl.'s Opp'n, Docket No. [10], and Defendants have filed their reply,see Defs.' Reply, Docket No. [11]. Briefing on Defendants' Motion is therefore complete and the issues are ripe for the Court's resolution.
II. LEGAL STANDARDS
Defendants have moved for dismissal of Plaintiff's Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and/or 12(b)(6) and have also moved in the alternative for summary judgment pursuant to Federal Rule of Civil Procedure 56. Insofar as Defendants have moved for dismissal of certain claims under Rule 12(b)(1), the Court may consider a complaint “supplemented by undisputed facts evidenced in the record or the complaint supplemented by undisputed facts plus the court's resolution of disputed facts.”” Coalition for Underground Expansion v. Mineta, 333 F.3d 193, 198 (D.C. Cir. 2003) (quoting Herbert v. Nat'l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992)). To the extent, however, that Defendants have moved to dismissed certain claims for failure to state a claim under Rule 12(b)(6), the Court is limited to considering the facts alleged in the complaint, any documents attached to or incorporated in the complaint, matters of which the court may take judicial notice, and matters of public record.See E.E.O.C. v. St. Francis Xavier Parochial Sch. , 117 F.3d 621, 624 (D.C. Cir. 1997).
In this case, Defendants have attached five exhibits to their motion — namely, the June 10, 1998 Order and Decision of the United States Tax Court in Boritz v. Commissioner of Internal Revenue and four Certificates of Official Record (Form 3430) relating to Plaintiff concerning tax years 1994 and 1995. See Defs.' Mot. at Exs. A–E. All of the attached exhibits may be appropriately considered by the Court for purposes of Defendants' Motion to Dismiss brought under Rule 12(b)(1). In addition, while the June 10, 1998 Order and Decision is a matter of public record and therefore may be considered by the Court in ruling on Defendants' Motion to Dismiss under Rule 12(b)(6), the Certificates of Official Record are not incorporated in or referenced by the Complaint and are therefore arguably outside the scope of the pleadings in this matter; as such, they may not be considered in evaluating Defendants' Motion to Dismiss brought under Rule 12(b)(6). Accordingly, to the extent the parties have relied upon those materials in moving for dismissal of Plaintiff's claims, the Court must construe Defendants' motion as a Motion for Summary Judgment pursuant to Rule 56. See Fed. R. Civ. P. 12(d) (“If, on a motion under Rule 12(b)(6) ..., matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56. All parties must be given a reasonable opportunity to present all the material that is pertinent to the motion.”). 2
Here, Defendants have moved to dismiss Plaintiff's claims against the IRS as well as Counts I (quiet title action pursuant to 28 U.S.C. § 2410) and IX (APA) of his Complaint for lack of jurisdiction under Rule 12(b)(1). As such, the Court may consider all attached exhibits in evaluating Defendants' Motion to Dismiss these claims pursuant to Rule 12(b)(1). With respect to the remaining claims, however, Defendants have moved to dismiss for failure to state a claim, or in the alternative, for summary judgment; accordingly, to the extent the parties rely upon and the Court does not exclude from consideration the Certificates of Official Record, the motion must be construed as a motion for summary judgment. In this case, the parties have relied upon and the Court does not exclude from consideration the Certificates in resolving Defendants' motion only with respect to Count VI (failure to issue notice of levy in violation of § 6331(d)). As such, the Court must construe Defendants' motion as to Count VI as a Motion for Summary Judgment pursuant to Rule 56. With respect to the remaining counts, however, the Court finds that the attached Certificates of Official Record are neither relied upon by the parties nor relevant to resolution of Defendants' motion. The Court therefore treats Defendants' motion on these counts — namely, Counts II (failure to issue notice of deficiency in violation of §§ 6212 and 6213), III (failure to make assessment in violation of § 6203), IV (failure to make assessment in violation of § 6303), V (failure to release lien in violation of § 7342), VII (unauthorized disclosure in violation of § 6103(b)(6)), and VIII (failure to issue certificate of release in violation of § 6325) — as a Motion to Dismiss for failure to state a claim pursuant to Rule 12(b)(6).
With this framework in place, the Court shall set forth the applicable legal standards relating to Defendants' Motion to Dismiss pursuant to Rule 12(b)(1) and Rule 12(b)(6), or in the alternative, Motion for Summary Judgment pursuant to Rule 56.
A. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(1)
A court must dismiss a case when it lacks subject matter jurisdiction pursuant to Rule 12(b)(1). As indicated above, the Court may “consider the complaint supplemented by undisputed facts evidenced in the record, or the complaint supplemented by undisputed facts plus the court's resolution of disputed facts.” Coalition for Underground Expansion, 333 F.3d at 198 (citations omitted); see also Jerome Stevens Pharm., Inc. v. Food & Drug Admin., 402 F.3d 1249, 1253 (D.C. Cir. 2005) (“[T]he district court may consider materials outside the pleadings in deciding whether to grant a motion to dismiss for lack of jurisdiction.”);Vanover v. Hantman , 77 F. Supp. 2d 91, 98 (D.D.C. 1999), aff'd, 38 F. App'x 4 (D.C. Cir. 2002) (“[W]here a document is referred to in the complaint and is central to plaintiff's claim, such a document attached to the motion papers may be considered without converting the motion to one for summary judgment.”) (citing Greenberg v. The Life Ins. Co. of Va., 177 F.3d 507, 514 (6th Cir. 1999)). “At the motion to dismiss stage, counseled complaints, as well as pro se complaints, are to be construed with sufficient liberality to afford all possible inferences favorable to the pleader on allegations of fact.” Settles v. U.S. Parole Comm'n, 429 F.3d 1098, 1106 (D.C. Cir. 2005). In spite of the favorable inferences that a plaintiff receives on a motion to dismiss, it remains the plaintiff's burden to prove subject matter jurisdiction by a preponderance of the evidence.Am. Farm Bureau v. Envtl. Prot. Agency , 121 F. Supp. 2d 84, 90 (D.D.C. 2000).
B. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6)
The Federal Rules of Civil Procedure require that a complaint contain ““a short and plain statement of the claim showing that the pleader is entitled to relief,” in order to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.”” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)); accord Erickson v. Pardus, 551 U.S. 89, 93 (2007) (per curiam). Although “detailed factual allegations” are not necessary to withstand a Rule 12(b)(6) motion to dismiss, to provide the “grounds” of “entitle[ment] to relief,” a plaintiff must furnish “more than labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Id. at 1964–65; see also Papasan v. Allain, 478 U.S. 265, 286 (1986). Instead, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”Ashcroft v. Iqbal , __ U.S. __, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556).
In evaluating a Rule 12(b)(6) motion to dismiss for failure to state a claim, the court must construe the complaint in a light most favorable to the plaintiff and must accept as true all reasonable factual inferences drawn from well-pleaded factual allegations. In re United Mine Workers of Am. Employee Benefit Plans Litig., 854 F.Supp. 914, 915 (D.D.C. 1994);see also Schuler v. United States , 617 F.2d 605, 608 (D.C. Cir. 1979) (“The complaint must be “liberally construed in favor of the plaintiff,” who must be granted the benefit of all inferences that can be derived from the facts alleged.”). However, as the Supreme Court recently made clear, a plaintiff must provide more than just “a sheer possibility that a defendant has acted unlawfully.” Iqbal, 129 S.Ct. at 1950. Where the well-pleaded facts set forth in the complaint do not permit a court, drawing on its judicial experience and common sense, to infer more than the “mere possibility of misconduct,” the complaint has not shown that the pleader is entitled to relief. Id. at 1950.
C. Motion for Summary Judgment Pursuant to Federal Rule of Civil Procedure 56
Pursuant to Federal Rule of Civil Procedure 56, a party is entitled to summary judgment “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see also Tao v. Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994). Under the summary judgment standard, the moving party bears the “initial responsibility of informing the district court of the basis for [its] motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits which [it] believe[s] demonstrate the absence of a genuine issue of material fact.”Celotex Corp. v. Catrett , 477 U.S. 317, 323 (1986). In response, the non-moving party must “go beyond the pleadings and by [its] own affidavits, or depositions, answers to interrogatories, and admissions on file, “designate” specific facts showing that there is a genuine issue for trial.” Id. at 324 (internal citations omitted).
Although a court should draw all inferences from the supporting records submitted by the nonmoving party, the mere existence of a factual dispute, by itself, is insufficient to bar summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). To be material, the factual assertion must be capable of affecting the substantive outcome of the litigation; to be genuine, the issue must be supported by sufficient admissible evidence that a reasonable trier-of-fact could find for the nonmoving party. Laningham v. U.S. Navy, 813 F.2d 1236, 1242–43 (D.C. Cir. 1987);Liberty Lobby , 477 U.S. at 251 (the court must determine “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law”). “If the evidence is merely colorable, or is not sufficiently probative, summary judgment may be granted.” Liberty Lobby, 477 U.S. at 249–50 (internal citations omitted). “Mere allegations or denials in the adverse party's pleadings are insufficient to defeat an otherwise proper motion for summary judgment.” Williams v. Callaghan, 938 F. Supp. 46, 49 (D.D.C. 1996). The adverse party must do more than simply “show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Instead, while the movant bears the initial responsibility of identifying those portions of the record that demonstrate the absence of a genuine issue of material fact, the burden shifts to the non-movant to “come forward with “specific facts showing that there is agenuine issue for trial .”” Id. at 587 (citing Fed. R. Civ. P. 56(e)) (emphasis in original).
III. LEGAL DISCUSSION

A. Defendants' Motion to Dismiss Pursuant to Rule 12(b)(1)
The Court turns first to consider Defendants' Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1), which is directed towards Plaintiff's claims against the IRS as well as Count I (quiet title action pursuant to 28 U.S.C. § 2410) and Count IX (APA) of Plaintiff's Complaint.

1. Plaintiff's Claims Against Defendant IRS

As indicated above, Plaintiff has named as Defendants in this action both the United States and the IRS. Defendants contend that the United States is the only proper defendant in this action and have therefore moved to dismiss Plaintiff's claims against the IRS for lack of jurisdiction. Although Plaintiff filed an opposition to Defendants' motion, he failed to address Defendants' specific argument that the IRS must be dismissed as a defendant in this case. See generally Pl.'s Opp'n. “It is well understood in this Circuit that when a plaintiff files an opposition to a dispositive motion and addresses only certain arguments raised by the defendant, a court may treat those arguments that the plaintiff failed to address as conceded.” Hopkins v. Women's Div., General Bd. of Global Ministries, 284 F. Supp. 2d 15, 25 (D.D.C. 2003),aff'd 98 Fed. Appx. 8 (D.C. Cir. 2004); see also Franklin v. Potter, 600 F. Supp. 2d 38, 60 (D.D.C. 2009) (treating defendant's argument in motion for summary judgment as conceded where plaintiff failed to address it in his response). The Court previously advised Plaintiff that his failure to respond to the Defendants' motion may result in the Court treating the motion as conceded. See 8/22/09 Order, Docket No. [8]. Accordingly, because Plaintiff had the opportunity to respond to the Defendants' argument but did not do so, the Court shall construe his failure as a concession with respect to Defendants' request to dismiss the IRS as a defendant in this action. See Hopkins, 284 F. Supp. 2d at 25. Defendants' Motion to Dismiss shall therefore be GRANTED as CONCEDED insofar as Defendants move to dismiss Plaintiff's claims against the IRS. 3

2. Count I of Plaintiff's Complaint

Count I of Plaintiff's Complaint purports to bring a quiet title action pursuant to 28 U.S.C. § 2410, which provides that the “United States may be named a party in any civil action or suit in any district court ... having jurisdiction of the subject matter ... to quiet title to ... real or personal property on which the United States has or claims a mortgage or other lien.” 28 U.S.C. § 2410(a)(1). Defendants argue that, although Plaintiff has attempted to frame his claim as challenging only the procedural deficiencies of the lien and levy at issue, it is apparent that Plaintiff is in fact attempting to use section 2410 as a means to challenge the validity of the underlying tax assessments and the Court therefore lacks jurisdiction to entertain his claim. Defs.' Mot. at 5; Defs.' Reply at 2–3. The Court agrees.

“It is elementary that the United States, as sovereign, is immune from suit save as it consents to be sued, and the terms of its consent to be sued in any court define that court's jurisdiction to entertain that suit.” United States v. Mitchell, 445 U.S. 535, 538 (1980) (citation omitted). Moreover, “a waiver of sovereign immunity “cannot be implied but must be unequivocally expressed.””Id. (citing United States v. King, 395 U.S. 1, 4 [23 AFTR 2d 69-1358] (1969)). Plaintiff argues that section 2410 acts as a waiver of sovereign immunity for his quiet title claim.See Pl.'s Opp'n at 5–8. 4 Plaintiff, however, is incorrect. Section 2410 “constitutes a waiver of sovereign immunity to a suit brought by a taxpayer against the United States which challenges the validity of a federal tax lien ... [but only] so long as the taxpayer refrains from contesting the merits of the underlying tax assessment itself.” Aqua Bar & Lounge v. U.S. Dep't of Treasury, 539 F.2d 935, 939–40 [38 AFTR 2d 76-5466] (3d Cir. 1976) (emphasis added); see also Pollinger, 539 F. Supp. 2d at 251. Indeed, “[t]he principle that a taxpayer cannot use section 2410(a) to challenge the extent of, or existence of, substantive tax liability is well-settled.” Robinson v. United States, 920 F.2d 1157, 1161 [67 AFTR 2d 91-393] (3d Cir. 1990). Despite Plaintiff's efforts to characterize his quiet title action as challenging only certain alleged procedural deficiencies, it is abundantly clear that his arguments regarding such alleged errors are premised upon his substantive challenge to the merits and validity of the tax assessment underlying the Notice of Federal Tax Lien and Notice of Levy issued. See Compl.¶ 7 (alleging that he “filed all returns required to be filed for tax years 1994 and 1995 and fully satisfied and paid all income taxes Plaintiff was made liable for and required to pay regarding the years in dispute”); see also id. ¶¶ 2–6. His principal concern is with the assessments — not with the actual tax liens. At heart, he alleges that the Notice of Federal Tax Lien and Notice of Levy are procedurally deficient only because he does not owe the claimed underlying taxes and/or no assessment ever took place, such that “Defendants have no estate, title, claim, lien, or superior claim in the Plaintiff's personal property or any portion thereof.” Id. ¶ 26. Accordingly, as Plaintiff has not “refrain[ed] from contesting the merits of the underlying tax assessment itself,” this Court lacks jurisdiction over his quiet title action. Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants seek dismissal of Count I of Plaintiff's Complaint for lack of jurisdiction pursuant to Rule 12(b)(1).

3. Count IX of Plaintiff's Complaint

In Count IX of the Complaint, Plaintiff alleges that Defendants acted in excess of their statutory authority and seeks non-monetary declaratory and injunctive relief pursuant to the section 706(2) of the APA. Compl. ¶¶ 58–64. As Defendants correctly point out, however, Plaintiff cannot pursue a claim for declaratory or injunctive relief under the APA based upon alleged wrongful tax assessment or collection actions. First, to the extent Plaintiff seeks injunctive relief, his claim is barred by the Anti-Injunction Act, 26 U.S.C. § 7421(a), which is part of the Tax Code and which “withdraw[s] jurisdiction from the state and federal courts to entertain suits seeking injunctions prohibiting the collection of federal taxes.” Enochs v. Williams Packing & Nav. Co., 370 U.S. 1, 5 [9 AFTR 2d 1594] (1962); see also Ross v. United States, 460 F. Supp. 2d 139, 149 [98 AFTR 2d 2006-7712] (D.D.C. 2006) (finding plaintiff's claim for injunctive relief under the APA barred by the Anti-Injunction Act where claim based on assessment or collection of taxes). Although the Supreme Court has recognized a limited exception to this rule, Plaintiff has not shown that the exception applies in this case. In Enochs, the Supreme Court held that the a suit for injunction may be maintained “[o]nly if it is [] apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim .... Otherwise, the District Court is without jurisdiction, and the complaint must be dismissed.” 370 U.S. at 7. As is selfevident from the Court's rulings herein granting Defendants' motion, it is clear that the limited exception recognized in Enochs is inapplicable to the case at hand.

Second, Plaintiff's claim for declaratory relief is barred by the Declaratory Judgment Act, 28 U.S.C. § 2201, which authorizes a court of the United States to “declare the rights and other legal relations of any interested party,” but expressly excludes cases “with respect to Federal taxes,” subject to one exception not applicable here. See Bob Jones Univ. v. Simon, 416 U.S. 725, 732–33 [33 AFTR 2d 74-1279] n. 7 (1974) (“The congressional antipathy for premature interference with the assessment or collection of any federal tax also extends to declaratory judgments.... [T]he federal tax exception to the Declaratory Judgment Act is at least as broad as the Anti-Injunction Act.”); see also McGuirl v. United States, 360 F. Supp. 2d 129, 132 [93 AFTR 2d 2004-1922] (D.D.C. 2004) (finding Plaintiff's claim under the APA for declaratory relief based upon the assessment or collection of taxes was barred by Declaratory Judgment Act), aff'd, 167 Fed. Appx. 808 (D.C. Cir. 2005). For these reasons, the D.C. Circuit has made clear that “Congress has preserved the immunity of the United States from declaratory and injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the IRC.” Murphy v. IRS , 493 F.3d 170, 174 [100 AFTR 2d 2007-5075] (D.C. Cir. 2007) (“Congress has preserved the immunity of the United States from declaratory and injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the [IRC].”). Accordingly, Defendants' Motion to Dismiss is GRANTED insofar as Defendants move to dismiss Count IX of Plaintiff's Complaint for lack of jurisdiction pursuant to Rule 12(b)(1).

B. Defendants' Motion to Dismiss Pursuant to Rule 12(b)(6)
The Court turns next to consider Defendants' Motion to Dismiss for failure to state a claim pursuant to Rule 12(b)(6), which as construed by the Court is directed towards Count II, which alleges a failure to issue a notice of deficiency; Counts III and IV, which allege a failure to assess taxes and provide assessment notices; Count V and VIII, which allege a failure to release a lien and to issue a certificate of release; and Count VII, which alleges unauthorized disclosure of Plaintiff's social security number.

1. Count II of Plaintiff's Complaint
Count II of Plaintiff's Complaint alleges that Defendants failed to send a notice of deficiency to Plaintiff's last known address before issuing the Notice of Levy thereby violating 26 U.S.C. §§ 6212(a) and 6213(a). Plaintiff seeks damages pursuant to section 7433 based upon this alleged violation. Compl. ¶¶ 28–31. Section 6212(a) “authorize[s]” the IRS, upon determining the existence of a tax deficiency, “to send notice of such deficiency to the taxpayer by certified mail or registered mail.” 26 U.S.C. § 6212(a). Such notice “shall be sufficient,” “if mailed to the taxpayer at his last known address ... even if such taxpayer is deceased or under a legal disability.” Id. § 6212(b). The taxpayer has 90 days after the notice is mailed in which to “file a petition with the Tax Court for a redetermination of the deficiency.” Id. § 6213(b). Pursuant to section 6213(a), the IRS is precluded from imposing any “assessment of a deficiency” or from making any “levy or proceeding in court for its collection” until the “notice [of deficiency] has been mailed to the taxpayer, []or until the expiration of [the] 90-day ... period, ... []or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.” Id.

“The purpose of a notice of deficiency is, first, to notify the taxpayer that a deficiency has been determined against him, and second, to afford him an opportunity to challenge the determination in tax court.” Kiley v. Kurtz, 533 F. Supp. 465, 467–68 [50 AFTR 2d 82-5501] (D. Colo. 1982) (citingBarnes v. Commissioner of Internal Revenue , 408 F.2d 65, 68 [23 AFTR 2d 69-895] (7th Cir. 1969)). As the Ninth Circuit has observed,

Reading the interrelated sections of the Code as an integrated whole, it is apparent that the legislative plan contemplates that actual notice of the deficiency should be given where such can reasonably be achieved and that the mailing authorized by § 6212(a) is a means to that end.

Clodfelter v. Commissioner of Internal Revenue, 527 F.2d 754, 756 [37 AFTR 2d 76-554] (9th Cir. 1975). The key, then, “is that the taxpayer have actual notice and not that he have it in any particular way.” Id. at 757; see also Borgman v. Commissioner of Internal Revenue, 888 F.2d 916, 917 [64 AFTR 2d 89-5795] (1st Cir. 1989) (“The purpose of section[] 6212(a) ... is to ensure that the taxpayer receives a timely actual notice so he can challenge the assessment within the 90-day period provided in section 6213.”). Accordingly, “[w]here the taxpayer receives actual notice of the contents of the deficiency notice, the purpose of the statute is satisfied.” Gibson v. United States, 761 F. Supp. 685, 690 [68 AFTR 2d 91-5102] (C.D. Cal 1991).

Plaintiff in this case alleges that he did not receive the required notice of deficiency prior to the issuance of the Notice of Levy and argues that Defendants are therefore in violation of sections 6212(a) and 6213(a). See Pl.'s Opp'n, Att. 1 (Affidavit of Peter Boritz) (hereinafter, “Boritz Aff.”), ¶ 7. Defendants respond that — even accepting Plaintiff's allegation as true — Plaintiff's claim must nonetheless be dismissed because public records demonstrate that he filed a timely petition with the Tax Court regarding the determination of tax deficiencies in the years at issue and therefore clearly received actual notice of the deficiencies.See Defs.' Mot. at 5–6 & Ex. A (Order and Decision dated June 10, 1998, in Boritz v. Commissioner of Internal Revenue, No. 17664-97) (hereinafter, “Tax Court Order”). 5 The Court agrees.

Plaintiff concedes that he filed a petition in Tax Court for tax years 1994 and 1995, but argues that he did so “without said notices, based on other letters and notices received from the IRS alleging the assessment of penalties.” Pl.'s Opp'n at 8. Even assuming, as Plaintiff apparently asserts, that none of the “letters and notices” he received from the IRS constituted the required notice of deficiency, this does not negate that Plaintiff had actual notice of the deficiencies and filed a timely petition in Tax Court for the tax years in question. As the IRS' mailings and notices “result[ed] in actual notice without prejudicial delay (as was clearly the case here),” the Court finds that the IRS has “[met] the conditions of § 6212(a).” Clodfelter, 527 F.2d at 757. Moreover, “[b]y timely invoking Tax Court jurisdiction, [Plaintiff] effectively waived any objection to the notice of deficiency.” Mulvania v. Commissioner of Internal Revenue, 769 F.2d 1376, 1380 [56 AFTR 2d 85-5744] (9th Cir. 1985);see also Roszkos v. Commissioner of Internal Revenue , 850 F.2d 514 [62 AFTR 2d 88-5084], (9th Cir. 1988) (where the “taxpayer acknowledges notice by timely petitioning the Tax Court for a redetermination of deficiency,” he “render[s] harmless the IRS' error”);cf. Kiley , 533 F. Supp at 468 (“In the present case, the plaintiff acknowledges that he actually received his notice of deficiency and he does not allege any detrimental delay. His challenge to the notice of deficiency is therefore without merit.”). Accordingly, Defendants' Motion to Dismiss is GRANTED insofar as Defendants assert that Count II of Plaintiff's Complaint should be dismissed for failure to state a claim pursuant to Rule 12(b)(6).

2. Count III and Count IV of Plaintiff's Complaint
Counts III and IV of Plaintiff's Complaint seek damages pursuant to 26 U.S.C. § 7433 for the IRS' alleged failure to assess taxes and provide assessment notices. Specifically, Plaintiff alleges in Count III of the Complaint that Defendants violated 26 U.S.C. § 6203 by issuing the Notice of Federal Tax Lien and the Notice of Levy without first making an assessment regarding Plaintiff's tax liabilities for years 1994 and 1995. Compl. ¶¶ 32–35. In Count IV of the Complaint, Plaintiff alleges that Defendants failed to give him notice within 60 days after any alleged assessment as is required by 26 U.S.C. § 6303(a). Id. ¶¶ 36–39.
Both claims therefore relate to the IRS' assessment of tax liability. As such, the claims are not actionable under section 7433 and must be dismissed for failure to state a claim. As noted above, Section 7433(a) authorizes taxpayers to bring actions for civil damages against the United States when any IRS officer or employee recklessly, intentionally, or negligently acts in disregard of the Code or its implementing regulations “in connection with any collection of Federal tax.” 26 U.S.C. § 7433(a) (emphasis added). As this Court has previously held, section 7433 is limited to alleged violations of law by the IRS in connection with tax collection and ““does not provide a cause of action for wrongful tax assessment or other actions that are not specifically related to the collection of income tax.”” Pollinger, 539 F. Supp. 2d 242 [101 AFTR 2d 2008-1383] at 255–56 (quoting Buaiz v. United States, 471 F. Supp. 2d 129, 135–36 [99 AFTR 2d 2007-699] (D.D.C. 2007));see also Jaeger v. United States , 524 F. Supp. 2d 60, 63–64 [100 AFTR 2d 2007-7117] (D.D.C. 2007) (holding that “ section 7433 does not provide a cause of action for wrongful tax assessment, the absence of a tax assessment, or other actions not related to collection of income tax”); Spahr v. United States, 501 F. Supp. 2d 92, 95 [100 AFTR 2d 2007-5601] (D.D.C. 2007) (same). 6 The Court's holding in Pollinger applies equally here and mandates the dismissal of Plaintiff's claims in Count III and Count IV arising from the IRS' alleged failure to make an assessment in compliance with 26 U.S.C. §§ 6203, 6303. While Defendants themselves have not specifically challenged the viability of Plaintiff's claims on this point, instead addressing the merits of Plaintiff's claims, it is well settled in this Circuit that “[c]omplaints may [] be dismissed,sua sponte if need be, under Rule 12(b)(6) whenever “the plaintiff cannot possibly win relief.””Best v. Kelly , 39 F.3d 328, 331 (D.C. Cir. 1994) (quoting Baker v. Director, United States Parole Comm'n, 916 F.2d 725, 726 (D.C. Cir. 1990) (per curiam)). Accordingly, because it is patently obvious that Plaintiff's claims relating to the alleged errors in the assessment of taxes “cannot possibly win relief,” the Court concludes that Count III and Count IV must be dismissed sua sponte for failure to state a claim under Rule 12(b)(6). Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants have moved to dismiss Counts III and IV, albeit on the alternative reasoning that Plaintiff has failed to state a claim under section 7433. 7
3. Count V and Count VIII of Plaintiff's Complaint
In Count V and Count VIII of the Complaint, Plaintiff alleges that Defendants have failed to release the Notice of Federal Tax Lien and issue a certificate of release as required by 26 U.S.C. § 6325(a)(1). Plaintiff seeks monetary damages for this failure under 26 U.S.C. §§ 7432 and 7433, respectively. Compl. ¶¶ 40–43, 53–57. Section 6325 provides that “the Secretary shall issue a certificate of release of any lien imposed with respect to any internal revenue tax not later than 30 days after the day on which ... [t]he Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable.” 26 U.S.C. § 6325(a)(1).
In this case, the parties agree that the Notice of Federal Tax Lien is now unenforceable because the ten-year limitation periods for collection of the underlying tax assessment have expired.See Compl. ¶ 56; Defs.' Mot. at 9 (“the liens have not been refiled and are considered released”). This is confirmed by reference to the Notice of Federal Tax Lien, which is attached as an exhibit to Plaintiff's Complaint and which states as follows:
IMPORTANT RELEASE INFORMATION: For each assessment listed below, unless notice of the lien is refiled by the date given in column (e), this notice shall, on the day following such date, operate as a certificate of release as defined in IRC 6325(a).
Id., Ex. C. There is no allegation by Plaintiff that the liens have been refiled; indeed, Plaintiff alleges that the liens are now unenforceable (i.e., that no enforceable lien was refiled). See id. ¶¶ 54–56. Accordingly, the Notice of Federal Tax Lien itself operated as the certificate of release required under section 6325(a) and automatically released the tax liens at issue when no notice of lien was refiled by the dates listed in column (e).See Rotte v. United States , 615 F. Supp. 2d 1347, 1351 [103 AFTR 2d 2009-1734] (S.D. Fla. 2009) (finding that IRS “complied with section 7432 because the notice of federal tax lien was self-releasing);cf. Enax v. United States , Civ. Act. No. 06-14774, 2007 WL 708976 [99 AFTR 2d 2007-1356], 450 (11th Cir. Mar. 8, 2007) (observing that “[a]t the end of the limitations period, the liens self-release unless the IRS had revoked the self-release and re-filed the liens before the limitations period expired”);Eastman v. United States , Civ. Act. No. 06cv1069, 2008 WL 899252 [101 AFTR 2d 2008-1566], 2 (W.D. Ark. Mar. 31, 2008) (“[T]he 10 year collection statute of limitations on these assessments expired and the lien documents self released. The IRS did not refile its notice of lien ... [t]herefore, ... the Notice of Federal Tax Lien became the § 6325(a) certificate of release of these liens.”). As such, Plaintiff cannot succeed on his claims that Defendants violated section 6325 by failing to release the Notice of Federal Tax Lien and/or by failing to issue a certificate of release. Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants move to dismiss Counts V and VIII of Plaintiff's Complaint for failure to state a claim pursuant to Rule 12(b)(6).
4. Count VII of Plaintiff's Complaint
In Count VII of the Complaint, Plaintiff seeks damages under 26 U.S.C. § 7433 based upon Defendants' allegedly unauthorized public disclosure of his social security number on the Notice of Federal Tax Lien in violation of 26 U.S.C. § 6103(b)(6). Compl. ¶¶ 48–52. Section 6103 states the general rule that return information shall be kept confidential and, except as authorized, shall not be disclosed. 26 U.S.C. § 6103; Church of Scientology of Calif. v. IRS, 484 U.S. 9, 10–12 [60 AFTR 2d 87-5832] (1987). One of the exceptions to section 6103, however, permits disclosure of return information “in connection with ... collection activity ... to the extent that such disclosure is necessary in obtaining information ... with respect to the enforcement of any other provision of [the Code].” 26 U.S.C. § 6103(k)(6). The implementing regulations for section 6103 further provide that disclosure may be made in order “to locate assets in which the taxpayer has an interest ... or otherwise to apply the provisions of the Internal Revenue Code relating to establishment of liens against such assets, or levy, seizure, or sale on or of the assets to satisfy any such liability.” 26 C.F.R. § 301.6103(k)(6)-1(vi); see also Glass v. United States, 480 F. Supp. 2d 162, 165–66 [99 AFTR 2d 2007-1853] (D.D.C. 2007).
Based on section 6103(k)(6) and the related regulations, several courts, including the undersigned Judge, have concluded that a notice of lien does not give rise to an unauthorized disclosure action. See, e.g., Pollinger, 539 F. Supp. 2d at 253 (“Plaintiff cannot state an unauthorized disclosure claim based upon the various notices of liens and levies.”); see also Glass, 480 F. Supp. 2d at 165–66 (finding that “a notice of lien does not give rise to a cause of action”); Mann v. United States, 204 F.3d 1012, 1018 [85 AFTR 2d 2000-963] (10th Cir. 2000) (dismissing plaintiff's claim for unauthorized disclosure of social security number in notice of lien because “ § 6103(k)(6) and the relevant regulations do permit disclosure of tax return information when made in notices of lien and levy, to the extent necessary to collect on taxes assessed.”); McGraw v. United States, Civ. Act. No. 08-0092, 2008 WL 4000570 [102 AFTR 2d 2008-5875], 3 (W.D. Wash. Aug. 25, 2008) (dismissing plaintiff's claim that IRS violated section 6103(k) by disclosing plaintiff's social security number in the notices of federal tax liens and levies because disclosure was permitted under implementing regulations). Accordingly, the Court finds that Plaintiff cannot state an unauthorized disclosure claim based upon the Notice of Federal Tax Lien. Defendants' Motion to Dismiss is therefore GRANTED insofar as Defendants move to dismiss Count VII of Plaintiff's Complaint for failure to state a claim.
C. Defendants' Motion for Summary Judgment
The Court finally turns to consider Defendants' motion for summary judgment, which as construed by the Court is directed towards Plaintiff's final claim — Count VI, in which Plaintiff alleges that Defendants failed to serve him with a notice of levy, as required by 26 U.S.C. § 6331(d)(2). Plaintiff seeks civil damages for this alleged failure pursuant to 26 U.S.C. § 7433. Compl. ¶¶ 44–47. Given the somewhat obscure nature of Plaintiff's Complaint, it is not entirely clear whether he means to allege that Defendants violated section 6331(d)(2) by failing to serve him with an actual copy of the Notice of Levy issued against his bank account or rather by failing to serve him with a notice of its intent to issue the Notice of Levy before doing so. As Defendants correctly point out, section 6331(d) requires only that the IRS notify a taxpayer “in writing of his intention to make [the] levy” at least 30 days before the day of the levy. 26 U.S.C. § 6331(d)(1). It does not require that a copy of the Notice of Levy itself be provided to the taxpayer. See id. Accordingly, to the extent Plaintiff contends that the IRS violated section 6331(d) by failing to provide him with a copy of the actual Notice of Levy, such a claim cannot succeed.
Nonetheless, cognizant of Plaintiff's pro se status, the Court shall give Plaintiff the benefit of the doubt and instead construe Count VI as alleging that Defendants violated section 6331(d) by failing to provide a notice of intent to levy. Even construing Plaintiff's Complaint in his favor, however, it is clear that Plaintiff's claim is without merit. The undisputed facts on the present record demonstrate that the IRS issued the required notices of intent. Specifically, Defendants direct the Court to the Certificates of Official Record (Form 4340) regarding Plaintiff's tax liability in the tax years 1994 and 1995. Defs.' Mot. at 8 n. 2. These Certificates of Official Record, which are attached to Defendants' motion as Exhibits B, C, D and E, indicate that the required notices of intent to levy were provided to Plaintiff. See id., Ex. B, C, D, and E. As noted above, see supra n. 7, these Certificates of Official Record are “self-authenticating” and “provide a sufficient basis for summary judgment.”Buaiz , 521 F. Supp. 2d at 96; see also Hines v. United States, 658 F. Supp. 2d 139 [104 AFTR 2d 2009-6652] (D.D.C. 2009) (awarding presumption of regularity to IRS records demonstrating that notices of intent to levy were sent to plaintiff). Plaintiff has offered no facts or documentary evidence to refute the accuracy of the certified forms or to otherwise indicate that the notices of intent to levy were not provided. As such, he has failed to defeat the Defendants' motion for summary judgment. Accordingly, Defendants' Motion for Summary Judgment is GRANTED insofar as Defendants contend that there are no material disputes of fact and they are entitled to judgment as a matter of law with respect to Count VI of Plaintiff's Complaint.
IV. CONCLUSION
For the reasons set forth above, Defendants' [7] Motion to Dismiss or in the Alternative Motion for Summary Judgment is GRANTED. Specifically, the Court holds as follows. First, Defendants' Motion to Dismiss Plaintiff's claims against the IRS is GRANTED as conceded. Second, Defendants' Motion to Dismiss Count I (quiet title action pursuant to 28 U.S.C. § 2410) and Count IX (APA) for lack of jurisdiction pursuant to Rule 12(b)(1) is GRANTED. Third, Defendants' Motion to Dismiss Count II (failure to issue notice of deficiency in violation of §§ 6212 and 6213), Count III (failure to make assessment in violation of § 6203), Count IV (failure to make assessment in violation of § 6303), Count V (failure to release lien in violation of § 7342), Count VII (unauthorized disclosure in violation of § 6103(b)(6)), and Count VIII (failure to issue certificate of release in violation of § 6325), for failure to state a claim pursuant to Rule 12(b)(6) is GRANTED. Fourth and finally, Defendants' Motion for Summary Judgment as to Count VI (failure to issue notice of levy in violation of § 6331(d)) is GRANTED. An appropriate Order accompanies this Memorandum Opinion.
Date: February 23, 2010
COLLEEN KOLLAR-KOTELLY
United States District Judge
________________________________________
1
As discussed below, the Court grants Defendants' motion to dismiss the IRS as a defendant in this action. The Court nevertheless refers to the United States and the IRS collectively as “Defendants” in this opinion, so as to be consistent with the parties' filings.
________________________________________
2
The Court notes that Plaintiff was given notice that Defendants' motion may be treated as a motion for summary judgment under Rule 56 and that in opposing such a motion, he “may not rely merely on allegations or denials in its own pleading; rather, its response must—by affidavits or as otherwise provided in this rule—set out specific facts showing a genuine issue for trial. If the opposing party does not so respond, summary judgment should, if appropriate, be entered against that party.” See Aug. 22, 2009 Order, Docket No. [8].
________________________________________
3
Alternatively, the Court notes that Plaintiff's claims for monetary damages under sections 7432(a) and 7433(a) against the IRS would nonetheless fail because suits for civil damages for wrongful tax collection activity and for failure to release a lien may be brought, if at all, against the “United States.” See 26 U.S.C. § 7432(a);id. § 7433(a). Similarly, Plaintiff's claims for declaratory and injunctive relief against the IRS would fail as “Congress has preserved the immunity of the United States from declaratory and injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the IRC. As an agency of the Government, of course, the IRS shares that immunity.”Murphy v. IRS , 493 F.3d 170, 174 [100 AFTR 2d 2007-5075] (D.C. Cir. 2007) (internal citations omitted).
________________________________________
4
Although Plaintiff argues in his briefing that section 2410 acts as the relevant waiver of sovereign immunity in this case, Plaintiff's Complaint actually cites 28 U.S.C. § 1367 as jurisdictional grounds for his quiet title claim. See Compl. ¶ 16. Section 1367, however, does not save Plaintiff's claim. That section provides only that “in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a). Section 1367 does not constitute a waiver of sovereign immunity by the United States. See 28 U.S.C. § 1367; see also San Juan Co., Utah v. United States, 503 F.3d 1163, 1181 (10th Cir. 2007) (“ Section 1367(a) is expressed in general terms, applying to all litigants. There is no mention of sovereign immunity or of the special status of the government as a litigant. Under settled law, ... this statute does not waive federal sovereign immunity.”); Dunn & Black v. United States, 492 F.3d 1084, 1088 [100 AFTR 2d 2007-5170] n. 3 (9th Cir. 2007) (same); United States v. Certain Land Situated in City of Detroit, 361 F.3d 305, 307 (6th Cir. 2004) (same).
________________________________________
5
As shown by the Tax Court Order, Plaintiff was held to have outstanding tax deficiencies for the years in question. See Tax Court Order.
________________________________________
6
While some courts have held that the limitations on the right of action under section 7433 are jurisdictional because they pertain to the scope of the United States' waiver of sovereign immunity, see, e.g., Buaiz, 471 F. Supp. 2d at 135–36; Spahr, 501 F. Supp. 2d at 96, this Court finds persuasive the reasoning set forth by Judge John D. Bates in Jaegar concluding that “the limitations on the right of action are nonjurisdictional because the language of section 7433 is not jurisdictional, and, furthermore, this Circuit treats the lack of a right of action as an issue of failure to state a claim upon which relief can be granted, id. 524 F. Supp. 2d at 64 n.1 (internal citations omitted). See also Pollinger, 539 F. Supp. 2d at 256 (dismissing claims relating to tax assessment under Rule 12(b)(6) for failure to state a claim).
________________________________________
7
Alternatively, the Court notes that Defendants would be entitled to summary judgment as the undisputed facts demonstrate that assessments were timely made and that notice was sent to Plaintiff as required. Defendants submit the Certificates of Official Record (Form 4340), regarding Plaintiff's tax liability in the tax years 1994 and 1995, which demonstrate that assessments were made, and that notice and demand in accordance with section 6303 was given, on November 16, 1998, December 18, 1998, and December 21, 1998, thus satisfying sections 6203 and 6303. See Defs.' Mot. at Exs. B, C, D, and E. While Plaintiff contends that the Certificates of Official Record are insufficient to support an award of summary judgment without providing the underlying supporting documentation, the case law makes clear that the certified Form 4340s “are self-authenticating and need no extrinsic evidentiary support as a predicate to admissibility.”Buaiz , 521 F. Supp. 2d at 96. As such, they are “presumptive proof of the taxpayer's liability” and “may provide a sufficient basis for summary judgment.”Id. Plaintiff has offered no facts or documentary evidence to refute the accuracy of the certified forms, and he has therefore failed to defeat the Defendants' motion for summary judgment.

ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 03 Mar 2010 14:18:00 +0000

CREEL SR. v. COMM., Cite as 96 AFTR 2d 2005-5487 (419 F.3d 1135), 08/02/2005 , Code Sec(s) 6330; 7122

--------------------------------------------------------------------------------
Billy S. CREEL, SR., PETITIONER-APPELLEE v. COMMISSIONER of Internal Revenue, RESPONDENT-APPELLANT.

Case Information:
Code Sec(s): 6330; 7122

Court Name: U.S. Court of Appeals, Eleventh Circuit,
Docket No.: No. 04-11817,
Date Decided: 08/02/2005.
Prior History: Tax Court affirmed.
Tax Year(s): Years 1987, 1988, 1989, 1990, 1991.
Disposition: Decision for Taxpayer.
Cites: 419 F.3d 1135, 2005-2 USTC P 50504.

HEADNOTE
1. Collection due process—review of administrative determination—satisfaction of liabilities—settlements—criminal restitution and civil tax liabilities. Tax Court properly determined that IRS erred in its administrative determination to collect taxpayer's liabilities for years subject of already-completed restitution order imposed in prior criminal tax case. Restitution order by its plain terms intertwined all taxpayer's criminal and civil tax liabilities for subject years, thus fully covering subject civil liabilities, including any applicable penalties and interest; so, those liabilities were completely extinguished and IRS had no right to pursue further collection once taxpayer completed his payments and U.S. Attorney issued lien release and satisfaction of judgment explicitly stating that obligations were fully paid or settled. Also, govt.'s attempt to circumvent such settlement on grounds U.S. Attorney lacked authority to enter same was meritless; and argument about missing witness inference was rejected.

Reference(s): ¶ 63,305.01(5) ; ¶ 71,225.01(15) ; ¶ 71,225.04(40) Code Sec. 6330 ; Code Sec. 7122

OPINION
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT,

Appeal from a Decision of the United States Tax Court

Before EDMONDSON, Chief Judge, and TJOFLAT and KRAVITCH, Circuit Judges.

Judge: KRAVITCH, Circuit Judge:

[PUBLISH]

Tax Court No. 3037-01L

Respondent-Appellant, the Commissioner of Internal Revenue (“the Commissioner”), appeals the Tax Court's decision denying a proposed levy to collect federal income taxes for the years 1987–1991 allegedly owed by Petitioner-Appellee, Billy Creel, Sr. (“Creel”). 1

I. Background
1. Prior Criminal Tax Case
Creel failed to file timely federal income tax returns for the years 1985–1991. The Internal Revenue Service (“IRS”) referred the matter to the Department of Justice [pg. 2005-5488] (“DOJ”) for prosecution, and the DOJ assigned the matter to the United States Attorney's Office for the Middle District of Alabama. On April 8, 1993, Creel pleaded guilty to both counts of a two-count criminal information charging him with willfully failing to file federal income tax returns for 1987 and 1988, in violation of 26 U.S.C. § 7203. As part of the plea agreement, Creel agreed to file returns for the years 1985–1991 and make full restitution of the amount of loss resulting from his failure to file returns for the years 1986–1991. 2

Creel's returns for the years 1986–1991 showed unpaid income taxes totaling $83,830. 3 The IRS assessed the taxes shown on the returns, plus interest. The IRS assessed penalties for failure to file timely returns for each year under 26 U.S.C. § 6651(a), and penalties for underpayment of estimated tax under 26 U.S.C. § 6654 for the years 1985–1989. 4

On June 14, 1993, the district court sentenced Creel in the criminal case and he was placed on probation for five years. As a condition of probation, Creel was ordered to make restitution to the IRS for the years 1986–1991 in the amount of “$83,830 plus any applicable penalties and interest.” 5 (emphasis added). The district court ordered the restitution pursuant to 18 U.S.C. § 3663(a)(3), which provides that a “court may...order restitution in any criminal case to the extent agreed to by the parties in a plea agreement.” To secure the restitution obligation, the U.S. Attorney recorded a judgment lien against Creel's property. [pg. 2005-5489]

Beginning in May 1994, and continuing through June 1998, Creel made monthly restitution payments totaling $83,830. On June 9, 1998, after Creel made his last monthly restitution payment, the USAO informed the district court that Creel's restitution obligation had been paid or was otherwise settled. The U.S. Attorney filed a Satisfaction of Judgment that stated: “The assessment, fine, and/or restitution imposed by the Court...having been paid or otherwise settled, the Clerk...is hereby authorized and empowered to satisfy the Judgment as to the monetary imposition only.” The U.S. Attorney also recorded a Cancellation and Release that stated that the previously-recorded judgment lien was “fully released, satisfied, discharged, and cancelled” because the debt was “paid in full.”

2. Administrative Proceeding
[1] The IRS applied the restitution payments totaling $83,830 to fully satisfy Creel's tax liability for 1986 and part of his tax liability for 1987. Claiming that Creel owed additional taxes, penalties, and interest for 1985 and 1987–1991, in June 1998, the IRS assigned the account to the Collection Division. The revenue officer and Creel's representative discussed whether Creel could enter into an offer in compromise or a deferred payment schedule. These discussions ended when the parties disagreed as to the amount Creel could afford to pay.

On February 2, 2000, the Commissioner sent Creel a notice of intent to levy showing unpaid amounts totaling $284,758.28 and a notice of a right to a collection-due-process (“CDP”) hearing with respect to these unpaid amounts 6 :

(For additional columns, see below.)

Assessed Late
Assessed Filing Penalties and
Unpaid Tax Statutory Interest
Year Per Return as of July 24, 2000
---- ---------- -------------------
1985 $18,772.16 $34,818.37
1987 $9, 514.96 $10,326.78
1988 $15,974.75 $16,720.50
1989 $15,148.34 $9,592.03
1990 $10,425.95 $4,834.60
1991 $9,479.16 $3,114.52

Total Unassessed Late
Assessed Payment Penalties
Amounts as of and Statutory Total
Year July 24, 2000 Interest Due
---- ------------- -------- ----
1985 $53,601.53 n7 $31,803.67 $85,405.20
1987 $18,063.01 n8 $19,189.06 $37,252.07
1988 $32,695.25 $28,729.02 $61,424.27
1989 $24,751.37 n9 $22,270.20 $47,021.57
1990 $15,271.55 n10 $14,026.54 $29,298.09
1991 $12,593.68 $11,763.40 $24,357.08
----------
Total $284,758.28

---------------------------------------------------------------------------
n7 Includes fees and collection costs totaling $11.
n8 Includes fees and collection costs totaling $11 and reflects
the application of a $1,500 payment and a $278.73 payment.
n9 Includes fee and collection costs totaling $11.
n10 Includes fee and collection costs totaling $11.
Creel requested a CDP hearing. Creel's counsel met with Judy Kelly, the Appeals Officer assigned to the case, to discuss the proposed levy. Creel's counsel argued that Creel's alleged civil tax liabilities for the years 1986–1991 had been satisfied by virtue of his payment of $83,830. Kelly disagreed, determining that the restitution order required that Creel pay “83,830 plus any applicable penalties and interest.” (emphasis added). Accordingly, Kelly sustained the Commissioner's proposal to collect the unpaid “applicable penalties and interest.”

3. Tax Court Proceeding
Creel petitioned the United States Tax Court under 26 U.S.C. § 6330(d) for review. At the trial, Creel testified that it was his understanding that his payment of $83,830 satisfied all of his tax liabilities for the subject years. Besides Creel, the only other witness to testify was Kelly. The Commissioner reserved in its trial memorandum the right to call as a witness [pg. 2005-5490] a representative of the DOJ and/or the USAO, but never did so.

Following the trial, the Tax Court entered an order, in which it did not sustain the proposed levy with respect to the 1987–1991 liabilities. 11 The Tax Court found that Creel's payment of $83,830 and the U.S. Attorney's issuance of a satisfaction of judgment and release of lien settled the alleged civil tax liabilities. The Tax Court found, inter alia, that Creel testified “credibly and without contradiction that he understood that his payment of the $83,830 would satisfy his civil tax obligation for $83,830 plus related penalties and interest.” The court also relied on the “missing witness inference,” inferring that the Commissioner's failure to call to the stand a representative of the U.S. Attorney's Office suggested that “any relevant testimony from such a witness would have been unfavorable” to the Commissioner. Finally, the Tax Court concluded that the U.S. Attorney had the authority to settle Creel's civil tax liabilities. The Commissioner now appeals the Tax Court's decision.

II. Discussion
1. Standard of Review
We review the Tax Court's factual findings for clear error and its legal conclusions de novo. Atlanta Athletic Club v. Commissioner, 980 F.2d 1409, 1411–12 [71 AFTR 2d 93-588] (11th Cir. 1993). “A finding of fact is clearly erroneous if the record lacks substantial evidence to support it, so that our review of the entire evidence leaves us with the definite and firm conviction that a mistake has been committed.” Atlanta Athletic Club, 980 F.2d at 1411–12 (citations and quotation marks omitted).

2. Analysis
The Commissioner concedes that Creel's criminal restitution obligation was satisfied, and thus, his criminal tax liabilities were discharged. The Commissioner contends, however, that the satisfaction of Creel's criminal restitution obligation has no bearing on the Commissioner's ability to pursue Creel for additional civil tax liabilities.

In the abstract, the Commissioner is correct. As a general rule, the government can recover criminal penalties from an individual in a criminal prosecution and can recover additional civil penalties in a civil proceeding. See generally United States v. Barnette, 10 F.3d 1553, 1558 (11th Cir. 1994); Hickman v. Commissioner of Internal Revenue, 183 F.3d 535, 537–38 [84 AFTR 2d 99-5346] (6th Cir. 1999). Moreover, an order to pay restitution under 18 U.S.C. § 3663 is a criminal penalty rather than a civil penalty. United States v. Johnson, 983 F.2d 216, 220 (11th Cir. 1993). Indeed, the restitution statute used in the instant case expressly contemplates that a civil claim may be brought subsequent to a criminal conviction by providing for an offset for the amount of restitution paid in the criminal case against any damages recovered in the civil proceeding. 18 U.S.C. § 3663(e)(2).

The key problem with the Commissioner's position is that it fails to take into account the unique facts and the nuances of the instant case, most notably the language of the restitution judgment and the actions of the U.S. Attorney.

As a condition of probation, the district court ordered Creel to pay restitution to the IRS. As stated in the PSI, the plea agreement mandated: “[a]s a condition of probation, the Court shall impose a condition requiring restitution in the amount of $83,830 to the Internal Revenue Service, in addition to any interest and penalties which may be imposed by the Internal Revenue Service.” (emphasis added). In turn, the judgment in the criminal case set the amount of restitution at “$83,830 plus any applicable penalties and interest.” (emphasis added). Thus, as the Tax Court found, the restitution amount specifically included the civil [pg. 2005-5491] penalties that the Commissioner now seeks to recover. 12

Creel made his monthly restitution payments totaling $83,830. As a condition of probation, Creel still owed the “applicable penalties and interest.” Rather than pursue these additional civil penalties, the U.S. Attorney undertook two key actions. First, the U.S. Attorney issued a satisfaction of judgment which stated that “[t]he assessment, fine, and/or restitution imposed by the Court in the above styled case having been paid or otherwise settled...” (emphasis added). Second, the U.S. Attorney signed a cancellation and release of lien which stated that “[t]he debt secured...having been paid in full, said lien is hereby fully released, satisfied, discharged, and cancelled.” (emphasis added).

Creel argues that because the government elected to include his civil tax liabilities as part of the restitution order, when the U.S. Attorney discharged the restitution obligation, Creel's civil tax liabilities were also extinguished. We agree. Creel testified in the Tax Court proceeding that he understood his payment of $83,830 constituted a full payment of his tax liabilities. He also testified to the effect that he understood the release issued by the U.S. Attorney discharged all that he owed. The Commissioner did not refute Creel's testimony or show that the release of lien and satisfaction of judgment should be viewed as anything other than a release of all liabilities contained in the restitution order. As the Tax Court noted:

Although the record does not establish why the USAO treated the restitution order satisfied for the lesser amount, the record does establish that the sentencing court considered petitioner to be a man of limited wealth. A reasonable inference is that the USAO believed that the receipt of petitioner's civil taxes (exclusive of penalties and interest) in the amount of $83,830 was the most that it could recover from petitioner and agreed with him following his sentencing that his timely payment of that amount would serve to settle his civil tax liability of $83,830 plus related penalties and interest.
Upon review of the record, we conclude that the Tax Court did not err in finding that Creel's civil tax liabilities were settled by virtue of the $83,830 payment and the actions of the U.S. Attorney. Thus, although not compelled to do so, the government discharged Creel's civil tax liabilities as part of the criminal case.

The Commissioner also argues that the Tax Court erred in applying certain legal principles. The Commissioner first contends that the Tax Court erred in concluding that the U.S. Attorney had the authority to compromise Creel's civil tax liabilities. Without such authority, the U.S. Attorney's actions would not bind the government, even if he intended to compromise Creel's civil tax liabilities. United States v. Beebe, 180 U.S. 343, 351 (1901); Klein v. Commissioner, 899 F.2d 1149, 1152 [65 AFTR 2d 90-1039] (11th Cir. 1990). “It is well settled that persons dealing with a governmental agent must take notice of the agent's authority and that any unauthorized acts taken by the agent do not bind the government. United States v. Killough, 848 F.2d 1523, 1526 (11th Cir. 1988).

Under 26 U.S.C. § 7122(a), “the Attorney General or his delegate may compromise” any “civil or criminal case arising under the internal revenue laws” after “reference to the Department of Justice for prosecution or defense.” In turn, the Attorney General's authority to compromise any “civil or criminal case arising under the internal revenue laws” has been delegated to the Assistant Attorney General, Tax Division. 28 C.F.R. §§ .70, 0.160. Moreover, some civil claim settlement authority has been re-delegated to U.S. Attorneys. Tax Div. Directive No. 105, § 7, 60 Fed. Reg. 31244 (1995), 28 C.F.R., Appendix to [pg. 2005-5492] Subpart Y of Part O. 13 Although the Commissioner acknowledges that some civil settlement authority has been re-delegated to U.S. Attorneys, he argues that Creel fails to show that the formal requirements of a re-delegation were satisfied.

Under the unique facts of this case, we are not persuaded by the Commissioner's position. Importantly, the Commissioner concedes that the U.S. Attorney had authority to settle Creel's criminal restitution obligation. And here the restitution obligation was drafted such that Creel's civil tax liabilities were inextricably intertwined with his criminal tax liabilities, which together formed a condition of his probation. Because the U.S. Attorney had the authority to settle the criminal side of the case, and the civil penalties were consolidated within the criminal case, the U.S. Attorney acted within the scope of his authority. Cf. In re Knopf v. United States, 190 B.R. 647, 651–52 (Bankr. D. Mont. 1995) (noting that “it does not bode well for an IRS attorney to...challenge the authority of the Assistant U.S. Attorney to settle a tax prosecution case by a court accepted Plea Agreement.”).

Finally, the Commissioner argues that the Tax Court erred in applying the missing witness inference. The Tax Court inferred from the Commissioner's failure to present a witness from the DOJ or U.S. Attorney's Office that any relevant testimony from such a witness would have been unfavorable to the Commissioner. The Tax Court noted that the failure to call such a witness was peculiar given that the Commissioner listed a representative from the U.S. Attorney's Office or DOJ on its pre-trial witness list.

“It is well settled that the production of weak evidence when strong is available can lead only to the conclusion that the strong would have been adverse.” Raley, Inc. v. Kleppe, 867 F.2d 1326, 1329 (11th Cir. 1989); see also Mammoth Oil Co. v. U.S., 275 U.S. 13, 52 (1927). The Commissioner argues that the use of the inference was improper because Creel had the burden to show that his civil tax liabilities were compromised, and the Commissioner's failure to call a witness cannot by itself satisfy Creel's burden. 14 That argument assumes that the Tax Court relied solely on the missing witness inference. A review of the record reveals that such an assumption is incorrect. The Tax Court simply relied on the missing witness inference along with the other evidence presented in the case. See Steiner v. Commissioner, 350 F.2d 217, 223 [16 AFTR 2d 5174] (7th Cir. 1965). Creel proffered other evidence to support the existence of a compromise: (1) Creel's uncontradicted testimony that he believed his payment of $83,830 fully satisfied all of the amounts he owed to the government; and (2) evidence showing that the U.S. Attorney issued a release of lien and satisfaction of judgment. Under these circumstances, we hold that there was nothing improper about the use of the missing witness inference.

For the foregoing reasons, we AFFIRM.

AFFIRMED.

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1

The Tax Court sustained the Commissioner's proposed collection with respect to Creel's tax liabilities for 1985. Thus, the 1985 tax liabilities are not at issue in this appeal.
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2

The plea agreement itself is not in the record. The Presentence Investigation Report (PSI) issued by the U.S. Probation Office states the terms of the plea agreement.
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3

The tax returns showed the following unpaid taxes:

Year Tax Unpaid
---- ----------
1986 $23,287.00
1987 $9,514.96
1988 $15,974.75
1989 $15,148.34
1990 $10,425.95
1991 $9,479.16

Creel also filed a return for 1985 showing unpaid taxes of $18,772.16.
--------------------------------------------------------------------------------
4

The assessed penalties and interest were as follows:
Year Sec. 6651(a) Sec. 6654 Interest Total
---- ------------ --------- -------- -----
1985 $4,223.74 $1,396.73 $29,197.90 $34,818.37
1986 $5,239.65 $1,267.57 $23,477.31 $29,984.53
1987 $2,140.87 $578.13 $7,607.78 $10,326.78
1988 $3,594.32 $3,594.31 $9,531.87 $16,720.50
1989 $3,408.37 ----- $6,183.66 $9,592.03
1990 $2,345.83 ----- $2,488.77 $4,834.60
1991 $2,132.81 ----- $981.71 $3,114.52

--------------------------------------------------------------------------------
5

The amount of restitution was computed as follows:

Year Tax Amount
---- ----------
1986 $23,287
1987 $9,514.96
1988 $15,974.75
1989 $15,148.34
1990 $10,425.95
1991 $9,479.16

Total $83,830.00

The judgment stated that the restitution should be paid to the DOJ in monthly installments according to a schedule determined by the U.S. Probation Office.
--------------------------------------------------------------------------------
6

Prior to a levy, the IRS must give the taxpayer notice of an opportunity for a CDP hearing before the IRS Appeals Office. 26 U.S.C. § 6330(a).
--------------------------------------------------------------------------------
7

Includes fees and collection costs totaling $11.
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8

Includes fees and collection costs totaling $11 and reflects the application of a $1,500 payment and a $278.73 payment.
--------------------------------------------------------------------------------
9

Includes fee and collection costs totaling $11.
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10

Includes fee and collection costs totaling $11.
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11

The Tax Court sustained the proposed levy for the 1985 tax year because that year was not included in the restitution order. Thus, as noted earlier, the 1985 tax liabilities are not at issue in this appeal. The court also held that the Appeals Office did not abuse its discretion in rejecting Creel's proposal to make minimal monthly payments of $250.
--------------------------------------------------------------------------------
12

The Commissioner also argues that the “any applicable penalties and interest” portion of the restitution judgment was too vague to be legally enforceable. The fact that penalties and interest might be undetermined at sentencing does not make them legally ineffective, so long as the amount is eventually agreed upon by the parties or adjudicated. See United States v. Stoehr, 196 F.2d 276, 284 [41 AFTR 1190] (2d Cir. 1952). Here, there was no such need for agreement or adjudication because the penalties and interest were waived.
--------------------------------------------------------------------------------
13

The full text of the regulation states:
Section 7. Subject to the conditions and limitations set forth in Section 8 hereof, United States Attorneys are authorized to:
((A)) Reject offers in compromise of judgments in favor of the United States, regardless of amount;
((B)) Accept offers in compromise of judgments in favor of the United States where the amount of the judgment does not exceed $300,000; and
((C)) Terminate collection activity by his or her office as to judgments in favor of the United States which do not exceed $300,000 if the United States Attorney concludes that the judgment is uncollectible:
provided that such action has the concurrence in writing of the agency or agencies involved, and provided further that this authorization extends only to judgments which have been formally referred to the United States Attorney for collection.

--------------------------------------------------------------------------------
14

The Commissioner also argues that a witness was not called because he did not have adequate notice prior to the trial of Creel's theory of the case. Creel's pre-trial memorandum, however, specifically stated the relevant issue as whether “[he had] paid his tax liability in full” and argued that he paid as restitution the total amount of taxes owed in the amount of $83,830 and had received a satisfaction of judgment. Thus, there is no merit to this argument.

ab@irstaxattorney.com (www.irstaxattorney.com) — Sun, 28 Feb 2010 15:29:00 +0000

Second, 26 U.S.C. § 7809(b)(1) provides for the placement of funds offered in compromise in a deposit fund account, and more importantly here, for the return of such funds to the maker of the offer upon rejection by the Secretary. The statute specifically states that sums offered under the provisions of 26 U.S.C. § 7122 would be deposited with the Treasurer in a deposit fund account, and “the Secretary shall refund to the maker of such offer the amount thereof.” See 26 U.S.C. § 7809(b)(1) (emphasis added). This framework is also outlined in the Internal Revenue's own regulations. Specifically, 26 C.F.R. § 301.7122-1(h) provides:

2010-1 ustc ¶50,240
Code Sec. 7122, Code Sec. 7433

DEBORAH SLUTTER, Plaintiff v. UNITED STATES OF AMERICA, Defendant.
IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. CIVIL

ACTION. NO. 08-3046. February 19, 2010.

MEMORANDUM

STENGEL, J. : Deborah Slutter brought this case against the United States of America seeking the return of $20,000 which she offered in compromise for the full discharge of her tax indebtedness for tax years 2003, 2004, and 2005. The Internal Revenue Service rejected the offer initially and on appeal, and applied the sum to the $57,242.67 she owed the government for those tax years. The defendant has filed a motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. For the following reasons, I will grant the motion and enter judgment in favor of the defendant.

I. BACKGROUND
On August 28, 2007, with the assistance of a certified public accountant, Miss Slutter submitted IRS Form 656, 1 entitled Offer in Compromise, to the Internal Revenue Service together with a lump-sum payment of $20,000. See Compl. ¶ 4; see also Pl. Ex. A. Three months later, the government rejected the offer and retained the money. Id. ¶ 5. A month later, Miss Slutter appealed the decision but her appeal was denied the following April. 2 She received notice from the Internal Revenue Service that part of the $20,000 payment was used to satisfy her liability for tax year 2003, and the remaining amount, i.e., $9,649.45, was characterized as an overpayment and applied toward her liability for tax year 2004. Id. ¶¶ 6, 7; see also Compl. Ex. D at 3. Miss Slutter then filed this complaint characterizing the government's decision to retain the lump sum offer as an “outrageous abuse of discretion and a violation of its own regulations.”

II. STANDARD FOR JUDGMENT ON THE PLEADINGS
Rule 12(c) of the Federal Rules of Civil Procedure provides that “[a]fter the pleadings are closed - but early enough not to delay trial - a party may move for judgment on the pleadings.” The applicable standard on a motion for judgment on the pleadings is the same as the standard applied to a motion filed pursuant to FED.R.CIV.P. 12(b)(6). Spruill v. Gillis , 372 F.3d 218 (3d Cir. 2004)). Such a motion cannot be granted “unless the moving party has established that there is no material issue of fact to resolve, and that it is entitled to judgment in its favor as a matter of law.” Rosenau v. Unifund Corp. , 539 F.3d 218, 221 (3d Cir. 2008) (citing Jablonski v. Pan Am. World Airways, Inc. , 863 F.2d 289, 290-291 (3d Cir.1988)). In reviewing a 12(c) motion, the court must view the facts in the pleadings and the inferences drawn therefrom in the light most favorable to the non-moving party. Id.

III. DISCUSSION
The first obstacle to Miss Slutter's recovery is the government's entitlement to sovereign immunity. The United States is immune from suit, unless it consents to be sued by waiving its sovereign immunity. Lehman v. Nakshian , 453 U.S. 156, 160 (1981); see also United States v. Testan , 424 U.S. 392, 399 (1976) (the United States, including its agencies and its employees, can be sued only to the extent that it has expressly waived its sovereign immunity). Moreover, when a plaintiff seeks to sue the United States, she may not rely on the general federal question jurisdiction of 28 U.S.C. § 1331 , but must identify a specific statutory provision that waives the government's sovereign immunity from suit. Such a waiver must be “unequivocally expressed,” and any waiver will be strictly construed in favor of the sovereign. United States v. Nordic Village, Inc. , 503 U.S. 30, 33-34 (1992); see also Clinton County Comm'rs v. United States EPA , 116 F.3d 1018, 1021 (3d Cir. 1997) (same). Where the sovereign has waived immunity, no suit can be maintained unless it is in exact compliance with the terms of the statute under which the sovereign has consented to be sued. United States v. King , 395 U.S. 1, 4 (1969). A plaintiff bears the burden of asserting specific provisions waiving the sovereign immunity of the United States. Holloman v. Watt , 708 F.2d 1399, 1401 (9th Cir. 1983).

Miss Slutter asserts that jurisdiction is conferred on this court by the provisions of 28 U.S.C. § 1346(a)(1) . See Compl. ¶ 3. That section provides that the district courts shall have original jurisdiction of:

(1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.

28 U.S.C. § 1346(a)(1) . The defendant insists that Miss Slutter has not established that an explicit waiver of the United States' sovereign immunity exists because the cited statute is a general grant of jurisdiction to the court and is not a cause of action by itself. I do not agree.

The United States Supreme Court recognized that 28 U.S.C. § 1346(a)(1) waives the government's sovereign immunity from suit by authorizing federal courts to adjudicate “any civil action against the United States for the recovery of any internalrevenue tax alleged to have been erroneously or illegal assessed or collected.” United States v. Williams , 514 U.S. 527, 530 (1995). Despite its spacious terms, however, Section 1346(a)(1) must be read in conformity with other statutory provisions placing requirements or restrictions on such actions which limit and determine the scope of this grant of jurisdiction. Koss, et al. v. United States of America , 69 F.3d 705, 707 (3d Cir. 1995) (citing United States v. Dalm , 494 U.S. 596, 601 (1990)). In its alternative argument, the defendant suggests that this action be considered a claim for a tax refund, and that § 1346(a)(1) be read in conformity with 26 U.S.C. § 7422 . 3 I am not persuaded.

In order to bring a suit for refund under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422 , the taxpayer must first exhaust her administrative remedies by paying the tax assessment fully and then timely filing a claim for refund with the Internal Revenue Service. See 26 U.S.C. § 7422(a) ; Dalm , 494 U.S. at 601-602; Flora v. United States , 357 U.S. 63, 68 (1958); Koss , 59 F.3d at 708. As the defendant points out, Miss Slutter has not fulfilled either of these jurisdictional prerequisites, and her claim would fail.

Nevertheless, I do not agree with the defendant that Miss Slutter is seeking a tax “refund” as that term is typically used in tax cases. Miss Slutter is not seeking the return by the government of excess taxes that she paid. Instead, she availed herself of a legal mechanism outlined in the Internal Revenue Code which allowed her to present the government an offer-in-compromise of her tax liability. It is that payment of $20,000 of which she seeks the return due to the government's rejection of her offer, not any excess taxes paid. Thus, the $20,000 cannot be characterized as a traditional tax “return,” as contemplated in § 7422 . Rather, it is the consideration which accompanied her offer-incompromise ultimately rejected by the government.

I find that three sections in particular of the Internal Revenue Code, when read in conformity with § 1346(a)(1) , provide the statutory provisions necessary to determine the scope of the court's authorization to adjudicate these types of cases. Koss , 69 F.3d at 707.

First, 26 U.S.C. § 7122 gives the Secretary of the Treasury, or his delegate, the authority to compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense. 26 U.S.C. § 7122(a) . The statute further states that the Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-incompromise is adequate and should be accepted to resolve a dispute. 26 U.S.C. § 7122(c) .

Second, 26 U.S.C. § 7809(b)(1) provides for the placement of funds offered in compromise in a deposit fund account, and more importantly here, for the return of such funds to the maker of the offer upon rejection by the Secretary. The statute specifically states that sums offered under the provisions of 26 U.S.C. § 7122 would be deposited with the Treasurer in a deposit fund account, and “the Secretary shall refund to the maker of such offer the amount thereof.” See 26 U.S.C. § 7809(b)(1) (emphasis added). This framework is also outlined in the Internal Revenue's own regulations. Specifically, 26 C.F.R. § 301.7122-1(h) provides:

Deposits. Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments… . If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.

26 C.F.R. § 301.7122-1(h) (emphasis added). I note that the regulation places no onus on the taxpayer to “flag” the money offered in compromise as a deposit in order to receive the money back, as instructed on IRS form 656, see supra pp. 1-2, n. 1. To the contrary, these sections of the Internal Revenue Code and the Internal Revenue Regulations clearly support Miss Slutter's contention that the payment she offered in compromise of her tax liability should have been returned to her once that offer was rejected.

Finally, 26 U.S.C. § 7433(a) specifically waives sovereign immunity limited to actions seeking damages in connection with any collection of tax that involves the reckless, intentional, or negligent disregard of any provision or regulation under the Internal Revenue Code:

If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States . Except as provided in section 7432 , such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

See 26 U.S.C. § 7433(a) (emphasis added). That Miss Slutter did not receive the $20,000 back from the government upon the rejection of her offer-in-compromise tends to prove that an officer or employee of the Internal Revenue Service disregarded the above provisions of the Tax Code either recklessly, intentionally, or negligently.

The final obstacle to Miss Slutter's recovery, however, is a fatal one. Title 26 of the United States Code, Section 7433 is subject to a requirement that all administrative remedies within the Internal Revenue Service available to the plaintiff be exhausted before bringing suit here. See 26 U.S.C. § 7433(d) . The framework for these administrative remedies is outlined in 26 C.F.R. 301.7433-1(d). 4 While Miss Slutter appealed the rejection of her offer-in-compromise with the Internal Revenue Service, there is nothing in the record which shows that she filed an administrative claim described in 26 C.F.R. 301.7433-1(e) 5 for the return of the $20,000 submitted with the offer-in-compromise before filing this complaint. Her request for an appeal of the decision rejecting the offer-in-compromise is a separate matter and does not satisfy this requirement. Under these circumstances, this case cannot be maintained due to its noncompliance with the terms of the statute under which the sovereign has consented to be sued. King , 395 U.S. at 4. Because sovereign immunity is jurisdictional in nature, F.D.I.C. v. Meyer , 510 U.S. 471, 475 (1994), and Miss Slutter has failed to meet the jurisdictional prerequisite of exhaustion of administrative remedies, I am constrained to find that the court has no subject matter jurisdiction over this matter. Accordingly, I will grant the defendant's motion.

An appropriate Order follows.

Footnotes

1 Page 2 of this form contains the following provision: "By submitting this offer, I/we have read, understand and agree to the following conditions: … (b) Any payments made in connection with this offer will be applied to the tax liability unless I have specified that they be treated as a deposit. Only amounts that exceed the mandatory payments can be treated as a deposit. Such a deposit will be refundable if the offer is rejected or returned by the IRS or is withdrawn. I/we understand that the IRS will not pay interest on any deposit." The plaintiff and her CPA both executed this form. The plaintiff argues that this form directly contradicts the IRS's own regulations and statutes, and characterizes the form as a contract of adhesion. While the provision on the form directly contradicts the relevant portions of the Internal Revenue Code and its regulations, see infra pp. 6-7, that is not dispositive here.

2 The notice from the Internal Revenue Service informing Miss Slutter that her appeal was denied contains a typographical error, which the parties have not mentioned. The first sentence reads, "This refers to your offer of $2,000, dated August 28, 2007 to compromise your liability …" See Compl., Exhibit D at 1. All other documents correctly portray Miss Slutter's offer-in-compromise as $20,000.

3 Section 7422 provides "[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected … until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof." 26 U.S.C. § 7422(a) .

4 26 C.F.R. § 301.7433-1(d) provides:

(1) Except as provided in paragraph (d)(2) of this section, no action under paragraph (a) of this section shall be maintained in any federal district court before the earlier of the following dates: (i) The date the decision is rendered on a claim filed in accordance with paragraph (e) of this section; or (ii) The date six months after the date an administrative claim is filed in accordance with paragraph (e) of this section.

(2) If an administrative claim is filed in accordance with paragraph (e) of this section during the last six months of the period of limitations described in paragraph (g) of this section, the taxpayer may file an action in federal district court any time after the administrative claim is filed and before the expiration of the period of limitations.

5 26 C.F.R. § 301.7433-1(e) provides:

(1) An administrative claim for the lesser of $ 1,000,000 ($ 100,000 in the case of negligence) or actual, direct economic damages as defined in paragraph (b) of this section shall be sent in writing to the Area Director, Attn: Compliance Technical Support Manager of the area in which the taxpayer currently resides.

(2) Form. The administrative claim shall include:

(i) The name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim;

(ii) The grounds, in reasonable detail, for the claim;

(iii) A description of the injuries incurred by the taxpayer filing the claim;

(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable; and

(v) The signature of the taxpayer or duly authorized representative.

ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 24 Feb 2010 14:20:00 +0000

Karl L. Matthies, et ux. v. Commissioner, 134 T.C. No. 6, Code Sec(s) 61; 402; 6662.
________________________________________
KARL L. MATTHIES AND DEBORAH MATTHIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 61; 402; 6662
Docket: Docket No. 22196-07.
Date Issued: 02/22/2010
Judge: Opinion by THORNTON
A return that has a “reasonable basis” is not negligent. Sec. 1.6662-3(b)(1), Income Tax Regs. The “reasonable basis” standard is “significantly higher than not frivolous or not 12 (...continued) and (3) that the “Annual Reserve Increase” was $305,866.76. Petitioners' own brief indicates that at the end of policy year 2, Hartford Life's reserves in the insurance policy were $1,035,030. Petitioners have offered no explanation why the interpolated terminal reserve value was purportedly only $305,866.74 in the light of their representation that Hartford Life maintained a reserve of $1,035,030. patently improper.” Sec. 1.6662-3(b)(3), Income Tax Regs. This standard is satisfied if the return position is reasonably based on various types of enumerated authorities, including statutory provisions, regulations, revenue rulings, and notices published by the IRS, taking into account the relevance and persuasiveness of the authorities and subsequent developments. Secs. 1.6662- 3(b)(3), 1.6662-4(d)(3)(iii), Income Tax Regs. The “reasonable basis” standard is less stringent than the “substantial authority” standard (which entails “an objective standard involving an analysis of the law and application of the law to relevant facts”), which in turn is less stringent than the “more likely than not standard” (which asks whether there is “a greater than 50-percent likelihood of the position being upheld”). Secs. 1.6662-3(b)(3), 1.6662-4(d)(2), Income Tax Regs. The negligence penalty may be inappropriate where an issue to be resolved by the Court is one of first impression involving unclear statutory Bunney v. Commissioner, 114 T.C. 259, 266 (2000); language. Lemishow v. Commissioner, 110 T.C. 110, 114 (1998); Hitchins v. Commissioner, 103 T.C. 711, 719-720 (1994); see Everson v. United States, 108 F.3d 234, 238 [79 AFTR 2d 97-1335] (9th Cir. 1997) (stating that “When a legal issue is unsettled, or is reasonably debatable” a negligence penalty is generally not appropriate).
This Court has not previously addressed the tax treatment of a bargain sale of a life insurance policy under section 61 or 402(a) or the application of the “entire cash value” standard under the applicable regulations. In adopting the 2005 final section 402(a) regulations, the IRS stated that it was responding to the question under the then-existing regulations of whether “entire cash value” includes a reduction for surrender charges. T.D. 9223, 2005-2 C.B. 591. Furthermore, the amended section 402(a) regulations, which dispense with the “entire cash value” standard, indicate that for a bargain sale of an insurance contract that occurs before August 29, 2005, the bargain element is includable in income under section 61 but is not treated as a “distribution” under the subchapter of the Code that includes section 402. Sec. 1.402(a)-1(a)(1)(iii), Income Tax Regs. On supplemental brief respondent has modified his original position as to the applicability of this amended regulation. Respondent's shift in this regard, together with his explanation of his reasons for promulgating the amended section 402(a) regulations, is indicative of the uncertainty under the applicable regulations of the tax consequences of the transaction in question. We conclude that petitioners had a reasonable basis for their return position. 13 We hold that petitioners are not liable for the accuracy-related penalty for negligence.
Other contentions raised by the parties but not addressed in. this Opinion we deem to be moot or without merit. 14 To reflect the foregoing and concessions by respondent,

ab@irstaxattorney.com (www.irstaxattorney.com) — Tue, 23 Feb 2010 17:14:00 +0000

Dec. 58,137(M)
Code Sec. 61, Code Sec. 446, Code Sec. 6501, Code Sec. 6663

Individuals: Income: Reconstruction of income: Specific items method: Penalties: Fraud: Assessment: Limitations

T.C. Memo. 2010-31

LISA R. AND DARREN T. COLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. SCOTT C. AND JENNIFER A. COLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
UNITED STATES TAX COURT. Docket Nos. 16991-08, 17275-08. Filed February 22, 2010.
Darren T. Cole and Scott C. Cole , for petitioners.

Stewart Todd Hittinger and Timothy Lohrstorfer , for respondent.

MEMORANDUM OPINION
KROUPA, Judge: Respondent determined deficiencies in petitioners' 1 Federal income taxes and fraud penalties under section 6663 2 for 2001. Specifically, respondent determined a $102,227 deficiency and a $76,670 section 6663 fraud penalty against Darren and Lisa Cole for 2001. 3 Respondent also determined a $556,187 deficiency and a $417,140 section 6663 fraud penalty against Scott and Jennifer Cole for 2001.

There are two primary issues for decision. The first issue is whether petitioners understated their income in the amounts respondent determined for 2001 as adjusted. We hold that they did. The second issue is whether petitioners are liable for the fraud penalty for 2001. We hold that they are. Because we find fraud, respondent is not time barred from assessing petitioners' taxes for 2001.

Background
Lisa and Darren Cole resided in California at the time they filed their petition. Jennifer and Scott Cole resided in Indiana at the time they filed their petition.

The Bentley Group
Petitioners Scott C. Cole (Scott) and Darren T. Cole (Darren) are brothers. Scott and Darren are attorneys who practiced law in Indiana through an entity known as the Bentley Group during 2001. Bentley was the maiden name of Darren's wife, Lisa Cole (Lisa). The brothers formed the Bentley Group in 1998 and also did business under the name Cole Law Offices. The Bentley Group and Cole Law Offices were different names for the same business, but there were no assumed name filings for either entity.

The law practice was a family affair, with Scott, Darren, and Lisa all taking an active part in the business. Scott's legal practice focused in part on business planning and taxation. Scott created limited liability companies (LLCs) for his clients, prepared corporate and individual tax returns, and represented clients before the Internal Revenue Service (IRS). Scott and Darren also performed criminal defense work, including work for the public defender's office in Boone County, Indiana. Darren, a graduate of Creighton University School of Law, was responsible for the management of the law practice. Lisa, a college graduate, acted as a paralegal.

Darren opened a business checking account for Cole Law Offices but used the Bentley Group's employer identification number. Scott, Darren, and Lisa all had signature authority over this account. The brothers agreed to share equally the law practice's profits and losses, though petitioners failed to present any documentation regarding this sharing arrangement. Darren and Scott also agreed that they could withdraw money from the Bentley Group's account. Any money withdrawn from the account other than money they earned for their legal services was considered “borrowed.” Petitioners failed to report any money they withdrew, however, as income for providing legal services and they also failed to provide any loan documents, notes, or any other investment account records evidencing loan transactions between Scott, Darren, and the Bentley Group's account.

Scott and Darren advised their individual clients, and they also advised clients together. These joint clients were the law practice's clients. Clients made payments either directly to the respective brother, through the Bentley Group, or to Cole Law Offices. Scott also received payment from a client with a check made payable to Scott C. Cole and Associates even though there was no such entity. The brothers did not keep records, nor did they produce or maintain invoices for their services. They also failed to keep records or invoices for Lisa's paralegal services.

The taxable deposits in the Bentley Group's account for 2001 totaled $1,430,802. The earnings came from many sources involving the efforts of both brothers and Lisa. The Bentley Group received most of its legal fees from Constance J. Gestner and Terri L. Haynes, co-trustees of the George Sandefur Living Trust (Sandefur Trust), which paid Scott $1.2 million in 2001 to represent the trust in all estate matters. The Sandefur Trust paid the fees in four installments of $300,000. The first check was payable to “Scott Cole and Associates,” a fictional business, and the remaining checks were made payable to “Cole Law Offices.”

Scott, Darren, and Lisa withdrew in excess of $1 million from the Bentley Group's account during 2001. They then transferred the funds into numerous other accounts with no business explanation for doing so. The brothers were unclear as to which account they used for Interest on Lawyer Trust Accounts (IOLTA) purposes. No records were kept for any of the transfers from the Bentley Group's account. The withdrawals made by or on behalf of Darren or Lisa totaled $198,308, while the withdrawals made by or on behalf of Scott included $1,173,263 in 2001.

Scott and Jennifer Cole's Personal Financial Activities
Scott did not always deposit his legal services fees into the Bentley Group's account. Scott deposited $79,294 into the personal checking account of his wife, Jennifer Cole (Jennifer), and deposited $6,475 into his personal bank account in 2001. Scott and Jennifer used the funds in these accounts to pay a variety of personal expenses including their children's school tuition and music lessons and residential landscaping.

Scott failed to report the legal services fees he generated in 2001 as taxable wage or self-employment income regardless of which account the amounts were credited. In addition, Scott failed to report any amounts he withdrew from the Bentley Group's account as taxable wage or self-employment income even though he withdrew $1 million plus for personal nonbusiness purposes.

Scott freely transferred amounts in the Bentley Group's account to his family and friends without keeping sufficient documentation of the transfers or reporting the transactions. For example, he transferred $50,000 from the Bentley Group's bank account to his mother. Scott also lent his father $40,000 from the Bentley Group's account. Scott used this transaction to further convolute the tracing of his income and told his father, rather than paying him back directly, to make a contribution to his church for $40,000 in Scott's name. Scott and Jennifer, thereafter, claimed a $40,000 charitable contribution deduction yet failed to report any of that amount as taxable wage or self-employment income. Scott also lent $300,000 to a friend for options trading and made a loan to his brother Mark for Mark's roofing company. Scott has not provided any records or other documentation to show that any amount withdrawn from the Bentley Group's account was not taxable. In addition, he has failed to show any business purpose for these transfers.

Scott also created an LLC known as JAC Investments, LLC (JAC). JAC are the initials for Jennifer A. Cole. JAC reported its principal business activity as “Investments” although there is nothing in the record to show any stock transactions. Rather, JAC operated as a conduit to which Scott transferred and assigned income from his legal services. JAC reported taxable deposits for 2001 of $79,652 and claimed $28,647 of expenses, though none of these expenses have been substantiated. Deposits into JAC's bank account were almost exclusively checks made payable to Scott individually, not JAC. Jennifer is a college graduate and had previously worked as an accountant. In 2001 she was a homemaker and had no income of her own, yet Scott reported her as owning a 99-percent interest in JAC with him owning a 1-percent interest in JAC. Scott reported self-employment tax on only $1,162 of income for 2001.

Scott formed and solely owned Scott C. Cole, P.C. (SCC), an Indiana professional corporation in 1997. 4 The Indiana Secretary of State administratively dissolved SCC in 2001 because SCC did not file its required business entity reports. SCC had no assets and did not appear to serve any business purpose. In 2005 Scott filed a tax return for SCC for 2001, the first and only tax return filed for SCC. SCC did not report receiving any income from the Bentley Group's account in 2001. SCC reported gross receipts of $158,553 and taxable income of $738 with a reported tax due of $258.

Scott transferred or assigned over $1 million in legal services fees in 2001 from the Bentley Group to at least seven different accounts. Scott commingled amounts in the Bentley Group's account with amounts in other accounts including JAC's account, SCC's account, Jennifer's personal account, Scott's personal account, his father's business account, and his mother's account. Scott and Jennifer failed to report, however, any wages or salaries, Schedule C income, or income from the Bentley Group or Cole Law Offices on their joint tax return for 2001. Instead, the joint tax return reflected only $341 of tax liability and $164 of self-employment tax liability. Scott subsequently filed for bankruptcy in 2002, at which time he failed to disclose any interest in the Bentley Group, Cole Law Offices, or any other law practice.

Darren and Lisa Cole's Personal Financial Activities
Darren also failed to report the amounts he withdrew from the Bentley Group's account on any tax return for 2001. Darren's primary source of income during 2001 was from the practice of law. This income was paid through the Bentley Group or directly to Darren. Like Scott, Darren transferred his legal services fees to multiple accounts. Darren maintained no bank account in his own name during 2001. Darren deposited checks totaling $24,847, paid to him for legal services he performed, into Lisa's bank account in 2001 but failed to report this amount on their joint tax return for 2001.

Scott formed an LLC for Darren and Lisa's benefit known as LRC Investment, LLC (LRC). LRC are the initials for Lisa R. Cole. LRC, similar to JAC, served no business purpose. Darren used it as a conduit to transfer and assign his legal services fees. Darren opened a bank account in LRC's name with an initial $20,000 deposit. No explanation has been given as to where the $20,000 originated or whether it was taxable. Darren and Lisa claimed to be 50-percent partners in LRC. Darren filed an information return for LRC for 2001 reporting LRC's principal business as “Management Consulting” and concealed that he was an attorney. The Bentley Group distributed $145,930 to LRC, which LRC reported as its total gross receipts. No amount was reported on any investment or stock transaction. LRC claimed unsubstantiated expenses of $135,636. In addition to lacking documentation, no claimed expense bore any relationship to the claimed business of LRC.

Lisa represented on a car loan application that she was employed by the Bentley Group and that she received a yearly salary of $51,996. Lisa made a similar representation on a home mortgage loan application. Her yearly salary on the mortgage loan application was represented at an increased $72,000 even though the representations were only days apart. In addition, Lisa deposited a total of $138,248 into her personal bank account during 2001. Despite these deposits and representations, Lisa failed to report any wage or self-employment income on any tax return for 2001.

Darren and Lisa withdrew a total of $198,308 from the Bentley Group's bank account in 2001 yet failed to report any amount. Lisa received at least $45,527 from the Bentley Group and other sources during 2001 but failed to report even a fraction of this amount. Lisa also made a $28,873 down payment on a house at the same time the Bentley Group's bank account reflected a withdrawal of the same amount, yet she failed to report any of this amount. Instead, Darren and Lisa reported only $10,201 in adjusted gross income on their joint tax return for 2001 and sought a $2,477 refund. They reported two minimal sources of income on the joint tax return. They reported only $2,978 from the Bentley Group and $10,294 from LRC. Darren filed for bankruptcy in 2003, at which time he failed to disclose any interest in the Bentley Group or any other law practice.

Respondent's Examination
Respondent began an examination of Scott and Jennifer's joint tax return for 2001 in 2003. Respondent assigned the audit to Revenue Agent Loretta Reed. Revenue Agent Reed met with Scott and learned of Scott and Darren's involvement in the Bentley Group, which still had not submitted a tax return for 2001.

Revenue Agent Reed thereafter requested, due to Darren's involvement in the Bentley Group, that Darren and Lisa's joint tax return for 2001 be selected for examination. Respondent assigned Revenue Agent Reed to audit Darren and Lisa. Neither Lisa nor Darren cooperated with Revenue Agent Reed during the audit. Darren threatened that Revenue Agent Reed would be arrested if she came upon his property, and Revenue Agent Reed received no response from Lisa after sending audit notices and summonses to her. Revenue Agent Reed eventually obtained audit information by issuing third-party summonses to Darren and Lisa's banks and mortgage company.

The Bentley Group's 2001 Information Return, Form 1065
Darren filed the information return for the Bentley Group for 2001 in 2004 after the audit of both partners had begun. The Bentley Group reported gross receipts and ordinary income of $1,583,900. It also reported there were no cash distributions or transfers of partnership interests for the 2001 tax year. This was inconsistent with all the distributions made to entities and persons during 2001. The K-1s attached to the Bentley Group's information return also did not reflect reality. The K-1 on the late-filed information return reflected that Darren had a 0-percent interest in the profits and losses of the Bentley Group and had only a 1-percent interest in its capital. The K-1 reflected that Scott's defunct SCC owned all the profits and losses of the Bentley Group and had a 99-percent interest in its capital. SCC had not filed any tax return for 2001. There was no K-1 for Scott individually.

Neither Scott nor Darren filed employment tax returns for the Bentley Group, and the Bentley Group claimed no deduction on the information return for payment of unemployment taxes. It also claimed no other expenses normally associated with operating a law practice. Further, despite the significant legal services income the Bentley Group received during 2001, the Bentley Group did not report any legal services income for 2001. At trial, Scott and Darren both asserted that SCC was the only partner of the Bentley Group. Neither Darren nor Scott reported any sale of his interest in the Bentley Group to SCC on his joint tax return.

Deficiency Notices Issued
Respondent used the specific items method to reconstruct Scott's and Darren's respective incomes from the Bentley Group in 2001. Respondent used the available records for the withdrawals that petitioners made from the Bentley Group's bank account. Respondent also did bank deposit analyses with respect to their incomes from other sources. Respondent determined that petitioners had omitted wages and self-employment income from their joint tax returns, and respondent issued petitioners deficiency notices and asserted fraud penalties against them. Petitioners timely filed petitions with this Court.

Discussion
We are asked to decide whether petitioners, two attorney brothers and their spouses, failed to report over $1.5 million in income from providing legal and tax preparation services, and if so, whether such underreporting of income was attributable to fraud. Petitioners created so many different legal entities and distributed money to so many entities and individuals in 2001 that petitioners themselves were confused at trial. Petitioners failed to keep adequate invoices and records, thus making their financial dealings even more convoluted. We begin by discussing the unreported income.

I. Unreported Income
Gross income generally includes all income from whatever source derived. Sec. 61(a) . Taxpayers must keep adequate books and records from which their correct tax liability can be determined. Sec. 6001 . When a taxpayer fails to keep records, the Commissioner has discretion to reconstruct the taxpayer's income by any reasonable means. Sec. 446(b) ; Webb v. Commissioner , 394 F.2d 366, 371-372 (5th Cir. 1968), affg. T.C. Memo. 1966-81; Factor v. Commissioner , 281 F.2d 100, 117 (9th Cir. 1960), affg. T.C. Memo. 1958-94.

The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving that these determinations are erroneous. Rule 142(a); Welch v. Helvering , 290 U.S. 111, 115 (1933). Both brothers acknowledge they are attorneys and earned income from providing legal services. In addition, Scott prepared taxes for others and testified that he understood that income earned from legal services must be reported on tax returns. They argue nonetheless that all the income deposited in the Bentley Group's account should be assigned to SCC, a defunct entity, not them individually.

Taxpayers may not avoid their tax liability on income they earned by simply assigning income to others. Trousdale v. Commissioner , 16 T.C. 1056, 1065 (1951), affd. 219 F.2d 563 (9th Cir. 1955). When a taxpayer creates an entity as a pure tax avoidance vehicle, the assignment of income theory applies to tax the taxpayer for the income attributed to the entity. See Jones v. Commissioner , 64 T.C. 1066, 1076 (1975). There is no written evidence for 2001 to suggest that SCC was involved with the Bentley Group. In fact, SCC was a defunct corporation that had been dissolved in 2001. The only document suggesting that SCC was a partner of the Bentley Group was the K-1 attached to the Bentley Group's information return for 2001, but this return was not filed or prepared until after Scott and Darren were being audited. All other evidence, including testimony at trial, shows that Scott and Darren were the only two partners of the Bentley Group in 2001. Furthermore, not only was SCC defunct in 2001 but it reported no taxable income and paid no income tax in 2001. Accordingly, we find any money deposited into the Bentley Group's account is income allocated to Scott and Darren, not SCC.

Petitioners failed to maintain adequate records of their income. Revenue Agent Reed therefore collected financial information through third-party summonses issued to their banks and mortgage lenders. The Commissioner may use indirect methods of reconstructing a taxpayer's income. Holland v. United States , 348 U.S. 121 (1954). The reconstruction of a taxpayer's income need only be reasonable in light of all surrounding facts and circumstances. Giddio v. Commissioner , 54 T.C. 1530, 1533 (1970). The specific items and bank deposits methods of income reconstruction used by the Commissioner have long been sanctioned by the courts. Clayton v. Commissioner , 102 T.C. 632, 645 (1994); Estate of Mason v. Commissioner , 64 T.C. 651, 656 (1975), affd. 566 F.2d 2 (6th Cir. 1977).

The bank deposits method assumes that all money deposited in a taxpayer's bank account during a given period constitutes income, but the Commissioner must take into account any nontaxable sources or deductible expenses of which the Commissioner has knowledge. Clayton v. Commissioner , supra at 645-646. The burden is on petitioners to show that respondent's method of computation is unfair or inaccurate. See DiLeo v. Commissioner , 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). We now focus on respondent's reconstruction of each couple's income for 2001.

A. Scott and Jennifer—Unreported Income

Scott and Jennifer filed a joint tax return for 2001 and reported gross income of $100,276, taxable income of $18,265, and a tax liability of $505. Respondent determined, however, that Scott received legal services and tax preparation fees far in excess of what they reported. The Sandefur Trust paid Scott $1.2 million for his legal services, though Scott and Jennifer did not report any of the amount on their joint tax return. In addition, Scott withdrew $1,173,263 from the Bentley Group's account in 2001, but failed to report any of the withdrawals as income. Scott claims he lent most of this money to his father, friends, and brothers and mistakenly asserts that loan proceeds are tax-exempt. Scott's misconception about amounts lent to others does not absolve Scott from paying taxes on income he earned by providing legal services.

In addition, JAC had taxable deposits of $79,652, all coming from Scott's legal services fees, yet Scott reported self-employment tax on only $1,162 of income for 2001. Moreover, a total of $79,294 was deposited into Jennifer's personal bank account in 2001, of which $59,264 was from Scott's legal services and tax preparation fees. Neither Scott nor Jennifer reported these deposits as income. Instead, Scott and Jennifer failed to report, in toto, over $1 million in legal services fees. They failed to report any of the legal services fees, yet they claimed a $40,000 charitable contribution deduction for amounts of legal services fees they had contributed to their church.

Respondent determined that Scott and Jennifer omitted $1,215,183 of income from their joint tax return for 2001. Respondent also allocated income for self-employment tax purposes between the brothers and determined that Scott had $1,329,689 of unreported self-employment income for 2001 after reviewing the checks deposited into the Bentley Group's account for 2001.

We conclude that the specific items and bank deposits methods respondent used to reconstruct Scott and Jennifer's income for 2001 were reasonable and substantially accurate. Scott and Jennifer have introduced no documentary evidence to show otherwise. Any inaccuracies in the income reconstruction are attributable to Scott and Jennifer's failure to maintain books and records. Accordingly, we find Scott and Jennifer had unreported income in the amounts respondent determined in the deficiency notices as adjusted.

B. Darren and Lisa—Unreported Income

Darren and Lisa reported $10,201 of adjusted gross income and claimed a $2,477 refund on their joint tax return for 2001. Darren testified that all of his income from the practice of law went through the partnership, yet he reported only $2,978 of the money deposited in the Bentley Group's account and $10,294 of the money deposited in LRC's account. Darren and Lisa withdrew, however, a total of $198,308 from the Bentley Group's account in 2001. Moreover, Lisa represented that she was employed and paid by the law practice, but she failed to report any income. Lisa also made a $28,873 down payment on her house directly from funds in the Bentley Group's account but failed to report any of this amount as income.

Darren and Lisa have failed to explain several omissions of income and have failed to substantiate the claimed expenses on their joint tax return. Darren and Lisa reported LRC received gross receipts of $145,930 in 2001, all coming from the Bentley Group, yet they offset the gross receipts with $135,636 of unsubstantiated expenses. We find it inconsistent that Darren and Lisa would be able to pay such excessive amounts of expenses for LRC if they had only a small amount of reportable income. The records support respondent's determination that Darren and Lisa omitted $261,684 of income from their joint tax return for 2001.

Darren earned significant legal fees working for a law practice that had ordinary income in excess of $1.5 million. Respondent determined that Darren had $198,282 of self-employment income from the practice of law, yet Darren failed to report any self-employment income. Lisa also failed to report any earnings from the Bentley Group on their joint tax return. This conflicts with her representations about her earnings on loan and mortgage documents. Moreover, the record reflects she received funds from the Bentley Group in 2001 yet failed to report any income. Deposits totaling $138,248 were made into Lisa's bank account in 2001, and only $21,550 can be attributed to nontaxable sources. Lisa also made a $28,873 down payment on her house directly from the Bentley Group's account. Respondent determined that Lisa earned $74,399 of self-employment income in 2001.

We conclude that the specific items and bank deposits methods respondent used to reconstruct Darren and Lisa's income were reasonable and substantially accurate. Darren and Lisa have introduced no documentary evidence to show otherwise. Any inaccuracies in the income reconstruction are attributable to Darren and Lisa's failure to maintain books and records and to their failure to cooperate with respondent during the audit. We find Darren and Lisa had unreported income in the amounts respondent determined in the deficiency notice as adjusted.

II. Fraud Penalty
We next consider whether any of petitioners is liable for the fraud penalty for 2001. The Commissioner must prove by clear and convincing evidence that the taxpayer underpaid his or her income tax and that some part of the underpayment was due to fraud. Secs. 7454(a) , 6663(a); Rule 142(b); Clayton v. Commissioner , 102 T.C. at 646.

Fraud is a factual question to be decided on the entire record and is never presumed. Rowlee v. Commissioner , 80 T.C. 1111, 1123 (1983); Beaver v. Commissioner , 55 T.C. 85, 92 (1970). The Commissioner must show that the taxpayer acted with specific intent to evade taxes that the taxpayer knew or believed he or she owed by conduct intended to conceal, mislead, or otherwise prevent the collection of the tax. Sec. 7454 ; Recklitis v. Commissioner , 91 T.C. 874, 909 (1988); Stephenson v. Commissioner , 79 T.C. 995, 1005 (1982), affd. 748 F.2d 331 (6th Cir. 1984).

Direct evidence of fraud is seldom available, and its existence may therefore be determined from the taxpayer's conduct and the surrounding circumstances. Stone v. Commissioner , 56 T.C. 213, 223-224 (1971). Courts have developed several indicia or badges of fraud. These badges of fraud include understating income, failure to deposit receipts into a business account, maintaining inadequate records, concealing income or assets, commingling income or assets, establishing multiple entities with no business purpose, failing to cooperate with tax authorities, and giving implausible or inconsistent explanations for behavior. Spies v. United States , 317 U.S. 492, 499 (1943); Bradford v. Commissioner , 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601. Although no single factor is necessarily sufficient to establish fraud, a combination of several of these factors may be persuasive evidence of fraud. Solomon v. Commissioner , 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603. We will look at each couple to determine whether the fraud penalty applies with respect to either spouse.

A. Scott and Jennifer—Fraud Penalty

We now consider whether Scott or Jennifer is liable for the fraud penalty. A taxpayer's intelligence, education, and tax expertise are relevant in determining fraudulent intent. Stephenson v. Commissioner , supra at 1006. Jennifer is college educated and worked as an accountant. Scott is an attorney and, as such, took an oath to uphold the law. In addition, Scott's legal practice included tax law and preparing tax returns for others. Scott testified that he understood that income from providing legal services is taxable, yet he failed to report the income as taxable on any return for 2001. In addition, Scott diverted most of the legal fees from the Bentley Group's account into numerous other accounts ostensibly as loans. Scott wants the Court to believe that such substantial withdrawals were loans, yet there is no documentation or records to show that a loan was made or that the person receiving the funds paid any interest. Further, even if such transactions were loans, that would not excuse Scott from reporting his legal services fees as income, whether directly payable to him or as a distributive share.

Scott and Jennifer commingled personal and business income without hesitation. Scott deposited earnings from his law practice into JAC's account, in which Jennifer was a 99-percent owner, and into Jennifer's personal account. Jennifer was aware of these deposits and wrote checks from these accounts to pay personal expenses, including her children's school tuition, landscaping payments, and her children's music lessons.

Scott and Jennifer did not report any income from the law practice on their joint tax return for 2001 even though more than $1.5 million was deposited into the Bentley Group's account. Scott had unfettered control over the Bentley Group's account and treated the money deposited in the Bentley Group's account as his personal funds. Scott transferred most of the money in the Bentley Group's account to relatives and friends including a transfer of $50,000 to his mother. Scott failed to produce any records documenting his deposits and withdrawals from the Bentley Group's account and has not rebutted respondent's determination that he received over $1 million in legal services fees in 2001. The lack of records indicates that Scott was not concerned with respecting the existence of different entities or the partners in the Bentley Group.

Scott also concealed assets. Scott deposited his legal services fees into numerous other accounts to hide income. We divine no business purpose for the LLCs Scott established. It appears they served as conduits to hide income Scott earned from providing legal services and preparing tax returns. Scott did not indicate he practiced law on any return filed or indicate that any income earned would be subject to self-employment taxes. Rather, he generally indicated he was an investor. Scott and Jennifer received over $1.2 million in income in 2001, but their joint tax return reflected only $341 of tax liability. Scott and Jennifer avoided income and self-employment taxes by assigning income from Scott's law practice to JAC and using those funds for personal purposes.

Scott also gave inconsistent answers regarding his legal and tax preparation practice. Scott testified that he considered himself a partner in the Bentley Group, and apparently he represented to others that he was a partner. He also represented that he was practicing law under Scott Cole and Associates, Cole Law Offices, and individually. He accepted checks made payable to any of these “persons” and deposited them in the Bentley Group's account regardless to whom the check was made payable. Scott showed little respect for business formalities and effectively made the Bentley Group nothing more than a checking account. Scott asserts that he transferred his entire interest in the Bentley Group to SCC, yet there are no documents to reflect such a transfer. Scott did not even know whether the IOLTA account was a Scott C. Cole account or a Cole Law Offices account. All the while he was transferring his legal services fees into seven different accounts.

We find that Scott and Jennifer used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes. Scott and Jennifer claimed that JAC was an investment company. If it was an operating company, however, it did not have any employees nor can we find that it was created for any valid business purpose. JAC was merely created in an attempt to avoid taxation.

Several of the badges of fraud apply to Scott and Jennifer. We conclude that respondent has proven by clear and convincing evidence that Scott and Jennifer each fraudulently understated their tax liabilities for 2001, and they have failed to show that any portion of the underpayment is not due to fraud. Accordingly, we find that the fraud penalty under section 6663 applies to Scott's and Jennifer's underpayment of tax for 2001 as adjusted.

B. Darren and Lisa—Fraud Penalty

We now consider whether Darren and Lisa are each liable for the fraud penalty. We agree with respondent that many of the badges of fraud are equally present for Darren's and Lisa's underpayment. Lisa worked as a paralegal at the law practice, and she had access to and signing authority over the Bentley Group's account. Darren, an attorney, was responsible for keeping the financial records of the law practice and prepared the information return for the Bentley Group for 2001. Darren failed to maintain or produce any records, however, evidencing deposits, withdrawals or loan transactions involving the Bentley Group's account. Darren also did not file the requisite information return for the Bentley Group until 2004, after he and Scott were being audited. In addition, the Bentley Group failed to file employment tax returns for Lisa, or any other employees of the law practice. Lisa failed to report any wage income from the Bentley Group.

Darren and Lisa both earned substantial amounts from the Bentley Group, yet reported only a nominal amount on their joint tax return. Darren never established a personal account in his name, but, like Scott, established multiple other accounts to avoid paying taxes. Darren and Lisa reported only $10,000 of income on their joint tax return after they claimed $135,636 of unsubstantiated expenses on the information return for LRC. Darren maintained no records to support his withdrawals and transfers to and from the Bentley Group's account. Darren and Lisa reported that the Bentley Group paid LRC $150,000 of income, not an insignificant amount, but there was no written explanation for the payment. Darren and Lisa also failed to cooperate with Revenue Agent Reed. Darren threatened that he would have Revenue Agent Reed arrested if she came on his property, and Lisa was unresponsive after receiving summonses from her.

We find that Darren and Lisa, like Scott and Jennifer, used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes. Darren and Lisa claimed that LRC was an investment company. If it was an operating company, however, it did not have any employees nor can we find that it was created for any valid business purpose. LRC was merely created in an attempt to avoid taxation. While Darren and Lisa did pay self-employment tax on the $10,000 of net income of LRC, they claimed expenses totaling 92.9 percent of the income. They cannot substantiate these expenses. Perhaps no documentation was kept because LRC had no business purpose and was merely a conduit for the assignment of income.

Several of the badges of fraud apply to both Darren and Lisa. We conclude that respondent has proven by clear and convincing evidence that Darren and Lisa each fraudulently understated their tax liabilities for 2001, and they have failed to prove that any portion of the underpayment is not due to fraud. We find that the fraud penalty under section 6663 applies to Darren's and Lisa's underpayment of tax for 2001 as adjusted.

III. Limitations Period
Because of our findings of fraud, the limitations periods for assessing petitioners' taxes have not expired. See sec. 6501(c)(1) .

We have considered all remaining arguments the parties made and, to the extent not addressed, we conclude they are irrelevant, moot, or meritless.

To reflect the foregoing,

Decisions will be entered for respondent for the reduced amounts .

Footnotes

1 These cases have been consolidated for purposes of trial, briefing, and opinion.

2 All section references are to the Internal Revenue Code in effect for 2001, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

3 Respondent issued petitioners “whipsaw” deficiency notices because of the inconsistent positions petitioners took. The amounts provided, however, are the amounts respondent ultimately determined are due rather than the amounts set forth in the deficiency notices.

4 Scott asserts that SCC was a partner in the Bentley Group, rather than he as an individual. We find no evidence to support this claim.

ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 17 Feb 2010 21:45:00 +0000

T.C. Memo. 2010-23

LEE E. AND KATHY H. NEWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
UNITED STATES TAX COURT. Docket No. 26844-06. Filed February 16, 2010.
Edward I. Kaplan , for petitioners.

Andrew R. Moore , for respondent.

MEMORANDUM OPINION
MARVEL, Judge: Respondent determined deficiencies in Federal income tax and an addition to tax under section 6651(a)(1) 1 as follows:

Addition to tax

Year
Deficiency 1

sec. 6651(a)(1)

1996
$72,145

-0-

1997
846,531

-0-

2001
473,380

$47,338

2002
229,565

-0-

2003
336,821

-0-

1 The years in dispute are 2001, 2002, and 2003. The deficiencies determined for 1996 and 1997 reflect solely the disallowance of net operating losses from the years in dispute.

The only issue for decision is whether the managing member interest of petitioner husband Lee E. Newell (petitioner husband) in a California limited liability company (L.L.C.) that is classified as a partnership for Federal income tax purposes is a limited partnership interest as a limited partner for purposes of applying the passive activity rules under section 469 and related regulations. 2 We hold that it is not.

Background
The parties submitted this case fully stipulated pursuant to Rule 122. We incorporate the stipulation of facts into our findings by this reference. On the date they petitioned this Court, petitioners resided in California.

Petitioner husband is an attorney licensed in Florida, but he does not practice law. His primary business activity involves the management of real estate investments. He spends more than 50 percent of his time and more than 750 hours annually in real property trade or business activities.

During 2001, 2002, and 2003 (years at issue) petitioner husband owned all of the stock in California Custom Millworks, Inc. (Millworks), an S corporation. Millworks' business included manufacturing and installing windows, cabinets, doors, trim, and other items of carpentry.

During the years at issue petitioner husband actively engaged in the conduct of the trade or business of Millworks as follows:

Year
Hours

2001
250

2002
300

2003
350

His participation in the trade or business of Millworks was a significant participation activity as defined by section 1.469-5T(c) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). During the years at issue Millworks incurred losses that were distributed to petitioner husband and deducted by petitioners on their Federal income tax returns. 3 Respondent does not challenge the amount of the losses, which were as follows:

Year
Loss

2001
$458,379

2002
1,270,452

2003
798,431

During the years at issue petitioner husband also owned 33 percent of the member interests in Pasadera Country Club, L.L.C. (Pasadera). Pasadera was formed in 1999 as an L.L.C. under California law to engage in the business of owning and operating a golf course, restaurant, and country club facility. Pasadera is classified as a partnership for Federal income tax purposes.

At all relevant times petitioner husband was the managing member of Pasadera 4 and was responsible for hiring and firing all management personnel. As the managing member, he also oversaw the construction of Pasadera's 38,000-square-foot clubhouse; created and administered all membership programs, including advertising and reviewing and approving membership applications; and reviewed, approved, and signed all checks for expenses incurred in the construction and operation of Pasadera. He was also responsible for annual filings with State and county agencies and for any liquor license, compliance, or other legal issues of Pasadera.

Petitioner husband negotiated all construction and permanent loans for Pasadera and was personally liable for those loans. As of the date on which the parties submitted the stipulation of facts, petitioner husband remained personally liable for Pasadera's outstanding loan obligations. If Pasadera experienced an operational cash shortfall, he, along with two other members of Pasadera, provided funding to cover the shortfall.

Petitioner husband actively engaged in the conduct of the trade or business of Pasadera as follows:

Year
Hours

2001
450

2002
400

2003
400

Pasadera incurred losses in each of the years at issue. Petitioner husband's distributive shares of the losses, the amounts of which respondent does not dispute, were as follows:

Year
Loss

2001
$1,882,125

2002
2,104,000

2003
2,034,394

Petitioners deducted the losses on their 2001-03 joint Federal income tax returns.

Respondent examined petitioners' 2001-03 income tax returns and determined that the losses from both Millworks and Pasadera had been incurred in a passive activity under section 469 and that the Millworks and Pasadera losses petitioners claimed in each of the years at issue “are suspended and not currently deductible” under section 469(a)(1) . Respondent issued to petitioners a notice of deficiency reflecting the determinations. As a further consequence of respondent's disallowance of the passive activity losses for the years at issue, respondent disallowed petitioners' claimed net operating loss carrybacks to 1996 and 1997 in the notice of deficiency. Petitioners timely petitioned this Court.

Discussion
A. Passive Activity Losses in General
Generally, losses incurred in a trade or business are deductible by a taxpayer under section 165(c)(1) . However, the deduction of a passive activity loss 5 is suspended, i.e., the loss is not deductible in the year incurred, but it may be carried forward to the next taxable year. Sec. 469(a)(1) , (b).

A passive activity is any activity that involves the conduct of a trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1) . A taxpayer materially participates in an activity if the taxpayer is involved in the operations of the activity on a regular, continuous, and substantial basis. Sec. 469(h)(1) .

When it enacted section 469 , Congress authorized the Secretary to prescribe regulations that specify what constitutes material participation for purposes of section 469 . Sec. 469(l)(1) . Pursuant to that grant of authority, in 1988 the Secretary promulgated temporary regulations under section 469 that apply to the years at issue. Secs. 1 .469-1T through 1.469-11T, Temporary Income Tax Regs., 53 Fed. Reg. 5686 (Feb. 25, 1988). 6

The temporary regulations promulgated under section 469 provide seven tests for determining whether an individual shall be treated as materially participating in an activity. 7 Sec. 1.469-5T(a) , Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). The parties agree that the only material participation test under the temporary regulations applicable to petitioner husband's Millworks and Pasadera activities is the significant participation activity test under section 1.469-5T(a)(4) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Under that test (1) the activity must be a significant participation activity for the taxable year, and (2) the individual's aggregate participation in all significant participation activities during the year must exceed 500 hours. Id. An activity is a significant participation activity only if (1) the activity is a trade or business, (2) the individual participates in the activity for more than 100 hours during the year, and (3) the individual cannot establish material participation under any of the other material participation tests in the regulations. Sec. 1.469-5T(c) , Temporary Income Tax Regs., supra .

B. The Parties' Arguments
The parties agree that petitioner husband's participation in Millworks and Pasadera satisfies the significant participation activity test of section 1.469-5T(a)(4) , Temporary Income Tax Regs., supra . Despite this agreement, respondent argues that section 469(h)(2) requires petitioner husband's interest in Pasadera, a California L.L.C., to be treated as an interest with respect to which he does not materially participate. Respondent contends that under section 469(h)(2) , which sets forth a special rule for “interests in a limited partnership as a limited partner”, and section 1.469-5T(e) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), petitioner husband's member interest in Pasadera is treated as a limited partnership interest as defined under section 1.469-5T(e)(3)(i)(B) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), and is subject to the restriction contained in section 1.469-5T(e)(1) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Respondent's argument assumes that petitioner husband held a limited partnership interest in Pasadera as a limited partner .

C. Special Rule for Limited Partnership Interests
Section 469(h)(2) provides: “Interests in limited partnerships.—Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.” 8 Section 1.469-5T(e) , Temporary Income Tax Regs., supra , 9 provides:

(e) Treatment of limited partners—(1) General rule. Except as otherwise provided in this paragraph (e), an individual shall not be treated as materially participating in any activity of a limited partnership for purposes of applying section 469 and the regulations thereunder to—

(i) The individual's share of any income, gain, loss, deduction, or credit from such activity that is attributable to a limited partnership interest in the partnership; and

(ii) Any gain or loss from such activity recognized upon a sale or exchange of such an interest.

* * * * * * *

(3) Limited partnership interest—(i) In general. * * * for purposes of section 469(h)(2) and this paragraph (e), a partnership interest shall be treated as a limited partnership interest if—

(A) Such interest is designated a limited partnership interest in the limited partnership agreement or the certificate of limited partnership, without regard to whether the liability of the holder of such interest for obligations of the partnership is limited under the applicable State law; or

(B) The liability of the holder of such interest for obligations of the partnership is limited under the law of the State in which the partnership is organized, to a determinable fixed amount (for example, the sum of the holder's capital contributions to the partnership and contractual obligations to make additional capital contributions to the partnership).

By its terms section 469(h)(2) applies only if the taxpayer has an interest in a limited partnership as a limited partner. See Garnett v. Commissioner , 132 T.C. ___ (2009). In Garnett we held that an interest in an Iowa L.L.C. was not an “interest in a limited partnership as a limited partner” within the meaning of section 469(h)(2) or the regulations thereunder. Id. at ___, ___ (slip op. at 22-23, 27). In so doing we recognized that Congress enacted section 469(h)(2) to address the statutory constraints on a limited partner's ability to participate in the partnership's business and that a member of an Iowa L.L.C. was not similarly constrained. Id. at ___ (slip op. at 21-23). Because a member of an Iowa L.L.C., unlike a limited partner, was not prohibited by State law from participating in the partnership's business and more closely resembled a general partner, we concluded that a member of an Iowa L.L.C. came within the general partner exception of section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra . Consequently, we held that the special rules of section 469(h)(2) did not apply to an interest in an Iowa L.L.C.

We turn then to petitioner husband's interest in Pasadera. Pasadera was formed as an L.L.C. under California law. Under California law, a member of an L.L.C. may participate in the management of the L.L.C. Cal. Corp. Code sec. 17150 (West 2006). 10 Moreover, under Pasadera's operating agreement, the managing member has the right to participate in the management of the L.L.C. 11 Petitioner husband was permitted to participate in the management of Pasadera by California law, and he was required to do so by the operating agreement. In contrast, under California law, a limited partner in a California limited partnership will lose his limited liability if he participates in managing the limited partnership. See Cal. Corp. Code sec. 15507(a) (West 2006).

Respondent concedes that petitioner husband substantially participated in managing Pasadera as its managing member. Respondent argues, however, that petitioner husband's interest in Pasadera was a limited partnership interest as that term is defined in section 1.469-5T(e)(3)(i)(B) , Temporary Income Tax Regs., supra , and consequently, section 469(h)(2) applies to his interest. In support of his argument, respondent notes, and petitioners do not dispute, that Pasadera is treated as a partnership for Federal tax purposes under section 301.7701-3(a) and (b), Proced. & Admin. Regs., and that petitioner husband enjoys limited liability under California law.

We reject respondent's argument. Respondent's argument fails to recognize that in order for section 469(h)(2) to apply at all, petitioner husband must have held an ownership interest in a limited partnership as a limited partner . See Garnett v. Commissioner , supra ; Gregg v. United States , 186 F. Supp. 2d 1123 (D. Or. 2000). Petitioner husband did not. As we emphasized in Garnett , an L.L.C. is a hybrid form of business entity that shares some of the characteristics of a partnership and some of the characteristics of a corporation. Garnett v. Commissioner , supra at ___ (slip op. at 14); see also 1 Bromberg & Ribstein, Partnership, sec. 1.01(b)(4) (1996). Members of a California L.L.C. can participate directly in management, but they also enjoy limited liability for company debts and liabilities under California law. 12 If we analogize a California L.L.C. to a limited partnership, the members of a California L.L.C. more closely resemble general partners than limited partners. This is particularly true with respect to petitioner husband, who was the managing member of Pasadera. In that capacity he managed the day-to-day operations of Pasadera, functioning just as a general partner would function in a limited partnership.

In Garnett v. Commissioner , supra , we did not decide whether an interest in an Iowa L.L.C. could be treated as an interest in a limited partnership for purposes of section 469 and the temporary regulations. 13 Instead, we focused our analysis on whether a member in an L.L.C. holds his membership interest “as a limited partner”. Specifically, we examined whether a member in an L.L.C. qualifies for the general partner exception set forth in section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra .

Section 1.469-5T(e)(1) , Temporary Income Tax Regs., supra , sets forth the general rule that a limited partner shall not be treated as materially participating in any activity of a limited partnership for purposes of applying section 469 and the regulations thereunder. However, section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra , provides:

(ii) Limited partner holding general partner interest.—A partnership interest of an individual shall not be treated as a limited partnership interest for the individual's taxable year if the individual is a general partner in the partnership at all times during the partnership's taxable year ending with or within the individual's taxable year (or the portion of the partnership's taxable year during which the individual (directly or indirectly) owns such limited partnership interest).

As we pointed out in Garnett v. Commissioner , 132 T.C. at ___ (slip op. at 18), the general partner exception of section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra , is not expressly confined to the situation where a limited partner also holds a general partnership interest. The exception provides that an individual who is a general partner is not restricted from claiming that he materially participated in the partnership. After examining the legislative history of section 469 and taking into account the lack of any prohibition regarding participation in management under State law, we concluded that the general partner exception was broad enough to cover the activity of a taxpayer who holds an interest in an L.L.C. and is authorized by State law to participate in managing the L.L.C. Garnett v. Commissioner , supra at ___ (slip op. at 20-23). We held that the taxpayers who were members of an Iowa L.L.C. held their membership interests in the L.L.C. as “general partners” within the meaning of the temporary regulations. Id.

The same reasoning applies to a membership interest in a California L.L.C. And, because the membership interest at issue here is held by the managing member, the reasoning is even more compelling. Unlike the taxpayers in Garnett , whose exact roles in the management of the L.L.C.s were not fleshed out, the parties stipulated that petitioner husband was the L.L.C.'s managing member and, as such, he actively and substantially participated in its management during 2001-03. In addition to the authority conferred by California law to participate in the L.L.C.'s management, petitioner husband was expressly authorized by the operating agreement to act on the L.L.C.'s behalf and to manage the L.L.C.'s operations. In fact, the parties stipulated that petitioner husband handled the day-to-day operations of Pasadera, including hiring and firing employees, negotiating loan agreements and other contracts, overseeing construction, administering membership programs, and reviewing, approving, and signing all checks. As the managing member of the L.L.C., petitioner husband functioned as the substantial equivalent of a general partner in a limited partnership. See id . at ___ (slip op. at 22).

In view of the above and consistent with Garnett , we conclude that petitioner husband comes within the general partner exception of section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra , and consequently did not hold his managing member interest in Pasadera, a California L.L.C., as a limited partner. Because section 469(h)(2) does not apply to petitioner husband's membership interest in Pasadera and because respondent concedes that petitioner husband otherwise met the requirements of the significant participation activity test under section 1.469-5T(a)(4) , Temporary Income Tax Regs., supra , petitioner husband's Pasadera activity was a significant participation activity for the years at issue, and his aggregate participation in all significant participation activities (Millworks and Pasadera) in each of the years at issue exceeded 500 hours. Thus, under the significant participation test of section 1.469-5T(a)(4) , Temporary Income Tax Regs., supra , petitioner husband is treated as materially participating in Millworks and Pasadera during the years 2001-03. We hold therefore that petitioners properly deducted their Millworks and Pasadera losses for 2001-03.

To reflect the foregoing,

Decision will be entered for petitioners .

Footnotes

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 The parties stipulated that the sec. 6651(a)(1) addition to tax applies to any deficiency determined for 2001. Because we conclude that petitioners are not liable for the deficiency determined for any of the years at issue, petitioners are not liable for the addition to tax.

3 In 2005 Millworks filed for bankruptcy “in which all its assets were disposed, and then liquidated.”

4 The parties stipulated that petitioner husband was the managing member of Pasadera during the years at issue. The First Amended and Restated Limited Liability Company Operating Agreement of Pasadera in effect during the years at issue (operating agreement) stated that the managing member of Pasadera was NCDG Golf, L.L.C. (NCDG Golf). Petitioner husband, as president of NCDG Golf, signed the operating agreement as the managing member.

5 Sec. 469(d)(1) defines a passive activity loss as the amount by which the aggregate losses from all passive activities for the taxable year exceed the aggregate income from all passive activities for the year.

6 Sec. 7805(e)(2) , which was enacted in 1988, provides: “Any temporary regulation shall expire within 3 years after the date of issuance of such regulation.” It applies to any temporary regulation issued after Nov. 20, 1988. Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 6232(b) , 102 Stat. 3735. The sec. 469 temporary regulations were issued on Feb. 19, 1988, before the effective date of sec. 7805(e) .

7 The seven tests in the temporary regulations are as follows:

(1) The individual participates in the activity for more than 500 hours during such year;

(2) The individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual's participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

(4) The activity is a significant participation activity (within the meaning of paragraph (c) of this section) for the taxable year, and the individual's aggregate participation in all significant participation activities during such year exceeds 500 hours;

(5) The individual materially participated in the activity (determined without regard to this paragraph (a)(5)) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;

(6) The activity is a personal service activity (within the meaning of paragraph (d) of this section), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; or

(7) Based on all of the facts and circumstances (taking into account the rules in paragraph (b) of this section), the individual participates in the activity on a regular, continuous, and substantial basis during such year.

Sec. 1.469-5T(a) , Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).

8 The temporary regulations under sec. 469 provide that an individual is not subject to sec. 469(h)(2) if: (1) The individual participates in the activity for more than 500 hours during the year; (2) the individual materially participated in the activity for any 5 taxable years (whether or not consecutive) during the 10 taxable years that immediately precede the taxable year; or (3) the activity is a personal service activity, which is an activity in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor, and the individual materially participated in the activity for any 3 taxable years (whether or not consecutive) preceding the taxable year. Sec. 1.469-5T(e)(2) , (a)(1), (5), (6), (d), Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988). None of the exceptions applies in this case.

9 Petitioners do not challenge the validity of sec. 1.469-5T , Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).

10 In addition, no member of an L.L.C. is personally liable for any debt, obligation, or liability of the L.L.C. solely by reason of being a member thereof. Cal. Corp. Code sec. 17101(a) (West 2006).

11 Although petitioner husband was personally liable for some loans of Pasadera, those obligations, as respondent points out, do not alter the fact that petitioner husband's liability as a member of Pasadera was limited to a determinable fixed amount.

12 Nevertheless, petitioner husband obligated himself personally for Pasadera's outstanding loan obligations.

13 In Thompson v. United States , 87 Fed. Cl. 728, 734 (2009), which was decided after we issued our Opinion in Garnett v. Commissioner , 132 T.C. ___ (2009), the U.S. Court of Federal Claims examined sec. 1.469-5T(e)(3) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), and concluded that sec. 1.469-5T(e)(3)(i)(B) , Temporary Income Tax Regs., supra , “literally requires that the ownership interest be in a business entity that is, in fact, a partnership under state law—not merely taxed as such under the Code.” Because the cited portion of the regulation was unambiguous, the Court of Federal Claims concluded that it had to enforce the regulation's plain meaning. Thompson v. United States , supra at 734. Moreover, because sec. 469(h)(2) refers to an interest in a partnership “as a limited partner”, the Court of Federal Claims concluded that “the taxpayer must actually be a limited partner” for the prohibition of sec. 469(h)(2) to apply. Id. The Court of Federal Claims held that (1) once sec. 1.469-5T(e)(3) , Temporary Income Tax Regs., supra , “is read in context and with due regard to its text, structure, and purpose, it becomes abundantly clear that it is simply inapplicable to a membership interest in an LLC”, and (2) even if the regulation could apply to the taxpayer, the taxpayer's interest “would best be categorized as a general partner's interest under §1.469-5T(e)(3)(ii) ”. Id. at 738 (citing Garnett v. Commissioner , supra at ___ (slip op. at 23), with approval).

ab@irstaxattorney.com (www.irstaxattorney.com) — Thu, 11 Feb 2010 14:55:00 +0000

Seven Important Facts about Claiming the First-Time Homebuyer Credit

If you purchased a home in 2009 or early 2010, you may be eligible to claim the First-Time Homebuyer Credit, whether you are a first-time homebuyer or a long-time resident purchasing a new home.

Here are seven things the IRS wants you to know about claiming the credit:

You must buy – or enter into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you enter into a binding contract by April 30, 2010, you must close on the home on or before June 30, 2010.
To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
To be considered a long-time resident homebuyer you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased. Additionally, your settlement date must be after November 6, 2009.
The maximum credit for a first-time homebuyer is $8,000. The maximum credit for a long-time resident homebuyer is $6,500.
You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Therefore, if you claim the credit you will not be able to file electronically.
New homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the dated certificate of occupancy. Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract.
If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 10 Feb 2010 22:34:00 +0000

U..S. v. BATES, 105 AFTR 2d 2010-XXXX, 01/28/2010
________________________________________

Court Name: UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
Docket No.: No. 07-2183,
Date Decided: 01/28/2010.
Disposition:
UOPINION
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN

Defendant-appellant Alonzo Bates appeals from the district court's denial of his motion for a new trial under Brady v. Maryland, 373 U.S. 83 (1963). Bates pled guilty to four counts of failing to file a tax return and was convicted on four counts of theft from a program receiving federal funds and one count of bank fraud. The charges related to Bates's use of his city-funded payroll during his three years as a Detroit City councilman. Bates argued before the district court that the government failed to turn over exculpatory and material evidence in the form of handwritten notes by an FBI case agent that contained two purported statements made by Bates's former girlfriend, Verenda Arnold. The statements were not included in the previously disclosed FBI 302 report, authored by the same agent, that detailed the interview with Arnold. The district court rejected Bates's Brady claims regarding both purported statements. For the reasons herein, we affirm.
On March 9, 2006, a federal grand jury returned a superseding indictment charging Bates in fourteen counts, including mail fraud, in violation of 18 U.S.C. § 1341 (counts one through four); theft from a program receiving federal funds, in violation of 18 U.S.C. § 666 (counts five through eight); extortion, in violation of 18 U.S.C. § 1951 (count nine); bank fraud, in violation of 18 U.S.C. § 1344 (count ten); and failure to file a tax return, in violation of 26 U.S.C. § 7203 (counts eleven through fourteen). The government alleged that Bates, an elected member of the Detroit City Council, orchestrated a scheme to employ “ghost” employees, including Arnold, who were paid hourly by the city to perform work for the office of Councilman Bates but who actually did not perform their work obligations, thereby stealing money from the city. On August 22, 2006, the first day of trial, Bates pled guilty to all four counts of failure to file a tax return, and the government dismissed the four counts of mail fraud. A jury convicted Bates on four counts of theft from a program receiving federal funds and one count of bank fraud but did not reach a verdict on the extortion count.

On January 30, 2007, Bates moved for a new trial, alleging that the government failed to turn over exculpatory evidence prior to trial in violation of Brady. Bates argued that the government did not disclose FBI case agent Michael Haynie's handwritten notes, which indicated that Arnold had said during a government debriefing that Bates did not know that she was not working her assigned twenty hours per week. That statement was not included in the FBI 302 report formally summarizing the debriefing that was authored by Agent Haynie and disclosed to the defense prior to trial. Furthermore, Bates contended that Haynie also omitted from the FBI 302 report the fact that Arnold strongly disagreed with the government's calculation of the hours for which she was wrongfully paid. The government disputed whether Arnold had made the statement relating to Bates's knowledge during the debriefing and argued that Arnold's comment regarding the number of hours billed that she actually worked was made outside the presence of the prosecution team. On the question of whether there was aBradyviolation, the Government argued before the district court that 1) Arnold's statement as to Bates's knowledge was speculative and therefore inadmissible at trial; 2) in light of the overwhelming evidence at trial, the outcome would not have been different even if the evidence had been admitted; and 3) Bates was on notice of the essential facts contained in the handwritten notes.

The district court held evidentiary hearings on the motion on March 7 and June 12, 2007, and subsequently denied Bates's motion on July 26, 2007. Regarding whether Arnold made a statement during the debriefing that disputed the percentage of hours billed for which she actually worked, the district court found that Bates did not offer any evidence to refute a contradictory assertion made in the affidavit of Arnold's attorney, Robert Harris. Harris had stated that Arnold never made that statement to the prosecution team but rather had made the claim to Harris outside the presence of the prosecution team. Because Bates did not establish that the prosecution team was even aware that Arnold claimed to have worked at least fifty percent of the hours billed, the district court found that Bates could not establish suppression of that information by the government. 1 Turning to the issue of Arnold's statement regarding Bates's lack of knowledge of her failure to work her billed hours, the district court presumed that Arnold made the statement to the prosecution team during the debriefing. The district court concluded, however, that the government's failure to disclose this information to Bates did not constitute aBradyviolation because Bates was indisputably aware that Arnold might be a source of exculpatory evidence and that he reasonably should have interviewed her on the subject of whether Bates knew of her actual work hours.
On September 20, 2007, the district court sentenced Bates to thirty-three months of imprisonment. Bates timely appealed.
II.
This court “reviews denial of a motion for a new trial based on Brady violations under an abuse of discretion standard,” but reviews “the district court's determination as to the existence of a Brady violation ... de novo.”United States v. Graham, 484 F.3d 413, 416–17 [99 AFTR 2d 2007-2366] (6th Cir. 2007) (citingUnited States v. Jones , 399 F.3d 640, 647 (6th Cir. 2005), and United States v. Miller, 161 F.3d 977, 987 (6th Cir. 1998)).

III.
Under Brady, “the suppression by the prosecution of evidence favorable to an accused upon request violates due process where the evidence is material either to guilt or to punishment, irrespective of the good faith or bad faith of the prosecution.” 373 U.S. at 87. There is noBrady violation, however, “unless the nondisclosure was so serious that there is a reasonable probability that the suppressed evidence would have produced a different verdict.” Strickler v. Greene, 527 U.S. 263, 281 (1999). As the Court noted in Kyles v. Whitley, “[t]he question is not whether the defendant would more likely than not have received a different verdict with the evidence, but whether in its absence he received a fair trial, understood as a trial resulting in a verdict worthy of confidence.” 514 U.S. 419, 434 (1995). We have held that where the defendant was ““aware of the essential facts that would enable him to take advantage of the exculpatory evidence,”” the government's failure to disclose that evidence does not violate Brady. Spirko v. Mitchell, 368 F.3d 603, 610 (6th Cir. 2004) (citing United States v. Todd, 920 F.2d 399, 405 (6th Cir. 1990)). To be entitled to a new trial, a defendant must also show that the suppressed exculpatory evidence “could not have been discovered earlier with due diligence, and is material.” United States v. Corrado, 227 F.3d 528, 538 (6th Cir. 2000) (citingUnited States v. Frost , 125 F.3d 346, 382 (6th Cir. 1997)).

Bates has not shown that he would have been unable to obtain Arnold's statement regarding his knowledge of work hours through reasonable pretrial due diligence. Rather, the record reflects that Arnold's statement and the related testimony that might result from the discovery of that statement were available to Bates from an easily accessible and known source. Bates has himself argued that his knowledge about whether his employees were working the hours for which they billed was a central issue for the defendant at trial, and the record demonstrates that Bates and his counsel were aware that Arnold might have been able to provide information on that issue. Furthermore, given the more than twenty-five year romantic relationship between Bates and Arnold and the “strong emotional attachment” that Arnold still feels for Bates, Bates and his counsel clearly had access to Arnold pretrial. Bates's trial counsel, Steven Fishman, stated that he had “many conversations” with Arnold's lawyer prior to trial and that Arnold's lawyer “kept [him] apprised of what was going on” with Arnold. (Mot. Hr'g Tr. at 77.) In fact, before Arnold pled guilty, Fishman believed that Arnold “was going to stand trial and claim that she didn't misstate her hours, that she worked those hours and she was supposedly going to explain how she was able to have a full-time job plus work the 20 hours a week for which she was paid.” (Mot. Hr'g Tr. at 72.) A reasonable defendant, therefore, “would have pursued that inquiry” by interviewing Arnold prior to trial, “unless, of course, he already knew that the inquiry would not in fact result in exculpatory information.”Spirko , 368 F.3d at 611. Because Bates was aware of the essential facts that would enable him to take advantage of the exculpatory evidence and could have discovered the evidence prior to trial with due diligence, we affirm the district court's denial of Bates's motion for a new trial.

Even if this Court were to assume that Bates could not have discovered the evidence prior to trial with due diligence, the record demonstrates that Arnold's statement about Bates's knowledge and related testimony on that topic would not have created a “reasonable probability” of a different verdict.Strickler , 527 U.S. at 281. Bates argues that “Arnold's proposed testimony, like her statements to agents during the debriefing, would have contradicted everything that the Government was arguing about [Bates's] knowledge of the hours worked/billed by his employees.” (Def.'s Br. at 10.) While Arnold's statement and testimony may be viewed as somewhat favorable to Bates, the inconsistencies present in that testimony render it insufficient to have produced a different result at trial. Although Arnold testified at the evidentiary hearing that Bates did not know when she worked fewer than twenty hours per week, she contradicted herself in explaining that Bates was “very hard on” his employees and required that they take notes at meetings to document and prove that they were there. (Evid. Hr'g Tr. at 13.) Furthermore, Arnold testified that while there “were weeks that [she] worked less than 20 hours” (Evid. Hr'g Tr. at 17), Bates approved all of her time sheets. These statements cast significant doubt on Arnold's claim that Bates lacked knowledge about the hours she worked.

The record also reveals significant questions regarding Arnold's credibility that would impact the value of her testimony at trial. See Mason v. Mitchell, 320 F.3d 604, 629 (6th Cir. 2003) (approving district court's credibility determination in Brady analysis). First, Arnold's long relationship with Bates, the fact that they have a son together for whom Bates pays child support, and Arnold's “strong emotional attachment” and desire not “to see him go to jail” all demonstrate a bias in favor of Bates. (Evid. Hr'g Tr. at 18, 30–31.) Second, the government has identified several instances of untruthfulness in Arnold's testimony that would undercut its value before a jury, including Arnold's lack of candor regarding whether she worked the midnight shift at the hospital leaving her days free, the nature of her relationship with Bates, and whether she did work for Bates during her hours at the hospital.
In light of the inconsistencies in Arnold's testimony and the credibility issues raised by the government, Arnold's statement does not rise to the level of materiality warranting reversal under Brady.

IV.

For the foregoing reasons, we affirm the district court's denial of defendant Bates's motion for a new trial and affirm his convictions.
________________________________________
*
The Honorable Paul L. Maloney, Chief United States District Judge for the Western District of Michigan, sitting by designation.
________________________________________
1
Bates raises this argument again on appeal. The district court's conclusion, however, that Bates had not offered any evidence to refute the statement contained in the affidavit of Arnold's attorney that Arnold never made this statement to the prosecution team, is fully supported by the record. Bates does not now cite, nor does a review of the record reflect, any evidence that challenges the district court's finding.

ab@irstaxattorney.com (www.irstaxattorney.com) — Mon, 08 Feb 2010 19:25:00 +0000

https://checkpoint.riag.com/app/Checkpoint?usid=2281d6b7441&lastCpReqId=1583634&lkn=mainFS&uqp=441831&bhcp=1

ab@irstaxattorney.com (www.irstaxattorney.com) — Mon, 08 Feb 2010 17:36:00 +0000

ADVANCE RELEASE Documents, In re F. Abir, (Feb. 8, 2010)
2010-1 ustc ¶50,201Code Sec. 6871
In re Fereydoon Abir and Flora Abir, Debtors.
Fereydoon Abir and Flora Abir, Plaintiffs v. United States of America, Department of Treasury, and Internal Revenue Service, Defendants.
UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK. Case No.: 08-70566-478. Chapter 7. Adv. Pro. No.: 08-8321-478.
The Debtors argue that their tax obligations for the years at issue should be discharged because the tax returns were due more than three years prior to the Petition Date and that there were no assessments of tax within 240 days of the Petition Date. The IRS argues that the Debtors' requests for a collection due process hearing with the IRS for the 2000 to 2003 tax years suspended the statute of limitations with regards to collection actions by the IRS for 700 days under 26 U.S.C. §6330(e) , plus an additional 90 days provided under 11 U.S.C. §507(a)(8) . When the 790 day suspension on collection is taken into account, the expiration dates for the collection statutes for the 2000 to 2003 tax years fall within three years of the Petition Date under 11 U.S.C. §507(a)(8)(A)(i) . With respect to the obligation for the 2004 tax year, the IRS argues that the Debtors' 2004 tax return was due within three years of the Petition Date and thus excepted from discharge under §507(a)(8)(A)(i) . Alternatively, the IRS argues that the Debtors' tax obligations at issue should be excepted from discharge under 11 U.S.C. §524(a)(1)(C) alleging that the Debtors willfully attempted to evade or defeat their tax obligations.
DISCUSSION
Under 11 U.S.C. §523(a)(1) , a discharge under 11 U.S.C. §727 does not discharge an individual debtor from any debt (1) for a tax of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of the Bankruptcy Code, whether or not a claim for such tax was filed or allowed. 11 U.S.C. §523(a)(1)(A) .
Under 11 U.S.C. §523(a)(1)(A) and §507(a)(8)(A) , allowed unsecured claims of governmental units are excepted from discharge to the extent such claims are for a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition:
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
(ii) assessed within 240 days before the date of the filing of the petition, exclusive of —
(I) any time during which an offer and compromise with respect to that tax was pending or in effect during that 240 day period plus 30 days; and
(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days .

11 U.S.C. §507(a)(8)(A) .
An otherwise applicable time period in this paragraph [507(a)(8)] shall be suspended for any period during which a governmental unit is prohibited under applicable nonbankruptcy law from collecting a tax as a result of a request by the debtor for a hearing and an appeal of any collection action taken or proposed against the debtor, plus 90 days; plus any time during which the stay of proceedings was in effect in a prior case under this title or during which collection was precluded by the existence of 1 or more confirmed plans under this title, plus 90 days .
11 U.S.C. §507(a)(8) (emphasis added).
Section 6330(e) of the United States Internal Revenue Code provides in pertinent part, “if a hearing is requested under [26 U.S.C. §6330(a)(3)(B) ], the levy actions which are the subject of the requested hearing and the running of any period of limitations under section 6502 (relating to collection after assessment) … shall be suspended for the period during which hearing, and appeals therein, are pending.” 26 U.S.C. §6330(e) .
The argument by the IRS that the Debtors' tax liability for the 2000 to 2003 tax years is nondischargeable under section 507(a)(8)(A)(i) on the basis that the collection statutes expire within the three-year look-back period from the petition date is incorrect. Section 507(a)(8)(A)(i) excepts tax claims for which a tax return is last due within the three-year lookback period. 11 U.S.C. §507(a)(8)(A)(i) . See also Young v. United States , 535 U.S. 43, 46 (2002). It is the date the tax returns are due that controls whether a tax obligation is dischargeable and not whether the collection statute for such taxes expires within the three-year look-back period which determines dischargeability.
However, in spite of the IRS's misapplication of section 507(a)(8)(A)(i) , in determining the three-year look-back period from the Petition Date, section 507(a)(8) provides that any applicable time period under this paragraph shall exclude any time during which a stay of collection proceedings was in effect as a result of (a) a prior bankruptcy case filed within such period, or (b) any suspension arising under the Internal Revenue Code as a result of a request by the Debtors for a hearing of any collection action taken or proposed against the debtors, plus 90 days. 11 U.S.C. §507(a)(8) . Young v. United States , 535 U.S. 43 (holding that the three-year look-back period is subject to traditional principles of equitable tolling and is tolled during the pendency of a previous bankruptcy case). As discussed above, the IRS was stayed from any collection action from July 28, 2005 when requests for a collection due process hearing were filed with the IRS to June 28, 2007 when the withdrawal of such requests was made, plus the 90 day period following June 28, 2007 to September 26, 2007. While the Debtors argue that the IRS failed to resolve any issues with respect to the Debtors' tax liability for almost 2 years during the collection due process period, the Court notes that during this period, the Debtors' first bankruptcy case was filed and was pending for almost 8 months before being dismissed.
Prior to the end of the 90 day period after June 28, 2007, the IRS was again stayed from any collection action for the pre-petition taxes as a result of the Southern District Bankruptcy Case filed against Dr. Abir on September 12, 2007. Under 11 U.S.C. §362(a) , the filing of a bankruptcy petition, whether a voluntary petition under section 301 or 302, or an involuntary petition under section 303 , operates as a stay, applicable to all entities, of any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the bankruptcy case. 11 U.S.C. §362(a)(6) . Similarly, under 26 U.S.C. §6503(h) ,
[t]he running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collection and (1) for assessments, 60 days thereafter; and (2) for collection, 6 months thereafter.
26 U.S.C. §6503(h) .
The IRS was again stayed from any collection action from September 12, 2007 to December 20, 2007, when Dr. Abir's Southern District Bankruptcy Case was dismissed, plus at least another 90 days under 11 U.S.C. §507(a)(8)(A)(ii)(II) . However, less than 90 days after the dismissal of the Southern District Bankruptcy Case, the bankruptcy petition for this present case was filed on February 4, 2008. As a result of the requests for due process hearing and Dr. Abir's Southern District Bankruptcy Case, the IRS has been continuously stayed from any collection action since July 28, 2005 under either the United States Internal Revenue Code or the Bankruptcy Code.
Accordingly, with respect to Dr. Abir, the three-year look-back period has been continuously tolled since July 28, 2005. Therefore, the three-year look-back is essentially three years back from July 28, 2002 to July 28, 2005. As the 2000 to 2004 tax returns were filed within three years of July 28, 2005, Dr. Abir's tax liabilities to the IRS for the 2000 to 2004 tax years are excepted from discharge.
Moreover, with respect to the Debtors' federal income tax liability for the 2004 tax year, the Debtors concede that their 2004 tax return was due within three years of the Petition Date absent any suspension of IRS collection actions. Accordingly, the Debtors' federal tax liability for the 2000, 2001, 2003 and 2004 tax years are not dischargeable pursuant to 11 U.S.C. 507(a)(8)(A)(i).
In addition, the Court finds that the Debtors' federal income tax liabilities for the 2000 to 2004 tax years are also excepted from discharge pursuant to 11 U.S.C. §507(a)(8)(A)(ii) as the Debtors' income tax liabilities for those years were assessed within 240 days of the Petition Date. While the Debtors argue there were no assessments by the IRS for the tax years at issue within 240 calendar days of the Petition Date, section 507(a)(8) provides that any time during which a stay of collection proceedings was in effect as a result of (a) a prior bankruptcy case filed within such 240 day period, or (b) any suspension arising under the Internal Revenue Code as a result of a request by the Debtors for a hearing of any collection action taken or proposed against the debtors with the addition of 90 days, is also excluded from the calculation of the 240 day period. 11 U.S.C. §507(a)(8) .
Here, the IRS made assessments on (1) June 27, 2005 for the 2000 tax year, (2) January 10, 2005 for the 2001 tax year, (3) April 11, 2005 for the 2002 and 2003 tax years, and (4) September 19, 2005 for the 2004 tax year. As discussed above, the IRS has been continuously stayed from any collection action against Dr. Abir since July 28, 2005. From the earliest assessment date of January 10, 2005 to July 28, 2005, when the Debtors filed their request for a collection due process hearing, only 199 days had passed. Accordingly, with respect to Dr. Abir the IRS assessments for the 2000 to 2004 tax years are within 240 day look-back period and are non-dischargeable under 11 U.S.C. §§523(a)(1) and 507(a)(8)(A)(ii).
With respect to Mrs. Abir, the 240 day look-back period would only exclude the period from July 28, 2005 to September 26, 2007 as she was not a debtor in the Southern District Bankruptcy Case. Accordingly, the 240 day look-back period for Mrs. Abir would go back to April 10, 2005. Therefore, Mrs. Abir's federal tax obligations would also be nondischargeable with respect to the 2000, 2002, 2003 and 2004 tax years under 11 U.S.C. §§523(a)(1) and 507(a)(8)(A)(ii). With respect to the 2001 tax year, the Court has already determined that Mrs. Abir's liability is nondischargeable under 11 U.S.C. §§523(a)(1) and 507(a)(8)(A)(i).
As the Court has determined the Debtors' tax liability for the 2000 to 2004 tax years to be excepted from discharge, the Court need not make a determination as to whether the Debtors willfully attempted to evade or defeat such taxes so that the tax obligations would also be excepted from discharge under 11 U.S.C. §523(a)(1)(C) .
CONCLUSION
Based upon the foregoing, the Debtors' federal income tax liability for the 2000 to 2004 tax years are excepted from discharge under 11 U.S.C. §§523(a)(1) , 507(a)(8)(A)(i) and/or 507(a)(8)(A)(ii). The Debtors' request for a determination that their federal income tax liabilities for the 2000 to 2004 tax years are discharged is hereby denied.
So ordered.
Dated: Central Islip, New York February 1, 2010

ab@irstaxattorney.com (www.irstaxattorney.com) — Thu, 04 Feb 2010 13:09:00 +0000

SCHUMER, HATCH UNVEIL TARGETED JOB CREATION BILL
Senators Believe Payroll Tax Cut Most Effective, Affordable Way to Get America Back to
Work
WASHINGTON – U.S. Senators Chuck Schumer (D‐New York) and Orrin Hatch (R‐Utah) unveiled
targeted legislation today that they believe would be most effective at putting the American
people back to work. The Hire Now Tax Cut Act of 2010 would grant any private‐sector
employer that hires a worker who had been unemployed for at least 60 days to not have to pay
the employer’s 6.2 percent share of the Social Security payroll tax on that employee for the
remainder of 2010.
“This proposal shows how much we can do to help create jobs when politics is put aside. Our
payroll tax cut is a simple, cost‐effective and bipartisan solution. It will help put more Americans
to work right away,” Senator Schumer said.
“While Senator Schumer and I disagree on most issues, we’ve been able to come together on an
affordable, effective and targeted proposal to get the American people back to work,” said
Hatch. “As a conservative, this proposal isn’t about more and more government spending; it’s
about tax relief to get employers hiring again, which is exactly what millions of unemployed
Americans most desperately need.”
The Senators cite five reasons why the payroll tax holiday is the best means of spurring
job creation:
• Simple. This proposal is not only easy to explain, but easy to administer –
avoiding waste, fraud and abuse.
• Focused. It is exclusively focused on hiring unemployed workers.
• Front‐loaded. It provides an incentive for businesses to hire workers earlier in
the year.
• Immediate. It puts money into a business to start hiring immediately.
• Affordable. It will cost substantially less than other proposals.
Unlike various other tax credit proposals, this payroll tax holiday would go immediately
to a business’ bottom line – there would be no waiting until 2011 to receive a tax credit.
As an additional incentive, for any qualifying worker hired under this initiative that the
employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an
additional non‐refundable $1,000 tax credit after the 52‐week threshold is reached, to
be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the
second 26‐week period must be at least 80 percent of the pay in the first 26‐week
period.
Workers hired after the date of introduction are eligible for the payroll tax forgiveness
and the retention bonus, but only wages paid after the date of enactment receive the
exemption from payroll taxes.
A document fully outlining the proposal is below.
###
Senators Charles E. Schumer and Orrin Hatch
“HIRE NOW TAX CUT ACT OF 2010”
February 3, 2010
BASIC CONCEPT: Starting immediately after enactment, any business that hires a
worker that had been without full‐time work for at least 60 days prior to employment
can avoid paying the employer’s share of Social Security taxes on that worker for the
duration of 2010. The more a business pays a worker (up to the maximum Social
Security wage of $106,800), and the longer a business has a worker on its payroll, the
greater the tax benefit – so there is an incentive to hire people sooner, and pay them
more.
Unlike various tax credit proposals, the benefits under the “Hire Now Tax Cut” go
immediately into a business’ bottom line – no waiting until 2011 to receive a tax credit.
And since the benefit starts immediately after enactment and does not have an
arbitrary cap, it will facilitate utilization because some of the past issues with payroll
software are avoided.
For any qualifying worker hired under this incentive that the employer keeps on payroll
for a continuous 52 weeks, that employer is eligible for an additional $1,000 tax credit
after the 52‐week threshold is reached, to be taken on their 2011 tax return. In order to
be eligible, the employee’s pay in the second 26‐week period must be at least 80
percent of the pay in the first 26‐week period.
Workers hired after the date of introduction (February 2) are eligible for the payroll tax
forgiveness and the retention bonus, but only wages paid after the date of enactment
receive the exemption from payroll taxes.
EXAMPLES OF TAX SAVINGS:
􀂾 Hire a $50,000 worker on March 1, save $2,583.
􀂾 Hire a $90,000 worker on April 1, save $4,185.
􀂾 Hire a $60,000 worker on May 1, save $2,480.
ADDITIONAL FEATURES:
The tax benefit applies only to private‐sector employment, including nonprofit
organizations – public sector jobs are not eligible for either benefit.
Employees who are immediate family members of the employer do not qualify.
There is no minimum weekly number of hours that the new employee must work for the
employer to be eligible, and there is no maximum on the dollar amount of payroll taxes
per employer that may be forgiven.
For workers that would otherwise be eligible for the Work Opportunity Tax Credit, the
employer must select one benefit or the other for 2010 – no double‐dipping.
A worker who replaces another employee who performed the same job for the
employer is not eligible for the benefit, unless the prior employee left the job voluntarily
or for cause.
For the retention bonus to be paid, the worker’s wages during the second 26‐week
period must be at least 80 percent of the wages during the first 26‐week period.
Lost Social Security Trust Fund revenues will be supplemented by the General Fund.
ADVANTAGES/BENEFITS:
• Simple. The Schumer‐Hatch idea is easy to explain and administer: “No
employer payroll taxes on unemployed workers hired in 2010.” Since the
proposal is for a complete elimination of the 6.2 percent payroll tax for eligible
workers, rather than a fixed or capped dollar amount, employers will know to
simply zero out the tax for eligible workers.
• Focused. Given our budgetary constraints and the nagging problem of long‐term
unemployment, any employment incentive should be focused on the hiring of
workers who are currently unemployed. Only by focusing on the unemployed
can we get people off the unemployment rolls at an affordable cost to
taxpayers. Plus, unlike some versions of a payroll tax holiday, this proposal is not
biased towards either low‐wage or high‐wage workers. Under the Schumer‐
Hatch plan, a business saves 6.2 percent on both a $40,000 worker and a
$90,000 worker.
• Front‐Loaded. The proposal provides an incentive for businesses to hire workers
earlier in the year, because the tax benefit will be greater. A $60,000 worker
hired on March 1 will save a business about $3,100 in taxes, while that same hire
delayed until May 1 will save about $2,500.
• Immediate. In the current environment, no business should have to wait until
2011 to receive tax relief for hiring. Our proposal puts money into a business'
cash flow immediately, since the tax is simply not collected in the first place.
• Affordable. Because this provision is targeted towards hiring the unemployed,
as opposed to providing a tax benefit for any increase in payroll, its cost should
be more affordable at a time of record budget deficits

ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 03 Feb 2010 12:10:00 +0000

Notice 2010-19, 2010-7 IRB, 02/02/2010, IRC Sec(s).

Headnote:

Reference(s):

Full Text:

Purpose And Background

This notice alerts taxpayers that the Internal Revenue Service (IRS) intends to issue Notice 2010-19, 2010-7 IRB, 02/02/2010, IRC Sec(s).

Headnote:

Reference(s):

Full Text:

Purpose And Background

This notice alerts taxpayers that the Internal Revenue Service (IRS) intends to issue guidance under section 2511(c) of the Internal Revenue Code. Congress enacted this section in section 511(e) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and amended it in section 411(g)(1) of the Job Creation and Worker Assistance Act of 2002. Public Laws 107-16, 115 Stat. 71, and 107-147, 116 Stat. 46. Section 2511(c) is effective for transfers made after December 31, 2009, and before January 1, 2011.

Section 2511(a) generally provides that the gift tax shall apply to transfers in trust or otherwise, whether direct or indirect. Under § 25.2511-2(b) of the Gift Tax Regulations, a gift is complete when the donor parts with sufficient dominion and control as to leave in the donor no power to change its disposition. Section 2511(c) provides that, notwithstanding any other provision of section 2511 and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1. The Joint Committee on Taxation's explanation of section 2511(c) provides that certain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would not have been treated as transfers under the gift tax provisions in effect prior to 2010. Joint Committee on Taxation, Technical Explanation of the “Job Creation and Worker Assistance Act of 2002” (JCX-12-02), March 6, 2002.

Interim Provisions

Some taxpayers may have inaccurately interpreted section 2511(c) as excluding from the gift tax transfers to a trust treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1, even though those transfers would otherwise be taxable under Chapter 12. The provisions of Chapter 12 regarding the substantive law applicable to the gift tax were not amended by EGTRRA, and those provisions continue to apply to all transfers made by donors during 2010. Section 2511(c) is an addition to those substantive law provisions and is applicable to transfers made in 2010. Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax. Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1 is considered to be a transfer by gift of the entire interest in the property under section 2511(c). The provisions of Chapter 12 as in effect on December 31, 2009, continue to apply (both before and during 2010) to all transfers made to any other trust to determine whether the transfer is subject to gift tax.

Effective Date

This notice is applicable to transfers made in trust after December 31, 2009. The Treasury Department and the IRS intend to issue regulations to confirm the conclusions set forth in this notice.

DRAFTING INFORMATION

The principal author of this notice is Laura Urich Daly of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact Laura Urich Daly on (202) 622-3090 (not a toll-free call).. Congress enacted this section in section 511(e) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and amended it in section 411(g)(1) of the Job Creation and Worker Assistance Act of 2002. Public Laws 107-16, 115 Stat. 71, and 107-147, 116 Stat. 46. Section 2511(c) is effective for transfers made after December 31, 2009, and before January 1, 2011.

Section 2511(a) generally provides that the gift tax shall apply to transfers in trust or otherwise, whether direct or indirect. Under § 25.2511-2(b) of the Gift Tax Regulations, a gift is complete when the donor parts with sufficient dominion and control as to leave in the donor no power to change its disposition. Section 2511(c) provides that, notwithstanding any other provision of section 2511 and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1. The Joint Committee on Taxation's explanation of section 2511(c) provides that certain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would not have been treated as transfers under the gift tax provisions in effect prior to 2010. Joint Committee on Taxation, Technical Explanation of the “Job Creation and Worker Assistance Act of 2002” (JCX-12-02), March 6, 2002.

Interim Provisions

Some taxpayers may have inaccurately interpreted section 2511(c) as excluding from the gift tax transfers to a trust treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1, even though those transfers would otherwise be taxable under Chapter 12. The provisions of Chapter 12 regarding the substantive law applicable to the gift tax were not amended by EGTRRA, and those provisions continue to apply to all transfers made by donors during 2010. Section 2511(c) is an addition to those substantive law provisions and is applicable to transfers made in 2010. Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax. Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1 is considered to be a transfer by gift of the entire interest in the property under section 2511(c). The provisions of Chapter 12 as in effect on December 31, 2009, continue to apply (both before and during 2010) to all transfers made to any other trust to determine whether the transfer is subject to gift tax.

Effective Date

This notice is applicable to transfers made in trust after December 31, 2009. The Treasury Department and the IRS intend to issue regulations to confirm the conclusions set forth in this notice.

DRAFTING INFORMATION

The principal author of this notice is Laura Urich Daly of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact Laura Urich Daly on (202) 622-3090 (not a toll-free call).

ab@irstaxattorney.com (www.irstaxattorney.com) — Tue, 02 Feb 2010 13:32:00 +0000

2010-1 ustc ¶50,190Code Sec. 7201, Code Sec. 7212
UNITED STATES OF AMERICA Plaintiff - Appellee v. JAMES RAY PHIPPS Defendant - Appellant.

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT. No. 08-10831. Appeal from the United States District Court for the Northern District of Texas.
Before KING, GARZA, and HAYNES, Circuit Judges.

GARZA, Circuit Judge: James Ray Phipps appeals his conviction for mail and wire fraud, and aiding and abetting, in violation of 18 U.S.C. §§1341 , 1343, and 2; corrupt endeavoring to obstruct and impede the internal revenue laws, in violation of 26 U.S.C. §7212(a) ; and income tax evasion, in violation of 26 U.S.C. §7201 . For the reasons set forth below, we AFFIRM.
I
For over twenty years, Phipps has operated self-styled “educational programs dedicated to teaching others how to eliminate their debt and live within their means.” Despite notice from the United States Postal Service (“USPS”) that both of his prior, similarly structured endeavors were considered illegal pyramid schemes, Phipps created the instant program, Life Without Debt (“LWD”). Members were encouraged to contribute between $2,000 and $100,000; Phipps claimed that a larger contribution would engender larger returns. As with prior schemes, members were required to recruit two new members prior to receiving any payments; they also received educational literature and tapes with anti-income tax messages. Notably, Phipps told participants that the income received through LWD would not need to be reported to the IRS. Phipps himself did not report any of his LWD income to the IRS.
During his ten years of operating LWD, Phipps received notices from the states of Georgia, Oklahoma, and Maryland that LWD constituted a pyramid scheme, and he may be subject to civil or criminal enforcement actions as a result. Indeed, six LWD members were arrested in Florida for felony and misdemeanor promotion of and participation in an illegal lottery. Despite these warnings that his activities might be illegal, Phipps continued to recruit new members through mass mailings, teleconference calls, and seminars in major cities. Phipps sent periodic small payments to members to encourage them to remain in the program, recruit new members, or reinvest in larger payment plans. Though Phipps marketed LWD as a compound-leveraging investment program that would generate large sums of money for its investors, less than nine percent of LWD's approximately 31,000 participants made a net profit above their initial investment. Phipps “earned” $4,606,396 from LWD, $1,381,683 of which was “participation income,” and $3,224,782 of which he paid to himself under aliases within the scheme.
A jury found Phipps guilty of mail and wire fraud and aiding and abetting, corrupt endeavor to obstruct and impede the due administration of the internal revenue laws, and income tax evasion. 1 Phipps was sentenced to 210 months imprisonment, to be followed by three years of supervised release. Phipps was also ordered to pay $1,402,446 in restitution. Phipps now appeals the sufficiency of the evidence to support his convictions and whether his sentence was properly calculated.
II
Phipps challenges the sufficiency of the evidence to support his mail and wire fraud, corrupt impediment of the internal revenue laws, and income tax evasion convictions. In evaluating a defendant's argument regarding the sufficiency of the evidence supporting his conviction, we consider “whether a rational jury, viewing the evidence in the light most favorable to the prosecution, could have found the essential elements of the offense beyond a reasonable doubt.” United States v. Riviera , 295 F.3d 461, 466 (5th Cir. 2002).
A
Phipps contends that the Government failed to present sufficient evidence that he acted with the specific intent required for mail and wire fraud offenses under 18 U.S.C. §§1341 and 1343. Specifically, he argues that evidence of warnings he received regarding programs that preceded LWD did not constitute sufficient evidence of intent to commit fraud via LWD.
The elements of 18 U.S.C. §§1341 and 1343 are parallel, and therefore we apply the same analysis to both statutes. See United States v. Mills , 199 F.3d 184, 188 (5th Cir. 1999). Mail and wire fraud are both specific intent crimes that require the Government to prove that a defendant knew the scheme involved false representations. United States v. Brown , 459 F.3d 509, 518-19 (5th Cir. 2006) (wire fraud); United States v. Rochester , 898 F.2d 971, 976 (5th Cir. 1990) (mail fraud).
Phipps argues that the evidence demonstrates that he sincerely endeavored to educate members of LWD about financial planning and the methodologies of his program rather than to defraud them. However, he presents no support for this self-serving statement beyond diagrams of LWD's upline and downline payment programs, which he drafted. Furthermore, the jury heard testimony from a retired USPS Inspector who had investigated Phipps and who testified to the pyramid structure of all of Phipps' programs (his two prior programs))Fast Cash Financial Services and Marathon Marketing))and LWD).
The record also demonstrates that Phipps had been warned by various federal and state law enforcement authorities of the illegality and fraudulence of his basic scheme, both while operating prior programs and while operating LWD. A prior warning to cease and desist fraudulent activity can serve as evidence of specific intent to defraud in a subsequent, similar scheme. See United States v. Aubin , 87 F.3d 141, 147 (5th Cir. 1996). Despite receiving warnings that his activities were illegal, Phipps continued to operate these pyramid-style programs, merely changing their names to avoid detection. Given this evidence, the jury reasonably could have concluded that Phipps acted with the specific intent required for mail and wire fraud in making fraudulent and illegal representations to his potential LWD program members.
B
Phipps contends that the Government failed to present sufficient evidence of wire fraud because the “wire” at issue, a single fax sent by a program participant to Phipps notifying him of an address change, was only tangentially related to the alleged fraud. Phipps argues that to sustain a conviction for wire fraud, “the government must present evidence that shows a link between the fraudulent activity and the [wire] at issue which demonstrates that the [wire] either advanced or [was] integral to the fraud.” United States v. Strong , 371 F.3d 225, 230 (5th Cir. 2004) (internal quotation marks and citation omitted). Phipps claims that the fax sent by a program participant to Phipps neither advanced nor was integral to the alleged fraud, and therefore failed to establish the requisite connection between the wire and the fraud.
Phipps argues that because he did not send the fax, it could not “advance” the alleged fraud. However, there is no statutory requirement that a defendant generate a wire transmission or mailing. Phipps needed only to cause the use of wire communication facilities. See 18 U.S.C. §1343 . By providing the fax number to participants in LWD, it was reasonably foreseeable that participants would use the number for customer service inquiries, as the participant in question did when she faxed an update to her account information.
Phipps also argues that the fax was too tenuously connected to the fraud to be considered “integral,” as it merely provided a change of address after the alleged fraud, inducing entry into LWD, had been consummated. Though the federal fraud statute requires more than a tangential relationship between the wire communication and the fraud, “[i]t is sufficient for the mailing to be incident to an essential part of the scheme or a step in [the] plot.” Strong , 371 F.3d at 228. Communications that occur after initial purchase into the fraudulent scheme, “designed to lull the victim into a false sense of security, postpone inquiries or complaints, or make the transaction less suspect[,] are mailings in furtherance of the scheme.” United States v. Toney , 598 F.2d 1349, 1353 (5th Cir. 1979) (citation omitted). Accordingly, a rational jury could find that a participant's fax updating her contact information in anticipation of future LWD payments was an important part of “lulling” LWD participants into believing that Phipps' investment scheme was a legal, secure financial program, and therefore essential to the overall commission of wire fraud.
C
Phipps challenges the sufficiency of the evidence presented to support his conviction for corrupt impediment under 26 U.S.C. §7212(a) . Section 7212(a) criminalizes the actions of “[w]hoever corruptly … obstructs or impedes, or endeavors to obstruct or impede the due administration of this title.” A defendant acts “corruptly” for the purposes of §7212(a) when he or she acts “with the intention of securing improper benefits or advantages for one's self or others.” United States v. Reeves , 752 F.2d 995, 1001-02 (5th Cir. 1985).
Phipps alleges that his tax evasion advocacy was protected by the First Amendment. This allegation is without merit. Telling his adherents that he did not report his LWD income to the IRS and encouraging them to do the same place Phipps' speech within the sphere of proscribed speech likely to incite or produce “imminent lawless action.” Brandenburg v. Ohio , 395 U.S. 444, 447 (1969); see also United States v. Kelley , 864 F.2d 569, 577 (7th Cir. 1989) (rejecting First Amendment protection of “more than mere advocacy” where defendant told clients to keep tax shelter information secret from the IRS and received commissions from sales); United States v. Buttorff , 572 F.2d 619, 624 (8th Cir. 1978) (rejecting First Amendment protection of activity that went “beyond mere advocacy of tax reform” in explaining to others how to avoid income tax liability). Phipps has not shown that his behavior advising and advocating tax evasion to LWD participants should be entitled to First Amendment protection.
As his advocacy of tax-evasion strategies is unprotected speech, the jury was entitled to rely on it as evidence supporting his conviction for corrupt impediment of the internal revenue laws. Thus, given that Phipps directly advised and encouraged program participants to break federal law by failing to pay their income taxes, a reasonable jury could have found Phipps guilty on this charge.
D
Phipps contends that there was insufficient evidence to sustain a conviction based on income tax evasion pursuant to 26 U.S.C. §7201 . Specifically, Phipps contends that he was genuine in his belief that the cash receipts from LWD did not constitute income that needed to be reported to the IRS. Evasion of income tax requires “willfulness,” or a voluntary, intentional violation of a known legal duty. Cheek v. United States , 498 U.S. 192, 199-200 (1991). Phipps claims he sincerely believed his LWD income was not taxable. However, during several of the years that LWD was in business, the IRS prepared and filed substitute tax returns and gave Phipps notice of these returns as well as the taxes he owed. Therefore, Phipps was at the very least on notice that the IRS expected him to pay taxes on his LWD income.
Furthermore, part of the LWD program was to advise participants on how to plan a “reliance defense” against paying income tax. The key component of this defense is for a participant to rely on the advice of income tax professionals and other credible sources that could be used to convince a jury that the participant sincerely believed he or she was not liable for federal or state income tax. Given that he was advising others to employ calculated tactics to avoid paying income taxes, and his receipt of prior notice from the IRS regarding his tax liability, a rational jury reasonably could have found that Phipps willfully evaded paying income tax on his LWD income.
III
Phipps also challenges the district court's calculation of the amount of loss used for determining his sentence. Phipps did not specifically object to this calculation at sentencing; therefore, we review for plain error. United States v. Green , 324 F.3d 375, 381 (5th Cir. 2003). A showing of plain error requires (1) an error, (2) that is clear or obvious, and (3) that affected Phipps' substantial rights. United States v. Cotton , 535 U.S. 625, 631-32 (2002); United States v. Olano , 507 U.S. 725, 732-34 (1993).
Phipps contends that the district court erred in failing to reduce his loss amount by the value of the materials received by the program participants. The Guidelines state that the amount of “[l]oss shall be reduced by … the fair market value of … the services rendered, by the defendant … to the victim before the offense was detected.” U.S.S.G. §2B1.1 cmt. 3(E)(i). However, Phipps offered no evidence as to the value of the tapes and educational materials he suggests that the court should have considered. Without such evidence, the district court not only had no reason to consider such a reduction, but also had no basis on which to determine the amount of the reduction even if it had considered Phipps' claim.
Moreover, the district court heard testimony from Agent Lagos, the case agent in charge of Phipps' investigation, who stated that all of the information regarding pecuniary loss from members of Phipps' program came directly from Phipps' computer database where he recorded his financial activities. Based on those records, Lagos determined a loss value of $16,215,882, the amount which the district court adopted as its final loss determination. Accordingly, the district court raised Phipps' offense level by 20 levels based on Guideline §2B1.1(b)(1)(K) , which covers losses ranging from $7,000,000 to $20,000,000. Phipps would need to demonstrate that his dissemination of educational materials entitles him to a reduction of more than $9,215,882 before his loss amount would change his offense level. He has not done so. Thus, we find Phipps has not shown plain error in the district court's calculation of his loss amount.
IV
For the foregoing reasons, we AFFIRM.

Footnotes

1
Phipps was also indicted for twelve counts of money laundering and aiding and abetting, in violation of 18 U.S.C. §§1956(a)(1)(A)(i) and 2. Two of these counts were dismissed during trial, and the district court entered a judgment of acquittal on all of the other money laundering counts based on its reading of United States v. Santos , U.S. , 128 S. Ct. 2020 (2008).

ab@irstaxattorney.com (www.irstaxattorney.com) — Mon, 01 Feb 2010 12:23:00 +0000

News Release 2010-14, 01/29/2010, IRC Sec(s).

An expanded Earned Income Tax Credit (EITC) means larger families will qualify for a larger credit, offering greater relief for people who struggled through difficult financial times last year, the Internal Revenue Service said today.

The IRS and the Treasury Department marked EITC Awareness Day as their partners nationwide worked to highlight the availability of this important tax credit. EITC, which is in its thirty-fifth year, is one of the federal government's largest benefit programs for working families and individuals. Last year, nearly 24 million people received $50 Billion in benefits. The average credit was more than $2,000.

“As part of the economic recovery efforts, there have been important changes to expand EITC to benefit taxpayers,” said IRS Commissioner Doug Shulman. “Today, more than ever, hard-working individuals and families can use a little extra help. EITC can make the lives of working people a little easier.”

Eligibility for EITC depends on earned income and family size, among other tests. However, single people and childless workers also are eligible, although for smaller amounts. For tax years 2009 and 2010, the American Recovery and Reinvestment Act created a new category for families with three or more children and expanded the maximum benefit for this category.

To qualify for the EITC, earned income and adjusted gross income (AGI) for individuals must each be less than:

$43,279 ($48,279 married filing jointly) with three or more qualifying children
$40,295 ($45,295 married filing jointly) with two qualifying children
$35,463 ($40,463 married filing jointly) with one qualifying child
$13,440 ($18,440 married filing jointly) with no qualifying children
The maximum credit for tax year 2009 is:

$5,657 with three or more qualifying children
$5,028 with two qualifying children
$3,043 with one qualifying child
$457 with no qualifying children
The maximum amount of investment income is $3,100 for tax year 2009. For families, there are also certain requirements for child residency and relationship that must be met. Additional eligibility information is available in FS-2010-11 and on the Web at IRS.gov/EITC.

Another new provision adds to the definition of a “qualifying child:” The child must be younger than the person claiming the child unless the child is totally and permanently disabled any time during the year. The child cannot have filed a joint return other than to claim a refund. Also new for 2009, if a qualifying child can be claimed by either a parent or another person, the other person must have an AGI higher than the parent in order to claim the child for EITC purposes.

Historically, one in four eligible taxpayers fails to claim the EITC, which is why the IRS and its free tax preparation partners host an annual EITC Awareness Day. This year, there are 68 news conferences being held around the country. Community coalitions and IRS partners nationwide also are also issuing 128 news releases, writing letters to the editor and using social media tools to spread the word about EITC.

Typically, people who fail to claim the EITC include workers without qualifying children, people whose earned income falls below the threshold required to file a tax return, farmers, rural residents, people with disabilities and nontraditional families such as grandparents raising grandchildren. People must file a tax return to claim the EITC.

Free help is available to EITC-eligible taxpayers. There are nearly 12,000 free tax preparation sites nationwide. People who want to prepare their own tax returns can visit Free File on IRS.gov. This free tax software and free electronic filing program will walk taxpayers through a question and answer format and help them claim the tax credits and deductions for which they are eligible.

EITC-eligible taxpayers also can seek assistance at the 400 IRS Taxpayer Assistance Centers nationwide. To assist EITC taxpayers, 167 IRS assistance centers will offer Saturday service on Jan. 30, Feb. 6 and Feb. 20. A list is attached.

There is an online EITC Assistant also available on IRS.gov which can help taxpayers and tax preparers determine eligibility. And, for tax preparers and IRS partners, there is EITC Central which has links to toolkits that include marketing products.

More than 65 percent of EITC returns are prepared by a third party. The IRS urges taxpayers to choose a reputable tax preparer to avoid problems that come with an inaccurate tax return. The agency also urges tax preparers to follow due diligence requirements when preparing an EITC tax return. More information is available at www.irs.gov/eitc.

ab@irstaxattorney.com (www.irstaxattorney.com) — Thu, 28 Jan 2010 10:53:00 +0000

U.S. v. OHLE, Cite as 105 AFTR 2d 2010-XXXX, 01/12/2010

UNITED STATES of America, Plaintiff, v. John B. OHLE III and William E. Bradley, Defendants.
Case Information:

Code Sec(s):
Court Name: United States District Court, S.D. New York,
Docket No.: No. S2 08 Cr. 1109(LBS),
Date Decided: 01/12/2010.
Disposition:
HEADNOTE

.

Reference(s):

OPINION

United States District Court, S.D. New York,

MEMORANDUM & ORDER

Judge: SAND, District Judge.

On August 11, 2009, the Government filed the Second Superseding Indictment (“Indictment”) against Defendant JohnB. Ohle III (“Ohle”) and Defendant William E. Bradley (“Bradley”). The Indictment, which includes eight counts, charges Ohle and Bradley with various tax and fraud offenses. The Indictment alleges that between 2001 and 2004, Ohle and various co-conspirators engaged in a massive scheme to cheat the Government out of over $100 million by causing dozens of United States taxpayers to engage in fraudulent tax shelter transactions and fraudulently report the results of those shelters on their tax returns. Ohle is alleged to have formed two conspiracies, charged in Count One and Count Five. Bradley is only alleged to have been a member of the Count Five conspiracy.

The Count One conspiracy (the “HOMER conspiracy”) charges Ohle and others with conspiring to defraud the United States and to commit various tax crimes and mail and wire fraud. Ohle and his coconspirators are charged with developing and implementing an allegedly fraudulent tax shelter known as “Hedge Option Monetization of Economic Remainder” (“HOMER”). Ohle, a certified public accountant and attorney, is charged with helping to design, market, and implement HOMER while he was working for a national bank (“Bank A”), which maintained its principal offices in Chicago, Illinois. The scheme was allegedly designed to eliminate or reduce the amount of U.S. income taxes paid by wealthy clients of Bank A and law firm Jenkens & Gilchrist, P.C. (“J & G”). The scheme generated extraordinary fee income for Bank A, J & G, Ohle, and his co-conspirators. The Indictment also alleges that Ohle and other members of the Innovative Strategies Group (“ING”) at Bank A received bonuses based in part on the amount of fees each generated through their sale of the HOMER tax shelters. Ohle is charged with substantive tax evasion as to various clients in Count Two (Client D.W.), Count Three (Client C.P.), and Count 4 (Client D.D.).

The Count Five conspiracy, referred to in the Indictment as “The Mail and Wire Fraud and Personal Income Tax Fraud Conspiracy”, charges Ohle, Bradley, and co-conspirators Douglas Steger and Individual C with conspiracy to commit fraud. The conspiracy alleged in Count Five consists of two schemes: the referral fees and Carpe Diem. The Indictment alleges that as part of an effort to market, sell, and implement HOMER tax shelters, Ohle, other members of Bank A's ISG, and attorneys from J & G agreed to pay referral fees to third parties who referred a client who ultimately entered into a HOMER tax shelter. Third-party referral sources sent invoices to J & G, who would then pay referral fees to those third parties based on the amounts stated in the invoices. The Indictment alleges that J & G would issue IRS Forms 1099-MISC, when appropriate, to the third parties to reflect the payment of the referral fees as non-employee compensation to the third parties. As part of the referral scheme, Ohle is alleged, along with Steger and Bradley, to have prepared fraudulent invoices to obtain referral fees from Bank A, which they were not entitled to receive under the fee arrangement. Ohle is alleged to have contacted Bradley to prepare invoices for referral fees in connection with Client Group 1's HOMER tax shelter, despite the fact that Bradley performed no services in connection with that deal. Bradley is also alleged to have prepared fraudulent invoices related to two of Bank A's HOMER clients.

Second, the Carpe Diem scheme alleges that Ohle approached Client E, with whom Ohle had an established business relationship, to invest in Carpe Diem, a Bermuda-based hedge fund for whom Steger was an independent salesman. Client E invested $7 million in Carpe Diem. The Indictment alleges that Ohle also met with Client F and Client G, both of whom were HOMER clients of Bank A. Client F and Client G invested $1 million each in Carpe Diem. Ohle is alleged to have received a 5% commission on each of the Carpe Diem transactions, even though he told Client E that he would not receive any commission on her investments. The Indictment also alleges, related to the Carpe Diem fees, that Ohle unlawfully diverted funds from Client E's trust account to be used for Ohle's personal benefit. When Client E informed Ohle that she and her lawyer wished to discuss the finances of the trust, Ohle, with the assistance of Bradley, replaced a portion of the funds that had been unlawfully diverted from the trust bank account.

In Counts Six and Seven, Ohle is charged with personal tax evasion for the tax years 2001 and 2002, respectively. Count Eight of the Indictment alleges that Ohle obstructed and impeded the due administration of the internal revenue laws. With this background, the Court now addresses Defendant Ohle's and Defendant Bradley's various pretrial motions. For the purposes of these motions, all of the allegations in the Indictment are accepted as true.

I. Discussion

a. Use of the Mail Fraud Statute (Count One)

Ohle argues that Count One of the indictment impermissibly uses the wire fraud statute to reach an alleged criminal tax conspiracy, citing United States v. Henderson, 386 F.Supp. 1048 [34 AFTR 2d 74-6245] (S.D.N.Y.1974). Henderson held that the mail fraud statute (the scope of which is identical to the wire fraud statute, United States v. Schwartz, 924 F.2d 410, 417 (2d Cir.1991)), was not intended to reach cases of alleged tax evasion and was superseded by the comprehensive system of penalties Congress later enacted in the Internal Revenue Code. Henderson, 386 F.Supp. 1048 [34 AFTR 2d 74-6245]. Though it has never explicitly disapproved Henderson, the Court of Appeals for the Second Circuit has recently stated that “Henderson-which other circuits have rejected, ... provides weak authority for the proposition that schemes aimed at defrauding the government of taxes do not fall within the scope of the mail and wire fraud statutes.”Fountain v. United States , 357 F.3d 250, 258 [93 AFTR 2d 2004-615] (2d Cir.2004). 1. We agree with the many courts of appeals 2. and courts within this District 3. that have declined to follow Henderson. Ohle's motion to dismiss the wire fraud allegations is denied. 4.

b. Duplicity (Count Five)

Ohle and Bradley both move to dismiss Count Five as duplicitous. An indictment is duplicitous if it joins two or more distinct crimes in a single count. United States v. Aracri, 968 F.2d 1512, 1518 [70 AFTR 2d 92-6305] (2d Cir.1992). Duplicitous pleading is not presumptively invalid; rather, it is impermissible only if it prejudices the defendant.United States v. Olmeda , 461 F.3d 271, 281 (2d Cir.2006). Duplicity is only properly invoked when a challenged indictment affects one of the doctrine's underlying policy concerns: (1) avoiding the uncertainty of a general guilty verdict, which may conceal a finding of guilty as to one crime and not guilty as to other, (2) avoiding the risk that jurors may not have been unanimous as to any one of the crimes charged, (3) assuring the defendant has adequate notice of charged crimes, (4) providing the basis for appropriate sentencing, and (5) providing the adequate protection against double jeopardy in subsequent prosecution. Olmeda, 461 F.3d at 281 (citing United States v. Margiotta, 646 F.2d 729, 732–33 (2d Cir.1981)).

The Court of Appeals for the Second Circuit has recognized that application of the duplicity doctrine to conspiracy indictments presents “unique issues.” United States v. Murray, 618 F.2d 892, 896 (2d Cir.1980). In this Circuit, “it is well established that [t]he allegation in a single count of a conspiracy to commit several crimes is not duplicitous, for [t]he conspiracy is the crime and that is one, however diverse its objects.”Aracri , 968 F.2d at 1518 (internal citations and quotations omitted). “A single conspiracy may be found where there is mutual dependence among the participants, a common aim or purpose or a permissible inference from the nature and scope of the operation, that each actor was aware of his part in a larger organization where others performed similar roles equally important to the success of the venture.” United States v. Vanwort, 887 F.2d 375, 383 (2d Cir.1989). Each member of the conspiracy is not required to have conspired directly with every other member of the conspiracy; a member need only have “participated in the alleged enterprise with a consciousness of its general nature and extent.”United States v. Rooney , 866 F.2d 28, 32 [63 AFTR 2d 89-534] (2d Cir.1989). If the Indictment on its face sufficiently alleges a single conspiracy, the question of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury.Vanwort , 887 F.2d at 383; see also United States v. Szur, No. S5 97 CR 108(JGK), 1998 WL 132942, at 11 (S.D.N.Y. Mar. 20, 1998). Accordingly, courts in this Circuit have repeatedly denied motions to dismiss a count as duplicitous.See United States v. Nachamie , 101 F.Supp.2d 134, 153 (S.D.N.Y.2000) (collecting cases).

Bradley, pointing to United States v. Muñoz-Franco, 986 F.Supp. 70 (D.P.R.1997), argues that Count Five is duplicitous on its face. We find Judge Rakoff's decision in United States v. Gabriel, 920 F.Supp. 498 (S.D.N.Y.1996), to be more instructive in this case. 5. InGabriel , Judge Rakoff found that, although the count at issue contained boilerplate allegations of a single conspiracy, the subsequent paragraphs in the count were more consistent with two conspiracies than a single conspiracy.Gabriel , 920 F.Supp. at 503. As inMuñoz-Franco, the paragraphs describing the overt acts in the Gabriel Indictment were divided into two distinct sets. Id. at 503; Muñoz-Franco, 986 F.Supp. at 71. Finding that “on any but a superficial reading, [the Government] appears to actually allege two distinct conspiracies[,]” Judge Rakoff stated that if it were within his power he would dismiss the count at issue as duplicative. Gabriel, 920 F.Supp. at 504–05. “But the Court of Appeals has repeatedly cautioned that the determination of whether a conspiracy is single or multiple is an issue of fact “singularly” well suited to determination by a jury.” Id. Therefore, Judge Rakoff held that “[g]iven Count Six's boilerplate allegations of a single conspiracy, the Court cannot conclude on the basis of the pleadings alone that there is no set of facts falling within the scope of Count Six that could warrant a reasonable jury in finding a single conspiracy.”Id.

Similarly, in the case at bar, Count Five contains “boilerplate allegations” of a single conspiracy. The Indictment alleges, “From in or about 2001 until at least in or about February 15, 2004, in the Southern District of New York and elsewhere, JOHNB. OHLE III, and WILLIAM BRADLEY, the defendants, together with Douglas Steger and Individual C, co-conspirators not named as defendants herein, and others known and unknown, unlawfully, willfully, and knowingly did combine, conspire, confederate, and agree together and with others to defraud the United States and an agency thereof, to wit, the IRS of the United States Department of Treasury, and to commit offenses against the United States, to wit, violation of Title 18, United States Code, Section 1341 and 1343, and Title 26, United States Code, Section 7201.” Indictment ¶ 80. Count Five then describes the two schemes involved: the referral fee fraud and Carpe Diem.

The Indictment's subsequent description of the overt acts indicates that Count Five may consist of multiple conspiracies. But, as in Gabriel, Count Five survives the facial test. The Government alleges that Bradley and Ohle, along with co-conspirators, are accused of participating in a conspiracy to “steal money by fraud, [and] pay no taxes.” (Gov't Opp. 47.) The Indictment alleges that both schemes sought to obtain money through fraud, and, thereafter, defrauded the IRS by concealing those ill-gotten gains. Both schemes occurred at the same time-between mid-November 2001 and February 2002. 6. (Gov't Opp. 44.) Ohle is alleged to have participated in all the Count Five schemes. But, contrary to Defendants' argument, Ohle was not the only member of the conspiracy alleged to have participated in multiple frauds. Steger and Bradley are both alleged to have submitted false invoices to J & G as part of the referral fee fraud. Indictment ¶¶ 84, 85. Bradley is alleged to have shared his proceeds with Individual C, who was owed legitimate referral fees. Ohle urged Individual C “to take care of” Bradley; Individual C then gave Bradley a check for $4,000. Indictment ¶ 92. Ohle and Steger are also alleged to have obtained funds from three different clients through investments in the Carpe Diem hedge fund. Indictment ¶¶ 95–102. One of these clients was Client E. Ohle is alleged to have misappropriated almost $350,000 of Client E's funds, which had been run through Carpe Diem. After Client E began to make inquiries regarding his investment, Ohle enlisted Bradley to replace a portion of the funds that had been misappropriated. Indictment ¶ 104.

Bradley's role in aiding Ohle to replace a portion of Client E's funds, which had been unlawfully diverted, alleges a “mutual dependence and assistance” across the schemes.See Vanwort , 887 F.2d at 383. Individual C's payment to Bradley shows that each individual submitting invoices was not acting in a vacuum. Given that the two frauds occurred at the same time and had common participants, and that compensation was paid amongst the co-conspirators (not just between co-conspirators and Ohle) and across the two frauds, we find that the Indictment alleges a single conspiracy on its face. Furthermore, proceeding on the current Count Five would not undermine any of the policies underlying the duplicity doctrine. 7. See Margiotta, 646 F.2d at 732–33. Defendants' motion to dismiss Count Five as duplicative is denied.

c. Severance

Federal Rule of Criminal Procedure 8(a) permits joinder of offenses if the offenses charged are “of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan.” Fed.R.Crim.P. 8(a). Rule 8(b) permits joinder of defendants “if they are alleged to have participated in the same act or transaction, or in the same series of acts or transactions, constituting an offense or offenses. The defendant may be charged in one or more counts together or separately. All defendants need not be charged in each count.” Fed.R.Crim.P. 8(b). Even if joinder is proper under Rule 8, a court may still sever pursuant to Rule 14(a) if it appears joinder would prejudice a defendant or the government. Fed.R.Crim.P. 14(a). “For reasons of economy, convenience and avoidance of delay, there is a preference in the federal system for providing defendants who are indicted together with joint trials.”United States v. Feyrer , 333 F.3d 110, 114 (2d Cir.2003).

i. Count Five

Bradley and Ohle both move to sever Count Five of the Indictment. “Though Rule 8(a) addresses joinder of offenses and Rule 8(b) concerns joinder of defendants, when a defendant in a multi-defendant action challenges joinder, whether of offenses or defendants, the motion is construed as arising under Rule 8(b).” 8. United States v. Stein, 428 F.Supp.2d. 138, 141 (S.D.N.Y.2006); see United States v. Turoff, 853 F.2d 1037, 1043 [62 AFTR 2d 88-5236] (2d Cir.1988). The Court of Appeals for the Second Circuit has explained that a ““series” exists if there is a logical nexus between the transactions.” United States v. Joyner, 201 F.3d 61, 75 (2d Cir.2001). Unlike Rule 8(a), “Rule 8(b) does not permit joinder of defendants solely on the ground that the offenses charged are of “the same or similar character.”” Turoff, 853 F.2d at 1042. Joinder is proper only when the charged offenses are either (1) “unified by some substantial identity of facts or participants,” or (2) “arise out of a common plan or scheme.” United States v. Attanasio, 870 F.2d 809, 815 (2d Cir.1989); see also Feyrer, 333 F.3d at 114; Lech, 161 F.R.D. at 256. We take “a common sense approach when considering the propriety of joinder under Rule 8(b),” Feyrer, 333 F.3d at 114, and ask whether “a reasonable person would easily recognize the common factual elements that permit joinder.”Turoff , 853 F.2d at 1044. Determining whether joinder of two conspiracies is permitted often requires a fact specific analysis. See United States v. Reinhold, 994 F.Supp. 194, 199 (S.D.N.Y.1998) (collecting cases).

The Government's most persuasive argument that the two conspiracies have a common purpose is found in its Surreply: “A significant aspect of implementation [of the HOMER conspiracy] involved Ohle's recruitment and funding of a nominee, or puppet, in the form of Individual A, whose third-party role Ohle needed to fund in order to make the HOMER tax shelter work. Ohle generated that funding through his scheme to obtain HOMER client referral fees, and other client fees, by fraud-the core aspects of Count Five.” (Gov't Surreply 7.) The problem, though, is that these facts are not alleged in the Indictment. The Indictment alleges that “OHLE embezzled funds from a client, “Client E,” and used some of the money to fund Individual A's participation in the HOMER tax shelter. In addition, OHLE obtained by fraud from Bank A referral fees related to the HOMER tax shelter, the majority of which OHLE kept.” Indictment ¶ 74. Based on the Indictment, Count Five is only alleged to have had a minor role in financing the HOMER conspiracy. Additionally, the money allegedly transferred to Individual A was related to Carpe Diem not to the referral fee scheme. Therefore, based on the language of the Indictment, we read Count Five to allege a conspiracy to commit fraud in order to obtain money-some of which was diverted to Individual A in order to fund his role in the HOMER conspiracy.

Courts have upheld joinder in situations where the criminal acts of one offense helped to finance the criminal acts of another offense. See Turoff, 853 F.2d at 1037 [62 AFTR 2d 88-5236];United States v. Catapono , 05 Cr. 229, 2008 WL 3992303 (E.D.N.Y. Aug. 28, 2008). In Turoff, the Court found that a “quid pro quo was exchanged between [the] participants,” and that “these financial benefits were part and parcel of the tax fraud.”Turoff , 853 F.2d at 1044. The court emphasized that “there is a key link between the two offenses-one scheme stemmed from the other-and that link provides a sound basis for joinder under Rule 8(b).” Turoff, 853 F.2d at 1044. Ohle is alleged to have used only a portion of the funds embezzled from Client E to finance Individual A's role in the HOMER conspiracy. The transfer of funds to Individual A's account does not provide a “key link” between the two conspiracies; rather, it appears to be an ancillary aspect of the Count Five conspiracy.

In United States v. Lech, then Judge Sotomayor found that “Turoff stands for the proposition that [defendants] may be tried together because they had specific knowledge of each other's activities, jointly participated in many of the acts alleged in the Indictment, and used that knowledge and participation as a springboard for the [other alleged offenses].” Lech, 161 F.R.D. at 257. The Indictment does not allege that Bradley had any knowledge of the HOMER conspiracy or the transfer of funds to Individual A. 9. Knowledge of the other conspiracy is not required, but it is an indicator of whether or not there is a common scheme or purpose. See United States v. Menashe, 741 F.Supp. 1135, 1139 (S.D.N.Y.1990) (“O'Toole's plan cannot be called “common”, since he is the only one alleged to be aware of it.....”)

Furthermore, the referral fees scheme's object-to fraudulently obtain fees from Bank A, a co-conspirator in the HOMER conspiracy-demonstrates that it did not have a common purpose with the HOMER conspiracy. In United States v. Rojas, S4 01 Cr. 251(AGS), 2001 WL 1568786 (S.D.N.Y. Dec. 7, 2001), the court found that a common scheme could not exist where the goals of the conspiracy were antagonistic. InRojas , the Count One conspiracy, known as the LRO, sought to sell narcotics for financial gain, and the Count Two conspiracy sought to rob the Count One conspiracy of its narcotics and sell the stolen drugs for their own financial gain. The two conspiracies had at least one defendant in common. The court concluded that the conspiracies did not have a common goal and the similarity of facts did not support joinder.Rojas , 2001 WL 1568786, at 5 (“[T]heir goals were antagonistic: for the Count Two Conspiracy to succeed, it would have to harm the LRO by stealing the LRO's drugs.”).

Although the instant case only involves defrauding a single co-conspirator, as opposed to the conspiracy as a whole, the referral fee scheme undermined the HOMER conspiracy by defrauding one of its co-conspirators. In United States v. Kouzmine, 921 F.Supp. 1131 (S.D.N.Y.1996), Judge Kaplan noted that because the two defendants had a falling out prior to the second conspiracy, “there is no colorable argument” that the two conspiracies were part of one single overarching scheme.Id. at 1133. In the instant case, the referral scheme's object of defrauding a HOMER co-conspirator of its financial gain from that conspiracy, demonstrates an animosity between the two schemes, analogous to the falling out inKouzmine.

Nor do we find that the conspiracies are unified by a “substantial identity of facts or participants.”Attanasio , 870 F.2d at 815. “It is well settled ... that two separate transactions do not constitute a series within the meaning of Rule 8(b) merely because they are of a similar character or involve one or more common participants.”Lech , 161 F.R.D. at 256; see also United States v. Van Berry, No. 04 Cr. 269(JBS), 2005 WL 1168398, at 5 (D.N.J. May 18, 2005) (“That the same participants were involved in crimes of a separate nature, however, (or at the very least that the defendants believed the same participants were involved in separate crimes) is not sufficient to connect otherwise distinct crimes.”); United States v. Giraldo, 859 F.Supp. 52, 55 (E.D.N.Y.1994) (“[D]efendants charged with two separate-albeit similar-conspiracies having one common participant are not, without more, properly joined.”).

The Government argues that the two conspiracies share a substantial identity of similar facts because both conspiracies involve the HOMER tax shelter. The Government further argues that if Count Five is severed, it will be forced to prove the HOMER tax shelter twice. We do not agree. Severance of Count Five will not force the Government to prove “essentially the same facts” more than once. See Shellef, 507 F.2d at 99–100. The HOMER tax shelter plays an important role in both conspiracies but in different capacities. The Government will need to provide evidence of HOMER to contextualize Count Five but it will not have to prove HOMER's illegality. In trying the HOMER conspiracy, the Government will likely devote a substantial amount of time to the issue of the legality of the tax shelter, dissecting how HOMER worked and the role Ohle played in developing and operating it. In contrast, the Government could prove its entire burden in Count Five-the fraud perpetrated through the referral fee scheme, the Carpe Diem scheme, and the embezzlement of Client E's funds-without ever proving or alleging the illegality of the HOMER tax shelter.

In the instant case, the similarity between the two conspiracies is marginal. The courts in this Circuit have consistently required a far more substantial connection.See United States v. Butler , No. S1 04 Cr. 340(GEL), 2004 WL 2274751, at 4 (S.D.N.Y. Oct. 7, 2004) (finding the facts involved in the two counts to be “so closely connected that proof of the very same facts is necessary to establish each of the joined offenses”); United States v. Ferrarini, 9 F.Supp.2d 284, 292 (S.D.N.Y.1998) (finding a substantial connection because “evidence of those activities-and their unlawful nature-would be necessary at a separate trial on the false statement charges to prove the falsity of the defendants' statements that they were not engaged in fraudulent activity”). The most significant common factor is the HOMER tax shelter, but the fact that the Count Five conspiracy sought to steal proceeds from the HOMER conspiracy significantly decreases the relevance of this factor.See Rojas , 2001 WL 1568786, at 5 (finding that the antagonistic nature of the two conspiracies negated the significance of the fact that they involved the same narcotics). We find that the two conspiracies do not have a common scheme or plan, nor do they share a substantial identity of facts and participants; Defendants' motion to sever Count Five 10. is granted. 11.

ii. Severance of Counts Six through Eight

Ohle also seeks to sever Counts Six through Eight. Counts Six and Seven charge Ohle with personal tax evasion in 2001 and 2002, respectively. Count Eight charges Ohle with obstructing and impeding the due administration of the Internal Revenue laws pursuant to 26 U.S.C. § 7212(a). As we have already severed Count Five, Ohle is the only defendant remaining in the Indictment. Therefore, Rule 8(a) governs the question of whether Counts Six through Eight are properly joined with Counts One through Four. Rule 8(a), unlike Rule 8(b), permits joinder solely on the ground that the offenses charged are “of the same or similar character.” Fed.R.Crim.P. 8(a); see Turoff, 853 F.2d at 1042.

Ohle's challenge to the joinder of Count Eight is without merit. Ohle is charged with obstructing and impeding the administration of the Internal Revenue laws through the design and implementation of the HOMER tax shelter. Without question Count Eight is “based on the same act or transaction” as Counts One through Four. Fed.R.Crim.P. 8(a). Therefore, Count Eight is properly joined.

With regard to severing Counts Six and Seven, we find this to be a close question. “[T]ax counts can properly be joined with non-tax counts where it is shown that the tax offenses arose directly from the other offenses charged.”Turoff , 853 F.2d at 1043; see also Shellef, 507 F.3d at 87–88. “The most direct link possible between non-tax crimes and tax fraud is that funds derived from non-tax violations either are or produce the unreported income.” Turoff, 853 F.2d at 1043. “However, if the character of the funds derived do not convince us of the benefit of joining these two schemes in one indictment, other overlapping facts or issues may.”Id. at 1043–44.

The Government has alleged a relationship between the unreported income in Counts Six and Seven and the HOMER conspiracy proceeds. However, the Government relies on allegations outside of the Indictment. Although the Court of Appeals for the Second Circuit has not directly confronted the question of whether joinder must be decided on the face of the Indictment, the Court recently “caution[ed] that the plain language of Rule 8(b) does not appear to allow for consideration of pre-trial representations not contained in the indictment, just as the language of the Rule does not allow for the consideration of evidence at trial.” United States v. Rittweger, 524 F.3d 171, 178 n. 3 (2d Cir.1998). Accordingly, we find that the Government's allegations regarding the relationship between the unreported income and the HOMER conspiracy proceeds cannot justify joinder.

Counts Six and Seven are alleged to be objects of the Count Five conspiracy. The unreported income includes money Ohle received from the referral fee fraud and Carpe Diem. (Gov't Mem. 72.) Thus, there is a “direct link” between the unreported income in Counts Six and Seven and the proceeds of the Count Five conspiracy. See Turoff, 853 F.2d at 1043. Given the close nexus between Counts Five, Six, and Seven, we conclude that Counts Six and Seven should also be severed.

Defendants' motion to sever is granted as to Counts Five, Six, and Seven and denied as to Count Eight.

d. Statute of Limitations

i. Count One

The applicable limitations period for a wire fraud conspiracy charge is generally five years. 18 U.S.C. § 3282;see United States v. Scop , 846 F.2d 135, 138 (2d Cir.1988). However, “if the offense affects a financial institution,” then a ten-year statute of limitations applies. 18 U.S.C. § 3293(2); see United States v. Bouyea, 152 F.3d 192, 195 (2d Cir.1998). Ohle does not contest that Bank A is a financial institution within the meaning of the statute. Rather, Ohle argues that § 3293(2) does not apply because Bank A was an active participant in the fraud, not the object of the fraud, and not directly affected by the fraud.

In United States v. Serpico, 320 F.3d 691, (7th Cir.2003), the Seventh Circuit specifically rejected the defendant's argument that a financial institution is not “affected” if it is an active participant in the offense.Serpico , 320 F.3d at 695. The Court concluded that the financial institution's active participation in the scheme did not negate the effect on the institution. Id. (“[W]e find it hard to understand how a bank that was put out of business as a direct result of the scheme was not “affected,” even if it played an active part in the scheme.”). Ohle attempts to distinguish Serpico, by limiting the holding to apply only when the financial institution is both the object of the scheme to defraud and a participant in the scheme. (Ohle Reply Memo. 6–7, n. 1.)

The statute applies a ten year period of limitations if the offense “affects” a financial institution. 18 U.S.C. § 3293(2). This Circuit has found that this language is to be read broadly. See Bouyea, 152 F.3d 192, 195 (2d Cir.1998) (“[T]he statute is clear: it broadly applies to any act of wire fraud “that affects a financial institution.””). In United States v. Bouyea, the Court of Appeals for the Second Circuit found that the statute was applicable to a wholly owned subsidiary where the parent company, but not the subsidiary, was a financial institution. Bouyea, 152 F.3d at 195. The Second Circuit rejected the defendant's argument that “the defrauding of a financial institution's subsidiary-leading to a reduction of the financial institution's assets-is insufficient as a matter of law to meet the “affect[ing] a financial institution” requirement of § 3293(2).”Id. In reaching this conclusion, the Court extensively quoted the Third Circuit's reasoning inUnited States v. Pellulo , 964 F.3d 193 (3d Cir.1992). Id. Notably, Bouyea quotes the Third Circuit's conclusion that “[the defendant's] argument would have more force if the statute provided for an extended limitations period where the financial institution is the object of fraud. Clearly, however, Congress chose to extend the statute of limitations to a broader class of crimes.” Id. (quoting Pellulo, 964 F.2d at 216).

Bouyea “easily reject[s]” the argument that the financial institution must be the object of fraud, requiring, instead, that the effect on the financial institution be “sufficiently direct.” Bouyea, 152 F.3d at 195. The effect on Bank A was direct. Ohle and his co-conspirators are alleged to have used Bank A to perpetrate the HOMER tax shelter “through the Bank's ostensible backing of the transaction, the use of its subsidiary as the “trustee” in each HOMER shelter, and the use of Bank funds.” (Gov't Opp. 16.) As Ohle argues himself, Bank A was an active participant in the fraud. As a result of this participation, Bank A was not only exposed to substantial risk but experienced actual losses.Id. Bank A paid over $24,000,000 in settlements to HOMER clients and over $4,200,000 in attorneys' fees defending the suits. Id. Ohle's argument that this effect is too remote is unpersuasive. In using Bank A as a central player in the HOMER conspiracy, Ohle and his co-conspirator's knew they were exposing it to risk if their fraud was uncovered. “[T]he whole purpose of § 3293(2) is to protect financial institutions, a goal it tries to accomplish in large part by deterring would-be criminals from including financial institutions in their schemes.” Serpico, 329 F.3d at 694–95. Through his alleged use of Bank A in the HOMER conspiracy, Ohle put Bank A at substantial risk. This risk resulted in millions of dollars of losses for the financial institution, and the losses were a direct and foreseeable result of the HOMER conspiracy. We find the ten year statute of limitations applies, 12. and Ohle's motion to dismiss Count One as time-barred is denied. 13.

ii. Counts Two, Four, and Six

Ohle contends that Counts Two, Four and Six are also time-barred. Pursuant to Section 6531(2), a six year statute of limitations period is applicable to tax evasion offenses. 26 U.S.C. § 6531(2). The period begins to run upon the filing of the tax returns that underlie those counts. See United States v. Habig, 390 U.S. 222, 223 [21 AFTR 2d 803] (1968). The initial indictment in this case was returned on November 13, 2008. The returns at issue were filed approximately six years and one month prior to the Indictment: October 17, 2002 (Count Two), October 21, 2002 (Count Four) and October 16, 2002 (Count Six).See Indictment ¶¶ 38, 70, 107. Section 6531 provides for a tolling of the limitations period for the time “during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice.” 26 U.S.C. § 6531. The tolling provision is applicable even if the defendant is outside of the country for business or pleasure trips.United States v. Myerson , 368 F.2d 393, 395 [18 AFTR 2d 5997] (2d Cir.1966); see also United States v. Marchant, 774 F.2d 888, 892 [57 AFTR 2d 86-451] (8th Cir.1985). The Government states that it will prove at trial that Ohle spent at least two months outside of the country, which would result in the counts at issue being timely. Ohle's motion to dismiss Counts Two, Four and Six as time-barred is denied.

iii. Count Eight

Title 26, United States Code, Section 6531 sets forth the periods of limitation for criminal tax prosecutions.See 26 U.S.C. § 6531. The statute provides that, in general, criminal tax proceedings must be initiated within three years of the offense, but it carves out eight exceptions for which the statute of limitations is six years.Id. Section 6531(6) provides a six year statute of limitations “for the offense described in section 7212(a) (relating to intimidation of officers and employees).” 26 U.S.C. § 6531(6). Ohle urges a literal reading of the statute, which would apply the six year statute of limitations to violations of Section 7212(a) related to intimidation of officers and employees but not to omnibus clause violations of 7212(a).

Numerous circuits have applied the six year statute of limitations to the omnibus clause of Section 7212(a).See United States v. Kassouf , 144 F.3d 952, 959 [81 AFTR 2d 98-2066] (6th Cir.1998) (“There is nothing to indicate that Congress intended the parenthetical to be limiting rather than merely descriptive of § 7212(a). Similar parentheticals in other statutes have also been found to be descriptive rather than limiting.”); United States v. Wilson, 118 F.3d 228, 236 [80 AFTR 2d 97-5281] (4th Cir.1997) (applying, without discussion, the six year period of limitations to the alleged violation of the omnibus clause of § 7212(a)); United States v. Workinger, 90 F.3d 1409, 1414 [78 AFTR 2d 96-5710] (9th Cir.1996) (“In short, the structure of § 6531 makes it apparent that the parenthetical language in § 6531(6) is descriptive, not limiting.”). In United States v. Kelly, this Circuit found that the district court's application of the six year period of limitations to an omnibus clause violation of Section 7212(a) was not plain error. Kelly, 147 F.3d 172, 177 [82 AFTR 2d 98-5030] (2d Cir.1998). We find no reason to diverge from the persuasive reasoning of the courts that have previously addressed this issue. 14. Accordingly, we find that the six year period of limitations should be applied to the alleged violation of the omnibus clause of Section 7212(a). Ohle's motion to dismiss Count Eight as time-barred is denied.

e. Venue

Defendants Ohle and Bradley allege that venue is not proper in the Southern District of New York and move to dismiss Count Five. Ohle also moves to dismiss the substantive tax offenses-Counts Two, Three, Four, Six and Seven-for lack of venue. The United State Constitution provides that a defendant has the right to trial in “the district wherein the crime shall have been committed.” U.S. Const., Amend. VI.; see also United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181, 1188 (2d Cir.1989). Where “the acts constituting the crime and the nature of the crime charged implicate more than one location, venue is properly laid in any of the districts where an essential conduct element of the crime took place.” United States v. Ramirez, 420 F.3d 134, 139 (2d Cir.2005). The Government bears the burden at trial of proving venue by a preponderance of the evidence. United States v. Potamitis, 739 F.2d 784, 791 (2d Cir.1989). When the defendant is charged with more than one count, venue must be proper to each count. Beech-Nut Nutrition Corp., 871 F.2d at 1188.

The Government need only allege that criminal conduct occurred within the venue, “even if phrased broadly and without a specific address or other information,” in order to satisfy its burden with regard to pleading venue. United States v. Bronson, No. 05 Cr. 714(NGG), 2007 WL 2455138, at 4 (E.D.N.Y. Aug. 23, 2007); see also United States v. Szur, 97 Cr. 108(JGK), 1998 WL 132942, at 9 (S.D.N.Y. Mar. 20, 1998). In each count of the Indictment, the Government alleges that the offenses occurred “in the Southern District of New York and elsewhere.” See Indictment ¶¶ 40, 55, 72, 80, 107, 109. These allegations alone are sufficient to survive a pretrial motion to dismiss. 15. The question of whether there is sufficient evidence to support venue is appropriately left for trial. 16.Chalmers, 474 F.Supp.2d at 575. Defendants' motions to dismiss based on venue are denied without prejudice to renewing those motions at the close of the Government's case. 17.

f. Sufficiency of Pleading (Count Eight)

In Count Eight, Ohle is charged with obstructing and impeding the due administration of the Internal Revenue laws pursuant to 26 U.S.C. § 7212(a). Ohle alleges that Count Eight is insufficiently pled and applying Section 7212(a) in the instant case would render the statute unconstitutionally vague. Count Eight, which tracks the language of the statute and incorporates specific allegations from previous paragraphs in the Indictment, is sufficiently pled and provides Ohle with fair notice of the charges against him. See United States v. Walsh, 914 F.3d 37, 44 (2d Cir.1999) (“[W]e have consistently upheld indictments that do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.”) (internal citations and quotations omitted); United States v. Tramunti, 513 F.2d 1087, 1113 (2d Cir.1975) (“[A]n indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.”).

Ohle argues that under United States v. Kassouf, 144 F.3d 952 [81 AFTR 2d 98-2066] (6th Cir.1998), Section 7212(a) requires proof of a pending IRS action that the defendant corruptly endeavored to obstruct; and, therefore, the Government has failed to allege a violation of Section 7212(a). (Ohle Mem. 25.) At the outset we note that Kassouf was immediately limited in its own circuit. 18. The Court of Appeals for the Second Circuit, along with many other circuits, has repeatedly affirmed convictions for violations of § 7212(a), or otherwise failed to raise objections to § 7212(a) indictments, in which no IRS proceeding or investigation was pending. See United States v. Wilner, No. 07 Cr. 183(GEL), 2007 WL 2963711 [100 AFTR 2d 2007-6349], at 3 (S.D.N.Y. Oct. 11, 2007) (collecting cases). Furthermore,Kassouf is fundamentally at odds with this Circuit's broad interpretation of the omnibus clause. In United States v. Kelly, the Second Circuit held that the language of the omnibus clause is extremely broad and “renders criminal “any other” action which serves to obstruct or impede the due administration of the revenue laws.” Kelly, 147 F.3d at 175.

Count Eight, which incorporates prior paragraphs of the Indictment, alleges numerous specific acts of obstruction, including but not limited to undermining the ability of the IRS to ascertain HOMER clients' true tax liabilities and determine whether penalties should be obtained through the drafting of fraudulent opinion letters. Indictment ¶ 110 (incorporating ¶ 17). These allegations, which allege that Ohle participated in a scheme to conceal his own income and the income of others from the IRS, charge a violation of Section 7212(a) with sufficient specificity. See Wilner, 2007 WL 2963711 [100 AFTR 2d 2007-6349], at 6 (denying the motion to dismiss an indictment, which charged the defendant “with scheming to create a false paper trail of checks and divert income to a corporation in order to avoid taxes properly owing on income he himself earned as an individual (or similarly owed by other taxpayers)”).

Ohle also argues that the statute is unconstitutionally vague as applied. The Second Circuit rejected a similar argument inKelly. In Kelly, the court relied on the “well-reasoned opinion” of Judge Gertner inUnited States v. Brennick, 908 F.Supp. 1004 [79 AFTR 2d 97-1210] (D.Mass.1995), to conclude that the court's broad interpretation of the statute did not run afoul of the constitutional doctrines of overbreadth and vagueness. Id. We similarly find that application of Section 7212(a) in the instant case does not render the statute unconstitutionally vague. Ohle's motion to dismiss Count Eight is denied.

g. Lack of Pre-Indictment Administrative Conferences

Ohle argues that the failure of the IRS and the DOJ to offer Ohle a pre-indictment conference merits dismissal of the Indictment. However, IRS guidelines do not provide for a pre-indictment conference “if the taxpayer is the subject of a grand jury investigation,” as was the case here. IRM 9.5.12.3.1 (July 25, 2007). The United States Attorneys' Manual (“USAM”) provides that, “If time and circumstances permit, the Tax Division generally grants a taxpayer's written request for a conference with the Division in Washington, D.C.” USAM 6-4.214 (Sept.2007). However, the Second Circuit has held that the provisions of the USAM “reflect executive branch policy judgments” and “do not confer substantive rights on any party.” United States v. Piervinanzi, 23 F.3d 670, 682–83 (2d Cir.1994);see also United States v. Kelly, 147 F.3d 172, 176 [82 AFTR 2d 98-5030] (2d Cir.1998) (stating that “[internal department] guidelines provide no substantive rights to criminal defendants” in discussing DOJ Criminal Tax Manual). The Government claims it decided not to offer Ohle a pre-indictment conference in order to prevent Ohle from dissipating assets subject to forfeiture before he was indicted and arrested. This decision does not provide a basis for dismissal of the indictment. See United States v. Goldstein, 342 F.Supp. 661, 666 [30 AFTR 2d 72-5475] (E.D.N.Y.1972) (failure to offer preindictment conference in criminal tax case not grounds for dismissal of indictment because “such a conference is clearly not a matter of right”).

h. Request for Evidentiary Hearings

Ohle seeks a hearing on two issues: (1) whether grand jury subpoenas subsequent to the return of the initial Indictment were issued for the improper purpose of gathering evidence at trial; and (2) whether the Government improperly utilized two civil tax investigations to gather proof for the pending criminal trial.

Turning first to the issue of Grand Jury subpoenas, we find that there is no credible claim of improper use. The law is settled in this Circuit that “[i]t is improper to utilize a Grand Jury for the sole or dominating purpose of preparing an already pending indictment for trial.” In reGrand Jury Subpoena Duces Tecum Dated January 2, 1985 (Simels), 767 F.2d 26, 29 (2d Cir.1985); see also United States v. Dardi, 330 F.2d 316, 336 (2d Cir.1964). But “absent some indicative sequence of events demonstrating an irregularity, a court has to take at face value the Government's word that the dominant purpose of the Grand Jury proceedings is proper.” United States v. Raphael, 786 F.Supp. 355, 358 (S.D.N.Y.1992).

Ohle relies principally on In re Grand Jury Subpoena Duces Tecum Dated January 2, 1985 (Simels), 767 F.2d 26 (2d Cir.1985). In Simels, the Government first issued a trial subpoena for certain evidence. The trial subpoena was challenged, and the Government, instead of responding to that challenge, issued a Grand Jury subpoena for the exact same evidence. Id. at 29–30. In quashing the subpoena, the Second Circuit noted that the timing of the subpoena “casts significant light on its purposes.”Id. at 29. Ohle argues that the timing in the instant case is suspicious because Grand Jury subpoenas were issued after the initial Indictment. But what Ohle fails to acknowledge is that subsequent superseding indictments were filed. Since the filing of the Second Superseding Indictment on August 11, 2009, not a single Grand Jury subpoena has been issued. Ohle has simply failed to point to any aspect of the Government's actions that is questionable, and, thus, we find that there is no reason to hold an evidentiary hearing with regard to the Grand Jury subpoenas.

Next, Ohle argues an evidentiary hearing is necessary to determine whether the evidence obtained through tax audits of Ohle should be suppressed. The Government may use evidence acquired in a civil action in a subsequent criminal proceeding, unless the defendant demonstrates that the use of such evidence would violate his or her constitutional rights or depart from the proper administration of criminal justice. United States v. Kordel, 397 U.S. 1, 11–13 (1970). InKordel, the Supreme Court set forth certain circumstances where a defendant's right to due process may be violated, including when the Government brings a civil action solely for the purpose of obtaining evidence in a criminal prosecution. Id. at 12; see also United States v. Teyibo, 877 F. Supp 846, 856 (S.D.N.Y.1995).

Although Ohle cites a number of legal propositions, he alleges no acts of bad faith on the part of the Government to support the contention that the Government conducted the civil tax proceedings in order to obtain evidence for the pending criminal trial. He argues only that the timing of the two civil audits conducted in the midst of the criminal tax investigation is “suspicious” without alleging relevant dates or information obtained. Notably, Ohle does not contest the Government's statement that he had counsel during both of the audits, and that one of the audits was commenced prior to the criminal investigation (Gov't Opp. 77 n. 45.) Ohle has not raised any issues or pointed to any potential infringement of his rights that would warrant an evidentiary hearing. Ohle's motion for an evidentiary hearing is denied.

II. Conclusion

Defendants' motions to sever Count Five, Count Six, and Count Seven are granted; Defendant Ohle's motion to sever Count Eight is denied. All remaining motions are also denied.

SO ORDERED.

1.
See also United States v. DeFiore, 720 F.2d 757 (2d Cir.1983) (distinguishingHenderson in prosecution for wire fraud where state tax laws were violated, and noting that the Court of Appeals for the Ninth Circuit had rejected Henderson),cert. denied, 466 U.S. 906 (1984); United States v. Mangan, 575 F.2d 32, 49 [41 AFTR 2d 78-1174] (2d Cir.) (distinguishingHenderson in prosecution for wire fraud and federal tax evasion), cert. denied, 439 U.S. 931 (1978).
2.
See, e.g., United States v. Dale, 991 F.2d 819, 849 [76 AFTR 2d 95-7649] (D.C.Cir.1993) (rejectingHenderson in prosecution for wire fraud and federal tax evasion); United States v. Computer Sciences Corp., 689 F.2d 1181, 1187 n. 13 (4th Cir.1982) (rejectingHenderson in prosecution for mail and wire fraud and making false claims to the government), cert. denied, 459 U.S. 1105 (1983), overruled in nonrelevant part by Busby v. Crown Supply, Inc., 896 F.2d 833, 841 (4th Cir.1990); United States v. Shermetaro, 625 F.2d 104, 110–11 [46 AFTR 2d 80-5303] (6th Cir.1980) (rejecting Henderson in prosecution for conspiracy to defraud the United States and federal tax evasion);United States v. Weatherspoon , 581 F.2d 595, 599–600 (7th Cir.1978) (distinguishingHenderson in prosecution for mail fraud and making false statements to the government); United States v. Miller, 545 F.2d 1204, 1216 [39 AFTR 2d 77-364] n. 17 (9th Cir.1975) (rejectingHenderson in prosecution for mail fraud and federal tax evasion), cert. denied, 430 U.S. 930 (1977),overruled on other ground by, Boulware v. United States , 552 U.S. 421 [101 AFTR 2d 2008-1065] (2008); see also United States v. LaBar, 506 F.Supp. 1267, 1274 (M.D.Pa.1981) (distinguishing Henderson in prosecution for mail fraud and making false statements to the government),aff'd mem. , 688 F.2d 826 (3d Cir.), cert. denied, 459 U.S. 945 (1982).
3.
See United States v. Regan, 713 F.Supp. 629 (S.D.N.Y.1989) (upholding inclusion of mail fraud allegations charging tax fraud as RICO predicates);United States v. Standard Drywall Corp. , 617 F.Supp. 1283, 1295–96 (S.D.N.Y.1985) (noting that “[a]lthough never rejected by the Second Circuit,Henderson has not carried the day in that court either”); United States v. Abrahams, 493 F.Supp. 296 (S.D.N.Y.1980) (noting Henderson's rejection by other courts and refusing to hold that the Commodity Futures Trading Commission Act had implicitly repealed in part the mail and wire fraud statutes). But see United States v. Gallant, 570 F.Supp. 303, 309 (S.D.N.Y.1983) (followingHenderson in disallowing dual prosecution for mail and wire fraud and copyright violations), abrogated on other grounds by Dowling v. United States, 473 U.S. 207 (1985).
4.
Ohle also argues that, even if the conspiracy to commit wire fraud allegations are upheld, the Government is not authorized to seek criminal forfeiture based on the proceeds of a conspiracy to commit wire fraud. However, this argument is based on a misreading of the complex statutory scheme at issue. 28 U.S.C. § 2461(c) allows the Government to seek criminal forfeiture when a defendant is charged with an offense for which any form of forfeiture is authorized. 18 U.S.C. § 981(a)(1)(c) authorizes civil forfeiture for “any offense constituting “specified unlawful activity” (as defined in 18 U.S.C. § 1957(c)(7) of this title), or a conspiracy to commit such offense.” “Specified unlawful activity” is defined by § 1957(c)(7) to include offenses listed in the federal RICO statute, 18 U.S.C. § 1961(1). Lastly, § 1961(1)(b) includes wire fraud within the definition of “racketeering activity.” Ohle's argument fails to consider the phrase “or a conspiracy to commit such offense” in § 981(a)(1)(c), which has the effect of allowing criminal forfeiture of the proceeds of a conspiracy to commit wire fraud.See United States. v. Evanson , No. 05 Cr. 00805(TC), 2008 WL 3107332, at 1 (D.Utah Aug. 8, 2008) (“[P]ursuant to Section 2461(c), the government may seek the criminal forfeiture of the proceeds of conspiracy to commit mail fraud and wire fraud if the indictment alleges those offenses.”). The Government, therefore, is authorized to seek criminal forfeiture of the proceeds of a conspiracy to commit wire fraud, and Ohle's motion to dismiss the forfeiture allegations is denied.
5.
The Second Circuit has repeatedly emphasized that the determination of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury. See United States v. Johansen, 56 F.3d 347, 350 (2d Cir.1995); United States v. Maldonado-Rivera, 922 F.2d 934, 962 (2d Cir.1990);United States v. Vanwort , 887 F.2d 375, 383 (2d Cir.1989). Not only is Gabriel from this Circuit, but unlike the court inMuñoz-Franco , Judge Rakoff discusses the strong preference for juries to determine the question of whether multiple or single conspiracies exist and how this preference affects the pleading requirements. See Gabriel, 920 F.Supp. at 504–05.
6.
The only act alleged to have occurred prior to November 2001 is the embezzlement of Client E's trust, which the Indictment alleges began as early as 2000 and continued through 2003. Indictment ¶¶ 103–04. The fact that the embezzlement occurred over a significantly broader period of time than the referral fee fraud and the Carpe Diem fraud does not render it a distinct conspiracy. In Gabriel, the two conspiracies did not overlap in time at all, as the second set of criminal acts sought to cover up the first set.Gabriel , 920 F.Supp. at 503–04.
7.
Courts have noted that much of the risk of prejudice created by a potentially duplicative charge can be cured through proper instructions at trial. See Szur, 1998 WL 132942, at 11 (Defendants “may properly request a multiple conspiracies jury instruction depending upon the evidence presented at trial.”); Murray, 618 F.2d at 898 (“As we have stated in a related context, “(i)t is assumed that a general instruction on the requirement of unanimity suffices to instruct the jury that they must be unanimous on whatever specifications they find to be the predicate of the guilty verdict.””).
8.
This Circuit is currently divided on whether Rule 8(a) or Rule 8(b) governs when a defendant in a multi-defendant case seeks to sever a count in which only he or she is charged. See United States v. Shellef, 507 F.2d 82, 97 n. 12 (2d Cir.2007). But what is clear is that when a defendant, such as Bradley, seeks to sever a count in which he and another defendant are charged, we apply Rule 8(b).See United States v. Turoff , 853 F.2d 1037, 1043 [62 AFTR 2d 88-5236] (2d Cir.1988).
9.
In oral argument, the Government stated that “Mr. Bradley's own words in a deposition, which we will seek to have admitted at trial, show that he had knowledge of aspects of the Count One conspiracy, that he knew about the transaction, that he knew about the trust aspect of it, and that he knew that he was required to profess that he had done legal services in connection with that transaction in order to get referral fees.” (Tr. at 51.) Although the Court of Appeals for the Second Circuit has not directly addressed the question of whether joinder must be decided on the face of the Indictment, the Court recently “caution[ed] that the plain language of Rule 8(b) does not appear to allow for consideration of pre-trial representations not contained in the indictment.”United States v. Rittweger , 524 F.3d 171, 178 n. 3 (2d Cir.2008). Regardless, the proffered evidence would not alter our conclusion. At most, this evidence suggests that Bradley might have had some knowledge of the illegality of HOMER. InLech , the court found that the defendant had “very little, if any, knowledge of the other schemes, and did not participate in them.” Id. at 257. Similarly, even if Bradley's deposition testimony would show some knowledge of HOMER, his knowledge of its purpose appears to be marginal, if it existed at all, and there are no allegations that he had any role in that conspiracy.
10.
Ohle moves the Court to order a severance of Defendants pursuant to Rule 14. Ohle argues under Bruton v. United States, 391 U.S. 123 (1968), that he will be prejudiced by the admission of Bradley's proffer agreement. The Government has stated that it would redact the proffer agreement in order to ensure that it would not prejudice Ohle, including redacting any mentions of Ohle's name. Ohle protests that no such proposed redacted version of the agreement has been supplied. Prior to admission, the Court will inspect any proposed proffer agreement. If the proffer agreement cannot be adequately redacted in order to ensure that it does not unfairly prejudice Ohle, than the Court will exclude it. Ohle's motion to sever Defendants is denied.
11.
Ohle and Bradley both argue that the wire fraud allegations in Count Five should be dismissed because they fail to state a legally cognizable claim. These arguments rely heavily on the issue of repugnance, which is moot as the Court has severed Count Five. To the extent that issues remain as to whether Bank A had a property right in the referral fees, we need not reach that issue at this point. To find in Defendants' favor on this issue, the Court would have to determine that the HOMER tax shelter is illegal; and, therefore, any right Bank A had to the referral fees was based on an illegal agreement. This determination is not one the Court can or should make at this juncture. Defendants' motion to dismiss the mail and wire fraud allegations in Count Five is denied.
12.
We need not address the Government's additional arguments that Count One is timely, having concluded that the ten-year statute of limitations applies.
13.
Defendants also challenge Count Five as time-barred. The ten year statute of limitations also applies to Count Five. Bank A was the object of the referral fee scheme. (Gov't Opp. 48.) This scheme is alleged to have defrauded Bank A of over a million dollars. Id. Therefore, the Count Five conspiracy, which in part sought to defraud Bank A of money through the fraudulent referral fee scheme and did, in fact, defraud the bank of over a million dollars, affects a financial institution within the meaning of Section 3293(2). See Bouyea, 152 F.3d at 195;Serpico , 320 F.3d at 695.
14.
Ohle cites only one case where a court has declined to apply 6531(6) to omnibus violations of Section 7212(a). (Ohle Mem. 23–4); see United States v. Connell, No. CR-F 94-5052(REC) (E.D.Cal., Feb. 6, 1995). Ohle does not cite specifically to Connell, an unreported decision from the Eastern District of California, nor the court's reasoning, but rather to the discussion of Connell in United States v. Brennick, 908 F.Supp. 1004 [79 AFTR 2d 97-1210] (D.Mass.1995). Brennick declined to followConnell, saying that the court “appeared to assume” that 6531(6) applied only to intimidation offenses.Brennick , 908 F.Supp. at 1017. Connell predates the Ninth Circuit decision in Workinger, where the Court found that the six year period of limitations did, in fact, apply to omnibus violations of Section 7212(a).Workinger , 90 F.3d at 1414.
15.
See Bronson, 2007 WL 2455138, at 4 (“The Superseding Indictment alleges facts sufficient to support venue because it alleges that the criminal activity occurred “within the Eastern District of New York and elsewhere.””); United States v. Chalmers, 474 F.Supp.2d 555, 574–75 (S.D.N.Y.2007) (rejecting defendant's argument that the “allegation that the charged conduct took place “in the Southern District of New York and elsewhere” is insufficient to support venue because it fails to indicate which specific criminal acts were committed in this District”); Szur, 1998 WL 132942, at 9 (“[O]n its face, the Indictment alleges that the offense occurred “in the Southern District of New York and elsewhere,” which is sufficient to resist a motion to dismiss.”).
16.
Bradley contends that he will suffer substantial hardship and prejudice as a result of a trial in New York because his family, including his daughter who has a congenital brain formation, lives in Louisiana. (Bradley Mem. 17–18.) As Bradley is currently incarcerated in Georgia, these hardships are no longer relevant.
17.
Ohle also asserts that upholding venue would violate Ohle's Sixth Amendment right to be tried in “the district wherein the crime shall have been committed.” (Ohle Mem. 15.) We deny the motion on this basis as well.
18.
In United States v. Bowman, 173 F.3d 595 [83 AFTR 2d 99-2219] (6th Cir.1999), after limiting the applicability ofKassouf to its specific facts, Bowman held that Section 7212(a) was properly applied to the defendant, who provided false information to the IRS in an effort to stimulate an IRS investigation of other tax payers, despite the fact that there was no pending IRS action. Bowman, 173 F.3d at 600.
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ab@irstaxattorney.com (www.irstaxattorney.com) — Wed, 27 Jan 2010 15:20:00 +0000

IRS SB/SE Reissuance of Procedures for an Offer to Compromise an Accepted Offer, SBSE-05-0110-003, (Jan. 27, 2010)
2010ARD 018-4
Internal Revenue Service: SB/SE memorandum: Interim guidance: Offer to compromise an accepted offer
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON. D.C. 20224
SMALL BUSINESS/SELF.EMPLOYED DIVISION
January 15, 2010
Control Number: SB/SE-05-0110-003
Expiration Date: January 15, 2011
Impacted: IRM 5.8.9
MEMORANDUM FOR DIRECTOR, CAMPUS COMPLIANCE OPERATIONS (BROOKHAVEN) and (MEMPHIS) DIRECTORS, COLLECTION AREA OPERATIONS
FROM: Frederick W. Schindler /s/ Frederick Schindler Director, Collection Policy
SUBJECT: Reissuance of Procedures for an Offer to Compromise an Accepted Offer
The purpose of this memorandum is to reissue interim guidance dated February 2, 2009 with control number SB/SE-05-0209-007 titled, Interim Guidance for an Offer to Compromise an Accepted Offer. This interim guidance memorandum provides procedures for working an offer to compromise an accepted offer. Please ensure this information is distributed to all affected employees.
When the monitoring campuses receive a proposal to change the payment terms of an accepted offer or receive a formal proposal to compromise an accepted offer, the monitoring campus is required to send an Other Investigation (OI) to the office of jurisdiction that initially accepted the offer for consideration (OIC Field function, Centralized OIC (COIC) or Appeals).
Although taxpayers are not required to use a specific offer form, i.e. Form 656, to submit a proposal they are required to submit the proposal in writing. The proposal will be forwarded with the OI to the office that will conduct the investigation. Taxpayers are not required to include a 20 percent payment or periodic payments with the proposal.
Employees will secure and review the taxpayer's updated financial information and supporting documentation and negotiate the terms of the proposal based on the taxpayer's financial situation. The terms available are the same as the terms offered on Form 656 (rev 02/2007 or later), i.e. lump sum cash or periodic payment, regardless of the original offer IRS received date. Employees must adhere to IRM 5.8.9.4.3 when considering a proposal for an offer on an offer and IRM 5.8.9.4.4 when closing the investigation. The investigating office will provide Monitoring Offer in Compromise Unit (MOIC) with the revised terms of the accepted offer. The offer will not be open on the Automated Offer in Compromise System (AOIC), and therefore no documentation will be necessary on AOIC. If the taxpayer's proposal is not acceptable, the investigating office will advise MOIC to proceed with the default of the original offer.
If you have any questions, please feel free to contact me, or a member of your staff may contact Diana Estey. Territory personnel should direct any questions, through their management staff to the appropriate Area contact.
cc: National Taxpayer Advocate
Chief Appeals
www.irs.gov

ab@irstaxattorney.com (www.irstaxattorney.com) — Tue, 26 Jan 2010 11:07:00 +0000

MAGUIRE PARTNERS - MASTER INVESTMENTS, LLC, MAGUIRE PARTNERS, INC., TAX MATTERS PARTNERS, et al., Plaintiffs v. UNITED STATES OF AMERICA, Defendant.

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA. Case No. CV 06-07371-JFW(RZx) ✓. Related Case Nos.: CV 06-7374-JFW (RZx). CV 06-7376-JFW (RZx). CV 06-7377-JFW (RZx). CV 06-7380-JFW (RZx). Dated: December 11, 2009.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW

WALTER, United States District Judge: This action came on for a court trial on August 12, 13, and 14, 2008. Steven R. Mather and Lydia Turanchik of Kajan Mather and Barish appeared for Plaintiffs Maguire Partners - Master Investments LLC, Maguire Partners Inc., Thomas Master Investments LP, Thomas Partners Inc., Tax Matters Partner, Huntington/Fox Investments LP, Edward D. Fox, Jr., Thomas Division Partnership LP, Thomas Investment Partners Ltd., (collectively “Plaintiffs”). Andrew Pribe, Rick Watson, and Jonathan Sloat of the Office of the United States Attorney appeared for Defendant United States of America (“Defendant”). On September 22, 2008, the parties filed their proposed Post-Trial Findings of Fact and Conclusions of Law. On October 6, 2008, the parties each filed their Post-Trial Briefs and their marked copies of the opposing parties' proposed Post-Trial Findings of Fact and Conclusions of Law. After considering the evidence, briefs and argument of counsel, the Court makes the following findings of fact and conclusions of law: 1

Findings of Fact 2

I. Factual and Procedural Background

A. The Principals and Their Entities

1. James Thomas

James Thomas, a real-estate investor and developer, is the trustee of the Lumbee Clan Trust, which is a partner in Thomas Investment Partners Ltd. (“TIP”), which, in turn, is a partner in Thomas Division Partnership LP (“TDP”). In 2001 through 2002, these various partnerships owned an interest in: the Library Tower in Los Angeles; the Gas Company Tower in Los Angeles; the Wells Fargo Center in Los Angeles; the MGM Plaza in Santa Monica; the Solana project in Dallas; and Commerce Square in Philadelphia. These investments were highly leveraged with debt in the range of eighty to ninety percent of the value of the property. Thomas's net worth in 2001 was approximately $200 million, with approximately twenty to thirty percent in cash or marketable securities/cash equivalents and the remainder in real estate holdings, including those identified above.

2. Edward Fox

Edward Fox, a real-estate investor and developer, is the trustee of The Edward D. Fox, Jr. Family Trust dated February 14, 1990 (the “Fox Trust”), which is a partner in Huntington/Fox Investments LP (“HFI”), which, in turn, is a partner in both Maguire Partners - Master Investments LLC (“MP-MI”) and Thomas Master Investments LP (“TMI”). In 2001 through 2002, these various partnerships owned an interest in: the Library Tower in Los Angeles; the Gas Company Tower in Los Angeles; the Wells Fargo Center in Los Angeles; the MGM Plaza in Santa Monica; the Solana project in Dallas; and Commerce Square in Philadelphia. These investments were highly leveraged with the debt in the range of eighty to ninety percent of the value of the property.

In 2001, Fox also was a major investor in the publicly-held Center Trust REIT where he served as chairman of the board and chief executive officer. The Media Center Shopping Mall in Burbank, California was one of the key assets owned by the Center Trust REIT. In 2001, Fox also was a founder and owner of Commonwealth Partners, which was assembling a portfolio of commercial real estate projects in partnership with various California state pension funds. Fox's net worth in 2001 was approximately $50 million.

B. The Transactions At Issue

1. The Lumbee Clan Trust Transaction

On December 20, 2001, the Lumbee Clan Trust and AIG entered into a transaction in which the Lumbee Clan Trust paid $1.5 million to AIG. The source of the funds used to pay AIG was a distribution from TIP. Thomas contends that the purpose of the transaction was to serve as a hedge against potential loss in the value of his real-estate interests arising from the risk of terrorism after September 11, 2001. Thomas also contends that the Lumbee Clan Trust paid $1.5 million for an opportunity to receive a net maximum of $38.4 million. The potential payout from the transaction was tied to the value of a portfolio of twenty REIT stocks (the “REIT basket”).

a. The Structure of the Transaction

In general, the transaction between the Lumbee Clan Trust and AIG consisted of a short option, a long option, and a promissory note. On December 20, 2001, the Lumbee Clan Trust and AIG in order to implement the transaction did the following: (1) the Lumbee Clan Trust sold a short option to AIG for $100 million; (2) the Lumbee Clan Trust purchased a long option from AIG for $61,683,169; (3) the Lumbee Clan Trust purchased a promissory note from AIG for $39,816,831; and (4) the Lumbee Clan Trust pledged the proceeds from the long option and the promissory note to secure the short option. The Lumbee Clan Trust's transaction costs amounted to $1.5 million. The long and short options were Asian-style European options. 3 The promissory note eliminated AIG's obligation to transfer funds to the Lumbee Clan Trust in the amount representing the difference between the price of the short option and the price of the long option. The strike price of the short option was fifty percent of the value of the REIT basket, or $100,021,176. The strike price of the long option was seventy percent of the value of the REIT basket, or $140,029,647.

b. The Terms of the Transaction

The terms of the transaction provided that any payoff depended on the average value of the REIT basket between December 20, 2001, and March 19, 2002, as compared to the value as of December 19, 2001. If the average value of the REIT basket between December 20, 2001, and March 19, 2002, did not fall by greater than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Lumbee Clan Trust would receive no payout. If the average value of the REIT basket between December 20, 2001, and March 19,2002, fell more than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Lumbee Clan Trust would receive a cash payment that would increase dollar-for-dollar with the reduction in the average value of the REIT basket below seventy percent of the value of the REIT basket on December 19, 2001, until a maximum payout of $40,008,471 was reached. This maximum payout would be reached if the average value of the REIT portfolio fell by fifty percent or more from its value of December 19, 2001. However, the Lumbee Clan Trust would never be obligated to pay out-of-pocket anything other than the $1.5 million transaction costs paid to AIG on December 20, 2001, for the transaction.

c. The Contributions to the Partnerships

On December 27, 2001, the Lumbee Clan Trust contributed the transaction to TIP. Specifically, the Lumbee Clan Trust contributed the long option and the promissory note, and TIP assumed the short option. On December 27, 2001, TIP contributed the transaction to TDP. Specifically, TIP contributed the long option and the promissory note, and TDP assumed the short option. These contributions of the assets and assumptions of the short option were with the approval of AIG. After the contributions to the partnerships, AIG's position in the short option remained secured by the pledge of the long option and the promissory note.

d. The Performance of the REIT Basket and the Transaction

The value of the REIT basket did not decline by an average of thirty percent for the period between December 20, 2001, and March 19, 2002, as compared to its value on December 19, 2001. Therefore, the transaction did not yield a net payment to TDP.

e. The Tax Reporting by the Partnerships and the IRS Adjustments Related to the Transaction

(i.) Thomas Investment Partners

TIP reported on its 2001 Form 1065 that $101,500,000 had been contributed in capital during the year and that this amount constituted an asset of TIP. TIP also reported on its 2001 Form 1065 that the Lumbee Clan Trust had increased its capital in TIP by $101,500,000. TIP also issued a K-1 (partner's share of income, credits, deductions, etc.) to the Lumbee Clan Trust for 2001 that reflected an increase in the Lumbee Clan Trust's capital account of $101,500,000 due to the contribution of the transaction. TIP reported on its 2002 Form 1065 that it had interest income of $191,640 and it claimed deductions of $1,691,640. TIP did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued a notice of Final Partnership Adjustment (“FPAA”) which adjusted downward the capital contributed to and assets of TIP by $101,500,000 and sought to adjust the outside basis of LCT by $101,500,000. For 2002, the FPAA adjusted downward income by $191,640 and disallowed the deduction of $1,691,640.

(ii.) Thomas Division Partnership

TDP reported on its 2001 Form 1065 that $101,500,000 had been contributed in capital during the year and that this amount constituted an asset of TDP. TDP also reported on its 2001 Form 1065 that TIP had increased its capital in TDP by $101,500,000. TDP also issued a K-1 to TIP for 2001 that reflected an increase in TIP's capital account of $101,500,000 due to the contribution of the transaction. TDP reported on its 2002 Form 1065 that it had interest income of $191,640, and it claimed deductions of $1,691,640. TDP did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of TDP by $101,500,000, and sought to adjust the outside basis of TIP by $101,500,000. For 2002, the FPAA adjusted downward income by $191,640, and disallowed the deduction of $1,691,640.

2. The Fox Trust Transaction

On December 20, 2001, the Fox Trust and AIG entered into a transaction in which the Fox Trust paid $675,000 to AIG. Fox contends that the purpose of the transaction was to serve as a hedge against potential loss in the value of his real-estate interests arising from the risk of terrorism after September 11, 2001. Fox also contends that the Fox Trust paid $675,000 for an opportunity to receive up to a net maximum of $17,242,574. The potential payout from the transaction was tied to the value of a portfolio of twenty REIT stocks (the “REIT basket”). This was the identical basket that the Lumbee Clan Trust transaction used.

a. The Structure of the Transaction

In general, the transaction between the Fox Trust and AIG consisted of a short option, a long option, and a promissory note. On December 20, 2001, the Fox Trust and AIG in order to implement the transaction did the following: (1) the Fox Trust sold a short option to AIG for $45 million; (2) the Fox Trust purchased a long option from AIG for $27,757,426; (3) the Fox Trust purchased a promissory note from AIG for $17,917,574; and (4) the Fox Trust pledged the proceeds from the long option and the promissory note to secure the short option. The Fox Trust's transaction costs amounted to $675,000. The options were Asian-style European options. The promissory note eliminated AIG's obligation to transfer funds to the Fox trust in an amount representing the difference between the price of the short option and the price of the long option. The strike price of the short option was fifty percent of the value of the REIT basket, or $45,009,529. The strike price of the long option was seventy percent of the value of the REIT basket, or $63,013,341.

b. The Terms of the Transaction

The terms of the transaction provided that any payoff depended on the average value of the REIT basket between December 20, 2001, and March 19, 2002, as compared to the value as of December 19, 2001. If the average value of the REIT basket between December 20, 2001, and March 19, 2002, did not fall by greater than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Fox Trust would receive no payout. If the average value of the REIT basket between December 20, 2001, and March 19, 2002, fell by more than thirty percent as compared to the value of the REIT basket on December 19, 2001, then the Fox Trust would receive a cash payment that would increase dollar-for-dollar with the reduction in the average value of the REIT basket below seventy percent of the value of the REIT basket on December 19, 2001, until a maximum payout of $18,003,812 was reached. This maximum payout would be reached if the average value of the REIT portfolio fell by fifty percent or more from its value on December 19, 2001. However, the Fox Trust would never be obligated to pay out-of-pocket anything other than the $675,000 transaction costs paid to AIG on December 20, 2001.

c. The Contributions to the Partnerships

On December 27, 2001, the Fox Trust contributed the transaction to HFI. Specifically, the Fox Trust contributed the long option and the promissory note, and HFI assumed the short option. On December 27, 2001, HFI contributed $34,749,083 of the transaction to MP-MI. Specifically, HFI contributed seventy-six percent of the long option and the promissory note, and MP-MI assumed seventy-six percent of the short option. HFI had no prior investment in MP-MI. On December 27, 2001, HFI contributed $7,682,535 of the transaction to TMI. Specifically, HFI contributed seventeen percent of the long option and the promissory note, and TMI assumed seventeen percent of the short option. HFI had no prior investment in TMI. On December 27, 2001, HFI contributed the remaining seven percent of the transaction to Manhattan Properties, LP 4 , which assumed the remaining seven percent of the short option. These contributions of the assets and assumptions of the short option were with the approval of AIG. After the contributions to the partnerships, AIG's position in the short option remained secured by the pledge of the long option and the note.

d. The Performance of the REIT Basket and the Transaction

The value of the REIT basket did not decline by an average of thirty percent for the period between December 20, 2001, and March 19, 2002, as compared to its value on December 19, 2001. Therefore, the transaction did not yield a net payment to Fox.

e. The Tax Reporting by the Partnerships and the IRS Adjustments Related to the Transaction

(i.) Huntington/Fox Investments

HFI reported its investment in MP-MI on its 2001 Form 1065 in the amount of $513,515. HFI reported its investment in TMI on its 2001 Form 1065 in the amount of $113,519. HFI reported on its 2002 Form 1065 deductions of $707,183 and income of $80,114 pertaining to the transaction. HFI did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of HFI by $42,431,618, and sought to adjust outside basis of the Fox Trust by $42,431,618. For 2002, the FPAA adjusted income downward by $80,114, and disallowed the deduction of $707,183.

(ii.) Maguire Partners-Master Investments

MP-MI reported on its 2001 Form 1065 that it had made a capital contribution of $34,749,083 during the year and that this amount constituted an asset of the partnership. MP-MI also reported on its 2001 Form 1065 that HFI had increased its capital in MP-MI by $34,749,083. MP-MI also issued a K-1 to HFI for 2001 that reflected an increase in the HFI's capital account of $34,749,083 due to the contribution of the transaction. MP-MI reported on its 2002 Form 1065 that it had interest income of $65,609 and it claimed deductions of $579,143 pertaining to the transaction. It also reported other investments of $34,235,549. MP-MI did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of MP-MI by $34,749,083, and sought to adjust the outside basis of HFI by $34,749,083. For 2002, the FPAA adjusted downward income by $65,609, and disallowed the deduction of $579,143. The IRS also adjusted the other investments downward by $34,235,549.

(iii.) Thomas Master Investments

TMI reported on its 2001 Form 1065 that it had made a capital contribution of $7,682,535 during the year and that this amount constituted an asset of TMI. TMI also reported on its 2001 From 1065 that HFI had increased its capital in TMI by $7,682,535. TMI also issued a K-1 to HFI for 2001 that reflected an increase in HFI's capital account of $7,682,535 due to the contribution of the transaction. TMI reported on its 2002 Form 1065 that it had interest income of $14,505, and it claimed deductions of $128,040 pertaining to the transaction. It also reported other investments of $7,569,000. TMI did not account for the short option on either the Form 1065 or the K-1s for 2001 and 2002. For 2001, the IRS issued an FPAA that adjusted downward the capital contributed to and assets of TMI by $7,682,535, and sought to adjust the outside basis of HFI by $7,682,535. For 2002, the FPAA adjusted downward income by $14,505, and disallowed the deduction of $128,040. The IRS also adjusted the other investments downward by $7,569,000.

C. Background Regarding the Transactions at Issue

1. The Arthur Andersen Call-Option Spread

The transactions that were entered into by the Lumbee Clan Trust and AIG and the Fox Trust and AIG were designed by Arthur Andersen and referred to internally by various names, such as the “call-option spread”, the “synthetic put” and “asset-hedging.” The call-option spread consisted of two call options - one long and one short - and a promissory note. 5 By using the call-option spread, a taxpayer would be able to create a basis in an amount substantially greater than the amount of money actually paid for the call-option spread by taking the position that the transaction created a “contingent” liability for purposes of I.R.C. § 752 . In order to create basis and obtain the tax benefit, the taxpayer was required to contribute the call-option to a partnership.

The call-option spread was viewed by Arthur Andersen tax partners as one of many-tax-avoidance techniques marketed by Arthur Andersen. In fact, from 1999 to 2001, Arthur Andersen arranged approximately ten call-option spread transactions, and in all but one of these transactions AIG was the counterparty. The call-option spread was considered a “proven solution” by Arthur Andersen, which included techniques offered by Arthur Andersen to minimize taxes. It is estimated that the call-option spread transactions generated about $14.7 million in fees for Arthur Andersen in fiscal years 2000 and 2001.

2. Thomas and Fox Learn About the Call-Option Spread

In 2001, Martin Griffiths, a tax partner in the Los Angeles office of Arthur Andersen, was the engagement partner and the main point of contact for Thomas and Fox. In fact, Thomas, Fox, and another real estate investor, Robert Maguire, represented approximately one hundred percent of Griffiths's business. Because Griffiths was familiar with the investment portfolios and tax needs of Thomas and Fox, he considered it his duty to investigate and determine if any of the “interesting planning ideas” presented to him by Arthur Andersen had any applicability to Thomas or Fox. He testified that it was his job to bring Arthur Andersen's “industry expertise” to bear on Thomas and Fox's interests.

Sometime before September 11, 2001, Griffiths became aware of the call-option spread, and decided to investigate it for Thomas, Fox, and Maguire. Before September 11, 2001, Griffiths contacted his fellow tax partner Mandel to learn more about the call-option spread. After discussing the call-option spread with Mandel, Griffiths and Mandel met with Thomas and, separately, with Fox on September 27, 2001. During these meetings, Mandel explained to Thomas, a former trial attorney with the I.R.S., and Fox the increased basis that could result from the call-option spread, which Mandel described as a hedge, if the options and note were contributed to a partnership. In the weeks after the September 27, 2001 meetings, Griffiths continued to discuss the call-option spread with Thomas and Fox, including detailed discussions regarding the structure of the transaction.

In December 2001, Paul Rutter, outside transactional counsel to Thomas and Fox, met with Mandel to discuss the transaction. He also reviewed the transactional documents prepared by Sullivan & Cromwell, counsel to AIG. Rutter was not an expert on options or hedging, and did not provide business advice to Thomas or Fox regarding the transaction. Instead, Rutter's representation was limited to reviewing the documents prepared by AIG's counsel, which included the contribution agreements by which the transaction would be contributed to the partnerships. Rutter testified that it was his understanding “that they [AIG] were doing this transaction with other people and had a pre-existing set of documents they used[.]”

Rutter also testified that the decision to contribute the transactions to Thomas and Fox's respective partnerships had already been made by the time he became involved in the transaction. In fact, Thomas and Fox admitted that it was always their intention to contribute the transactions to their respective partnerships. The partnership contributions were always viewed by Thomas, Fox, Griffiths, and Rutter as integral to the entire transaction.

On December 20, 2001, Thomas and Fox entered into the call-option spread transactions, described above, with AIG.

II. Discussion

A. The Lumbee Clan Trust Transaction And The Fox Trust Transaction Lack Economic Substance.

A taxpayer is not permitted to reap tax benefits from a transaction that lacks economic substance. 6 Coltec Industries, Inc. v. United States , 454 F.3d 1340, 1352-55 (Fed. Cir. 2006) (discussing Supreme Court precedent invoking economic substance since 1935). As the Federal Circuit explained in Coltec , the economic substance doctrine requires “disregarding, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality,” and, thus, “prevent[s] taxpayers from subverting the legislative purpose of the tax code by engaging in transactions that are fictitious or lack economic reality simply to reap a tax benefit.” Id. at 1352-54.

1. Legal Standard for Economic Substance Analysis

To determine whether a transaction is merely an economic sham, the court must determine whether the transaction had any practical economic effect other than the creation of tax benefits. Casebeer v. Commissioner , 909 F.2d 1360, 1363 (9th Cir. 1990); Sochin v. Commissioner , 843 F.2d 351, 354 (9th Cir. 1988). Therefore, the court must exam the objective economic substance of the transaction and the subjective business motivation of the taxpayer. Sochin , 843 F.2d at 354; Casebeer , 909 F.2d at 1363. However, the objective and subjective inquiries are not “discrete prongs of a rigid twostep analysis,” but “are simply more precise factors to consider in the application of [the Ninth Circuit's] traditional sham analysis; that is, whether the transaction had any practical economic effects other than the creation of income tax losses.” Id.

a. The Objective Economic Substance Inquiry

Under the objective economic substance inquiry, the Court must determine “whether the transaction ha[s] economic substance beyond the creation of tax benefits.” Casebeer , 909 F.2d at 1365 ( citing Bail Bonds by Marvin Nelson, Inc. v. Commissioner , 820 F.2d 1543, 1549 (9th Cir. 1987). To do so, the court must analyze whether the “substance of the transaction reflects its form” and whether, objectively, “the transaction was likely to produce economic benefits aside from a tax deduction.” Id.

A transaction lacks objective economic substance where it does not appreciably affect a taxpayer's beneficial interest except to reduce his taxes. Knetsch v. United States , 364 U.S. 361, 366 (1960); ACM Partnership v. Commissioner , 157 F.3d 231 248 (3d Cir. 1998). For example, de minimis economic effect - such as the accumulation of small amounts of cash value in an annuity contract or the assumption of marginal risks in a partnership arrangement - are insufficient to create economic substance. Knetsch , 364 U.S. 361, 365-66 (finding transaction involving leveraged annuities to be economic sham because possible $1,000 cash value of annuities at maturity was “relative pittance” compared to purported value of annuities); ASA Investerings Partnership v. Commissioner , 201 F.3d 505, 514 (D.C. Cir. 2000); ACM , 157 F.3d at 251-52.

b. The Subjective Business Purpose Inquiry

The Court analyzes a taxpayer's subjective business purpose by determining “whether the taxpayers have shown that they had a business purpose for engaging in the transaction other than tax avoidance.” Casebeer , 909 F.2d 1363-64. This analysis “often involves an examination of the subjective factors that motivated a taxpayer to make the transaction at issue,” such as the experience of the taxpayer, the extent of the taxpayer's investigation into a transaction, the extent of any advisor's investigation into the deal, and the taxpayer's trial testimony regarding their motivation for entering into the transaction.” Bail Bonds , 820 F.2d at 1549; see, also, Casebeer , 909 F.2d at 1364.

One factor that can be considered in analyzing a taxpayer's subjective business purpose is whether the taxpayer was acting like a prudent economic actor or contrary to rational business interests in the transaction. See, e.g., Gilman v. Comm'r , 933 F.2d 143, 146-47 (2d Cir.1991) (requiring taxpayer to demonstrate that prudent investor could have concluded that “realistic potential for economic profit” existed) (internal quotation marks omitted); Rice's Toyota World, Inc. v. Comm'r , 752 F.2d 89, 91 (4th Cir.1985) (equating lack of economic substance with finding that “no reasonable possibility of a profit exists”); Long Term Capital , 330 F.Supp.2d at 172 (finding that transaction lacked economic substance because, “at the time the transaction was entered into, a prudent investor would have concluded that there was no chance to earn a non-tax based profit return in excess of the costs of the transaction”); Estate of Strober v. Comm'r , 63 T.C.M. (CCH) 3158, 3160 (1992) (“We conclude that … a prudent investor, relying upon independently obtained appraisals and research, would not have concluded that [the] transaction offered a reasonable opportunity for economic gain exclusive of tax benefits.”). Thus, as the Federal Circuit found in Coltec, there must be an objective inquiry into economic reality that would ask “‘whether a reasonable possibility of profit from the transaction existed,’” Coltec , 454 F.3d at 1356 (quoting Black & Decker , 436 F.3d at 441), and “whether the transaction has ‘realistic financial benefit.’” Id . at 1356 n. 16 (quoting Rothschild , 407 F.2d at 411); see, also, Jade Trading, 80 Fed. Cl. At 47-48 (“The inquiry is not whether the [taxpayers] believed the Jade transaction was a real investment capable of making a profit, but whether the Jade transaction in fact objectively was a real investment capable of making a profit and altering their financial positions.”). In addition, where a taxpayer is sophisticated in economics and/or taxation, entering a bad deal may shed light on the taxpayer's true tax-avoidance motivation. Id. (“the absence of reasonableness sheds light on Long Term's subjective motivation, particularly given the high level of sophistication possessed by Long Term's principals in matters economic.”). Similarly, a conspicuous lack of concern over the particulars of the transaction by the taxpayer may be evidence that the transaction is a sham. See, Mahoney v. Commissioner , 808 F.2d 1219, 1220 (6th Cir. 1987).

2. The Transactions At Issue Lack Economic Substance

The presence or lack of economic substance for federal tax purposes is determined by a fact-specific inquiry on a case-by-case basis. Frank Lyon , 435 U.S. at 584. In this case, the Court finds that the evidence demonstrates that the transactions at issue do not have economic substance because Thomas and Fox received no economic benefit, other than the increase in basis, from the transactions. In addition, the Court finds that the evidence demonstrates that Thomas and Fox were motivated by this increased basis and not by any purported “hedging” benefit.

Plaintiffs argue that factual differences between this case and the recent economic substance cases of Stobie Creek and Jade Trading mean that the transactions at issue in this case do, in fact, have economic substance. However, an examination of how the economic substance analysis was applied in Stobie Creek and Jade Trading demonstrate that the transaction at issue in this case, like the transactions in those cases, do not have economic substance.

a. Under the Economic Substance Analysis as Applied in Stobie Creek , The Transactions At Issue in This Case Lack Economic Substance

Stobie Creek involved the contribution of offsetting long and short foreign-currency options to single-member LLCs. The plaintiffs in Stobie Creek alleged that the principal involved was a “reasonable investor” who “made a reasonable assessment regarding profitability.” Id . at 693. In evaluating this claim, the court stated that it could not “ignore the functional and historical reality that the [offsetting option pairs] were part of the prepackaged J&G strategy marketed to shelter taxable gains.” Id. In addition, the Court in Stobie Creek relied heavily on the expert testimony offered by the Government in concluding that “plaintiffs' attempts to establish a legitimate profit motive wither against the devastating, much more credible expert testimony that established the objective economic reality that the [offsetting option pairs] were severely over-priced, had a negative expected-rate-of-return, and consequently had a scant profit potential.” Stobie Creek , 823 Fed. Cl. At 696. The Government's expert concluded that the transaction “was priced at levels that far exceeded [the components'] theoretical value[,]” where those values were computed using an adaptation of the Black-Scholes model. Id. At 685.

The court dismissed the plaintiffs' expert's criticism of the Government's expert's reliance on the Black-Scholes model. While the court recognized the validity of the criticism that “the model involves assumptions of perfect and static markets[,]” it found that the plaintiffs' expert “could not offer a more appropriate substitute.” Id. at 689-90. The court concluded that the expert testimony “suggests that no reasonable and prudent investor would have expected a possibility of a profit on these transactions.” Id. at 693.

In evaluating the subjective business purpose prong of the economic substance analysis, the court rejected the testimony of the principal that he “believed a 30% chance of doubling his investment existed” because the court found that “the [offsetting option pairs] had no objectively reasonable possibility of returning a profit and therefore lacked an objective business purpose.” Id. at 698. The court found that the transactions were “integral to a ‘preconceived’ tax shelter scheme that was not structured to create a viable profit-producing investment, but, rather, to inflate the basis in an unrelated asset that would yield large capital gains upon sale.” Id. Moreover, the court found that while there was “limited evidence” of an investment motive, the evidence was “not sufficient to overcome the evidence that the [offsetting option pairs] were economic nullities beyond producing the claimed tax benefits.” Id.

Similarly, in this case, Defendant's expert, Professor Grendier, used recognized option-pricing-modeling techniques to conclude that the value of the Thomas transaction was $574, and the value of the Fox transaction was $259. 7 Therefore, based on a thirty-five percent volatility, Thomas and Fox paid approximately 2,700 and 2,600 times the value of the transactions they purchased.

Although Plaintiffs' experts, Professors Manaster and Edelstein, criticized Professor Grendier's Black-Scholes method, Professor Manaster testified that, in the absence of comparative prices, he would have performed the same analysis while Professor Edelstein offered no acceptable alternative to Professor Grenadier's analysis.

Moreover, like the transaction in Stobie Creek , the call option spread was a prepackaged deal offered by Arthur Andersen that focused on the creation of basis. Arthur Andersen did not offer any advice on whether the transaction was a hedge, and Mandel, who offered the call option spread to Thomas and Fox, had no expertise on hedging or options.

Finally, there is no credible evidence that the transactions performed as hedges. First, there is no credible evidence that a close correlation exists between the value of the broad-based REIT basket and the value of any of Thomas's and Fox's real estate investments. Second, even if the transactions served as hedges, the price paid by Thomas and Fox vastly exceeded any benefit they could have received. In addition, despite claiming to follow the REIT market closely, Fox did not know the difference between the average drop required to produce a return of one dollar on his transaction, and the historical drop that occurred in 1974. Therefore, as in Stobie Creek , the Court does not find that the self-serving testimony of the principals, Thomas and Fox, sufficient to overcome the substantial and objective evidence that the transactions at issue are economic nullities entered into for the purpose of fabricating tax basis in amounts that are vastly disproportionate to the actual cost.

b. Under the Economic Substance Analysis as Applied in Jade Trading , The Transactions At Issue in This Case Lack Economic Substance

Jade Trading , another recent case involving economic substance analysis, involved the contribution of a long option and a short option to a partnership. Jade Trading , 80 Fed. Cl. at 11-13. The three taxpayers each paid $150,002, and each obtained an increased basis of $15 million. Id. The court disallowed the claimed tax benefits and determined that the transaction was an economic sham. Id. at 14. The court reached its conclusion based on five reasons. First, the claimed losses “were purely fictional” because the taxpayers “did not invest $15 million in the spread and did not lose $15 million when exiting Jade without exercising either option.” Second, the plaintiffs contentions that the transaction had a profit potential was contradicted by the large limitation on the maximum net profit that could be earned and the “large and unusual” fees that the plaintiffs paid. Third, the transaction was “devised and marketed by a tax accounting group …as a tax product, not by an investment advisor as a vehicle to earn a profit,” and, thus, the court found it “was developed as a tax avoidance mechanism and not an investment strategy.” Fourth, the initiation of the transaction outside the partnership followed by the contribution to the partnership “had no effect whatsoever on the investment's value, quality, or profitability, except to add cost and burden,” but “packaging the investment in the partnership vehicle was an absolute necessity for securing the tax benefits.” Fifth, there was a “highly disproportionate tax advantage to the underlying monetary outlay - the tax loss per [taxpayer], $14.9 million, was roughly 65 times greater than each LLC's $225,002 financial commitment to Jade, almost 100 times each LLC's $150,002 investment in the spread transaction which generated the loss, and approximately 100 times the $140,000 potential net profit each LLC could have earned.”

Similarly, the Court finds that consideration of these same five reasons in this case leads to the same result - that the transactions at issue in this case lack economic substance. First, the claimed basis is fictional, because Thomas and Fox paid only $1.5 million and $675,000, respectively for the integrated transactions they purchased, but gained an increased basis of $101,500,000 and $45,675,000, respectively. The increase in basis is approximately sixty-seven times what they paid for the transactions. Second, as Professor Grenadier explained, there is virtually no likelihood of a thirty percent average drop over ninety days - the drop required to yield a one dollar return - much less the average fifty percent drop required to yield the maximum payout possible. 8 Third, the design of the call option spread demonstrates that it was designed for the creation of tax benefits. Mandel, who was intimately familiar with the call option spread transaction format and was integral in selling these transactions to Thomas and Fox, was a tax expert specializing in “leading edge tax solutions,” not an options or risk-management expert. Moreover, there is no evidence that the call option spread was designed as a hedge generally, or that it operated as a hedge with respect to the transactions at issue in this case. Fourth, there is no evidence that the contribution to the partnerships, which was part of the design of the prepackaged transactions, had any effect “on the investment's value, quality, or profitability.” However, the contribution was required for the creation of an increased basis. In addition, in the weeks after Mandel first discussed the call option spread with Thomas and Fox, Griffiths provided tax advice to them about the increased basis they would achieve if they purchased the transactions. Fifth, the tax benefit is highly disproportional - sixty-seven times - to the actual economic outlay. As a result the Court finds that the transactions at issue lack economic substance.

c. The Transactions At Issue In This Case Are Economic Shams.

In this case, it is clear that Plaintiffs are not taxpayers “who structured their transactions and ordered their affairs in a way so as to reduce their liability for taxes or to achieve the greatest tax benefits; rather, the tax benefits shaped the structure of the investment in order to achieve the goal of tax avoidance.” Stobie Creek , 82 Fed. Cl. at 698; see, also, Coltec , 454 F.3d at 1357 (“there is a material difference between structuring a real transaction in a particular way to provide a tax benefit (which is legitimate), and creating a transaction, without a business purpose, in order to create a tax benefit (which is illegitimate).”). Because of the mismatch between the purported purpose of “hedging” and the inability of the Asian-style options to satisfy that purpose, the dramatic overpayment by Thomas and Fox for the de minimis value they received in return, and the virtual impossibility of receiving even one dollar in return versus the certain increase in basis by $101,500,000 Thomas and 445,675,000 by Fox, the Court finds that the only appreciable benefit gained by the transactions at issue was an increased basis. This conclusion is supported by the fact that Thomas and Fox were sophisticated economic actors. In fact, Thomas was a former trial attorney with the IRS. Thomas and Fox, along with Griffiths, their tax advisor, obviously recognized the value that would result from the increased basis, such as shielding distributions of cash and property from their partnerships by characterizing that property as a return on capital, or reducing the obligation to restore a negative capital account on termination of their partnerships.

The Court finds that the weight of evidence, including the persuasive expert testimony by Professor Grenadier, established that the transactions at issue did not appreciably improve the economic position of Thomas and Fox beyond the creation of an increased basis. Any subjective belief by Thomas and Fox that the transaction constituted a hedge was not objectively supported by the evidence, and any subjective belief that there was an economic benefit is not objectively reasonable. No prudent business person, such as Thomas or Fox, would pay between 2,600 and 2,700 times the value of the transactions in this case for this type of a hedge. Because the transactions do not provide any appreciable economic benefit to Thomas or Fox, the Court finds that the transactions at issue are economic shams, and any evidence of a non-tax avoidance subjective motivation is not sufficient to give the transactions economic substance. Therefore, the transactions must be disregarded under the prevailing economic substance doctrine, and are without effect for purposes of federal taxation.

B. Application of the Step Transaction Doctrine Yields a Cost-Basis of $1.5 Million for Thomas and $675,000 for Fox.

As an alternative to the economic substance doctrine, Defendant also seeks to invalidate the tax effects claimed by Plaintiffs under the step transaction doctrine. “The Supreme Court has expressly sanctioned the step transaction doctrine, noting that ‘interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction.’” The Falconwood Corp. v. United States , 422 F.3d 1339, 1349 (2005) (quoting Comm'r v. Clark , 489 U.S. 726, 738 (1989)). “[T]he objective of the doctrine is to ‘give tax effect to the substance, as opposed to the form of a transaction, by ignoring for tax purposes, steps of an integrated transaction that separately are without substance.’” Id . (quoting Dietzsch v. United States , 204 Ct.Cl. 535, 498 F.2d 1344, 1346 (1974)).

Courts principally rely on two tests to determine whether to apply the step-transaction doctrine: the interdependence test and the end result test. See, Kornfield v. Commissioner , 137 F.3d 1231, 1235 (10th Cir. 1998); Brown v. United States , 782 F.2d 559, 563-64 (6th Cir. 1986); Security Indus. Ins. Co. v. United States , 702 F.2d 1234, 1244 (5th Cir. 1983); McDonald's Rests. v. Commissioner , 688 F.2d 520, 524-25 (7th Cir. 1982). While the two tests have different formulations, both tests have as their central purpose the implementation of “the central purpose of the step transaction doctrine; that is, to assure that tax consequences turn on the substance of a transaction rather than on its form.” King , 418 F.2d at 517.

1. The End-Result Test

The end-result test applies when “a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.” Greene v. United States , 13 F.3d 577, 583 (2d Cir. 1994)( citing Penrod v. Commissioner , 88 T.C. 1415, 1429 (T.C. 1987). “[p]urportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result.” Brown , 782 F.2d at 564 ( quoting King , 418 F.2d at 516). While the taxpayer's intent is relevant under the end-result test, it is not the intent to avoid taxes; instead, it is whether the taxpayer intended to achieve a particular end-result, legitimate or not, through a series of interrelated steps. True , 190 F.3d at 1175. Thus, if a taxpayer structures a single transaction in a certain way that involves multiple steps, “he cannot request independent tax recognition of the individual steps unless he shows that at the time he engaged in the individual step, its result was the intended end result in and of itself.” Id. at 1175 fn. 9.

In this case, both Thomas and Fox contend that the reason they engaged in the transactions at issue was to “hedge” against a catastrophic collapse in the real-estate market. Thus, as they described it, Thomas and Fox essentially placed a “bet” that they now contend amounted to a hedge. Therefore, the long option, the short option, and the promissory note are simply the “interrelated steps” through which Thomas and Fox accomplish this “bet” or “hedge.” Under the end results test, these interrelated steps of the transaction should be collapsed into a unified whole and the tax consequences determined accordingly.

In addition, any attempt by Plaintiffs to argue that they had a valid business purposes, such as the plaintiff in the Falconwood case, in engaging in the transactions at issue does not “immunize” these transactions from the step transaction doctrine. See, Stobie Creek , 82 Fed. Cl. at 701. While the court in Falconwood held that the step transaction doctrine did not apply to the series of transactions at issue, it did so because the taxpayer had an independent business purpose for the initial step, and then was bound by regulation to follow the remaining steps that the Government had sought to collapse. Falconwood , 422 F.2d at 1351-52 (“Upon completing a downstream merger for independent business reasons, Falconwood therefore had little choice in the face of quasi-legislative mandates but to file a final consolidated tax return for the group that covered Falconwood's operations for its entire taxable year.”). However, as in Stobie Creek, Plaintiffs “cannot align themselves with the factual circumstances presented in Falconwood ” because they “were not bound by any legislative or regulatory mandate to proceed along the tortuous steps that resulted in the claimed basis enhancement.” Stobie Creek , 82 Fed. Cl. at 702.

2. The Interdependence Test

“The interdependence formulation of the step transaction doctrine requires an inquiry into whether the individual transactions in the series would be “fruitless” without completion of the series.” Id. at 699 ( quoting Falconwood , 422 F.3d at 1349). Under this test, courts analyze whether or not one part of the overall transaction would have occurred without another part. Kornfield , 137 F.3d at 1235; Security Indus. Ins. , 702 F.2d at 1247. If not, the transaction is then integrated and the step transaction applies. Id. Thus, under this test, courts “disregard the tax effects of individual transactional steps if “it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts.” True , 190 F.3d at 1175 ( citing Kuper v. Commissioner , 533 F.2d 152, 156 (5th Cir. 1976)).

In this case, the components of the transactions at issue were interdependent because each component was required to accomplish the desired economic result, which was, as Plaintiffs describe it a “bet” or “hedge” against a collapse in the real estate market. This is best demonstrated by the fact that the documents executed as part of the transactions created interlocking contractual obligations. For example, the Certificate re: Consent and Authorization discusses a “Master Transaction.” The Master Transaction “would be effectuated through the execution and delivery by the Trust of the following agreements: (a) Master Agreement to be entered into by … the Trust and [AIG] …; (b) Note …, to be entered into by and between the Trust and [AIG]…; (c) Pledge Agreement by and between Trust and [AIG]; (d) Option and Equity Derivative Account Agreement by and between Trust and [AIG], and (e) Confirmation Letter Agreements re: share option transaction I and re: share option transaction II to Trust from [AIG].” Moreover, the Master Agreement specifies that all transactions and confirmations constitute a single agreement.

The creation of these interlocking obligations with respect to the long option, the short option, and the note accomplished the goal of creating the “bet” sought by Thomas and Fox. Neither the long or short option independently could have created the required “bet.” For example, Thomas and Fox would have only benefitted from an independent purchase of the long option if prices of the stocks in the REIT basket increased, which is the opposite of what they were trying to accomplish in “hedging” against a drastic downturn in the real estate market. In addition, an independent purchase of the short option would have exposed Thomas and Fox to unlimited losses if the price of the stocks in the REIT basket increased. Thus, the purchase of the long option, the short option, and the AIG note were required to accomplish the desired “hedge.” Therefore, the transactions making up the steps of the “hedge” strategy pursued by the Plaintiffs “are interdependent and have no independent functional justification outside of the series.” Stobie Creek, 82 Fed. Cl. at 700. “Under the interdependence test, the individual steps must be disregarded and collapsed into a single transaction.” Id.

The Court finds that, under either the interdependence test or the end result test, the step transaction doctrine applies to Plaintiffs' transactions. Id. Accordingly, the tax consequences should be determined on the substance of the transactions at issue, and not on the form used by Plaintiffs. Id.

C. Application of the Substance Over Form Doctrine Yields a Cost-Basis of $1.5 Million for Thomas and $675,000 for Fox.

In 1945, the Supreme Court stated: “The incident of taxation depends on substance rather than form of the transaction.” Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945); see, also, True v. United States , 190 F.3d at 1174 (10th Cir. 1999); Allen v. Commissioner , 925 F.2d 348, 352 (9th Cir. 1991). In applying this principle, a court “must look beyond the taxpayers' characterization of isolated, individual transaction steps, and also review the substance of each series of transactions in its entirety.” True , 190 F.3d at 1174. Thus, taxpayers may not characterize a transaction solely based on the labels they have used, because such an approach “would completely thwart the Congressional policy to tax transactional realities rather than verbal labels.” Crenshaw v. United States , 450 F.2d 472, 477-78 (5 th Cir. 1971). Therefore, it is the “true nature” of the transaction, not its “mere formalisms” that control. Court Holding , 324 U.S. at 334; see, also, Allen , 925 F.3d at 352; True , 190 F.3d at 1174.

The countervailing consideration to application of the substance over form doctrine is the principle that taxpayers may generally structure their transactions as they wish. Brown v. United States , 329 F.3d 664, 671 (9 th Cir. 2003). Thus, courts do not invalidate claimed tax benefits if the form of the transaction yields tax benefits which are consistent with Congressional intent as to the particular Internal Revenue Code provisions at issue. Id. at 672. Therefore, courts must make a fact-specific inquiry to determine if the facts fall within the intended scope of the applicable statute. Stewart v. Commissioner , 714 F.2d 977, 988 (9 th Cir. 1983).

In this case, Thomas and Fox entered into the transactions at issue, which they described as “bets” or “hedges” against a collapse in the real estate market. Thomas contends that he “paid approximately $1,500,000 to take a chance that he could receive up to $38,400,000.” According to Thomas, “[t]he $1.5 million is, in effect, the TDP transaction cost, the cost of inducing Banque AIG to make a bet on real estate values. Similarly, Fox contends he “paid approximately $675,000 to take a chance that he could receive up to $17,242,574.” According to Fox, “[t]he $675,000 is, in effect, the Fox transaction cost, the cost of inducing Banque AIG to make a bet on real estate values.”

Once these initial payments of $1.5 million and $675,000 were made, Thomas and Fox had no downside exposure from their “bets,” and only an extremely remote possibility of receiving a return. These contractually interlocking transactions were carefully structured so that the amount payable under the short option would never exceed the amounts to be received from the long option and the AIG note. The assets - the long option and the note - were pledged to AIG to secure the liability created by the short option.

For purposes of the application of the form over substance doctrine, the substance of the transaction is clearly a net payment of $1.5 million by Thomas and $675,000 by Fox for a possible payout with no downside exposure. Therefore, Thomas's true economic cost is $1.5 million, not $101.5 million. Similarly, Fox's true economic cost is $675,000, not $45,675,000.

Because the basis of property is its cost per I.R.C. § 1012 , and because Thomas's economic cost for the entire transaction was $1.5 million, his basis was $1.5 million. Thomas's partnerships succeeded to that basis. Similarly, because Fox's economic cost for the entire transaction was $675,000, his basis was $675,000. HFI succeeded to that basis, while MP-MI and TMI succeeded to their proportional share of that basis. The partnerships' characterization of the contribution at more than sixty times what Thomas and Fox actually paid for their unified position is plainly inconsistent with the fundamental principle that basis equals cost as expressed by Congress in I.R.C. § 1012 . Accordingly, under the substance over form doctrine, the tax consequences should be determined on the substance of the transactions at issue, and not on the form used by Plaintiffs.

D. Even if the Transactions At Issue Have Economic Substance and the Step-Transaction and Form Over Substance Doctrines Do Not Apply, the Obligation Created by the Short Option is a Liability for Purposes of I.R.C. § 752.

When a partner contributes property to a partnership, the partnership succeeds to the contributing partner's basis in the property under I.R.C. § 723 . In addition, the contributing partner increases his basis in the partnership by his cost basis in the property under I.R.C. § 722 .

On the other hand, when a partnership assumes a liability of a partner, the partner's basis in his partnership interest is: (1) decreased by the amount of the liability; and (2) increased by the partner's share of the partnership liability resulting from the assumption of the liability. I.R.C. §§ 722 , 733(1), and 752(a) and (b). Once the liability is satisfied, the partner's basis in his partnership interest is decreased by the amount of the liability. I.R.C. §§ 733(1) and 752(b).

In this case, Plaintiffs argue that the short option was not a liability for purposes of Section 752 . Therefore, for example, Thomas argues that the $101.5 million increase in basis that he received when he contributed the long option and the AIG note should not be reduced to account for the offsetting $100 million short option. However, as explained above, when the liability is satisfied, Thomas's basis should be reduced by $100 million pursuant to Section 752 . Therefore, the increase in Thomas's basis would be merely $1.5 million, or the equivalent of Thomas's net payment for the transaction. Thus, the characterization of the partnership's short option as a liability for purposes of Section 752 is consistent with the cost basis - and the economic reality - of Thomas's contribution. See , I.R.C. § 1012 .

The above interpretation of Section 752 is consistent with Revenue Ruling 88-77 , where the I.R.S. determined that when an obligation creates or increases the basis of the obligor's assets, the obligation is a “liability” for the purposes of Section 752 . In Revenue Ruling 88-77 , the I.R.S. defined liability for purposes of Section 752 to “include an obligation only if and to the extent that incurring the liability creates or increases the basis to the partnership of any of the partnership's assets (including cash attributable to borrowings).”

In this case, the short option, the long option, and the AIG note were contractually interlocked, and the acquisition of the obligation (the short option) clearly created basis (via the long option and the note) and should be recognized as a liability for purposes of Section 752 . In fact, the long option and the AIG note were purchased with the proceeds of the sale of the short option.

The above interpretation of Revenue Ruling 88-77 is consistent with the Fifth Circuit's interpretation in Korman & Associates, Inc., v. United States , 527 F.3d 443 (5th Cir. 2008), and the Court of Federal Claim's recent interpretation in Marriott International Resorts, L.P., v. United States , 83 Fed. Cl. 291 (2008). 9 At the time of the transactions at issue in this case and prior to the Fifth Circuit's decision in Korman , the Helmer line of cases found that certain liabilities assumed by partnerships should not be recognized for basis purposes because they were too indefinable or “contingent.” See, Helmer v. Commissioner , T.C. Memo. 1975-160 (1975); see, also, Long v. Commissioner , 71 T.C. 1 (1978), and La Rue v. Commissioner , 90 T.C. 465 (1988).

For example, in Helmer , a corporation held a purchase option on real estate owned by a partnership, and made periodic payments to maintain the option. T.C. Memo. 1975-160 (1975). Because the partnership was obligated to apply the option payments to the purchase price if the corporation exercised its option, the partners argued that its receipt of these payments created a partnership liability that increased their basis in the partnership. Id. However, the Tax Court found that the payments “created no liability on the part of the partnership to repay the funds paid nor to perform any services in the future.” 10 Id.

However, in Korman , the Fifth Circuit addressed the question whether the assumption of a liability from a short sale of Treasury notes is a liability under Section 752 , and determined that it was a Section 752 liability because the assumption was accompanied by the contribution of the proceeds from the short sale. In Korman, the taxpayer borrowed $100 million in Treasury bills and sold them for $102.5 million. The taxpayer then contributed the $102.5 million to a partnership, and the partnership assumed the liability for covering the short sale. The taxpayer then conveyed the partnership interest to another partnership, which sold the interest for $1.8 million. The taxpayer claimed a loss of $100 million, and ignored the liability created by the obligation to cover the short sale because it was “contingent.” 11

The Fifth Circuit noted that the taxpayer acknowledged “only suffer[ing] a $200,000 economic loss” but “claim[ing] a $102.6 [m]illion tax loss on its return.” Id. at 456. The Fifth Circuit found the taxpayer was making a “premeditated attempt to transform this wash transaction (for economic purposes) into a windfall (for tax purposes)” that was “reminiscent of an alchemist's attempt to transmute lead into gold.” Id.

In this case, as in Kornman , Plaintiffs are seeking to “treat[] [their] contingent assets and … contingent liabilities asymmetrically.” Id. at 460 (internal citation omitted). Moreover, the proceeds from the initial short sale and the subsequent covering transaction in this case are “inextricably intertwined.” Id . at 460-61. Therefore, to apply the Helmer line of cases to this case would, as the Korman court found, “fl[y] in the face of reality” and result in an “unwarranted aberration.” Id. at 461.

E. Even if the Short Option is Not an I.R.C. § 752 Liability, the Obligation Created by the Short Option Must Still be Taken into Account under Treasury Regulation § 1.752-6.

Section 1.752-6 of the Treasury Regulations applies to a partnership's assumption of liability occurring after October 18, 1999, and before June 24, 2003, if I.R.C. § 752(a) and (b) do not apply to that liability. 12 26 C.F.R. 1.752-6. On June 24, 2003, the Treasury Department proposed regulations, including temporary Treasury Regulation § 1.752-6 , that would define “liability” in the partnership context under I.R.C. § 752 , and which relied on the interpretation of “liability” found in I.R.C. § 358(h)(3) 13 and Revenue Ruling 88-77 . See, Assumption of Partner Liabilities , 68 Fed.Reg. 37,434 (June 24, 2003) (Prop. Treas. Reg. §§ 1.752-0 to -7). These temporary regulations became final on May 26, 2005, and the Treasury Department specified that Treasury Regulation § 1.752-6 would apply retroactively. See, 70 Fed.Reg. 30,334, 30,335 (May 26, 2005). Treasury Regulation § 1.752-6 was adopted by Congressional directive pursuant to Section 309 of the Community Renewal Tax Relief Act of 2000 (“2000 Act”), which added Section 358(h) to the I.R.C., and which defines “liability” as including contingent obligations for purposes of certain corporate stock exchanges. Section 309(c)(1) of the 2000 Act required the Secretary of the Treasury to adopt comparable rules for transactions involving partnerships, and expressly authorized retroactivity of those rules by stating that the Treasury Regulations adopted under Section 309(c) “shall apply to assumption of liabilities after October 18, 1999, or such later date as may be prescribed in such rules.”

If Treasury Regulation § 1.752-6 is applied retroactively in this case, the short options at issue would constitute liabilities for purposes of I.R.C. § 752 , and, thus, would require a reduction in the partnership basis claimed by Plaintiffs.

Plaintiffs argue that, as the court in Stobie Creek recently found, the requirement under Section 1.752-6 that a partner's basis in a partnership interest must be reduced by the value of the contingent liabilities assumed by the partnership is “contrary to the then existing policy to exclude contingent liabilities from the computation of partnership basis.” Stobie Creek Investments, LLC v. United States , 82 Fed. Cl. 636, 668 (2008) (citing Helmer , 34 T.C.M. (CCH) 727 (1975)). Both Plaintiffs and the court in Stobie Creek base the conclusion that Section 1.752-6 represented a change from previous policy on the Treasury Department's statement that “[t]he definition of a liability contained in these proposed regulations [including Section 1.752-6 ] does not follow Helmer. ” Stobie Creek, 82 Fed. Cl. At 668 (citing 68 Fed.Reg. at 37,436).

However, other courts have found that Treasury Regulation § 1.752-6 does apply retroactively. For example, in Cemco the United States Court of Appeals for the Seventh Circuit observed that Treasury Regulation § 1.752-6 was “explicit” in stating that it applied retroactively to assumptions of liabilities occurring before its enactment. Cemco Investors, LLC v. U.S. , 515 F.3d 749, 752 (7th Cir. 2008). The Cemco court relied on I.R.C. § 7805(b)(6) which specifically allows retroactivity. 14 Cemco , 515 F.3d at 752. The Cemco court found that the effect of Treasury Regulation § 1.752-6 was to “instantiate the pre-existing norm that transactions with no economic substance don't reduce people's taxes.” Cemco , 515 F.3d at 752.

This Court agrees with the Cemco court that Treasury Regulation § 1.752-6 should be applied retroactively. The Court finds that the rationale of the First Circuit in Stobie Creek and Plaintiffs with respect to Treasury Regulation § 1.752-6 “misrepresents the state of prior law” by interpreting the statement that “[t]he definition of a liability contained in these proposed regulations does not follow Helmer v. Commissioner ” as an indication that Helmer represented the prevailing prior law. Burke, Karen C. and McCough, Gayson, M.P., Cobra Strikes Back: Anatomy of a Tax Shelter (June 19, 2008), at 33 and 39 n. 121. In addition, the Treasury Department also stated that “following the principles set forth in § 1.752-1T(g) and Rev. Rul. 88-77 , the proposed regulations provide that an obligation is a liability if and to the extent that incurring the obligation: (A) Creates or increases the basis of any of the obligor's assets (including cash).” 68 Fed. Reg. 37434, 37437 (2003).

Recognizing that “[t]here is no statutory or regulatory definition of liabilities for purposes of section 752 ” (68 Fed. Reg. 37434, 37435 (2003)), the Treasury Department relied upon Revenue Ruling 88-77 and Salina Partnership v. Commissioner , T.C. Memo 2000-352 (T.C. 2000), and concluded that “[c]ase law and revenue rulings, however have established that, as under section 357(c)(3) , the terms liabilities for this purpose does not include liabilities the payment of which would give rise to a deduction, unless the incurrence of the liability resulted in the creation of, or increase in, the basis of property.” 68 Fed. Reg. 37334, 37435 (2003). Thus, the Treasury Department found that “[t]he question of what constitutes a liability for purposes of section 752 was addressed in Revenue Ruling 88-77 ,” and that the definition of liability in Revenue Ruling 88-77 was consistent with the Internal Revenue's position in Revenue Ruling 95-26 . Id. at 37436. Therefore, the Treasury Department simply applied the pre-existing rule contained in Revenue Ruling 88-77 to address the possibility of abuse caused by contingent liabilities not being recognized under I.R.C. § 752 . 15

Moreover, Notice 2000-44 placed Plaintiffs on notice that the transactions it described would be scrutinized and penalized. Because Notice 2000-44 was issued in August 2000, and notified taxpayers that the contribution of paired long and short options to partnerships in order to artificially increase outside basis were abusive, and would not be allowed, the Secretary's exclusion of these transactions from the exceptions in Treas. Reg. § 1.752-6(b) should not have been a surprise to sophisticated taxpayers such as Thomas and Fox, and their advisor, Arthur Andersen tax partner Griffiths. Moreover, while Plaintiffs argue that Notice 2000-44 did not give them notice because the transactions at issue are not identical to those described in Notice 2000-44 , Plaintiffs conveniently ignore the “substantially similar” language contained in the Notice. Accordingly, the Court finds that even if the short options at issue in this case are not liabilities under I.R.C. § 752 , the obligations created by the short options still must be taken into account under Treasury Regulation § 1.752-6 .

F. The Accuracy-Related Penalties on the Ground of Negligence or Disregarding the Rules or Regulations is Appropriate Under I.R.C. § 6662.

Section 6662 of the Internal Revenue Code governs accuracy-related penalties. The purpose of penalties is “to deter taxpayers from playing the ‘audit lottery,’ that is, taking undisclosed questionable reporting positions and gambling that they [will] not be audited. Caulfield v. Commissioner , 33 F.3d 991, 994 (8th Cir. 1994). As Plaintiffs have argued, Thomas and Fox have not yet used any of the tax benefits associated with the transactions at issue in this case. Because this case is a partnership-level proceeding, the Court must determine “the applicability of any penalty … which relates to an adjustment to a partnership item.” I.R.C. § 6221 . However, the actual computation of the penalty in not done at the partnership level.

One of the accuracy-related penalties provided for in Section 6662 of the Internal Revenue Code is for negligence or disregard of rules or regulations. I.R.C. § 6662(a) and (b)(1). The Code defines negligence as “any failure to make a reasonable attempt to comply with the provisions” of the Code. I.R.C. § 6662(c) . This is an objective standard requiring that the taxpayer exercise “due care.” Hansen v. Commissioner , 471 F.3d 1021, 1028 (9th Cir. 2006) ( citing Collins v. Commissioner , 857 F.2d 1383, 1386 (9th Cir. 1988)). Due care exists where the taxpayer “acted as a reasonable and prudent person would act under similar circumstances.” Id. Under the Treasury Regulations, negligence is “strongly indicated” where “a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit, or exclusion on a return which would seem to a reasonable and prudent person to be ‘too good to be true’ under the circumstances.” Treas. Reg. § 1.6662-3(b)(1)(ii) (2002); see also Hansen , 471 F.3d at 1029. In the Ninth Circuit, negligence is determined by an analysis of “both the underlying investment and the taxpayer's position taken on the tax return.” Hansen , 471 F.3d at 1029; see also Neonatology Associates, P.A. v. Commissioner , 299 F.3d 221, 234 (3d Cir. 2002) (finding that a taxpayer “proceeds at his own peril” when “presented with what would appear to be a fabulous opportunity to avoid tax obligations.”); Pasternak v. Commissioner , 990 F.2d 893, 902 (6th Cir. 1993) (upholding negligence penalty where the “Tax Court found that petitioners were aware that they were buying a program primarily of ‘window dressings’ for tax benefits and either negligently or intentionally disregarded the law.”).

In this case, the Court finds that the facts support the imposition of an accuracy-based penalty on the grounds of negligence or disregard of the rules and regulations. Specifically, the transactions were entered into over one year after the IRS issued IRS Notice 2000-44 entitled “Tax avoidance using artificially high basis,” which alerted taxpayers and their representatives that purported losses arising from certain transactions designed to create artificially high bases in partnership interests would be disallowed. In addition, the partnerships failed to demonstrate any attempt to determine whether the transactions would potentially be covered by Revenue Ruling 88-77 . Moreover, the partnerships failed to demonstrate that they attempted to determine whether the transactions had any economic substance. Furthermore, the partnerships failed to demonstrate that they sought and received disinterested and objective tax advice because the tax advice that they did receive came from Arthur Anderson, which also arranged the transactions. Based on these facts, the Court concludes that any objective view of the transactions results in the conclusion that they had no non-tax economic benefit.

In addition, the partnership returns reported the valuation of the transaction at sixty-seven times their proper value under either I.R.C. § 752 or the substance over form or step-transaction analysis. In that regard, the Thomas partnerships reported an increase in its capital account of $101,500,000, which is sixty-seven times the actual economic outlay of $1.5 million that Thomas paid for the transaction. Any reasonable and prudent taxpayer would consider the transaction “too good to be true.” Treas. Reg. 1.6662-3(b)(1)(ii) (2002). Therefore, the Court finds that the partnerships were negligent and disregarded the rules and regulations for purposes of I.R.C. § 6662 . Id.

The reasonable cause and good faith defense is a fact and circumstance test that focuses on the taxpayer's affirmative actions to determine its correct tax liability: “[g]enerally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability.” Treas. Reg. § 1.6662-4(b) . The taxpayer's “experience, knowledge, and education” may be taken into account. Id. Reliance on a tax advisor “does not necessarily demonstrate reasonable cause and good faith.” Id.

In this case, the partnerships did not have reasonable cause to disregard the liabilities created by the short options in valuing the Arthur Andersen call option spreads contributed to the partnerships. The transactions were entered into over one year after the IRS issued IRS Notice 2000-44 entitled “Tax avoidance using artificially high basis.” This notice alerted taxpayers and their representatives that purported losses arising from certain transactions designed to create artificially high basis in partnership interests would be disallowed. In addition, the partnerships have failed to provide evidence that they diligently attempted to properly assess their proper tax reporting. The partnerships also have failed to demonstrate any attempt to determine whether the transactions would potentially be covered by Revenue Ruling 88-77 . Furthermore, the partnerships have failed to demonstrate that they attempted to determine whether the transactions had any economic substance. Finally, the partnerships have failed to demonstrate that they sought and received disinterested and objective tax advice because the tax advice that they did receive came from Arthur Andersen, which also arranged the transactions resulting in the increased basis that is at issue in this case. Therefore, the partnerships have failed to demonstrate that they acted in good faith as required by the reasonable cause exception of I.R.C. § 6664(c)(1) .

Conclusions of Law

1. The Court has original jurisdiction over the federal claims asserted in this action pursuant to Section 6226 of the Internal Revenue Code. The Court's jurisdiction extends to all items of the partnership for the period at issue. I.R.C. § 6226(f) . Contributions to partnerships and distributions from partnerships are partnership items. Treas. Reg. § 301.6231(a)(3)-1(a)(4)(I) and (ii). The characterization of offsetting options when contributed to partnerships is a partnership item. See, Jade Trading, LLC v. United States , 80 Fed. Cl. 11, 41-43 (Fed. Cl. 2007); Nussdorf v. Comm'r , 129 T.C. 30, 43-44 and n. 16 (2007). 16

2. Venue is proper in the United States District Court for the Central District of California under 28 U.S.C. § 1391(b) because the alleged acts complained of occurred and are occurring in this district.

3. In applying the economic substance analysis to the transactions at issue in this case, the Court concludes that the transactions at issue are economic shams for tax purposes.

4. Application of the step-transaction doctrine, through either the end result test or interdependence test, yields a cost basis of $1.5 million for Thomas and $675,000 for Fox.

5. Application of the substance over form doctrine yields a cost basis of $1.5 million for Thomas and $675,000 for Fox.

6. The obligations created by the short options in the transactions at issue are liabilities for purposes of I.R.C. § 752 .

7. The obligations created by the short options in the transactions at issue are liabilities for purposes of Treasury Regulation § 1.752-6 .

8. I.R.C. § 6221 requires that “the tax treatment of any partnership item (and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item) shall be determined at the partnership level.” I.R.C. § 6226(e) authorizes this Court to conduct partnership-level proceedings and determine “the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item,” I.R.C. § 6226(f) . In this case, the Court concludes that the partnerships were negligent for purposes of IRC § 6662 , and, therefore, accuracy-related penalties are applicable in this case.

Footnotes

1
The Court deferred ruling on the admissibility of deposition testimony of Messrs. Mandel, Varellas and Nelson offered by the government as well as certain trial exhibits objected to by the parties in the Final Pre-Trial Exhibit Stipulation filed August 5, 2008, pending further post-trial submissions by the parties. On October 6, 2008, the parties filed Notices of Designated Deposition Testimony of Kenneth Mandel, Lawrence Varellas, and Kurt Nelson, Plaintiffs' Objections and Defendant's Response to Objections.

The Court has reviewed the objections to the proffered deposition testimony and the objections to certain trial exhibits in the Final Pre-Trial Stipulation filed August 5, 2008, and rules as follows: The Court overrules the objections to Exhibits 45, 52, 53, 54, 74, 81, 82, 85, 86, 88, 89, 90, 94, 95, 97, 100, 101, 102, 103, 105, 130, 131, 140, 141, 142, 143, 144, 145, 146, 151, 260 (a) - (v) and those exhibits will be received into evidence as of the last day of trial, which was August 14, 2008. As to the objections to the deposition testimony of Mr. Mandel, all of the Plaintiffs' objections are overruled except for the following objections which are sustained: (1) p. 35, lines 2 - 4. As to the objections to the deposition testimony of Mr. Varellas, all of Plaintiffs' objections are overruled except the following which are sustained: (1) p. 47, lines 1- 10 and 15 - 25; (2) p. 48, lines 1 - 25; (3) p. 54, lines 1 - 25; (4) p. 55, lines 1 - 8; and (5) p. 87, lines 15 - 25. As to the objections to the deposition testimony of Mr. Nelson, all of Plaintiffs' objections are overruled. Plaintiffs' objections to Defendant's attempt to introduce documents through deposition excerpts which were not marked by Defendant as trial exhibits are sustained. Those documents are inadmissible and will not be received into evidence and have not been considered by the Court.

2
The Court has elected to issue its findings in narrative form. Any finding of fact that constitutes a conclusion of law is also hereby adopted as a conclusion of law, and any conclusion of law that constitutes a finding of fact is also hereby adopted as a finding of fact.

3
An Asian-style option is an option whose payoff depends on the average value of the underlying security or commodity over a specified period of time. In this case, the Asian-style feature meant that the payout was dependent on the average value of the REIT basket from December 20, 2001, to March 19, 2002, as compared to the value of the REIT basket on December 19, 2001. A European option is one that can only be exercised on a particular date. In this case, the date was March 19, 2002.

4
The Manhattan Properties, L.P., transaction is not a part of this litigation.

5
Ken Mandel was a tax partner at Arthur Andersen who worked on "leading edge tax solutions for both high-net-worth clients and large public corporations." Defendant contends that Mandel developed the call-option spread, which is an allegation that Plaintiffs deny. In any case, it is clear from the evidence in this case that Mandel is familiar with the Arthur Andersen technique referred to as the call-option spread. In fact, Mandel described the call-option spread as suitable "for a handful of very large dollar, trust-client transactions, where we excluded the participation from outside attorneys and other non Firm professionals."

6
Defendant argues that Plaintiffs are not entitled to the increased basis created by the transactions at issue under the economic substance doctrine, the substance-overform doctrine, or the step-transaction doctrine. As the Stobie Creek court noted, "[t]hese doctrines vary in origin and somewhat in application, yet apply to the same analysis." (citing King Enters., Inc. v. United States , 418 F.2d 511, 516 n. 6 (1969) ( "[C]ourts have enunciated a variety of doctrines, such as step transaction, business purpose, and substance over form. Although the various doctrines overlap and it is not always clear in a particular case which one is most appropriate, their common premise is that the substantive realities of a transaction determine its tax consequences." ); and H.J. Heinz Co. & Subsidiaries v. United States , 76 Fed.Cl. 570, 583-85 (2007) (discussing multiple formulations employed by courts to consider whether transaction has economic substance or whether it is a "sham" )).

7
Professor Grenadier used a thirty-five percent implied volatility, which is validated by the implied volatility of the Bank of America and JP Morgan quotes Plaintiffs received for similar transactions.

8
In post-trial filings in January 2009, Plaintiffs ask the Court to take judicial notice of the fact that had options with identical terms been purchased on October 1, 2008, there would have been a payoff. In fact, Plaintiffs allege that the actual drop in the REIT basket for the ninety-day period from October 1, 2008 to December 29, 2008, using Asian-style options was 43.47 percent. Defendant does not dispute that this information is accurate, but asserts that it is irrelevant because Defendant did not argue that a payoff from the transactions as issue was "impossible" , but merely "extremely low" and, thus, any economic substance from the transactions at issue was de minimis . The Court agrees with Defendant that the fact that Plaintiffs are able to demonstrate one instance of an Asian-style European option drop in the nearly fifty-year history of REITs occurring seven years after the transactions in question does not change the Court's conclusion that a payoff from the transactions at issue was, at best, highly unlikely. In addition, the Court's conclusion that the transaction at issue lack economic substance is based on, as explained above, a variety of other factors.

9
The recent Court of Federal Claims case of Marriott International Resorts , relied on Revenue Ruling 88-77 to determine that the obligation created by a short sale was a liability for purposes of I.R.C. § 752 . Marriott International Resorts, L.P. v. United States , 83 Fed. Cl. 291 (2008) (finding that, in light of the promulgation of Revenue Ruling 88-77 , symmetrical treatment that "would call for recognition of the corresponding obligation to replace the borrowed securities" was required under Section 752 ).

10
That the option holder in Helmer was able to exercise his option or not is a key distinction between Helmer , and its progeny, and this case where the funds received from the sale of the short option are used to purchase the long option and the AIG note, and the proceeds of which are pledged to secure the liability created by the short option. Helmer and its progeny also are distinguishable from this case because they did not involve the assumption of a payment obligation by a partnership from a partner.

11
However, as the Fifth Circuit found, "[t]he Internal Revenue Code deals with dollars, and the basis adjustment provisions of section 752 presume that the value of the liability is ascertainable." Korman, 527 F.3d at 452.

12
Section 1.752-7 applies to assumptions of liability occurring after June 24, 2003, and taxpayers could elect to apply it to assumptions of liability occurring between October 18, 1999, and June 24, 2003. Treas. Reg. § 1.752-7(k) .

13
Section 358(h)(3) , which defines "liability" in the context of determining basis on corporate transactions as including "any fixed or contingent obligation to make payment."

14
Retroactivity is also permitted to prevent abuse pursuant to I.R.C. § 7805(b)(3) .

15
Treasury Regulation § 1.752-6 also incorporates the definition of liability contained in I.R.C. § 358(h)(3) , which defines "liability" to include contingent liabilities.

16
The parties do not dispute the facts requisite to federal jurisdiction.