New Blog at Sprouse

Please welcome the newest blogger at SSS, Shawn Twing. Here is a link to his new blog, Labor and Employment Law.

Shawn and I both recently attended the annual meeting of the Texas Cattle Feeders Association, where Shawn was a speaker on Immigration issues. You can link to the Power Point presentation for his speech on his blog. Welcome Shawn.

Court Awards $180,000 and Attorney's Fees for Failure to Provide Plan Documents

An Alabama District Court awarded nearly $180,000 in penalties and attorney's fees against a doctor who was also a plan administrator when the doctor did not provide requested plan documentation as required under ERISA. Cromer-Tyler v. Teitel, et. al., (2007, DC AL) 2007 WL 2684863. The doctor delayed delivering the requested documents for over 4-1/2 years.The court imposed a maximum penalty of $110 per day, or $179,960. The court also ordered the doctor to pay attorney's fees.

Changes in Charging Orders for Texas Entities

The Texas legislature, in its most  recently ended regular session, made many changes to the Texas Business Organizations Code (BOC) and to the old Texas statutes that were codified to become the BOC. Those changes became effective September 1, 2007 and were, for the most part, technical in nature. Among the substantive changes adopted were new provisions regarding charging orders for Texas partnerships and LLCs.

Texas will now use the so-called Delaware approach to charging orders. Under this approach, charging orders are the exclusive remedy of creditors to reach the ownership interest of an owner of one of these Texas entities. The charging order is considered a lien on the owner’s interest. The creditor specifically has no rights to interfere in the entity's operations or to exercise any remedies regarding the entity's assets.

These new rules will create consistency between all of the non-corporate business entities in Texas. They should also reduce the use of Nevada or Delaware entities in Texas. Before these new rules were adopted, Nevada or Delaware entities may have been used in order to get more certainty regarding charging orders and the asset protection that owners of them may expect to get from these entities. Using Nevada or Delaware entities in Texas for asset protection purposes should no longer be necessary with the adoption of these new rules.

IRS Refuses to Follow the 6th Circuit

It’s almost as if the IRS is trying to prove my recent personal commentary correct. In a recent action on decision (AOD 2007-004,10/01/2007), the IRS announced that it won't acquiesce in the Sixth Circuit's holding in U.S. v. Roxworthy, (2006, CA6) 98 AFTR 2d 2006-5964, 457 F3d 590. That case reversed a district court order enforcing an IRS summons on a corporate taxpayer's vice president for memoranda prepared by the company's outside audit/consulting firm. The Appeals Court found that the memoranda were prepared in anticipation of litigation and were protected by the work product doctrine. IRS disagreed with that conclusion and stated that a document prepared in anticipation of an audit is not prepared in anticipation of litigation.

This puts the IRS out of line, not only with the Sixth Circuit, but with a recent district court decision which rejected the IRS's request to examine “tax accrual workpapers.” In a case involving Textron, Inc. and its subsidiaries,  the found that the workpapers were privileged under the work product privilege (see U.S. v. Textron INC. and Subsidiaries, (DC RI 8/28/2007) 100 AFTR 2d 2007-5848. Since the IRS now says that it will not follow these decisions, even in the 6th Circuit, one must hope that any taxpayer with the resources to fight the IRS over the privilege issue will be rewarded, not only with a victory, but with attorneys fees as well. Continue Reading...

Government Attitude on Tax Planning

The other day I received my annual invitation to attend the Meadows Collier Conference in Dallas. I have a scheduling conflict. So, I won't be able to attend this year's program. But there was something that caught my eye. The very first item on the program's agenda is something called "Tax Planning Under Attack." That item starts out with this description:

The IRS' aggressive examination and litigation tactics essentially take the position that if a transaction included tax planning, the tax benefits of that planning should not be sustained.

This statement actually made me feel better because I was afraid I was becoming paranoid in my views of, and experience with, the IRS. Instead it simply confirms the old adage: Just because you're paranoid doesn't mean they're not out to get you.

However, this statement also made me feel worse, more than it made me feel better, because of the concern it raises not only for my profession as a tax planner, but also for the state of our country and it's taxpayers. When I was in law school, my tax professors, on practically the first day of class, would quote the highly respected and erudite Learned Hand:

.   .   .   a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. Gregory v. Helvering, 69 F. 2d at 810 (2d Cir 1934)

While not quite so artfully stated, the U.S. Supreme Court affirmed Learned Hand's statement regarding tax planning in the appeal of Judge Hand's decision:

The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. Gregory v. Helvering 293 U.S. at 469 (1935). 

When the government begins to disregard these long-held principles of tax planning, we should all be wary. Not many taxpayers have the resources to fight off the resources that the government can bring to bear on a single taxpayer, especially if those resources come in the form of criminal accusations -- criminal accusations in situations that a few years ago would have been civil audits. Let us hope that this trend can and will be reversed.