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Succession of Ciervo v. Robinson

Court of Appeals of Louisiana, First Circuit

December 12, 2019

THE SUCCESSION OF ANTHONY CIERVO, JR.
v.
KIMBERLY L. ROBINSON, SECRETARY, DEPARTMENT OF REVENUE, STATE OF LOUISIANA

          Appealed from the Louisiana Board of Tax Appeals State of Louisiana Case No. 10832D The Honorable Judge Tony Graphia (Ret.) Chairman Presiding Cade R. Cole, Board Member Frances "Jay" Lobrano, Board Member

          William A. Neilson, Sr. Kyle A. Spaulding New Orleans, Louisiana and Kevin M. Wheeler Donald J. Miester, Jr. New Orleans, Louisiana Counsel for Plaintiff/Appellant The Succession of Anthony Ciervo, Jr.

          Miranda Y. Scroggins Antonio Ferachi Debra Morris Brian DeJean' Baton Rouge, Louisiana Counsel for Defendant/Appellee Kimberly Robinson, Secretary of the Louisiana Department of Revenue

          BEFORE: McDONALD, THERIOT, AND CHUTZ, JJ.

          THERIOT, J.

         In this income tax prescription case, a taxpayer's succession seeks review of a decision of the Board of Tax Appeals ("BTA"), which dismissed its Petition for Redetermination of Assessment filed against the Louisiana Department of Revenue ("LDR"). For the reasons set forth herein, we reverse and remand to the BTA.

         FACTS AND PROCEDURAL HISTORY

         Anthony Ciervo, Jr. filed timely Louisiana state income tax returns for the tax years 2006-2011, all of which were accepted by the LDR. His original reported federal tax liability for the tax years 2006-2011 was $7, 963.00, $10, 184.00, $4, 155.00, $2, 747.00, $2, 698.00, and $3, 464.00, respectively.

         On August 1, 2014, Mr. Ciervo made a preliminary request to participate in the federal Offshore Voluntary Disclosure Program ("OVDP") administered by the Internal Revenue Service ("IRS"). The OVDP's objective is to give taxpayers, who are out of compliance with United States tax and related laws due to undisclosed foreign accounts and assets, an opportunity to avoid the risk of substantial civil penalties and generally eliminate the risk of criminal prosecution for tax noncompliance and failure to file by voluntarily disclosing the foreign accounts and assets and submitting full payment of any tax liabilities for the years included, plus certain penalties and interest. In accordance with the requirements for participation in the OVDP, on April 24, 2015, Mr. Ciervo filed amended federal income tax returns for tax years 2006-2011, reporting his previously-undisclosed foreign accounts or assets, and made estimated advance payments of federal taxes, including penalties and interest, in the amounts of $1, 731, 329.00 for 2006, $1, 879, 993.00 for 2007, $1, 567, 482.00 for 2008, $576, 755.00 for 2009, $320, 786.00 for 2010, and $23, 299.00 for 2011.

         Mr. Ciervo died in March 2016, and "The Succession of Anthony Ciervo, Jr.," represented by its independent executor, Anthony V. Ciervo, proceeded with the OVDP process. Following Mr. Ciervo's death, the IRS examined his amended returns, made adjustments, and refunded a portion of the estimated advance payments to reflect the adjustments. Once the OVDP process was concluded, the IRS reported the adjustments to Mr. Ciervo's 2006-2011 federal income tax liability to the LDR. The Succession did not report the adjustments to Mr. Ciervo's 2006-2011 federal tax liability to the LDR, nor did it file amended state returns for 2006-2011 to reflect the adjustments.

         On June 26, 2017, based on the IRS report revealing a substantial discrepancy in federal tax liability between what was reported originally by Mr. Ciervo and what was reported on the amended returns, the LDR assessed additional state income tax owed by Mr. Ciervo for the tax years 2006-2011. These LDR assessments, which included tax, interest, and penalties calculated through July 11, 2017, totaled: $242, 523.90 for 2006; $262, 439.92 for 2007; $220, 296.68 for 2008; $82, 566.10 for 2009; $47, 551.74 for 2010; and $2, 612.18 for 2011.

         The Succession protested the LDR assessments and filed a Petition for Redetermination of Assessment, asserting that the taxes were prescribed under the three-year prescriptive period provided by the Louisiana Constitution and that none of the provisions of La. R.S. 47:1580, which provide for interruption or suspension of prescription, were applicable. The LDR's answer denied the allegation that none of the provisions of La. R.S. 47:1580 were applicable and raised as an affirmative defense that the assessments were properly assessed and timely.

         Although the LDR's assertion that its facially-prescribed assessment notices were timely implies an allegation that prescription was interrupted or suspended under La. R.S. 47:1580, the LDR did not specify the particular grounds for interruption or suspension on which it relied, either in its answer or in response to discovery requests. As a result, the Succession filed a motion to compel complete discovery responses, as well as a motion to strike the LDR's affirmative defense of timeliness on the ground that it was not set forth with particularity as required by La. C.C.P. art. 1005. A hearing was held on the motions on April 11, 2018, at which time the LDR argued that its failure to provide more detailed discovery responses was at least partially the result of its inability to obtain information about Mr. Ciervo's federal taxes from the IRS. One example given by the LDR was its attempt to ascertain whether Mr. Ciervo had been audited by the IRS. The commencement of a federal audit would suspend prescription under La. R.S. 47:1580(B)(3), but without access to Mr. Ciervo's federal tax file to determine whether and when such an audit commenced, the LDR could not allege facts supporting suspension of prescription under La. R.S. 47:1580(B)(3) with particularity. According to the LDR, it had requested that the Succession obtain the federal transcripts and other necessary information from the IRS, since this information can be released to the taxpayer but not to the LDR, but the Succession had refused to do so. The LDR noted that its witness, LDR Management Analyst Ursula Domingue, has authority to access certain federal tax information regarding Mr. Ciervo and can testify as to those matters at the hearing on the merits; however, Ms. Domingue was not allowed to provide a printed copy or even show the federal tax information to LDR's counsel, thus preventing LDR from providing the detailed discovery responses requested by the Succession. At the conclusion of the April 11 hearing, the BTA indicated that it would take the matter under advisement, but cautioned the parties that granting of the motion to compel so close to the scheduled hearing date of May 8, 2018 would necessitate the rescheduling of the hearing on the merits. The BTA also recommended that the Succession obtain the tax transcripts requested by the LDR to eliminate the need for expert witness testimony as to matters that could be easily resolved by the documents, such as whether or not an audit took place. Faced with the prospect of rescheduling the hearing on the merits, counsel for the Succession announced that he would "withdraw all of [the Succession's] discovery" in order to preserve the May 8, 2018 hearing date, and the BTA noted that the Succession's motion to strike and motion to compel were withdrawn.

         The scheduling order issued by the BTA for the May 8, 2018 hearing on the merits required prehearing memoranda to be submitted and all witnesses disclosed at least fifteen days prior to the hearing. The Succession filed its prehearing memorandum and witness list on the April 23, 2018 deadline, revealing for the first time that: (1) Mr. Ciervo's amended federal returns were filed in accordance with the IRS's OVDP, which does not include an audit as part of the process, and (2) the closing agreement entered into by the Succession and the IRS as part of the OVDP explicitly states that no audit had taken place.

         On April 24, 2018, the Succession filed a motion in limine, seeking to exclude the LDR's witnesses in order to prevent a "trial by ambush," since they had not been disclosed timely, and an advance objection to any request the LDR might make for a continuance of the hearing on the merits in order to cure the failure to file the witness list at least fifteen days before the hearing. The motion was set for hearing on May 8, 2018, immediately prior to the hearing on the merits.

         On May 7, 2018, the LDR filed its prehearing memorandum and witness list. The only witness listed by the LDR was Ursula Domingue, who had been identified by the LDR as a potential witness at the April 11 hearing. The LDR's prehearing memorandum set forth several bases for its argument against prescription, including: (1) prescription on the 2011 tax year was suspended under La. R.S. 47:1580(B)(2) by Ciervo's OVDP agreement with the IRS; (2) prescription was interrupted under La. R.S. 47:1580(C)(1) by the Succession's failure to file an amended state return as required by La. R.S. 47:103(C) following the federal adjustments; (3) the adjustments reported to LDR by the IRS in October 2016 created an obligation for the Succession to file amended state returns, resulting in a duty for LDR to assess new taxes due; and (4) prescription was suspended under La. R.S. 47:1580(A)(4) by the filing of each of Mr. Ciervo's original returns because they were demonstratively false and "[t]he totality of the breadth of omissions, the major discrepancies in amounts reported to the IRS and [LDR], and the failure to file the amended [state] returns show a willful intent. . . to evade paying taxes to [LDR]." The LDR noted that although its prehearing memorandum was untimely, the facts supporting several of its listed arguments against prescription were not known to the LDR until it received the Succession's April 23, 2018 prehearing memorandum.

         At the beginning of the hearing on the merits, the BTA granted the Succession's motion in limine, excluding the LDR's witness, except for rebuttal purposes, due to the LDR's failure to comply with the scheduling order regarding disclosure of witnesses. The Succession then asked the BTA to rule on its motion to strike the LDR's affirmative defense, which it asserted had been taken under advisement at the April 11 hearing. The Succession maintained that any assertion of fraud in connection with an affirmative defense had been waived by the LDR's failure to plead fraud with particularity in its answer. The LDR argued that it was not aware of certain facts supporting its affirmative defense until it received the Succession's April 23, 2018 prehearing memorandum, which disclosed Mr. Ciervo's participation in the OVDP for the first time. Although the BTA correctly noted that the Succession had voluntarily withdrawn its motion to strike the affirmative defense in order to preserve the hearing date, it nevertheless prohibited the LDR from claiming fraud or introducing evidence on the issue of fraud at the hearing on the merits. In so ruling, the BTA distinguished a fraudulent return from a false return, noting that the LDR was not prohibited from alleging that a false return was filed. However, the BTA noted that regardless of whether a return was alleged to be fraudulent or false, evidence of intent to evade taxes would be required in order to suspend prescription under La. R.S. 47:1580(A)(4).

         At the hearing on the merits, the following exhibits were filed by the Succession: Mr. Ciervo's original timely-filed 2006-2011 Louisiana income tax returns; the LDR's March 3, 2017 notices of proposed tax due for tax years 2006-2011; the Succession's March 30, 2017 protest letter, asserting that the proposed tax assessments were barred by prescription; the LDR's June 26, 2017 notices of assessment and appeal rights for tax years 2006-2011; the updated IRS account transcripts for tax years 2006-2011; and the IRS's published Frequently Asked Questions and Answers regarding the OVDP. Following the introduction of its exhibits, the Succession moved for a directed verdict, arguing that its documentary evidence proved that the assessments were facially-prescribed, and since the LDR had been prohibited from alleging fraud, they would be unable to prove suspension or interruption of prescription. The BTA denied the motion, noting that there are other bases besides fraud on which the LDR could possibly prove interruption or suspension of prescription under the law.

         Jerald L. Curtner, a semi-retired former IRS revenue officer, testified as an expert on behalf of the Succession. Mr. Curtner's work for the IRS included analyzing IRS account transcripts and determining tax liability. Since his retirement from the IRS, he has assisted taxpayers in submitting offers and compromises to the IRS or the LDR in conjunction with audits and collection matters. Mr. Curtner reviewed Mr. Ciervo's 2006-2011 IRS account transcripts and testified regarding his conclusion that an IRS audit did not occur. According to Mr. Curtner, the transcripts contain a Code 420, which means that the return was flagged for a possible examination or audit, but did not contain Code 424, which would indicate an audit took place. Mr. Curtner explained that the IRS examination of the amended returns under the ODVP process was not an audit; it was a less formal review simply to determine accuracy and completeness of the amended returns, without any of the rights afforded a taxpayer in the case of an audit.

         Mr. Curtner was asked to explain why a taxpayer, such as Mr. Ciervo, would elect to participate in the OVDP and pay millions of dollars in tax, interest, and penalties, when the statute of limitations on those tax liabilities had already expired. Although he was unable to give an opinion as to why Mr. Ciervo in particular may have agreed to waive the statute of limitations and elect to participate in the OVDP, having never spoken to Mr. Ciervo or seen his OVDP application, Mr. Curtner acknowledged that the OVDP could be an aid for taxpayers who are ripe for being audited and incurring criminal penalties. Further, he noted that the statute of limitations for the IRS to assess taxes can be extended or eliminated altogether under certain circumstances, such as where the IRS can prove fraud.

         Michael A. Mayhall, a board certified tax specialist who represents taxpayers before the IRS and LDR in connection with the OVDP, [1] also gave expert testimony on behalf of the Succession. Mr. Mayhall testified that Mr. Ciervo made a preliminary application to participate in the IRS's OVDP on August 1, 2014. In order to participate in the OVDP, Mr. Ciervo was required to submit all items listed in the voluntary disclosure submission within ninety days after approval of his preliminary request to participate. Although not a complete listing, Mr. Ciervo's voluntary disclosure submission was required to include the following for the 2006-2011 tax years: payment for the total amount of tax, interest, offshore penalty, accuracy-related penalty, and (if applicable) failure-to-file and failure-to-pay penalties; copies of previously-filed original and (if applicable) amended federal income tax returns; complete and accurate amended federal income tax returns, with applicable schedules detailing the amount and type of previously-unreported income from foreign financial accounts or domestic sources; copy of the completed and signed Offshore Voluntary Disclosure Letter submitted to the IRS Criminal Investigation Division; completed Foreign Account or Asset Statement for each previously-undisclosed OVDP asset during the voluntary disclosure period; completed and signed Taxpayer Account Summary with Penalty Calculation; properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and FBAR[2] penalties; copies of filed FBARs for foreign financial accounts maintained during the voluntary disclosure period; copies of statements for all financial accounts reflecting all account activity and all relevant documents pertaining to OVDP assets other than foreign financial accounts; a statement identifying all foreign entities, held directly or indirectly, as well as a statement concerning the entities' ownership or control; complete and accurate information returns (or amended returns, if applicable) required if foreign entities held ODVP assets; and any specific additional information requested by the examiner to process the voluntary disclosure. Mr. Mayhall testified that Mr. Ciervo submitted all items required for participation in the OVDP on April 23, 2015, and the OVDP process concluded on October 24, 2016, after Mr. Ciervo's death.

         Like Mr. Curtner, Mr. Mayhall concluded, based on his review of the federal tax transcripts and his knowledge of the OVDP, that no IRS audit had taken place. Mr. Mayhall explained that Mr. Ciervo would not have even been eligible to participate in the OVDP if he was already under criminal investigation by the IRS Criminal Investigation Division or under IRS civil examination for any year, regardless of whether it related to undisclosed OVDP assets. Further, the OVDP process does not include the procedural formalities required of an audit, the 2006- 2011 account transcripts did not include an audit code, and the closing agreement executed as part of the OVDP process contains an acknowledgment by the IRS that it did not conduct an audit.

         Although the stated objective of the OVDP is "to bring taxpayers that have used undisclosed foreign accounts and assets . . . to avoid or evade tax into compliance with United States tax and related laws," (emphasis added), Mr. Mayhall explained that the 2014 OVDP was available to taxpayers who wished to voluntarily disclose their previously-undisclosed foreign accounts and assets to avoid prosecution and limit their exposure to civil penalties, without any requirement that the taxpayer admit that he had been intentionally avoiding or evading taxes. Mr. Mayhall testified that in his experience, there are a variety of reasons why a taxpayer would enter the OVDP, and not all of those reasons necessarily involve an intent to avoid or evade taxes:

         I represented people that didn't know they had offshore accounts.

They did not know. It was set up by their parents and their parents had passed away and all of [a] sudden they find out years later that they had an offshore account and we would have to go back and adjust that.
I've represented people who have come to the United States and who had accounts, say, in England or Italy, and didn't realize that they were supposed to . . . report those accounts and had income that they should have reported. That ...

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