Tags: Virgin Islands | IRS | tax | court

Appeals Court Spots IRS' Disingenuous Argument

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Monday, 24 Feb 2014 06:40 AM Current | Bio | Archive

The IRS has a hair trigger when it comes to claiming that some protesting taxpayer's argument in litigation is frivolous or abusive. They regularly whipsaw the taxpayer by claiming substance over form, or form over substance, whichever works in their favor at the moment.

The courts and Congress have even bought into the IRS argument that a taxpayer trying to save income taxes does not have a substantial economic effect.

The Tax Court has even accepted the IRS' argument that the taxpayer should be liable to pay taxes twice without getting any credit for paying the first time.

The Tax Court in particular seems especially motivated to back up whatever new or novel theory the IRS says should be the law. (Many tax professionals have the view that the Tax Court is just another enforcement appendage of the IRS anyway.)

In an unusual opinion by the Eleventh Circuit Court of Appeals, the court took the Tax Court and the IRS to task.

About 10 years ago, the IRS decided that the Economic Development Programs of the U.S. Virgin Islands were nothing more than abusive tax shelters. This resulted in some targeted undercover investigations followed by indictments. Other taxpayers who had operating businesses under the respective Economic Development Programs came under intensive audits.

When the criminal case came to trial, the IRS lost.

The civil audits continued resulting in taxpayers filing petitions in the Tax Court to contest the IRS' findings of tax deficiencies.

The IRS took the view that the taxes paid by the taxpayers when they claimed residency in the U.S. Virgin Islands and filed their tax returns with the Bureau of the Internal Revenue in the U.S. Virgin Islands would not be allowed to offset the taxes that the IRS now claimed was due. Further, the statute of limitations that would normally prevent the IRS from collecting was not applicable.

When the U.S. Virgin Islands government tried to intervene in the case, the IRS made the argument in the Tax Court that the U.S. Virgin Islands did not have an interest in the case.

The Tax Court agreed with the IRS.

Thus, the case went up on appeal to the Eleventh Circuit Court of Appeals.

The court understood that taxpayers might not like having double taxation. The court also realized that the U.S. Virgin Islands government was very much a party in interest in the tax contest. Although not explicitly stated to the court, the U.S. Virgin Islands tax authorities in defending their determination would likely be supporting the arguments raised by the taxpayer's in their defense against the IRS claims. Hence, the reason the IRS wanted them out of the case.

The court found that the U.S. Virgin Islands did indeed have a stake in the outcome. if the IRS was right, then the U.S. Virgin Islands may well be asked by the IRS to turn the money they received from the taxpayers over to the IRS, among a couple of other possibilities.

As the court found, both the U.S. Virgin Islands Bureau of Internal Revenue and the IRS have an interest in avoiding "the possibility of inconsistent taxation, conserves judicial resources and assures a more informed decision by virtue of both governments' participation."

In a statement showing remarkable insight, clarity and candor about what the IRS was trying to pull off, the court stated "[W]e find the IRS' attempts to dismiss the Virgin Islands' interests in the Tax Court to be unpersuasive, bordering on disingenuous."

No doubt, all the taxpayers would like more courts to be this forthright and outspoken in analyzing tax controversy issues where the IRS' litigation positions may also be, so-to-speak, overally creative.

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Kleinfeld
The IRS has a hair trigger when it comes to claiming that some protesting taxpayer's argument in litigation is frivolous or abusive. They regularly whipsaw the taxpayer by claiming substance over form, or form over substance, whichever works in their favor at the moment.
Virgin Islands,IRS,tax,court
610
2014-40-24
Monday, 24 Feb 2014 06:40 AM
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