July 22, 2014

U.S. District Court Strikes Down IRS’s Registered Tax Return Preparer Regulations

TramLeBy Tram Le

On Jan. 18, 2013, the U.S. District Court for the District of Columbia issued a decision enjoining the IRS from enforcing its new registered tax return preparer program. See Loving v. IRS, No. 12-385, 2013 WL 204667 (D.D.C. Jan. 18, 2013).

In 2011, the IRS issued final regulations requiring all paid tax return preparers, who were not otherwise regulated by the IRS, to comply with Circular No. 230. Specifically, the regulations required tax return preparers who are not attorneys, CPAs or enrolled agents to pass a qualifying exam, pay an annual fee, and take 15 hours of continuing education courses each year.

In promulgating the regulations, the IRS relied on 31 U.S.C. Sec. 330, which gave them the authority to regulate individuals who “practice” before it.

Factual and Procedural History

Three paid tax return preparers, who were not previously regulated, filed suit against the IRS in federal court. The individuals argued that the IRS had no authority under 31 U.S.C. Sec. 330 to regulate tax return preparers who only prepare and sign tax returns, and file claims for refund and other documents with the IRS.

The tax return preparers claimed that the new IRS regulations would likely cause them to lose customers and close their business due to the increased costs and burdens associated with compliance. Therefore, they sought for injunctive and declaratory relief and moved for summary judgment.

Issue and Decision

The issue before the court was whether all paid tax return preparers are “representatives” who “practice” before the IRS under 31 U.S.C. Sec. 330 and therefore, are properly subject to the new IRS regulations. In deciding the case, the court applied the two prong Chevron test. Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). The first step asks whether “the intent of Congress is clear.” Under this test, if the intent is clear, then the court “must give effect to the unambiguously expressed intent of Congress” and does not need to address the second step.

In this case, the court found that the intent of Congress was clear under 31 U.S.C. Sec. 330 and preparers who are limited to preparing and signing tax returns and claims for refund, and other documents to the IRS are not “representatives” who “practice” before the IRS.

The court reasoned that under 31 U.S.C. Sec. 330(a)(2)(D), the definition of “practice of representatives” does not include tax return preparation. The court equates “practice” as advising and assisting taxpayers in presenting their cases. The court stated that merely filing a tax return would never in its normal usage be described as “presenting a case.”

The court also reasoned that the IRS’s interpretation of 31 U.S.C. Sec. 330 would displace an existing statutory scheme that regulates penalties on tax return preparers. The court referred to Title 26 of the U.S. Code, which provides for a “careful, regimented schedule of penalties for misdeeds by tax-return preparers.” For example, a tax return preparer would be subject to a fine of $50 (with an annual maximum of $25,000) for failing to sign a return without reasonable cause under 26 U.S.C. Sec. 6695(c). If tax return preparers were subject to 31 U.S.C. Sec. 330, the IRS would have a considerable amount of discretion to impose penalties ranging from $0 and the “gross income derived (or to be derived) from the conduct giving rise to the penalty.”

Furthermore, the court stated that a federal penalty provision pursuant to 26 U.S.C. Sec. 7407, which remedies abusive practice by tax return preparers, would be irrelevant under the IRS’s interpretation.

The court held that the statute was not ambiguous based on the plain language and does not clearly cover individuals who prepare and sign tax returns, file claims for refund and other documents to the IRS. Since the regulations failed under the first prong of the Chevron test, the court did not consider the second prong. As such, the court granted a declaratory judgment and permanent injunctive relief, enjoining the IRS from enforcing its new regulations.

Appeal of Ruling

In response to the district court’s decision, the IRS filed a motion to suspend the permanent injunction against the tax return preparer regulations. On Feb. 1, 2013, the court denied the IRS’s motion. However, the court agreed to modify the ruling to clarify that IRS could continue its Preparer Tax Identification Number (PTIN) program and was not required to close its testing and continuing-education centers.

Tram Le, CPA, Esq., LL.M. – SALT Consultant – Golden, CO – With more than six years of government financial and forensic auditing experience, Tram has developed and implemented audit procedures for forensic audits and assisted in investigations of fraud, waste and abuse such as improper payments. Tram is a CPA and a licensed attorney.  She received a joint JD/LL.M. in taxation from the University of Denver. Tram is currently developing knowledge and expertise in State and Local Tax (SALT). She focuses on variety of state and local sales and income/franchise tax issues and assists with protesting and the representation of clients at administrative appeals and appeals meetings. She writes for the CBA Taxation Section newsletter, where this article originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Colorado Court of Appeals: Calculation of Tax Increment Financing for Suspended Portions of Urban Renewal Project Not Addressed by Statute

The Colorado Court of Appeals issued its opinion in Northglenn Urban Renewal Authority v. Reyes, Adams County Assessor on Thursday, February 28, 2013.

Summary Judgment—Tax Increment Financing—Urban Renewal Plan.

In this case involving the financing of an urban renewal plan, plaintiff Northglenn Urban Renewal Authority (NURA) appealed the trial court’s summary judgment in favor of defendants Gil Reyes, in his official capacity as Adams County Assessor (Assessor), and the Board of County Commissioners of the County of Adams (BOCC). The judgment was affirmed in part and reversed in part, and the case was remanded with directions.

In 1992, Northglenn City Council (City Council) approved an urban renewal plan created by NURA for the redevelopment of blighted areas. The plan included tax increment financing (TIF). In 2004, the City Council by resolution substantially amended the urban renewal plan, adding several new tracts of property to the Northglenn Urban Renewal Area. No significant activity occurred on most of this new property from 2005 to 2009. In 2009, the City Council resolved to suspend the TIF for those properties within the renewal area without active urban renewal projects.

In 2009, the assessor calculated the TIF revenue by removing the suspended property from the total assessed value but including the suspended property in the base value. The assessor also concluded that the TIF period for all properties would expire in 2017, twenty-five years after the effective date of the original plan.

NURA disagreed with the method used to calculate the TIF following the TIF suspension. It sought mandamus relief and a declaratory judgment that the assessor improperly calculated the base value of the property in the urban renewal area, and improperly shortened the duration of the applicable TIF period for the additional properties. The trial court denied mandamus relief because the dispute involved the manner in which TIF revenues were calculated, not the assessor’s refusal to act. The Court of Appeals did not address this issue but turned only to the declaratory judgment claims.

The Court agreed with NURA that the assessor erred in the calculation of TIF following the suspension. The parties agreed that the statute does not address the TIF calculation of the renewal area when TIF is suspended for a portion of the property. Likewise, the assessor’s manuals and appraisal procedures have no provisions that address this. The Court therefore tried to interpret the statute in accordance with legislative intent and objectives (commending this issue to the legislature to address it at some future date).

Specifically, the Court agreed that the assessor should have removed the value of the suspended properties from the total assessed value and from the base value, not just from the total assessed value. The assessor’s method impeded the goals of addressing and financing renewal of blighted areas.

NURA then argued that the twenty-five-year period did not increase the TIF provision in the renewal plan for those properties added after the effective date of the plan. The Court disagreed. The Court found that the plain language of CRS § 31-25-107(9)(a)(I) creates a reference date based on the effective date of adoption of a TIF provision. Although the City Council could have altered the dates when it added the new properties, it included them in the original urban renewal area and subjected them to the original plan . Therefore, they were bound by the original twenty-five-year period. The part of the trial court’s summary judgment regarding the assessor’s calculation of TIF was reversed, and the part regarding the twenty-five year TIF expiration was affirmed.

Summary and full case available here.

Colorado Court of Appeals: No Violation of Laws or Constitution When District Offers Scholarships to Students of Private Schools

The Colorado Court of Appeals issued its opinion in Taxpayers for Public Education v. Douglas County School District on Thursday, February 28, 2013.

Choice Scholarship Program—Standing—Public School Finance Act of 1994—Colorado Constitution.

In 2011, the Douglas County Board of Education (County Board) adopted the Choice Scholarship Program (CSP). Pursuant to the CSP, parents of eligible elementary school, middle school, and high school students residing in the Douglas County School District (District) may choose to have their children attend certain private schools, including some with religious affiliation. The District would pay parents of participating students “scholarships” covering some of the cost of tuition at those schools, and the parents would then remit the scholarship money to the schools.

Plaintiffs are nonprofit organizations, Douglas County taxpayers, District students, and parents of District students. They filed suit to enjoin implementation of the CSP, claiming that it violates the Public School Finance Act of 1994, CRS §§ 22-54-101 to -135 (Act), and various provisions of the Colorado Constitution.

Plaintiffs claimed that the CSP violated the Act because the District will impermissibly use state money distributed by the Colorado Department of Education to pay for private school tuition at private schools. The Court of Appeals did not reach the merit on this claim, however, because it found that plaintiffs did not have standing to bring a private cause of action seeking enforcement of the Act.

Plaintiffs further contended that the court erred in rejecting their claim alleging a violation of article IX, § 2, of the Colorado Constitution, which requires the General Assembly to “provide for the establishment and maintenance of a thorough and uniform system of free public schools throughout the state.” Article IX, § 2 plainly is not violated where a local school district decides to provide educational opportunities in addition to the free system the Constitution requires. It also is not violated merely because some students’ parents may choose to have their children forego the available opportunity to attend a school within the system the Constitution requires. Therefore, plaintiffs failed to prove beyond a reasonable doubt that the CSP violates the Colorado Constitution.

Plaintiffs also contended that the court erred in rejecting their claim alleging a violation of article IX, § 3, of the Colorado Constitution because the public school fund is used for private schools. There was no record support for this argument. Therefore, the Court assumed that the CSP was funded out of the 95% of total per-pupil revenue that does not come from the public school fund.

Plaintiffs further argued that the CSP violated article IX, § 15, of the Colorado Constitution, and that the district court erred in ruling to the contrary. However, article IX, § 15, does not apply to the CSP because the directors of the boards of education of local school districts have control of instruction in the public schools of their respective districts.

Plaintiffs also argued that the CSP violated article II, § 4; article V, § 34; and article IX, §§ 7 and 8, of the Colorado Constitution. The CSP is neutral toward religion generally and toward religion-affiliated schools specifically. The CSP is intended to benefit students and their parents, and any benefit to the participating schools is incidental. Further, the CSP does not compel anyone to do anything, much less attend religious services. To the extent students would attend a particular private school or religious services at that school, they would do so as a result of parents’ voluntary choices. Therefore, the CSP does not violate the Colorado Constitution.

Finally, plaintiffs argued that the CSP violated article V, § 34, of the Colorado Constitution by providing funds to private schools and religious organizations. The General Assembly appropriates state money for elementary and secondary education to the Colorado Department of Education, which in turn distributes it to local school districts in the form of total per pupil revenue. At that point, ownership of the funds passes to the local school districts. The District’s expenditure of funds under the CSP, therefore, does not constitute an appropriation by the General Assembly. As a result, the CSP does not violate article V, § 34.

Summary and full case available here.

Colorado Court of Appeals: Arbitration Award Must Be Confirmed by Trial Court if Not Timely Appealed

The Colorado Court of Appeals issued its opinion in In re Marriage of Rivera on Thursday, February 28, 2013.

Dissolution of Marriage—Arbitration Award—CRS §§ 13-22-222(1) and 14-10-128.5(2).

In this dissolution of marriage proceeding, husband appealed from the trial court’s order partially confirming an arbitration award as to property and maintenance provisions and ordering a hearing on the remaining parenting issues. The order was reversed and the case was remanded with directions.

Husband and wife agreed to resolve the terms of their dissolution of marriage through mediation and arbitration. At mediation, they agreed to joint decision-making authority and adopted the parenting schedule recommended by the child and family investigator. The parties agreed the mediator would be designated as an arbitrator to resolve any dispute arising out of the mediated agreement.

The parties then disputed the property distribution provisions in the mediated agreement and proceeded to arbitration. The arbitrator entered a final award, which reaffirmed the parenting time agreement. Wife then filed a motion requesting trial court confirmation of the arbitration award under CRS § 13-22-222(1), and husband objected on grounds not relevant to the appeal. The court held a hearing wherein husband withdrew his objection, and both parties requested the mediated agreement and arbitration award be made orders of the court.

Following a colloquy with wife, the trial court determined that wife did not believe the mediation agreement was fair and therefore stopped the hearing, declined to confirm the arbitration award, and set a permanent orders hearing. Husband then moved to confirm the arbitration award under CRS § 13-22-222(1). He stressed that because neither party had timely sought to vacate, modify, or correct the award, the court was required to confirm it. Wife agreed, but objected as to the provisions concerning parenting issues. The court entered an order confirming all property and maintenance provisions, but ordered all parenting issues remain set for hearing. Husband appealed.

Husband argued that because he and wife resolved the dissolution through arbitration and wife did not seek to vacate, modify, or correct the arbitration award in a timely manner, the trial court lacked authority to set a permanent orders hearing to resolve parenting issues. The Court of Appeals agreed. CRS § 14-10-128.5(2) provides a specific means by which a party may seek trial court review of an arbitration award. The motion for a hearing must be made no later than thirty-five days after the date of the award. Here, no such timely request was made. Accordingly, the order was reversed and the case was remanded to confirm the award in its entirety.

Summary and full case available here.

Colorado Court of Appeals: Plain Language of C.R.S. § 18-1.3-202 Allows Incarceration for Each Specific Grant of Probation

The Colorado Court of Appeals issued its opinion in People v. Gravina on Thursday, February 28, 2013.

Deferred Judgment and Sentence—Sexual Exploitation of a Minor—CRS § 18-1.3-202.

Defendant appealed the trial court’s judgment revoking his deferred judgment and sentence, entering a judgment of conviction, and sentencing him for the crime of sexual exploitation of a minor. The judgment and sentence were affirmed.

In December 2010, defendant pleaded guilty to sexual exploitation of a child, a class 5 felony, for possessing nude photographs of his 17-year-old girlfriend. Pursuant to the plea agreement, the trial court granted defendant a deferred judgment and sentence for four years. Defendant agreed to complete Sex Offender Intensive Supervision Probation (SOISP) and other conditions, one of which was that he could not have “possession or have any contact with any form of . . . [m]aterial that contains nudity, sexual themes, and sexually explicit or violent images.”

In February 2011, defendant’s probation officer searched defendant’s house. She found a Hooters calendar and aMaxim magazine. She also found photographs of defendant with a naked woman and nine pornographic movies. This resulted in defendant being removed from his treatment program.

After a hearing, the trial court found defendant in violation of his probation and revoked his deferred judgment and sentence, and sentenced him to five years of SOISP. In addition, he was to serve ninety days in jail, with sixty days suspended and credit for one day served.

Defendant contended it was error to commit him to ninety days in jail after he had already been committed to ninety days in jail as a condition of his initial probation, because CRS § 18-1.3-202 allows only an aggregate of ninety days in jail as a condition of probation for any single conviction. The Court of Appeals disagreed. The Court found the plain language of CRS § 18-1.3-202 to allow a trial court to include as a condition of probation a commitment to jail for up to the maximum number of days permitted by statute. The ninety-day limit applies to each specific grant of probation and not to the sentencing for the underlying crime.

Defendant also argued it was error to revoke his deferred judgment because the terms of his probation were unconstitutionally vague as applied to the magazine and calendar, and the prosecution failed to prove that he knowingly possessed the movie and photos. The Court found no error. Defendant’s probation prohibited him from possessing “sexually oriented or sexually stimulating material.” Though neither the calendar nor the magazine was part of the record, the Court presumed the trial court was correct that they were sexually oriented or stimulating within the meaning of the probation condition. As for proving “knowing” possession, the Court found the record supported such a finding.

Summary and full case available here.

Colorado Court of Appeals: Plea Counsel for Criminal Defendant Should Have Advised of Mandatory Deportation but No Prejudice Shown

The Colorado Court of Appeals issued its opinion in People v. Campos-Corona on Thursday, February 28, 2013.

Crim.P. 35(c)—Ineffective Plea Counsel.

Defendant appealed from an order denying his motion for relief pursuant to Crim.P. 35(c). The judgment was affirmed.

Defendant was charged with one count of possession of a schedule II controlled substance with intent to distribute, and one count of conspiracy to distribute a schedule II controlled substance. He pleaded guilty to an added count of distribution of a schedule II controlled substance in exchange for dismissal of the original charges and a more favorable sentencing range. After successfully completing his sentence to probation, he faced deportation proceedings.

Defendant filed a Crim.P. 35(c) motion to seek to withdraw his plea on the ground that plea counsel was ineffective in advising him regarding the immigration consequences of his guilty plea. At the post-conviction hearing, plea counsel testified that he advised defendant that a guilty plea would make renewing his permanent residence status difficult, if not impossible, and he would likely be deported. Plea counsel stated that defendant wanted to plead guilty to try to be sentenced to probation and would deal with the immigration issue later. Plea counsel acknowledged that he had not told defendant that the plea would subject him to a mandatory removal provision from which no discretionary relief could be had.

Defendant testified that plea counsel advised him that he “would [or] could have problems” renewing his permanent resident status. He gave conflicting testimony as to whether he was advised he could be deported as a result of pleading guilty. He testified that if he had been told in absolute terms that he would be deported, he would not have entered a guilty plea. The post-conviction court found plea counsel’s representations were adequate regarding potential deportation.

On appeal, defendant argued it was error to deny his petition for post-conviction relief. The Court of Appeals found that counsel’s performance was deficient, but agreed the petition was properly denied for failure to sufficiently demonstrate prejudice. A criminal defendant is entitled to relief for ineffective assistance of counsel by showing that (1) counsel’s performance fell below an objective standard of reasonableness, and (2) a reasonable probability exists that but for counsel’s errors, the defendant “would not have pleaded guilty and would have insisted on going to trial.”

Here, 8 USC § 1227(a)(2)(B)(i) mandates removal for violation of any law relating to controlled substances other than a single offense involving possession of marijuana for personal use of thirty grams or less. Defendant admitted a significant quantity of cocaine was found in his possession and at his home. He was not advised that pleading guilty would subject him to mandatory, permanent removal. Plea counsel’s performance was not reasonable and the trial court’s finding otherwise was in error.

However, the Court agreed that even if inadequate advice was provided, defendant failed to show he was prejudiced. The Court deferred to the trial court’s findings that his testimony established only that he wanted to avoid prison and therefore it would not have been rational for him to proceed to trial. The order was affirmed.

Summary and full case available here.

HB 13-1134: Empowering HOA Information and Resource Center to Perform Certain Regulatory and Investigatory Actions

On January 18, 2013, Rep. Su Ryden and Sen. Morgan Carroll introduced HB 13-1134 - Concerning Unit Owners’ Associations Under the “Colorado Common Interest Ownership Act.” This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The HOA information and resource center (center) was created in 2010 to track inquiries and complaints related to unit owners’ associations (a/k/a homeowners’ associations or HOAs) and report them to the director of the division of real estate (director). The center also serves as a clearinghouse for information concerning the rights and duties of unit owners and associations. The center does not have regulatory or investigative power. The bill empowers the center to perform certain regulatory and investigative actions. The bill directs the director to calculate the annual fee paid by associations to support the center’s operation on a per-unit basis and provides a formula for the director to use to calculate each association’s fee. The bill amends the annual registration provisions. The bill is assigned to the Business, Labor, Economic, & Workforce Development Committee.

HB 13-1126: Changing Statutorily Established Time Intervals to Comply with “Rule of Seven”

On January 18, 2013, Rep. Jared Wright and Sen. Irene Aguilar introduced HB 13-1126 - Concerning Statutorily Established Time IntervalsThis summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The bill changes time periods in the appellate process to seven-day periods or periods that are multiples of seven days to avoid actions being due on weekends. Similar changes to seveb-day periods or periods that are multiples of seven days were made to the Colorado Revised Statutes in 2012, pursuant to Senate Bill 12-175. On Feb. 18, the House passed the bill on 3rd Reading; it has been assigned to the Judiciary Committee in the Senate.