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IRS Extends Permanent Invitation to Exam to Attend Appeals Conferences

by Jean A. Pawlow and Kevin Spencer | Sep 8, 2017 | IRS Appeals, IRS Guidance, Uncategorized

On May 1, 2017, the IRS issued FAQs concerning its recent practice of inviting IRS Examination Agents (Exam) into the Appeals discussion. The FAQs make clear that Exam will now be routinely invited to Appeals conferences. The release premises this procedural shift on perceived efficiencies of having Exam stay during the taxpayer’s rebuttal presentation. The FAQs explain, however, that settlement discussions with the taxpayer will be held without Exam present. This is an important clarification, and the FAQs explain that this new process is different from Rapid Appeals.

Practice Point: It is clear that diminishing resources have put substantial pressure on the Appeals process. In several recent Appeals sessions, Exam has been invited to stay for our clients’ rebuttal to Exam’s presentation. After the taxpayers’ presentation, Appeal tries to elicit a back-and-forth communication between the taxpayer and Exam, putatively to ensure that all of the relevant facts are developed and agreed upon. Exam typically has counsel at these Opening Conferences, which tends to make Exam more of an advocate as opposed to the traditional developer of the facts and of the IRS’s audit position. This two-way communication seems to be an attempt to morph the Appeals session into some type of mini-mediation akin to a FastTrack session. Taxpayers therefore must take care to plan their settlement strategy, as the line between development of the facts and discussion of the hazards can be blurry. While in some cases it might be useful to negotiate in the presence of the Exam team, we have found that more progress typically is made when Exam leaves the room.

Motion Practice – Moving for Summary Adjudication

by McDermott Will & Emery | Sep 6, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

Summary judgment is a common practice in all courts, including courts hearing tax disputes. Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Full or partial summary judgment is appropriate where there is no genuine issue of material fact and a decision may be rendered as a matter of law on the issue presented. Summary judgment can be obtained by a party upon the filing of a motion if the pleadings and other evidence in the record, including any affidavits or declarations in support of or against the motion, demonstrate that no factual dispute exists. Each court has its own particular rules on motions for summary judgment, but all are grounded on the essential requirement that the pertinent facts not be in dispute. The party moving for summary judgment bears the burden of showing that no genuine issues exists as to any material fact and that it is entitled to judgment as a matter of law, with all factual materials and inferences drawn from them considered in the light most favorable to the nonmoving party. To defeat a motion for summary judgment, the nonmoving party must do more than merely allege or deny facts; it must set forth specific facts showing a genuine dispute for trial. Thus, facts that are not properly supported or that are irrelevant or unnecessary will not be counted.

The decision of whether to file a motion for summary judgment must be carefully made. In some cases the decision may be fairly straightforward because both sides agree on the pertinent facts and the issue is purely legal. However, in other cases, the factual record may not be as clear and the parties may differ on which facts are material and which properly remain in dispute. Further, a motion for summary judgment by one party may result in a cross-motion for summary judgment by the other party. Thus, the party initially moving for summary judgment needs to be confident that it will not need additional facts or supporting information from witnesses before seeking summary adjudication. (more…)

A 360-Degree View: August and September 2017

by McDermott Will & Emery | Sep 5, 2017 | Uncategorized

Upcoming Tax Controversy Activities in September:

September 13, 2017: Tom Jones is presenting an update on Captive Tax in Charleston, South Carolina, at the South Carolina Captive Insurance Association Annual Conference.

September 14, 2017: Robin Greenhouse and Kristen Hazel will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about tax ethics.

September 18, 2017: Justin Jesse is speaking at the PLI Basics of International Taxation session in San Francisco about “Tax Concerns for US Persons Investing or Operating Outside of the US (Outbound Investments) – Active Business Operations.”

Wrapping up August:.

Our August 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on tax controversy news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

August 3, 2017: Tax Court Addresses “Issue of First Impression” Defense to Penalties

August 7, 2017: President Trump Nominates Copeland and Urda to US Tax Court

August 8, 2017: Record Numbers Are Giving Up US Citizenship

August 9, 2017: TIGTA Pounces on IRS Federal Records Retention Policies; Recommends Changes

August 11, 2017: The IRS Is Struck Down Again in Privilege Dispute

August 14, 2017: McDermott Named “Law Firm of the Year” at 2017 US Captive Services Awards

August 16, 2017: Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

August 17, 2017: Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

August 23, 2017: Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage

August 24, 2017: Internal Revenue Service Updates Golden Parachute Payments Audit Technique Guide, Signaling Key Items IRS May Review on Audit

August 25, 2017: IRS Criminal Investigation Division Announces Two New Initiatives

Tax Court Reinforces Plain Meaning Approach in Interpreting Tax Statutes

by Kevin Spencer and McDermott Will & Emery | Sep 1, 2017 | Tax Refunds, Trial Courts, Uncategorized

The Internal Revenue Service (IRS) and taxpayers frequently spar over the meaning and interpretation of tax statutes (and regulations). In some situations, one side will argue that the statutory text is clear while the other argues that it is not and that other evidence of Congress’ intent must be examined. Courts are often tasked with determining which side’s interpretation is correct, which is not always an easy task. This can be particularly difficult where the plain language of the statute dictates a result that may seem unfair or at odds with a court’s views as the proper result.

The Tax Court’s (Tax Court) recent opinion in Borenstein v. Commissioner, 149 TC No. 10 (August 30, 2017), discussed the standards to be applied in interpreting a statute and reinforces that the plain meaning of the language used by Congress should be followed absent an interpretation that would produce an absurd result.

In Borenstein, the taxpayer made tax payments for 2012 totaling $112,000, which were deemed made on April 15, 2013. However, she failed to file a timely return for that year and the IRS issued a notice of deficiency. Before filing a petition with the Tax Court, the taxpayer submitted return reporting a tax lability of $79,559. The parties agreed that this liability amount was correct and that the taxpayer had an overpayment of $32,441 due to the prior payments. However, the IRS argued that the taxpayer was not entitled to a credit or refund of the overpayment because, under the plain language of Internal Revenue Code Sections 6511(a) and (b)(2)(B), the tax payments were made outside the applicable “lookback” period keyed to the date the notice of deficiency was mailed. (more…)

IRS Criminal Investigation Division Announces Two New Initiatives

by Kevin Spencer and McDermott Will & Emery | Aug 25, 2017 | IRS Guidance, Uncategorized

In a press call on August 2, 2017, the Chief of the Internal Revenue Service’s (IRS) Criminal Investigation Division (CID), John D. Fort, announced two new enforcement initiatives: a National Coordinated Investigations Unit and an International Tax Enforcement Group.

The National Coordinated Investigations Unit is intended to be, in Fort’s words, a “cutting edge” group answering directly to CID’s management. It is intended to harness data already being gathered by the IRS’s civil departments to identify areas of non-compliance, so that major investigations can be coordinated at a national level.

The first three areas of inquiry for the new unit will be international tax enforcement, employment tax enforcement and microcap stock fraud (an effort that will be coordinated with the Security and Exchange Commission). In Fort’s words, these efforts will generate “must-work referrals that come out of this group to the field offices.” International tax and employment tax enforcement are already longstanding CID priorities, so it will be interesting to see how CID’s use of data analytics will further those goals and whether greater coordination at the national level will result. (more…)

Internal Revenue Service Updates Golden Parachute Payments Audit Technique Guide, Signaling Key Items IRS May Review on Audit

by Andrew Liazos, Ashley McCarthy and McDermott Will & Emery | Aug 24, 2017 | IRS Guidance, Uncategorized

In early 2017, the IRS updated its Golden Parachute Payments Audit Technique Guide for the first time since its 2005 issuance. While intended as an internal reference for IRS agents conducting golden parachute examinations, the Audit Technique Guide offers valuable insight for both public and private companies, and recipients of golden parachute payments, into how IRS agents are likely to approach golden parachutes when conducting an audit.

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Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage

by McDermott Will & Emery and McDermott Will & Emery | Aug 23, 2017 | Transfer Pricing Resource, Trial Courts, Uncategorized

On August 14, 2017, the United States District Court for the District of Columbia (DC District Court) decided Starr International Company, Inc. v. United States. In Starr International, the DC District Court held that the Internal Revenue Service (IRS) was not arbitrary or capricious in finding at least one of the taxpayer’s principal purposes for moving its residency to Switzerland was to obtain tax benefits under the US-Swiss Treaty.

Before discussing the facts and holding in Starr International, it is helpful to set the stage for the dispute. The United States has a bilateral tax treaty with a number of nations to avoid double taxation and encourage cross-border investments. Bilateral tax treaties provide benefits to residents of the two contracting states. The United States has a bilateral tax treaty with Switzerland (the US-Swiss Treaty). Treaty benefits under the US-Swiss Treaty are generally desirable for qualified taxpayers because treaty coverage reduces the tax on certain types of transactions, such as US-source dividend income for Swiss residents.

Article 1 of the US-Swiss Treaty provides, except as otherwise provided, the Treaty shall apply to persons who are residents of Switzerland. A person generally is treated as a resident of Switzerland if that person, under Swiss law, is liable to tax therein by reason of his domicile, residence or other similar criteria. However, Article 22, Limitation on Benefits, provides additional criteria to claim benefits provided for in the US-Swiss Treaty.

The Limitation on Benefits provision of the US-Swiss Treaty contains multiple objective tests to claim benefits provided for in the US-Swiss Treaty. All the tests provided in Article 22 aim to identify entities with legitimate, non-tax purposes for residency in Switzerland. This provision intends to stop taxpayers from “treaty shopping” and establishing residency in Switzerland with the principal purpose of obtaining benefits of the US-Swiss Treaty.

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Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

by Jeffrey M. Glassman and McDermott Will & Emery | Aug 17, 2017 | IRS Guidance, Trial Courts, Uncategorized

We recently wrote here about “John Doe” summonses and a case where an anonymous “John Doe” was allowed to intervene in a summons enforcement action. To refresh, under Internal Revenue Code (IRC) Section 7602 the Internal Revenue Service (IRS) has broad authority to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records would be covered by the summons, the IRS may issue a “John Doe” summons to a third party to produce documents related to the unidentified taxpayers.

In Hohman v. United States, Case No. 16-cv-11429 (E.D. Mich. July 11, 2017), two John Doe summonses directed a banking institution to deliver to the IRS records related to three accounts, which were identified only by account numbers. Two of the accounts were held by limited liability companies (LLCs) and the other was held by an individual. The banking institution notified some of the account-holders that it had received a John Doe summons that sought records for accounts relating to them.

The account-holders filed a civil action, alleging that the IRS’s efforts to obtain their financial records through the use of John Doe summonses violated the federal Right to Financial Privacy Act (RFPA). The RFPA accords customers of banks and similar financial institutions certain rights to be notified of and to challenge in court administrative subpoenas of financial records in the possession of banks. The individual account-holder did not allege that the IRS actually obtained or disclosed any records of account information as a result of the John Doe summons.

The government moved, under Rule 12(b)(1) of the Federal Rules of Civil Procedure (FRCP), to dismiss the RFPA claims for lack of subject-matter jurisdiction. The government asserted that it has sovereign immunity from the account-holders’ RFPA claims. The waiver of sovereign immunity under the RFPA applies only to claims that a government authority disclosed or obtained financial records.

The court agreed with the government. First, the court concluded that the RFPA’s waiver of sovereign immunity applies only to “customers,” and the LLCs were not “customers” as defined under the RFPA. The court reasoned that the plain language of the RFPA does not state that an LLC is either a “person” or a “customer” and the court was not at liberty to expand the definitions. Second, the court concluded that sovereign immunity was not waived with respect to the individual’s claim because the individual had not alleged that the IRS actually obtained or disclosed any financial records or information from the account as a result of the John Doe summons.

Practice Point: Although waivers of sovereign immunity are often construed strictly, taxpayers should consult with their advisors to determine whether their particular facts may allow an action against the government.

Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

by Kristen E. Hazel and Sandra P. McGill | Aug 16, 2017 | Court Procedure Matters, IRS Audits, IRS Guidance, Tax Refunds, Trial Courts, Uncategorized

In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.

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McDermott Named “Law Firm of the Year” at 2017 US Captive Services Awards

by McDermott Will & Emery | Aug 14, 2017 | Uncategorized

McDermott Will & Emery is pleased to announce our Captive Insurance team was named “Law Firm of the Year” at the 2017 US Captive Services Awards in Burlington, Vermont. Elizabeth Erickson, partner in our US & International Tax practice group, was on-site to accept the award on behalf of the Firm.

The judges noted that, “McDermott Will & Emery’s varied legal practice ensures captive clients can go to the firm on a range of issues – from claims and tax to regulatory and transactional.” The judges were impressed by the Firm’s “impressive book of case work and deep understanding of the captive sector.”

This is the second year in a row that McDermott earned a significant award from Captive Review. In 2016, the Firm received the “Onshore Law Firm of the Year” award for its contributions to the captive market through legal expertise and innovation, strategic vision and business winning client care. In past years, the Firm has also been named “Tax Advisory Firm of the Year” and “Captive Healthcare Specialist of the Year.”

McDermott’s Captive Insurance team provides integrated tax, corporate, regulatory and insurance coverage, and reinsurance claims and disputes services to captives and industry participants in high-profile matters affecting the global insurance and reinsurance markets. The team includes McDermott’s insurance coverage practitioners who have decades of experience litigating and resolving high-exposure coverage and reinsurance disputes throughout the United States and in offshore jurisdictions, as well as precedential and other sensitive matters affecting CGL, D&O, E&O, EPL, property, crime, marine, legacy and other lines of business.

For more information on the 2017 US Captive Service Awards, please click here.