Court Procedure Matters Archives - Page 21 of 34

IRS Loses Summary Judgment In Mylan Case

On March 10, 2016, Tax Court Judge Laro denied the Internal Revenue Service’s (IRS) motion for summary judgment in Mylan’s challenge of the IRS’s determination that approximately $372 million should be treated as ordinary income. See Mylan Inc. and Subsidiaries v. Commissioner of Internal Revenue, T.C.M. 2016-45. In its Tax Court petition, Mylan seeks a redetermination of tax deficiencies related to proceeds from the sale of “all substantial rights” in a patent that Mylan treated as capital gain. The IRS recharacterized the income as ordinary income received under a sublicense of patent rights.

Mylan entered into a number of agreements, including a 2008 agreement in the form of an “exclusive license,” that Mylan contends effectuated a sale of patent rights and entitles it to capital gain treatment. In deciding the motion for summary judgment, the Tax Court considered whether the tax treatment should be determined based upon Mylan’s licensing agreements. The IRS argued that pursuant to Commissioner v. Danielson, 378 F.2d 771,775 (3d Cir. 1967), taxpayers are bound by the terms of their agreements. Mylan argued that Danielson does not apply because the Third Circuit has previously examined not only the terms of the contracts but also the intent of the parties in determining whether “all substantial rights” under a patent were transferred, relying on such authorities as Merck & Co. v. Smith, 261 F.2d 162 (3d Cir. 1958) and E.I. du Pont de Nemours & Co. v. United States, 432 F.2d 1052 (3d Cir. 1970).

The Tax Court, however, determined that there is no inconsistency between Danielson, Merck and E.I. du Pont:

We do not see the inconsistency here. In Danielson, a taxpayer sought to change the tax consequences of a transaction by challenging the validity of the underlying contract’s terms, specifically, allocation of consideration between the sale of stock and the covenant not to compete, because the taxpayer believed these terms did not reflect the agreement of the parties. In Merck and E.I. du Pont de Nemours the taxpayers did not seek to alter or challenge the agreements in question. Instead, the taxpayers disagreed with the Commissioner’s interpretation of those contracts and characterization of the related payments for tax purposes. Here, unlike in Danielson, petitioners do not seek to change the tax consequences of the transaction by challenging the underlying agreements and reforming the contractual terms. On the record before us, the facts here resemble those in Merck and E.I. du Pont de Nemours. The question presented here is a question of proper tax characterization of the proceeds of valid and enforceable contracts, and we are mindful that the Commissioner and taxpayers often disagree on this issue.

The Tax Court found that there are issues of material fact in dispute, and denied the IRS’s motion for summary judgment.

Now that the Tax Court has denied summary disposition of the case, the parties will litigate the capital vs. ordinary tax treatment of transfers of patents. We will report back as developments occur in this hotly contested area [...]

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LB&I Practice Units: Know Your EOI Programs

On January 20, 2016, the Large Business and International (LB&I) Division released a Practice Unit entitled Overview of Exchange Information Programs and Types of EOI Exchanges, defining and describing the Internal Revenue Service (IRS) Exchange of Information (EOI) programs. These EOI Practice Units specify what types of exchanges are covered by EOI programs and what types of information the IRS can seek through each type of EOI exchange.

The IRS breaks down the avenues for international information exchange into several categories:

Specific Requests involve requests for information pertaining to a specific taxpayer under examination or investigation for a specific period.
Spontaneous Exchanges involve the transmission of taxpayer information by one member of an EOI agreement that is deemed potentially of interest to a foreign partner even though no specific requests have been initiated by the foreign partner.
Automatic Exchanges involve the transmission of taxpayer information that foreign partners have agreed to exchange on a regular and systematic basis without individualized specific requests. The most common example includes information relating to dividends, interest, rents, royalties, salaries and annuities earned in one partner country by residents of the other partner country.
Industry-Wide Exchanges involve the sharing of trends, policies and operating practices in a particular industry or economic sector and do not implicate specific taxpayer information.
The Simultaneous Examination Program coordinates strategies and the development of technical issues between the United States and a foreign partner if it is determined a common interest exists between the respective taxing authorities. These discussions are intended to facilitate the exchange of relevant taxpayer information with the foreign partner in furtherance of the separate independent examinations of a taxpayer by each jurisdiction.
Joint Audits take place when the United States and one or more of its foreign partners collaborate to conduct a single examination of a taxpayer or a related taxpayer within their jurisdictions.
The Simultaneous Criminal Investigation Program operates through the EOI provisions of bilateral tax agreements and fosters the coordination of separate criminal investigations conducted concurrently by the United States and the foreign partner.
The Mutual Legal Assistance Program relates to an agreement that authorizes a partner country to secure evidence for use by the requesting country in criminal judicial proceedings of the taxpayer.
The Mutual Collection Assistance Request Program is intended to utilize the collection assistance provisions of tax treaties, enabling one partner state to collect taxes covered by the treaty on behalf of the other contracting state. These collection provisions appear in a limited number of current United States treaties.

The Practice Units provide a short general overview of each method and—of particular usefulness—describe what government office or department is responsible for executing requests in each category. Thus, the Practice Units may be a good “first line of defense” for information-gathering when you believe the IRS is pursuing or has received an international EOI request related to your client.

In future posts, we will discuss how these tools are utilized in practice, [...]

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