October 2017

We have previously reported on the various forums in which taxpayers can litigate tax cases, noting that the vast majority of tax cases are litigated in the US Tax Court (Tax Court). The Tax Court is the preferred forum for several reasons, including that the judges are all tax specialists, and taxpayers can litigate their case without having to pay the tax beforehand. Trial sessions and other work of the Tax court are conducted by presidentially appointed judges, senior judges serving on recall and Special Trial Judges. These judges travel nationwide to conduct trials in designated cities.

We have also previously noted important procedural developments and other news from the Tax Court, such as proposals to changes the Court’s rules: Tax Court Considering Requiring Notice of Non-Party Subpoenas, Tax Court Anticipates Releasing Revisions to its Rules in the Near Future and Tax Court Adopts Rules for Judicial Conduct and Judicial Disability Complaints. According to recent media reports, the Tax Court is currently considering whether to use teleconference technology to take testimony from witnesses remotely, rather than requiring a witness’ physical appearance in Court. Continue Reading Tax Court Considering Allowing Remote Testimony

On October 20, 2017, the Internal Revenue Service (IRS) published Office of Chief Counsel Internal Revenue Service Memorandum 20174201F (FSA), legal advice written by a field attorney in the Office of Chief Counsel that was reviewed by an associate office, which deals with a merchant bank’s claim that its revenue from merchant discount fees qualifies as Domestic Product Gross Receipts (DPGR) under Internal Revenue Code (Code) Section 199. According to the FSA, on its amended return the taxpayer claimed a Code Section 199 deduction with respect to its merchant discount fees based on the third-party comparable exception for online software found in Treasury Regulation § 1.199-3(i)(6)(ii)(B). The taxpayer argued that the merchant discount fees were derived from the use of computer software, the software “Platform.” The taxpayer took solace in the fact that third parties derived gross receipts from the disposition of substantially identical software. Accordingly, the taxpayer argued that the merchant discount fees should be treated as DPGR pursuant to the third party comparable exception.

The IRS, however, had a very different perspective. Its analysis began with the threshold question of whether there was a “disposition” of the Platform. The IRS concluded that the taxpayer did not dispose of the Platform because the taxpayer did not lease, rent, license, sell, exchange or otherwise dispose of the Platform as required by Treasury Regulation § 1.199-3(i)(6)(i). Moreover, the IRS concluded that the merchant discount fees represented remuneration for “online services” (e.g., online banking services) per Treasury Regulation §1.199-3(i)(6)(i). Because the taxpayer did not establish that there was a disposition of the Platform, the third party comparability exception in Treasury Regulation § 1.199-3(i)(6)(ii)(B) is inapplicable—the merchant discount fees were derived “from the provision of merchant acquiring services.”

Practice Point: We have reported extensively on the IRS’s attacks on taxpayer’s ability to claim the IRC section 199 deduction for computer software and qualified film production. The issue is also on the IRS’s annual Guidance Plan as an area in which the IRS expects to issue regulations within the next year. The FSA is further proof that taxpayers and the IRS do not see eye-to-eye on these issues. Indeed, there are presently several docketed cases seeking judicial determinations regarding the applicability of the third-party comparable exception. Because we have several clients who have this same issue, we are watching it closely, and will report back with any developments.

The US Department of Treasury (Treasury) and Internal Revenue Service (IRS) issue Priority Guidance Plans each year to identify the tax issues they believe should be addressed through regulations, revenue rulings, revenue procedures, notice and other published administrative guidance. On October 20, 2017, the IRS and Treasury released the 2017-2018 Priority Guidance Plan.

  • Part 1 focuses on the eight regulations from 2016 that were identified pursuant to Executive Order 13789 (see here for prior coverage on Treasury’s report in response to this Order) and the intended actions related to those regulations.
  • Part 2 describes certain projects that Treasury and the IRS have identified as burden reducing and that they believe can be completed in the eight and a half months remaining in the plan year.
  • Part 3 describes the various projects related to the implementation of the new statutory partnership audit regime. See here for prior coverage.
  • Part 4 describe specific projects by subject area that will the focus of the balance of Treasury’s and the IRS’s efforts for the plan year.

Practice Point: The Priority Guidance Plan is a useful tool for taxpayers in that it highlights areas in which Treasury and the IRS are focused, both in the short-term and the long-term. Although items in the Priority Guidance Plan are subject to modification, they provide a blueprint for issues that the government views as important. For example, the plan reports guidance projects relating to Internal Revenue Code Section 199, focused on the treatment of computer software and films. These issues have created substantial controversy for the IRS and taxpayers, as we have previously reported. See https://www.taxcontroversy360.com/2017/04/the-irss-assault-on-section-199-computer-software-doesnt-compute/ and https://www.taxcontroversy360.com/2017/03/irs-campaign-focuses-on-definition-of-qualified-film-under-section-199/. Additional guidance would be welcomed.

Today, President Trump announced his intention to designate David Kautter to be the Acting Commissioner of Internal Revenue effective November 13, 2017. John Koskinen, the current Commissioner of Internal Revenue, is near the end of his term, which ends on November 12, 2017. The Commissioner’s role is to preside over the nation’s tax system and manage an agency consisting of more than 80,000 employees with a budget in excess of $11 billion.

Mr. Kautter has been the Assistant Secretary of the Treasury (Tax Policy) since August 2017. Prior to that, he was the Leader of the Washington National Tax practice at RSM US LLP. From 2011–2015, he was a Managing Director at American University, Kogod School of Business. From 1974–1979 and 1982–2010, he worked in a variety of roles with EY, ranging from compensation and benefits issues to domestic and international tax issues. From 1979–1982, he was Tax Legislative Counsel for former Senator John Danforth. Mr. Kautter graduated with a bachelor’s degree in Business Administration from the University of Notre Dame and obtained his law degree from Georgetown University. His LinkedIn profile can be viewed here.

On September 14, 2017, Cross Refined Coal LLC (Partnership) (and USA Refined Coal LLC as the Tax Matters Partner) filed a Petition in the US Tax Court seeking a redetermination of partnership adjustments determined by the Internal Revenue Service (IRS). According to the Petition, during audit of the 2011 and 2012 tax years, the IRS reduced the Partnership’s and certain partners’ Internal Revenue Code Section 45(e)(8) refined coal production tax credits by several million dollars and disallowed several million dollars more of claimed losses. The Notice of Deficiency, a copy of which is attached to the Petition, provides the following reasons for the adjustments:

  • Neither the Partnership nor the partners have established the existence of the partnership as a matter of fact;
  • The formation of the Partnership was not, in substance, a partnership for federal income tax purposes because it was not formed to carry on a business or for the sharing of profits and losses from the production or sale of refined coal by its purported members/partners, but rather was created to facilitate the prohibited transaction of monetizing refined coal tax credits;
  • The refined coal tax credits are disallowed because the transaction was entered into solely to purchase refined coal tax credits and other tax benefits; and
  • Ordinary losses were disallowed because it has not been established that they were ordinary and necessary or credible expenses in connection with a trade or business or other activity engaged in for profit.

As we have previously reported, the IRS has issued negative guidance concerning refined coal transactions and has denied the tax benefits associated with some of those transactions.

We will be watching this case closely and will report back on any developments.

McDermott extended its popular Tax in the City® program to Seattle, with a meeting on October 12 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. One of the most attended Tax in the City® events to date, the meeting featured a CLE/CPE presentation about Privilege and the Ethics of Social Media by Cate BattinKristen Hazel and Jane May, followed by a roundtable discussion led by Elizabeth ChaoBritt HaxtonSandra McGill and Diann Smith. Continue Reading Inaugural Seattle Tax in the City® | Highlights and Takeaways

Coca-Cola is seeking a re-determination in Tax Court of certain Internal Revenue Service (IRS) transfer-pricing adjustments relating to its 2007–2009 tax years. In the case, the IRS moved for partial summary judgment seeking a ruling that a 1996 Internal Revenue Code Section 7121 “closing agreement” executed by the parties is not relevant to the case before the court.

Closing Agreement Background

Following an audit of the taxpayer’s transfer pricing of its tax years 1987–1989, the parties executed a closing agreement for Coca-Cola’s 1987–1995 tax years. In the closing agreement, the parties agreed to a transfer pricing methodology, in which the IRS agreed that it would not impose penalties on Coca-Cola for post-1995 tax years if Coca-Cola followed the methodology agreed upon. Despite following the agreed-to methodology for its post-1995 tax years, the IRS determined income tax deficiencies for Coca-Cola’s 2007–2009 tax years, arguing that pricing was not arm’s-length. Continue Reading Tax Court: Prior Closing Agreement May Have Relevance in Coca-Cola’s Transfer Pricing Case

As most taxpayers know, under Internal Revenue Code (Code) Section 6501(a), the Internal Revenue Service (IRS) generally has three years after a tax return is filed to assess any additional tax. However, Code Section 6501 provides several exceptions to this rule, including but not limited to the following.

  • False or fraudulent returns with the intent to evade tax (unlimited assessment period)
  • Willful attempt to defeat or evade tax (unlimited assessment period)
  • Failure to file a return (unlimited assessment period)
  • Extension by agreement (open-ended or for a specific period)
  • Adjustments for certain income and estate tax credits (separately provided in specific statutes)
  • Termination of private foundation status (unlimited assessment period)
  • Valuation of gifts of property (unlimited assessment period)
  • Listed transactions (assessment period remains open for one year after certain information is furnished)
  • Substantial omission of items (six-year assessment period)
  • Failure to include certain information on a personal holding company return (six-year assessment period)

If the IRS issues a notice of deficiency and the taxpayer files a petition in the Tax Court, the statute of limitations on assessment is extended until after the Tax Court’s decision becomes final. See Code Section 6503(a); see also Roberson and Spencer, “11th Circuit Allows Invalid Notice to Suspend Assessment Period,” 136 Tax Notes 709 (August 6, 2012). Continue Reading Statutes of Limitation in the International Tax Context

Faced with the prospect of potential tax liability after an unsuccessful audit, taxpayers are faced with the options of filing a petition in the US Tax Court (Tax Court) prior to paying the liability or paying the liability, making a claim for refund, and (if denied or more than six months have passed) suing the government for a refund in local district court or the Court of Federal Claims. For taxpayers that select the Tax Court route, sometimes a question later arises as to whether they can seek to dismiss their case in order to refile in a different forum. The problem that arises is that Internal Revenue Code (Code) Section 7459(d) provides that if a Tax Court petition in a deficiency proceeding is dismissed (other than for lack of jurisdiction), the dismissal is considered as a decision that the deficiency is the amount determined by the Internal Revenue Service (IRS).

Taxpayers have attempted to avoid this rule in the past, presumably so that they could refile a lawsuit in another forum either because they believe that forum would be more favorable or because they desire a jury trial (Tax Court cases are bench trial; no juries are allowed). More than 40 years ago, the Tax Court rejected this tactic in Estate of Ming v. Commissioner, 62 TC 519 (1974),  holding that under Code Section 7459(d), a taxpayer who petitions the court for a redetermination of a deficiency may not withdraw a petition to avoid the entry of decision. Specifically, the court held: “It is now a settled principle that a taxpayer may not unilaterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.” Since Ming, the Tax Court has distinguished its holding in collection due process cases which involve the review of the IRS’s collection action, not the redetermination of a tax deficiency. See Wagner v. Commissioner, 118 TC 330 (2002). The Tax Court has further extended Wagner to non-deficiency cases involving whistleblower claims under Code Section 7623(b)(4) and stand-alone innocent spouse cases under Code Section 6015(e)(1). See Jacobson v. Commissioner, 148 TC No. 4 (Feb. 8, 2017); Davidson v. Commissioner, 144 TC 273 (2015). Continue Reading When Can a Taxpayer Dismiss a Tax Court Case as Moot?