IRS Doesn't Have Superior Claim to Songwriter's Royalties

In United States v. Edward J. Holland Jr. et al. No. 18-1712 (10 March 2020), Holland a songwriter, sold his song-rights to music companies, in exchange for royalty payments. Holland failed fully to report his income. 

In 1986-1990, the IRS levied Holland’s royalty assets and recovered $1.5 million. 

In 1997, the IRS informed him that it intended again to levy those assets. 

Holland converted his interest in future royalty payments into a lump sum and created a partnership wholly owned by him, to which he transferred title to the royalty assets ($23.3 million). The partnership borrowed $15 million, for which the royalty assets served as collateral. Bankers Trust paid $8.4 million directly to Holland, $5 million in fees, and $1.7 million for Holland’s debts, including his taxes. 

• The IRS did not assess any additional amounts against Holland until 2003. 
• In 2005, the partnership refinanced the 1998 deal, using Royal Bank. 
• In 2012, the IRS concluded that the partnership held the royalty assets as Holland’s alter ego or fraudulent transferee and recorded a $20 million lien against the partnership.

In an enforcement suit, the partnership sold the royalty assets. The proceeds ($21 million) went into an interpleader fund, to be distributed to the partnership’s creditors in order of priority. The government’s lien ($20 million), if valid against the partnership, would take priority over Royal Bank’s security interest. 

The Sixth Circuit affirmed a judgment for Royal Bank. Transactions to monetize future revenue, using a partnership or corporate form, are common and facially legitimate. Holland received adequate consideration in 1998. The IRS’s delay in making additional assessments rather than the 1998 transfer caused the government’s collection difficulties.

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Atty Wife Not Entitled To Innocent Spouse Relief For Under Reporting

In Rogers v. Commissioner of Internal Revenue, No. 17-3358 (7th Cir. 2018) the US Court of Appeals affirmed the Tax Court’s conclusion that Mrs. Rogers’s participation through her counsel, an experienced tax attorney, in the prior Tax Court proceedings indicated her meaningful participation and therefore was not entitled to Innocent Spouse Relief.

Frances and her husband John filed a joint return for 2004. The IRS subsequently found the return deficient and informed them that they owed an additional $488,177 in income taxes and under reporting penalties of $138,732.

The couple filed suit. John, a Harvard-educated tax lawyer, represented them at trial. Frances, a former teacher with an MBA, doctorate, and a law degree, attended the trial. The Tax Court ruled against the couple, finding them jointly and severally liable, 26 U.S.C. 6013(d),

Three years later, Frances sought innocent spouse relief, 26 U.S.C. 6015. 

• The Tax Court rejected the claim. 
• The Seventh Circuit affirmed, finding that in the trial precluded Frances from after-the-fact seeking to avoid responsibility for those liabilities.

Such Relief Is Available Only If The Petitioner
Has Not “Participated Meaningfully In [The] Prior Proceeding,”
In This Case, The 2012 Trial.

Mrs. Rogers’s contention that she lacked knowledge of business and financial matters, including complex tax matters, and otherwise did not understand what transpired during the 2012 trial lacked credibility and she had every opportunity to raise her claim during the 2012 trial. Her testimony was self-serving and at odds with her education and experience.

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IRS Loses 2 FBAR Penalty Calculation Cases

We recently posted DC Determined That IRS Arbitrarily Calculated $1.5M FBAR Penalty, where we discussed that a California District Court in Margaret J. Jones v. U.S., case number 2:19-cv-04950, in the U.S. District Court for the Central District of California, determined that the IRS arbitrarily calculated a penalty of over $1.5 million for a woman who failed to file foreign bank account reports.

The $1.5 million was an arbitrary figure because it was based on her 2013 account balances instead of 2011,when she had less money in her accounts, Jones added. Had it been based on the latter, she would have owed about $37,000 less, she said. Jones moved for summary judgment to dismiss the penalty and on the charge she willfully failed to file.

We also recently posted DC Finds That FBAR Penalty Not Violate 8th Amendment & Imposed a Penalty of $12.9M Based Upon FMV on June 30, where we discussed that a Florida District Court in U.S. v. Isac Schwarzbaum, case number 9:18-cv-81147, in the US District Court for the Southern District of Florida, has determined that Schwarzbaum, will pay the IRS a $12.9 million penalty for failing to file reports on his foreign bank accounts, a federal court ordered after having determined that the agency erred when it calculated the penalty at $13.7 million or $800,000 more than the court determined to be correct.

According court documents, the USA originally utilized the highest aggregate balance in each account for each year to arrive at a mitigated willful FBAR penalty amount of $35,729,591.00 and then mitigated this penalty based on the highest aggregate account balances, which results in a maximum penalty of $23,826,738.00 (as opposed to $35,729,591.00).

 
Judge Bloom rejected the agency's arguments, saying it should have obtained the balance information before it assessed penalties. Using the $100,000 figure where the balances were estimated, she added half of the June 30 account balances, calculating the penalty amount at $12.9 million (down from the original $35,729,591.00 or 1/3 of the original assessment).

 

Finally The Court Concluded That The Penalty Assessed By The Government Did Not Conform To Statutory Requirements Because They Did Not Use Utilizing 50% of The Balance In Each Account At The Time Of The Violation, Which Was The Deadline To File The FBAR or June 30 of Each Year.

 

The government used the highest aggregate balance in each of the accounts for each year as reported by Taxpayer on a penalty calculation worksheet provided in connection with his OVDI disclosures. 

When representing taxpayers who have rolled out of the OVDP program or are being audited and assessed the willful FBAR penalty, be sure to check the IRS' calculation of the FBAR penalty and ensure that is based upon the balance in the foreign account as of June 30 of the following year!

 

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DC Determined That IRS Arbitrarily Calculated $1.5M FBAR Penalty

According to Law360, in Margaret J. Jones v. U.S., case number 2:19-cv-04950, in the U.S. District Court for the Central District of California, the Court determined that the IRS arbitrarily calculated a penalty of over $1.5 million for a woman who failed to file foreign bank account reports, a California federal court has ruled, but she still must prove her failure to file the FBARs wasn't willful.

The IRS has accused Jones of flouting foreign bank account reporting requirements when she failed to report accounts in Canada and New Zealand in 2011 and 2012. The agency based its argument in part on the fact she had constructive knowledge of her duty because she signed her 2011 and 2012 tax returns even though they were prepared by her tax adviser.

The IRS penalized her $1.5 million based on amounts in her accounts in 2013, which was prorated so that half was assessed for 2011 and the other for 2012. The agency moved for summary judgment on the issue that Jones knowingly failed to file FBARs.

Jones countered that she did not properly file her FBARs because of a good-faith misunderstanding. The family's tax preparer had not told her about the requirement, she said, and she voluntarily filed FBARs once she learned of her error. The 2012 FBAR had been timely filed, she said.

The $1.5 million was an arbitrary figure because it was based on her 2013 account balances instead of 2011,when she had less money in her accounts, Jones added. Had it been based on the latter, she would have owed about $37,000 less, she said. Jones moved for summary judgment to dismiss the penalty and on the charge she willfully failed to file.

The court agreed with Jones that the $1.5 million penalty was arbitrary because it was based on her 2013 account balances instead of her balances in 2011, when she failed to file an FBAR. Jones had subsequently filed a 2012 FBAR, the court pointed out.

The court dismissed both parties' motions on Jones' willfulness. The fact she signed her tax returns created a case that, on the surface, she understood her duty to file an FBAR, which could be refuted, creating a genuine dispute that was appropriate for trial. The court said it would remand the amount of Jones' penalty to the IRS should it prove her willfulness.

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DC Finds That FBAR Penalty Not Violate 8th Amendment & Imposed a Penalty of $12.9M Based Upon FMV on June 30

On September 4, 2019 we posted FBAR Consent to Extend Statute Held Valid!, we discussed that In United States v. Schwarzbaum (S.D. Fla. No. 18-cv-81147) a federal district court rejected an individual's claims that FBAR penalties assessed against him should be set aside because they were assessed after the limitations period expired.

Now in U.S. v. Isac Schwarzbaum, case number 9:18-cv-81147, in the US District Court for the Southern District of Florida, the Court has determined that Schwarzbaum, will pay the IRS a $12.9 million penalty for failing to file reports on his foreign bank accounts, a federal court ordered after having determined that the agency erred when it calculated the penalty at $800,000 more.

The court concluded that the penalty assessed by the government did not conform to statutory requirements because rather than utilizing 50% of the balance in each account at the time of the violation, which was the deadline to file the FBAR or June 30 of each year, the government used the highest aggregate balance in each of the accounts for each year as reported by Taxpayer on a penalty calculation worksheet provided in connection with his OVDI disclosures.

As a result, the court concluded:

1. That the IRS used the incorrect base amounts to calculate the FBAR penalties,
2. It rejected that the IRS’s methodology in calculating the penalty was harmless error and
3. The court also concluded that an FBAR penalty does not fall within the purview of the Eighth Amendment’s excessive fines provision.

The Internal Revenue Service cannot use estimates of what was in Isac Schwarzbaum's foreign accounts to calculate his penalty, set by federal tax law at the greater of $100,000 or half the account, U.S. District Court Judge Beth Bloom said in a decision issued on May 18, 2020. It must have the actual amounts or use the $100,000 figure, she said. 

Schwarzbaum Had Faced A $13.7 Million Tax Penalty Before Judge Bloom Determined That The Internal Revenue Service Had Erroneously Calculated It And She Determined The Correct Penalty To Be $12.9 Million.

Each willful violation has a penalty of $100,000 or half the amount in a foreign account on the date of the violation, Judge Bloom said in her March opinion, citing Section 5321, Title 31 of the U.S. Code. 31 U.S.C. 5321 The IRS used the highest aggregate balance in the accounts, not the amount on June 30, she said.  

The statute at issue in this case states as follows:  [. . .]

(D) Amount.—The amount determined under this subparagraph is—  [. . .]

• (ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

The IRS was unable to independently determine the June 30 balance in several of Schwarzbaum's accounts, according to court documents. In a supplemental brief filed in April, the agency asked Judge Bloom to use its estimates, arguing they were the best information available. Otherwise, taxpayers might be encouraged to withhold balance information, the IRS said.

Judge Bloom rejected the agency's arguments in the May 18, 2020 ruling, saying it should have obtained the balance information before it assessed penalties. Using the $100,000 figure where the balances were estimated, she added half of the June 30 account balances, calculating the penalty amount at $12.9 million.

Schwarzbaum didn't dispute that he had a number of foreign bank accounts, or that he failed to timely file the reports from 2006 through 2009, according to court documents. He argued he should not be penalized for willingly failing to file because he received poor advice from a number of financial advisers and filed after discovering the error.

The IRS had argued Schwarzbaum, by signing his tax returns, implicitly reviewed them and knew he failed to file. The judge disagreed in the March opinion, pointing out that by that logic, every failure to file would be willful because every return must be signed.

Turning to each year in question in the March opinion, Judge Bloom found:

 

• Schwarzbaum did not willfully fail to file his 2006 report. He relied on an accountant to prepare it and followed the accountant's advice that no tax was due, she said.
• However, Schwarzbaum personally filed the 2007 through 2009 returns, she said, and should have known by 2007 how to properly disclose the accounts.
   

  Have Undeclared Income from an Offshore Account?  

  

   

  Want to Know Which OVDP Program is Right for You?

   

   

  

   

  Contact the Tax Lawyers at 

  Marini& Associates, P.A. 

   

  

   

  for a FREE Tax Consultation

  at: www.TaxAid.com or www.OVDPLaw.com or

  Toll Free at 888-8TaxAid (888) 882-9243

  
   

 
 Sources:

Law360