TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
Appellate Courts
Subscribe to Appellate Courts's Posts

Ninth Circuit Interprets Summons Notice Rules Strictly Against IRS

by and | Mar 5, 2019 | , , , ,

The Internal Revenue Service (IRS) had broad examination authority to determine the correct amount of tax owed by taxpayers. In addition to seeking information directly from a taxpayer, the IRS is also authorized to seek information from third parties. However, Internal Revenue Code (Code) Section 7602(c)(1) requires that the IRS provide “reasonable notice in advance to the taxpayer” before contacting a third party. The US Court of Appeals for the Ninth Circuit recently addressed what constitutes “reasonable notice” for this purpose.

In J.B. v. United States, the taxpayer sought to quash an IRS summons for insufficient notice. The taxpayers were selected for a compliance research examination as part of the IRS’s National Research Program, which involves in-depth audits of random taxpayers to improve the government’s access to compliance information and ensure that the IRS is auditing the right taxpayers. The IRS notified the taxpayers of the audit by mail and enclosed a copy of Publication 1, Your Rights as a Taxpayer. Publication 1 states, in relevant part, that the IRS may sometimes talk to other persons if the taxpayers are unable to provide or verify information received from the taxpayer. In J.B., the IRS summonsed the California Supreme Court for copies of billing statements, invoices and other documents relating to payments to the taxpayer-husband, who was a lawyer who accepted appointments to represent indigent criminal defendants in capital cases. The taxpayers did not learn of the summons until after it had been issued, and therefore moved to quash the summons for insufficient notice. The district court held in favor of the taxpayers.

The Ninth Circuit affirmed, albeit on different grounds. After explaining that “reasonable notice” is a fact-sensitive determination and that advance notice is intended to provide taxpayers the right to avoid potential embarrassment caused by IRS contact with third parties, the court discussed the Internal Revenue Manual and the IRS’s prior practice of providing taxpayer-specific notice. In particular, the predecessor IRS letter had more than 20 iterations tailored to meet different functional requirements. The court ultimately held that the IRS must provide notice “reasonably calculated under all relevant circumstances to apprise interested parties of the possibility that the IRS may contact third parties and that affords interested parties a meaningful opportunity to resolve issues and volunteer information before those third-party contacts are made.”

The Ninth Circuit was particularly troubled by the facts that: (1) the IRS had reason to know that the billing records at issue might have been subject to attorney-client privilege and (2) the taxpayers would have had access to those documents and would have been able to provide redacted copies of the pertinent records. Moreover, the court noted that Publication 1 was “divorced from any specific request for documents.” The court concluded that “[a]lthough we limit our holding to the facts of this case, we are doubtful that Publication 1 alone will ever suffice to provide reasonable notice in advance to the taxpayer, as [...]

Continue Reading



read more

Congress Allows Transfer of Improperly Filed Cases to Tax Court

by | Dec 21, 2018 | , , , ,

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.



read more

The (Potential) Demise of Auer Deference?

by | Dec 12, 2018 | , ,

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.



read more

Recent Developments in US Federal Income Tax Litigation

by | Aug 20, 2018 | , , ,

Summer is winding down and fall is approaching. Here are a few of the significant tax cases from the last few weeks.

Tax Court

  • 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.

(more…)



read more

Alta Wind: Federal Circuit Reverses Trial Court and Kicks Case Back to Answer Primary Issue

by and | Aug 6, 2018 | , , , ,

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:

Government Appeal of Alta Wind Supports Decision to File Suit Now

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Act Now To Preserve Your Section 1603 Grant

SOL and the 1603 Cash Grant – File Now or Forever Hold Your Peace

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 [...]

Continue Reading



read more

DC Circuit Reverses Tax Court and Holds Section 883 Regulations Invalid under Chevron Test

by | Aug 2, 2018 | , , , ,

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).

(more…)



read more

Fifth Circuit Dismisses Anti-Inversion Regulation Case

by | Aug 1, 2018 | , , ,

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.



read more

Recent Developments in US Federal Income Tax Litigation

by | Jul 26, 2018 | , , ,

Presented below is a roundup of significant tax cases from the last few weeks.      

Tax Court

  • 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.


read more

Recent Developments in US Federal Income Tax Litigation

by | Jul 12, 2018 | , , ,

Presented below is a roundup of significant tax cases from the last month. 

Tax Court

  • 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).
  • 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.

Appellate Court

  • 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.


read more

BLOG EDITORS

Kevin Spencer

Evan Walters

STAY CONNECTED

Subscribe

TOPICS

ARCHIVES

jd supra readers choice top firm 2023 badge