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McDermott’s Real-Time Tax Disputes Insights
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McDermott’s Real-Time Tax Disputes Insights
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Two Current Tax Controversies Utilize ‘Quick Peek’ Agreements to Resolve Privilege Disputes

by and | May 31, 2016 | , , , ,

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…)



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Auer Deference Debate Remains Unresolved

by | May 20, 2016 | , ,

As we previously discussed, the issue of deference is a hot topic in the tax arena.  Unfortunately, the Supreme Court of the United States recently passed on the opportunity to address the continuing validity of what is commonly known as Auer deference.  This level of deference sometimes applies when an agency interprets its own regulations.

In United Student Aid Funds, Inc. v. Bryana Bible, S.Ct. No. 15-861, the Supreme Court denied a petition for writ of certiorari, leaving in place an opinion by the Court of Appeals for the Seventh Circuit that deferred to the Department of Education’s interpretation in an amicus brief of the regulatory scheme that it enforces.  In a scathing dissent from the denial of certiorari, Justice Thomas stated that the Auer doctrine “is on its last gasp” and that the Court should have taken the opportunity to reconsider and re-evaluate the doctrine.  The Supreme Court’s rules require that at least four Justice must vote to accept a case.  Although Chief Justice Roberts and Justice Alito have recently acknowledged that the doctrine should be reconsidered, the other vocal member in favor or reconsideration was the recently deceased Justice Scalia.  It remains to be seen whether another current Justice will join these three Justices in the future to vote to revisit the issue.



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BREAKING NEWS: Sales Tax Battle Breaks Out in South Dakota; Quill’s Last Stand?

by and | Apr 29, 2016 | , ,

This post is a follow-up to a previous post on McDermott’s Inside SALT blog from April 21, 2016.

Introduction

On March 22, 2016, South Dakota Governor Dennis Daugaard signed into law Senate Bill 106, which requires any person making more than $100,000 of South Dakota sales or more than 200 separate South Dakota sales transactions to collect and remit sales tax. The requirement applies to sales made on or after May 1, 2016.

The law clearly challenges the physical presence requirement under Quill, and that’s precisely what the legislature intended. The law seeks to force a challenge to the physical presence rule as soon as possible and speed that challenge through the courts.

As we discussed in our earlier post, the big question in response to the legislation was whether taxpayers should register to collect tax.  For those who did not register, an injunction is now in place barring enforcement of the provisions until the litigation is resolved.

Last night and this morning two different declaratory judgment suits were filed in the Sixth Judicial Circuit Court of South Dakota regarding S.B. 106’s constitutionality, and more may follow. As has already been reported in a few outlets, one of these cases is American Catalog Mailers Association and NetChoice v. Gerlach (the ACMA Suit).  In ACMA, the plaintiffs are trade associations representing catalog marketers and e-commerce retailers.  The complaint can be found here.

What has yet to be widely reported is the other suit.  This suit (the State Suit) was filed by South Dakota.  Letters sent by South Dakota indicated that identified retailers needed to register by April 25.  Because the new law does not become effective until May 1, many observers thought that South Dakota might wait to file until after that date.  However, the suits have already been filed.

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Update on Deference to IRS Positions

by , and | Apr 20, 2016 | , , ,

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.



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Senate Finance Committee Approves Tax Court Nominees Copeland and Stoll

by and | Apr 19, 2016 | , ,

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.



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Supreme Court Denies Review in Highly Contested Foreign Tax Credit Case

by and | Apr 19, 2016 | , , ,

On April 18, 2016, the Supreme Court denied certiorari in the foreign tax credit dispute involving Albemarle Corp.  We have previously written about the case here, here, and here, which involved the timeliness of claims for refund pursuant to Internal Revenue Code (IRC) section 6511(d)(3)(A)’s 10-year limitations period.

Generally, a taxpayer must file a claim for refund within the later of three years from the time the original return was filed, or two years from the time the tax was paid.  Congress extended this period for refund claims related to foreign tax credits (FTC).   IRC section 6511(d)(3)(A) extends the refund limitation period to “10 years from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued.” Before IRC section 6511(d)(3)(A) was amended in 1997, the statute required that refund claims be made within 10 years from the date prescribed by law for filing the return for the year with respect to which the claim was made.

In the Albemarle case, the taxpayer filed refund claims related to foreign taxes paid that were more than 10 years after the date the tax returns for the years were due, without extension.  The taxpayer argued that the plain language of the statute permitted it to file a claim for refund within 10 years from the date the payment was in fact (actually) made, which was less than 10 years before the claims were filed.  Both the US Court of Federal Claims and the Federal Circuit disagreed, with the latter holding that the term “actually … accrued” is ambiguous and that Congress intended that the relevant period commenced on the due date of the original returns.

Taxpayers with a similar fact pattern to Albemarle, and who desire to dispute the holding in that case, will want to file suit in local district court to avoid the negative precedent and hope that a court not bound by the Federal Circuit will reach a different decision.  Taxpayers may also want to consider filing protective refund claims in situations where it does not appear that a tax payment to a foreign jurisdiction will actually be made (and there will be enough time to file a formal refund claim with the IRS) within 10 years from the date the US federal income tax return was filed to avoid the situation in Albemarle.



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3M Company, IRS File Opening Briefs in “Blocked Income” Case

by | Apr 18, 2016 | , , ,

As noted in an earlier post, 3M Co. v. Commissioner, T.C. Dkt. No. 5816-13, involves 3M’s challenge to the Internal Revenue Service’s (IRS’s) determination that Brazilian legal restrictions on the payment of royalties from a subsidiary in that country to its US parent should not be taken into account in determining the arm’s-length royalty between 3M and its subsidiary under Treas. Reg. § 1.482-1(h)(2). The case has been submitted fully stipulated under Tax Court Rule 122, and the parties’ simultaneous opening briefs were filed on March 21, 2016.

Citing First Sec. Bank of Utah and cases following it, 3M first argues that “[c]ase law consistently holds that the Commissioner cannot employ section 482 to allocate income that the taxpayer has not received and cannot receive because a law prevents its payment or receipt.” Under this line of authority the IRS’s proposed allocation of royalty income to 3M is precluded by Brazilian law. This result is not changed by Treas. Reg. § 1.482-1(h)(2) because that regulation is invalid.

The regulation is “procedurally invalid,” 3M argues, because Treasury and the IRS failed to satisfy the requirements of § 553 of the Administrative Procedure Act (APA) when they promulgated the regulation. They did not respond to significant comments criticizing the proposed regulation; nor did they articulate a satisfactory justification or explanation for the regulation. They thus did not engage in the “reasoned decisionmaking” required by the APA and case law such as State Farm and Altera when an agency issues regulations. (more…)



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Tax Court Rules Whether IRS’s Transfer Pricing Adjustments Are Arbitrary, Capricious Depends on Facts and Circumstances

by | Apr 13, 2016 | , , ,

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…)



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Ax v. Commissioner: The Tax Court Reaffirms that It Is Not Subject to the APA

by and | Apr 12, 2016 | , , ,

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.

(more…)



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