August 24, 2011
The Federal Circuit’s en banc opinion is out. It affirms the Court of Federal Claims on the reasoning set out in our prior posts and rejects the harmless error analysis of the prior panel opinion. We are pleased to see the Federal Circuit safely emerge (albeit clutching map and compass) from the TEFRA forest.
Briefing Complete in NPR
August 18, 2011
As we mentioned in our last post, the only brief remaining to be filed in NPR was the taxpayer’s reply brief. That brief has now been filed and with it a DOJ motion to strike part of that reply as an inappropriate sur-reply. The motion concerns a section in the reply in which the taxpayer takes on DOJ for arguing (in its previously filed reply brief ) that the only relevant factor in determining the incidence of the valuation misstatement penalty (between partnership and partner) is whether there are partnership items involved and not where the specific misstatement results in a loss.
The taxpayer’s view is that DOJ is trying to have its cake and eat it too – arguing that the penalty applies at the partnership level becuase it is related to partnership items but refusing to allow section 6664 arguments to be heard on the grounds that those are specific to the partner. DOJ’s position is that it would be barred from raising the penalty outside of the context of a partnership proceeding becuase the penalty relates to a partnership item (or items) and that it is not inconsistent to require section 6664 intent to be evaluated at the partner level (and, in any event, it is required by the regulations). All of this, as we have extensively discussed, is interwined in the silliness of trying to separate partner and partnership intent between TEFRA levels something the regulations perhaps should not have done but clearly do. It will be interesting to see how the Fifth Circuit handles the case.
August 12, 2011
It has been a while since we published an update on NPR (please no comments on Supreme Court Justices, schoolchildren, and bloggers taking summers off). Since our last post discussing the government’s opening brief, the taxpayer filed its brief responding to the government and opening the briefing on their cross-appeal. The government also filed its response/reply. All that remains now is the taxpayer’s reply brief on its cross-appeal, currently due on August 15. There are a slew of technical TEFRA issues that are raised by the parties. The taxpayer is appealing the district court’s rulings regarding whether a no change letter can ever be an FPAA and, if it can be, whether an erroneously checked box on the tax return (claiming that the partnership was not a TEFRA partnership) can constitute a misrepresentation of a material fact such that the no-second-FPAA rule of section 6223(f) is inapplicable. As we discussed last post, the parties are jointly briefing — in the government’s appeal — the application of the Heasley/Weiner line of cases to the taxpayer’s concession strategically made to circumvent the gross valuation misstatement penalty. Mayo is implicated by the application of Treasury Regulation section 1.6662-5(d) (DOJ relies on Brand X to argue that the regulation controls over the contrary rule previously announced in Heasley).
However, as we discussed in prior posts, the main issue here is good faith reliance on counsel — R.J. Ruble — by the taxpayer for purposes of the section 6664 reasonable cause defense and when, procedurally, that defense can be raised. The government continues to hew to the line that reliance is inappropriate (because of a technical conflict and because reliance was just not reasonable under the circumstances). DOJ also argues that the defense can be raised only in a partner-level proceeding pursuant to then Temporary Treasury Regulation section 301.6221-1T(d) (the judges may want to get a cholesterol test with all of this Mayo being spread around). For its part, the taxpayer argues that the district court already determined — after seeing the witness testimony — that the reliance was in good faith. Furthermore, since one of the partners is the TMP, the reasonable cause defense is being raised by the partnership as much as by the partners. Setting aside whether you believe the testimony (which the district court judge did), if we could decide cases based on the fact that section 301.6221-1T(d) of the TEFRA penalty regulations is stupid, this would be easy. As we have said before, separating partner and partnership intent in a transaction involving a partnership that was purposefully created by the partners to implement that very same transaction is like trying to dance on a headless pin. With deference under Mayo, however, “stupid is as stupid does” is not the test for striking down regulations. We will just have to wait and see how much patience the Fifth Circuit has for this Forrest Gump of a regulation.
Oral Argument Scheduled in Quality Stores
August 4, 2011
At long last, the Sixth Circuit has scheduled oral argument in the Quality Stores case for October 6, 2011. This will be more than a year since the briefing in the case was completed. The identity of the three-judge panel is expected to be announced on September 19.