Wednesday, November 30, 2011

Settlement as wages

LAFA 20114704F






UIL No. Can the penalty portion of a settlement allocation pursuant to a class action lawsuit against [Redacted Text], be converted to wages?



FULL TEXT:

Release Number: 20114704F



Release Date: 11/25/2011



CC:TEGE:FS:GCDAL:JHFetter



POSTF-149214-09



date: January 6, 2010



to:



LMSB Team 1167



7850 S.W. 6th Court



Room 355,



Plantation, FL 33324



from: Jeremy H. Fetter



General Attorney



(Tax Exempt & Government Entities)



subject

issue:

Can the penalty portion of a settlement allocation pursuant to a class action lawsuit against [Redacted Text], be converted to wages?



This advice constitutes return information subject to I.R.C. § 6103. This advice contains confidential information subject to attorney-client and deliberative process privileges and if prepared in contemplation of litigation, subject to the attorney work product privilege. Accordingly, the recipient of this document may provide it only to those persons whose official tax administration duties with respect to this case require such disclosure. In no event may this document be provided to Examination, Appeals, or other persons beyond those specifically indicated in this statement. This advice may not be disclosed to taxpayers or their representatives.



This advice is not binding on the TEGE Division and is not a final case determination. Such advice is advisory and does not resolve the Service's position on an issue or provide the basis for closing a case. The determination of the Service in the case is to be made through the exercise of the independent judgment of the office with jurisdiction over the case.



This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse affect on privileges, such as the attorney-client privilege. If disclosure becomes necessary, please contact this office for our views.



ISSUE

1. Whether the Internal Revenue Service (IRS) is bound by the settlement allocation of payment per the class action lawsuits involving [Redacted Text]?



2. If the IRS is not bound by the settlement allocation, can it convert penalty payments to wages, thus subject to employment taxes?



CONCLUSION

1. Based upon the facts provided, the IRS is not bound by the settlement allocation of payment per the class action lawsuits involving [Redacted Text]



2. Based upon the facts provided, the IRS can likely convert both portions of settlement allocated penalty payments and interest payments to wages per the class action lawsuits involving [Redacted Text]



FACTS

[Redacted Text][Redacted Text] is a large company-owned and operated [Redacted Text]company with approximately $[Redacted Text] in sales and through subsidiaries, employs approximately [Redacted Text]employees. [Redacted Text] is headquartered in [Redacted Text], and the company's owned and operate [Redacted Text]chains include [Redacted Text][Redacted Text][Redacted Text][Redacted Text] [Redacted Text]and [Redacted Text]. [Redacted Text] is a Compliance Assurance Process (CAP) taxpayer for the fiscal years ending [Redacted Text], [Redacted Text], and [Redacted Text].



The lawsuits that resulted in the settlement agreements in question in this case were filed in [Redacted Text] of [Redacted Text]. The underlying disputes were between [Redacted Text] Managers (excluding general managers) and [Redacted Text], and between [Redacted Text] Managers, [Redacted Text]Managers, and [Redacted Text] Managers and [Redacted Text]. Neither the Revenue Agent's Report (RAR) nor the administrative file contained much information regarding these lawsuits. Therefore the facts regarding the cases were gleaned from the settlement agreements provided by the taxpayer. The claims made by the managers included the following: (1) recovery of [Redacted Text] pursuant to [Redacted Text][Redacted Text]; (2) restitution of [Redacted Text] under [Redacted Text][Redacted Text] [Redacted Text]; (3) [Redacted Text] penalties under [Redacted Text][Redacted Text]; (4) penalties for failure to provide [Redacted Text][Redacted Text][Redacted Text]pursuant to [Redacted Text][Redacted Text]; (5) penalties for alleged failure to provide [Redacted Text] under [Redacted Text][Redacted Text][Redacted Text]; and (6) attorneys fees and costs. In [Redacted Text] of [Redacted Text], the parties met with a well-known wage and hour class action mediator and the settlement agreements in question were the result of that mediation.



There are two settlement agreements involved in this case; one between managers and [Redacted Text][Redacted Text] and one between managers and [Redacted Text]. Both of the settlement agreements specify that neither [Redacted Text] nor [Redacted Text] admit to any wrongdoing by entering into the agreements. The agreements provide for a claims process requiring payment of settlement awards on a claims-made basis according to a specified formula on each timely and valid claim submitted. Each of the settlement agreements allocated the settlement awards as follows: allocated to alleged unpaid wages for which IRS Forms W-2 will issue; [Redacted Text] allocated to interest for which IRS Forms 1099 will issue; and [Redacted Text]allocated to alleged civil penalties for which IRS Forms 1099 will issue. The methodology for determining the [Redacted Text] allocations was not given anywhere in the settlement agreements.



The Revenue Agent sent Form 4564 Information Document Request (IDR) on [Redacted Text], requesting information pertaining to any payments to settle claims or suits filed against [Redacted Text] during the calendar years ending [Redacted Text] and [Redacted Text]. The taxpayer provided a limited response to the IDR on [Redacted Text], consisting of a one page spreadsheet titled “Settlement Summary” and copies of selected settlement agreements.



A second IDR was issued on [Redacted Text], requesting additional documentation pertaining to the settlement agreements accompanying case number [Redacted Text]. The taxpayer responded to the second IDR on [Redacted Text], and provided its settlement fund's EIN, copies of the payment checks reflecting the gross amount received into wages, copies of W-2s and Form 1099s that were issued, and a summary of settlement payment allocations and applicable tax withholdings. The taxpayer supplemented its response on [Redacted Text], by sending a reconciliation of payments made pursuant to the settlement agreements and the 1096 and W-3 that were provided to the taxpayer by its Internal Dispute Resolution Department.



Legal Analysis

1. Based upon the facts provided, the IRS is not bound by the settlement allocation of payment per the class action lawsuits involving [Redacted Text]



A. Authorities



The Service is not bound by the allocations contained in settlement agreements to which it was not a party. See Robinson v. Commissioner, 102 T.C. 116 (1994), rev'd in part on other grounds, 70 F.3d 34 (5 th Cir. 1995), cert. denied 519 U.S. 824 (1996). The allocation among the various claims of the settlement can be challenged where the facts and circumstances indicate that the allocation does not reflect the economic substance of the settlement. See Phoenix Coal Company, Inc. v. Commissioner, 231 F.2d 420 (2 nd Cir. 1956). The characterization of settlement proceeds cannot depend entirely on the intent of the parties. See Hemelt v. U.S., 122 F.3d 204 (4 th Cir. 1997).



In the event of a lump sum payment, the Service will allocate the payment using the best evidence available. The evidence may consist of the taxpayer's complaint requesting reasonable amounts of damages for each claim. Rev. Rul. 75-230, 1975-1 C.B. 93 and Rev. Rul. 85-98, 1985-2 C.B. 51 superseding Rev. Rul. 58-418, 1958-2 C.B. 18.



B. Application to the Taxpayer



In this instance, the settlement amounts paid by [Redacted Text] were not in a lump sum, but rather were allocated in [Redacted Text] to unpaid wages, interest and civil penalties. As mentioned above, allocations may be challenged where the facts and circumstances indicate that the allocation does not reflect the economic substance of the settlement. The fact that each of the settlement agreements allocates the amounts in even [Redacted Text]seems arbitrary, and nothing in the settlement agreements states how the allocated amounts were determined. Each of the individual plaintiffs [Redacted Text] who had brought suit in their respective cases sought penalties under the [Redacted Text]Code as part of their causes of action. Both the interest amount and the penalty amount should be a percentage of the total amount of the back pay awarded for the overtime that was unpaid. The current allocation of [Redacted Text] to each category essentially says that the interest and penalty amounts equal [Redacted Text]% of the amount of those unpaid wages.



It is likely that a portion of the settlement amount may be allocated to both interest and civil penalties. However, the current allocations, which also [Redacted Text]the amount allocated to wages, cannot be accurate. The taxpayer should show what rate is being used to calculate the total interest amount and the corresponding allocation should be based on that computation. Each of the penalties imposed under the [Redacted Text] Code are based upon the amount of days or hours worked by the employee. If in fact, the civil penalty allocation in the settlement agreement is meant to represent amounts that would have been awarded under the [Redacted Text] Code sections, the taxpayer should show how the allocation amount was calculated. The data provided by the taxpayer does not supply that information with respect to the individual class members who received settlement payments. The penalties contained in the state [Redacted Text] code sections do not provide for a [Redacted Text]% penalty when compared to the unpaid wages, therefore the current allocation is not correct. Therefore, we find that the IRS is not bound by allocation payments made pursuant to a settlement agreement and, based on the facts presented in the current case it is likely that the court would support a reallocation of the settlement payment amounts for both interest and civil penalties.



2. Based upon the facts provided, the IRS can likely convert both portions of settlement allocated penalty payments and interest payments to wages per the class action lawsuits involving [Redacted Text]



A. Authorities



Settlement payments may be wages subject to employment taxes. If settlement payments are considered wages, applicable federal employment taxes are imposed and are required to be withheld. I.R.C. § 3402(a)(1). The employment taxes that may apply include FICA, income tax withholding and FUTA. FICA taxes, income tax withholding and FUTA taxes are imposed on “wages” as defined in the Internal Revenue Code (the “Code”). For income tax withholding purposes, “wages” is broadly defined as “all remuneration for services performed by an employee for his employer,” with specific exceptions. I.R.C. § 3401(a). Sections 3121(a) and 3306(b) of the Federal Insurance Contributions Act and Federal Unemployment Tax Act, respectively, define the term “wages”, with certain exceptions not material here, as “all remuneration for employment”.



Remuneration for employment, unless such remuneration is otherwise excluded, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them. Treas. Reg. § 31.3121(a)-1(i). The Supreme Court has made plain that the term “remuneration for employment” is not limited to payments made for work actually performed but includes the entire employer-employee relationship for which compensation is paid by the employer to the employee. Social Security Board v. Nierotko, 327 U.S. 358, 365-266 (1946).



Whether an amount received in settlement of a dispute is remuneration for employment and subject to employment tax depends on the nature of the item for which the settlement amount is a substitute. See Alexander v. Internal Revenue Service, 72 F.3d 938, 942 (1 st Cir. 1995) (the test for purposes of determining the character of a settlement payment for tax purposes “is not whether the action was one in tort or contract but rather the question to be asked is 'in lieu of what are the damages awarded?'”).



Rev. Rul. 72-268, 1972-1 C.B. 313, concluded that certain amounts of unpaid minimum wages and unpaid overtime compensation restored by a company to its employees were considered wages, but that the liquidated damages paid were not wages, as they represented an additional penalty. The Service concluded that, because the liquidated damages were required as a penalty for failure to comply with the law, they could not be categorized as wages. The provisions of Rev. Rul. 72-268 have been found not to apply when the taxpayer failed to show the extent to which such allocation to liquidated damages would apply. See 1996 FSA LEXIS 244. Thus, in the referenced Field Service Advice Memoranda, the Service refused to conclude that a portion of the settlement was entitled to non-wage treatment.



B. Application to the Taxpayer



The settlement allocation payments allocated to civil penalties in this case included [Redacted Text] of the total amount. Whether a settlement amount is remuneration for employment and subject to employment tax depends on the nature of the item for which the settlement amount is a substitute. The amount allocated to civil penalties was likely in lieu of the penalties that would have been imposed due to the violation of [Redacted Text][Redacted Text][Redacted Text][Redacted Text][Redacted Text] and [Redacted Text] Violation by [Redacted Text] of these various state code sections was alleged in the various claims by the [Redacted Text] managers included in the class action suit.



We find that the penalties encapsulated in the violation of the various [Redacted Text] Code sections may fall under the category of liquidated or punitive damages, as applied in Rev. Rul. 72-268. The ruling found that, where amounts were required as a penalty for failure to comply with the law, they could not be categorized as wages. In the present situation, the civil penalty amounts may have been imposed based on the violation of [Redacted Text] Code sections and, therefore, may not be wholly reallocated to wages. Additionally, the settlement agreements were not silent on the amount of the total award that was allocated to the civil penalties, instead stating that a third of the total settlement amount was allocated to that category. As such, the facts of 1996 FSA LEXIS 244 are not directly on point with the facts in the present case.



However, as mentioned in the prior section regarding whether the IRS is bound by settlement allocations, we believe that the [Redacted Text] amount of the settlement payment allocated to civil penalties was not the proper amount. Any portion of that allocation that the taxpayer can show directly corresponded with penalty amounts under the [Redacted Text] Code should be respected as a proper allocation. The [Redacted Text]code provisions do not provide for what appears to be a [Redacted Text]% penalty calculation in relation to the amount of back wages awarded. As such, the amount of the [Redacted Text] allocation to civil penalties that the taxpayer cannot substantiate could likely be converted to wages, and thus subject to employment taxes. Additionally, while settlement amounts properly allocated to interest cannot be converted to wages, we do not believe that the current allocation of [Redacted Text] to interest is correct. As previously mentioned, the interest amount should be a percentage of the total amount of unpaid wages that are being awarded. Any portion of the [Redacted Text]amount that cannot be shown to be properly allocated to interest should also be reallocated to wages, along with the correct portion of the amount allocated to civil penalties.



In summary and based on the facts provided, we find that the IRS is not bound by the settlement allocation payments made by [Redacted Text] pursuant to the settlement agreements made with managers of [Redacted Text] and [Redacted Text]. Additionally, the allocations that are properly shown to result from civil penalties under the [Redacted Text] Code sections may not be reallocated to wages if determined to be liquidated damages, but the remaining amount of the [Redacted Text] allocation likely could be reallocated to wages, and thus subject to employment taxes.



Please contact the undersigned at [Redacted Text] if you have any further questions.



SHELLEY TURNER VAN DORAN



Area Counsel



(Tax Exempt & Government Entities: Field Service)



By: _____________________________



Jeremy H. Fetter



General Attorney



(Tax Exempt & Government Entities)

LIFO International

LAFA 20114702F






UIL No. 472.05-00LIFO conformity violation



FULL TEXT:

Release Number: 20114702F



Release Date: 11/25/2011



CC:LB&I:HMT:DET:EREdberg



POSTS-104573-11



UILC: 472.05-00



date: May 13, 2011



to: David W. Bulger, Inventory Technical Advisor



(Large Business & International)



Rodney K. Kelley, Revenue Agent



(Large Business & International)



from: Elizabeth R. Edberg



Attorney (Detroit)



(Large Business & International)



subject:

LIFO conformity violation



This memorandum responds to your request for assistance. This advice may not be used or cited as precedent.



LEGEND:

Date 1 =



Date 2 =



Foreign Parent =



Taxpayer =



ABC =



ABC Consolidated Group =



Tax Year 1 =



ISSUES

Does the Taxpayer have a LIFO conformity violation related to its provision of financial statements prepared using IFRS to its lending bank?



CONCLUSIONS

The provision of financial statements prepared using IFRS to the lending bank violated the LIFO conformity requirements.



FACTS

Background

On Date 1, the Taxpayer became a wholly-owned subsidiary of ABC and a member of the ABC Consolidated Group. The ABC Consolidated Group filed a consolidated federal tax return for Tax Year 1.



ABC is wholly-owned by Foreign Parent, a foreign entity. Foreign Parent reported its worldwide consolidated financial statements using the International Financial Reporting Standards (“IFRS”) for Tax Year 1. Foreign Parent required the Taxpayer to adopt the IFRS standards to facilitate the process of preparing these worldwide consolidated financial statements. Therefore, the Taxpayer adopted IFRS for the first time for Tax Year 1. This marked the first year that the Taxpayer issued any IFRS based financial statements. Prior to the adoption of IFRS, the Taxpayer used U.S. GAAP as its accounting standard.



The last-in, first-out (“LIFO”) inventory method is not an allowable method under IFRS. The Taxpayer has used the LIFO inventory method for accounting for a portion of its inventory since Date 2 for both tax and financial reporting purposes. The Taxpayer continued to use the LIFO inventory method for Tax Year 1.



The Taxpayer provided financial statements to its foreign parent based upon IFRS standards for Tax Year 1. Thes e financial statements included a balance sheet and income statement based upon IFRS standards. The Taxpayer also provided the IFRS-only balance sheet and income statement to its lending bank.



Along with the IFRS-only balance sheet and income statement, the Taxpayer provided its lending bank with tabulated versions of its balance sheet and income statement whereby each was presented on an IFRS and U.S. GAAP standard. Specifically, the tabulated financial statements made adjustments (including LIFO adjustments) to the IFRS column to arrive at U.S. GAAP. The IFRS version of the profit/income of the Taxpayer was based on a method that did not include LIFO principles in inventorying goods. The Taxpayer did not make a distinction between primary or supplemental information within these financial statements related to the change from IFRS to U.S. GAAP reporting standards; nor did it include explanatory footnotes regarding the change. The Taxpayer provided these financial statements to the lending bank in accordance with lending requirements imposed by the bank related to a letter of credit.



LAW AND ANALYSIS

Applicable Law

Internal Revenue Code section 472(c) provides that a taxpayer who elects to use the LIFO inventory method for federal income tax purposes must establish to the satisfaction of the Secretary that it has used no method other than LIFO in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which LIFO is to be used, for the purpose of a report or statement covering such taxable year to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes.



Section 472(e)(2) imposes a requirement similar to that contained in section 472(c) for taxable years subsequent to the year of the LIFO election and provides that the taxpayer may be required to discontinue the use of the LIFO inventory method if this requirement is violated.



Section 472(g) provides that all members of the same group of financially related corporations shall be treated as one taxpayer for purposes of the LIFO conformity requirements contained in subsections (c) and (e)(2). The term “group of financially related corporations” means any affiliated group as defined in section 1504(a), determined by substituting “50 percent” for “80 percent” each place it appears and without regard to section 1504(b), and any other group of corporations that consolidate or combine for purposes of financial statements.



Treasury Regulation section 1.472-2(e)(1) provides, in part:



The taxpayer must establish to the satisfaction of the Commissioner that the taxpayer, in ascertaining the income, profit, or loss for the taxable year for which the LIFO inventory method is first used, or for any subsequent taxable years, for credit purposes or for purposes of reports to shareholders, partners, or other proprietors, or to beneficiaries, has not used any inventory method other than that referred to in § 1.472-1 or at variance with the requirements of § 1.472-2(c).

Section 1.472-2(e)(1)(i) provides that the taxpayer's “use of an inventory method other than LIFO for purposes of ascertaining information reported as a supplement to or explanation of the taxpayer's primary presentation of the taxpayer's income, profit, or loss, for a taxable year in credit statements or financial reports” is not considered at variance with the requirements § 1.472-2(e)(1).



Section 1.472-2(e)(1)(ii) provides that the “use of an inventory method other than LIFO to ascertain the value of the taxpayer's inventory of goods on hand for purposes of reporting the value of such inventories as assets” is not considered at variance with the requirements of § 1.472-2(e)(1). Section 1.472-2(e)(1)(iii) provides that the taxpayer's “use of an inventory method other than LIFO for purposes of ascertaining information reported in internal management reports” is not considered at variance with the requirements § 1.472-2(e)(1).



Section 1.472-2(e)(4) provides:



Under paragraph (e)(1)(ii) of this section, the use of an inventory method other than LIFO to ascertain the value of the taxpayer's inventories for purposes of reporting the value of the inventories as assets is not considered the ascertainment of income, profit, or loss and therefore is not considered at variance with the requirement of paragraph (e)(1) of this section. Therefore, a taxpayer may disclose the value of inventories on a balance sheet using a method other than LIFO to identify the inventories, and such a disclosure will not be considered at variance with the requirement of paragraph (e)(1) of this section. However, the disclosure of income, profit, or loss for a taxable year on a balance sheet issued to creditors, shareholders, partners, other proprietors, or beneficiaries is considered at variance with the requirement of paragraph (e)(1) of this section if such income information is ascertained using an inventory method other than LIFO and such income information is for a taxable year for which the LIFO method is used for Federal income tax purposes. Therefore, a balance sheet that discloses the net worth of a taxpayer, determined as if income had been ascertained using an inventory method other than LIFO, may be at variance with the requirement of paragraph (e)(1) of this section if the disclosure of net worth is made in a manner that also discloses income, profit, or loss for a taxable year. However, a disclosure of income, profit, or loss using an inventory method other than LIFO is not considered at variance with the requirement of paragraph (e)(1) of this section if the disclosure is made in the form of either a footnote to the balance sheet or a parenthetical disclosure on the face of the balance sheet. In addition, an income disclosure is not considered at variance with the requirement of paragraph (e)(1) of this section if the disclosure is made on the face of a supplemental balance sheet labelled as a supplement to the taxpayer's primary presentation of financial position, but only if, consistent with the rules of paragraph (e)(3) of this section, such a disclosure is clearly identified as a supplement to or explanation of the taxpayer's primary presentation of financial income as reported on the face of the taxpayer's income statement.

Section 1.472-2(e)(3) provides specific rules related to the exception of the conformity requirement for supplemental or explanatory information.



Section 1.472-2(e)(3)(i) provides:



Information reported on the face of a taxpayer's financial income statement for a taxable year is not considered a supplement to or explanation of the taxpayer's primary presentation of the taxpayer's income, profit, or loss for the taxable year in credit statements or financial reports. For purposes of paragraph (e)(3) of this section, the face of an income statement does not include notes to the income statement presented on the same page as the income statement, but only if all notes to the financial income statement are presented together.

Section 1.472-2(e)(3)(ii) provides, in part:



Information reported in notes to a taxpayer's financial income statement is considered a supplement to or explanation of the taxpayer's primary presentation of income, profit, or loss for the period covered by the income statement if all notes to the financial income statement are presented together and if they accompany the income statement in a single report.

Section 1.472-2(e)(3)(iii) provides:



Information reported in an appendix or supplement to a taxpayer's financial income statement is considered a supplement to or explanation of the taxpayer's primary presentation of income, profit, or loss for the period covered by the income statement if the appendix or supplement accompanies the income statement in a single report and the information reported in the appendix or supplement is clearly identified as a supplement to or explanation of the taxpayer's primary presentation of income, profit, or loss as reported on the face of the taxpayer's income statement... For purposes of paragraph (e)(3)(iii) of this section, information is considered to be clearly identified as a supplement to or explanation of the taxpayer's primary presentation of income, profit, or loss as reported on the face of the taxpayer's income statement if the information either—

(A) Is reported in an appendix or supplement that contains a general statement identifying all such supplemental or explanatory information;

(B) Is identified specifically as supplemental or explanatory by a statement immediately preceding or following the disclosure of the information;

(C) Is disclosed in the context of making a comparison to corresponding information disclosed both on the face of the taxpayer's income statement and in the supplement or appendix; or

(D) Is a disclosure of the effect on an item reported on the face of the taxpayer's income statement of having used the LIFO method.

For example, a restatement of cost of goods sold based on an inventory method other than LIFO is considered to be clearly identified as supplemental or explanatory information if the supplement or appendix containing the restatement contains a general statement that all information based on such inventory method is reported in the appendix or supplement as a supplement to or explanation of the taxpayer's primary presentation of income, profit, or loss as reported on the face of the taxpayer's income statement.

Section 1.472-2(e)(5), which is supposed to provide specific rules related to the exception of the conformity requirement for internal management reports, has been reserved.



Analysis

Because the Taxpayer elected the LIFO method of accounting for federal income tax purposes, it is subject to the LIFO conformity requirements. See I.R.C. § 472(c), (e)(2); Treas. Reg. § 1.472-2(e)(1).



With respect to the financial statements provided to its lending bank, the Taxpayer violated the LIFO conformity requirements if (1) it used an inventory method other than LIFO to ascertain its income, profit or loss in the financial statements; (2) the financial statements were “for credit purposes“; and (3) the financial statements are not within any of the exceptions to the LIFO conformity requirements.



The Taxpayer provided the same IFRS-only balance sheet and income statement provided to the foreign parent to the lending bank. It also provided tabulated versions of these documents that adjusted the IFRS amounts to arrive at U.S. GAAP amounts.



Both the balance sheets and income statements involve the ascertainment of items of income, profit, or loss. The balance sheets do not fall within the exception under , Treasury Regulation section 1.472-2(e)(1)(ii), (4), which provides valuing inventory as an asset is not an ascertainment of income, profit, or loss, as the Taxpayer also used IFRS to ascertain retained earnings and net income on the balance sheets. The income statements by their nature involve the ascertainment of income, profit, or loss.



There is no question the IFRS-only versions used a method other than LIFO to ascertain income, profit, or loss, as IFRS is a non-LIFO method and was the only method used. Arguably, the tabulated versions of the financial statements provided to the lending bank comply with the LIFO conformity requirements as they used U.S. GAAP to determine income, profit, and loss. However, they also used IFRS. The LIFO conformity requirements do not merely require the use of a LIFO inventory method; they require that no method other than LIFO be used. See I.R.C. § 472(c), (e)(2); Treas. Reg. § 1.472-2(e)(1).



The financial statements were issued to the Taxpayer's lending bank in accordance with lending requirements related to a letter of credit. Thus, there was a debtor-creditor relationship between the Taxpayer and the lending bank and the financial statements were provided pursuant to this debtor-creditor relationship. The Taxpayer's continued receipt of credit was dependent upon the provision of such financial statements. Therefore, the financial statements were “for credit purposes.”



It could be argued that the use of IFRS was for purposes of supplementing or explaining the Taxpayer's primary U.S. GAAP position and, thus, the tabulated financial statements meet the exception for supplemental or explanatory information. See Treas. Reg. § 1.472-2(e)(1)(i). However, the provision of information using IFRS was not presented as either supplemental or explanatory.



With respect to the tabulated balance sheet, the disclosure of income, profit, and loss using IFRS was not made in the form of a footnote to the balance sheet or a parenthetical disclosure on the face of the balance sheet. See Treas. Reg. § 1.472-2(e)(4). Even if the disclosure qualified as a parenthetical, despite the lack of parentheses, or other punctuation or formatting to indicate the IFRS information is an aside, there is still the problem of the tabulated income statement. Section 1.472-2(e)(3)(i) clearly provides that “[i]nformation reported on the face of a taxpayer's financial income statement for a taxable year is not considered a supplement to or explanation of the taxpayer's primary presentation of the taxpayer's income, profit, or loss.” The IFRS information was reported on the face of the income statement and not as part of a note to the income statement. See Treas. Reg. § 1.472-2(e)(3).



Moreover, even if the tabulated financial statements conformed to the requirements of section 472(e) and the regulations thereunder, the Taxpayer also provided the lending bank with the same balance sheet and income statement it provided to the Foreign Parent. These documents were prepared based solely on IFRS. These documents were not identified as supplemental, explanatory, or appendixes. For instance, the balance sheet was not clearly identified as a supplement to or explanation of the taxpayer's primary presentation. See Treas. Reg. § 1.472-2(e)(4). Similarly, the income statement was not marked as an appendix or otherwise clearly identified as a supplement to or explanation of the taxpayer's primary position. See Treas. Reg. §1.472-2(e)(3)(iii).



Therefore, these documents do not meet the exception for supplemental or explanatory information, and no other exception applies. The issuance of these financial statements to the lending bank violated the LIFO conformity requirements.



CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.



Please call (313) 237-6440 if you have any further questions.



ERIC R. SKINNER



Associate Area Counsel



(Large Business & International)



By: Elizabeth R. Edberg



Elizabeth R. Edberg



Attorney (Detroit)



(Large Business & International)

Examination NOL

LAFA 20114701F






UIL No. 7605.01-00Examination of previously examined year in connection with net operating loss carryback



FULL TEXT:

Release Number: 20114701F



Release Date: 11/25/2011



CC:LB&I:HMT:DET:EREdberg



POSTF-111438-11



UILC: 7605.01-00



date:



May 12, 2011



to: Sandy Gordon



Revenue Agent



(Large Business & International)



from: Eric R. Skinner



Associate Area Counsel (Detroit)



(Large Business & International)



subject:

Examination of previously examined year in connection with net operating loss carryback



This memorandum responds to your request for assistance. This advice may not be used or cited as precedent.



LEGEND:

$X =



$Y =



Tax Year 1 =



Taxpayer =



ISSUES

Whether the IRS's examination of a previously audited year in connection with a claim for refund is a violation of the prohibition in section 7605(b) against unnecessary examinations or inspections, and more than one inspection of the taxpayer's books of account.



CONCLUSIONS

The re-examination of a previously audited year in connection with a claim for refund is not a second inspection for purposes of section 7605(b).



FACTS

On its tax return for Tax Year 1, the Taxpayer deducted a bad debt loss of $X. The IRS audited Tax Year 1, including the issue of the bad debt loss. During the audit, the Taxpayer argued the loss should have been deducted as a worthless stock loss rather than a bad debt loss. The Revenue Agent allowed the loss, concluding the loss would either be deductible as a bad debt or worthless stock loss. 1 The statute of limitations for assessment under I.R.C. § 6501 has expired for Tax Year 1.



In a later year, the Taxpayer filed a Form 1139, Corporation Application for a Tentative Refund, for a net operating loss (“NOL”) carryback to Tax Year 1, which results in a refund of approximately $Y. The audit team considering the Taxpayer's claim for refund is examining Tax Year 1 in connection with this claim. After further consideration, it appears the loss of $X claimed for Tax Year 1 is not allowable as either a bad debt or worthless stock loss. The IRS's disallowance will be limited to the amount of the NOL carryback. The IRS will not assess additional tax for that year.



The Taxpayer objects to the examination of the bad debt/worthless stock issue as a reopening of a closed year under Internal Revenue Code section 7605(b). The Taxpayer also cites Internal Revenue Manual (“IRM”) section 4.11.11.12(5) Example 1 for the proposition the IRS cannot raise this issue. The audit team issued Information Document Requests to the Taxpayer regarding this issue. The Taxpayer responded to these requests, but continues to object to the examination of this issue.



LAW AND ANALYSIS

I.R.C. § 7605(b) provides that “[n]o taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.”



Section 7605(b) first appeared as section 1309 of the Revenue Act of 1921.42 Stat. 310. Congress enacted the section in response to taxpayer complaints that revenue agents were subjecting them to onerous and unnecessarily frequent examinations and investigations. See H.R. Rep. No. 67-350 at 16 (1921). The purpose of the section is to relieve taxpayers from unnecessary annoyance.61 Cong. Rec. 5855 (Statement of Sen. Penrose) (1921). However, “Congress did not intend for section 7605(b) to be a severe restriction on the Commissioner's powers in monitoring and enforcing the Code.” Law Offices-Richard Ashare, P.C. v. Commissioner, T.C. Memo 1999-282, at 6; see United States v. Powell, 379 U.S. 48, 54-55 (1964).



Rev. Proc. 2005-32, 2005-1 C.B. 1206, § 4.02 provides that “[a] reopening of a closed case involves an examination of a taxpayer's liability that may result in an adjustment to liability unfavorable to the taxpayer for the same taxable period as the closed case, with exceptions, some of which are noted below. The Service's review, including an inspection of books of account, of a taxpayer's claim for a refund on an amended excise or income tax return, as well as the Service's review of a Form 843, Claim for Refund and Request for Abatement, claiming a refund for an overpayment reported on a return, is not a reopening.”



Section 5 of Rev. Proc. 2005-32 sets forth IRS procedures for reopening closed cases. “The Service will not reopen a case closed after examination to make an adjustment unfavorable to the taxpayer unless: (1) there is evidence of fraud, collusion, concealment, or misrepresentation of material fact; (2) the closed case involved a clearly-defined, substantial error based on an established Service position existing at the time of the examination; or (3) other circumstances exist indicating that a failure to reopen the case would be a serious administrative omission.”



In applying the procedures set forth in Rev. Proc. 2005-32, we see no reason to distinguish the facts of this case from those set forth in § 4.02 of the revenue procedure, because a taxpayer's claim for refund requires that the Service review the affected tax years whether the taxpayer files the claim through a Form 843, an amended tax return, or another means (here, a Form 1139). As such, the Service's examination of Tax Year 1 in connection with Taxpayer's claim for refund is not a reopening of a closed case under IRS procedures.



Even if the examination were considered a reopening of a closed case under IRS procedures, section 7605(b) does not prohibit a second examination. Section 7605(b) prohibits unnecessary examination or investigations and requires that the taxpayer be notified in writing if an additional examination is necessary. The reopening would arguably be attributable to clearly-defined, substantial error based on an established Service position existing at the time of the examination or necessary in order to avoid a serious administrative omission. “Substantial” refers to the dollar amount of the tax that would not be assessed if the case were not returned. IRM 4.8.2.8.1.1. Reopening because of a “serious administrative omission” covers situations in which a failure to reopen could:(1) result in serious criticism of the Service's administration of the tax laws; (2) establish a precedent that would seri ously hamper subsequent attempts by the Service to take corrective action; (3) result in inconsistent treatment of similarly situated taxpayers who have relatively free access to knowledge as to how the Service treated items on other taxpayers' returns. IRM 4.8.2.8.1.3.



Further, even if the Service did not follow Rev. Proc. 2005-32, it would not lend validity to the Taxpayer's claim for refund. Procedural rules are merely directory, not mandatory. Hawkins v. Commissioner, T.C. Memo. 2005-149, at 4.



In Lewis v. Reynolds, 284 U.S. 281 (1932), modified on other grounds, 284 U.S. 599 (1932), the Supreme Court upheld the Commissioner's denial of a claim for refund when, upon re-examination of the previously audited return, the Commissioner determined a previously allowed deduction for attorney's fees was improper and there was an additional tax due greater than the tax paid. The additional tax was barred from assessment by the statute of limitations. The Supreme Court concluded that the Commissioner's actions were proper, stating:



While the statutes authorizing refunds do not specifically empower the Commissioner to reaudit a return whenever repayment is claimed, authority therefor is necessarily implied. An overpayment must appear before refund is authorized. Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded.

Lewis v. Reynolds, 284 U.S. at 283.



Moreover, the Supreme Court has recognized the IRS may reconsider the entire return, even to the extent of disallowing any deductions erroneously previously allowed, in connection with a claim for refund. See Lewis v. Reynolds, 284 U.S. at 283. Similarly, the Tax Court has held that a reexamination in connection with a claim for refund is not of the nature to which section 7605(b) applies. See Service Elec. Co., Inc. v. Commissioner, T.C. Memo. 1965-176.



In Service Elec. Co., Inc. v. Commissioner, T.C. Memo. 1965-176, the Tax Court held that section 7605(b) does not apply to an investigation in connection with a claim for refund. The court stated: “There was no second investigation of the books of Service Electric in the instant case except in connection with a claim for refund based on a tentatively allowed carryback with deficiencies being determined only of the amounts previously tentatively allowed as a refund. Such an investigation is not of the nature to which section 7605(b) of the Internal Revenue Code of 1954 has reference.”



This is not a case where the IRS is subjecting the Taxpayer to onerous and unnecessarily frequent examinations and investigations. See H.R. Rep. No. 67-350 at 16 (1921). The reexamination of Tax Year 1 is not a unilateral action on the part of the IRS, but in response to the Taxpayer's election to carry back net operating losses and claim a refund. In order to determine the Taxpayer's right to the claimed refund, the IRS must determine the Taxpayer's proper tax liability. To allow the Taxpayer a refund to which it is not entitled because Tax Year 1 was previously audited would be an improper application of section 7605(b). “Congress did not intend for section 7605(b) to be a severe restriction on the Commissioner's power in monitoring and enforcing the Code.” Law Offices-Richard Ashare, P.C., T.C. Memo 1999-284; see Powell, 379 U.S. at 54-55. This is consistent with Rev. Proc. 2005-32, § 4.02, which recognizes that examinations in connection claims for refund are not reopenings.



With respect to the Taxpayer's reliance on the IRM, the example cited does not pertain to a claim for refund resulting from an NOL carryback. The example contains no reference to, or explanation, of section 7605. Furthermore, the IRM does not have the force of law, is not binding on the IRS, and confers no rights upon the Taxpayer. See Fargo, 447 F.3d at 713. “It is a well-settled principle that the Internal Revenue Manual does not have the force of law, is not binding on the IRS, and confers no rights on taxpayers.”McGaughy v. Commissioner , T.C. Memo. 2010-183; see Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), aff'g T.C. Memo.2004-13; Carlson v. United States, 126 F.3d 915, 922 (7th Cir. 1997);Tavano v. Commissioner , 986 F.2d 1389, 1390 (11th Cir. 1993), aff'g T.C. Memo.1991-237; Marks v. Commissioner, 947 F.2d 983, 986 n. 1 (D.C. Cir. 1991), aff'g T.C. Memo.1989-575; Valen Mfg. Co. v. United States, 90 F.3d 1190, 1194 (6th Cir. 1996); United States v. Horne, 714 F.2d 206, 207 (1st Cir.1983); Einhorn v. DeWitt, 618 F.2d 347, 349-50 (5th Cir.1980).



Therefore, the reexamination of Tax Year 1 in connection with the Taxpayer's NOL carryback and claim for refund is not a violation of section 7605(b). The audit team may reexamine Tax Year 1, including the previously allowed bad debt/worthless stock deduction, to determine whether the Taxpayer is entitled to a claimed refund.



CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

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Please call (313) 237-6440 if you have any further questions.



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Associate Area Counsel



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R. Edberg_________



By: _Elizabeth



Elizabeth R. Edberg



Attorney (Detroit)



(Large Business & International)

1





No closing agreement or similar agreement was signed with respect to this issue

Hair Care

U.S. v. ABRAMSON-SCHMEILER, Cite as 108 AFTR 2d 2011-XXXX, 11/29/2011




UNITED STATES OF AMERICA, Plaintiff-Appellee, v. LINDA ABRAMSON-SCHMEILER, a/k/a Linda J. Abramson, a/k/a Linda Abramson, a/k/a Linda A. Schmeiler, a/k/a Linda Schmeiler, Defendant-Appellant.

Case Information:

Code Sec(s):

Court Name: UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT,

Docket No.: No. 11-1125; (D.C. No. 1:09-CR-00359-REB-1) (D. Colo.),

Date Decided: 11/29/2011.

Disposition:



HEADNOTE

.



Reference(s):



OPINION

UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT,



Before TYMKOVICH, Circuit Judge, BRORBY, Senior Circuit Judge, and EBEL, Circuit Judge.



ORDER AND JUDGMENT *

Judge: Wade Brorby Senior Circuit Judge



A jury convicted Linda Abramson-Schmeiler of five counts of violating 26 U.S.C. § 7206(1). She appeals from her convictions. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm.



Background

Defendant was charged with five counts of filing a false tax return in violation of 26 U.S.C. § 7206(1). The charges were based on her alleged failure to report all of the income she received from her business of “diversionary sales” (purchasing and then reselling large quantities of hair-care products). The government alleged that she falsely underreported her business's gross receipts, or sales, by more than $1.4 million during the years 2003, 2004, and 2005, which then resulted in her falsely underreporting her personal income for the same amount. In support of these allegations, the government introduced evidence at trial through defendant's bank records and tax returns. These records showed that the gross-receipts figures on defendant's taxes were significantly lower than the gross-receipts amounts reflected in her bank records.



At trial, defendant's main defense was that she did not intentionally underreport her sales and income. She admitted that she had failed to report payments her business received for selling hair-care products. But she asserted that many of her diversionary sales were in cash and unrecorded and that she lost money or broke even on many of these transactions. She testified that when she did not make money on a transaction, she would consider it a “wash” and she would not report the transaction to her accountant for reporting on her income tax returns. Aplt. App., Vol. 5 at 1305–06. She testified that she did not knowingly fail to report gross receipts on her taxes.



Agent R. Jonathan Lynch, a certified public accountant who works for the Internal Revenue Service, testified for the government. He testified that in order for defendant to account for more than $1.4 million in unreported sales, she would also have had to underreport her purchases by $1.4 million so that the net effect on her profits (and taxable income) was zero. Agent Lynch testified that after reviewing her tax returns and bank records, he could find no evidence that she underreported the amount of hair-care products she purchased, nor could he find that she had an additional $1.4 million to spend.



At trial, defendant claimed to have an additional off-the-books source of funds that was not included in the records obtained by the government. She testified that she found $1 million in cash and $80,000 in bonds in her parents' house after her mother died. She testified that she did not put this money in the bank because she “just didn't want to,” Aplt. App., Vol. 6 at 1456, so she kept it in a box in her house. She testified that she used the cash from the box to pay for the hair-care products.



The jury convicted defendant on all counts. She was sentenced to thirty-six months' imprisonment on each count, to be served concurrently, and ordered to pay restitution. This appeal followed.



Discussion

Defendant challenges her convictions on three grounds: 1) the district court erred in precluding important lay witness testimony; 2) the district court erred in refusing to give defendant's good-faith jury instruction; and 3) the government committed prosecutorial misconduct throughout the trial.



1. Exclusion of Lay Witness Testimony

The evidentiary ruling at issue here took place during testimony by defendant's tax accountant, Richard Powell. He prepared defendant's tax returns for the years she was charged with failure to report all of her income. The government called Mr. Powell to testify in support of its case and he was not designated as an expert at trial.



During cross-examination of Mr. Powell, defense counsel asked to approach the bench. The following exchange then took place:



[Counsel]: ... The one issue I want to approach on, when I conducted an interview of this witness his opinion was if the payments were underreported that he didn't believe that she did it on purpose, and I know that's an [ultimate] issue opinion but under Rule 704 that's not precluded. There is some language about experts but he has not been qualified as an expert ....

Court: No one, expert or any other witness, may express an opinion. It's precluded expressly under [Federal Rule of Evidence] 704, and it's generally precluded through a lay fact witness such as Mr. Powell.

Aplt. App., Vol. 2 at 539.



Defendant argues that the district court committed reversible error when it relied on Rule 704 to preclude this important lay witness testimony that went to the heart of her defense. We review for abuse of discretion a district court's decision on the admissibility of evidence. United States v. Leonard, 439 F.3d 648, 650 (10th Cir. 2006).



Although the district court's ruling is not a model of clarity, in prohibiting Mr. Powell from testifying that he did not believe defendant underreported her income on purpose, the court appears to be suggesting that there is a categorical bar against opinion testimony on ultimate issues. But there is only one categorical bar to a witness offering an opinion on an ultimate issue and that involves expert testimony.



Rule 704(b) expressly precludes an expert from offering an opinion about the ultimate issue of a defendant's mental state in a criminal case, explaining that “[s]uch ultimate issues are matters for the trier of fact alone.” Fed. R. Evid. 704(b). Rule 704(a), however, explains that all other opinion testimony that is otherwise admissible “is not objectionable because it embraces an ultimate issue to be decided by the trier of fact.” Fed. R. Evid. 704(a).



In addition, there is no bar to this type of testimony in Federal Rule of Evidence 701, which governs opinion testimony by lay witnesses. That rule provides:



If the witness is not testifying as an expert, the witness' testimony in the form of opinions or inference is limited to those opinions or inferences which are (a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.

Fed. R. Evid. 701. This issue came up in a recent case where the district court excluded all lay witness testimony about a defendant's mental state. In reversing the district court's decision, we explained that: “The Federal Rules of Evidence do not ... categorically prohibit lay witnesses from offering opinion testimony regarding the defendant's mental state.”United States v. Goodman , 633 F.3d 963, 968 (10th Cir. 2011).



We conclude that the district court expressed a mistaken view of the law and therefore abused its discretion in excluding this opinion testimony for the reasons expressed at trial.See United States v. Allen , 449 F.3d 1121, 1125 (10th Cir. 2006) (“Although the abuse of discretion standard is deferential, abuse is shown where the decision was based on a mistaken view of the law.”). But that does not end our inquiry. Although the government does not concede that the district court erred, it argues that any error by the district court was harmless. We agree.



“A non-constitutional error, such as a decision whether to admit or exclude evidence, is considered harmless unless a substantial right of a party is affected.” United States v. Burgess, 576 F.3d 1078, 1100 (10th Cir. 2009) (quotations and brackets omitted). “An error affecting a substantial right of a party is an error which had a substantial influence on the outcome or which leaves one in grave doubt as to whether it had such an effect.” Id. (quotations omitted). When making the harmless error determination, “[w]e review the record as a whole.”Id. (quotations omitted). Given these considerations and our review of the record, we conclude that the exclusion of Mr. Powell's opinion testimony was harmless error.



Defendant provided ample testimony in support of her good faith defense. Defense counsel elicited testimony on cross-examination that Mr. Powell never explained to defendant how the IRS calculates cost of goods sold; never explicitly told her to “make sure that you include in your sales and in your cost of goods sold all transactions where you didn't make a profit,” Aplt. App., Vol. 2 at 526; and he did not think there was anything suspicious about the gross receipts and cost-of-goods-sold numbers she provided to him. Mr. Powell also agreed with the statement that “someone who is uneducated in tax law and how [a] tax return is done might say the transactions I don't make a profit on I don't need to report them because it doesn't affect my ultimate tax ....”Id. at 529. He further testified that he kept preparing defendant's taxes—even after learning of the criminal investigation—explaining, “from my end I had nothing there to say anything was going wrong.”Id. at 532. And even after speaking with the IRS criminal investigators three times and giving testimony to the grand jury, he continued to do her taxes because he “still didn't think she was doing anything wrong.” Id. at 533.



Defense counsel also solicited testimony from Mr. Powell that the government attorneys were having difficulty with the concept of how you calculate profit in relation to the cost of goods sold so Mr. Powell prepared his own exhibit to help explain it.Id. at 529–530; see also Aplt. Br., Att. D. Mr. Powell further testified that he never went over anything like what was contained in the exhibit with the defendant. Defense counsel also solicited testimony from Agent Lynch, the IRS investigator. Agent Lynch testified that to determine defendant's gross receipts he needed to look at the gross receipts definition in the IRS tax code, the Department of Treasury regulations, and case law. As defendant argues in her opening brief, “Agent Lynch's testimony, in conjunction with Mr. Powell's, supports [defendant's] good faith defense in that it demonstrates that the information she would need to know to accurately report her business income was extremely complex.” Aplt. Br. at 23–24.



Defendant also testified in support of her good faith defense. She explained that when she broke even on a sale she would consider it a “wash,” and she did not write it down in her records or report it on her taxes because “there was no consequence for income.” Aplt. App., Vol. 5 at 1306. She testified that she did not knowingly leave off gross receipts or not report gross receipts to try to cheat on her taxes and she didn't report them to Mr. Powell because she didn't know they were gross receipts. She closed her direct testimony by stating “I still am not clear that those were gross receipts, and I still think I did my taxes right. I just see that the government wants you to put stuff down even if you didn't make anything on it. I didn't know that at the time.” Id., Vol. 6 at 1418.



Defense counsel argues that the proffered testimony that Mr. Powell did not believe defendant intentionally underreported payments “went to the very heart of her defense,” Aplt. Br. at 24, and was not harmless. Although Mr. Powell's excluded testimony would have been consistent with defendant's good faith defense, there was sufficient testimony in the record to support her defense, namely, the complexities of the tax code, Mr. Powell's statement that he continued to do her taxes because he did not believe she was doing anything wrong, and defendant's own testimony. Mr. Powell's statement would have been cumulative and would not have aided the jury in further understanding his testimony. The jury could reasonably infer from Mr. Powell's testimony that he did not believe defendant intentionally underreported her income.



In addition, the government contends that the evidence against defendant was “overwhelming,” and would have led the jury to convict her even if Mr. Powell's statement had been admitted. Aplee. Br. at 19–20. Defendant's main defense was that she did not intentionally violate the tax laws because she did not believe she had to report “wash” sales. But the other part of her defense had to respond to the government's position that in order to account for more than $1.4 million in unreported sales, she would also have had to underreport her purchases by $1.4 million so that the net effect on her profits was zero.



Agent Lynch testified that after reviewing her tax returns and bank records, he could find no evidence that she underreported the amount of hair-care products she purchased, nor could he find that she had an additional $1.4 million to spend. To the contrary, Agent Lynch testified that defendant actually overstated her purchases and that from 2003 to 2005 defendant was running a deficit of about the same amount. He further testified that defendant's personal expenditures exceeded the amount of money she had available in income and bank-account savings by $1.5 million over those three years.



If the jury credited Agent Lynch's testimony and analysis, defendant's “wash” sales defense would be untenable unless she had some additional off-the-books source of funds that was not included in the records obtained by the government. Defendant did claim to have such an off-the-books source of funds: she testified that she found $1 million in cash and $80,000 in bonds in her parents' house after her mother died. She testified that she put this money in a box and put it under her bed. When asked if there was something preventing her from putting the money in the bank, she testified that “she just didn't want to,” although she also testified that she did not “have a problem” using banks. Aplt. App., Vol. 6 at 1456.



Defendant never gave an exact amount that was in the box and in later testimony stated that there were actually two boxes– one with about $700,000 in it and one with about $300,000 in it. Defendant also failed to adequately explain why she would ever need to withdraw money from her bank accounts if she had a box (or boxes) with $1 million in cash. Moreover, defendant never squarely addressed how a purported cash hoard of $1.1 million would be enough to account for more than $1.4 million in additional hair-care product as well as over $1.5 million in personal spending.



At sentencing, the district court stated that “this defense was so feckless and incredible that if the matter was not so serious it would be laughable. Boxes full of money, quantities of money increasing every time the government was able to demonstrate that the initial amount claimed in the initial box was inadequate mathematically to support and sustain her position.” Id. at 1640. Viewing the record as a whole, any error in excluding Mr. Powell's proffered testimony did not have a substantial influence on the outcome of the trial and therefore any error was harmless. See Burgess, 576 F.3d at 1100–01.



2. Good-faith jury instruction

Defendant argues that the district court abused its discretion when it refused to give her tendered good-faith instruction. Defendant initially tendered two separate instructions–one for willfulness and one for good-faith, although the willfulness instruction also contained good-faith language. The district court ultimately rejected defendant's stand-alone good-faith instruction, but gave the jury a three-paragraph instruction, which included as its third paragraph the good-faith language from defendant's proposed willfulness instruction. The instruction stated:



Defendant is considered to have acted “willfully,” as that term is used in element number 4 of Instruction No. 10, when she is found to have acted with the voluntary intent to violate a known legal duty.

Defendant acted willfully if she knew it was her legal duty to include truthful information in her individual or corporate tax returns, and then voluntarily and intentionally included false information.

Defendant is not considered to have acted willfully if her conduct resulted from negligence, inadvertence, accident, mistake, or reckless disregard for the requirements of the law, or resulted from a good faith misunderstanding that she was not violating a duty that the law imposed on her.

Aplt. Br., Att. H.



Defendant concedes that the district court's instruction gave the jury an accurate definition of willfulness. She argues, however, that the district court's refusal to give her stand-alone good-faith instruction meant that the jury was not adequately instructed regarding the “quantum of evidence necessary to consider [her] defense, the government's burden to disprove her good faith defense, and the fact that such good faith belief need not be rational or reasonable,”Id. at 30.



When considering a jury-instruction challenge:



We review the instructions as a whole de novo to determine whether they accurately informed the jury of the governing law. We then review any instructions offered by the defendant and rejected by the court. A defendant is entitled to an instruction on his theory of the case if the instruction is a correct statement of the law, and if he has offered sufficient evidence for the jury to find in his favor. We review a district judge's refusal to issue a requested instruction under this standard for abuse of discretion.

United States v. Pinson, 542 F.3d 822, 831 (10th Cir. 2008) (citations omitted).



The government argues that the district court adequately instructed the jury. 1 We agree. First, the jury was properly instructed on the parties' respective burdens of proof in the district court's general reasonable doubt instruction. That instruction explained to the jury: “The law does not require a defendant to prove her innocence or produce any evidence at all. The government has the burden of proving defendant guilty beyond a reasonable doubt concerning any alleged crime then under your consideration.” Aplt. Br., Att. I, Instr. No. 6. Second, the district court's willfulness instruction covered defendant's good-faith defense, explaining that a “[d]efendant is not considered to have acted willfully if her conduct resulted from negligence, inadvertence, accident, mistake, or reckless disregard for the requirements of the law, or resulted from a good-faith misunderstanding that she was not violating a duty that the law imposed on her.” Id., Instr. No. 11.



The district court's instructions correctly set forth the definition of willfulness, correctly informed the jury that the government bore the burden of proving defendant's willfulness beyond a reasonable doubt, and correctly explained that a person who makes a good-faith mistake was not acting willfully. Because juries are presumed to follow their instructions, see Richardson v. Marsh, 481 U.S. 200, 211 (1987), defendant's argument amounts to no more than a claim that her stand-alone good-faith instruction would have given the jury a more clear understanding of the law. But as defendant acknowledges, this is not a basis for finding an abuse of discretion. See Aplt. Br. at 27 (“[A theory of the defense] instruction is not required ... if it would “simply give the jury a clearer understanding of the issues.”” (quotingUnited States v. Bowling , 619 F.3d 1175, 1183–84 (10th Cir. 2010)). We therefore see no abuse of discretion in the district court's refusal to give defendant's proposed instruction.



3. Prosecutorial Misconduct

Defendant contends that the prosecutor's continuing course of misconduct throughout her trial requires the reversal of her convictions. Defendant argues that the prosecutor (1) improperly solicited irrelevant and derogatory testimony regarding her religion; (2) failed to disclose his intent to introduce evidence that he subsequently used as improper propensity evidence at trial; and (3) engaged in improper argument throughout his closing and rebuttal closing arguments. Defendant admits, however, that she did not contemporaneously object to any of this alleged misconduct during trial. Because defendant failed to object at trial, we review the alleged misconduct for plain error. See United States v. Taylor, 514 F.3d 1092, 1095 (10th Cir. 2008).



To prevail on plain-error review, defendant must “show there is (1) error, (2) that is plain, (3) which affects [her] substantial rights, and (4) which seriously affects the fairness, integrity, or public reputation of judicial proceedings.” United States v. Poe, 556 F.3d 1113, 1128 (10th Cir. 2009) (quotations omitted). Viewing the alleged misconduct in the context of the whole trial,see United States v. Lopez-Medina , 596 F.3d 716, 738 (10th Cir. 2010), defendant has failed to show plain error.



Conclusion

The judgment of the district court is AFFIRMED.



Entered for the Court



Wade Brorby



Senior Circuit Judge

*





After examining the briefs and appellate record, this panel has determined unanimously to grant the parties' request for a decision on the briefs without oral argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore ordered submitted without oral argument. This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.

1



The government's brief argues three alternative grounds for resolving defendant's jury instruction challenge: (1) waiver; (2) a good-faith instruction was not required; and (3) the district court's instructions to the jury were adequate. Because we conclude that the district court did not abuse its discretion in the instructions it gave to the jury, we need not reach the first two grounds argued by the government.

Tuesday, November 29, 2011

lead figure in ponzi scheme dead

Rev. Proc. 2011-58, 2011-50 IRB, 11/28/2011, IRC Sec(s).






Headnote:



Reference(s):



Full Text:

1. Purpose

This revenue procedure modifies the definition of a qualified loss in section 4.02 of Rev. Proc. 2009-20, 2009-1 C.B. 749, to address certain situations in which the death of a lead figure (as described in section 4.01 of Rev. Proc. 2009-20) has foreclosed the possibility of criminal charges. This revenue procedure also makes a conforming modification to the definition of discovery year in section 4.04 of Rev. Proc. 2009-20.



2. Background

.01 Rev. Rul. 2009-9, 2009-1 C.B. 735, describes the proper income tax treatment for losses resulting from certain fraudulent investment arrangements, including so-called Ponzi schemes. .02 Rev. Proc. 2009-20 provides an optional safe harbor allowing certain investors to claim a theft loss deduction under § 165 of the Internal Revenue Code for qualified losses from certain fraudulent investment schemes. Under section 4.02 of Rev. Proc. 2009-20, a qualified loss is a loss from a specified fraudulent arrangement (defined in section 4.01) for which authorities have charged the lead figure by indictment, information, or criminal complaint with a crime that meets the definition of theft for purposes of § 165. .03 Since publication of Rev. Proc. 2009-20, the deaths of some lead figures in Ponzi schemes have foreclosed authorities' ability to charge them with criminal theft. Qualified investors in these cases are unable to meet the definition of a qualified loss in section 4.02 of Rev. Proc. 2009-20 and therefore are precluded from using the optional safe harbor, solely because of the death of a lead figure. This revenue procedure expands the definition of qualified loss in Rev. Proc. 2009-20 to address these cases.



.04 This revenue procedure also clarifies that the terms “ indictment,” “ information,” and “ criminal complaint” in section 4.02 of Rev. Proc. 2009-20 have meanings similar to the use of those terms in the Federal Rules of Criminal Procedure.



3. Scope

This revenue procedure applies to qualified investors within the meaning of section 4.03 of Rev. Proc. 2009-20.



4. Application

.01 Section 4.02 of Rev. Proc. 2009-20 is modified to read as follows: .02 Qualified loss. A qualified loss is a loss resulting from a specified fraudulent arrangement in which, as a result of the conduct that caused the loss—



(1) A lead figure was charged by indictment or information (see, for example, Fed. R. Crim. P. 7) under state or federal law with the commission of fraud, embezzlement, or a similar crime that, if proven, would meet the definition of theft for purposes of § 165 of the Internal Revenue Code and § 1.165-8(d) of the Income Tax Regulations under the law of the jurisdiction in which the theft occurred, and the indictment or information has not been withdrawn or dismissed (other than because of the death of the lead figure);

(2) A lead figure was the subject of a state or federal criminal complaint (see, for example, Fed. R. Crim. P. 3) alleging the commission of a crime described in section 4.02(1) of this revenue procedure, the complaint has not been withdrawn or dismissed (other than because of the death of the lead figure), and either—

(a) The complaint alleged an admission by the lead figure, or the execution of an affidavit by that person admitting the crime; or

(b) A receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen; or

(3) A lead figure, or an associated entity involved in the specified fraudulent arrangement, was the subject of one or more civil complaints (see, for example, Fed. R. Civ. P. 3, 7) or similar documents (such as a notice or order instituting administrative proceedings or other document the Internal Revenue Service designates) that a state or federal governmental entity filed with a court or in an administrative agency enforcement proceeding, and—

(a) The civil complaint or similar documents together allege facts that comprise substantially all of the elements of a specified fraudulent arrangement, as described in section 4.01 of this revenue procedure, conducted by the lead figure;

(b) The death of the lead figure precludes a charge by indictment, information, or criminal complaint against that lead figure as described in section 4.02(1) or (2) of this revenue procedure; and

(c) A receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen. .02 Section 4.04 of Rev. Proc. 2009-20 is modified to read as follows: .04 Discovery year. A qualified investor's discovery year is the investor's taxable year in which—

(1) The indictment, information, or complaint described in section 4.02(1) or (2) of this revenue procedure is filed; or

(2) The complaint or similar document described in section 4.02(3) of this revenue procedure is filed, or the death of the lead figure occurs, whichever is later.

4. Effective Date

This revenue procedure applies to losses for which the discovery year is a taxable year beginning after December 31, 2007.



5. Effect On Other Documents

Rev. Proc. 2009-20 is modified.



Drafting Information

The principal author of this revenue procedure is Justin G. Meeks of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Mr. Meeks at (202) 622-5020 (not a toll-free call).

Sunday, November 27, 2011

World Trade Center Original decision

In the Matter of the Petition of 1 World Trade Center LLC, et al.


Case Information:



Docket/Court: TAT(H)07-34(CR), New York City Tax Appeals Tribunal, Administrative Law Judge Determination



Date Issued: 12/03/2009



Tax Type(s): New York City Commercial rent



OPINION

Schwartz, A.L.J.:



DETERMINATION

Petitioners, 1 World Trade Center LLC, 2 World Trade Center LLC, 4 World Trade Center LLC and 5 World Trade Center LLC (now known as 3 World Trade Center LLC) (“Petitioners” or the “Silverstein Lessees”) filed Petitions for Hearing with the New York City (“City”) Tax Appeals Tribunal (“Tribunal”) seeking redeterminations of deficiencies of City Commercial Rent Tax (“CRT”) under Chapter 7 of Title 11 of the City Administrative Code (“Code”) for the five tax years beginning June 1, 2001 and ending May 31, 2006 (“Tax Years”).



A hearing was held and various documents were admitted into evidence. Petitioners were represented by Elliot Pisem, Esq. and Joseph Lipari, Esq. of Roberts & Holland LLP. The Commissioner of Finance (“Respondent” or “Commissioner”) was represented by Frances J. Henn, Esq., Senior Counsel of the City's Law Department. Joshua M. Wolf, Esq., Assistant Corporation Counsel, participated on Respondent's briefs. Both parties filed briefs and reply briefs.



CONCLUSIONS

The payments made by Silverstein Lessees to the Port Authority after September 11, 2001 did not constitute base rent paid for taxable premises because the Silverstein Lessees no longer had the right to occupy specific space after the government takeover of the World Trade Center site on September 11, 2001. Thus, the Commercial Rent Tax does not apply to those payments.



FINDINGS OF FACT

The Silverstein Lessees and the Port Authority of New York and New Jersey (the “Port Authority”) executed four Agreements of Lease (the “Leases”), dated as of July 16, 2001, each for a term of 99 years. The Leases related to the buildings (“Buildings”) which were known as “One World Trade Center,” 1 “Two World Trade Center,” 2 “Four World Trade Center” and “Five World Trade Center.” One World Trade Center and Two World Trade Center were collectively known as the “Twin Towers.”



Each of the Buildings was located on a portion of the World Trade Center site in Lower Manhattan that is owned by the Port Authority (the “WTC Site”). The WTC Site consisted of 16-acres (roughly four north-south city blocks long by two cross-town city blocks wide) that was bounded on the north by Vesey Street, on the south by Liberty Street, on the east by Church Street and on the west by West Street. 3 At the time the Leases were entered into, the WTC Site contained the four Buildings leased by the Silverstein Lessees, and also contained a Marriott Hotel, a Customs House, retail space leased to an unrelated party and a PATH train 4 terminal.



Each of the Leases was identical in all material respects relevant to this Determination other than with regard to the Building to which each one related. Each of the Leases was amended, in part, by an agreement effective as of July 24, 2001.



The Leases did not provide for the lease of the land underlying the Buildings to the Petitioners. Instead, as indicated by the language of the Lease for One World Trade Center (the “Lease”), they provided, 5 in pertinent part, that: The Port Authority hereby lets to the Lessee and the Lessee hereby hires and takes from the Port Authority at the World Trade Center: (a) all that certain volume of space occupied by the Building (as hereinafter defined) and any replacements thereof, known and designated as One World Trade Center, also known as Tower A, situate, lying and being in the Borough of Manhattan, County, City and State of New York, the exterior limits of any horizontal plane which lies within said volume of space being more particularly bounded and described on “Exhibit A” attached hereto .... ... (b) together with all buildings now or hereafter occupying such volume of space demised under Section 2.1.(a) above and all other improvements, fixtures, ....



The Lease also provided for certain rights which effectively served as easements over certain common areas. 6 In addition, the Lease included certain sub-grade space under One World Trade Center. 7 The Leases between the Port Authority and the other Petitioners contain substantially identical provisions, other than with respect to the subgrade space. 8



Michael Levy, Petitioners' Vice President at the time the Leases were negotiated with the Port Authority, was actively involved in negotiating the Leases and structuring the transactions. 9 Mr. Levy credibly testified that it was his understanding that the Port Authority refused to lease the land under the Buildings to Petitioners because they were prohibited by statute from doing so, and that the properties covered by the Leases (“Premises”) were described in the manner set out in the Leases at the Port Authority's insistence. 10



Petitioners intended to operate the Buildings and, for a short time did operate the Buildings, by subleasing the leased space to subtenants and receiving subtenant rent. Petitioners anticipated that the subtenant rents would greatly exceed the amounts payable to the Port Authority under the Leases.



However, the Buildings were totally destroyed in the terrorist attacks on the World Trade Center on September 11, 2001. As a result of the destruction of the Buildings, the subtenants that had previously occupied space in the Buildings stopped paying rent to Petitioners. While some of the subleases technically continued after the Buildings were destroyed, Petitioners' property insurer did not let Petitioners terminate the leases. However, Petitioners did not pursue these subtenants to continue to collect rent. 11



The Leases contained the following obligation to rebuild (the “Rebuilding Obligation”): If the Premises ... shall be damaged or destroyed ..., the Lessee, at its sole cost and expense, and whether or not such damage or destruction is covered by insurance proceeds sufficient for the purpose, shall remove all debris resulting from such damage or destruction, and shall rebuild, restore, repair and replace the Premises ..., substantially in accordance, to the extent feasible, prudent and commercially reasonable, with the plans and specifications for the same as they existed prior to such damage or destruction or with the consent in writing of the Port Authority, which consent shall not be unreasonably withheld, conditioned or delayed, make such other repairs, replacements, changes or alterations as is mutually agreed to by the Port Authority and the Lessee. Such rebuilding, restoration, repairs, replacements, or alterations shall be commenced promptly and shall proceed with all due diligence .... 12



Under the Rebuilding Obligation, even if the Buildings were destroyed, the Leases could not be surrendered or terminated and Petitioners continued to be liable for the payments under the Leases. 13



After September 11, 2001, Mr. Levy was involved with the Port Authority, other governmental entities and the insurers to address the various issues that arose after the destruction of the World Trade Center in the terrorist attacks. Mr. Levy credibly testified 14 that shortly after September 11, 2001, Petitioners understood, as a result of statements on behalf of various government entities including the State of New York (the “State”), the City, the Lower Manhattan Development Corporation (“LMDC”) and the Port Authority, that office towers could not be rebuilt on the portion of the WTC Site that became known as the Twin Towers Footprints. 15 Because of the huge loss of life on those locations, that area had attained the status of hallowed ground which had to be preserved for a memorial to the victims of the attacks.



In the aggregate, the Silverstein Lessees had leased approximately ten million square feet of rentable office space in the four Buildings. Because of their height, the volume of space occupied by the Twin Towers accounted for ninety percent of the total area that had been leased to Petitioners and that is at issue here. 16



Immediately following the September 11, 2001 terrorist attacks, the City took control of the entire WTC Site to conduct activities relating to rescuing any survivors, recovering human remains, cleaning up the debris and shoring up the “bathtub.” 17 From September 11, 2001 until approximately July 1, 2002, neither the Petitioners nor the Port Authority had control over the WTC Site, and no work could be performed by Petitioners, the Port Authority, or any private party anywhere on the WTC Site. On approximately July 1, 2002, the City returned control over the WTC Site to the Port Authority. From that time through the remainder of the Tax Years, the Port Authority managed and controlled the entire WTC Site and controlled access to the WTC Site. 18



As of July 18, 2002, Petitioners and the Port Authority entered into an “Interim Access Agreement” 19 under which they acknowledged that the Port Authority and the Metropolitan Transit Authority (“MTA”) would be performing work on the WTC Site needed to expedite construction of the temporary PATH facilities and repair subway lines. Petitioners entered into this agreement at the Port Authority's request to enable the Port Authority and the MTA to perform essential work on the transit facilities, a portion of which was to be constructed on space that comprised a portion of the Premises covered by the Leases. Petitioners understood that because it was a national emergency, the government was going to do this work in any event. By entering into the agreement at a time when Petitioners could not otherwise obtain liability insurance, Petitioners received protections from the Port Authority against claims by persons injured while working on the WTC Site. 20 In addition, under this agreement, the Port Authority was responsible for providing a construction fence around the WTC Site and providing a security force. The Port Authority controlled access to the WTC Site and Petitioners or their agents had to receive permission from the Port Authority to enter any portion of the WTC Site. 21 This agreement was extended five times and remained in effect until May 31, 2004. 22



The Port Authority, which is a governmental body, has its own police and buildings departments that are not under the jurisdiction of the City. The Port Authority has the jurisdiction to grant building permits on the WTC Site. 23 Although Petitioners had the Rebuilding Obligation under the Leases, Petitioners could not rebuild until a comprehensive redevelopment plan was adopted by the relevant government entities, designating specific locations where Petitioners could construct new buildings. They also could not rebuild until the Port Authority issued building permits for the new construction. After recovery and clean-up efforts were underway at the WTC Site, discussions and consultations began among various governmental entities concerning exactly how the process of rebuilding would be conducted. These discussions extended over a number of years. It was expected that a successful site plan would need to provide for a memorial and museum to be built on the Twin Towers Footprints. On the remainder of the site, approximately ten million square feet of rentable office space (which was the amount of office space previously contained in the Buildings), a performing arts center, a retail component and a new PATH terminal would be built. Thus, although it was expected that Petitioners would eventually be allowed to construct office towers somewhere on the WTC Site, the decisions as to the location and size of such towers and the time at which they would be built remained subject to negotiation with the Port Authority.



In the Spring of 2002, the Port Authority and the LMDC requested design proposals for the WTC Site. They held a design competition, including a public referendum at the Javits Center, and reviewed various proposed site plans. The Port Authority and the LMDC did not even seek Petitioners' consent to carry out the site plan design in this manner.



In February 2003, when the design competition was completed, the Governor of the State and the Mayor of the City joined the Port Authority and the LMDC in announcing the selection of a design concept proposed by Daniel Libeskind for the redevelopment of the WTC Site. The Libeskind proposal located office towers on the perimeter of the site. The interior of the site would contain a memorial located on the Twin Towers Footprints and a museum. There would also be a performing arts center on the WTC Site. Daniel Libeskind was chosen to be the site planner. Petitioners were not asked to consent to the selection of the design plan.



As of December 15, 2003, the Petitioners and the Port Authority entered into an amendment to the Leases (“December 2003 Amendment”) formally removing the Twin Towers Footprints and certain other spaces from the Premises leased by Petitioners and providing that the parties agreed to “include in the Premises” leased by Petitioners other space on which Petitioners could build five office towers containing at least ten million square feet of office space (as well as related space), 24 rather than the four office towers that had been destroyed. The December 2003 Amendment provided that such new towers were to be built “generally in the locations shown on [the attached site diagram] (or in other locations mutually acceptable to [Petitioners] and the Port Authority.)” The fifth tower (“Tower 5”) was to be located south of Liberty Street in an area that was outside the original WTC Site. The descriptions and space allocated to the Petitioners in that amendment were extremely rudimentary, lacking among other things, metes and bounds for the descriptions of Petitioners' new space or dimensions for the buildings to be constructed. These space allocations were considered interim in nature.



As of November 24, 2004, Petitioners, the Port Authority and others agreed to the World Trade Center Design and Site Plan 25 (the “November 2004 Site Plan”). Under that agreement, the signatories approved the locations of buildings, streets, and other facilities and agreed that they would cooperate with respect to any refinements or changes to the plan, recognizing that environmental analyses had not yet been done. Although this agreement was materially more detailed than the December 2003 Amendment, it was still tentative, failed to contain sufficient information to allow Petitioners to rebuild and did not require the Port Authority to turn over access to any portion of the WTC Site to the Petitioners. 26



The first building to be constructed on the WTC Site was to be the Freedom Tower, which is designated “One World Trade Center.” It was intended to be the symbol that the World Trade Center would be rebuilt bigger and higher. The elevation was planned to be 1,776 feet and it was planned to be the tallest building in the world. However, its location was not to be on the Footprint of the former One World Trade Center but elsewhere on the WTC Site. Petitioners were given limited access to the WTC Site beginning in 2004 for the purpose of designing the Freedom Tower. After Petitioners released a complete design of the Freedom Tower to the public, the City Police Department raised security concerns and the Port Authority would not give Petitioners a building permit. After a substantial redesign of the Freedom Tower to address the security concerns raised by the Police, Petitioners and the Port Authority agreed that the Freedom Tower would be built by an entity owned by the Port Authority.



In 2006, after the close of the Tax Years, the process of redesigning the WTC Site which began in 2002 ended. In November, 2006, Petitioners and the Port Authority entered into the Master Development Agreement for Towers 2/3/4 of the World Trade Center (“November 2006 Master Development Agreement.”) 27 In connection with the execution of the November 2006 Master Development Agreement, the ownership of 1 World Trade Center LLC, the former lessee of One World Trade Center was assigned to the Port Authority and this Port Authority newly-owned entity was to build both the Freedom Tower and Tower 5, both of which, were to have been built by one or more of the Silverstein Lessees under the December 2003 Amendment. The remaining three Silverstein Lessees were given the rights to build three buildings (Towers 2, 3 and 4) with an aggregate of 6.2 million square feet of office space. None of these buildings was to be located on the Twin Towers Footprint, where ninety percent of the rentable space had been located prior to 9/11. 28 At the same time, the remaining three Silverstein Lessees executed amended leases containing adjustments to the monthly payments to be made thereafter by them to the Port Authority for the replacement space. The portion of the WTC Site that was set aside for a memorial and memorial museum included the Twin Towers Footprints and also the area surrounding the Twin Towers Footprints. 29



The November 2006 Master Development Agreement established a development schedule under which, beginning in 2008, the Port Authority was required to deliver portions of the WTC Site to the remaining Silverstein Lessees so that they could commence rebuilding. The Port Authority was required to pay liquidated damages to the remaining Silverstein Lessees if it failed to do so. None of the prior interim agreements provided specific dates by which the Port Authority was required to deliver portions of the WTC Site to Petitioners or contained any penalty provisions if the Port Authority failed to do so.



Each of the Leases originally entered into in July 2001 required an initial rent payment (“Lump Sum Payments”) aggregating approximately $491,000,000 for the four Buildings. The Lump Sum Payments were to be paid at the commencement of the Leases and were “for the letting of the Premises.” 30 Additional monthly payments were required to be made throughout the 99-year term of the Leases. The Lump Sum Payments were made in July 2001. Petitioners also made the monthly payments required under the Leases throughout the Tax Years even though the Buildings had been destroyed and could not be rebuilt during those years.



The Leases provided that the Lump Sum Payments should be allocated to specific monthly periods over the term of the Leases for Federal Income Tax purposes. 31 Mr. Levy credibly testified that the Lump Sum Payments were viewed by the parties to the Leases as consideration for the entire 99-year term of the Leases. 32



The Leases required Petitioners to maintain casualty insurance 33 and to name the Port Authority as an additional insured. Petitioners' insurance also included “business interruption” coverage under which each Petitioner received payments for lost subtenant rents. On or about April 11, 2002, Petitioners, the lessee of the retail space, their mortgagees and the Port Authority entered into an agreement regarding the allocation of the insurance proceeds which had been held in escrow. Additional terms relating to the insurance proceeds were reduced to writing on December 1, 2003. 34 This agreement provided that the insurance proceeds could be used to pay at least $1,500,000,000 to the Port Authority, repay Petitioners' mortgagee and the retail lessee's mortgagee, and pay any remainder to Petitioners and the retail lessee. Petitioners made the periodic payments due to the Port Authority under the Leases after September 11, 2001 from their business interruption insurance proceeds. Petitioners were required under the Leases to continue to make the periodic payments. Petitioners believed that if they stopped making the payments, the Port Authority would most likely commence litigation. Petitioners were concerned that if they were held to be in default under the Leases they could lose any rights to build on alternative locations at the WTC Site once an agreement was reached regarding rebuilding. 35



For the 2001/2002 tax year, Petitioners filed CRT returns and paid CRT in the total amount of $11,710,289 on all initial Lump Sum Payments and several periodic payments of rent. For the 2002/2003, 2003/2004 and 2004/2005 Tax Years, each Petitioner filed CRT returns on which that Petitioner reported as “rent” all of the payments it made to the Port Authority during that Tax Year. Petitioners also filed CRT Quarterly returns for the period June 1, 2005 through August 31, 2005 in which they claimed an exemption from the CRT based on new Code § 11-704(a)6 which repealed the CRT with respect to the WTC Site. 36



Each Petitioner computed its “base rent” subject to CRT by deducting all the rents received from subtenants in the same tax period. Some of the Petitioners reported relatively small amounts of subtenant rent from actual subtenants on the CRT returns for periods after the 2001/2002 year. However, there is nothing in the Department of Finance's audit files 37 to indicate that these payments of rent (that were apparently received after the 2001/2002 Tax Year) related to periods subsequent to September 11, 2001.



On their CRT returns for the 2002/2003, 2003/2004 and 2004/2005 Tax Years, Petitioners also treated the business interruption insurance proceeds that covered lost rent payments as payments from subtenants for purposes of computing base rent. As a result, they showed no CRT liability and paid no CRT for those Tax Years.



Following an audit of Petitioners' CRT Returns, the Commissioner issued a Notice of Determination, dated May 27, 2007, to each of the four Petitioners asserting proposed deficiencies including substantial understatement penalties and interest, 38 as follows:



1 World Trade Center LLC:



-----------------------------------------------------------------------------

Tax Year Principal Interest Penalty Total

-----------------------------------------------------------------------------

2001/2002 $ 4,521,322.56 $2,073,131.28 $ 452,132.26 $ 7,046,586.10

-----------------------------------------------------------------------------

2002/2003 2,181,901.68 815,141.50 218,190.17 3,215,233.35

-----------------------------------------------------------------------------

2003/2004 2,037,455.28 585,036.48 203,745.53 2,826,237.29

-----------------------------------------------------------------------------

2004/2005 2,048,576.83 411,427.05 204,857.68 2,664,861.56

-----------------------------------------------------------------------------

2005/2006 512,087.04 52,919.43 51,208.70 616,215.17

-----------------------------------------------------------------------------

Total $11,301,343.39 $3,937,655.74 $1,130,134.34 $16,369,133.47

-----------------------------------------------------------------------------

2 World Trade Center LLC:



-----------------------------------------------------------------------------

Tax Year Principal Interest Penalty Total

-----------------------------------------------------------------------------

2001/2002 $ 4,354,221.41 $1,996,511.53 $ 435,422.14 $ 6,786,155.08

-----------------------------------------------------------------------------

2002/2003 2,163,361.32 808,214.96 216,336.13 3,187,912.41

-----------------------------------------------------------------------------

2003/2004 1,949,127.38 559,673.94 194,912.74 2,703,714.06

-----------------------------------------------------------------------------

2004/2005 1,959,779.76 393,593.44 195,977.98 2,549,351.18

-----------------------------------------------------------------------------

2005/2006 489,855.42 50,621.99 48,985.54 589,462.95

-----------------------------------------------------------------------------

Total $10,916,345.29 $3,808,615.86 $1,091,634.53 $15,816,595.68

-----------------------------------------------------------------------------

5 World Trade Center LLC (now known as 3 World Trade Center LLC):



-----------------------------------------------------------------------------

Tax Year Principal Interest Penalty Total

-----------------------------------------------------------------------------

2001/2002 $ 478,253.92 $219,290.49 $ 47,825.39 $ 745,369.80

-----------------------------------------------------------------------------

2002/2003 253,893.74 94,852.74 25,289.37 374,035.85

-----------------------------------------------------------------------------

2003/2004 216,376.64 62,130.56 21,637.66 300,144.86

-----------------------------------------------------------------------------

2004/2005 216,385.65 43,457.93 21,638.57 281,482.15

-----------------------------------------------------------------------------

2005/2006 54,223.56 5,603.50 5,422.36 65,249.42

-----------------------------------------------------------------------------

Total $1,219,133.51 $425,335.22 $121,813.35 $1,766,282.08

-----------------------------------------------------------------------------

4 World Trade Center LLC:



-----------------------------------------------------------------------------

Tax Year Principal Interest Penalty Total

-----------------------------------------------------------------------------

2001/2002 $249,690.55 $114,488.92 $24,969.06 $389,148.53

-----------------------------------------------------------------------------

2002/2003 127,484.33 47,627.14 12,748.43 187,859.90

-----------------------------------------------------------------------------

2003/2004 112,767.21 32,380.07 11,276.72 156,424.00

-----------------------------------------------------------------------------

2004/2005 113,140.29 22,722.60 11,314.03 147,176.92

-----------------------------------------------------------------------------

2005/2006 28,196.22 2,913.82 2,819.62 33,929.66

-----------------------------------------------------------------------------

Total $631,278.60 $220,132.55 $63,127.86 $914,539.01

-----------------------------------------------------------------------------

The stated reason for the proposed deficiencies was Respondent's disallowance of the amount of the business interruption insurance payments as subtenant deductions.



None of the Petitioners requested a Conciliation Conference. On August 22, 2007, Petitioners filed Petitions for Hearing with the Tribunal. After the Tribunal's pre-hearing conference process was completed, a Hearing was held on November 24, 2008. The First Supplemental Stipulation of Facts was filed on March 9, 2009. The Second Supplemental Stipulation of Facts and accompanying exhibits were filed on November 30, 2009. Pursuant to that Second Supplemental Stipulation of Facts, the record of the Hearing was reopened with the consent of the parties for the limited purpose of entering into the record Taxpayers' Exhibits 32, 33, 34, 35, and 36. The record is now closed.



POSITIONS OF PARTIES

Petitioners contend that the CRT does not apply to the payments they made to the Port Authority after September 11, 2001. They note that the Leases gave Petitioners rights to the volume of space occupied by the Buildings. They assert that once the Buildings were destroyed, the leased “volume of space occupied by the Buildings” no longer existed and, therefore, there were no taxable premises. Petitioners note that the Leases required Petitioners to rebuild the Buildings on the original locations only if that was “feasible, prudent and commercially reasonable.” However, Petitioners contend that various government entities deprived Petitioners of access to the WTC Site and made it clear, even before the Leases were initially amended in December, 2003, that Petitioners would never be permitted to rebuild on the Twin Towers Footprints. In any event, Petitioners assert that the Leases were not amended with sufficient specificity to permit Petitioners to rebuild until after the close of the Tax Years. Therefore, Petitioners assert, there were no premises that they had the right to use or occupy during the Tax Years other than for the brief period prior to September 11, 2001.



Respondent agrees that “premises” must exist for the CRT to apply. However, in Respondent's view, all that is necessary is identification of a “space” subject to a landlord-tenant relationship. Respondent contends that Petitioners had the right, under the Leases, throughout the Tax Years, to rebuild in the same locations and those locations still existed during the Tax Years. The Commissioner asserts that the Leases were not amended with specificity to remove that right until after the close of the Tax Years.



Petitioners alternatively argue that even if the amounts paid to the Port Authority were properly included in base rent, the amounts received from business interruption insurance to replace lost subtenant rents should be deducted from base rent under the provision permitting the deduction of “amounts received ... from any tenant.” 39 Respondent counters that the amounts paid by the insurance company would not be entitled to the subtenant deduction because the insurance company was not Petitioners' subtenant.



Additionally, Petitioners assert that the Lump Sum Payments made in July, 2001, which they reported in full on the CRT returns for that period and on which they fully paid CRT either were not taxable at all because they were not rent allocable to any period or they should have been amortized over the entire 99-year term of the lease. Petitioners assert that, in either case, Petitioners overpaid CRT for the 2001/2002 Tax Year. While Petitioners are not claiming refunds, they assert that these alleged overpayments should be used to offset any CRT due for subsequent years under the doctrine of equitable recoupment. Respondent counters that the CRT is due in the tax period when the payment is made regardless of the tax period to which the payment relates. Respondent also notes that there is no language in the Code or Rules that would permit Petitioners to amortize the payments for CRT purposes over the term of the Leases.



Finally, Petitioners claim that the substantial understatement penalty should not apply because the statutory language of the CRT supports their position and there was no unfavorable authority. They assert that they had both substantial authority and reasonable cause for taking the position that no CRT was due on the payments to the Port Authority after the Buildings were destroyed. The Commissionier contends that there is no substantial authority for Petitioners' position. As a result, the Commissioner asserts that there was no reasonable cause for Petitioners' reporting position and that he cannot use his discretion to waive the penalty.



DISCUSSION AND ANALYSIS

Code § 11-702 imposes the CRT on the “base rent” paid by a tenant to a landlord for “taxable premises.” “Base rent” is “rent” paid for each “taxable premises” with certain adjustments. Code § 11-701.7. “Rent” is the “consideration paid or required to be paid by a tenant for the use or occupancy of premises ....” Code § 11-701.6. “Taxable premises” means “[a]ny premises in the city occupied, used or intended to be used for the purpose of carrying on or exercising any ... commercial activity, including any premises so used even though it is used solely for the purpose of renting, or granting the right to occupy or use ....” Code § 11- 701.5. “Premises” means “[a]ny real property or part thereof, and any structure thereon or space therein.” Code § 11-701.4. The applicable Rules merely restate the statutory language. 19 RCNY § 7-01.



By their terms, the Leases could not be terminated by Petitioners even if the Buildings were destroyed. In such instance, Petitioners remained liable for payments due under the Leases. The Leases further provided that Petitioners would be responsible for rebuilding or replacing any such destroyed Building. Petitioners obtained insurance to cover any such costs. After 9/11, the payments Petitioners made to the Port Authority were from the proceeds of that insurance. The Commissioner seeks to impose the CRT on these payments.



The CRT would apply to the post-9/11 payments if the amounts Petitioners paid the Port Authority constituted “rent” (that is, consideration for use or occupancy of premises) and if Petitioners used or intended to use those premises for a taxable purpose (such as subletting those premises) during the period for which Respondent seeks to impose the tax. Petitioners contend that the CRT does not apply because there were no “premises” to which they had rights of use or occupancy after 9/11. The Commissioner acknowledges that some form of “premises” must exist prior to a finding of taxability, but claims that all the CRT requires is mere identification of a space subject to a landlord/tenant relationship. The Commissioner asserts that the airspace that had been surrounded by the Buildings prior to 9/11 still existed and contends that because the Leases were not amended with enough detail to permit Petitioners to rebuild elsewhere during the Tax Years, Petitioners still had the rights granted to them under the Leases to rebuild in that airspace.



The Department has a published position that a tenant is subject to the CRT where the liability to pay rent continues after the premises have been destroyed by fire. 40 However, this position, does not address a case such as the one here where, post 9/11, there was an effective takeover by the government of the Premises and a defacto modification of the Leases which prohibited the Silverstein Lessees from rebuilding in the same airspace that had been covered by the Leases. In addition, Petitioners were not provided with alternative space on which they could begin to rebuild during the Tax Years.



Clearly, the Leases gave Petitioners the responsibility to remove debris at their expense, to rebuild the Buildings as they had existed before the destruction, to the extent feasible, and to make changes in the building plans, if necessary, with the consent of the Port Authority. Yet, the government exercised its police power to effectively strip Petitioners of all of those rights.



Within minutes of the first plane crashing into One World Trade Center at 8:40 a.m. on September 11, 2001, the City had taken control of the WTC Site. On that day, the Mayor of the City issued a Mayoral Order proclaiming a local state of emergency. This Proclamation of Emergency was renewed every five days until the end of June 2002. The City Office of Emergency Management (“OEM”) took control of the WTC Site and controlled access to the WTC Site. Petitioners were excluded from the WTC Site and were granted access only upon express authorization from the City. 41 Notwithstanding that the Leases made Petitioners responsible for debris removal, the City hired the contractors who performed the debris removal activities and Petitioners had no control over this activity nor did they bear its cost. 42 Thus Petitioners were deprived of the right to fulfill this debris removal obligation under the Leases.



Almost 3,000 people died in the attack on the Twin Towers and public sentiment made it impossible to rebuild in the same location. 43 Petitioners' witness, Mr. Levy, testified that shortly after 9/11, based on the statements of various governmental officials, it was clear that Petitioners would not be permitted to rebuild on the Twin Towers Footprints. Not only is this testimony credible, but it would stretch credulity to believe otherwise, especially since the Port Authority was not only Petitioners' landlord but was also the government entity with the power to make any necessary changes in the use of the WTC Site.



The Port Authority is a public authority created by a compact between the State and the State of New Jersey. 44 In 1962, the Port Authority was given the power to plan, construct and operate the World Trade Center. 45 It has complete control over the land that constitutes the WTC Site. 46 It has extremely broad land use powers over the WTC Site including the power of condemnation. 47



The LMDC was formed as a public benefit corporation which was created in the aftermath of 9/11 to coordinate the remembrance, rebuilding and revitalization efforts in Lower Manhattan. It is a subsidiary of the State Urban Development Corporation (“NYSUDC”) doing business as the Empire State Development Corporation. 48 The LMDC has the statutory authority of the NYSUDC and broad land use powers with respect to lower Manhattan. 49 It is the agency responsible for conducting the environmental and historic preservation reviews of the WTC Site. 50



The State and City governments, the Port Authority, the LMDC and Petitioners, faced with a crisis of historic proportions, endeavored in good faith to find a way to redevelop the WTC Site while addressing the concerns of the public and the families of the victims of the attacks, as well as the challenging financial requirements of an economically viable redevelopment. In the spring of 2002, while the City still controlled the WTC Site, the Port Authority and the LMDC requested design proposals for the WTC Site. They held a design competition and announced the wining design concept in February 2003. During this planning and design phase, Petitioners were not asked to consent to the decision to redesign the WTC Site in this manner nor were they asked to consent to the selection of the winner of the competition. Thus, Petitioners were deprived of their right under the Leases to rebuild the Buildings following the previous plans, or to initiate changes to those plans with the consent of the Port Authority.



Mr. Levy's credible testimony that Petitioners were told shortly after 9/11 that they would not be able to rebuild on the Twin Towers Footprints is also supported by the December 2003 Amendment to the Leases which first formally memorialized the actions of various government entities over the preceding 27 months during which those government entities deprived Petitioners of the right under the Leases to rebuild new buildings on the locations of the destroyed Buildings. The December 2003 Amendment contained a broad outline of the new design for the WTC Site as it affected the Lessees. In that design, the Twin Towers Footprints and certain other spaces were removed from the Premises leased to Petitioners and the parties agreed to “include in the Premises” other space on which Petitioners could build five office towers containing at least ten million square feet of office space.



In the December 2003 Amendment, the broad scope of the business deal had changed. The Silverstein Lessees had originally leased four Buildings containing an aggregate of ten million square feet of office space in particular locations. Now, it was contemplated that they would be given the same amount of space in five buildings in different locations, and one of these buildings was even outside the original WTC Site. However, this document did not provide enough detail to enable Petitioners to begin rebuilding. The Leases were not amended with sufficient detail to actually begin the rebuilding process until 2006, after the close of the Tax Years. At that point, 1 World Trade Center LLC was acquired by the Port Authority and the remaining three Silverstein Lessees were given the right to build three buildings containing 6.2 million square feet of office space, most of which was not in the locations of any of the original four Buildings. This was a business arrangement very different from both the one entered into in 2001 and the one contemplated in 2003.



The Commissioner also claims that throughout the Tax Years Petitioners always had rights to “premises” covered by the Leases because the Port Authority leased to Petitioners the volumes of space and “any replacements thereof. 51 Under Respondent's reading of the Leases, throughout the Tax Years, Petitioners always had the rights to either the original locations, or replacement locations within the WTC Site, either of which would constitute the “Premises” covered by the Leases.



The language to which the Commissioner refers reads as follows:



The Port Authority hereby lets to the Lessee and the Lessee hereby hires and takes from the Port Authority at the World Trade Center: (a) all that certain volume of space occupied by the Building (as hereinafter defined) and any replacements thereof [emphasis added] .... 52

However, Respondent's analysis rests on a misreading of this provision. The phrase “any replacements thereof” clearly refers to the possible future replacement of the Building during the ninety-nine year term of the Lease, a possible need for which was foreseen and addressed in the Rebuilding Obligation. 53 Respondent points to nothing in the Leases to indicate that the parties ever contemplated a replacement of the location of the volume of space occupied by the Building covered by that Lease.



It is clear that beginning immediately after 9/11, the Port Authority was in breach of its obligation to Petitioners under the Leases to provide premises to which Petitioners had rights of use or occupancy. There was, of course, no malice in this breach. It was caused by necessary government action taken in response to a tragedy of massive proportions. Where performance becomes impossible because of action taken by government, performance is excused. Metpath Inc. v. Birmingham Fire Insurance Co., 86 A.D.2d 407, 411 (1 st Dept. 1982) , citing 10 N.Y. Jurisprudence, Contracts § 373 and the cases cited therein.



Nevertheless, while Petitioners were deprived by government action of their rights under the Leases, they continued to make the payments due under those Leases. Respondent, citing Conboy, Hewitt, O'Brien & Boardman, TAT No. 92-1121 (City Tax Appeals Tribunal, December 31, 1996), aff'd, 249 A.D.2d 235 (1 st Dep't 1998) , contends that the rent must be for “premises” because “[n]o commercial enterprise can be viewed as making payments without any reason therefor.” However, businesses do make payments for a variety of reasons that may be deductible as business expenses for federal income tax purposes but which are not necessarily subject to the CRT. See, e.g., Peat Marwick Main & Co. v. NYC Dept. of Finance, 76 N.Y.2d 527 (1990) [payments for use of a luxury skybox in Madison Square Garden where the taxpayer entertained business clients were not subject to CRT].



Petitioners bore the risk of loss from the destruction of the premises and bore the risk of lost income from their subtenants. Petitioners insured against such losses and made payments to the Port Authority from the proceeds of this insurance. After 9/11, Petitioners had the expectation that they would eventually be able to rebuild somewhere on the WTC Site and continued to make the payments due under the Leases because they were contractually obligated to do so and they did not want to be in default and risk losing those rights once the WTC Site plans were finalized. Therefore, the payments made were for the expectation of the right to occupy in the future as yet unidentified premises and not for the use and occupancy of the specific premises described in the Leases.



It is not surprising that there is no direct authority regarding the applicability of the CRT to payments for the possibility in the future of obtaining premises yet to be designated. There is some authority, however, that is tangentially relevant on the issue of when the CRT applies where a tenant makes payments under a lease but no longer occupies the premises.



In Conboy, Hewitt, supra, a lessee entered into an agreement with its landlord to surrender possession of the premises and terminate the lease a year early. The agreement required the tenant to continue to pay rent unless and until the landlord relet the premises, at which time the landlord and vacating tenant would split any “net profits” from reletting at a higher rent to a new tenant. The Tribunal held that the CRT applied to these payments because the payments related back to the original lease and were for “taxable premises.” The landlord never released the tenant from the lease and the tenant “used” the premises by leaving it in a condition that would facilitate its re-rental in order to terminate the lessee's obligations.



In contrast, the Department previously opined that a lump sum payment in consideration for the landlord's cancellation of a lease is not subject to CRT. FLR(111)-CR-10/85. See, also, Ted Bates Worldwide, Inc., TAT(H) 93-274(CR) (City Tribunal, ALJ Division, March 31, 1994) (a non-precedential ALJ determination). The Department's view appears to be that this payment terminates the tenant's interest in the future disposition of the premises and the tenant can no longer be said to be “using” those premises.



Conboy, Hewitt, the Department's ruling and Ted Bates all dealt with specifically identified physical locations that the tenants no longer wished to occupy, but which they could have continued to occupy had they not voluntarily surrendered possession of those premises. Nevertheless, this limited authority indicates that taxability depends on the reason for a payment and whether the tenant has any continuing rights to use the specific premises covered by the lease and for which the payment at issue is being made. The record is abundantly clear that the payments at issue were made because Petitioners had assumed the risk of loss under the Leases and hoped that they would be permitted to rebuild in some unspecified location on the WTC Site in the future. Such payments were not for the use or occupancy of the Premises defined in the Leases, since by governmental action, Petitioners no longer had any continuing rights to build on any specific spaces covered by the Leases.



The Department's own interpretation of the CRT supports Petitioners' position that the CRT does not apply when the taxpayer has no rights to a specific space. The Department stated that the CRT is applicable where “the storer rents a specific portion of a warehouse, and ... where goods are assigned to a particular space ....” By contrast, “[t]he tax is not applicable when particular space in a warehouse is not assigned to the goods deposited by the storer.” 54 Thus, the Department's own interpretation of the CRT indicates that it cannot impose the CRT on payments for the right to some premises yet to be determined in the future. For the tax to be imposed, there must be a right to occupy specific premises.



The Commissioner asserts that the enactment of Code § 11-704(a)6 in 2005, 55 which repealed the CRT with respect to the WTC Site effective August 30, 2005, indicates that the CRT applied to Petitioners during the Tax Years because the Legislature would not have engaged in a meaningless or redundant act. However, this legislation was part of broader legislation that provided both CRT and sales tax exemptions as well as various other incentives to businesses that located in Lower Manhattan. 56 It provides a permanent CRT exemption, even after the Buildings are rebuilt. It applies not only to Petitioners, but also to any of their future tenants and to tenants of other buildings on the WTC Site that are leased to parties other than Petitioners. In addition, the legislation provides various incentives applicable to parts of Lower Manhattan that are outside the WTC Site to aid in redevelopment of this area. There is nothing in the legislative history of this exemption to indicate that the Legislature considered the applicability of the CRT to Petitioners during the Tax Years. 57



The Commissioner also contends that this forum must give deference to his interpretation of statutory terms unless that interpretation is irrational or unreasonable. He is in error. The Tribunal was created under the City Charter for the express purpose of reviewing petitions contesting notices issued by the Commissioner and it has the “same power and authority as the commissioner of finance to impose, modify or waive any taxes within its jurisdiction....” City Charter § 168(a). 58



As Petitioners did not pay rent for taxable premises after September 11, 2001, it is not necessary to address Petitioners' alternative arguments regarding the applicability of the subtenant deduction to the insurance payments or the proper treatment of the Lump Sum Payments. 59



ACCORDINGLY, IT IS CONCLUDED THAT:



The payments made by Petitioners to the Port Authority after September 11, 2001 did not constitute base rent paid for taxable premises because Petitioners no longer had the right to occupy specific space after the government takeover of the World Trade Center site on September 11, 2001. Thus, the CRT does not apply to those payments.



For the reasons set out above, the Petitions of 1 World Trade Center LLC, 2 World Trade Center LLC, 4 World Trade Center LLC and 5 World Trade Center LLC (now known as 3 World Trade Center LLC) are granted and the Notices of Determination dated May 27, 2007 are cancelled.



DATED: December 3, 2009, New York, New York



_______

MARLENE F. SCHWARTZ

Administrative Law Judge



1



One World Trade Center was also known as “Tower A” or the “North Tower.”

2



Two World Trade Center was also known as “Tower B” or the “South Tower.”

3



See, Taxpayers' Exhibit (“T. Ex.”) 1, Exhibit T and Tr. pp. 49-50.

4



“PATH” is the Port Authority's Trans-Hudson commuter rail line that connects Manhattan with various locations in New Jersey. See, McKinney's Unconsol L. § 6861.

5



T. Ex. 1, Sections 2.1(a)and (b).

6



T. Ex. 1, Section 2.1(c).

7



T. Ex. 1, Exhibit A.

8



This distinction is not material to these proceedings.

9



Tr. pp. 21-2.

10



Tr. p. 26.

11



Tr. pp. 28-9.

12



T. Ex. 1, Section 15.1.

13



T. Ex. 1, Section 15.1.4.

14



Tr. pp. 31-2.

15



The portion of the WTC Site on which the Twin Towers stood prior to their destruction on September 11, 2001 came to be known as the “Twin Towers Footprints.” That term is also used to describe the portion of the concrete slab on which the Twin Towers stood prior to 9/11. See, Coalition of 9/11 Families, Inc. v. Lower Manhattan Development Corp., 820 N.Y.S.2d 842 (Table), 2006 N.Y. Slip Op. 51212 (U) (unreported disposition), WL 1789056 (N.Y. Sup.) .

16



This includes the sub-grade space in the net leased premises for One World Trade Center (the North Tower).

17



The “bathtub” is the concrete barrier surrounding the WTC Site that keeps the Hudson River out.

18



T. Ex. 31, ¶ 7; Tr. pp. 31, 41-2.

19



T. Ex. 16.

20



Tr. p. 54.

21



Tr. pp. 30-1.

22



T. Exs. 17, 18, 19, 20 and 21.

23



Tr. p. 43.

24



T. Ex. 10, Section 1.(a)(ii), and (c).

25



T. Ex. 11.

26



T. Ex. 11, Tr. pp. 38-9.

27



T. Ex. 12.

28



To the extent that the location eventually designated for one of the buildings to be constructed by one of the Petitioners overlaps somewhat with the location of one of the Buildings that had been destroyed, that overlap is coincidental. Tr. p. 60.

29



See, T. Ex. 12, Exhibit I.

30



T. Ex. 1, Section 5.1.

31



T. Ex. 1, Section 5.5. This is required under Internal Revenue Code “IRC” § 467 .

32



Tr. p. 27.

33



T. Ex. 1, Section 14.1.

34



T. Ex. 9.

35



T. Ex. 31, ¶ 11; Tr. pp. 52-3.

36



L. 2005, ch. 2, § A 4, eff. Aug. 30, 2005.

37



City's Exs. A, B, C, and D.

38



Computed to June 15, 2007.

39



Code § 11-701.7.

40



See, e.g., NYC Finance Admin. Bulletin, March, 1972.

41



See, In Re World Trade Center Disaster Site Litigation, 456 F. Supp.2d 520 (S.D.N.Y., 2006), aff'd in part and appeal dismissed in part, 521 F.3d 169 (2d Cir. 2008) . This case dealt with liability for injuries to workers involved in cleaning up the WTC Site. The court held that Petitioners [the “Silverstein Defendants”] were not liable for these injuries because they had been “divested of control over their leasehold interests immediately following the September 11 attacks, reentering the site only with the City's permission and for limited purposes.” 456 F. Supp.2d at 572.

42



Diversified Carting, Inc. v. The City of New York, 2006 WL 147584 (S.D.N.Y., 2006) . This was a suit in quasi-contract by certain subcontractors relating to payment for clean-up work done at the WTC Site. The City had hired the contractors who, in turn, hired the subcontractors. The subcontractors argued that they were performing a duty owed by Petitioners [the “Silverstein Entities”] as the lessees and that they provided a benefit to Petitioners for which Petitioners should compensate them. The court held that Petitioners were not liable to these subcontractors because the City took over the WTC Site and Petitioners did not participate in or fund the clean-up efforts.

43



For example, the New York Times reported that some family members of those who died vowed to chain themselves to bulldozers if any effort was made to build anything on the site where their loved ones had died. NY Times July 28, 2002. See, also, Coalition of 9/11 Families, Inc., supra n. 16 for an indication of how strong the feelings of the 9/11 Families were with respect to the Twin Towers Footprints.

44



The State laws relating to the Port Authority are contained in McKinneys Unconsol. L. § 6401 et seq.

45



See, McKinneys Unconsol. L. § 6601 et seq.

46



Coalition of 9/11 Families, Inc., supra, n.15

47



Courtesy Sandwich Shop, Inc. v. Port of New York Authority, 12 N.Y. 2d 379 appeal dismissed, 375 U.S. 78 , reh'g denied, 375 U.S. 960 (1963) .

48



See, Coalition of 9/11 Families, Inc., supra, n. 15 .

49



See, Wall Street Garage Park Corp. v. LMDC, 799 N.Y.S. 2d 165 (Sup. Ct. N.Y. Cty 2004) .

50



Coalition of 9/11 Families, supra, n. 15 .

51



Respondent's Brief, p. 21.

52



T. Ex. 1 Sections 2.1(a).

53



See, text accompanying n. 12, supra.

54



NYC Finance Dep't Bulletin 1965-1, April 7, 1965 interpreting the former (but substantially identical) CRT Former Code §§ L46-1.0 and L46-2.0.

55



See, n. 36, supra.

56



Memorandum in Support of S5930, New York State Senate, 2005 McKinney's Session Laws of NY at 1897-98.

57



See, generally, Bill Jacket, L. 2005, ch. 2.

58



See, also In re Cord Meyer Development Company, TAT No. 90-0614 (City Tribunal, January 9, 1992) in which the Commissioner's deference argument was specifically rejected.

59



I have considered all other arguments and do not find them persuasive.