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Altera Corporation Files Answering Brief in Commissioner’s Ninth Circuit Appeal of Altera

by | Sep 19, 2016 | , , ,

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (“QCSA”) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because Treasury and the IRS did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. The Commissioner of Internal Revenue (“Commissioner”) appealed this holding to the Ninth Circuit Court of Appeals, Dkt. Nos. 16-70496, 16-70497. The Commissioner filed his opening brief on June 27, 2016. Two groups of law school professors filed amicus briefs in support of the Commissioner’s position. On September 9, 2016, Altera Corporation (“Altera”) filed its answering brief with the Ninth Circuit.

Altera begins with the observation that the Commissioner “has remarkably little to say” about the Tax Court’s rationale in holding the QCSA regulation invalid. According to Altera, the Commissioner either did not respond to the salient points in the Tax Court’s analysis or, more often, actually admitted that those points were correct. Instead, the Commissioner advanced a “new, litigation-driven position” that Section 482’s “commensurate with income” requirement is an independent “internal standard” that “does not require consideration of transactions between unrelated parties.” Indeed, Altera notes, the Commissioner now argues “that the arm’s-length standard may be applied without considering any facts at all.” Thus, rather than engage with the Tax Court’s reasoning, the Commissioner “mistakenly accuses the Tax Court of overlooking an argument that is missing from the administrative record.”

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Sixth Circuit Defines ‘Corporation’ for Purposes of Overpayment Interest

by | Aug 22, 2016 | , , ,

The US Court of Appeals for the Sixth Circuit recently held in U.S. v. Detroit Medical Center that a nonprofit entity incorporated under state law falls within the definition of a ‘corporation’ for purposes of determining the interest rate applicable to tax refunds. The case is worth reading for its plain meaning analysis as well as its reliance on prior case law dating back hundreds of years.

In Detroit Medical, a not-for-profit corporation overpaid its taxes, entitling it to a refund plus interest. Under the Internal Revenue Code (Code), ‘corporations’ receive lower interest rates on refund than other taxpayers. The taxpayer claimed that, as a not-for-profit corporation, it should not be treated as a ‘corporation’ and thus was eligible for the higher interest rate resulting in an extra $9.1 million in refunds. The Sixth Circuit found nothing in the relevant statute that excludes a not-for-profit corporation from the definition of “corporation.” In reaching its holding, the court relied on various statutory construction principles, including: (1) in the absence of any statutory definition to the contrary, courts presume that Congress adopts the customary meaning of the terms it uses; (2) the word “includes” is a term of inclusion, not exclusion; (3) dictionary definitions (both old and new) are appropriate tools to determine the meaning of a word used in the Code; and (4) when Congress uses particular language in one section of a statute but omits it in another part of the same Act, the general rule is that Congress acted intentionally and purposely in the disparate inclusion or exclusion.

As further support for its plain meaning analysis, the Sixth Circuit relied primarily on an 1819 opinion by Chief Justice Marshal in Dartmouth College that permitted charitable organizations to be treated as corporations.  The court further noted that in 1612, Sir Edward Coke wrote in The Case of Sutton’s Hospital that a charitable hospital and school founded at the London Charterhouse was as valid a corporation as any other because it possessed all the characteristics that are of the essence of a corporation. Finally, the court cited to commentaries by William Blackstone from 1753 that charitable corporations are one of three basic kinds of corporations.

The Sixth Circuit’s approach of applying a strict plain meaning analysis is consistent with its approach in prior tax cases, including its interpretation of Code section 956 in The Limited and Code section 1256 in Wright  Additionally, the opinion highlights the importance in tax litigation of not limiting one’s argument to just the most recent cases and searching for useful authority outside the tax context. In a recent opinion involving the interpretation of Code section 6662, the Tax Court in Rand employed a similar approach by applying the rule of lenity and relying on an 1820 Supreme Court opinion dealing with homicide at sea.



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Protecting Confidential Taxpayer Information in Tax Court

by , and | Jul 21, 2016 | , , , , , , ,

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case.

In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that “[h]earings before the Tax Court . . . shall be open to the public.” Code Section 7461(b), however, provides several important exceptions. First, the court is afforded the flexibility to take any action “which is necessary to prevent the disclosure of trade secrets or other confidential information, including [placing items] under seal to be opened only as directed by the court.” Second, after a decision of the court becomes final, the court may, upon a party’s motion, allow a party to withdraw the original records and other materials introduced into evidence. In our experience, the trend appears to be erring on the side of protecting information from disclosure.

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Senate Finance Committee Approves Tax Court Nominees Copeland and Stoll

by and | Apr 19, 2016 | , ,

Senate Finance Committee Ranking Member Ron Wyden (D-Oregon) issued an April 18, 2016 statement noting the committee’s approval of Tax Court nominees Elizabeth Copeland and Vik Stoll.  In 2015, President Obama nominated Copeland and Stoll to be judges at the US Tax Court.

Copeland is a partner at the law firm Strasburger & Price, LLP. If confirmed, she will be assuming the position left vacant by the 2014 retirement of Judge Diane L. Kroupa.

Stoll is Deputy Chief Administrative Officer and Director of Collections for Jackson County, Missouri. If confirmed, he will be assuming the position left vacant by Judge James S. Halpern, who took senior status in late 2015.



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Ax v. Commissioner: The Tax Court Reaffirms that It Is Not Subject to the APA

by and | Apr 12, 2016 | , , ,

On April 11, 2016, the US Tax Court issued its T.C. opinion in Ax v. Commissioner.  The notice of deficiency in the case determined that certain premium payments made to a captive insurance company were not established by the taxpayer to be (1) insurance expenses and (2) paid.  But this is not a run of the mill captive insurance case—at least not yet.

The Internal Revenue Service (IRS) moved for leave to amend its answer in the case to assert additionally that (1) the taxpayers’ captive insurance arrangement lacked economic substance and (2) amounts paid as premiums were neither ordinary nor necessary (and to allege facts in support of both assertions).  The taxpayers opposed, citing Mayo Foundation for Med. & Educ. Research v. United States, 562 U.S. 44, 55 (2011), and arguing that the Administrative Procedure Act (APA) and SEC v. Chenery, 318 U.S. 80 (1943) barred the IRS from “raising new grounds to support [the IRS’s] final agency action beyond those grounds originally stated in the notice of final agency action.”  The taxpayers also argued that the IRS’s new assertions constituted “new matters” that did not meet required heightened pleading standards under the Tax Court’s Rules of Practice and Procedure.  Ultimately, the Tax Court sided with the IRS.

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Former Tax Court Judge Indicted for Tax Evasion

by and | Apr 5, 2016 | ,

On April 4, 2016, the US Attorney for the District of Minnesota announced a federal grand jury indictment charging former US Tax Court Judge Diane L. Kroupa and her husband with conspiring to evade the assessment of taxes. In a multi-count indictment, both were charged with conspiracy, tax evasion, making and subscribing false tax returns and obstruction of an IRS audit. According to the indictment and documents filed in court, Kroupa and her husband fraudulently claimed personal expenses as business deductions, failed to report income from a land sale, and falsely claimed financial insolvency. They also allegedly concealed certain documents from their taxpayer preparer and an IRS agent during an audit, and caused misleading documents to be delivered to the IRS. The indictment alleges that between 2004 and 2010, Kroupa and her husband purposely understated their taxable income by approximately $1 million and the amount of tax owed by at least $400,000.

Judge Kroupa was appointed to the Tax Court in June 2003, and retired from the court in June 2014. While she was on the bench, Kroupa was very active—the Tax Court’s website indicates that she authored 234 opinions, including 31 division or “T.C.” opinions, 180 “memorandum” opinions, and 23 “summary” opinions. Some of her more notable opinions were Canal Corp., Bank of NY Mellon, BMC Software, Samueli and Eaton.

Here is a link to a press release issued by the U.S. Department of Justice: Former United States Tax Court Judge and Husband Indicted for Conspiracy to Commit Tax Evasion and Obstruction of an IRS Audit.



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IRS Updates Appeals Procedures for Tax Court Cases

by and | Mar 25, 2016 | , , , , , ,

On March 23, 2016, the Internal Revenue Service (IRS) issued Rev. Proc. 2016-22, 2016-15 IRB 1, which clarifies and describes the practices for the administrative appeals process in cases docketed in the Tax Court.  The stated purpose of the revenue procedure is to facilitate effective utilization of appeals and to achieve earlier development and resolution of Tax Court cases.

Previously, the procedures for the appeals process of Tax Court cases was contained in Rev. Proc. 87-24, 1987-1 C.B. 720.  In October 2015, the IRS released a proposed revenue procedure updating the rules and requesting public comments.  Three substantive comments were received and considered by the IRS, resulting in changes to the proposed revenue procedure.  Rev. Proc. 2016-22 states that some of the suggestions that were not adopted may be addressed in other IRS guidance materials.

The general rule followed by the IRS is that all cases docketed in the Tax Court that have not previously been considered by IRS Appeals will be transferred to Appeals unless the taxpayer notifies IRS counsel that it wants to forego settlement consideration by Appeals.  This rule is subject to certain exceptions, most notably if the case has been designated for litigation by the IRS.  The revenue procedure also provides that “[i]n limited circumstances, a docketed case or issue will not be referred if Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.”  Although no definition is provided, examples are provided of: (1) a case involving a significant issue common to other cases in litigation for which the IRS maintains a consistent position; or (2) cases related to a case over which the Department of Justice has jurisdiction.  Referral to IRS Appeals will generally occur within 30 days of the case becoming at issue in the Tax Court, which can be either the date the Answer is filed by the IRS or a Reply (if required) is filed by the taxpayer.

The revenue procedure clarifies, and limits, the role of IRS counsel when a case is referred to Appeals.  Unlike Rev. Proc. 87-24, the new revenue procedure provides that Appeals has sole discretion to determine whether IRS counsel may participate in any settlement conference and will consider input from the taxpayer on this point.  It also clarifies that when a case is forwarded to Appeals for consideration, “Appeals has the sole authority to resolve the case through settlement until the case is returned to Counsel.”  In the past, taxpayers were concerned about the ability of IRS counsel to disrupt a settlement reached with Appeals.  If a settlement is reached with Appeals, IRS counsel’s involvement is ministerial in that counsel should only review any decision document signed by the taxpayer for accuracy and completeness before signing the decision document on behalf of the IRS and filing it with the Tax Court.

The new revenue procedure should also be a welcome development for estate tax cases given that there is no statutory provision to extend the [...]

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Tax Court Announces New Chief Judge and Special Trial Judge

by | Mar 25, 2016 | ,

On March 24, 2016, the Tax Court announced that Diana L. Leyden has been selected as a Special Trial Judge scheduled to assume her duties in June 2016. Ms. Leyden most recently has been the Taxpayer Advocate in the New York City Department of Finance, but previously spent over 15 years as the Director of the Low Income Taxpayer Clinic at the University of Connecticut School of Law. She received the American Bar Association Tax Section Janet Spragens Pro Bono Award in 2005 for her work on behalf of low-income taxpayers. Ms. Leyden, who previously clerked at the Tax Court and spent several years in private practice, should be a welcomed addition to the bench. The Tax Court’s press release can be found here.

As previously announced by the Tax Court on February 29, 2016, Judge L. Paige Marvel will begin serving a two-year term as Chief Judge of the Tax Court beginning June 1, 2016. Judge Marvel was appointed to the Court in 1998. Prior to joining the Court, she focused on federal and state tax matters and controversies. As readers of this blog may know, Judge Marvel was the authoring Judge of the Court’s recent fully-reviewed opinion in Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), which struck down cost-sharing regulations under the Administrative Procedure Act. The Tax Court’s press release can be found here.



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