The expiration of the time for the Internal Revenue Service (IRS) to assess tax can bring closure on prior tax and financial reporting positions for taxpayers. We have previously reported and written for the International Tax Journal about tax statutes of limitation both generally and in the international tax context. As a follow-up to those materials, we wanted to alert you that the IRS recently released a Practice Unit providing an overview of statutes of limitation on the assessment of tax. These materials are all good resources and starting points for taxpayers and practitioners with questions on statutes of limitation.
Elizabeth Chao focuses her practice on US and international tax matters. Read Elizabeth Chao's full bio.
In late 2017, we provided a brief overview of statutes of limitation in the international tax context. At that time, we noted a forthcoming article on the subject. We are pleased to report that our expanded article on the subject has been published in the January-February 2018 edition of the International Tax Journal. The full article can be viewed here.
Andrew Roberson and Elizabeth Chao recently wrote an article for Law360 entitled, “A Recent Tax Court View Of Statute Of Limitations Provisions.” The article discusses the Tax Court’s recent opinion in Rafizadeh v. Commissioner on statute of limitations for amounts reportable under Internal Revenue Code Section 6038D.
Read the full coverage on Law360 here.
Under Subpart F, certain types of income and investments of earnings of a foreign corporation controlled by US shareholders (controlled foreign corporation, or CFC) are deemed distributed to the US shareholders and subject to current taxation. The recent tax reform legislation (Public Law No. 115-97) increased the amount of CFC income currently taxable to US shareholders, and expanded the CFC ownership rules, which means more foreign corporations are treated as CFCs.
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
Taxpayers can choose whether to litigate tax disputes with the Internal Revenue Service (IRS) in the US Tax Court (Tax Court), federal district court or the Court of Federal Claims. Claims brought in federal district court and the Court of Federal Claims are tax refund litigation: the taxpayer must first pay the tax, file a claim for refund, and file a complaint against the United States if the claim is not allowed. Claims brought in the Tax Court are deficiency cases: the taxpayer can file a petition against the IRS Commissioner after receiving a notice of deficiency and does not need to pay the tax beforehand.
As demonstrated in the chart below, approximately 97 percent of tax claims are instituted in the Tax Court. It should be noted that, after a taxpayer files a petition in Tax Court, the taxpayer no longer has the option of bringing the claim in any other court for the year(s) at issue.
Tax Court Versus Tax Refund Litigation
On January 31, the Internal Revenue Service (IRS) announced 13 Large Business & International (LB&I) “campaigns.” One campaign targets deductions claimed by multi-channel video programming distributors (MVPDs) and TV broadcasters under section 199 of the Internal Revenue Code (IRC). According to the IRS’s campaign announcement, these taxpayers make several erroneous claims, including that (1) groups of channels or programs constitute “qualified films” eligible for the section 199 domestic production activities deduction, and (2) MVPDs and TV broadcasters are producers of a qualified film when they distribute channels and subscription packages that include third-party content.
IRC section 199(a) provides for a deduction equal to 9 percent of the lesser of a taxpayer’s “qualified production activities income” (QPAI) for a taxable year and its taxable income for that year. A taxpayer’s QPAI is the excess of its “domestic production gross receipts” (DPGR) over the sum of the cost of goods sold and other expenses, losses or deductions allocable to such receipts. IRC section 199(c)(1). DPGR includes gross receipts of the taxpayer which are derived from any lease, rental, license, sale, exchange, or other disposition of “any qualified film produced by the taxpayer.” IRC section 199(c)(4)(A)(i)(II). A “qualified film” is “any property described in section 168(f)(3) if not less than 50 percent of the total compensation relating to the production of such property is compensation for services performed in the United States by actors, production personnel, directors and producers.” IRC section 199(c)(6). However, “qualified film” does not include property with respect to which records are required to be maintained under 18 U.S.C. § 2257 (i.e., sexually explicit materials). Id. Under regulations issued in 2006, “qualified film” also includes “live or delayed television programming.” Treas. Reg. § 1.199-3(k)(1); see also Notice 2005-14, 2005-1 C.B. 498, §§ 3.04(9)(a), 4.04(9)(a). “Qualified film” includes “any copyrights, trademarks, or other intangibles with respect to such film.” IRC section 199(c)(6). The “methods and means of distributing a qualified film” have no effect on the availability of the section 199 deduction. Id. IRC section 168(f)(3), entitled “Films and Video Tape,” provides an exclusion from accelerated depreciation for “[a]ny motion picture film or video tape.”
Though the January 31 announcement did not explain the IRS’s position on these issues in detail, the IRS rejected both claims in two Technical Advice Memoranda (TAMs) issued in late 2016. The IRS determined in TAM 201646004 (Nov.10, 2016) and TAM 201647007 (Nov.18, 2016) (the 2016 TAMs) that a subscription package of multiple channels of video programming transmitted by an MVPD to its customers via signal is not a “qualified film” as defined in IRC section 199(c)(6) and Treas. Reg. § 1.199-3(k)(1). It also determined that an MVPD’s gross receipts from its subscription package are not from the disposition of a qualified film produced by the MVPD and are therefore not DPRG included in calculating a section 199 deduction. The MVPD would only have DPRG from the subscription package to the extent its gross receipts are derived from an individual film or episode within the subscription package that is a qualified film produced by the MVPD.