TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
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Giving Back – Providing Pro Bono Tax Assistance

by , and | Feb 23, 2017 | ,

Here at McDermott, we value giving back to the community through pro bono efforts.  In particular, we provide substantial assistance in pro bono tax cases to low-income individuals through our relationships with low-income taxpayer clinics throughout the country.  Over the years, we have settled dozens of cases for low-income taxpayers in docketed tax cases and routinely reduced or eliminated deficiencies asserted by the Internal Revenue Service (IRS).  When settlement has not been possible, we have litigated cases in the Tax Court and obtained favorable results not just for our clients but for the low-income taxpayer community as a whole.  For example, we represented a husband and wife on a penalty issue involving an issue of first impression and convinced the Tax Court that the IRS had for years been improperly asserting and collecting penalties on improperly claimed refundable tax credits. In a recent article, we detail some of the pro bono efforts by low-income taxpayer clinics and private practitioners.

Practice Point:  In addition to assisting low-income individuals who cannot afford legal representation, providing pro bono tax services benefits tax practitioners in many ways.  It provides the opportunity for younger attorneys to take responsibility for a case and to get valuable experience in dealing with clients, negotiating with the IRS, and potentially gaining courtroom experience.  Assisting taxpayers on a pro bono basis is also rewarding and can make a significant difference in the lives of low-income individuals.



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Sixth Circuit Sets Limits on the Application of the Substance-Over-Form Doctrine

by and | Feb 21, 2017 | ,

The judicial substance-over-form doctrine provides the IRS with the ability to set aside carefully orchestrated tax planning arrangements to treat a transaction consistent with its substance.  However, the doctrine does not give the Service carte blanche to deny tax benefits. In Summa Holdings, Inc. v. Commissioner, No. 16-1712 (available here), the Sixth Circuit overturned the Tax Court and declined to apply the substance-over-form doctrine when faced with taxpayers who, “to [their] good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower [their] taxes” and “complied in full with the printed and accessible words of the tax laws.”

Summa Holdings involved a closely held corporation (Summa Holdings, Inc.) that supercharged the tax benefits provided by paying commissions to an interest charge domestic international sales corporation (IC-DISC) by having the IC-DISC owned by two Roth IRAs. While the dividends paid by the IC-DISC were taxable upon receipt, the dividend amounts (totaling $6 million over 7 years) were vastly larger than the annual contribution limits placed on Roth IRAs. For unfathomable reasons, the IRS did not challenge the $3,000 price that the Roth IRAs paid for the IC-DISC stock. Instead, the IRS asserted that that the substance of the arrangement was that the corporation paid dividends to its shareholders and the shareholders made excess contributions to the Roth IRAs.

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Should Taxpayers File Amicus Briefs in Tax Court Cases?

by and | Feb 15, 2017 | , , ,

Amicus–or “friend of the court”–briefs are not uncommon in Supreme Court and appellate court cases.  The purpose of an amicus brief is generally to provide assistance to the court by presenting additional arguments either in support or opposition of one of the litigant’s positions.  Amicus briefs should not rehash the same arguments presented by one of the parties, but rather should provide insights and a different perspective that is not presented by the parties, and to inform the court of the impact of the issues in the case on other affected parties.  The Federal Rules of Appellate Procedure provide detailed rules on how and when to file an amicus brief.  See here for Federal Rule of Appellate Procedure 29, which governs amicus filings.

Sometimes, amicus parties want to get involved at the trial court level before the trial record is fixed.  Thus, increasingly, amicus briefs are being filed in trial courts, and in particular in the United States Tax Court (Tax Court).  When, why and how to file an amicus brief in a trial court is not clear.  Indeed, most trial courts do not have procedural rules that directly address those filings.  This post provides an overview of some of the considerations and procedures for filing such briefs in a Tax Court case.

Whether to allow an amicus to participate in a case is within the sound discretion of the court.  Because the filing of an amicus brief is discretionary, the typical practice is to file a motion seeking permission or“leave” of the court to file an amicus brief accompanied with a statement stating that the litigants do, or do not, object to the filing of the amicus brief.

In deciding whether to grant permission to file anamicus brief, the Tax Court generally examines whether “the proffered information is timely, useful or otherwise helpful.”  The court also considers whether amici are advocates for one of the parties, have an interest in the outcome of the case and possess unique information or perspective.  This is consistent with the standards applied by other courts in making the determination.

Practice Point:  Several factors should be considered by taxpayers in deciding whether to file an amicus brief in Tax Court.  In addition to the cost, taxpayers may want to consider whether their position is being adequately represented by another taxpayer’s case and whether they believe that they can provide arguments that might persuade the court to adopt their position.  Participation as an amicus can also be helpful to taxpayers in coordinating legal positions and ensuring that the best possible arguments are presented on issues of first impression.  An effective amicus brief has the potential to persuade the court, and can be an effective tool to resolve an issue favorably.  This is especially true when, because of the specific facts of the taxpayer, the perspectives of other taxpayers are not adequately addressed.



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Run for Cover—IRS Unveils Initial “Campaigns” for LB&I Audits

by , , and | Feb 1, 2017 | , ,

They’re here!  On January 31, 2017, the Internal Revenue Service (IRS) Large Business & International (LB&I) division released its much-anticipated announcement related to the identification and selection of campaigns.  The initial list identifies 13 compliance issues that LB&I is focused on and lists the specific practice area involved and the lead executive for each campaign.  Prior coverage of audit campaigns can be found here.

The initial list, along with descriptions of each campaign, is as follows:

Domestic Campaigns

  • Section 48C Energy Credits

This campaign is designed to ensure that only taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by the IRS, are claiming the credit.  Apparently, there has been confusion regarding which taxpayers are entitled to claim the credits.

  • Micro-Captive Insurance

This campaign addresses certain transactions described in Notice 2016-66 in which a taxpayer reduces aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company.  We previously blogged about Notice 2016-66 here. Captive insurance, along with basketing and inbound distribution, were three subject-matter specific campaigns announced during LB&I’s initial rollout last summer, as we discussed in our prior post on the subject.

  • Deferred Variable Annuity Reserves & Life Insurance Reserves

This campaign seeks to address uncertainties on issues important to the life insurance industry, including amounts to be taken into account in determining tax reserves for both deferred variable annuities with guaranteed minimum benefits, and life insurance contracts.

  • Distributors (MVPD’s) and TV Broadcasts

This campaign is targeted at multichannel video programming distributors and television broadcasters that may claim that groups of channels or programs are a qualified film for purposes of the Internal Revenue Code (Code) Section 199 deduction.  The description indicates that LB&I has developed a strategy to identify taxpayers impacted by the issue and that it intends to develop training, including the development of a publicly published practice unit, published guidance, and issue based exams, to aid revenue agents.  It appears that this campaign stems from various private guidance issued in 2010, 2014 and 2016 on these issues.

  • Related Party Transactions

This campaign is focused on transactions among commonly controlled entities that the IRS believes might provide a taxpayer a means to transfer fund from the corporation to related pass-through entities or shareholders.  The campaign is aimed at the mid-market segment.

  • Basket Transactions

This campaign focuses on certain financial transactions described in Notices 2015-73 and 74, which relate to so-called basket transactions.  Basketing was a topic named during LB&I’s initial campaign announcement last summer, along with captive insurance and inbound distribution.

  • Land Developers – Completed Contract Method

This campaign addresses the Service’s concern that large land developers that construct residential communities may improperly be using the completed contract method.  This campaign appears to be a [...]

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What to Expect During a Change of Administration

by , , and | Jan 25, 2017 | , , ,

With the inauguration of President Trump, and the accompanying change of administration, the American people have been promised great change in all areas of the federal government. One question we at McDermott have been frequently asked since the election is: what should a taxpayer expect from the Internal Revenue Service (IRS) and the Department of Justice (DOJ) Tax Division while the transitions in the executive branch are taking place? Major tax policy changes are being discussed, but what about the immediate practical effects of a turnover in high-level personnel within these agencies, particularly if a taxpayer is under audit or investigation?

During a change in administration, taxpayers may be affected by any of the following:

  • If under audit, the exam team may ask for longer statute extensions than would otherwise apply, to account for possible delays in internal managerial-level approvals.
  • If a taxpayer is negotiating a settlement, and that settlement requires approval by the IRS National Office or the Assistant Attorney General for Tax, settlement approvals may be delayed due to personnel changes.
  • This applies to civil settlements reached with IRS Appeals, in Tax Court litigation, or in federal district court litigation. Delays are also possible for criminal agreements, including plea agreements, deferred prosecution agreements and non-prosecution agreements.
  • Ongoing litigation (particularly appellate litigation) may be stayed or delayed, to the extent a case involves a policy position that the administration may want to change.
  • The regulatory freeze enacted by the Trump administration also affects procedural regulations, including proposed regulations related to the new partnership audit rules.

Initial comments from prospective Secretary of Treasury Steven Mnuchin indicate that he believes IRS staffing should be increased, which would be a welcome change.  Any significant changes like this are likely to be long-term, however, so we are unlikely to see their effect for some time.



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Circuit Courts Agree Timely Filing Requirement for a Tax Court Petition is Jurisdictional

by and | Jan 23, 2017 | , , , ,

Arguably the most important aspect of litigating a case in the Tax Court or in a refund forum is the timely filing of the petition or complaint.  Absent timely filing, the court may not have jurisdiction and the case could be dismissed without the court ever reaching the substantive issues.  On January 13, 2017, the Seventh Circuit joined several other circuit courts in confirming that the time for filing a petition in Tax Court is jurisdictional, not a claims processing rule.

In Tilden v. Commissioner, No. 15-3838 (available here), the taxpayer’s petition was mailed on the last day of the 90-day filing deadline.  It was not stamped and bore no postmark; instead, a USPS print-at-home postage label was attached by legal staff, and it was delivered to the post office the same day.  The Internal Revenue Service (IRS) argued this was insufficient for timelymailing under the “mailbox rule” of Internal Revenue Code (Code) Section 7502.  The Tax Court disagreed with both parties about what section of the regulations applied, and used the date the envelope was entered into the postal service’s tracking system as the date of postmark and filing—which was two days late.  Thus, the Tax Court dismissed the petition for lack of jurisdiction (available here).

On appeal, the Seventh Circuit raised sua sponte the issue of whether the filing deadline for a Tax Court petition is jurisdictional or a claims processing rule.  The proper characterization of the filing deadline is extremely important.  If the deadline is considered jurisdictional, then late filing automatically precludes the taxpayer from seeking relief in the Tax Court.  But, the taxpayer may still pay the tax due, file a claim for refund with the IRS, and file a complaint in a refund forum (if the IRS denies or fails to timely act on the claim).  On the other hand, if the deadline is a claims processing rule, the taxpayer’s options may be limited.  Although the taxpayer that files a late petition might be able to demonstrate that the Tax Court should hear its case, if the court were to determine that the petition was untimely, it arguably would be required under the Code to enter a decision on the merits for the IRS, rather than a dismissal for lack of jurisdiction.  That result eliminates the alternative refund forum.

In Tilden, the Seventh Circuit considered the Supreme Court’s current approach in non-tax cases for determining whether deadlines are jurisdictional or claims processing rules, but decided that the language of the relevant statute and the body of Tax Court and circuit court precedent compelled a finding that the 90-day deadline is jurisdictional.  Finding it “imprudent to reject that body of precedent” under principles of stare decisis, the Seventh Circuit followed the Tax Court and other circuit court precedent.  The Seventh Circuit further disagreed with the Tax Court’s holding on the relevant postmark regulations to conclude that the petition was timely filed.

Practice Point: The Seventh Circuit’s opinion is a good reminder as to the [...]

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APA Challenge to Notice of Deficiency: QinetiQ Affirmed

by and | Jan 10, 2017 | , , ,

On January 6, 2017, the US Court of Appeals for the Fourth Circuit, by published opinion, affirmed the US Tax Court’s (Tax Court) earlier ruling in QinetiQ US Holdings, Inc. v. Commissioner.  We previously wrote about the case here, here, and here.  To refresh, the taxpayer had argued in Tax Court that the Notice of Deficiency issued by the Internal Revenue Service (IRS), which contained a one-sentence reason for the deficiency determination, violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”  The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the Notice of Deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law.  The taxpayer appealed to the Fourth Circuit.

In an opinion written by Circuit Judge Barbara Keenan, the court concluded that the IRS complied with all applicable procedural requirements.  The court reasoned that the Internal Revenue Code (Code) provided a unique system for judicial review that should govern the content requirements for a Notice of Deficiency.  Per the court, it “is that specific body of law, rather than the more general provisions for judicial review authorized by the APA, that governs the content requirements of a Notice of Deficiency.”  The court cited a Fourth Circuit opinion from 1959, in which it held that the Code’s provisions for de novo review are incompatible with limited judicial review of final agency actions allowed under the APA.

The court held that the APA’s requirement of a reasoned explanation in support of a “final” agency action does not apply to a Notice of Deficiency issued by the IRS.  A Notice of Deficiency, the Court reasoned, cannot be a “final” agency action within the meaning of the APA, because the agency action is not one “by which rights or obligations have been determined, or from which legal consequences will flow.”  After issuing a Notice of Deficiency, the IRS may later assert in Tax Court new theories and allege additional deficiencies.  Moreover, a taxpayer may also raise new matters in Tax Court.  In addition, the court cited to the Supreme Court’s 1988 opinion in Bowen v. Massachusetts, emphasizing that Congress did not intend for the APA “to duplicate the previously established special statutory procedures relating to specific agencies.”

The court also held that the Notice of Deficiency issued to QinetiQ satisfied the requirement of Code section 7522(a), which requires that the IRS “describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions [...]

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Former Tax Court Judge Pleads Guilty to Tax Crimes

by and | Oct 24, 2016 | ,

Following up on our prior coverage (see here), former US Tax Court Judge Diane L. Kroupa pleaded guilty on Friday to multiple tax criminal charges related to her tax returns and interactions with the Internal Revenue Service. The government stipulated during the hearing that all charges except defrauding the United States would be dropped if Kroupa agreed to be sentenced on the fraud charge. Based on sentencing guidelines, the recommended sentence is between 30-37 months, although the judge may ultimately sentence Kroupa to more or less time. A copy of the Change of Plea Hearing can be found here.



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Timing of a US Federal Tax Controversy

by | Oct 18, 2016 | , ,

Understanding the timing of a US Federal tax controversy is helpful in creating a sound and efficient strategy. This timeline shows the typical timing of a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.



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Tax Controversy Options

by | Oct 11, 2016 | , , , , , , ,

Knowing your options for a US Federal tax controversy is helpful in creating a sound and efficient strategy. The attached chart depicts the typical options involved in a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.



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