Originally published by Jack Townsend.
This article caught my attention today: Bruce Vielmetti, Former Foley & Lardner partner suspended for falsifying documents in IRS audit of Carmex family (Journal Sentinel 10/16/18), here. The opening paragraph says:
A former Foley & Lardner partner was suspended two years Tuesday by the state Supreme Court for lying to the IRS during an audit of two wealthy estates connected to a major area business.
So, I went to the Supreme Court opinion which is here. I offer the the pertinent portions relevant to the issue I address here as to whether and how the IRS can correct a tax under-assessed because of a Tax Court decision induced by fraud.
¶6 While working at the Foley firm, Attorney Wiensch provided estate planning services to a husband and wife who were owners of a privately owned business corporation. Attorney Wiensch prepared a trust under the terms of which the husband and wife were the trust donors and their children were the trustees and beneficiaries. Attorney Wiensch drafted an Installment Sale Agreement, pursuant to which the husband sold most of his stock in the company to the trust in exchange for a promissory note in an amount in excess of $50 million based on the appraised value of the stock sold. The purpose of the stock sale was to transfer wealth to the clients’ children, via the trust, free of gift and estate taxes and to ensure that any future appreciation of the stock held by the trust would not become part of the husband’s estate.
¶7 Transactions structured like the stock sale are reviewed by the Internal Revenue Service (IRS) to determine if the promissory note is a bona fide debt, or if the transaction should be treated as a taxable gift, or if transferred assets should be included in the seller’s gross estate for purposes of determining the estate tax liability. Strategies used by estate planning professionals to minimize the risk of an IRS challenge to transactions such as the stock sale have included the use of personal guarantees by trust beneficiaries of a certain percentage of the sale price, often ten percent, or of a defined value formula clause that automatically adjusts valuation of the transferred assets based on a final determination by the IRS or a court.
¶8 The husband died first, and pursuant to his estate plan, ownership of his remaining shares in the company passed to his wife as the surviving spouse. Attorney Wiensch was retained to represent the husband’s estate. Attorney Wiensch prepared the estate tax return for the husband’s estate and filed it with the IRS. The IRS audited the husband’s estate tax return, as well as other gift tax returns filed on behalf of the clients for years prior to the husband’s death.
¶9 An IRS estate tax attorney served as the examiner for the IRS in conducting the audit. The IRS attorney corresponded with Attorney Wiensch in an effort to obtain information material to the audit. In September 2012, in response to requests from the IRS attorney, Attorney Wiensch sent the IRS copies of an Installment Sale Agreement, a Collateral Pledge Agreement, and a Guaranty of Specific Transaction. Attorney Wiensch represented to the IRS that the Installment Sale Agreement memorialized the terms of the stock sale and that the Collateral Pledge and Guaranty related to the stock sale. The copy of the Installment Sale Agreement Attorney Wiensch sent to the IRS in September 2012 contained a defined value formula clause. Attorney Wiensch altered and misdated the Installment Sale Agreement he sent to the IRS in September 2012. He did not prepare this document contemporaneously with the stock sale. The Installment Sale Agreement the husband actually executed on an earlier date did not contain the defined value formula clause.
¶10 Attorney Wiensch also altered and misdated the Guaranty he sent to the IRS in September of 2012. He did not prepare this document contemporaneously with the stock sale. He copied the signatures of the clients’ children from a different document bearing a different date and pasted the signatures on the copy of the Guaranty he sent to the IRS attorney.
¶11 Subsequent to its receipt of Attorney Wiensch’s September 2012 letter and enclosures, the IRS issued a Notice of Deficiency with respect to the estate and gift tax returns Attorney Wiensch filed on behalf of the husband’s estate. In the Notice of Deficiency, the IRS asserted that the stock sale was a gift. The IRS also asserted, in the alternative, that if the sale was not a gift, the stock value at the time of the transfer was double the appraised value of the stock. The notice stated that the IRS sought gift and estate taxes and negligence penalties against the husband’s estate in the sum of multiple millions of dollars.
¶12 The IRS simultaneously issued a Notice of Deficiency regarding the wife, asserting she owed gift taxes and penalties in the sum of multiple millions of dollars. In the Notice of Deficiency issued to the wife, the IRS raised the same issues it had raised in the Notice of Deficiency issued to the husband’s estate.
¶13 After the IRS issued the Notice of Deficiency to her, the wife died. The clients’ children, as personal representatives of the husband’s estate, retained the Foley firm to respond to the Notice of Deficiency issued to his estate. The clients’ children, as personal representatives of the wife’s estate, also retained the Foley firm to respond to the Notice of Deficiency issued to the wife.
¶14 Attorneys with the Foley firm other than Attorney Wiensch filed a petition on behalf of both the husband and wife’s estate seeking a redetermination of the deficiencies found by the IRS. The petitions filed by the Foley attorneys alleged the stock sale was made pursuant to the Installment Sale Agreement Attorney Wiensch had altered to contain a defined value formula clause. The petitions also relied on the altered Guaranty purportedly signed by the clients’ children that Attorney Wiensch had sent to the IRS. At the time they filed the petitions on behalf of the clients’ estates, the Foley attorneys did not know that the Installment Sale Agreement relied on and the Guaranty purportedly signed by the clients’ children had been altered by Attorney Wiensch. Attorney Wiensch
did not inform the IRS attorney or the Foley attorneys that he had altered and misdated the Installment Sale Agreement and the Guaranty.
¶15 While the petitions were pending, the IRS continued its audit of the wife’s estate and gift tax returns. One item focused upon by the IRS was a lifetime gift transfer by the wife of some shares of the company she had inherited directly from the husband. These transfers were reported on gift tax returns filed with the IRS after the wife’s death indicating that just months prior to her death, the wife had transferred the shares to the clients’ children.
¶16 The same IRS attorney examining the husband’s estate was assigned the examination of the wife’s estate and gift tax returns. In conducting the examination, the IRS attorney requested information from Attorney Wiensch showing that the wife was mentally competent and authorized to make or consent to stock gifts to the clients’ children. By letter sent in September 2015, the IRS attorney asked Attorney Wiensch if the stock gifts were made pursuant to a Power of Attorney. Attorney Wiensch responded to the IRS in October 2015, saying that the stock gifts were made directly by the wife. In his October 2015 letter to the IRS attorney, Attorney Wiensch enclosed a copy of a Durable Power of Attorney to Make Gifts bearing an August 1999 date containing the wife’s signature. The instrument states that the wife appointed the husband as her agent and that if he lacked capacity to act, she appointed the clients’ children to be her agents. Attorney Wiensch created an altered Durable Power of Attorney to Make Gifts dated August 1999 by copying the wife’s signature from another document. Attorney Wiensch never informed the IRS attorney or the Foley attorneys that he had altered and misdated the Durable Power of Attorney to Make Gifts that he sent to the IRS attorney in October 2015.
¶17 The IRS noted that the altered Durable Power of Attorney gave the wife limited authority to make transfers of stock and in November 2015, the IRS attorney advised Attorney Wiensch that all shares of the company purportedly gifted by the wife would be considered part of the wife’s estate.
¶18 While the audit of the wife’s estate and gift tax returns was still underway, the IRS and the husband’s estate settled the issues presented in the petition filed on behalf of the husband’s estate. The settlement of the petition filed on behalf of the husband’s estate was induced by fraud, based on the altered and misdated documents that Attorney Wiensch had provided to the IRS attorney in September of 2012.
¶19 By letter dated April 14, 2016, the IRS attorney requested a response from Attorney Wiensch to the letter sent in November 2015 addressing the wife’s authority to make the stock transfers under the August 1999 Durable Power of Attorney to Make Gifts that Attorney Wiensch had provided in October 2015. By letter dated June 16, 2016 and transmitted by facsimile, Attorney Wiensch sent the IRS attorney a copy of a Durable Power of Attorney for Financial Matters bearing a February 2011 date purportedly signed by the wife. Attorney Wiensch created this document by copying and pasting the wife’s signature from another document.
¶20 Suspecting that the February 2011 Durable Power of Attorney was not what Attorney Wiensch purported it to be, the IRS attorney asked that Attorney Wiensch produce the original copies of the 1999 and 2011 powers of attorney and the February 2011 amendment to the wife’s trust. Attorney Wiensch told the IRS that he did not have the originals of the requested documents.
¶21 The IRS attorney then wrote directly to the clients’ children asking that the original documents that had been requested from Attorney Wiensch be produced. On July 13, 2016, Attorney Wiensch told the IRS attorney that the clients’ children were looking for the original documents but that “there is no reason to retain an original power of attorney after a principal’s death because the power of attorney lapses on a principal’s death.”
¶22 In July 2016, the IRS attorney told Attorney Wiensch the IRS would need to interview the clients’ children in person.
¶23 By letter dated August 22, 2016, the Foley firm informed the IRS that Attorney Wiensch was no longer with the firm and that they believed the August 1999 Durable Power of Attorney to Make Gifts and the February 2011 Durable Power of Attorney for Financial Matters that Attorney Wiensch had provided to the IRS were not authentic and were being withdrawn. The Foley firm subsequently alerted the IRS to the irregularities later discovered with regard to the Guaranty and the defined value formula clause in the Installment Sale Agreement and the firm reported Attorney Wiensch’s conduct to the OLR.
* * * *
¶33 The OLR says despite the circumstances under which it settled the litigation involving the estates, the IRS did not move to reopen the cases after it was informed of Attorney Wiensch’s misconduct.
JAT Comments:
I have bold-faced the portions above that I particularly refer to here.
I simply point out that, since the Tax Court decision was induced by fraud (see par. 18 above), the relevant statute of limitations my be open. Section 6212(c)(1) provides in relevant part that, if the taxpayer timely petitions the Tax Court, the IRS has no right to determine any additional deficiency of income tax for the same taxable year, * * * except in the case of fraud.”
At a surface level, this would seem to be a case that could permit the statute to be open and additional taxes asserted. However, I wonder if this statute might be interpreted similarly to the open statute of limitations in Section 6212(c)(1) where there is an unlimited statute of limitations “In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed.”
Readers may recall that, as of now there is a split between the Federal Circuit and the Tax Court as to whether, for purposes of the unlimited statute of limitations for fraud in § 6501(c)(1), the taxpayer’s fraud is required or whether someone else’s fraud that affected the return (e.g., a return preparer’s) will suffice. The Federal Circuit held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015) that the taxpayer’s fraud was required. The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that another’s fraud would suffice. That same interpretive issue may appear in this case with respect to § 6212(c)(1).
Apparently, the IRS has not taken action, but I suggest that, if the facts are as narrated, it would appear that the IRS could assert a deficiency. I don’t know that it would necessarily move to re-open the Tax Court cases.
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