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The Government Flexes Its Summons Muscles

by Edward L. Froelich | May 26, 2023 | IRS Guidance

Two recent decisions confirmed the broad administrative summons authority of the Internal Revenue Service (IRS). In the first, the US Supreme Court resolved a circuit conflict regarding notice requirements for third-party IRS summonses. In the second, the US Court of Appeals for the Third Circuit confirmed the primacy of the Internal Revenue Code (IRC) over state law insurance and privacy laws.

Polselli v. Internal Revenue Service[1]

Mr. Polselli owed over $2 million to the IRS, was not forthcoming with payment and, moreover, appeared to be hiding assets with accommodating parties. The IRS assigned a revenue officer to track down where his assets might be. The investigation pointed to several potential repositories of relevant financial information, including a law firm, the taxpayer’s wife and a company through which Mr. Polselli had made one tax payment of $300,000. The officer issued summonses under the authority of IRC section 7602 to three banks where the law firm, the wife and the company had accounts. The officer did not give notice to any of the third parties prior to issuing the summons. After learning of the summonses from the banks, the third parties moved to quash.

The precise question was whether the third parties were entitled to notice under IRC section 7609(a)(1) and thereby had standing to move to quash the summonses or whether the exception to the notice requirement under IRC section 7609(c)(2)(D)(i), where a summons is “issued in aid of the collection of an assessment made [against the delinquent taxpayer],” applied, thus resulting in lack of standing and ultimately lack of jurisdiction. The petitioners relied upon a Ninth Circuit decision that narrowed the scope of the IRC section 7609(c)(2)(D)(i) exception to those circumstances where the delinquent taxpayer had proprietary interest in the information sought by the summons. The Sixth, Seventh and Tenth Circuits found no such limitation on the exception in part because the statute did not contain one.

The Supreme Court unanimously rejected the Ninth Circuit’s application of IRC section 77609(c)(2)(D)(i) and found the petitioners had no standing to quash. At the risk of oversimplification, the Supreme Court opened the American Heritage Dictionary of 1969, looked up the word “aid” and determined, consistent with other relevant parts of the statute, that Congress intended to use the ordinary meaning of the word “aid,” i.e., help or assist. Was the effort to locate the taxpayer’s financial connections and maneuvers through the petitioners’ bank records intended to “help” in the goal of collecting the $2 million? Yes. Implicit in this conclusion is a requirement that there is some evidence that third parties have a financial connection with the taxpayer, as opposed to the IRS randomly picking bank accounts. However, the Court declined to opine on any such requirement as that question was not specifically argued. It did note the Government’s admission that some financial connection must exist to establish “aid” in the collection of the assessment.

United States v. State of Delaware Dept. of Insurance [2]

This case centers on the intersection [...]

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Sixth Circuit Sides with Taxpayer in APA Challenge to Reportable Transaction Regime

by Sarah M. Raben and Jenny L. Johnson Ware | Mar 7, 2022 | Appellate Courts, IRS Appeals

We previously posted about the US Supreme Court’s opinion in CIC Servs., LLC v. IRS, which allowed a pre-enforcement challenge to the Internal Revenue Service’s (IRS) “reportable transaction” regime. In that post, we noted the district court opinion in Mann Construction, Inc. v. United States, No. 1:20-cv-11307 (E.D. Mich. 2021), holding that an IRS Notice requiring disclosure of listed transactions was not subject to the Administrative Procedure Act’s (APA) notice-and-comment requirement, and identified unanswered questions and potential future disputes over IRS enforcement strategies.

The US Court of Appeals for the Sixth Circuit has now reversed the district court in Mann Construction, holding that the IRS’s process for issuing Notice 2007-83—which designates certain employee-benefit plans featuring cash-value life insurance policies as listed transactions—violated the APA. Specifically, the court found that Notice 2007-83 was a legislative rule under the APA because it had the force and effect of law. The Sixth Circuit relied on CIC Services, explaining that Notice 2007-83 “defines a set of transactions that taxpayers must report, and that duty did not arise from a statute or a notice-and-comment rule…failure to comply comes with the risk of penalties and criminal sanctions, all characteristics of legislative rules.” The court further found that Congress did not expressly exempt the IRS from the APA’s notice-and-comment requirements with respect to the reportable transaction regime. The Sixth Circuit explained that there was an absence of any express deviation from the APA’s notice-and-comment procedures, and “any exceptions to the sturdy protections established by the APA’s notice-and-comment requirements must come from Congress, not us and not the IRS.”

What now? Mann Construction is a heavy blow to the IRS’s reportable transaction regime, and similar APA attacks are underway against other Notices imposing non-statutory reporting obligations. One example is Notice 2017-10, which identifies certain syndicated conservation easement transactions as listed transactions subject to disclosure to the IRS.

Practice Point: In 2011, the Supreme Court announced in Mayo Found. for Med. Educ. & Rsch. v. United States, that “we are not inclined to carve out an approach to administrative review good for tax law only.” The last 10 years have seen numerous APA challenges in the tax world, some successful and others unsuccessful. CIC Services and Mann Construction are two important cases for taxpayers subject to non-statutory reporting obligations. Taxpayers and practitioners should carefully consider the impact of these cases in similar reporting situations in determining whether to initiate APA challenges.

Illinois Department of Revenue Issues Post-Wayfair Guidance Implementing October 1 Economic Nexus Law

by Mary Kay McCalla Martire and McDermott Will & Emery | Oct 23, 2018 | Uncategorized

This post originally appeared on McDermott’s Inside SALT blog, which is dedicated to in-depth coverage of issues surrounding state and local tax.

In June 2018, just before the US Supreme Court ruling in Wayfair, Illinois enacted an economic nexus standard modeled after South Dakota’s law (see our prior coverage). The new Illinois standard takes effect on October 1, 2018. On September 11, the Illinois Department of Revenue (Department) issued an emergency rule (Regulation 150.803), together with other guidance found on its website, intended to assist remote retailers with compliance with the new law. (more…)

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

by McDermott Will & Emery | Jun 29, 2018 | Appellate Courts, State Controversy, Tax Reform, Uncategorized

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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Santander Holdings USA Asks the Supreme Court to Address Economic Substance Doctrine

by Roger J. Jones | Apr 7, 2017 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

From 2003 to 2007, Sovereign Bancorp, Inc. (Sovereign) – now known as Santander Holdings USA, Inc. (Santander) – engaged in a so-called STARS transaction with Barclays Bank. According to Santander, “[b]y engaging in the STARS transaction, Sovereign transferred some of its income tax liability from the United States to the United Kingdom,” it “secured a loan of $1.15 billion,” and it received a payment “which effectively reduced its lending costs.” On its Federal corporate income tax returns for those years, Sovereign claimed foreign tax credits (FTCs) for UK taxes it paid in connection with the STARS transaction. It also claimed deductions for the interest paid on the $1.15 billion loan.

In 2009, the Internal Revenue Service (IRS) issued a Notice of Deficiency disallowing Sovereign’s FTCs and its deductions for interest paid on the $1.15 billion loan. The IRS did not challenge Sovereign’s compliance with the statutory and regulatory rules governing FTCs, instead arguing that Sovereign’s STARS transaction lacked “economic substance.” Sovereign paid the deficiency and sued for a refund in the US District Court for the District of Massachusetts. When the district court held for Sovereign on both issues, the IRS appealed to the US Court of Appeals for the First Circuit, but only with respect to the FTC issue. The crux of the issue was how to treat the UK taxes and the related FTCs for purposes of the “economic substance” analysis. Relying on Salem Financial, Inc. v. U.S., 786 F.3d 932 (Fed. Cir. 2015), and Bank of New York Mellon Corp. v. Comm’r, 801 F.3d 104 (2d Cir. 2015), the IRS argued that the UK taxes should be treated as an expense but that the related FTCs should be ignored in determining pre-tax profit. Citing IES Indus., Inc. v. U.S., 253 F.3d 350 (8th Cir. 2001), and Compaq Computer Corp. v. Comm’r, 277 F.3d 778 (5th Cir. 2001), Sovereign argued that either both should be included in the profit analysis or both should be ignored. The First Circuit held that Sovereign’s STARS transaction lacked “economic substance,” and upheld the disallowance of the FTCs at issue. In doing so, it treated the UK taxes as expenses that reduced pre-tax profit and ignored the related FTCs, following the Federal and Second Circuit’s approach. Santander Holdings USA, Inc. v. U.S., 844 F.3d 15 (1st Cir. 2016).

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