Following our post, The (Potential) Demise of Auer Deference?, we wrote an expanded article on tax reform and deference for Law360. The Law360 article, “Deference Principles: Tax Litigation’s Next Battleground,” can be accessed here.
Taxes and tax litigation can be complex and confusing. Taxpayers have the option of filing a petition in the United States Tax Court (Tax Court) prior to payment of any asserted deficiency. Alternatively, taxpayers can pay the deficiency, file a claim for refund with the Internal Revenue Service and, if that claim is denied or more than six months have elapsed, file a complaint in local District Court or the Court of Federal Claims requesting a refund. These forum rules sometimes trip up taxpayers and can lead to the filing of a suit in the wrong court.
In the Protecting Access to the Courts for Taxpayers Act (H.R. 3996), Congress has provided relief for taxpayers in this type of situation through an amendment to 28 USC section 1631:
Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court (or, for cases within the jurisdiction of the United States Tax Court) in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.
Practice Point: Allowing improperly filed cases to be transferred to the Tax Court is a welcome development for taxpayers. The amendment to 28 USC section 1631 protects taxpayers in situations where a complaint is filed within 90 days of receipt of a Notice of Deficiency in a refund jurisdiction when it should have been filed in the Tax Court.
On December 10, 2018, the Supreme Court granted certiorari in the case of James L. Kisor v. Peter O’Rourke, Acting Secretary of Veteran Affairs, S.Ct. Dkt. No. 18-15. Although this is not a tax case, it has significant implications for taxpayers and tax practitioners. The reason: the Court will finally squarely address the issue of whether it should overrule its controversial opinions in Auer v. Robbins, 519 US 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 US 410 (1945). Those opinions held that an agency is uniquely positioned to interpret any ambiguity in its own regulations and, therefore, such interpretations should be afforded controlling deference so long as reasonable. The Court’s decision to grant certiorari in Kisor is significant because the sole question to be considered is “[w]hether the Court should overrule Auer and Seminole Rock” and not how to apply that doctrine.
In the tax context, the Internal Revenue Service (IRS) and the Department of Justice (DOJ) Tax Division have both argued that interpretations taken in unpublished guidance are eligible for Auer deference, even if such positions are articulated for the first time on brief in a pending case in which the agency is a party. Courts have not been uniform in their application of Auer. For example, the Tax Court has indicated that to receive deference the IRS’s position should be in published guidance while some courts have given deference to statements made on brief.
The death of Justice Scalia, who ironically wrote Auer but later advocated for its demise, seemed to strike a blow to those seeking to overrule it. However, with the recent additions of Justices Gorsuch and Kavanaugh, it appears that the Supreme Court many now have a majority of Justices in the anti-Auer camp given that Chief Justice Roberts and Justices Thomas and Alito have all expressed doubts about the doctrine in the past. Additionally, the continuing role of Chevron deference has been questioned and, if Auer is overruled, Chevron could be the next deference battleground.
We will continue to follow this case closely and provide updates in the future. In the meantime, the links below contain prior discussions on Auer and other forms of deference in the tax context.
- Deference Principles in Tax Cases and the Unique Challenges of Auer Deference
- Deference to IRS Interpretations and the Challenges of Auer Deference
- Update on Deference to IRS Positions
- Senate Attempts to Repeal Chevron Deference
- Auer Deference Debate Remains Unresolved
- Supreme Court Grants Certiorari in Case Involving Auer Deference
Summer is winding down and fall is approaching. Here are a few of the significant tax cases from the last few weeks.
- YA Global Investments, LP v. Commissioner, 151 TC No. 2 (Aug. 8, 2018): The Tax Court held that withholding tax liability on effectively connected income of foreign partners is a partnership liability that constitutes a partnership item. The Tax Court has jurisdiction over the issue in a partnership-level proceeding.
- Illinois Tool Works Inc. & Subsidiaries v. Commissioner, TC Memo 2018-121 (Aug. 6, 2018): The Tax Court held that intercompany loans constituted bona fide debt for US federal income tax purposes.
- Becnel v. Commissioner, TC Memo. 2018-120 (Aug. 2, 2018): The Tax Court holds that a property developer’s yacht related expenses are non-deductible entertainment facility expenses under Code section 274.
- Kane v. Commissioner, TC Memo. 2018-122 (Aug. 6, 2018): Code section 6672 trust fund recovery penalties were imposed on a third-party vendor that performed bookkeeping services and held signature authority over certain accounts for a taxpayer delinquent on employment taxes. The Tax Court found that a collection officer did not abuse their discretion in denying a collection alternative during the collection due process proceeding, particularly when the taxpayer failed to submit an offer in compromise and already disputed the merits of the penalty during the appeals process.
On July 27, 2018, the US Court of Appeals for the Federal Circuit in Alta Wind v. United States, reversed and remanded what had been a resounding victory for renewable energy. The US Court of Federal Claims had ruled that the plaintiff was entitled to claim a Section 1603 cash grant on the total amount paid for wind energy assets, including the value of certain power purchase agreements (PPAs).
We have reported on the Alta Wind case several times in the past two years:
In reversing the trial court, the appellate court failed to answer the substantive question of whether a PPA that is part of the sale of a renewable energy facility is creditable for purposes of the Section 1603 cash grant.
Trial Court Decision
The Court of Federal Claims awarded the plaintiff damages of more than $206 million with respect to the cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). The court held that the government had underpaid the plaintiff its Section 1603 Grants arising from the development and purchase of large wind facilities when it refused to include the value of certain PPAs in the plaintiffs’ eligible basis for the cash grants. The trial court rejected the government’s argument that the plaintiffs’ basis was limited solely to development and construction costs. Instead, the court agreed with the plaintiffs that the arm’s-length purchase price of the projects prior to their placed-in-service date informed the projects’ creditable value. The court also determined that the PPAs specific to the wind facilities should not be treated as ineligible intangible property for purposes of the Section 1603 Grant. This meant that any value associated with the PPAs would be creditable for purposes of the Section 1603 Grant.
Federal Circuit Reverses and Remands
The government appealed its loss to the Federal Circuit. In its opinion, the Federal Circuit reversed the trial court’s decision, and remanded the case back to the trial court with instructions. The Federal Circuit held that the purchase of the wind facilities should be properly treated as “applicable asset acquisitions” for purposes of Internal Revenue Code (IRC) section 1060, and the purchase prices must be allocated using the so-called “residual method.” The residual method requires a taxpayer to allocate the purchase price among seven categories. The purpose of the allocation is to discern what amount of a purchase price should be ascribed to each category of assets, which may have significance for other parts of the IRC. For example, if the purchase price includes depreciable plant equipment and non-depreciable property (e.g., cash and marketable securities), the residual method asks the taxpayer to allocate the total purchase price between the property classes.
The Federal Circuit remanded the case back to the Claims Court to determine the proper allocation of the purchase prices of the wind facilities.
Why Is This Case Important?
If you are in the renewable energy industry, this decision is likely very important. Indeed, there are numerous taxpayers who did not receive the full amount of their Section 1603 Grant based upon the government’s reduction of the claim for the value of a PPA. This case will have precedential effect on those taxpayers’ claims. Moreover, the decision will affect how the industry prices deals for renewable facilities. These transactions have historically involved substantial financial modeling based upon cash flows.
The Federal Circuit Left the Primary Issue Unanswered
The Federal Circuit left the primary issue in the case, whether the PPA is creditable for purposes of the Section 1603 Grant, to the trial court to decide on remand. Accordingly, if the trial court determines that the PPAs cannot be divorced from the wind farm facilities assets, they will be correctly allocated to “Class V” in IRC section 1060, and will be credit able for purposes of the Section 1603 Grant. Implicitly, this is what the trial court had already decided, and the result would obtain the same economic result for the plaintiff as its original ruling. We will continue to follow this matter to see whether the trial court follows the prevailing thinking on this issue and of a decade of legal support.
On March 28, 2017, the US Tax Court (Tax Court) issued its opinion in Good Fortune Shipping SA v. Commissioner, 148 T.C. No. 10, upholding the validity of Treas. Reg. § 1.883-4. The taxpayer had challenged the validity of the regulation’s provision that stock in the form of “bearer shares” cannot be counted for purposes of determining the more-than-50-percent ownership test under Internal Revenue Code (Code) section 883(c)(1), but the Tax Court held that the regulation was valid under the two-step analysis of Chevron USA, Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), and applied it in ruling for the Internal Revenue Service (IRS). We previously discussed the Tax Court’s opinion here. The taxpayer appealed the Tax Court’s decision to the US Court of Appeals for the District of Columbia Circuit (DC Circuit).
We previously posted on the Order by the US District Court for the Western District of Texas in Chamber of Commerce of the United States of America, et al. v. Internal Revenue Service, Dkt. No. 1:16-CV-944-LY (W.D. Tex. Sept. 29, 2017). To recap, the district court held that Treas. Reg. § 1.7874-8T was unlawfully issued because it violated the Administrative Procedures Act (APA) by not providing affected parties with notice and an opportunity to comment on the temporary regulations. In addition to the APA analysis, the court’s Order was noteworthy for its conclusion that the plaintiff’s claims were not barred by the Anti-Injunction Act because the regulations did not involve assessment or collection of tax.
As we updated our readers, the government appealed the Order to the Court of Appeals for the Fifth Circuit. However, the case was stayed while the regulation underwent notice and comment. And, on July 11, 2018, Treasury and the Internal Revenue Service issued final regulations addressing inversion standards. On July 26, 2018, the government moved to dismiss its appeal with prejudice as moot. The Fifth Circuit has granted the government’s motion, thus ending the dispute.
Because the case was dismissed by the Fifth Circuit, the district court’s Order remains on the books. But what value does that Order have? As a technical matter, district court opinions are not precedential. However, lack of precedential value does not render the Order meaningless. If another court addressing a similar issue were to find the district court’s analysis to be well-reasoned and thorough, it might consider it persuasive on deciding the issue. One would certainly expect that a subsequent court would, at a minimum, have to address the Order if faced with a similar issue. For more reading on the precedential and persuasive value of opinions and order, see here.
Practice Point: The Order in the Chamber of Commerce case may be helpful to taxpayers desiring to challenge regulations on APA grounds and provides authority for a pre-enforcement challenge. It remains to be seen whether other courts will find the Order persuasive.
Presented below is a roundup of significant tax cases from the last few weeks.
- Balocco v. Commissioner, T.C. Memo. 2018-108 (July 9, 2018): Judge Kerrigan found that personal aircraft maintenance expenses incurred by a “property flipper” were: (1) not ordinary or necessary expenses; and (2) were not properly substantiated by the taxpayer.
- Archer v. Commissioner, T.C. Memo. 2018-111 (July 16, 2018): Judge Cohen reaffirmed the requirement for taxpayers to substantiate their expenses pursuant to Code section 6001. Archer engaged in unrelated marketing and construction operations, but failed to adequately document his transactions, offering only oral testimony and handwritten notes as substantiation, which the Court deemed insufficient.
Federal District Court:
- United States v. Durham, No. 4:18-MC-00137 JAR (E.D. Mo. July 9, 2018): Judge Ross ordered the taxpayer to answer certain questions, finding that a prior affidavit submitted by the taxpayer to the IRS effectively waived the taxpayer’s Fifth Amendment right against self-incrimination. The waiver was subject matter specific, so the taxpayer’s Fifth Amendment rights persisted for questions unrelated to the affidavit.
- United States v. Arora, 1:17-cv-00584-SWS-MLC, 2018 BL 251732 (D.N.M. July 16, 2018): The IRS relied on the deliberative process privilege to withhold two memoranda discussing the imposition of penalties from the affected taxpayer. The court concluded that the penalty determination was an application of agency policy and the agency’s deliberative process in formulating the decision are protected.
- Whitsitt v. Cato IRS Agent, et al., No. 2:17-cv-1818-EFB PS (E.D. Cal. July 19, 2018): A “Tax Avoider” could not enjoin the IRS from the collection of taxes due to a lack of subject matter jurisdiction under the Anti-Injunction Act for claims that would restrain the collection of taxes.
- Coggin v. United States, No. 1:16-CV-106 (M.D.N.C. July 17, 2018): A spouse was barred from filing untimely separate returns to reverse timely filed joint returns even though the spouse did not sign the original joint returns. The court found that the undisputed facts indicate the spouse intended to file joint returns, and is therefore barred from revoking an otherwise valid joint return to pay a lesser amount of tax on separate returns filed years later.
Presented below is a roundup of significant tax cases from the last month.
- Van Lanes Recreation Center Corp. v. Commissioner, TC Memo. 2018-92 (June 26, 2018): Judge Paris determined the IRS abused its discretion when the agency revoked a prior favorable determination letter regarding the status of the taxpayer’s employee stock ownership plan under Code section 401(a). The opinion can be found here.
- Endeavor Partners Fund, LLC v. Commissioner, TC Memo. 2018-96 (June 28, 2018): In Endeavor, Judge Lauber added to the list of decisions disallowing partnership losses due to lack of economic substance. Penalties were avoided, despite an assessment by the Court that “the partnerships’ conduct is plainly deserving” since the IRS failed to secure supervisory approval of the penalties prior to issuance of the FPAAs as required by Code section 6751(b)(1).
- For prior Tax Controversy 360 commentary on the issue of supervisory approval in penalty cases please see: IRS Required to Obtain Supervisory Approval to Assert Penalties and Graev v. Commissioner: Tax Court Divided on Penalty Procedural Rules.
- Donald Guess v. Commissioner, TC. Memo 2018-97 (June 28, 2018): Judge Jacobs removed the guesswork from the statute of limitations questions in Guess, finding that the clearly established elements of fraud warranted an exception to the three-year limitations period, opening the door for assessments and penalties. The fraudulent activity was related to the 2001 and 2002 tax years. The taxpayer was previously convicted of two counts of filing false tax returns for those years.
Federal District Court
- Scott Logan v. United States, 2:18-cv-00099-JES-MRM (M.D. Fla. June 21, 2018): The US Attorney’s Office in the Middle District of Florida recently invoked the variance doctrine to gain dismissal of two counts in an individual’s attempt to secure a refund of a $2.5 million gross valuation misstatement penalty previously assessed against him. The judgment can be found here: Logan v. United States; No. 2:18-cv-00099.
- Alpenglow Botanicals, LLC v. United States, No. 17-1223 (10th Cir. July 3, 2018): The Tenth Circuit confirmed a finding that the IRS has the authority to determine if a taxpayer is engaged in trafficking of a controlled substances for purposes of denying related deductions under Code section 280E. Owners of a medical marijuana dispensary were denied refund claims that would have resulted if the expense deductions were allowed.
- Hohman v. Eadie, et al, No. 17-1869 (6th Cir. 2018): The Sixth Circuit affirmed the dismissal of claims challenging John Doe summonses seeking certain financial information for individuals and related LLCs, holding the claims are barred by sovereign immunity.
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 prevalent. These actions are concerning because state laws often provide for treble damages and/or per occurrence penalties. Read more about McDermott’s win in the Starbucks case here.
- GILTI’s Effect on State and Local Tax – There is much to-do about GILTI at the state level. Be sure to monitor state legislation and administrative guidance concerning the inclusion of GILTI in the state tax base in the states that are important to your business. The state-level guidance is evolving every day.
We invite all tax professionals who identify as female to continue the conversation and share tax developments with the official LinkedIn group for Tax in the City®! Click here to join.
The next Tax in the City® meetings will take place in the Fall of 2018, in Chicago, New York, Seattle and our inaugural event in Dallas. Please contact Mia Dubinets if you would like to be added to any of the regional Tax in the City® mailing lists, and register for the upcoming events.