On June 2, 2016, the US Tax Court issued a unanimous court-reviewed opinion in Guralnik v. Commissioner, 146 T.C. No. 15 (available here), addressing several points related to the timely filing of court documents. The opinion provides important reminders to taxpayers to ensure that they meeting filing deadlines. (more…)
Due to the enormous amount of electronic data stored by companies in the modern era, discovery requests can involve millions of documents which need to be reviewed prior to being turned over to the opposing party. In conducting their analysis of this overwhelming quantity of information, litigants must, amongst other things, detect and exclude any privileged material. Should a party inadvertently fail to do so before such records reach the hands of the opposing counsel, he/she will be deemed to waive privilege in many jurisdictions. Given the massive quantity of data, however, such mistakes are practically unavoidable.
Federal Rule of Evidence (FRE) 502 was enacted in 2008 in an attempt to combat the issue of inevitable human error and the costs associated with parties’ efforts to avoid it. FRE 502(d) allows parties to request the court to grant an order stipulating that a disclosure of privileged material does not waive any claims of privilege with respect to those documents. If the court agrees to enter the order, it is controlling on third parties and in any other federal or state proceeding.
FRE 502(d) has led to the possibility of “quick peek” agreements where the parties give over all or a portion of their documents to opposing counsel without any privilege review whatsoever so that the recipient can identify which material he would like to retain. The recipient, in turn, agrees not to assert a waiver claim on any document that the producing party intends to withhold from the requested documents as privileged. These arrangements can dramatically ease the temporal and financial burdens of conducting a privilege review because they allow the producing party to focus only on those documents desired by the recipient while at the same time preserving their right to claim privilege on such documents. (more…)
We are proud to congratulate our Dallas colleague, Tracy Gomes, McDermott’s chief economist in transfer pricing, upon his appointment as chair of the American Bar Association Transfer Pricing Committee. This position provides the opportunity to propose issues and comments, and to have access to US tax officials in the Internal Revenue Service and Treasury Department as part of the ABA’s leadership committee. It expands upon McDermott’s already substantial knowledge, reputation and experience in the transfer pricing arena—an increasingly important area of IRS attention and focus.
This appointment reflects recognition of McDermott’s professionals as thought leaders in transfer pricing, as well as our commitment to furthering the collective knowledge-base, understanding and application of reasoned and cogent tax administration, and role in the shaping of tax policies, particularly in light of the changing international tax rules brought about by the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) action items.
Senator Rand Paul (R-KY) and six other plaintiffs’ efforts to challenge parts of the Foreign Account Tax Compliance Act (FATCA) were thwarted when the US District Court for the Southern District of Ohio dismissed their claims for lack of standing. Crawford v. Dep’t of Treasury, S.D. Ohio, US District Court for the Southern District of Ohio No. 3:15-cv-00250, (April 26, 2016). A copy of the ruling can be accessed online.
Senator Paul based his legal standing on his role as a US Senator, arguing a loss of political power as his injury. The court held Senator Paul did not have standing to litigate his claim because he had not alleged an injury to himself and that the “institutional injury he alleges is wholly abstract and widely dispersed.” The court noted that “[a] legislator does not hold any legally protected interest in proper application of the law that is distinct from the interest held by every member of the public.”
The court also found that another plaintiff did not have standing because his ability to sue could not be based on an injury caused by third parties. This plaintiff argued that because of the FATCA requirements, his brokerage firm refused to work with American clients. He also argued that he was uncomfortable with the reporting requirements and feared the “unconstitutionally excessive fines” if he willfully failed to file a “Report of Foreign Bank and Financial Accounts” or FBAR.
The remaining plaintiffs made similar arguments that the court refused to sustain.
In an earlier blog post, we discussed the US Tax Court’s ruling in QinetiQ U.S. Holdings, Inc. v. Commissioner, No. 14122-13 (Dec. 27, 2013). The taxpayer had argued that the Internal Revenue Service’s (IRS’) notice of deficiency containing a one-sentence reason for the deficiency determination violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA. To refresh, the APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. (more…)
As we discussed here, and in our recent article in The Federal Lawyer, deference to Internal Revenue Service (IRS) pronouncement is an important issue for taxpayers and their advisors. Our prior writings dealt generally with the three levels of deference in tax cases and how they have been applied by the courts. A recent Tax Court case looks at the level of deference owed to statements in preambles to tax regulations.
In Estate of Morrissette v. Commissioner, 146 T.C. No. 11 (Apr. 13, 2016), the taxpayer cited to the preamble to regulations dealing with split-dollar life insurance arrangements. Those regulations dealt with two mutually exclusive regimes for taxing these types of arrangements entered into after September 17, 2013. The preamble to the regulations included an example that was structurally identical to the arrangements at issue in the Tax Court case. In reviewing the preamble, the court noted that while it had previously been unpersuaded by a preamble, it believed that the preamble was a statement of the IRS’s interpretation of the statute and therefore should be judged under the “power to persuade” standard in Skidmore v. Swift & Co., 323 US 134, 140 (1944). The Tax Court found that the preamble was consistent with the taxpayer’s interpretation of the statute and contrary to the IRS’s position, and found the logic of the preamble to be sound.
The Tax Court’s statements regarding Skidmore deference are important for taxpayers, both in planning and defending transactions. In prior cases, the Tax Court has held that the IRS is “obligated to follow” its “published administrative position” and treated such positions as a concession as to the proper result, e.g., Dixon v. Commissioner, 138 T.C. 173, 188 (2013). A preamble to a regulation could be viewed as a published administrative position, given that it is part of a Treasury Decision that is published in the Internal Revenue Bulletin and the IRS’s position is that the Internal Revenue Bulletin is the “authoritative instrument of the Commissioner.” Treas. Reg. § 601.601(d). It is unclear whether the taxpayer in Estate of Morrissette argued that the IRS was obligated to follow the preamble.
Taxpayers that wish to rely on preambles to regulations, or that are defending against an IRS position based on a preamble, need to be aware of these arguments in planning and defending their transactions. To the extent the preamble is supportive of a position and contains a persuasive and sound analysis, one could argue that Skidmore deference applies. Under this argument, the IRS should not be able to disavow its interpretation of a statute or regulation. Additionally, taxpayers may wish to argue that under the principle announced in Dixon and prior Tax Court cases, the statements in a preamble constitute a concession by the IRS to which it is bound. A similar analysis should be undertaken if the preamble is contrary to the taxpayer’s position.
Senate Finance Committee Ranking Member Ron Wyden (D-Oregon) issued an April 18, 2016 statement noting the committee’s approval of Tax Court nominees Elizabeth Copeland and Vik Stoll. In 2015, President Obama nominated Copeland and Stoll to be judges at the US Tax Court.
Copeland is a partner at the law firm Strasburger & Price, LLP. If confirmed, she will be assuming the position left vacant by the 2014 retirement of Judge Diane L. Kroupa.
Stoll is Deputy Chief Administrative Officer and Director of Collections for Jackson County, Missouri. If confirmed, he will be assuming the position left vacant by Judge James S. Halpern, who took senior status in late 2015.
In Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al. v. Commissioner, 146 T.C. No. 5 (Feb. 29, 2016), the taxpayer filed a motion seeking partial summary judgment on the ground that the Internal Revenue Service’s (IRS’s) transfer pricing adjustments were “arbitrary, capricious and unreasonable” as a matter of law. Judge David Laro denied the motion, ruling that “whether the Commissioner abused his discretion … depends on the facts and circumstances of a given case.” The taxpayer’s motion thus presented “a question of fact that should be resolved on the basis of the trial record.”
The case involves transfer pricing adjustments under Section 482 that increased the income of Guidant Corporation and its U.S. subsidiaries by nearly $3.5 billion. Section 482 grants the IRS broad discretion to “distribute, apportion, or allocate gross income, deductions, credits, or allowances” between or among controlled enterprises if it determines that such a re-allocation is “necessary in order to prevent evasion of taxes or clearly to reflect the income” of any of the enterprises. A taxpayer that challenges a Section 482 adjustment has a “dual burden.” First, it must show that the IRS’s adjustments are “arbitrary, capricious, and unreasonable.” The taxpayer must then show that its intercompany transactions reflect arm’s-length dealing. (more…)
On April 11, 2016, the US Tax Court issued its T.C. opinion in Ax v. Commissioner. The notice of deficiency in the case determined that certain premium payments made to a captive insurance company were not established by the taxpayer to be (1) insurance expenses and (2) paid. But this is not a run of the mill captive insurance case—at least not yet.
The Internal Revenue Service (IRS) moved for leave to amend its answer in the case to assert additionally that (1) the taxpayers’ captive insurance arrangement lacked economic substance and (2) amounts paid as premiums were neither ordinary nor necessary (and to allege facts in support of both assertions). The taxpayers opposed, citing Mayo Foundation for Med. & Educ. Research v. United States, 562 U.S. 44, 55 (2011), and arguing that the Administrative Procedure Act (APA) and SEC v. Chenery, 318 U.S. 80 (1943) barred the IRS from “raising new grounds to support [the IRS’s] final agency action beyond those grounds originally stated in the notice of final agency action.” The taxpayers also argued that the IRS’s new assertions constituted “new matters” that did not meet required heightened pleading standards under the Tax Court’s Rules of Practice and Procedure. Ultimately, the Tax Court sided with the IRS.
On March 28, 2016, the U.S. Tax Court announced interim changes to its Rule of Practice and Procedure to incorporate changes made by Congress at the end of 2015. The interim changes impact several areas of the Tax Court’s Rules, including the impact of bankruptcy proceedings on the court’s jurisdiction, actions for review of failure to abate interest, partnership actions and jurisdiction related to passport certification actions. Additionally, the changes amend the rule regarding the application of the rules of evidence in Tax Court proceedings, which is summarized below.
Pursuant to IRC § 7453, the Tax Court has historically followed the rules of evidence as applied by the United States District Court of the District of Columbia in trials without a jury. Congress’s recent amendment to IRC § 7453 removed the reference to the rules of the United States District Court of the District of Columbia, and added a reference to the Federal Rules of Evidence.
To incorporate Congress’s change, the Tax Court amended Rule 143 regarding evidence that is effective immediately and a final proposed amendment that is subject to public comment. Tax Court Rule 143 now states that:
Trials before the court will be conducted in accordance with the Federal Rules of Evidence.
The amendment applies to all proceedings commenced after December 18, 2015, and also applies to all other proceedings pending on that date to the extent it is just and practicable.
The effect of the amendment to IRC § 7453 and Tax Court Rule 143 is to extend the so-called Golsen rule (named for Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971)) to evidence issues. Pursuant to this rule, the Tax Court chooses to follow the case law of the circuit to which a case is properly appealed. In prior cases and unpublished orders, the Tax Court had cited to both D.C. Circuit opinions and opinions of the circuit where any appeal in the specific case would normally lie in deciding evidentiary issues. This change may cause controversy where there is a split in the circuits on a particular evidence issue, for example in the case of the attorney-client privilege and the work-product doctrine. However, the change ensures that, as with other legal issues presented, the court will follow the law of the circuit to which the case is appealable.
Subscribe
