Photo of Kevin Spencer

Kevin Spencer focuses his practice on tax controversy issues. Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and reasonable compensation, civil and criminal tax penalties, IRS procedures, reportable transactions and tax shelters, renewable energy, state and local tax, and private client matters. After earning his Master of Tax degree, Kevin had the privilege to clerk for the Honorable Robert P. Ruwe on the US Tax Court. Read Kevin Spencer's full bio.

Back in April, we discussed possible changes to the Tax Court Rules of Practice and Procedure based on comments made at the Tax Court Judicial Conference in Chicago. On November 30, 2018, the Tax Court announced the adoption of amendments to its Rules in several areas. Certain amendments are discussed below.

Payments to the Tax Court

Payments to court, which previously were required to be made by cash, check or money order, may now be made electronically through Pay.gov.

Filing

A paper may be filed electronically either during or outside of business hours, unless the paper relates to an ongoing trial session, in which case it generally must be filed at the session. A document electronically filed is considered timely if filed at or before 11:59 pm, Eastern Time, on the last day of the applicable period for filing. This amendment comports with the practice in other federal courts, e.g., US District Courts.

Signature

A signature on an electronic filing does not have to be handwritten if the filing meets the standards required by the court. An email address must be provided immediately beneath the signature.

Electronic Filing of Petitions

The court is in the process of implementing procedures to allow the electronic filing of a petition to commence a case. Additional information will be furnished to taxpayers on the Tax Court’s website in its electronic filings guidelines.

Evidence

In accordance with recent legislation, the Rules were updated to require that the court to follow the Federal Rules of Evidence instead of the rules of evidence applicable in trials without a jury in the United States District Court for the District of Columbia.

Passport Actions

In accordance with recent legislation, new Rules are provided regarding the court’s jurisdiction and review of determinations to certain passport revocation actions.

Interest Abatement

Certain changes were made to the interest abatement rules and a corresponding change was made to the sample form of petition contained on the Tax Court’s website.

Lately, we have been frequently asked the question: “I file US tax returns and pay taxes here. Are my cryptocurrency transactions taxable or reportable in the US?”

The answer for US persons and US taxpayers most likely is “yes.” US persons are generally taxable on income earned worldwide, regardless of the manner in which that income is paid (e.g. currency (foreign or domestic) or property (tangible, intangible or virtual)). Thus, if you have bought, sold or exchanged cryptocurrency, those transactions could be subject to federal tax. If your cryptocurrency is held offshore, a number of offshore reporting obligations could also apply to these holdings.

Now is the right time to come forward and resolve any US compliance issues related to your cryptocurrency holdings. As we have seen in recent cases like the Coinbase summons enforcement proceeding (which we reported upon in several previous posts), the Internal Revenue Service (IRS) has stepped up its enforcement efforts regarding undisclosed interests in cryptocurrency worldwide.

How should you come forward? Following an IRS-attended conference earlier this year, comments began circulating that the IRS was considering the creation of a formal voluntary disclosure program for cryptocurrency transactions, similar to the now-ended Offshore Voluntary Disclosure Program. (We reported on that program numerous times, here.) Unfortunately, the IRS has now squashed this rumor, stating that “IRS is not contemplating a separate program related to offshore [virtual] currencies.” A domestic program was not even mentioned.

Despite this news, a number of disclosure options remain available for bringing your US and foreign cryptocurrency into compliance. The IRS’s longstanding voluntary disclosure policy remains in full force and effect. This policy acts to reduce or eliminate the risk of criminal prosecution related to nondisclosure of domestic or foreign taxable assets, and can provide avenues to reduce civil penalties as well. Further, the IRS’s Streamlined Filing Compliance Procedures and Delinquent International Information Return Procedures are still active and may provide reduced (or no) penalties for US international tax non-compliance in appropriate cases.

Practice Point: Beyond the short answer of “yes, cryptocurrency is taxable,” a number of open questions regarding the taxation and reporting of cryptocurrency in the US remain. For example, determining what offshore crypto holdings are subject to FBAR and Form 8938 reporting remains complicated and unclear. Also, although tax reform has eliminated the use of Section 1031 exchanges to avoid currently being taxed for personal property like cryptocurrencies, the IRS’s position on exchanges that occurred prior to 2018 is still unknown. There are also open valuation questions, particularly for crypto accounts subject to access limitations like lock-up periods. The tax treatment of so-called hard and soft “forks” is also unclear. Finally, crypto exchanges are navigating a number of open reporting and compliance issues. If you have significant holdings in cryptocurrency, consult with a federal tax advisor who understands the tax aspects of this unique asset to ensure your tax reporting is correct and complete.

Christopher Saddock, a secondee in the Firm’s Dallas office, also contributed to this article.

Andy Roberson, Kevin Spencer and Emily Mussio recently authored an article for Law360 entitled, “A Look At Tax Code Section 199’s Last Stand.” The article discusses the IRS’s contentious history in handling Code Section 199 and the taxpayers’ continued battle to claim the benefit – even after its recent repeal.

Access the full article.

Originally published in Law360, November 2018.

Tax reform made many structural changes to our tax system. Changes to Code Section 274, however, sent shudders through corporate America. As amended, Code Section 274 eliminated the 50 percent deduction for “entertainment” expenses that are related to business activities. Sadly, gone are the days of companies deducting the cost of box tickets to games for the local sport’s team. Gulp! But, in its haste, Congress left what constitutes entertainment expenses substantially undefined. Accordingly, a strict reading of the statute meant—along with the box seats—went the hot dogs and beer! Ugh! So, under this strict interpretation, taking your client to the fancy restaurant to encourage her to buy your product or services would no longer be deductible.

Thankfully, the IRS has recently clarified that meals are not entertainment under amended Code section 274. IRS Notice 2018-76 explains that business meals are still eligible for the 50 percent deduction if they are not lavish and extravagant. And an IRS press release, IR-2018-195, explains that the IRS will release proposed regulations explaining what “entertainment” means.

Practice Point: We can all sigh with relief that Uncle Sam will continue to underwrite the “wining and dining” of our clients. Although eating is officially not entertainment (at least for tax purposes), the recent IRS guidance acknowledges that America does a lot of its business while breaking bread.

We have previously discussed ongoing developments with the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP) program. In brief summary, CAP is a real-time audit program that seeks to resolve the tax treatment of all or most return issues before the tax return is filed. The CAP program began in 2005 on an invitation-only basis with 17 taxpayers, and was subsequently expanded to include pre-CAP, CAP and CAP Maintenance components. Taxpayers and IRS leadership generally praised the CAP program as one of the most successful corporate tax enforcement programs, with surveys showing that more than 90 percent of CAP taxpayers reported overall satisfaction with the program.

The fate of CAP has been uncertain in recent years given the IRS’s shift in the examination process to identifying and focusing on specific areas of risk and the continued dwindling of IRS resources. In 2016, we discussed whether this change might result in the death of the CAP program and the IRS’s announcement that it was formally assessing the program. In August of this year, the IRS announced that the CAP program will continue, with some modifications.

At a September 26 conference, the IRS indicated that it wanted to expand the CAP program, but that changes were needed to keep the program sustainable over the long term given issues with increased examination times for CAP audits based primarily on issues involving transfer pricing, research credits under Internal Revenue Code (Code) Section 41, and former Code Section 199. The IRS indicated that it needed to resolve two issues for the CAP program: (1) eligibility and (2) suitability. Regarding eligibility, the IRS indicated that only public companies will likely be allowed into the program. Regarding suitability, factors include: (1) responses to IRS information requests; (2) good-faith efforts to resolve issues; (3) disclosure of tax shelters, material items, investigation or litigation; (4) frequency of claims; and (5) complying with the terms of the program’s memorandum of understanding.

The IRS has also released a Compliance Assurance Process (CAP) Recalibration discussion document, dated September 28, 2018. The discussion document provides more detail on the IRS’s current thinking regarding the CAP program and the two issues identified above. The document indicates that no new applications will be accepted for 2019 but that the IRS expects to accept new application for the 2020 tax year. In addition to general application information, taxpayers with international cross-border activity and research and experimentation activities will be required to submit additional information.

Practice Point: Taxpayers that are currently in the CAP program or that are considering applying to the program should review the IRS’s recent discussion document to identify potential changes to the program and whether the program would be a good fit. For many taxpayers, the CAP program has been—or could be­—a great program for resolving tax disputes in a timely fashion and gaining finality on tax position at an early date. The IRS may use their “suitability” criteria to weed out which taxpayers should be in the CAP program. Query whether a taxpayer will be suitable for CAP if they have identified an issue that is listed in one of the IRS’s “campaigns.” Only time will tell. We have heard that some CAP teams are overburdened and may have little training on new tax reform issues, requiring them to seek assistance from their CAP taxpayers. This might be a good opportunity to educate your CAP team on how your specific facts align with tax reform.

The US Tax Court is alive with action these days. First, two new judges will start soon after they are sworn in. Ms. Elizabeth Copeland and Mr. Patrick Urda were nominated on August 2017 for 15-year terms to fill openings created by retiring tax court judges. They were confirmed on August 28, 2018. Ms. Copeland will replace Judge James S. Halpern, who retired from the court on August 28, 2018, but continues to perform judicial duties as a Senior Judge on recall. Mr. Urda will replace Judge Diana L. Kroupa, who retired from the court in June 2014.

Second, the Tax Court announced that Senior Judge Carolyn P. Chiechi will retire, effective October 19, 2018. Judge Chiechi was appointed by President George H.W. Bush October 1, 1992, and took senior status in 2007. Any cases submitted or assigned to Judge Chiechi will be reassigned.

Finally, Senior Judge David Laro passed away on September 21, 2018. More information about Judge Laro can be found on the TaxProf Blog. Judge Laro started at the Tax Court in 1992 and was involved in several important cases. In addition, he is well known among practitioners for his use of concurrent expert testimony (also referred to as “hot tubbing”). We have previously written about Judge Laro’s use of hot tubbing here.

Prior coverage of Tax Court nominations can be found in our previously shared articles.

Over the years, the determination of whether an item constitutes debt or equity has generated significant litigation. Courts have developed multifactor tests and engaged in intensive fact finding to make this determination. Arguably, part of the reason for the numerous disputes was the lack of regulations under Internal Revenue Code (Code) Section 385, which explicitly authorizes the US Department of Treasury (Treasury) to issue regulations to determine whether an interest in a corporation is to be treated for purposes of the Code as stock or indebtedness.

Proposed regulations under Code Section 385 were issued on April 14, 2016, but did not receive a warm welcome from the tax bar. This was particularly so with respect to strict contemporaneous written documentation requirements in the proposed regulations. After receiving substantial comments, Treasury released final regulations effective as of October 21, 2016, which retained the strict documentation requirements. However, President Trump subsequently issued Executive Order 13771 and Executive Order 13789 calling for a reduction in regulatory burdens and costs. In late 2017, Treasury indicated that it might revoke the documentation requirements under the Code Section 385 regulations. That day has now come.

Treasury and the Internal Revenue Service (IRS) have now issued proposed regulations removing the strict documentation requirements. Written or electronic comments and requests for a public hearing must be received by the IRS by late December.

Prior coverage of the Code Section 385 regulations can be found in our previously posted articles.

Practice Point: Although the strict requirements for documenting may be just a memory at this point, the need to document your lending transactions, especially intercompany transactions, is still present. At the very least, the old rules may have instilled more discipline into lending transactions, which may help support positions (e.g., Code Section 165 deductions) on your return.

On September 10, 2018, the Internal Revenue Service (IRS) Large Business and International (LB&I) Division announced five new audit “campaigns.” These new campaigns follow: (1) the initial 13 campaigns announced on January 31, 2017; (2) followed by 11 campaigns announced on November 3, 2017; (3) five campaigns announced on March 13, 2018; six campaigns announced on May 21, 2018; and five campaigns announced on July 2, 2018.

The following five new LB&I campaigns are listed by title and description:

Section 199 – Claims Risk Review

Public Law 115-97 repealed the Domestic Production Activity Deduction (DPAD) for taxable years beginning after December 31, 2017. This campaign addresses all business entities that may file a claim for additional DPAD under Internal Revenue Code (IRC) Section 199. The campaign objective is to ensure taxpayer compliance with the requirements of IRC Section 199 through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk.

Syndicated Conservation Easement Transactions

The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions, requiring disclosure statements by both investors and material advisors.

This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate. The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses.

Foreign Base Company Sales Income: Manufacturing Branch Rules

In general, foreign base company sales income (FBCSI) does not include income of a controlled foreign corporation (CFC) derived in connection with the sale of personal property manufactured by such corporation. However, if a CFC manufactures property through a branch outside its country of incorporation, the manufacturing branch may be treated as a separate, wholly owned subsidiary of the CFC for purposes of computing the CFC’s FBCSI, which may result in a subpart F inclusion to the U.S. shareholder(s) of the CFC.

The goal of this campaign is to identify and select for examination returns of U.S. shareholders of CFCs that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The treatment stream for the campaign will be issue-based examinations.

1120F Interest Expense/Home Office Expense

This campaign addresses compliance on two of the largest deductions claimed on Form1120-F, U.S. Income Tax Return of a Foreign Corporation. Treasury Regulation Section 1.882-5 provides a formula to determine the interest expense of a foreign corporation that is allocable to their effectively connected income. The amount of interest expense deductions determined under Treasury Regulation Section 1.882-5 can be substantial. Treasury Regulation Section 1.861-8 governs the amount of home office expense deductions allocated to effectively connected income. Home office expense allocations have been observed to be material amounts compared to the total deductions taken by a foreign corporation.

The campaign compliance strategy includes the identification of aggressive positions in these areas, such as the use of apportionment factors that may not attribute the proper amount of expenses to the calculation of effectively connected income. The goal of this campaign is to increase taxpayer compliance with the interest expense rules of Treasury Regulation Section 1.882-5 and the home office expense allocation rules of Treasury Regulation Section 1.861-8. The treatment stream for this campaign is issue-based examinations.

Individuals Employed by Foreign Governments and International Organizations

In some cases, individuals working at foreign embassies, foreign consular offices, and various international organizations may not be reporting compensation or may be reporting it incorrectly. Foreign embassies, foreign consular offices and international organizations operating in the U.S. are not required to withhold federal income and social security taxes from their employees’ compensation nor are they required to file information reports with the IRS.

This lack of withholding and reporting results in unreported income, erroneous deductions and credits, and failure to pay income and Social Security taxes. Because this is a fluid population, there may be a lack of knowledge regarding tax obligations. This campaign will focus on outreach and education by partnering with the Department of State’s Office of Foreign Missions to inform employees of foreign embassies, consular offices and international organizations. The IRS will also address noncompliance in this area by issuing soft letters and conducting examinations.

Practice Point: As the IRS continues to move toward issued-based examinations, campaigns have become more important in identifying and auditing issues. Taxpayers should be aware of the campaigns and IRS guidance on these areas. As we have previously discussed, Practice Units are helpful tools in understanding the IRS audit process on a particular subject. With limited resources, the IRS must streamline their examination approach. The IRS has determined that there is significant audit risk for taxpayers who have an issue listed in one or more of the campaigns. If you have one of these issues, be proactive, contact your tax professional, and make sure you have an “audit ready” file in place for when the IRS opens an examination.

On September 12, 2018, the Senate confirmed, by a vote of 64-33, Charles P. Rettig to be Commissioner of the Internal Revenue for the term expiring November 12, 2022. We previously discussed the nomination of Mr. Rettig and his background here.

The IRS Commissioner presides over the United States’ tax system and is responsible for establishing and interpreting tax administration policy and for developing strategic issues, goal and objectives for managing and operating the IRS. This includes responsibility for overall planning, directing, controlling and evaluating IRS policies, programs, and performance. The IRS Commissioner is also required by statute under Internal Revenue Code (Code) Section 7803 to ensure that all IRS employees are familiar with and act in accord with the Taxpayer Bill of Rights.

The nomination of Michael J. Desmond to be Chief Counsel of the Internal Revenue Service (IRS) remains pending in the Senate. We previously discussed the nomination of Mr. Desmond and his background here.

The IRS Chief Counsel serves as the chief legal advisor to the IRS Commissioner on all matters pertaining to the interpretation, administration, and enforcement of the Internal Revenue Code, as well as all other legal matters. Attorneys in the IRS Chief Counsel’s Office serve as lawyers for the IRS. Their role is to provide the IRS and taxpayers with guidance on interpreting Federal tax laws correctly, represent the IRS in litigation, and provide all other legal support required to carry out the IRS mission