Fifth Circuit Archives - TAX CONTROVERSY 360

Taxpayer Loses Claim for Research Credit

by Edward L. Froelich | Nov 30, 2023 | Appellate Courts, Court Procedure Matters, Trial Courts

In United States v. Grigsby, Docket No. 22-30764, the US Court of Appeals for the Fifth Circuit held that a refund claim based on claimed Internal Revenue Code (IRC) Section 41 credits was erroneous. Cajun Industries LLC, a subchapter S corporation, filed a refund claim that identified four highly specialized construction projects (two refineries and two flood control systems) as “business components,” which, in turn, gave rise to qualified research expenses (QRE). Cajun fabricated the systems under four separate contracts. The Internal Revenue Service (IRS) granted the claim and issued the refund (ultimately to Cajun’s shareholders who are the taxpayers in this case) but later regretted the decision and filed a suit for recovery of an erroneous refund under IRC Section 7405. The decision turned on two main factors:

A failure to plead
The funded contract exception under IRC Section 41(d)(4)(H)

PLEADING FAILURE

After discovery, the parties prepared for trial and moved for summary judgment. In its motion for summary judgment (and about a month before trial), for the first time in the litigation, the taxpayers identified certain construction processes as additional “business components,” giving rise to the claimed QRE. The Fifth Circuit held that the district court did not abuse its discretion by declining to consider these new processes as “components” in support of the claimed QRE. In short, the taxpayer was too late and paid the price for its delay. One taxpayer faced a similar problem in 2000 when it sought to put into evidence additional QRE beyond the amount described in its detailed refund claim. There, the Federal Circuit cited the doctrine of variance (i.e., a taxpayer must provide adequate notice of the grounds of the refund claim and any substantial variance from those grounds is not permitted in litigation) and declined to put the additional QRE into evidence. Variance may not have been applicable in the Grigsby case because the refund claim was reviewed and issued, but the taxpayers could have improved their position in court by including the construction processes at the beginning of the litigation or at the latest during discovery.

FUNDED EXCEPTION

The Fifth Circuit then analyzed the four contracts and focused particularly on terms pertinent to the ownership of research results and whether payment to Cajun was contingent upon success of its research. (Regulations promulgated under IRC Section 41(d)(4)(h) provide that research is funded and thus not eligible for the credit if the researcher does not retain substantial rights in its research.) The Court held that three of the contracts awarded sole rights in the research to the customer and removed any substantial rights from Cajun. The fourth contract (firm fixed price) was simply considered “funded” because payment was not contingent upon the success of any research performed by the taxpayer. The Court also rejected a Fairchild risk argument negating the funded nature of this fourth contract.

In general, regarding the three contracts, it’s not clear that Cajun retained zero substantial rights in its research. For [...]

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Supreme Court Grants Certiorari in One Tax Case, Denies it in Several Others

by Kevin Spencer and McDermott Will & Emery | Oct 6, 2021 | Appellate Courts, Court Procedure Matters, Trial Courts

Historically, the Supreme Court of the United States rarely grants petitions for certiorari in tax cases, and it appears this trend continues in the current term.

On September 30, 2021, the Supreme Court granted the petition for certiorari in Boechler, P.C. v. Commissioner. The case presents the question of whether Internal Revenue Code Section 6330(d)(1), which establishes a 30-day time limit for filing a petition in the US Tax Court to review a notice of determination by the Internal Revenue Service (IRS) in a collection due process matter, is a jurisdictional requirement or a claim-processing rule subject to the equitable tolling doctrine.

On October 4, 2021, the Supreme Court denied petitions for certiorari in Healthcare Distribution Alliance v. James and Taylor Lohmeyer Law Firm PLLC v. United States. The former involved a challenge to a US Court of Appeals for the Second Circuit decision that held that an opioid stewardship surcharge was a tax within the meaning of the Tax Injunction Act. The Court also found that the district court lacked subject matter jurisdiction to rule on the challenge to the payment. The latter case involved a law firm’s challenge to the US Court of Appeals for the Fifth Circuit’s decision that the IRS could use a “John Doe” summons to seek the identifies of taxpayers who it believed may have taken the firm’s advice to hide income offshore.

The Supreme Court also denied petitions for certiorari in the following cases:

Perkins v. Commissioner: A case regarding the taxability of income derived from the sale of land and gravel mined from treaty-protected land by an enrolled member of the Seneca Nation
Kimble v. United States: A case focused on Report of Foreign Bank and Financial Accounts penalties and
Razzouk v. United States: A case involving restitution for tax and bribery convictions

Still pending are petitions in Willis v. United States (which involves the value of collectible coins seized by the government and deposited into an IRS account) and Clay v. Commissioner (which deals with a dispute over whether to follow guidance from the Bureau of Indian Affairs or the IRS).

Practice Point: Although the Supreme Court rarely reviews tax cases, when it does, the decision is usually important because it’s applicable to numerous taxpayers. For example, cases such as Mayo Found. for Med. Educ. & Research v. United States and United States v. Home Concrete & Supply LLC both provided significant guidance for taxpayers regarding the IRS’s scope of regulatory authority. Additionally, non-tax cases from the Supreme Court can contain general principles that are also applicable and impact tax positions taken, or being considered, by taxpayers. Thus, it is important that taxpayers and their representatives stay abreast on what is happening at the Supreme Court.

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

by Kevin Spencer and Le Chen | Apr 28, 2020 | Appellate Courts, IRS Appeals, Trial Courts, Uncategorized

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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Government Appeals Defeat in Anti-Inversion Regulation Case

by McDermott Will & Emery | Nov 29, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Uncategorized

We previously posted on the Order by the US District Court for the Western District of Texas in Chamber of Commerce of the United States of America, et al. v. Internal Revenue Service, Dkt. No. 1:16-CV-944-LY (W.D. Tex. Sept. 29, 2017). In that Order, the court held that Treas. Reg. § 1.7874-8T was unlawfully issued. See here for our prior post. As expected by many, the government on November 27, 2017, appealed the Order to the Court of Appeals for the Fifth Circuit. The next steps are for the Fifth Circuit to set a briefing schedule and a date for oral argument. We will continue to follow this case and provide updates.