Federal Taxation - Ben E. Muraskin, James A. Lawton, and Tiffani W. Greene

• Publication year: 1997

Federal Taxation by Ben E. Muraskin^* James A. Lawton^** and

Tiffani W. Greene^*** ;

Unlike in prior years, in 1996 the Eleventh Circuit Court of Appeals considered nearly as many cases involving substantive tax law as procedural tax law. The procedural matters involved waivers of the statute of limitations for assessment and collection, tax liens and levies, the disclosure of "return information," and certain procedural requirements for a special use valuation election. Substantive tax issues decided included trusts as tax-exempt purchasers of insurance, perjury and tax evasion, split elections for net operating losses, and eligibility for QTIP treatment.

I. Procedural Issues

A. Waivers of the Statute of Limitations for Assessment and Collection

The Eleventh Circuit decided two cases involving waivers of the statute of limitations in 1996. The first involved the revocation by mail of a waiver of the statute of limitations for assessment. The second involved a change in the law that extended the statute of limitations for collection beyond the date set forth in a waiver.

In Coggin v. Commissioner,¹ the taxpayer mailed two Form 872-Ts (Notice of Termination of Special Consent to Extend the Time to Assess Tax)² to the Internal Revenue Service ("IRS") in an attempt to revoke his prior consent to indefinitely extend the time to assess tax on his 1980, 1981, and 1982 federal income tax returns that he made by filing Form 872-A (Special Consent to Extend the Time to Assess Tax).³ Taxpayer mailed the completed Form 872-Ts to the correct IRS office but failed to address them to the attention of the proper division within that office.⁴ Ten months later, the IRS issued a notice of deficiency for the same taxable years.⁵ The taxpayer argued that the notice of deficiency was time-barred due to the earlier filed Form 872-Ts.⁶

In affirming the Tax Court, the Eleventh Circuit held that a taxpayer must sign and mail a Form 872-T in strict compliance with the instructions contained on the form in order to terminate a Form 872-A Special Consent to Extend the Time to Assess Tax.⁷ The court determined that the improperly addressed revocation of waiver was not an effective "filing" until the proper division discovered the document.⁸

Consequently, the Commissioner's issuance of a notice of deficiency within ninety days from the date of discovery was timely.⁹

In Behren v. United States,¹⁰ the Eleventh Circuit addressed the issue of whether a waiver to extend the time to collect tax binds the IRS to the date specified in the waiver despite a congressional amendment extending the statutory collection period past the collection deadline contained in the waiver. In 1984, the IRS made a timely assessment of deficiency for the taxpayer's 1974 federal income taxes.¹¹ In April 1990, the taxpayers and the IRS, pursuant to section 6502(a)(2),¹² extended the period for collection of the assessment from November 1990 to June 1991 by signing a Form 900 (Tax Collection Waiver).¹³ In November 1990, Congress amended section 6502¹⁴ and substituted a ten-year limitations period in place of the previous six-year limitations period for the collection of previously assessed taxes.¹⁵ The IRS sought collection of the deficiency in March 1994, after the June 1991 extension date contained in the waiver but before November 1994, the amended statutory collection deadline.¹⁶

The taxpayers argued against application of the new ten-year limitations period on the grounds that the June 30, 1991 date set by the waiver was binding on the IRS.¹⁷ Citing Florsheim Bros. Drygoods Co. v. United States,¹⁸ a Supreme Court decision rejecting this argument in a similar context, the Eleventh Circuit noted that waivers have no effect on Congress' power to amend the statute of limitations.¹⁹

Consequently, a waiver does not bar the IRS from making collections after the period specified in the waiver where a subsequent statutory amendment extends the collection period.²⁰

B. Tax Liens

In Bilzerian v. United States,²¹ the court examined, (i) whether the IRS can rely on an original assessment to collect taxes paid pursuant to that assessment but later erroneously refunded back to the taxpayer, and (ii) whether the mere filing of a suit by the IRS to collect an erroneous refund is sufficient to validate a federal tax lien. In October 1989, the IRS sent taxpayers a notice of deficiency for taxes, interest, and penalties relating to their 1985 joint tax return.²² The taxpayers paid the alleged deficiency, filed an amended return claiming a refund, and actually received the refund in the following year.²³ Later, however, the IRS contended that the refund was due to computer error and sought recovery of the erroneous refund by filing a claim under section 7405.²⁴ Before judgment was rendered in the erroneous refund suit, the IRS filed a federal tax lien against property owned by one of the taxpayers.²⁵ The taxpayer requested the lien be released under section 6325 on the theory that the underlying tax liability was satisfied when that liability was originally paid.²⁶ After the IRS refused the request, the taxpayer filed a two-count complaint, one for damages for failure to release the lien under section 7432,²⁷ and the second seeking preliminary and permanent injunctions ordering the IRS to release the lien.²⁸

The Eleventh Circuit agreed with the district court's finding that the original tax liability was extinguished when the 1985 deficiency was originally paid.²⁹ Therefore, the IRS could not rely on the original assessment to collect the erroneous refund.³⁰ However, the Eleventh Circuit reversed the district court's finding that the mere filing of an erroneous refund suit by the IRS is sufficient to validate a federal tax lien.³¹ Rather, the proper procedure for the IRS to collect an erroneous refund is either to prevail on an erroneous refund suit under section 7405, or to make a new assessment, including the mailing of a new notice of deficiency.³²

As to taxpayer's claim for damages, the IRS contended that, based on the lack of controlling law in the Eleventh Circuit, it honestly and reasonably did not believe taxpayer's liability had been satisfied within the meaning of section 7432.³³ The court remanded the case with instructions for the taxpayer to demonstrate that the IRS employee knew, or should have known, that the requirements of section 6325 had been satisfied.³⁴

C. Tax Levies

In United States v. Ruff,³⁵ the court held a bankruptcy trustee personally liable to the IRS for a commission paid to a broker after receipt by the trustee of a Notice of Levy relating to any property of, or amounts owed to, the broker. In that case, the broker arranged for sale of certain of the bankruptcy estate's property. Upon consummation of the sale, the broker sought his commission by filing a fee application with the bankruptcy court.³⁶ In July 1989, before the bankruptcy court ruled on the broker's fee application, the IRS served on the trustee a Notice of Levy seeking "[a]ll property, rights to property, money, credits, and bank deposits now in your possession and belonging to [the broker] (or for which you are obligated), and all money or obligations you owe [to the broker]."³⁷ Because the bankruptcy court had not yet ruled on the broker's fee application, the trustee responded to the levy by stating that she held no funds due the broker and that she did not know when the estate would next owe the broker any money.³⁸ Two weeks later, the bankruptcy court approved the fee application, and the trustee executed a check payable to the broker.³⁹

The IRS contended that the bankruptcy estate's obligation to the broker at the time of the levy was property within the meaning of section 6332(a)⁴⁰ and that the trustee was personally liable for failure to pay over the commission under section 6332(d)(1).⁴¹ The trustee claimed that when she received the notice of levy, she was not in possession of property, or rights to property, subject to levy within the meaning of section 6332(a),⁴² because the bankruptcy court's approval of the fee application was a condition precedent to the payment of the commission.⁴³

The court held that under Florida law, the broker had rights to the commission as soon as the purchaser executed a binding contract to purchase the property, and that under federal law, the commission was a fixed and determinable obligation⁴⁴ properly subject to levy because the broker's underlying performance was complete and the commission was capable of precise measurement.⁴⁵ Accordingly, the court held the trustee personally liable for the value of the commission she failed to pay over to the IRS.⁴⁶

D. Disclosure of Return Information

In Ryan v. United States,⁴⁷ the Eleventh Circuit addressed whether certain financial information gathered from statements of witnesses in a taxpayer's criminal trial was "return information" within the meaning of section 6103(b)(2).⁴⁸ Taxpayer, a criminal defense lawyer who was indicted and convicted on drug charges and conspiracy to defraud the IRS in the ascertainment of taxes of other persons, asserted that the criminal prosecutor illegally released return information by disclosing a prosecution memorandum to a reporter.⁴⁹ Taxpayer argued that the disclosure of the memorandum constituted an illegal release of return information because an IRS agent assisted in the prosecution, and the memorandum included information contained in the taxpayer's return.⁵⁰

The court rejected taxpayer's argument. Recognizing that the purpose of the statute was to control loose disclosure practices by the IRS, the court held that the information contained in the memorandum did not fall within the statutory definition of return information because it was the work product of the prosecutor and not acquired from the IRS.⁵¹

E. Procedural Requirements for a Special Use Valuation Election

In Lucas v. United States (In re Estate of Lucas),⁵² the Eleventh Circuit determined...