David J. Shakow is counsel in the Philadelphia office of Chamberlain, Hrdlicka, White, Williams & Aughtry and is professor emeritus at the University of Pennsylvania Law School.

The Supreme Court’s decision in Home Concrete raises new questions about the deference to be given to administrative pronouncements that conflict with prior judicial decisions. Unfortunately, the opinions of a divided Court leave practitioners to puzzle over the boundaries of its decision.

This article originally appeared in Tax Notes.

Copyright 2012 David J. Shakow.
All rights reserved.

* * * * *

The Supreme Court has decided Home Concrete¹ and handed taxpayers a victory by holding that the statute of limitations was not increased from three to six years for taxpayers who overstated their bases in assets.

The case involved a son-of-BOSS tax shelter that improperly inflated the basis of assets. Under section 6501(e)(1)(A), the statute of limitations for assessing a deficiency against a taxpayer is extended from three to six years when she omits from gross income an amount in excess of 25 percent of the gross income stated on the return. The question was whether the reduction of gross income that results from the offset of the inflated basis against an amount realized on a disposition of the asset extends the statute of limitations under section 6501(e)(1)(A).

The question was complicated by two special circumstances. First, in 1958 the Supreme Court in Colony Inc. v. Commissioner² interpreted identical language in the 1939 code to mean that the extended statute of limitations did not apply. But in 2010, while Home Concrete was in litigation, the government issued regulations stating that the extended statute applied.³

Once the regulations were issued, the Chevron⁴ doctrine of administrative law was called into play. Chevron requires courts to defer to an administrative interpretation of a statute unless the statute is unambiguous (Chevron step one) or, if the statute is ambiguous, to defer to it unless the interpretation is not a permissible interpretation of the statute (Chevron step two). In Mayo,⁵ decided last year, the Court held that Chevron applies in tax cases the same way it applies in other areas of administrative law.

Is an administrative agency constrained in its interpretation if a court has already interpreted the statute? In Brand X,⁶ decided in 2005, the Court held that an administrative pronouncement could override a prior judicial interpretation of a statute. That is, if the administrative pronouncement passed the Chevron test, the administrative agency could overturn a judicial decision.

But Brand X has never been applied to allow an administrative agency to overturn a decision of the Supreme Court; perhaps such an application is too broad. On the other hand, the Court in Colony said, in reference to the statutory language before the Court in that case and in Home Concrete, that “it cannot be said that the language is unambiguous.” If the Supreme Court says the language is ambiguous, why not allow the administrative agency to clarify it?

Justice Stephen G. Breyer wrote the opinion in Home Concrete, with Chief Justice John G. Roberts and Justices Clarence Thomas and Samuel A. Alito in agreement. Justice Anthony M. Kennedy wrote the dissent, with Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan joining him. Justice Antonin Scalia’s opinion, concurring in part and concurring in the judgment, was the swing vote.

The majority found that because the language in Home Concrete was identical to the language it interpreted in Colony, the same result should apply. It rejected the government’s argument (which the dissenters accept) that changes made to related sections of the statute in 1954 require a reconsideration of the meaning of the language before the Court. In addition, it refused to defer to the regulations the IRS finalized in 2010. Breyer argues that in this context, once the Court interprets the statute, there is no other interpretation available for adoption by the agency. In explaining why Brand X does not apply, Breyer does not necessarily give special deference to every Supreme Court opinion. Instead, he interprets Brand X to mean that deference is to be given to an administrative interpretation only when there is evidence that Congress delegated gap-filling authority to an agency.

Thus, we are to understand Chevron step one (is the language unambiguous?) simply as an example of a situation when Congress clearly did not delegate gap-filling authority to the agency.⁷ But even if the language is ambiguous, the agency apparently can’t act unless there is an indication that Congress intended that it exercise its gap-filling authority. And in what might be the most novel point of Breyer’s opinion, he quotes Chevron to the effect that “if a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect.”⁸ In other words, it would appear that if “traditional tools of statutory construction” result in one interpretation of a statute,⁹ there is no room for an administrative agency to take a contrary position. If that is the law, it would seem to significantly limit the role of Chevron and, even more so, Brand X.

Note that while that could be the most novel point in Breyer’s opinion, it is not the most novel point of the majority. The section of the opinion in which that discussion is found was the part in which Scalia did not join, thus making it the position of only Breyer and the three Justices who accepted all of his opinion. But Scalia did not disagree with that discussion because he believed it went too far; instead, as the dissenter in Brand X, he believes that any court decision prevents an administrative agency from thereafter requiring that court to interpret the statute otherwise. In other words, if the Third Circuit decides to interpret a statute in a particular way, any contrary interpretation from the administrative agency is properly ignored by the Third Circuit.¹⁰

Scalia characterized Breyer’s position to be that if a pre-Chevron holding concludes that a statute is ambiguous, the court must also have found “that Congress wanted the particular ambiguity in question to be resolved by the agency”¹¹ if the agency is to invoke its Brand X “gap-filling” power. Presumably, the reason Scalia limits that approach to pre-Chevron decisions is that if a court after Chevron characterizes a statute as ambiguous, it is inviting an agency to supply any permissible interpretation in accordance with Chevron. But Scalia is not clear on that proposition: Perhaps he would extend the argument to post-Chevron cases, too. As for the dissenters, they take the position that the changes made in 1954 should have put taxpayers on notice that the language interpreted in Colony was subject to reinterpretation. Thus, in the absence of any authoritative interpretation of section 6501(e)(1)(A), the government was free to interpret it as it chose. Under that view, the case before the Court did not raise the delicate question whether Brand X (under which an administrative agency can overturn a judicial interpretation of a statute) would apply even to a decision of the Supreme Court.¹² Because the dissenters argued that the changes made in 1954 necessarily left the language of section 6501(e)(1)(A) ambiguous, it was open for the IRS to interpret it anew without any constraint from the Court’s decision in Colony.

The continuing significance of Home Concrete is unclear. The Court’s decision certainly means that reg. section 301.6501(e)-1, as amended in 2010, is invalid to the extent it conflicts with Colony. The more important question is whether the Court has further undermined the rickety Chevron structure.¹³ Breyer suggests that any administrative agency’s attempt to use Brand X logic to overturn a pre-Chevron decision now faces an additional hurdle. The agency would apparently now have to show that Congress delegated gap-filling authority in that circumstance. Presumably, Scalia would sign on to that position, although it is more limited than his approach.

But the logic of Breyer’s opinion in Home Concrete suggests that administrative actions taken to overturn a post-Chevron opinion may also face that additional hurdle. If a court opinion does not explicitly indicate that a statute is ambiguous for Chevron purposes, would Breyer insist that a court must determine whether a statute effectively delegates to an agency the power to fill a gap? The logic of his opinion suggests that he would. But would a majority of the Court go along with that approach?

It looks like tax practitioners, like other administrative law practitioners, will have to return to the Supreme Court for more guidance. Tax practitioners — welcome to the wonderful world of Chevron.

FOOTNOTES

¹ Home Concrete & Supply LLC v. United States, Sup. Ct. Dkt. No. 11-139 (2012), Doc 2012-8781 , 2012 TNT 81-11 , aff’g 634 F.3d 249 (4th Cir. 2011), Doc 2011-2674 , 2011 TNT 26-7.

² 357U.S. 28 (1958).

³ Reg. section 301.6501(e)-1.

⁴ Chevron USA Inc. v. Natural Resources Defense Council Inc., 467U.S. 837 (1984).

⁵ Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704 (2011), Doc 2011-609 , 2011 TNT 8-10.

⁶ National Cable & Telecommunications Assn. v. Brand X Internet Services, 545U.S. 967 (2005).

⁷ Slip op. at 9.

⁸ Slip op. at 10 (emphasis in original). It is interesting that after reviewing the analysis in Colony, Breyer said, “It may be that judges today would use other methods to determine whether Congress left a gap to fill.” That leaves yet another area for observers to argue about the precise scope of Breyer’s approach.

⁹ That the Court in Colony said the statutory language is “not unambiguous” is irrelevant, because the Court there was not speaking in the context of Chevron (which had not yet been decided). Instead, the fact that the Court in Colony interpreted the statute in a particular way meant that any lurking ambiguity is irrelevant for Chevron purposes. Slip op. at 10.

¹⁰ Although Scalia is not clear on that point, his argument does not seem to be limited to decisions of the Supreme Court. As he said in his Brand X dissent, “When a court interprets a statute . . . its interpretation . . . is the law.” 545U.S. at 1019.

¹¹ Scalia concurrence, slip op. at 3 (emphasis in original).

¹² See Kennedy dissent, slip op. at 6.

¹³ I discussed the uncertain state of Chevron jurisprudence in “Who’s Afraid of the APA?” Tax Notes, Feb. 13, 2012, p. 825, Doc 2011-27082 , or 2012 TNT 30-11.

END OF FOOTNOTES

Beginning with the 2011 tax year (i.e., for returns filed April 17, 2012 or later), individual taxpayers will be required to file Form 8938 if he or she has an interest in a “specified foreign financial asset” (“SFFA”) (click for additional information on FATCA requirements) that has a value exceeding a certain threshold.  A Taxpayer has an interest in a SFFA if any income, gains, losses, deductions, credits, gross proceeds or distributions from the asset would be required to be reported on the income tax return.

The reporting thresholds differ depending on whether the taxpayer is married or single and whether the taxpayer is living inside or outside the United States.

Form 8938 Reporting Thresholds

There are certain exceptions and limitations to reporting.  Arguably, the most important limitation (other than the thresholds listed above) is whether the taxpayer reports the same assets on a separate foreign information return such as Forms 3520, 5471, 8621, 8865 or 8891 (but not Form T.D. F 90-22.1, Report of Foreign Bank Account (“FBAR”).  If so, the taxpayer is only relieved from fully completing the Form 8938.  The taxpayer is NOT relieved from filing Form 8938.

Form 8938 requires the following information:

• Basic identification of the account/asset;
• Name/address of financial institution where account is held (if applicable);
• Name/address of issuer or counterparty of stock, securities or financial instruments (if applicable);
• Information regarding whether the account/asset was acquired (opened) or disposed of (closed) during the year, the amount of income, gain, or other tax attributes recognized during the year and schedule, form or return on which reported to IRS, currency exchange rate (and source of rate, if not from Treasury’s Financial Management Service); and
• If the SFFA is reported on another form (3520, 5471, etc.), the report type and number of such other form.

The minimum penalty for failing to file or report an asset on Form 8938 is $10,000 per year the Form 8938 is not filed.  The penalty can be increased up to a $50,000 maximum for noncompliance 90 days after receipt of an IRS notice.  It is important to note that the IRS has no discretion to reduce this penalty unless the Taxpayer “affirmatively shows the facts that support a reasonable cause claim.” It is unclear at this time what will constitute sufficient reasonable cause.  In addition to the above penalties, accuracy related penalties are increased from 20% to 40% for underpayments involving undisclosed SFFAs.

Recently, the IRS issued “Tax Tip 2012-39″ regarding important issues concerning mortgage debt forgiveness.  While anyone capable of reading this Blawg is capable of pulling that up from the IRS website and reading it, no action should be undertaken without making sure your tax professional has covered the positives and negatives of doing so.

Right now, a lot of people are “under water” on their home mortgage, and faced with possible foreclosure, short sale, or other transactions in which their mortgage debt is partly or entirely “forgiven” during this tax year.  There are several things to be wary of.  For starters, any time a debt is forgiven, it is presumed to result in taxable income.  However, there is a statute known as the Mortgage Forgiveness Debt Relief Act of 2007 that may permit the exclusion of up to $2,000,000 of debt forgiven on a personal residence.  (For a married person filing separately, the limit is $1,000,000).  This can take place through a mortgage restructuring as well as a debt forgiven in a foreclosure or short sale.  The only “qualified debt” involves monies used to buy, build or substantially improve the principal residence and be secured by that residence.  This includes refinancing for the purpose of substantially improving the principal residence.  A taxpayer seeking to qualify for this relief must fill out and file a Form 982 with the Federal Income Tax Return for the year in question.

Second, not all debt qualifies.  Proceeds of financing used for other purposes, such as paying off credit card debt, will not qualify.  Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for this relief provision.  However, some other tax relief provision – such as being insolvent both before and after the debt forgiveness – may be applicable, and these circumstances are covered on Form 982.

Next, if a debt is reduced or eliminated, a taxpayer is supposed to receive a year end statement, Form 1099-C, Cancellation of Debt, from the lender.  This form is supposed to show the amount of debt forgiven and the fair market value of the property foreclosed.  If you receive this form, examine it closely, because it is filed with the Internal Revenue Service and that agency will assume its contents are correct.  If it containsany incorrect information, notify the lender in writing immediately – pay especially close attention to the amount of debt forgiven in Box 2, as well as the value listed for the property in Box 7.  That notification should be in writing and this writer recommends that you send it certified mail with return receipt requested.

Finally, do not “attempt all this in your own home.”  Better to have a tax professional guide you through the process than to take the chance of a costly mistake.

The Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) enacted the Foreign Account Tax Compliance Act (“FATCA”).  P.L. 111-47.  FATCA greatly increases disclosure requirements and penalties on taxpayers with foreign accounts and assets.  These reporting requirements will affect individuals beginning with the 2011 tax year, and are expected to apply to certain domestic entities beginning with the 2012 tax year.

FATCA reporting is in addition to the Form T.D. F 90-22.1, Report of Foreign Bank Accounts (“FBAR”) requirements and other foreign reporting requirements such as Form 5471 (foreign corporations); Form 3520 (foreign estates and trusts); 8865 (foreign partnerships); 8621 (passive foreign investment companies); 8891 (beneficiaries of certain Canadian registered retirement plans).

These new reporting obligations apply to U.S. individuals with an interest in “specified foreign financial assets” (“SFFA”) with an aggregate value exceeding certain thresholds. SFFAs generally include:

• Any financial account maintained by a foreign financial institution (i.e., a bank);
• Any stock or security issued by a foreign person,
• Any financial instrument or contract held for investment that has a non-U.S. issuer or counter-party, or any interest in a foreign entity.

It is important to note that the SFFA concept is much broader than related FBAR concepts.  Some examples include:

• Investments by an entity that holds real estate;
• Investments in foreign hedge funds and private equity funds;
• Capital or profits interest in foreign partnership;
• Foreign debt(e.g., notes, bonds, other indebtedness issued by a foreign person);
• Interests in a foreign trust or estate;
• Swaps, options, derivatives, etc. with a foreign counterparty; and
• Foreign pension or deferred compensation plans.

As previously mentioned, beginning with the 2011 tax year, i.e., by April (or October if on extension) of 2012, Taxpayers with SFFAs must report these assets on new Form 8938 (click for additional information on Form 8938 ).  If a Taxpayer is required to file Form 8938, they must attach the Form to their 2011 tax return.  In contrast, the FBAR is not due until June 30^th of each year and is mailed to Detroit (not with the Taxpayer’s tax return).

In February, the IRS published its annual “Dirty Dozen” listing of tax scams to caution taxpayers about problems they may face in this filing season.  They range from self-inflicted—too good to be true—to situations where third parties prey upon the unsuspecting.

Several are fairly common and familiar, ranging from reporting income that was not earned in order to maximize refundable credit, claiming excessive fuel tax credits, or simply claiming deductions one did not incur.  So are the time-worn tax protester arguments that have been thrown out by the courts.  There are, however, several that are new and equally dangerous.

The first involves identity theft – where someone files a return with your name and social security number in order to obtain a fraudulent refund.  This writer can tell you from the experience of his clients that these things are happening at an alarming rate and, quite frankly, that the IRS has not made a really firm respose to the cases he has seen, notwithstanding its claims to have a “robust screening process” in place.  This problem has been the subject of many newspaper articles, and anyone who believes personal information has been stolen – such as where you receive a letter from the IRS that your return was previously processed – needs to visit the IRS Special Identity Theft page at www.irs.gov/identitytheft.

Second, there are an increasing number of “PHISHING” scams – unsolicited emails or fake websites that pose as IRS sites in order to lure victims to provide personal and financial information.  Any unsolicited email claiming to be from the IRS or an organization linked to the IRS should be reported to phishing@irs.gov.  The IRS does not initiate contacts with taxpayer by email or request personal or financial information in this fashion.

A third problem involves tax return preparer fraud.  There are some “bad apples” out there, and it is important to make sure that your tax return preparer operates on the up-and-up.  For 2012, every paid preparer needs to have a Preparer Tax Identification Number (“PTIN”), and enter it on the return being prepared.  If your preparer does not enter one on the return, or does not also sign it, beware!

A fourth problem area involves attempts to hide income offshore, which have received a great deal of publicity due to the IRS Offshore Voluntary Disclosure Programs.  This can include foreign accounts, nominee entities, credit cards issued by foreign banks, and a multitude of other approaches.  While there may be legitimate reasons for maintaining financial accounts abroad, taxpayers have to be mindful of the many reporting requirements that need to be fulfilled, because the penalties for failing to do so – even in legitimate situations – are severe.  The IRS is working on information exchange programs with virtually every foreign country, so that these accounts are being “discovered” every day.  If you have or need to open any sort of foreign financial account, talk to your tax advisor abour your reporting obligations.

Finally, there are situations where corporations are created to obscure the true ownership of a business,and trusts are promoted to disguise asset transfers.  There are legitimate uses of both, but promises that income can be reduced, deductions of personal expenses can be permitted, or estate and gift taxes can be reduced, must be viewed with great suspicion.  Again, have any such plan reviewed by an experienced tax professional before you proceed.

As long as we have a federal income tax, there are going to be scams to deal with.  Don’t be a victim in 2012!

Life grants few chances at true redemption. The Internal Revenue Code, likewise, is not known for facilitating taxpayer salvation. Sure, under certain circumstances, taxpayers have an opportunity to file late tax-related elections to rectify an oversight, and other forms of clemency exist. However, the general rule is that taxpayers are stuck with a position once they take it on a tax return filed the IRS. One obscure exception to this rule is the qualified amended return (“QAR”), which can be a powerful self-help remedy for taxpayers who experience the “oh-shoot” moment. This event often occurs when taxpayers realize that, oh shoot, they forget to include certain income items on their tax return or, oh shoot, they cannot sleep because the stance they took on their tax return was too aggressive. Filing a QAR in these situations may allow a taxpayer to sidestep penalties stemming from the inaccurate tax return. The QAR rules, like most things tax, are complex. A recent Tax Court case, Bergmann v. Commissioner, 137 T.C. No. 10 (2011), provides us an opportunity to analyze the purpose, application, intricacies, and evolution of the QAR rules. The attached article, called “The Parameters of Qualified Amended Returns Examined by Tax Court in Case of First Impression,” examines the issues in Bergmann v. Commissioner. It was published in the most recent edition of the Journal of Taxation.

Change is inevitable, particularly in the tax arena.  The world evolves at such a quick pace that the IRS frequently finds itself playing catch up.  Examples of this abound, but a recent event of interest involves the IRS’s attempt to deprive certain taxpayers of losses because of their decision to conduct business through limited liability companies (“LLCs”).

Congress, focused on combating “tax shelters” in the 1980’s, passed Section 469(h)(2).  This provision creates a legal presumption that a taxpayer who owns an interest in a limited partnership, as a limited partner, cannot utilize any losses flowing from the entity to offset the taxpayer’s unrelated, active income from other endeavors.  For its part, the IRS promulgated regulations over two decades ago containing special tests, rules, and exceptions for limited partnerships.  The problem is that time marched on, and the states introduced different types of business entities, such as LLCs.  Taxpayers began participating in activities through LLCs, some of which generated losses.  The IRS, citing the limited partnership regulations from yesteryear, started challenging the LLC-related losses on grounds that they were “passive.”  Tax disputes ensued over the next decade, and the taxpayers were triumphant in each instance.  In light of these repeated judicial defeats, the IRS recently acknowledged that the existing regulations under Section 469(h)(2) were outdated and thus issued new, proposed regulations in late November 2011.

The attached article, “LLC Members and the Passive Activity Loss Rules:  IRS Issues Proposed Regulations After Multiple Court Setbacks,” examines the congressional motives for attacking limited partnerships, the existing regulations that triggered the controversy, the five taxpayer victories in various courts, the IRS’s recent decision to surrender the fight, and the proposed regulations, which radically alter the definition of “limited” for passive activity purposes.  The article was published in the most recent issue of Journal of Passthrough Entities.

Given the frequent use by taxpayers of LLCs and other hybrid entities, the IRS’s propensity to challenge losses based on the passive activity rules, and the new standards introduced by the IRS in the proposed regulations, the debate is far from over.  Taxpayers and their advisors would be wise to follow this issue, both before and after the regulations under Section 469(h)(2) are finalized.

During a course that I taught about tax treaties at last week’s TEI Houston Tax School, one audience member asked whether the exchange-of-information provisions of U.S. tax treaties apply not only to the federal government but also to state and local governments.   I had to confess that I did not know the answer of the top of my head.  However, I took a quick look at the question later in the week.

By way of background, in each income tax treaty with foreign jurisdictions, the United States negotiates an “exchange of information and administrative assistance” provision.  This provision generally obligates the governments to share information with one another “as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State….”  United States Model Income Tax Convention (“Model Treaty”), art. 26, ¶ 1 (Nov. 15, 2006).

Thus, for example, if the IRS needs information about a U.S. company’s foreign operations to examine the correctness of the company’s subpart F inclusions, the IRS could seek that information from the governments of a treaty jurisdiction in which the foreign operations are located.  Conversely, if a foreign government requires information about a taxpayer’s U.S. operations, the exchange of information provision permits the IRS to provide such information to the foreign government.  This exchange of information is sanctioned domestically by Code section 6103(k)(4) (permitting disclosure of taxpayer information pursuant to tax treaties).

But do “taxes of every kind imposed by a Contracting State” include taxes imposed by state and local governments as well?  Treasury’s Technical Explanation of the Model Treaty states that Article 26 “applies with respect to all taxes imposed at the national level.” (emphasis added)  Furthermore, this statement immediately follows Treasury’s explanation that Article 24, relating to non-discrimination between residents of each treaty jurisdiction, “applies with respect to all taxes, including those imposed by state and local governments.”  The contrast between the two sentences tends to reinforce that Treasury chose its words carefully and that the exchange of information provisions do not apply to state or local governments.

Nevertheless, if a foreign government requests that the IRS provide certain taxpayer information, Article 26 requires the IRS to “use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own purposes.”  Model Treaty, art. 26, ¶ 4.  At least one U.S. District Court has concluded that the IRS may use its summons power under Code section 7602 to obtain information from state departments of revenue.  Martini v. United States, 97 AFTR2d  2006-2592 (D. Nev. 2006).  Reasoning that the IRS’ summons power is analogous to the power of a federal grand jury to obtain information from state governments, the Martini court held that “[section] 7602 is not constitutionally infirm when used to recover records held by a state department of taxation.”

Thus, the reasoning of Martini, combined with the plain language of Article 26 of the Model Treaty, would seem to suggest that foreign governments could obtain taxpayer information from state and local governments by using the IRS as an intermediary.  Bear in mind, however, that the ultimate conclusion will also depend on the language in the treaty that applies to a given situation.

It is not uncommon for sought-after job seekers to receive what appears to be an offer that is too good to be true:  in addition to a good compensation and benefits package, the employer proposes to make a loan to the applicant, and to forgive the entire amount if the person stays employed for a particular term—such as five years.  Sometimes the game plan is not in writing, and is left to “wink wink, nudge nudge” in terms of the likelihood that the loan will be forgiven if the person stays employed that length of time.

These arrangements are not in any way “illegal,” but as Robert and Elizabeth Brooks learned in the United States Tax Court this year, in TC Memo 2012-25, there are some significant tax problems that could arise from this arrangement.

At the outset, there is a question about whether the arrangement is really a “loan” when there is an intent to forgive in the first place.  A loan is a transaction where one person borrows money from the other, with the agreement that it will be repaid, and the lender expects repayment.  They are easily reduced to writing, bear interest, and are treated as loans by both parties.  Those facts alone, however, will not necessarily make the transaction a loan.

As Judge Mark Holmes pointed out in the Brooks case, such advances have in various contexts been treated as income at the outset because the Court concluded that the intent of the transaction was not a loan, but rather an attempt to induce the person to provide personal services, and the obligation to repay was conditional—only if the applicant quits or was fired for cause within five years.  In that situation, the “loan” could be treated as income in the year it is advanced.

In the case of Mr. and Mrs. Brooks, the Court was confronted with the tax year in which the loan was actually forgiven, and Judge Holmes noted that the Internal Revenue Code normally treats forgiveness of debt as income, since the borrower who does not have to pay it back has received an economic benefit.  This discharge of indebtedness income includes both the forgiven loan principal and the accrued interest.

In these situations, the old adage that “If it looks too good to be true, it probably is,” isn’t necessarily the point.  Rather, before one enters into a transaction like this, it is critical that the prospective employee pin down as closely as possible what the real intentions are, and then review them with a tax adviser.  A lot of trouble can be avoided if these steps are taken at the outset, rather than after the IRS comes in and questions the transaction.

On February 14, the Financial Crimes Enforcement Network (FINCEN) issued Notice 2012-1, which extends the 2011 and 2012 FBAR filing deadline for certain individuals to June 30, 2013.  The notice extends relief previously granted by FINCEN to employees and officers with signature authority over bank accounts owned by subsidiaries of certain regulated entities (e.g., banks, commodity traders, and investment advisors).  See Notice 2012-1; Notice 2011-1; Notice 2011-2; 31 C.F.R. § 1010.350(f)(2).

For those keeping score, the government has tinkered with the FBAR filing requirements and deadlines at least seven times in the last three years, each time for different categories of FBAR filers, and each time instituting a different filing deadline.  A quick review: Prior to 2008, the FBAR filing requirements were only described thoroughly in the instructions to the FBAR form itself.  As a result, many persons obligated to file FBARs simply did not know of this obscure requirement.  In 2008, the IRS announced that it intended to enforce the FBAR fling requirement more vigorously.  However, given the obscure and ambiguous “signature authority” and “commingled fund” definitions in the FBAR instructions, filers remained confused even after the IRS publicized more vigorous enforcement.  Recognizing the ambiguity, the IRS began issuing notices that eliminated or suspended the filing requirements for certain filers for various amounts of time.  See Notice 2009-62, Notice 2010-23.  These notices targeted limited categories of filers, but separately, as part of OVDI, the IRS announced that all filers who failed to file earlier FBARs could file without penalty, provided that they owed no income tax.  Then, the IRS pushed back that deadline after Hurricane Irene.

Meanwhile, also recognizing the ambiguity in the FBAR instructions, FINCEN promulgated final regulations in February 2011 intended to refine the filing requirements.  See 31 C.F.R. § 1010.350.  However, according to FINCEN, the final regulations created further confusion, leading to two more deadline-suspending notices in 2011 and the above-mentioned notice on February 14 of this year.  According to FINCEN, it continues to issue these sporadic notices to address constant questions it receives regarding the signature authority FBAR filing requirement.

These constantly changing and inconsistent rules cause more confusion than comfort.  Anecdotally, we’ve received calls from FBAR filers who learn of a given IRS or FINCEN notice that promises relief, but the filers do not always grasp the limited nature of a given notice.  For instance, whereas the IRS granted all categories of FBAR filers clemency as part of OVDI, only signature authority-based filers fitting in narrow categories qualify for relief beyond that year under FINCEN’s notices .  If all the rules and deadlines were set forth in one place, a filer may be able to sensibly work through them.  But the current jumble of forms, instructions, notices and regulations leaves filers flailing to grasp the rules.

What’s the solution?  FINCEN cannot realistically amend the regulations every time a question arises.  But, it should weigh the benefits of imposing an FBAR requirement on a given category of filer against the burdens placed on those persons, as well as the likelihood that such a filer would suspect intuitively that they have control over a foreign bank account and the likelihood that such a filer realistically has sufficient control over a given bank account to launder money through it.  To begin with, it seems that most questions surround the signature authority filing requirement.  As such, FINCEN should take a hard look at whether this requirement makes sense.  Then, issue and publicize clear rules – and stick to them.