The Art of the Tax Deal

by Tom Yamachika, President, Tax Foundation Hawaii

One of the basic freedoms we have in this country, enshrined in our Constitution, is the freedom to contract.  Two or more parties with differing interests can agree to just about anything, as long as it isn’t illegal, and our country’s court system will enforce that agreement.

The rules work a little differently when the government is part of the agreement.  The government has the ability to contract as well, but the ability is defined and limited by law.  It should be.  We, the people, have an interest in the deals that our government is making.  Especially if tax money, or government resources paid for by tax money, is part of the deal.

When it comes to taxes, furthermore, we want our government to be consistent and fair.  We can’t always see the terms of tax deals, because they are generally private tax return information, but we as the public want some assurance that there are no sweetheart deals being given to connected insiders, and that the terms of the agreements are not wildly different from those made with other taxpayers.

Given all of that, it looks like the “settlement” that created the Anti-Weaponization Fund has some issues.  This may not be a moot problem, because although Acting Attorney General Todd Blanche is telling Congress that the fund is dead, his boss, President Trump, still thinks it’s a good idea.

The Fund is loosely connected with a lawsuit Mr. Trump, two of his sons, and his company filed in the Southern District of Florida against the government because an IRS contractor leaked tax return information to the press.  The settlement consists of the settlement agreement and two attorney general orders (here and here) signed by Blanche. 

Part of the settlement consists of the Trump parties dropping the lawsuit, which they did.  A group of 35 former federal judges is trying to get the judge to reopen the suit (that challenge has its own problems primarily because courts are equipped to decide disputes between parties, and one of the issues here is whether there is any real dispute here, with Trump basically on both sides of the case).

Another part of the so-called settlement is more problematic.  The settlement agreement requires the termination of any tax audits and forbids, among other things, tax examinations on “any matters currently pending or that could be pending (including tax returns filed before the Effective Date).”

Tax settlements are governed by section 7121 of the Internal Revenue Code.  The Treasury Regulations under that section say that closing agreements shall be on forms specified by the IRS.  The IRS has two forms, Form 866 to agree upon a tax liability, and Form 906 to agree upon the tax treatment of specific matters.  The settlement here isn’t as to any specific matters, so Form 906 can’t be used.  Form 866, under IRS procedures, needs to include a liability determination for each year and tax type involved, as opposed to a blanket statement like “There shall be no tax assessed.”  The settlement agreement here is not on Form 866, obviously, and is not consistent with these regulations and procedures.

That is just one problem with the settlement.  Multiple lawsuits in other parts of the country are bringing up others.  The Department of Justice had been arguing, in the settlement agreement, the Attorney General orders, and elsewhere, that the settlement is consistent with other settlements the Department has done in the past.  That it may have been done before, however, doesn’t make it legal or right today.