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McDermott’s Real-Time Tax Disputes Insights
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2020’s Key Tax Controversy Developments

by and | Dec 16, 2020 | , , , , , ,

In the face of the pandemic and all the challenges that came with 2020, tax controversy marched on. In this article, we explore several important cases, including one of the most closely watched Supreme Court cases, CIC Services LLC v. Internal Revenue Service, which raises important questions regarding the scope of the Anti-Injunction Act and impacts the ability of taxpayers to engage in preenforcement challenges to regulations.

We also look into the latest updates in the transfer pricing area, changes to the Compliance Assurance Process, what to expect during the audit of a campaign issue and more.

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The End of an Era—Senior Judge Robert P. Ruwe Retires from US Tax Court

by and | Dec 3, 2020 | ,

The US Tax Court (Tax Court) recently announced that Senior Judge Robert P. Ruwe has fully retired as of November 25, 2020, after more than 33 years on the bench. Judge Ruwe graduated from Xavier University and was first in his class in law school at the Salmon P. Chase College of Law. He then joined the Internal Revenue Service (IRS), where he held various positions, including Director, Tax Litigation Division. Judge Ruwe was appointed to the Tax Court in 1987 and, after his 15-year term expired, he served as a senior judge. In 2012, Judge Ruwe received the J. Edgar Murdock Award for his distinguished service to the Tax Court.

At the time of his retirement, Judge Ruwe had authored hundreds of opinions, including many noteworthy concurrences and dissents. Some memorable ones include: (i) Rauenhorst v. Commissioner, 119 TC 157 (2002) (holding that the IRS was bound by its position in published guidance, and treating that position as a concession); (ii) Rhone-Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 TC 533 (2000) and GAF Corp. v. Commissioner, 114 TC 519 (2000) (addressing complex Tax Equity and Fiscal Responsibility Act (TEFRA) statute of limitations issues); Turner Broad. Sys. Inc. v. Commissioner, 111 TC 315 (1998) (requiring IRS to account for all the results of a transaction when seeking to recharacterize it); and (iv) Wayne Bolt & Nut Co. v. Commissioner, 93 TC 500 (1989) (accounting method changes).

We both served as attorney-advisors for Judge Ruwe in the early 2000s, and benefited significantly from his experience and wisdom. He was an excellent teacher and mentor to us during our time at the Tax Court, taking the time to explain the law and ways in which we could improve our research and writing skills. His grasp and memory of the tax law were extraordinary—he would frequently mention a legal principle and then cite us to the exact TC volume containing the case stating that principle. Additionally, he was interested in our personal lives, and we frequently took long walks with him throughout downtown Washington, DC, discussing not only pending cases but also topics like US history, sports and our families. We wish Judge Ruwe all the best in his retirement!



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Tax Court to Update Case Management System

by and | Oct 22, 2020 | ,

The US Tax Court (Tax Court) recently announced upcoming changes to its case management system. DAWSON (Docket Access Within a Secure Online Network), named after former Tax Court Judge Howard A. Dawson, Jr., who passed away in 2016, is expected to be active by the end of 2020.

To facilitate the transition to DAWSON, the Tax Court’s current e-filing system will become inaccessible and all electronic files will become read-only beginning at 5:00 pm EST on November 20, 2020. Cases will remain electronically viewable, but no documents may be e-filed during this time. Importantly, no orders or opinions are anticipated to be issued during the transition.

Due to the lack of e-filing during the transition, Tax Court judges are trying to avoid setting deadlines that fall within this period. If a filing is required, it must be done the old-fashioned way on paper and by mail, with a proper certificate demonstrating service on the opposing party.

Notable improvements in DAWSON include:

  • Electronic filing of petitions and payment of filing fee
  • More user-friendly interface
  • Web-based, mobile-friendly and fully integrated system.

Practitioners should be on the lookout for an email from the Tax Court to set up their new account on DAWSON.

Practice Point: DAWSON will represent a significant upgrade for Tax Court practitioners. The addition of e-filing for petitions is particularly noteworthy as taxpayers and their representatives will not have to worry about potential problems and delays associated with physically mailing petitions to commence a case in Tax Court.



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Weekly IRS Roundup August 24 – August 28, 2020

by | Sep 2, 2020 | , , , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 24, 2020 – August 28, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

August 24 2020: The IRS published a memorandum concerning guidance to the field on the criteria that should be applied in considering if a request for designation for litigation should be made to the Office of Chief Counsel. The memorandum also provides interim guidance on the requirements of Section 1001 of the Taxpayer First Act (TFA) with respect to the limitation on designation of cases as not eligible for referral to the IRS Independent Office of Appeals.

August 25, 2020: The IRS published a Summer 2020 Statistics of Income Bulletin. The Summer 2020 Bulletin focuses individual income tax shares, 2017; foreign recipients of US income, calendar year 2017; effects of post-filing adjustments on Statistics of Income (SOI) estimates; and implementation of the Tax Cuts and Jobs Act.

August 25, 2020: The IRS published a practice unit focusing on the definition of foreign earned income for purposes of section 911.

August 26, 2020: The IRS published a notice and request for comments on Treasury Decision 8702 concerning certain transfers of domestic stock or securities by US persons to foreign corporations. The regulation relates to certain transfers of stock or securities of domestic corporations pursuant to the corporate organization, reorganization or liquidation provisions of the Internal Revenue Code (Code). Transfers of stock or securities by US persons in tax-free transactions are treated as taxable transactions when the acquirer is a foreign corporation, unless an exception applies under section 367(a). The regulation provides that no US person will qualify for an exception unless the US target company complies with certain reporting requirements. The comments should be received on or before October 26, 2020.

August 26, 2020: The IRS published a notice and request for comments on Treasury Decision 8612 concerning the availability of the gift and estate tax marital deduction when the donee spouse or the surviving spouse is not a US citizen. The regulation provides guidance to individuals or fiduciaries: (1) for making a qualified domestic trust election on the estate tax return of a decedent whose surviving spouse is not a US citizen in order that the estate may obtain the marital deduction; and (2) for filing the annual returns that such an election may require. The comments should be received on or before October 26, 2020.

August 27, 2020: The IRS published an announcement on the opening of the application period for the 2021 Compliance Assurance Process program. The application period runs September 1 to November 13, 2020. The IRS will inform applicants if they’re accepted into the program in February 2021.

August 28, 2020: The IRS published
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Weekly IRS Roundup June 15 – June 20, 2020

by | Jun 23, 2020 | ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 15 – June 20, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 19, 2020: The US Tax Court announced that the Court will resume receiving mail effective July 10, 2020. Any items currently being held by the United States Postal Service or any private delivery service will be delivered to the Court on that day.

June 19, 2020: The IRS issued proposed regulations that provide guidance for the deduction of qualified transportation fringe (QTF) and commuting expenses. As part of the Tax Cuts and Jobs Act (TCJA), taxpayers are not allowed deductions for QTF expenses or for certain commuting expenses. These proposed regulations address the elimination of the QTF deduction. The proposed regulations also provide guidance to determine the amount of QTF parking expense that is nondeductible.

June 19, 2020: The IRS released Notice 2020-50 to help retirement plan participants affected by the COVID-19 take advantage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act regarding retirement plan distributions. The CARES Act provides that qualified individuals may treat as coronavirus-related distributions up to $100,000 in distributions made from their eligible retirement plans between January 1 and December 30, 2020 without being subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 on the individual’s spouse or household member.

June 20, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.



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Tax Court Holds That Form 870-AD Is Not a Binding Settlement Agreement

by , and | Jun 10, 2020 | , , , ,

A recent US Tax Court Memorandum Opinion held that a settlement agreement embodied in Internal Revenue Service (IRS) Form 870-AD does not preclude the IRS from reopening an audit and issuing a notice of deficiency.

In Howe v. Commissioner, T.C. Memo 2020-78, the Tax Court held that equitable estoppel did not bind the Commissioner to an agreement in Form 870-AD. Only settlements that comply with Internal Revenue Code (IRC) sections 7121 and 7122 are binding on both the taxpayer and government, and an IRS Form 870-AD does not comply with those provisions. Further, the Court held that equitable estoppel did not bar the IRS from asserting a larger deficiency against the taxpayer because, even if true, the alleged failures to follow internal IRS procedures would not rise to the level of affirmative misconduct.

An IRS revenue agent initially began an audit of the 2008 tax return for the taxpayer, who was CEO and majority shareholder of a healthcare company, in 2011. At the conclusion of the audit, the revenue agent issued a Notice of Proposed Adjustment (NOPA) and IRS Form 886-A. The taxpayer responded to the NOPA by filing a protest letter at the IRS Appeals Office. In settlement of the issue during the IRS Appeals Office review, the taxpayer and the IRS appeals officer (on behalf of the IRS) signed a Form 870-AD that reduced the asserted tax deficiency and eliminated the IRC section 6662 accuracy-related penalty. The IRS Appeals Officer filed an IRS Appeals Case Memorandum (ACM) summarizing the facts and legal arguments.

In response to the ACM, the revenue agent who conducted the audit, in consultation with her supervisor and local IRS counsel, internally filed a Dissent for Appeals Decision. The Dissent for Appeals Decision sought to reopen the case against the taxpayer on the grounds that the taxpayer made material factual misrepresentations during the IRS Appeals process. The IRS Appeals Director approved reopening the case, and the IRS issued a Notice of Deficiency.

The taxpayer sought review in the Tax Court on the grounds that the IRS improperly reopened the case and that the settlement represented in Form 870-AD equitably estopped the Commissioner from issuing the Notice of Deficiency. The Tax Court rejected the taxpayer’s argument. Following its holding in Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974), the Tax Court will only look behind a Notice of Deficiency when there is “substantial evidence of unconstitutional conduct on the Commissioner’s part and the integrity of our judicial process would be impugned if we were to let the Commissioner benefit from such conduct.” (Howe, at *12.) The Tax Court found there was no substantial evidence of unconstitutional conduct by the IRS.

Further, there is a heightened standard for applying equitable estoppel against the IRS. In addition to the traditional detrimental reliance elements, asserting equitable estoppel claims against the government requires a showing that: “(1) the government engaged in affirmative misconduct going beyond mere negligence; (2) the government’s wrongful acts will cause a serious [...]

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Tax Court Zooms into Remote Proceedings

by and | Jun 2, 2020 | ,

On May 29, 2020, the US Tax Court (Tax Court) announced that to accommodate continuing uncertainties relating to the COVID-19 pandemic, and until further notice, all court proceedings would be conducted remotely. The Tax Court also issued Administrative Order 2020-02 regarding the conduct of remote proceedings and Administrative Order 2020-03 regarding limited entries of appearance. The Orders are effective until terminated by the Tax Court.

Administrative Order 2020-02 contains sample forms, which are also available under the “Forms” tab on the Tax Court’s website, providing more information on how Tax Court proceedings will be conducted during the pandemic. The updated forms include:

The forms make clear certain requirements that are contained in the Tax Court Rules of Practice and Procedure but were not contained in a prior version of the Standing Pretrial Order. One notable change is that stipulations of fact, which are many times not filed until the day of trial, must now be filed at least 14 days before the trial commences.

Remote proceedings will be conducted using Zoomgov, and access information will be provided to the parties via a meeting identification number and a password. The parties must take steps to ensure that they and their witnesses have adequate technology and internet resources to participate in a remote proceeding. Personal Zoom accounts are not required.

Like most all court proceedings, remote proceedings will be open to the public. The Tax Court will post dial-in information on its website for each trial session, which will allow real-time audio access to proceedings to the general public.

Practice Point:  The Tax Court’s decision to conduct remote proceedings reflects the changing times. Being able to effectively present one’s case in person to a Tax Court Judge requires substantial preparation to tell the taxpayer’s story and advocate for the desired result. Taxpayers and their counsel must now prepare to do the same over videoconference, an arguably much more difficult task. We plan to explore the new rules in more detail in a future article and will keep our readers posted. Taxpayers should be mindful that the general public and the press will be able to virtually attend more court proceedings. Accordingly, your tax issues will be more open and accessible than ever before.



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Eighth Circuit Applies Subjective Standard to Reasonable Basis Penalty Defense

by and | May 4, 2020 | , ,

On April 24, 2020, the US Court of Appeals for the Eighth Circuit published its opinion in Wells Fargo & Co. v. United States, No. 17-3578, affirming a district court’s holdings that the taxpayer was not entitled to certain foreign tax credits and was liable for the negligence penalty for claiming the credits. Much has been written about the substantive issue, which we will not discuss here. Instead, we focus on the Eighth Circuit’s divided analysis relating to the reasonable basis defense to the negligence penalty.

In Wells Fargo, the taxpayer relied solely on the reasonable basis defense to the government’s assertion of penalties. Under Internal Revenue Code (IRC) section 6662(b)(1), a taxpayer is liable for penalty of 20% of an underpayment of its taxes attributable to its “negligence.” Various defenses are potentially applicable to the negligence penalty, which we recently discussed in detail here. One such defense is if the taxpayer can show it had a “reasonable basis” for its position. Under Treas. Reg. § 1.6662-3(b), this defense applies if the taxpayer’s return position was “reasonably based on” certain authorities specified in the regulations.

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Fifth Circuit Rules that Law Firm Clients’ Identities Are Not Privileged

by and | Apr 28, 2020 | , , ,

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, No. 19-50506, the United States Court of Appeals for the Fifth Circuit held that a Texas-based estate and tax-planning law firm (Firm) could not invoke the attorney-client privilege against an Internal Revenue Service (IRS) summons seeking the identity of its clients.

According to an IRS revenue agent’s declaration submitted in support of the summons, the Firm became a target for IRS investigation following an audit of one of its clients, an individual who had used the Firm’s services to establish and operate various foreign accounts and entities, through which the individual had funneled millions of dollars of unreported income. The IRS issued a John Doe summons to the Firm seeking, amongst other things, the identities of other clients for whom it had established foreign accounts or entities.

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IRS Flexes Its Administrative Summons Power in Recent Tax Case

by and | Apr 22, 2020 | , , ,

The United States Court of Appeals for the Tenth Circuit’s recent opinion in Standing Akimbo, LLC v. United States, No. 19-1049 (10th Cir. April 7, 2020), reminds us of the Internal Revenue Service’s (IRS) ability to obtain the information it needs to examine taxpayers’ returns using its powerful summons tool.

In May 2017, the IRS began auditing Standing Akimbo, LLC (Standing Akimbo), a Colorado limited liability company operating as a medical-marijuana dispensary. The audit focused on whether Standing Akimbo improperly claimed business deductions that were prohibited under Internal Revenue Code (IRC) section 280E. Generally, IRC section 280E provides that no deduction or credit is allowed for any amount paid or incurred in the carrying of a business if such business trafficks in controlled substances that are prohibited by Federal law. While legal under Colorado law, marijuana is still classified as a controlled substance under Federal law, and specifically the Controlled Substances Act. As a pass-through entity, any adjustments to Standing Akimbo’s returns would affect its owners’ (Taxpayers) individual tax returns.

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