TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
Trial Courts
Subscribe to Trial Courts's Posts

Giving Back – Providing Pro Bono Tax Assistance

by , and | Feb 23, 2017 | ,

Here at McDermott, we value giving back to the community through pro bono efforts.  In particular, we provide substantial assistance in pro bono tax cases to low-income individuals through our relationships with low-income taxpayer clinics throughout the country.  Over the years, we have settled dozens of cases for low-income taxpayers in docketed tax cases and routinely reduced or eliminated deficiencies asserted by the Internal Revenue Service (IRS).  When settlement has not been possible, we have litigated cases in the Tax Court and obtained favorable results not just for our clients but for the low-income taxpayer community as a whole.  For example, we represented a husband and wife on a penalty issue involving an issue of first impression and convinced the Tax Court that the IRS had for years been improperly asserting and collecting penalties on improperly claimed refundable tax credits. In a recent article, we detail some of the pro bono efforts by low-income taxpayer clinics and private practitioners.

Practice Point:  In addition to assisting low-income individuals who cannot afford legal representation, providing pro bono tax services benefits tax practitioners in many ways.  It provides the opportunity for younger attorneys to take responsibility for a case and to get valuable experience in dealing with clients, negotiating with the IRS, and potentially gaining courtroom experience.  Assisting taxpayers on a pro bono basis is also rewarding and can make a significant difference in the lives of low-income individuals.



read more

Retaliation Claims By Corporate Whistleblowers – What Is Too Far?

by | Feb 22, 2017 | , , ,

This week, a French court announced an indictment against UBS related to its alleged treatment of Nicholas Forissier, a former audit manager who provided information to French authorities a decade ago in a tax evasion investigation of UBS.  According to at least one press account, the indictment alleges that Forissier was “forced to work under difficult conditions, including internal criticism and eventual dismissal for gross misconduct in 2009” in retaliation for his cooperation with French authorities. Forissier’s case is apparently one of several whistleblower retaliation claims percolating in the French courts against UBS regarding non-disclosure of offshore accounts for tax purposes.

US law provides significant protections of potential whistleblowers for alleged tax violations. Revisions to IRC section 7623, effective from December 20, 2006, make whistleblower awards mandatory in some cases. The revised law has resulted in several large, public awards (the $104 million award given to Bradley Birkenfeld, for example, also related to UBS disclosures).

Protection for IRS whistleblower claimants is found under a number of statutes and rules.  IRC section 6103(i)(6) provides stringent confidentiality rules (including personal liability for government violators) regarding the government’s disclosure of information tending to reveal the existence of a whistleblower or confidential informant.  Also, the grand jury secrecy rule, Fed. R. Crim. P. 6(e), may provide an additional protection in an ongoing grand jury investigation. Further, OSHA, the False Claims Act and the Fair Labor Standards Act may provide protections against termination of whistleblowers and against adverse employment decisions related to a current employee’s status as a whistleblower, in an appropriate case.

Practice point:  It is also worth noting that these protections are not absolute. In fact, because an IRS whistleblower claimant may be in a privileged relationship with the target of an investigation, the IRS has more recently been called upon to clarify that the agency cannot and should not gather or use privileged information to develop a case, or else undermine the entire case as a violation of that privilege, i.e., the “fruit of the poisonous tree”. See our prior coverage on this issue here.



read more

Should Taxpayers File Amicus Briefs in Tax Court Cases?

by and | Feb 15, 2017 | , , ,

Amicus–or “friend of the court”–briefs are not uncommon in Supreme Court and appellate court cases.  The purpose of an amicus brief is generally to provide assistance to the court by presenting additional arguments either in support or opposition of one of the litigant’s positions.  Amicus briefs should not rehash the same arguments presented by one of the parties, but rather should provide insights and a different perspective that is not presented by the parties, and to inform the court of the impact of the issues in the case on other affected parties.  The Federal Rules of Appellate Procedure provide detailed rules on how and when to file an amicus brief.  See here for Federal Rule of Appellate Procedure 29, which governs amicus filings.

Sometimes, amicus parties want to get involved at the trial court level before the trial record is fixed.  Thus, increasingly, amicus briefs are being filed in trial courts, and in particular in the United States Tax Court (Tax Court).  When, why and how to file an amicus brief in a trial court is not clear.  Indeed, most trial courts do not have procedural rules that directly address those filings.  This post provides an overview of some of the considerations and procedures for filing such briefs in a Tax Court case.

Whether to allow an amicus to participate in a case is within the sound discretion of the court.  Because the filing of an amicus brief is discretionary, the typical practice is to file a motion seeking permission or“leave” of the court to file an amicus brief accompanied with a statement stating that the litigants do, or do not, object to the filing of the amicus brief.

In deciding whether to grant permission to file anamicus brief, the Tax Court generally examines whether “the proffered information is timely, useful or otherwise helpful.”  The court also considers whether amici are advocates for one of the parties, have an interest in the outcome of the case and possess unique information or perspective.  This is consistent with the standards applied by other courts in making the determination.

Practice Point:  Several factors should be considered by taxpayers in deciding whether to file an amicus brief in Tax Court.  In addition to the cost, taxpayers may want to consider whether their position is being adequately represented by another taxpayer’s case and whether they believe that they can provide arguments that might persuade the court to adopt their position.  Participation as an amicus can also be helpful to taxpayers in coordinating legal positions and ensuring that the best possible arguments are presented on issues of first impression.  An effective amicus brief has the potential to persuade the court, and can be an effective tool to resolve an issue favorably.  This is especially true when, because of the specific facts of the taxpayer, the perspectives of other taxpayers are not adequately addressed.



read more

Tax Court Affirms That Reportable Transaction Penalty Is Constitutional

by and | Feb 10, 2017 | , , ,

In Thompson v. Commissioner, 148 T.C. No. 3 148 (2017), the US Tax Court confirmed that the Internal Revenue Code (IRC) Section 6662A penalty for reportable transactions is constitutional and does not violate the Excessive Fines Clause of the Eighth Amendment.

IRC Section 6662A(a) imposes a penalty on any “reportable transaction understatement.” A “reportable transaction understatement” generally refers to the difference between the increase in the amount of federal income tax that is calculated from the proper treatment of an item that results from a reportable or listed transaction and the taxpayers actually treatment of that item.  IRC Section 6662A(b). If a taxpayer fails to adequately disclose a reportable transaction giving rise to an understatement under IRC section 6662A, the penalty is imposed at a rate of 30 percent, and there are no available defenses. IRC Section 6662A(c). However, if a taxpayer sufficiently discloses the details of the transaction, the penalty rate is 20 percent of the amount of the reportable transaction understatement. IRC Section 6662A(a). In this latter instance, a taxpayer may avoid the penalty if he shows reasonable cause and good faith, as well as that there is substantial authority for a position he claimed on the tax return, and the taxpayer reasonably believed that such treatment was more likely than not the proper treatment of the transaction in question. IRC Section 6664(d)(1) and (3).

(more…)



read more

Battat v. Commissioner: A Primer on the History of the US Tax Court

by and | Feb 9, 2017 | , ,

In Battat v. Commissioner, the US Tax Court recently affirmed its own constitutionality, in releasing an opinion relating to the President’s authority to remove Tax Court Judges.  The taxpayer filed a motion asking the court to disqualify all Tax Court Judges and to declare unconstitutional IRC Section 7443(f), which provides circumstances by which the President can remove Tax Court Judges.  The court denied this motion, holding that the President’s limited removal authority does not violate separation of powers principles.  The opinion describes the court’s operations, including procedures for the removal of judges, statutory provisions relating to the establishment and government of the court, and caselaw relating to the jurisprudence of the court.  Most interestingly, it provides a detailed history of the Tax Court—from its creation by Congress in 1924 as the Board of Tax Appeals and its reestablishment as the US Tax Court in 1969 through present day.



read more

Change in Leadership at DOJ Tax Division

by and | Feb 3, 2017 | , , ,

The Department of Justice (DOJ) Tax Division is responsible for litigating tax refund claims brought in Federal district courts and the Court of Federal Claims and handling appeals from decisions of the United States Tax Court (the Chief Counsel’s office is responsible for Tax Court litigation).  Effective January 23, 2017, David A. Hubbert became the Acting Assistant Attorney General for the DOJ Tax Division.  He replaces Carolyn Ciraolo, who resigned on January 20, 2017.  A copy of the DOJ press release, which includes biographical information on Mr. Hubbert, can be found here.  In accordance with the change, the Internal Revenue Service on January 31, 2017, announced corresponding changes in the address for correspondence to the DOJ Tax Division and the signature block for any Notice of Appeal from a Tax Court case.

Practice Note:  The changing of the guard is routine when there is a change in the administration, as demonstrated by the prior resignation of William J. Wilkins as Chief Counsel.  However, this year may be a little different as the new administration seems determined to “shake things up.”  In the coming weeks and months, we expect a lot of personnel changes.  Stay tuned!



read more

IRS Issues IPU on Summons of Foreign Owned US Businesses

by and | Feb 2, 2017 | , , , , ,

On January 30, 2017, the Internal Revenue Service (IRS) released an International Practice Unit (IPU) on the use of a summons under IRC Section 6038A (IRC Section 6038A Summons) when a US corporation is 25-percent owned by a foreign shareholder.  See IPU here. The IPU describes the steps that the IRS should take when issuing an IRC Section 6038A Summons, and what to do when the US corporation does not substantially comply with the summons.

In general, IRC Section 6038A imposes reporting and recordkeeping requirements (together with certain procedural compliance requirements) on domestic corporations that are 25-percent foreign-owned, which the regulations refer to as a domestic reporting corporation (DRC).  Among other requirements, a DRC is required to keep permanent books of account or records per IRC Section 6001 that are sufficient to establish the correctness of the federal income tax return of the DRC, including information, documents, or records to the extent they may be relevant to determine the correct US tax treatment of transactions with related parties. See Treas. Reg. Section 1.6038A-3.

The IRS may issue an IRC 6038A Summons when:  (i) the taxpayer under exam is a DRC; (ii) there was a transaction between the DRC and the 25 percent foreign shareholder or any foreign person related to the DRC or to such 25 percent foreign shareholder; and (iii) the DRC is appointed to act as a limited agent with respect to any request by the IRS to examine its records or produce testimony that may be relevant to the tax treatment of any transaction between the DRC and a foreign related party.  If the DRC does not substantially comply in a timely manner with the IRC 6038A Summons, the IRS has sole discretion to determine the amount of the DRC’s deductions related to transactions with, and the cost of property purchased from (or transferred to), the foreign related party.

The IPU is particularly relevant in light of final regulations published in the Federal Register on December 13, 2016 (TD 9796) which treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation for purposes of the reporting, record maintenance and associated compliance requirements under IRC Section 6038A.  The regulations are effective for tax years beginning after December 31, 2016, and ending on or after December 13, 2017.  The IPU refers to these regulations in describing the criteria which must be met before the IRS issues an IRC Section 6038A Summons.

Practice Point:  For US entities that are owned by foreign entities and file US tax returns, it is crucial to have all of the relevant information for the entity in the US. US taxpayers are required to support all of the positions claimed on a return.  For example, if there are expenditures of the US entity that are paid for by the foreign affiliate, there should be adequate documentation in the US to support those payments.



read more

National Taxpayer Advocate 2016 Report – Penalties

by | Jan 26, 2017 | , , , ,

Every year, the Taxpayer Advocate Service’s (TAS) Annual Report to Congress provides a unique perspective regarding the workings of the Internal Revenue Service (IRS) and how the IRS relates to the vast majority of taxpayers. That insight is particularly valuable when the IRS chooses to assert penalties—one of the most policy-driven decisions that the IRS can make. In its 2016 report, the TAS makes a number of important observations and recommendations related to three of the most commonly asserted types of penalties—accuracy-related penalties, failure-to-file and failure-to-pay penalties, and the Trust Fund Recovery Penalty.

Accuracy-Related Penalties

The TAS identified 122 cases litigated between June 1, 2015, and May 31, 2016 (the reporting period), involving accuracy-related penalties.  Of those cases, the IRS prevailed in full in 86 cases (70 percent), taxpayers prevailed in full in 20 cases (16 percent), and 16 cases were split decisions (13 percent) (percentages were rounded down in the original report). Unusual this year were the number of split decisions and the number of taxpayer wins in pro se cases. Many cases involving the negligence penalty turned upon the taxpayer’s failure to maintain adequate books and records related to the adjustments at issue.

In 2013, the TAS issued a study noting that the IRS’s imposition of accuracy-related penalties, subsequently abated after an assessment and a successful taxpayer appeal (among other fact patterns), could lead to a perception of unfairness among taxpayers regarding the IRS’s manner of assertion of these penalties. The TAS cited this study in its 2016 report, and noted again that this conduct could be detrimental to voluntary taxpayer compliance and could undermine the purpose of accuracy-related penalties.

In fact, a main priority of the Annual Report overall is to improve voluntary compliance, a fundamental element of our tax system. The TAS notes that “unnecessary coercion” by the IRS—whether through unsustained penalties or otherwise—could have the effect of reducing voluntary compliance.

Failure-to-File / Failure-to-Pay Penalties

The TAS identified 45 total decisions involving failure-to-file and failure-to-pay penalties in the reporting period.  Of these, 28 cases involved taxpayers representing themselves. The majority of cases involved full or partial taxpayer losses.

The TAS noted, consistent with our experience, that the IRS frequently relies upon selection of failure-to-file and failure-to-pay cases through its Reasonable Cause Assistant software, which makes the initial decision to impose the relevant penalties in most cases without significant human involvement.  Personal review of the penalty decision does not generally occur until after the taxpayer files an administrative appeal.  The TAS advocated for heightened personal review of these penalties and heightened consideration of relevant facts and circumstances potentially supporting abatement.

Trust Fund Recovery Penalties

The TAS noted that several Trust Fund Recovery Penalty cases this year had successfully challenged whether the penalty was properly noticed and assessed. United States v. Appelbaum, 117 A.F.T.R.2d 2016-633 (W.D.N.C.); Romano-Murphy v. United States, 816 F.3d 707 (11th Cir. 2016).

The TAS further discussed a number of unsuccessful taxpayer challenges to assessment of the Trust Fund Recovery Penalty on grounds of [...]

Continue Reading



read more

Circuit Courts Agree Timely Filing Requirement for a Tax Court Petition is Jurisdictional

by and | Jan 23, 2017 | , , , ,

Arguably the most important aspect of litigating a case in the Tax Court or in a refund forum is the timely filing of the petition or complaint.  Absent timely filing, the court may not have jurisdiction and the case could be dismissed without the court ever reaching the substantive issues.  On January 13, 2017, the Seventh Circuit joined several other circuit courts in confirming that the time for filing a petition in Tax Court is jurisdictional, not a claims processing rule.

In Tilden v. Commissioner, No. 15-3838 (available here), the taxpayer’s petition was mailed on the last day of the 90-day filing deadline.  It was not stamped and bore no postmark; instead, a USPS print-at-home postage label was attached by legal staff, and it was delivered to the post office the same day.  The Internal Revenue Service (IRS) argued this was insufficient for timelymailing under the “mailbox rule” of Internal Revenue Code (Code) Section 7502.  The Tax Court disagreed with both parties about what section of the regulations applied, and used the date the envelope was entered into the postal service’s tracking system as the date of postmark and filing—which was two days late.  Thus, the Tax Court dismissed the petition for lack of jurisdiction (available here).

On appeal, the Seventh Circuit raised sua sponte the issue of whether the filing deadline for a Tax Court petition is jurisdictional or a claims processing rule.  The proper characterization of the filing deadline is extremely important.  If the deadline is considered jurisdictional, then late filing automatically precludes the taxpayer from seeking relief in the Tax Court.  But, the taxpayer may still pay the tax due, file a claim for refund with the IRS, and file a complaint in a refund forum (if the IRS denies or fails to timely act on the claim).  On the other hand, if the deadline is a claims processing rule, the taxpayer’s options may be limited.  Although the taxpayer that files a late petition might be able to demonstrate that the Tax Court should hear its case, if the court were to determine that the petition was untimely, it arguably would be required under the Code to enter a decision on the merits for the IRS, rather than a dismissal for lack of jurisdiction.  That result eliminates the alternative refund forum.

In Tilden, the Seventh Circuit considered the Supreme Court’s current approach in non-tax cases for determining whether deadlines are jurisdictional or claims processing rules, but decided that the language of the relevant statute and the body of Tax Court and circuit court precedent compelled a finding that the 90-day deadline is jurisdictional.  Finding it “imprudent to reject that body of precedent” under principles of stare decisis, the Seventh Circuit followed the Tax Court and other circuit court precedent.  The Seventh Circuit further disagreed with the Tax Court’s holding on the relevant postmark regulations to conclude that the petition was timely filed.

Practice Point: The Seventh Circuit’s opinion is a good reminder as to the [...]

Continue Reading



read more

US Supreme Court Denies Petitions for Certiorari Filed In Two Federal Tax Cases

by | Jan 13, 2017 | , ,

On January 9, 2017, the US Supreme Court denied the petitions for certiorari filed in two federal tax cases.

In Chemtech Royalty Assoc. LP v. United States, Sup. Ct. Dkt. No. 16-810 (2016), 823 F.3d 282 (5th Cir. 2016),

Dow Chemical Co. challenged the decisions by the US Court of Appeals for the Fifth Circuit finding that the partnerships were a “sham” that should be disregarded for tax purposes and imposing the 40 percent substantial understatement penalty. In its petition, Dow complained of the “especially stringent” scrutiny applied by the Fifth Circuit to review a taxpayer’s decision to use the partnership form. “Applying that improper presumption against partnerships, the court became the first court in the nearly seventy years since Culbertson [337 US 733 (1949)] to hold that an investor that contributes its own capital in exchange for an equity interest in the partnership can be disregarded for tax purposes if its equity stake, like preferred stock, is relatively protected against fluctuations in profits and losses.”

The US Supreme Court also denied the petition filed by Dynamo Holdings Ltd. Partnership, Dynamo Holdings Limited Partnership v. United States, Sup. Ct. Dkt. No. 16-358 (2016) 816 F.3d 1310 (11th Cir. 2016),seeking review of an Eleventh Circuit decision that upheld the enforcement of IRS summonses.   Dynamo asked the Supreme Court to consider whether it was unfairly denied a request to amend the case submission to support an evidentiary hearing under then new standard established by this Court in an earlier appearance of this case. Dynamo complained that “this Court held for the first time, United States v. Clarke, 573 US ___, 134 S. Ct. 2361 (2014), that an individual or entity that receives an IRS summons is entitled to a limited evidentiary hearing to obtain discovery to support the claim that the summons should be quashed where that party points to specific facts or circumstances plausibly raising an inference of bad faith.” In contrast,  “[W]hen this case began in 2011, the standard in the Eleventh Circuit was that an individual or entity was entitled to an evidentiary hearing based upon the mere allegation of improper purpose . . . [and Dynamo was found by] the Eleventh Circuit to have satisfied that standard.  On remand from Clarke, the district court denied Petitioners request to make amended submissions to meet the new standard, and the district court and Eleventh Circuit ruled that Petitioners’ former submissions did not meet the new standard.”

Practice Tip:

In deciding whether to file a petition for certiorari, the party should consider the likelihood of the petition being granted and whether the Court’s denial of the petition will result in an adverse negative inference for a continuing issue that is being litigated in other jurisdictions. These cases illustrate how difficult it is to have the Supreme Court grant review.  The Supreme Court accepts few petitions each year and in the absence of a split in the circuits, a petition is unlikely to succeed [...]

Continue Reading



read more

BLOG EDITORS

Kevin Spencer

Evan Walters

STAY CONNECTED

Subscribe

TOPICS

ARCHIVES

jd supra readers choice top firm 2023 badge