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A 360-Degree View: August and September 2017

by | Sep 5, 2017 |

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



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Tax Court Reinforces Plain Meaning Approach in Interpreting Tax Statutes

by and | Sep 1, 2017 | , ,

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…)



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

by , and | Aug 24, 2017 | ,

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 and | Aug 23, 2017 | , ,

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.

(more…)



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Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

by and | Aug 17, 2017 | , ,

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.



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

by and | Aug 16, 2017 | , , , , ,

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 | Aug 14, 2017 |

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.

by Reciprocity Studio



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The IRS Is Struck Down Again in Privilege Dispute

by and | Aug 11, 2017 | , , , ,

Courts continue to strike down the Internal Revenue Service (IRS) as it continues to test the bounds of the attorney-client privilege and work product doctrine through the issuance of improper summonses. In the last several years, the IRS has filed numerous summons enforcement proceedings related to the production of documents generally protected by the attorney-client privilege, tax-practitioner privilege, and/or work product doctrine. These summonses include overt requests for “tax advice” and “tax analysis,” which several courts have refused to enforce. For example, see Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015).

Once again, in United States v. Micro Cap KY Insurance Co., Inc. (Eastern District of Kentucky), a federal district court rejected the IRS’s arguments and refused to enforce an inappropriate summons. The opinion is available here. The IRS filed this enforcement proceeding seeking to compel the production of confidential communications between taxpayers and the lawyers that assisted them in forming a captive insurance company. After conducting an in camera review (where the judge privately reviewed the documents without admitting them in the record), the judge found the taxpayers had properly invoked privilege since each document “predominately involve[d] legal advice within the retention of [] counsel.”

The court also rejected the government’s argument that the attorney-client privilege was waived by raising a reasonable cause and reliance on counsel defense to penalties in the taxpayers’ case filed in Tax Court. Because the government’s argument was untimely, it was waived and rejected outright. The court, however, proceeded to explain how the argument also failed on its merits. (more…)



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TIGTA Pounces on IRS Federal Records Retention Policies; Recommends Changes

by and | Aug 9, 2017 | , ,

The Treasury Inspector General for Tax Administration (TIGTA) recently summarized several critical deficiencies in how the IRS handles electronically stored federal records in a recent report, available here. The lapses identified by TIGTA may affect the availability of those electronic records for future Freedom of Information Act (FOIA) requests, litigation and Congressional review. The report does not address the IRS’s retention policy for physical documents.

Federal law mandates the retention of the government’s federal records. Unfortunately, prior to May 22, 2013, IRS electronic asset disposal policies included instructions to “wipe” and “reimage” computer hard drives that were no longer needed by IRS users. If those computers were the only repository for electronically stored federal records, that information would be lost. TIGTA noted that, even though the IRS revisited those policies several times, computers were still being wiped and reimaged as part of the IRS’s migration to Windows 7 through January 14, 2016. This also affects email retention since users are often required to manually identify and store or print their email records. An upgraded email solution that will permit the automatic retention and storage of email records is being implemented.

Further, TIGTA determined the IRS’ storage and retention policies for computers that were not wiped or reimaged were ineffective. For example, TIGTA found that the IRS has approximately 32,000 laptops and desktops in storage, but an inventory report identifying the number and location of computing devices currently in storage from specific employees could not be readily produced, rendering electronic federal records on those devices essentially unavailable.

These inadequate electronic record retention policies have resulted in the destruction of material subject to litigation holds, delays in the FOIA process, and the unavailability of responsive documents for FOIA requests. TIGTA made the following recommendations, which the IRS agreed to:

  • An enterprise email system should be implemented that enables the IRS to comply with federal records management requirements.
  • A methodology for developing one list of executives for the permanent and 15-year email retention groups should be documented.
  • The newly issued policy on the collection and preservation of federal records associated with separated employees should be disseminated broadly within the agency.
  • The director should ensure that the policy for documenting search efforts is followed by all employees involved in responding to FOIA requests.
  • The director should develop a consistent policy for the search of federal records associated with separated employees.

Practice Point: When drafting FOIA requests and discovery requests for electronic records, practitioners should be aware of record-retention challenges facing the IRS since they will impact the IRS’s ability to fully respond to FOIA requests and adequately implement litigation holds for years to come.



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