Ford v US: Sixth Circuit Resolves Interest Dispute and Brings Attention to Jurisdictional Issue

Earlier this month, the Sixth Circuit issued an opinion in Ford v US, a case I originally wrote about late last year when the Supreme Court remanded the matter to the Sixth Circuit. The case considered whether Ford was entitled to receive overpayment interest on about $875 million of deposits it made that it subsequently requested the IRS treat as advance payments.  It had made its deposits when IRS had audited Ford and had preliminarily determined that Ford had a sizeable liability. While Ford and IRS both eventually agreed that Ford overpaid its taxes, rather than underpaid, IRS and Ford disagreed on when the payments Ford made should generate overpayment interest.

In addition to the underlying issue as to when Ford was entitled to interest, the case has significant jurisdictional implications, as precedent outside the Sixth Circuit requires that disputes regarding the overpayment of interest are to be made in the Court of Federal Claims and not in federal district courts.

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On remand, the Sixth Circuit addressed the merits after it addressed the jurisdictional issue that generated the remand. Here is a bit more factual context:

Ford Motor Company remitted hundreds of millions of dollars to the United States Treasury after the Internal Revenue Service (IRS) notified Ford that it had underpaid its taxes in prior years. Ford designated the funds as “deposits in the nature of a cash bond” but later asked the government to convert its remittances into “advance tax payments,” which are treated differently under the IRS’s revenue procedures. When the government subsequently reexamined its computations and determined that Ford had overpaid its taxes in the relevant timeframe, the United States refunded Ford’s payments with interest. But the government refused to pay Ford any interest for the period during which the United States held Ford’s money as deposits—before the remittances were converted to advance tax payments. Ford demands about $450 million in additional interest from the government.

The jurisdictional issue before the Sixth Circuit was whether the district court had jurisdiction under 28 U.S.C. § 1346(a)(1), which vests the district courts with jurisdiction to hear claims “for the recovery of any . . . sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” The district court and the Sixth Circuit had previously not addressed this jurisdictional question, but the Supreme Court remanded for the appellate court to consider that, as well as whether the jurisdictional issue had any impact on the merits, and whether courts should view Section 6611 (the provision authorizing interest on overpayments) as a waiver of sovereign immunity.

A little backtracking may be helpful to appreciate how the case came back to the Sixth Circuit. Initially, the district court found in favor of the government in part because the district court deferred to Revenue Procedure 84-58 (since superseded); when Ford appealed, the US abandoned its argument that the Revenue Procedure was entitled to regulatory deference. The Sixth Circuit still held in favor of the government though, in part relying on the strict statutory construction canon applicable to waivers of sovereign immunity.

In opposing the cert petition Ford filed after it lost initially in the Sixth Circuit, the government argued for the first time that § 1346(a)(1) did not confer jurisdiction on the district court because “Ford did not seek to recover money already paid; rather, it demands interest that the IRS steadfastly refuses to pay.” The government maintained that “the only general waiver of sovereign immunity that encompasses [Ford’s] claim is the Tucker Act, 28 U.S.C. § 1491(a), which requires that suit be brought in the United States Court of Federal Claims.” It was that issue –which had not been briefed before—that triggered the Supreme Court’s remanding of the matter back to the Sixth Circuit.

Why does this matter? The Sixth Circuit is an outlier on this issue, as many other courts push these cases to the Claims Court and generally accept the government’s jurisdictional view. There is, however, a prior Sixth Circuit case, Scripps v US, that concluded that district courts have jurisdiction under 28 USC 1346(a)(1) to hear disputes about interest overpayments. In deciding the matter this month, despite its outlier status, the Sixth Circuit declined to accept the “government’s interest to poll the Sixth Circuit en banc to reconsider its view that the district court originally had jurisdiction under 28 USC 1346(a)(1).” To that end it discussed its view of the jurisdictional precedent in the Sixth Circuit:

In Scripps this court held that §1346(a)(1) confers jurisdiction on the federal district courts to adjudicate claims for overpayment interest because the term “recovery of any sum” in that statute includes suits to obtain overpayment interest. 420 F.3d at 597 (citing Flora v. United States, 362 U.S. 145, 149 (1960)). We concluded that our interpretation of § 1346(a)(1) was consistent with Library of Congress v. Shaw, 478 U.S. 310, 314 (1986), where the Court held that the United States is immune from any suit to obtain interest in the absence of express congressional consent to an award of interest. We noted that 26 U.S.C. § 6611, which specifically permits taxpayers to sue the government for overpayment interest, constitutes an express congressional waiver of the government’s immunity from suits to recover interest. Scripps, 420 F.3d at 597

On remand, the Sixth Circuit clarified its view as to how Supreme Court precedent treated interest claims against the federal government. Parsing Supreme Court cases such as Library of Congress v Shaw 478 US 310 (1986), the Sixth Circuit explained that waivers of sovereign immunity have two components: one jurisdictional one and one substantive:

Shaw thus appears to require two waivers of sovereign immunity in the context of a suit against the government to obtain interest—one jurisdictional waiver establishing the right to bring suit in an appropriate court, and a second substantive waiver expressly authorizing an award of interest.

While the Sixth Circuit in Ford backtracked and held that Section 6611 is not a jurisdictional waiver, it stated that it is a substantive waiver provision, subject to a court’s strict construction of the statute. Nonetheless, the Sixth Circuit clarified that the strict construction did not automatically forestall recovery of interest:

Because sovereign-immunity waivers must be strictly construed, the government contends, any doubts about whether Ford’s deposits constituted “overpayments” under § 6611 must be resolved in favor of the United States. Properly interpreted, however, Shaw does not stand for the proposition that any ambiguity in the scope of a statutory interest provision must be resolved in the government’s favor. It stands instead for the proposition that a litigant may not sue the United States to recover interest unless Congress has expressly authorized suits for interest.

After disposing of the jurisdictional issue and whether the matter involved sovereign immunity, the court went on to the merits. Not surprisingly it stuck to its guns and held (again) in favor of the government. It did so by using the “the usual tools of statutory interpretation to determine whether “the date of the overpayment” under § 6611 was the date Ford remitted its deposits, as Ford contends, or the date the IRS converted its deposits into advance tax payments, as the government contends.” To that end, it considered a dictionary definition of payment as “the act of paying or giving compensation: the discharge of a debt or an obligation.”

The heart of the issue according to the Court was that Ford’s intent when it remitted the money to the IRS, and that it could have designated the remittance as a tax payment but it chose not to:

That definition focuses on the purpose with which a person or entity sends the funds: A remittance is a payment when it is given to discharge a debt or obligation. …

According to IRS revenue procedures in effect at the time, both cash-bond deposits and advance tax payments stopped the government from charging interest on an estimated tax underpayment while the IRS finalized its tax assessment (as long as the deposit was eventually posted against the assessment.) But the revenue procedures treated deposits and advance tax payments differently in one important respect: A taxpayer could demand the immediate return of a deposit anytime, while an advance tax payment would be returned only through the IRS’s formal refund process, which take’s time. See Rev. Proc. 84-85 § 4.02.1. So when Ford sent its remittances, it faced a tradeoff: If a taxpayer remitted a cash-bond deposit but subsequently demanded the deposit’s return, the IRS would not pay the taxpayer any interest for the period during which the government held the funds.When a taxpayer demanded a refund of an excessive advance tax payment, by contrast, the IRS allowed the taxpayer to recoup interest. Thus the revenue procedures forced taxpayers to choose: immediate access without interest, or interest without immediate access.

Considered in this context, Ford’s purpose comes more sharply into focus, see Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006) (“Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis.”), and belies any claim that Ford’s purpose in remitting the cash-bond deposits was to discharge its estimated tax obligations. Ford could have designated its remittances as advance tax payments and instructed the IRS to apply its remittances against any tax liability ultimately assessed. Both parties agree that would have been a “payment” because such a remittance would have been made for the purpose of satisfying the estimated tax deficiency. Yet Ford chose instead to designate its remittances as deposits. Ford is a sophisticated taxpayer, and its designation of the remittances was not accidental. A taxpayer’s deliberate decision to designate its remittance as a deposit rather than an advance tax payment directly evidences an intent not to make a “payment.” That purpose is determinative.

(emphasis added; citations omitted)

Conclusion

This is a tough result for Ford. For other taxpayers, Steve has written about Section 6603 and interest on deposits before (and as we discuss in revised Saltzman/Book Chapter 6; the Ford dispute predates 6603). That provision allows taxpayers to get interest on deposits when the deposit is made for a disputable tax. What is potentially of more moment in this case, however, is whether other courts may follow the Sixth Circuit’s approach and allow federal district courts rather than the Court of Federal Claims to hear overpayment interest disputes. It is possible this will return to the Supreme Court, but at a minimum I would not be surprised to see other circuits wrestling with this issue.

UPDATE:

For an excellent earlier post discussing the Supreme Court remand last December, see Jack Townsend’s post Ford Wants Overpayment Interest While Its Remittance Was Held as a Deposit

Not Being in Filing Compliance Can Trip Your Client Up at the CDP Level

Today we welcome Diana Leyden as our guest blogger. Diana runs the low income taxpayer clinic at University of Connecticut Law School. She is a leader among tax clinicians with many innovative ideas and programs. She co-authored the chapter on Employment Tax issues in the forthcoming edition of Effectively Representing Your Client before the IRS and has written extensively on issues impacting low income taxpayers. Keith 

When a client gets a Notice of Intent to Levy or Notice of Filing of Federal Tax Lien, she gets the chance to offer a collection alternative through a CDP request. What if your client has not filed some of her tax returns? Can she still proceed with a collection alternative?   

Until recently, many practitioners believed that in the CDP context, collection alternatives were available as long as the client filed the last 6 years returns. Compliance, most tax practitioners believed, was met even if there were outstanding tax returns for other earlier years. However, the Tax Court in a Memorandum Decision ruled that the IRS can require the filing of all outstanding returns as a condition to considering a collection alternative of an installment agreement or an offer in compromise. Misty S. Doonis v. Commissioner, T.C. Memo. 2014-168 (Aug. 18, 2014). Judge Lauber concluded that such requirement was not an abuse of discretion. He also made other observations about CDP that merit discussion. 

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Ms. Doonis was a self employed medical recruiter who operated as a Schedule C business. She failed to file returns for 2005 through 2011. For some reason the IRS chose to prepare substitute for returns using the IRC 6020(b) procedure for 2007 and 2008. (The case was submitted on a stipulated record, so it is not clear whether the IRS made, or attempted to make, substitute for returns for other years.) It sent separate notices of deficiency for each year and Ms. Doonis did not file a Tax Court petition with respect to either notice of deficiency. Presumably after the usual correspondence seeking payment, the IRS sent Final Notice of Intent to Levy and Ms. timely requested a CDP hearing. Ms. Doonis offered three alternatives: currently not collectible (CNC), installment agreement or offer in compromise (OIC). The Settlement Officer (SO) told her that in order for the SO to consider either the installment agreement or the OIC collection alternative, Ms. Doonis must file the returns for 2005 through 2011. 

Ms. Doonis filed returns for 2006 through 2011 but did not file the 2005 return. The SO said no 2005 return, no collection alternative of either installment agreement or OIC. The SO also concluded that based on a financial statement submitted, Ms. Doonis could pay $3,896 a month toward her tax debt. Accordingly, the SO issued a determination letter sustaining the levy. Ms. Doonis petitioned the Tax Court and made several arguments.

First, Ms. Doonis argued that the Court should excuse her failure to file the 2005 return because she did not have sufficient records for that year. The Court said no because she had an affirmative duty to keep adequate records and to file. 

Second, she argued that she had “no reported income for the tax year 2005 per the IRS wage and income transcripts.” As many practitioners learn, the IRS does not keep wage and income transcripts back more than 6 years. However, the representative in this case should not have rested on the fact that there were no IRS transcripts available. The Court found that she worked as a Schedule C business for all of the other years making an average of over $78,000. Her Schedule C for 2006 did not indicate that the business started that year. Thus, the assumption was that she also received gross receipts from the business in 2005; she did not submit an affidavit that she did not earn any income in 2005. Even if she had, the Court might have questioned how Ms. Doonis was able to live if she did not have any income. (Often, when faced with this situation with low-income taxpayers, we back into an approximation of gross receipts or wages for purposes of an affidavit by reviewing their living expenses, minus any sources of gifts or nontaxable income.) 

Third, she argued that 2005 was more than six years prior to the time of the CDP notice and the IRS policy set out in IRM 1.2.14.1.18 generally solicits returns going back only six years. The Court found that the manual provided guidance, but the SO did not abuse discretion in requiring her to go back to 2005 to file returns. 

Lastly, she argued that if she did not qualify for a collection alternative because of the unfiled return, the Court should place her in CNC status. The Court pointed out that the SO found she could pay $3,896 per month and stated that it “does not recalculate the taxpayer’s ability to pay or substitute its judgment for that of the SO.” 

While the case is just a memo opinion, it has several instructive elements. 

First, as the opinion suggests, the IRS does not consider CNC a collection alternative, but will entertain a request for CNC as part of a CDP request. Given the calculation of her ability to pay, she needed to show how the SO made a mistake in its calculation if she had any hope of obtaining CNC status. The Court specifically found that an SO does not abuse his discretion when using the national and local standards to calculate a taxpayer’s ability to pay. Absent some showing of a mistake, which of necessity would need to be a serious mistake given the amount of discretionary income apparently available to the taxpayer, she had no hope of convincing the Court to order the IRS to grant her CNC status. 

Second, if the taxpayer requests an installment agreement or OIC as a collection alternative, then the IRS requires the taxpayer to be in “full compliance” with her filing obligations. Treas. Reg. 301.6320-1(d)(2), Q&A-D8; 301-6330-1(d)(2), Q&A-D8. Requiring a taxpayer to fully comply with his or her filing obligations in order to qualify for a collection alternative in a CDP case provides an interesting contrast to the CNC rules. When the Tax Court decided Vinatieri v. Commissioner, Judge Dawson concluded (in the CDP hearing context) that Appeals abused its discretion by denying a taxpayer CNC status when the IRS proposed a levy, based on the fact that the taxpayer was not in compliance. Judge Dawson relied upon Sec. 6343(a)(1) and Treas. Reg. Sec. 301.6343-1(b)(4) to conclude that if a levy were to create an economic hardship then the release of the levy could not be conditioned on the taxpayer’s compliance with filing requirements. 

Does this mean that where the OIC is for a minimal amount, because the taxpayer can prove that any levy or installment agreement would create an economic hardship, that the requirement for full filing compliance can stop a taxpayer from obtaining a collection alternative leaving them only with the option of CNC? Stated another way, a taxpayer who can demonstrate any collection action would create hardship should receive a determination that the IRS cannot proceed with the levy even though the IRS reject the OIC or IA due to a lack of compliance. The facts in Doonis did not raise this issue, as the record indicated that the taxpayer could pay $3,896 a month toward the tax debt. Outside of CDP, the IRS would return an offer to a taxpayer not in full compliance. (There seems to be inconsistency from the Centralized OIC unit as to whether substitutes for returns are considered returns for the compliance rule.) Those rules appear to follow a taxpayer into the CDP process. That result creates consistency in the application of the full compliance rules. It shows that CDP does not allow the taxpayer to reach a result she could not have achieved absent CDP, leaving CNC the only avenue for not-fully-compliant taxpayers in economic hardship situations. 

Another question Doonis raises, however, is what must a taxpayer do to show that she filed the returns? For pro se taxpayers, this might be difficult. In Eladio Duarte et. ux. v. Commissioner, T.C. Memo. 2014-176 (Aug. 29, 2014), a decision issued shortly after Doonis, Judge Buch remanded the case back to the Appeals office because the record did not clearly reflect whether the taxpayer was in filing compliance. The opinion suggests many missteps by the IRS. First, despite filing a timely CDP hearing request, the IRS levied Mr. Duarte’s funds. Some levies were released, while others were not. Then the Settlement Officer insisted on proof that a tax return was filed for the year 2005, but there did not appear to be any tax debt for 2005. Mr. Duarte provided a copy of the original signed 2005 tax return. This was accepted as evidence of full compliance, a condition precedent to a face-to-face hearing. The first SO assigned to the case agreed that Mr. Duarte submitted a processable OIC and she had all the information she needed from Mr. Duarte. Despite this, no one contacted Mr. Duarte for over a year. Then another SO was assigned to the case. The SO requested a new collection statement, copies of the most recent tax return, and proof that estimated tax payments had been made. 

In the intervening time, the representative lost contact with Mr. Duarte after Mr. Duarte moved. The representative sent unsigned copies of personal and business tax returns. The new SO concluded, contrary to the first SO, that Mr. Duarte could fully pay the liabilities and because Mr. Duarte did not provide a signed copy of his personal tax return for the most recent year or proof of estimate tax payments made, the SO rejected the OIC. Often taxpayers cannot afford to have outstanding tax returns prepared. Further, many unsophisticated taxpayers may have no way of calculating business expenses. This may paralyze them from filing a tax return. The upshot will always be a finding by an SO they are not in compliance and the rejection of an OIC. Unrepresented taxpayers may not realize that they can file a return, claiming no business expenses, and add the liability to the OIC. In this case, the Court concluded that the record did not show the basis for rejecting the OIC, including (it appears) whether Mr. Duarte actually filed his return and made the estimated tax payments, and so the Court remanded the case for a further hearing. 

The take away from these decisions, in addition to the clear requirement for full compliance in order to obtain a collection alternative, is that a practitioner cannot rely upon the IRS policy of requiring the last six years returns to prove filing compliance for collection alternatives in a CDP case and that the burden of proving that all returns have been filed is on the taxpayer. While the decisions demonstrate consistency in declining to allow a collection alternative, they highlight that the SO a taxpayer draws could have a significant impact on their case as SOs do not display consistency in their approach to the submission of unfiled returns. Had Ms. Doonis drawn a different SO, she might have satisfied that individual with the filing of all of the returns since 2006. Perhaps, the SO deviated from the general rule because Ms. Doonis was a Schedule C taxpayer with a decent amount of income. In Duarte, if the first SO had completed the case, then the later unfiled return might not have been an issue. It would be nice to know what causes such deviations if it is something other than personal preference. If it is only personal preference amongst the SOs, it would be nice to create consistency. 

 

Picking the Wrong Collection Due Process Notice to Petition

A recent collection due process (CDP) case, Johnson v. Commissioner puts a pro se taxpayer in a tough situation when he failed to petition based on his first CDP hearing. Mr. Johnson wanted to raise the merits of the underlying tax liability. He was told, perhaps erroneously, he could not do so in his first CDP hearing for the tax year. He chose not to petition the determination in that case. He got a second bite at the CDP apple and tried to raise the merits argument again only to learn that he may have lost his opportunity when he failed to petition following the initial CDP determination. It’s a tough result and one of the few summary opinions we have featured on the blog. 

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Mr. Johnson filed his 2005 return and got examined. The IRS determined he owed more tax and sent him a notice of deficiency to his last known address. The notice was returned unclaimed after three failed attempts. This raises the possibility that he could argue the merits of the underlying tax liability in a subsequent CDP case but also raises the possibility that he would be denied that opportunity by the application of the rule set out in the Onyango opinion (Be sure to visit the comments on this blog post). 

So, it is a “known unknown” to Judge Lauber in the Johnson case whether Mr. Johnson could raise the merits of the underlying liability in his subsequent CDP case or whether his failure to act regarding these notices may have barred him. It turns out not to matter. 

When Mr. Johnson failed to pick up the notice of deficiency, the IRS assessed the liability and began sending him collection notices ending with the CDP notice. He received the CDP notice and requested an appeal. The SO told him that he could not challenge the 2005 liability through the CDP process because he did not file a Tax Court petition when the IRS sent the notice of deficiency. While this advice may have missed the mark, Mr. Johnson chose not to file a petition with the Tax Court in response to the notice of determination. [The opinion does not say whether he received the notice of determination. If he did not receive the notice of determination for a reason that would not upset the Onyango rule and if he did not receive the notice of deficiency for a reason that would not create a bar based on Onyango, he might have had an interesting argument in his second CDP case. Being unrepresented, Mr. Johnson probably did not think about this too much. The case highlights the difficulties facing an unrepresented litigant.] 

While Mr. Johnson did not win his CDP case either on the merits or in seeking a collection alternative, if he sought one, he also did not pay the tax after the CDP hearing causing the IRS to take further collection action. The opinion does not provide the amount of the assessment against Mr. Johnson but the timing would place the collection sometime near the issuance of the Fresh Start rules in May 2012, increasing the amount of deficiency needed to trigger the filing of the notice of federal tax lien from $5,000 to $10,000 (of course the IRS could file the notice at any amount if it decided to do so).

In its further collection efforts, the IRS decided to file a notice of federal tax lien with respect to Mr. Johnson’s 2005 liability. By filing the notice of federal tax lien, the IRS triggered a new round of CDP rights for Mr. Johnson under IRC 6320. He received the notice giving him those rights. He requested a hearing. He again asked that the SO consider the underlying merits of the tax claiming that he did not owe the tax. He was again told that he could not raise the merits in his CDP hearing but this time the SO, SO2, pointed to both the failure to petition when the notice of deficiency was sent and the failure to petition when the first notice of determination was sent. The SO2 sent a determination letter upholding the filing of the notice of federal tax lien and Mr. Johnson petitioned the Tax Court choosing the Small Tax Case Procedure. 

Judge Lauber noted that the original SO may have made a mistake in refusing to allow Mr. Johnson to raise the merits of the underlying liability. In a footnote he explains that the record contains no evidence concerning Mr. Johnson’s failure to claim the notice of deficiency despite three failed attempts to deliver it. Because of the incomplete record, the decision of the initial SO to deny Mr. Johnson the right to raise the merits may have correctly stated the legal situation or may not have. Either way, Mr. Johnson had the opportunity to contest that determination and he would have had the opportunity to litigate the underlying merits of the liability, had he petitioned the determination and asked the Tax Court to determine that the failure of receipt did not bar him from raising the merits

Unfortunately, Mr. Johnson’s failure to petition following the first notice of determination sealed his fate with respect to his ability to raise the merits. The Court assumes that he received that notice of determination and nothing in the record appears to suggest he did not. Since he had the opportunity to contest the merits by petitioning from that notice of determination, assuming the right still existed, he lost his right to contest the merits at that point. 

The case not only points to the difficulties facing a pro se taxpayer in navigating the system, it provides a lesson about petitioning from a notice of determination. Mr. Johnson’s receipt of two notices of determination separated in time does not present a common situation but also does not present a unique one. This situation can arise. A taxpayer who wants to raise the merits of the liability must seize the first opportunity or see the CDP process cleanse the system of any rights to pursue the merits that might have existed after a failure to receive the notice of deficiency. 

 

 

 

Summary Opinions for 10/03/14

Happy Columbus Day.  I am not sure if we are celebrating the beginning of his journey, the ending, his birthday, or something else, but I am certain I’m jealous that many of our government readers have off today.   Here are the procedure items from last week that we didn’t otherwise cover:

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  • Buczek v. Comm’r , a decision from the Tax Court last week, is getting a lot of press.  Law professor Tim Todd has a great summary on his Tax Litigation Survey found here.  I’ve stolen Tim’s first few lines, which do a good job of outlining the buzz-worthy aspect of the case: “Judge Dawson held, in a division opinion, that the Tax Court has jurisdiction under IRC § 6330(d)(1) to review the IRS’s determination of whether a CDP request contains frivolous grounds and thus refused the IRS’s invitation to overturn Thornberry v. Commissioner, 136 T.C. 356 (2011).”  Prof. Todd asked for our thoughts on the matter via Twitter, in particular the Thornberry punt, and Les was kind enough to provide the following comment:

 The Buczek case involves a [tax] protestor submitting a [garbage Form] 12153. Thornberry gave the Tax Court jurisdiction when a taxpayer submitted some legitimate issues with the 12153, which also had protestor gibberish. In Buczek the request was all b#^& $#%/ and raised no legitimate CDP issues. The key point from the opinion is the first sentence below:

In Thornberry, the taxpayers’ hearing request, on its face, clearly raised proper issues set forth in section 6330(c)(2)(A) and (B), and the taxpayers raised those issues in the petition they filed in this Court appealing the disregard letter sent by the Appeals Office. By contrast, petitioner’s hearing request, which included Form 12153 and the pages attached thereto, does not challenge the appropriateness of the collection action, offer or request any collection alternatives, challenge the existence or amount of the underlying tax liability, or raise any spousal defenses….

Because petitioner [Buczek] did not raise in his hearing request any issues that may be considered in the administrative hearing, there are no issues that are deemed to be excluded from any portions of his request that the Appeals Office determined were frivolous. In accordance with section 6330(g), we make no review of the portions of a request for an administrative hearing that the Appeals Office has determined are frivolous. Moreover, because respondent’s determination that the IRS Collection Division could proceed with collecting petitioner’s unpaid tax liability for 2009 was not made in response to a proper request for a hearing, i.e., the entire request was properly treated as if it had never been submitted, this Court lacks jurisdiction to review respondent’s determination that collection may proceed, and therefore respondent’s motion to dismiss for lack of jurisdiction will be granted.

These are my parting thoughts.  In addition to Prof. Todd’s post, I would also suggest readers check out Lew Taishoff’s blog post on the subject found here.  Attorney Taishoff points out that Judges do not often overturn their own decisions (Judge Dawson wrote both opinions).  Moving forward, the Court will continue to review Appeals determinations that a position is frivolous (which the IRS is not fond of), and the IRS will probably continue to try to find another Judge to read Section 6330(g) more broadly to cover the determination.

  • In Law Office of John Eggersten v. Comm’r, the Tax Court vacated its prior holding (found here), which stated the IRS was time-barred from assessing ESOP excise tax by the statute of limitations under Section 4979A(e)(2)(D) even though the Form 5330, or something else constituting a return, had never been filed.  In the new opinion, the Tax Court held that the applicable statute was the general statute of limitations found under Section 6501, which was unlimited because no return was filed.  The IRS argued on reconsideration that Section 4979A(e)(2)(D) “supplements but does not replace” the general statute, which the Tax Court determined was a substantial error in the first holding, allowing the opinion to be vacated.
  • An interesting interest case from the Eastern District of NY in Maimonides Medical Ctr. v. United States (couldn’t find it free yet), where a 501(c)(3) entity sought a refund of FICA taxes paid, and argued it was not a corporation for purposes of the overpayment interest rate under Section 6621.  The 501(c)(3) argued that the Service IRM indicates that “corporations” are defined by the return they file, which does not include not-for-profits, and the Service has previously issued refunds using the non-corporate rate.  The Court stated the IRM cannot be used as precedent, or trump other regulations that would indicate the contrary.   The 501(c)(3) also argued that the check-the-box regulations were not clear on the classification of it as a corporation, so it should be afforded “special treatment”, which is allowed in limited circumstances. The Court did not find this persuasive, and held it was a business entity, the default treatment of which was a corporation.
  • More on Perez v. Mortgage Bankers Association from the Yale Journal on Regulation’s blog, Notice and Comment (our third reference to this new blog over the last two weeks).  We had an excellent guest post from Patrick Smith on the case this week, which can be found here.
  • From Jack Townsend’s Federal Tax Procedure Blog, a review of Cavallaro v. Comm’r, where the Tax Court found for the IRS in a valuation dispute on a transfer resulting in an imputed gift.  The Court held the taxpayer had the burden, even though the IRS had substantially reduced the value.  The Court found the taxpayer’s expert relied upon an incorrect assumption from the taxpayer regarding the ownership of certain technology.  This resulted in the Court disregarding the opinion completely, and the Service carrying the day.  Jack’s write up has some great commentary on the burden of proof matter.
  • Also from Jack Townsend, but this time from his Federal Tax Crimes Blog, you can find the IRS Information Letter regarding the tax regime for “green card” holders.  This ties into last week’s SumOp pretty well, where we discussed the Topsnik case, where a foreign individual tried to informally abandon his residency.
  • More statute of limitation issues, with the Service releasing CCA 201438021, which outlines the Service position on when third-party filed employment returns for common law employers will start the running of the statute of limitations.
  • The GAO has issued a report on recommendations to improve efficiency and effectiveness of large partnership audits, found here.  Thompson and Knight’s tax blog, TK Tax Knowledge has a short summery.
  • Bob McKenzie, writing at Forbes, has an article on the new OIC guidance issued by the Service, and the likely increase in acceptance rates resulting in the new rules, combined with the 2012 changes.
  • In US v. Wommer, the Ninth Circuit has affirmed an attorney/taxpayer’s conviction for subscribing false returns, currency offenses and evading tax, hold the taxpayer’s argument that interest and penalties were not “taxes” for purposes of tax evasion under Section 7201.  The taxpayer was able to advance case law regarding sentencing that advanced his position, but the facts were distinguishable and the Court held the statements were dicta.
  • From the US Bankruptcy Court in the Southern District of Texas comes In Re: Kemendo, where the taxpayer was able to discharge tax liabilities for years in which the Service prepared substitutes returns…which is generally not the rule under Bankruptcy Code Section 523(a)(1)(B).  In this case, Mr. Kemendo cooperated with the IRS in the preparation of those returns, taking them out of the exception for non-dischargeability.  Kieth noted that the Court placed the burden on the Service to prove the returns were not done with Mr. Kemendo’s cooperation, as he had alleged, which Keith found unusual.  Unfortunately for the Service, the returns had been prepared years before, and the Service did not have any records regarding that aspect of the case.

 

 

Unrecorded Conveyances and the Attachment of the Federal Tax Lien or Innocent Spouse Once Removed

On September 10, 2014, the IRS issued SBSE 05-0913-0077 announcing a change in its policy regarding the attachment of the federal tax lien to unrecorded conveyances. This post will seek to explain what this change means and does not mean for those battling the federal tax lien. 

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The federal tax lien exists whenever the IRS makes an assessment, the IRS sends notice and demand and the taxpayer neglects or refuses to pay. The federal tax lien does not require the filing of a notice in the public records in order to exist although such notice does protect the IRS vis a vis the competing creditors listed in IRC 6323(a) – purchasers, holders of a security interest, mechanics lienholders and judgment creditors. The Supreme Court has said that Congress could not have expressed intent to create a broader lien than the federal tax lien. 

The federal tax lien attaches to after acquired property as well as to property in existence at the moment it arises. The issue in this notice concerns whether property of the taxpayer existed at the time the lien arose and involves a very sad situation for a third party if the federal tax lien attaches. Mr. and Mrs. Filicetti got divorced in 2005 in Idaho. The divorce court awarded Mrs. Filicetti the principal residence with a contingent contractual right for her former husband to get half the proceeds if she sold the house within three years of the divorce. In Idaho the divorce decree itself is effective to convey title. Mrs. Filicetti did not record the divorce decree. She continued living in the house for more than three years. 

Meanwhile, Mr. Filicetti did not pay his 2005 taxes reported on his return. His failure to pay the 2005 taxes continued after the IRS assessed the taxes and sent a notice and demand letter. The federal tax lien arose as a result in 2006. In September 2008 the IRS filed the notice of federal tax lien. That notice tells the world that Mr. Filicetti owes the IRS and that its lien attaches to all of his property and rights to property. 

After filing the notice of federal tax lien, the IRS looked around to see what it could collect from Mr. Filicetti and noticed that he had an interest in jointly owned property – the principal residence during his marriage. The IRS brought a suit to foreclose its lien interest in the property when Mr. Filicetti did not work with it to pay the tax. I imagine discussions occurred prior to the initiation of the suit. Just like Bre’r Rabbit, Mr. Filicetti probably said to the IRS “please don’t throw me in the briar patch” by bringing a foreclosure suit against this property. Of course, Mr. Filicetti did not mind if his tax debt was paid from the proceeds of the home he lost in the division of property pursuant to the divorce. 

On the other hand, Mrs. Filicetti did mind. Her problem, however, stemmed from the fact that she never recorded the divorce decree awarding her the property and the decree left with Mr. Filicetti the contingent right to obtain half the property had she sold it within three years of the transfer pursuant to the divorce. 

The case plays out very much like an innocent spouse case but without the innocent spouse provisions to come to Mrs. Filicetti’s rescue since this is not a situation with a joint return. In 2012 the district court in Idaho determined that Mr. Filicetti did not have a continuing interest in the property to which the federal tax lien could attach and, therefore, entered a decision for Mrs. Filicetti. In the SBSE memo published last month, the IRS announced that it agrees with the court’s decision on this point and it will change the Internal Revenue Manual so that it does not sue to foreclose against similar parties in the future. This concession may be extremely narrow since Idaho’s recordation laws do not appear mainstream. For Mrs. Filicetti, the concession also comes after she had to expend funds and, no doubt, a fair amount of sleepless nights. 

The Notice reaches this conclusion through two steps. First, it views the state law which does not require recordation of the divorce decree to create a valid transfer of property. Because the decree created a valid transfer, when the federal tax lien arose it did not attach to the real property itself. The result stems from an acknowledgment that state law creates property rights and the federal tax lien attaches or does not attach to property based on the rights created under state law. In most instances state recording statutes require recordation of a deed or other instrument passing title in order to perfect title in the acquiring party. Here, state law vested all rights to the real property in Mrs. Filicetti with the issuance of the divorce decree settling property rights between the spouses. So, Mr. Filicetti had no interest in the real property left to which the federal tax lien could attach at the time it arose. This part of the concession by the IRS is totally dependent on the law of Idaho. If you practice in a state that requires record notice in order for good title to pass, the result would differ. Without doing a survey of the states on this issue, I suspect Idaho’s provision reflects that of a distinct minority. 

Having determined that Mr. Filicetti did not have an interest in the real property, the IRS moved onto the second issue – that of the contingent interest in the event of a sale within three years of the decree. The IRS viewed Mr. Filicetti’s interest in one half of the proceeds of the sale of the principal residence within three years as a personal property interest giving him a contingent right to monetary proceeds – a right that expired in three years. The federal tax lien attached to the right since it attaches to all property and rights to property but once the three year period ran the right ceased to exist and the lien interest did as well. The federal tax lien did not act to extend the three year right but merely attached to the taxpayer’s right which had a time limitation. 

Based on Idaho law and the contingent right owned by the taxpayer the SBSE memo reaches the right conclusion but the case serves as a cautionary tale for those divorcing or separating from their spouses. If you are parting company with a spouse, that spouse’s tax problems can continue to be your problems if you retain joint property interests. To protect yourself, you must eliminate joint property holdings. Nothing you write in the decree can protect you from the federal tax lien if the former or separated spouse incurs and does not pay a federal tax liability. 

I think the IRS is sensitive to the difficult situations in which former spouses can find themselves, but in collection matters it does not have the innocent spouse provisions to point to as a clear basis for granting relief. We had a case in our clinic a few years ago in which a wife owned property prior to marriage, placed her spouse on the title for purposes of obtaining a loan, separated from her husband after abuse but never divorced him or retitled the property. While living apart, he ran up federal tax liabilities. When she wanted to sell the property to move to a better part of the city with the child, she learned that the IRS wanted all of the equity in the house to satisfy the federal tax debts of the husband. Ultimately, the IRS consented to granting a discharge in that case with the intervention of the local taxpayer advocate and the kindness of the collection territory manager but the IRS did not need to do so. 

The Rodgers factors would almost certainly have prevented an attempt by the IRS to foreclose its lien had it shown any inclination to do so, which it did not, but she would have had to wait out the statute of limitations on collection of her former husband’s debt prior to selling the property had the IRS not consented to the discharge. Legally, the parties were stuck in a position in which the IRS probably could not move forward to affirmatively collect but neither did the law require it to give up its lien interest in the property. The discharge acknowledged the fact that by holding onto its right the IRS essentially barred her from selling without getting any benefit for itself. Its concession provided her with welcome relief she could not have obtained through litigation. The four factors that the Supreme Court set out in its Rodgers decision for district courts to weigh when the IRS seeks foreclosure were preventing the IRS from bringing, or succeeding, had it sought to resolve the problem through litigation because the harm to her outweighed the government’s interest in the property. 

Let your client know that as long as a joint interest is property exists, the unpaid taxes (and other debts) of the former spouse continue as a specter hanging over property your client may think is free from the problems of the former spouse. 

 

Changes in Agencies’ Interpretations of their own Regulations and Auer Deference

Today’s post is from guest blogger Patrick Smith, who is a partner in Ivins, Phillips & Barker’s Washington office. Patrick, in addition to his day job as representing clients as part of a major tax controversy practice, is a prolific author who has written widely on the intersection of administrative law principles and tax procedure. In this piece, which is a summary of a longer article available here, Patrick discusses the Perez v Mortgage Bankers Association case pending before the Supreme Court. As Patrick describes, the case may have broad influence on agency rulemaking. Les

The issue in Perez v. Mortgage Bankers Association, a non-tax case that is currently pending before the Supreme Court, is the propriety of a rule followed by the D.C. Circuit with respect to the notice-and-comment rulemaking requirements of the Administrative Procedure Act. Although this is not a tax case, the resolution of the case will necessarily affect tax cases since, after Mayo, it is clear that the tax world is subject to the same administrative law rules that apply in the case of all other federal agencies. For a discussion on Mayo and its implications on tax see here.

The APA requires that when an agency issues or amends “substantive rules,” ordinarily the agency must follow the notice-and-comment requirements for rulemaking that are set forth in the APA. However, when an agency issues “interpretative rules,” the notice-and-comment requirements need not be followed.

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The D.C. Circuit rule that is at issue in Mortgage Bankers Association is that when an agency has interpreted one of its own “substantive” regulations in a guidance document that would not otherwise itself be considered a “substantive” rule, the agency must nevertheless use notice-and-comment rulemaking to change that interpretation. In the context of the IRS, this rule would mean, for example, that when the IRS has issued a revenue ruling interpreting a substantive regulation issued by the IRS, the IRS would be required to use notice-and-comment procedures to issue a new revenue ruling adopting a different interpretation of the regulation.

When the issue is framed in this way, without adding further background or context, it might seem that the D.C. Circuit rule is clearly at variance with the unambiguous terms of the APA and therefore invalid under the Supreme Court’s decision in Vermont Yankee, which held that courts may not impose additional procedural requirements on agency action beyond those explicitly expressed in the APA. Under the APA, only “substantive” rules are subject to the notice-and-comment requirements, and the premise here is that the agency interpretation of its own “substantive” regulation would not itself be a “substantive” rule.

However, there is relevant background and context that gives considerably more logical force to the D.C. Circuit rule than is apparent from the foregoing statement of the issue. That background and context is the rule applied by the Supreme Court in cases such as Auer v. Robbins that an agency’s interpretations of its own regulations are ordinarily given deference that is similar to the deference that is given under Chevron to certain agency interpretations of statutory provisions. The type of deference that is given to an agency’s interpretation of its own regulations is now usually referred to as Auer deference.

In Mead Corp the Supreme Court held that agency interpretations of statutory provisions that receive deference under Chevron are those that the agency intends to have the force of law, provided the agency has statutory authority to issue rules that have the force of law. In the context of agency rulemaking, as opposed to agency adjudication, the agency interpretations of statutory provisions that the agency intends to have the force of law would ordinarily be those that the agency adopts using notice-and-comment rulemaking pursuant to the APA. For a discussion on a recent case clarifying this point see here.

It is reasonable to say that under the Auer principle, an agency’s interpretation of one of its own regulations has the force of law because it is given the same sort of deference that one of its statutory interpretations that has the force of law receives under Chevron. Under applicable Supreme Court authority, here and here, one way to describe the difference between “substantive” rules – those rules that are ordinarily subject to the APA notice-and-comment rulemaking requirements – and “interpretative” rules – those rules that are not subject to the APA notice-and-comment requirements – is that “substantive” rules have the force of law, while “interpretative” rules do not.

Thus, because of the deference that is given under Auer to an agency’s interpretations of its own substantive regulations, it seems reasonable to conclude that an agency’s interpretation of one of its own substantive regulations is also necessarily a substantive regulation even though it might not otherwise be in that category because under Auer that interpretation is given deference comparable to Chevron deference and accordingly has the force of law. If a rule is given deference by the courts, then the rule is used as the basis for deciding cases, and for that reason has the force of law.

Viewing the D.C. Circuit rule as converting an agency’s interpretations of its own substantive regulations into substantive regulations themselves does not violate Vermont Yankee because this approach is simply a way of applying the APA’s own distinction between substantive rules and interpretative rules, a distinction that is notoriously murky and unclear.

Moreover, if a change in an agency’s interpretation of a substantive regulation is subject to notice-and-comment because that change in interpretation in effect represents an amendment to the regulation being interpreted, it is hard to see why the adoption of the initial interpretation would not likewise be subject to notice-and-comment. Fox Television held that changes in agency interpretations were subject to precisely the same requirements under the APA arbitrary and capricious standard as initial adoptions of agency interpretations, and it is hard to see why a different analysis would apply under the notice-and-comment requirements. The D.C. Circuit rule that is at issue in Mortgage Bankers Association can be harmonized with Fox Television by extending the notice-and-comment requirement to initial agency adoptions of interpretations of the agency’s own substantive regulations.

The Auer deference principle has received negative commentary in recent opinions by three Supreme Court justices. The first was a concurring opinion by Justice Scalia in Talk America, Inc. v. Michigan Bell Telephone Co. The next was Justice Alito’s majority opinion in Christopher v. SmithKline Beecham Corp.

The last opinions in this series are separate opinions by several justices in Decker v. Northwest Environmental Defense Center. The majority opinion in this case applied Auer. Justice Scalia dissented on the grounds that the agency interpretation to which the majority had given Auer deference was not the most natural reading of the regulation that was being interpreted and on the grounds that the Auer principle should be overruled because it encourages agencies to draft vague regulations so that they can later interpret those vague regulations in any way they please. Justice Scalia’s negative views of Auer were supported by two other justices in a concurring opinion by Chief Justice Roberts, which was joined by Justice Alito

One of the concerns expressed about Auer in these separate opinions is that Auer permits agencies to issue vague substantive regulations having the force of law using notice-and-comment rulemaking procedures and then adopt interpretations of those regulations that have the force of law under Auer but that are issued without using notice-and-comment procedures. The D.C. Circuit rule that is at issue in Mortgage Bankers Association would cure that problem with Auer, especially if the rule is extended as described earlier to cover initial agency interpretations of the agency’s own regulations and not just changes in agency interpretations.

EDITOR UPDATE 

For more on the Perez v Mortgage Bankers case, you may wish to check out posts on the case from the Federal Regulations Advisor blog or the Notice and Comment blog.

UPDATE PART 2

Jeffrey Pojanowski at Notice and Comment has a piece discussing Pat Smith’s post and longer article. See here

Summary Opinions for 9/26/14

photo Short but sweet this week.  We have posts in the hopper on many of the larger developments for the week of Sept. 26th, so SumOp is a little light this week.  We do, however, touch on inversions, dealing with the media, informal abandonment of residence status, and if your online gambling problem is causing you and IRS FBAR problem…very international:

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  • The Service has issued a notice of proposed rulemaking to provide regulations that it hopes will curb inversions.  Most folks seem to be against inversions.  I had an inversion over the weekend, and it wasn’t that bad.  Not the most flavorful IPA, but definitely drinkable.
  • Sticking with the inversion notice of rulemaking, our former guest blogger, Professor Andy Grewal, has a terrific post on the in terrorem  effect of the notice  in the relatively new and exceedingly high quality Yale Journal on Regulation blog  “Notice and Comment”.  The post discusses how “under Section 7805(b)(1)(C) of the tax code, the Treasury enjoys the authority to issue regulations retroactive to the date on which any notice describing the anticipated regulations is issued.  Consequently, a mere notice can alter taxpayer behavior, even in the absence of any actual rulemaking activity.”
  • Frank Agostino’s firm’s October newsletter is out, and can be found here.  Both are articles are good, but I particularly liked the article on the use of media (traditional and new) in the area of tax controversy.  Most of my clients don’t want anyone to know they have an issue with the Service (even the ones who are not guilty), but for some clients a media strategy is a necessity.
  • In Topsnik v. Comm’r, the Tax Court held that a foreign individual was a lawful permanent resident (LPR), and subject to tax on his worldwide income, even though he had sold his US residence, and only made infrequent visits to the United States during the year in question.  The taxpayer could not “informally” abandon his status as a LPR, and instead had to follow the appropriate procedures. Here is an additional post on this case from the “Private Equity, VC, and Hedge Fund Taxation” Blog, which I was not familiar with.  The post points out how this case highlights what the Court will look at in these residency cases, and shows how the IRS will obtain information about a taxpayer from a treaty country.  Mr. Topsnik’s tax controversies have graced our pages before, with a Ninth Circuit opinion discussed in a February SumOp found here, discussing appropriate venue for a foreign individual’s refund claim.
  • My ad (hom)inem commentary on Mr. Hom’s prior pro se efforts were somewhat tongue in cheek, as he seemed to make clever legal arguments, which didn’t prevail (I don’t actually think I was attacking Mr. Hom personally, but my bad pun generator is not working well).  As previously mentioned , Joseph DiRuzzo of Fuerst Ittleman, has agreed to represent Mr. Hom in his appeal from the determination that his online poker accounts were bank accounts that had to be disclosed on his FBARs, which we covered here with a link to Jack Townsend’s far superior write up found here.  The matter has potentially far reaching implications, and I am happy to see a quality lawyer assisting Mr. Hom on this matter.  Mr. DiRuzzo shared his initial brief with me, and indicated I could share the same on PT.  Instead of reproducing it in its entirety, I recreate the summary of arguments below.  If you are interested in reviewing the brief, please let me know, and I will be happy to share.  Any mistakes in the below content are almost certainly mine:

I. THE ACCOUNTS AT ISSUE ARE NOT “BANK, SECURITIES, OR OTHER

FINANCIAL ACCOUNTS” UNDER THE BANK SECRECY ACT. THEREFORE,

THE DISTRICT COURT ERRED IN GRANTING THE GOVERNMENT’S

MOTION FOR SUMMARY JUDGMENT…………………………………………………………. 13

A. The Report of Foreign Bank and Financial Accounts & Penalty

Regimes Under the Bank Secrecy Act and its Implementing

Regulations. ………………………………………………………………………………………… 13

B. PokerStars, PartyPoker, and FirePay are not engaged in the business

of banking nor do they function as banks. Thus, the accounts

maintained with each are not “bank accounts” under the BSA. ………………. 16

1. Construing undefined terms in accordance with their ordinary and

natural meanings, the accounts at issue were not “bank accounts”

because PokerStars, PartyPoker, and FirePay do not “engage in the

business of banking.” …………………………………………………………………………. 17

2. When the BSA is read in pari materia with other banking and tax

statutes, it is evident the companies do not engage in the business

of banking. Thus, Hom’s accounts were not bank accounts and did

not trigger a filing obligation. ………………………………………………………….. 21

3. The lower court’s reliance on Clines is misplaced. ………………………………. 25

C. The accounts at issue would not properly be classified as “other

financial accounts” because PokerStars, PartyPoker, and FirePay do

not act as financial agencies. ………………………………………………………………. 28

D. The accounts are not “bank accounts” or “other financial accounts”

under the BSA. ………………………………………………………………………………………. 31

II. THE GEOGRAPHIC LOCATION OF THE ACCOUNT, NOT THE NATIONALITY

OF THE FINANCIAL ENTITY INSTITUTION IN WHICH THE ACCOUNT IS

FOUND DETERMINES WHETHER AN ACCOUNT IS “FOREIGN” FOR FBAR

PURPOSES. THUS, THE DISTRICT COURT’S CONCLUSION TO THE

CONTRARY IS AN ERROR OF LAW AND NECESSITATES REVERSAL. ……………… 32

A. The preamble is irrelevant. …………………………………………………………………. 33

B. The preamble is consistent with the position of the IRS and FinCEN

and advanced by Hom in the lower court that it is the geographic

location of the account funds not the location of the host institution

which is determinative of whether an account is “foreign” under the

BSA. ………………………………………………………………………………………………………. 34

C. The preamble is not entitled to Chervon deference. ………………………………….. 37

1. The regulation is unambiguous. Therefore the District Court erred

in considering the preamble. …………………………………………………………. 38

2. Assuming arguendo that the regulation is ambiguous, the preamble

would not be entitled to Chevron deference. Thus, the District

Court erred. ………………………………………………………………………………………… 40

3. Under the appropriate level of deference, the Court erred in relying

on the preamble as it is an unreasonable interpretation of the

regulation. …………………………………………………………………………………….. 42

4. To the extent the Government relies on the preamble as its basis

for enforcement of the FBAR reporting requirements against

Hom, the preamble violates the APA as an improperly

promulgated legislative rule. ……………………………………………………………….. 43

III. AS A “FOREIGN” ACCOUNT IS DETERMINED BY THE GEOGRAPHIC

LOCATION OF THE ACCOUNT HOLDING THE TAXPAYERS MONEY, THE

DISTRICT COURT ERRED IN GRANTING SUMMARY JUDGMENT BECAUSE A

MATERIAL ISSUE OF FACT REMAINS AS TO WHETHER HOM’S FUNDS WERE

LOCATED IN A FOREIGN ACCOUNT. ……………………………………………………… 45