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TAX CONTROVERSY 360
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TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
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Supreme Court Punts on Attorney-Client Privilege Question

by , and | Feb 2, 2023 | , , , ,

In a surprising move, the Supreme Court of the United States (SCOTUS) dismissed a dispute involving the proper test to apply when determining whether an unnamed law firm’s mixed bag of communications involving both legal advice and discussions of tax preparation was privilege. The dismissal came less than two weeks after oral arguments, with SCOTUS stating that “[t]he writ of certiorari is dismissed as improvidently granted” (commonly known as a “DIG,” which infrequently happens when SCOTUS determines there is no conflict warranting review, one or both parties have changed their position, or no consensus can be reached by the Justices and dismissal is preferable to fractured opinions with no controlling rationale).

BACKGROUND

The law firm and an unnamed company were each served with subpoenas for documents and communication related to a criminal investigation. Both produced some documents but withheld others on the grounds of attorney-client privilege and the work-product doctrine. The government moved to compel production, which the district court granted in part, explaining that the documents were not protected by any privilege, and they were discoverable under the crime-fraud exception. The company and law firm continued to withhold the documents, and the government filed motions to hold them in contempt. The district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice. On appeal to the US Court of Appeals for the Ninth Circuit, the law firm and the company argued that the court should have relied on a broader, “because of” test, not the “primary purpose” test. The Ninth Circuit disagreed and concluded that the “primary purpose” test governs, and the primary purpose of the communications was tax advice. SCOTUS granted certiorari in October 2022.

SUPREME COURT

In its brief, the law firm asked SCOTUS to adopt a more expansive “significant purpose” test, which was applied by the US Court of Appeals for the District of Columbia Circuit in In re Kellogg Brown & Root, Inc. The law firm argued that the test applied in Kellogg “appropriately protects attorney-client dual purpose communications” and that the test “asks a single question that arises directly from the long-established test for attorney-client privilege: whether a client is seeking or obtaining confidential legal advice from his or her lawyer.”

The government argued that courts consistently emphasize the need to construe the attorney-client privilege narrowly and that the primary or predominant purpose test “thus molds the scope of the privilege to its purpose of encouraging effective legal advice, while avoiding sweeping in communications predominantly about a nonlegal matter.”

During oral argument, the Justices seemed skeptical of a need to change the test and expressed some confusion as to how any privilege analysis would change from a practice perspective. Justice Kagan invoked the saying “if it ain’t broke, don’t fix it.” Shortly thereafter, SCOTUS issued the DIG.

Practice Point: More [...]

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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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News of Wayfair Decision Breaks during Tax in the City® New York

by | Jun 29, 2018 | , , ,

The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.

The event also featured a CLE/CPE presentation on the ethical considerations relative to tax reform by Kristen Hazel, Jane May and Maureen O’Brien, followed by a roundtable discussion on recent tax reform insights led by Britt Haxton, Sandra McGill, Kathleen Quinn and Diann Smith. Below are a few takeaways from last week’s Tax in the City® New York:

  • Supreme Court Update: Wayfair – Jurisdiction to Tax – The 5-4 opinion concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992’s Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority. Click here to read McDermott’s insight about the decision.
  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 and 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS and state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand that the IRS is allowed more than three years to assess tax, even when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the Section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • False Claims Act and Starbucks – False Claims Act actions involving state tax issues are becoming more and more [...]

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Tax Court Rejects IRS Argument that Corporate Taxpayer Failed to File Valid Return

by | Sep 13, 2017 | , ,

The issue of whether a valid tax return has been filed usually comes up in the context of individuals. One common situation involves taxpayers who file so-called zero returns or returns with an altered jurat and protest paying any taxes. Another common situation, which has received substantial attention lately, involves whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code. We previously posted on the latter.

This post focuses on the uncommon situation where the IRS disputes whether a corporate taxpayer filed a valid return. As we have previously discussed, in the widely cited Beard v. Commissioner, 82 TC 766 (1984), the Tax Court defined a four-part test (the Beard Test) for determining whether a document constitutes a “return.” To be a return, a document must: (1) provide sufficient data to calculate tax liability; (2) purport to be a return; (3) be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) be executed by the taxpayer under penalties of perjury. This test applies to all types of taxpayers, and its application to corporate taxpayers was recently highlighted in New Capital Fire, Inc. v. Commissioner, TC Memo. 2017-177.

In New Capital Fire, Capital Fire Insurance Co. (Old Capital) merged into New Capital Fire, Inc. (New Capital), with New Capital surviving, on December 4, 2002. The merger was designed to be a tax-free reorganization under Internal Revenue Code (Code) Section 368(a)(1)(F). Old Capital did not file a tax return for any part of 2002 and New Capital filed a tax return for 2002 which included a pro forma Form 1120-PC, US Property and Casualty Insurance Company Income Tax Return, for Old Capital’s 2002 tax year. The IRS issued Old Capital a notice of deficiency in 2012 determining that Old Capital was required to file a return for the short tax year ending December 4, 2002, because the merger failed to meet to reorganization rules. (more…)



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Senate Attempts to Repeal Chevron Deference

by and | Jul 31, 2017 | , ,

In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. 467 US 837 (1984), the Supreme Court of the United States established a framework for assessing an agency’s interpretation of statutory provisions. First, a reviewing court must ask whether Congress “delegated authority to the agency generally to make rules carrying the force of law,” and whether the agency’s interpretation was promulgated under that authority. United States v. Mead Corporation, 533 US 218, 226–27 (2001). Delegation may be shown in a variety of ways, including “an agency’s power to engage in adjudication or notice-and-comment rulemaking, or by some other indication of a comparable congressional intent.” Id. at 227. If an agency has been delegated the requisite authority, the analysis is segmented into two steps.

Under step one, the reviewing court asks whether Congress has clearly spoken on the precise question at issue. See Chevron, 467 US at 842. If so, both the court and agency must follow the “unambiguously expressed intent of Congress,” and the inquiry ends. Id. at 842–43.

If the statute under review is ambiguous or silent, the reviewing court moves to step two: whether the agency’s interpretation is based on “a permissible construction of the statute.” Id. at 842. This inquiry asks whether the interpretation is reasonable and not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 US at 843; see also Judulang v. Holder, 565 US 42, 53 n.7 (2011); Encino Motorcars, LLC v. Navarro, 579 US ____, 136 S. Ct. 2117, 2125 (2016). If the agency’s interpretation passes muster, then the agency’s interpretation is given Chevron deference, and afforded the force of law. The Chevron two-part analysis applies to tax regulations issued by the United States Department of the Treasury and the Internal Revenue Service. Mayo Foundation for Medical Education & Research v. United States, 562 US 44, 55 (2011). (more…)



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