July 19, 2019

Tenth Circuit: Rule of Lenity Does not Apply in Plain Error Review

The Tenth Circuit Court of Appeals published its opinion in United States v. Williamson on Monday, March 17, 2014.

Defendant John S. Williamson has been protesting taxes for 30 years. In May 2008 the Internal Revenue Service (IRS) levied his wife’s wages to collect his back taxes. The IRS sent a notice of the levy, which Defendant returned, writing across the document: “Refused for cause. Return to sender, unverified bill.” In June 2008, Defendant sent an invoice for $909,067,650.00 to two IRS agents who had worked on the matter. The invoice listed the value of real and personal property allegedly seized by the IRS, added damages for various alleged torts, and then trebled the total “for racketeering.”

In December 2008, Defendant and Mrs. Williamson filed with the clerk of Bernalillo County, New Mexico, a claim of lien against the agents’ real and personal property for the same amount as the invoice. A grand jury indicted Defendant and Mrs. Williamson on two counts: (1) “corruptly endeavor[ing] to impede the due administration of the Internal Revenue Code by filing a false and fraudulent Claim of Lien,” in violation of 26 U.S.C. § 7212(a); and (2) “fil[ing] . . . a false lien and encumbrance against the real and personal property [of the IRS agents] on account of the performance of [their] official duties,” in violation of 18 U.S.C. § 1521.

Defendant’s defense at trial was essentially that he genuinely believed his lien was proper. A forensic psychologist testified that Defendant suffered from a delusional disorder that prevented him from abandoning his beliefs even when confronted with overwhelming evidence that he was wrong. Defendant requested instructions that would support his “genuine belief” defense to both charges, but the court rejected them and the jury returned verdicts of guilty on the two charges.

Defendant argued on appeal that the jury instruction concerning § 7212 should have informed the jury that he could be guilty only if he intentionally violated a known legal duty. The Tenth Circuit reviewed for plain error because at trial, defense counsel only argued the instruction should also contain a definition of “unlawful.” The court held that there was no plain error and that the rule of lenity did not apply because the “doubt required for the rule of lenity must be doubt raised by an adequately preserved argument.”

The court also rejected Defendant’s challenge to the § 1521 jury instruction for not including his requested good-faith defense. The § 1521 statute prohibits filing a false lien “having reason to know” it was false as well as knowingly filing a false lien. “Having reason to know” includes an objective component. A reasonable person knowing what Defendant knew would know the lien Defendant filed was false. Therefore, Defendant was not entitled to a good-faith defense instruction. The court affirmed his convictions.

Tenth Circuit: ConocoPhillips Entitled to Neither “Basis-Increase” Nor “Going-Forward Deductions

The Tenth Circuit Court of Appeals published its opinion in United States v. ConocoPhillips Company on Wednesday, March 11, 2014.

In the 1970s and 1980s, the Internal Revenue Service was embroiled in a tax dispute with multiple companies (including Phillips Petroleum Company and Arco Transportation Alaska, Inc.) that had jointly developed a pipeline system known as the Trans-Alaska Pipeline System (“TAPS”). The parties agreed to settle the dispute through a Closing Agreement. After entering the agreement, Phillips Petroleum Company (now ConocoPhillips Company) acquired Arco Transportation. In 2000 and 2001, Conoco revisited the tax implications of its acquisition and claimed “going-forward” and “basis-increase” deductions on its amended consolidated tax returns. The IRS refunded Conoco’s 2000 going-forward deductions and did not challenge them here. But the IRS disputed the remaining deductions and the parties brought the dispute to federal district court, where the district court decided the issue on cross-motions for summary judgment. The court rejected Conoco’s position and granted summary judgment to the IRS. Conoco appealed.

Conoco claimed monthly “going-forward” deductions for the additional interests in TAPS that Arco Transportation acquired from 1977 to 2000 and the additional interest that it acquired in 2001. This contention was based on alternative theories that Arco Transportation was an “owner” or “successor in interest” under the Closing Agreement. However, the court held that Arco Transportation was considered an “owner” only with respect to its 21% ownership in TAPS as of July 1, 1977. For the subsequently-acquired interests, Arco Transportation was not considered an “owner.” Because Arco Transportation did not own the additional TAPS interests on July 1, 1977, it was not an “owner” with respect to these interests. Thus, Conoco was not entitled to “going-forward” deductions for these additional interests based on the theory that Arco Transportation was an “owner.”

The court then turned to the question whether Conoco was a “successor in interest.” Under the Closing Agreement, an entity became a “successor in interest” in two ways: (1) by succeeding the owner through statutory succession, or (2) by acquiring a TAPS interest from an affiliated entity when the transferor and transferee filed a consolidated tax return. Arco Transportation did not acquire its later-acquired interests by statutory succession or by transfer from a member of its consolidated group. Thus, Arco Transportation was not a successor in interest for the additional TAPS interests acquired from 1977 to 2001; and the parent company, Conoco, was not entitled to the tax benefit of Arco Transportation’s going-forward deductions on the 2001 consolidated tax return.

Conoco also claimed “basis-increase” deductions. But Conoco’s claim to these deductions was based on a misinterpretation of the scope of the Closing Agreement. Because the Closing Agreement did not fix a restoration cost/liability or exclude it from 26 U.S.C. § 461(h), Conoco was not permitted take the basis-increase deductions before economic performance.

In conclusion, the Tenth Circuit held that Conoco was not entitled to the asserted “going-forward” or “basis-increase” deductions. The court disallowed Conoco’s going-forward deductions because Arco Transportation was not an “owner” or a “successor in interest” with respect to the additional TAPS interests acquired from 1977 to 2001. The court also disallowed the basis-increase deductions because the Closing Agreement’s allowance of a $900 million aggregate deduction did not fix a liability or provide Conoco with a blanket exemption from § 461(h) for that amount.

Accordingly, the district court’s award of summary judgment to the government was AFFIRMED.

Tenth Circuit: Actions of Tax Court Invalidating Offshore OPIS Shelter Upheld

The Tenth Circuit Court of Appeals published its opinion in Blum v. Commissioner of Internal Revenue on Wednesday, December 18, 2013.

This case came to the Tenth Circuit on appeal from a decision of the Tax Court upholding the actions of the IRS Commissioner invalidating a financial transaction as lacking economic substance and imposing two penalties for underpayment of taxes. The Tenth Circuit concluded that the intricacies of this offshore financial transaction and the fog of plausible deniability surrounding it could not make up for the clarity of the big picture: this was a transaction designed to produce nothing more than tax advantages, and the Tax Court was right to uphold the Commissioner’s actions.

The taxpayer, Mr. Blum, was a successful businessman who founded Buy.com. In August 1998, he made two sales of Buy.com stock resulting in $45 million in capital gains. A KPMG accountant who previously worked on Mr. Blum’s tax returns who was aware of Mr. Blum’s possible capital gains referred him to Carl Hasting, also of KPMG. Mr. Hasting pitched to Mr. Blum a transaction called OPIS (Offshore Portfolio Investment Strategy). The transaction, it is now widely acknowledged, is a tax shelter. However, KPMG recommended the transaction to Mr. Blum before the IRS revealed this information to the public.

The OPIS shelter was designed to create large, artificial losses for taxpayers by allowing them to claim a large basis in certain assets. These artificial losses offset actual capital gains, reducing the tax liability of the taxpayer.

Because of OPIS, Mr. Blum claimed $45 million in losses on his 1998 income tax returns, and it caught the attention of the IRS. The IRS disallowed OPIS and similar transactions in 2001. Rather than individually prosecute each OPIS scheme, the IRS settled with over 90 percent of OPIS purchasers. Mr. Blum did not accept the settlement offer. In 2005, the IRS sent a deficiency notice to Mr. Blum regarding his 1998 and 1999 federal income tax returns. Mr. Blum challenged this notice in the Tax Court. The Tax Court rejected his challenge and Blum appealed.

In his appeal to the Tenth Circuit, Mr. Blum made three arguments: (1) the Tax Court erred when it disallowed the OPIS losses under the economic substance rule; (2) the Tax Court erred by imposing a penalty for a gross valuation misstatement after it concluded the underlying transaction lacked economic substance; and (3) the Tax Court erred by imposing penalties for negligent underpayment, because Blum relied in good faith on KPMG’s representations.

First, Blum maintained that the OPIS transaction presented a reasonable probability of generating a profit, and that the Commissioner was therefore wrong to disallow the losses he claimed as a result of the transaction. The Tenth Circuit was unconvinced, and held that the OPIS transaction was a sham designed to reduce Mr. Blum’s tax liability. First, the $45 million loss associated with the transaction was grossly disproportionate to the $6 million Mr. Blum invested. Moreover, Mr. Blum did not lose $45 million; the loss was fictional. Second, the OPIS transaction was planned and executed in a way that was designed to generate a massive tax loss. Third, the evidence showed OPIS did not provide a reasonable expectation of profit. Fourth and finally, what profit potential OPIS presented was de minimis when compared to the tax benefits of declaring capital losses of $45 million. This disparity indicated a lack of economic substance. Further, Mr. Blum’s actions during and after the OPIS transaction indicated that his sole motive was tax avoidance. For these reasons, the OPIS transaction lacked objective economic substance and the Tax Court was correct in disallowing the loss.

Second, the Commissioner assessed penalties against Mr. Blum for his underpayment of taxes associated with OPIS. One of these penalties was a gross-valuation misstatement penalty. Blum argued that the penalty was inapplicable because the underlying transaction had been invalidated by the economic substance doctrine. The Supreme Court resolved the split on this issue: invalidation of a transaction under the economic substance doctrine does not prohibit the imposition of the penalty. Therefore, the Tenth Circuit upheld the Tax Court’s decision allowing the penalty.

Finally, the Commissioner imposed a 20 percent penalty on Mr. Blum for negligent underpayment of taxes on his 1999 return. Section 662(b)(1) of the Tax Code allows the IRS to impose a 20% penalty if the taxpayer’s underpayment resulted from negligence. Mr. Blum recited a litany of reasons why his reliance on KPMG’s advice should excuse him from paying this penalty. The court stated that although KPMG may have acted nefariously, that did not excuse Mr. Blum’s negligence.


Tenth Circuit: Pension Plan Records Properly Withheld under FOIA; Consent of Company Required for IRS to Release

The Tenth Circuit Court of Appeals issued its opinion in Hull v. IRS on Wednesday, August 31, 2011.

The Tenth Circuit affirmed the district court’s decision. Petitioners are retired employees of US West, Inc. and participants in the US West Pension Plan. According to Plaintiffs’ 2008 Freedom of Information Act (FOIA) request, US West made a submission to the IRS under the Voluntary Compliance Review Program (VCRP) for access to records in which “the company fully described [a problem with some of its payments to US West Pension Plan participants] and requested IRS grant approval to make adjusted pension payments,” which the IRS did. The IRS informed Petitioners that their FOIA request for the pension plan records was a request for “tax records,” which “are confidential and may not be disclosed unless specifically authorized by law.” The IRS would require US West Pension Plan’s written consent before they could consider releasing the information. Petitioners appeal the district court’s decision that upheld the IRS’s determination.

The Court held that the IRS properly withheld the requested information. The IRS “succeeded in carrying its burden of proving that [Petitioners’] FOIA request . . .  only sought US West’s return information to which [Petitioners] are not entitled without US West’s consent. Because [Petitioners] have not provided that consent, the IRS properly withheld the requested information.”