Appellate Courts Archives | Page 9 of 19

Appellate Courts

IRS Opposes Granting of Certiorari in Cases Addressing Definition of Return

by McDermott Will & Emery and Roger J. Jones | Mar 16, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Uncategorized

Two petitions for certiorari pending before the Supreme Court of the United States ask the Court to resolve the question of whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code (BC). The answer to this question will determine whether a bankrupt taxpayer’s tax debts can be discharged or are permanently barred from discharge. According to these petitions, the courts of appeal are divided as to the answer.

BC § 523(a) generally allows a debtor to discharge unsecured debt, except for, inter alia, tax debts of debtors who: (1) failed to file tax returns; (2) filed fraudulent tax returns; or (3) filed late tax returns, where a bankruptcy petition is filed within two years of the date the late return was filed. See BC § 523(a)(1)(B)(i), (B)(ii), (C).

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Fourth Circuit Clarifies the Role of the Collection Due Process Hearing

by Joshua M. Ellenberg | Mar 10, 2017 | Appellate Courts, IRS Guidance, Transfer Pricing Resource, Uncategorized

In Iames v. Commissioner, No. 16-1154, the US Court of Appeals for the Fourth Circuit upheld the US Tax Court’s ruling that once a taxpayer has unsuccessfully challenged his tax liability in a preassessment hearing before the Internal Revenue Service (IRS) Office of Appeals, he is precluded from challenging his tax liability in a collection due process (CDP) hearing under Internal Revenue Code (IRC) Section 6330.

IRC Section 6330, enacted by Congress to protect taxpayers from abusive or arbitrary collection practices, provides a set of procedural safeguards for taxpayers facing a potential levy action by the IRS: notice, an administrative hearing and judicial review. More specifically, before collecting a delinquent tax through a levy on a taxpayer’s property, the IRS must notify the taxpayer at least thirty days in advance of his right to an administrative hearing before the IRS Office of Appeals. IRC Section 6330(a) and (b). After the Office of Appeals makes its determination, the taxpayer may then petition the Tax Court for judicial review. IRC Section 6330(d)(1).

In general, the taxpayer may raise “any relevant issue relating to the unpaid tax or the proposed levy” at the CDP hearing. IRC Section 6330(c)(2)(A). There are, however, certain restrictions as to the circumstances under which a taxpayer may bring a CDP challenge. Under IRC Section 6330(c)(2)(B), a taxpayer can dispute the existence or amount of the underlying tax liability but only so long as he “did not otherwise have an opportunity to dispute such tax liability.”

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Sixth Circuit Sets Limits on the Application of the Substance-Over-Form Doctrine

by David Sherwood and John Robert | Feb 21, 2017 | Appellate Courts, Uncategorized

The judicial substance-over-form doctrine provides the IRS with the ability to set aside carefully orchestrated tax planning arrangements to treat a transaction consistent with its substance. However, the doctrine does not give the Service carte blanche to deny tax benefits. In Summa Holdings, Inc. v. Commissioner, No. 16-1712 (available here), the Sixth Circuit overturned the Tax Court and declined to apply the substance-over-form doctrine when faced with taxpayers who, “to [their] good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower [their] taxes” and “complied in full with the printed and accessible words of the tax laws.”

Summa Holdings involved a closely held corporation (Summa Holdings, Inc.) that supercharged the tax benefits provided by paying commissions to an interest charge domestic international sales corporation (IC-DISC) by having the IC-DISC owned by two Roth IRAs. While the dividends paid by the IC-DISC were taxable upon receipt, the dividend amounts (totaling $6 million over 7 years) were vastly larger than the annual contribution limits placed on Roth IRAs. For unfathomable reasons, the IRS did not challenge the $3,000 price that the Roth IRAs paid for the IC-DISC stock. Instead, the IRS asserted that that the substance of the arrangement was that the corporation paid dividends to its shareholders and the shareholders made excess contributions to the Roth IRAs.

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Should Taxpayers File Amicus Briefs in Tax Court Cases?

by Kevin Spencer and McDermott Will & Emery | Feb 15, 2017 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

Amicus–or “friend of the court”–briefs are not uncommon in Supreme Court and appellate court cases. The purpose of an amicus brief is generally to provide assistance to the court by presenting additional arguments either in support or opposition of one of the litigant’s positions. Amicus briefs should not rehash the same arguments presented by one of the parties, but rather should provide insights and a different perspective that is not presented by the parties, and to inform the court of the impact of the issues in the case on other affected parties. The Federal Rules of Appellate Procedure provide detailed rules on how and when to file an amicus brief. See here for Federal Rule of Appellate Procedure 29, which governs amicus filings.

Sometimes, amicus parties want to get involved at the trial court level before the trial record is fixed. Thus, increasingly, amicus briefs are being filed in trial courts, and in particular in the United States Tax Court (Tax Court). When, why and how to file an amicus brief in a trial court is not clear. Indeed, most trial courts do not have procedural rules that directly address those filings. This post provides an overview of some of the considerations and procedures for filing such briefs in a Tax Court case.

Whether to allow an amicus to participate in a case is within the sound discretion of the court. Because the filing of an amicus brief is discretionary, the typical practice is to file a motion seeking permission or“leave” of the court to file an amicus brief accompanied with a statement stating that the litigants do, or do not, object to the filing of the amicus brief.

In deciding whether to grant permission to file anamicus brief, the Tax Court generally examines whether “the proffered information is timely, useful or otherwise helpful.” The court also considers whether amici are advocates for one of the parties, have an interest in the outcome of the case and possess unique information or perspective. This is consistent with the standards applied by other courts in making the determination.

Practice Point: Several factors should be considered by taxpayers in deciding whether to file an amicus brief in Tax Court. In addition to the cost, taxpayers may want to consider whether their position is being adequately represented by another taxpayer’s case and whether they believe that they can provide arguments that might persuade the court to adopt their position. Participation as an amicus can also be helpful to taxpayers in coordinating legal positions and ensuring that the best possible arguments are presented on issues of first impression. An effective amicus brief has the potential to persuade the court, and can be an effective tool to resolve an issue favorably. This is especially true when, because of the specific facts of the taxpayer, the perspectives of other taxpayers are not adequately addressed.

Change in Leadership at DOJ Tax Division

by Kevin Spencer and McDermott Will & Emery | Feb 3, 2017 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

The Department of Justice (DOJ) Tax Division is responsible for litigating tax refund claims brought in Federal district courts and the Court of Federal Claims and handling appeals from decisions of the United States Tax Court (the Chief Counsel’s office is responsible for Tax Court litigation). Effective January 23, 2017, David A. Hubbert became the Acting Assistant Attorney General for the DOJ Tax Division. He replaces Carolyn Ciraolo, who resigned on January 20, 2017. A copy of the DOJ press release, which includes biographical information on Mr. Hubbert, can be found here. In accordance with the change, the Internal Revenue Service on January 31, 2017, announced corresponding changes in the address for correspondence to the DOJ Tax Division and the signature block for any Notice of Appeal from a Tax Court case.

Practice Note: The changing of the guard is routine when there is a change in the administration, as demonstrated by the prior resignation of William J. Wilkins as Chief Counsel. However, this year may be a little different as the new administration seems determined to “shake things up.” In the coming weeks and months, we expect a lot of personnel changes. Stay tuned!

National Taxpayer Advocate 2016 Report – Penalties

by McDermott Will & Emery | Jan 26, 2017 | Appellate Courts, IRS Appeals, IRS Guidance, Trial Courts, Uncategorized

Every year, the Taxpayer Advocate Service’s (TAS) Annual Report to Congress provides a unique perspective regarding the workings of the Internal Revenue Service (IRS) and how the IRS relates to the vast majority of taxpayers. That insight is particularly valuable when the IRS chooses to assert penalties—one of the most policy-driven decisions that the IRS can make. In its 2016 report, the TAS makes a number of important observations and recommendations related to three of the most commonly asserted types of penalties—accuracy-related penalties, failure-to-file and failure-to-pay penalties, and the Trust Fund Recovery Penalty.

Accuracy-Related Penalties

The TAS identified 122 cases litigated between June 1, 2015, and May 31, 2016 (the reporting period), involving accuracy-related penalties. Of those cases, the IRS prevailed in full in 86 cases (70 percent), taxpayers prevailed in full in 20 cases (16 percent), and 16 cases were split decisions (13 percent) (percentages were rounded down in the original report). Unusual this year were the number of split decisions and the number of taxpayer wins in pro se cases. Many cases involving the negligence penalty turned upon the taxpayer’s failure to maintain adequate books and records related to the adjustments at issue.

In 2013, the TAS issued a study noting that the IRS’s imposition of accuracy-related penalties, subsequently abated after an assessment and a successful taxpayer appeal (among other fact patterns), could lead to a perception of unfairness among taxpayers regarding the IRS’s manner of assertion of these penalties. The TAS cited this study in its 2016 report, and noted again that this conduct could be detrimental to voluntary taxpayer compliance and could undermine the purpose of accuracy-related penalties.

In fact, a main priority of the Annual Report overall is to improve voluntary compliance, a fundamental element of our tax system. The TAS notes that “unnecessary coercion” by the IRS—whether through unsustained penalties or otherwise—could have the effect of reducing voluntary compliance.

Failure-to-File / Failure-to-Pay Penalties

The TAS identified 45 total decisions involving failure-to-file and failure-to-pay penalties in the reporting period. Of these, 28 cases involved taxpayers representing themselves. The majority of cases involved full or partial taxpayer losses.

The TAS noted, consistent with our experience, that the IRS frequently relies upon selection of failure-to-file and failure-to-pay cases through its Reasonable Cause Assistant software, which makes the initial decision to impose the relevant penalties in most cases without significant human involvement. Personal review of the penalty decision does not generally occur until after the taxpayer files an administrative appeal. The TAS advocated for heightened personal review of these penalties and heightened consideration of relevant facts and circumstances potentially supporting abatement.

Trust Fund Recovery Penalties

The TAS noted that several Trust Fund Recovery Penalty cases this year had successfully challenged whether the penalty was properly noticed and assessed. United States v. Appelbaum, 117 A.F.T.R.2d 2016-633 (W.D.N.C.); Romano-Murphy v. United States, 816 F.3d 707 (11th Cir. 2016).

The TAS further discussed a number of unsuccessful taxpayer challenges to assessment of the Trust Fund Recovery Penalty on grounds of [...]

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Circuit Courts Agree Timely Filing Requirement for a Tax Court Petition is Jurisdictional

by McDermott Will & Emery and McDermott Will & Emery | Jan 23, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

Arguably the most important aspect of litigating a case in the Tax Court or in a refund forum is the timely filing of the petition or complaint. Absent timely filing, the court may not have jurisdiction and the case could be dismissed without the court ever reaching the substantive issues. On January 13, 2017, the Seventh Circuit joined several other circuit courts in confirming that the time for filing a petition in Tax Court is jurisdictional, not a claims processing rule.

In Tilden v. Commissioner, No. 15-3838 (available here), the taxpayer’s petition was mailed on the last day of the 90-day filing deadline. It was not stamped and bore no postmark; instead, a USPS print-at-home postage label was attached by legal staff, and it was delivered to the post office the same day. The Internal Revenue Service (IRS) argued this was insufficient for timelymailing under the “mailbox rule” of Internal Revenue Code (Code) Section 7502. The Tax Court disagreed with both parties about what section of the regulations applied, and used the date the envelope was entered into the postal service’s tracking system as the date of postmark and filing—which was two days late. Thus, the Tax Court dismissed the petition for lack of jurisdiction (available here).

On appeal, the Seventh Circuit raised sua sponte the issue of whether the filing deadline for a Tax Court petition is jurisdictional or a claims processing rule. The proper characterization of the filing deadline is extremely important. If the deadline is considered jurisdictional, then late filing automatically precludes the taxpayer from seeking relief in the Tax Court. But, the taxpayer may still pay the tax due, file a claim for refund with the IRS, and file a complaint in a refund forum (if the IRS denies or fails to timely act on the claim). On the other hand, if the deadline is a claims processing rule, the taxpayer’s options may be limited. Although the taxpayer that files a late petition might be able to demonstrate that the Tax Court should hear its case, if the court were to determine that the petition was untimely, it arguably would be required under the Code to enter a decision on the merits for the IRS, rather than a dismissal for lack of jurisdiction. That result eliminates the alternative refund forum.

In Tilden, the Seventh Circuit considered the Supreme Court’s current approach in non-tax cases for determining whether deadlines are jurisdictional or claims processing rules, but decided that the language of the relevant statute and the body of Tax Court and circuit court precedent compelled a finding that the 90-day deadline is jurisdictional. Finding it “imprudent to reject that body of precedent” under principles of stare decisis, the Seventh Circuit followed the Tax Court and other circuit court precedent. The Seventh Circuit further disagreed with the Tax Court’s holding on the relevant postmark regulations to conclude that the petition was timely filed.

Practice Point: The Seventh Circuit’s opinion is a good reminder as to the [...]

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APA Challenge to Notice of Deficiency: QinetiQ Affirmed

by Jeffrey M. Glassman and McDermott Will & Emery | Jan 10, 2017 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

On January 6, 2017, the US Court of Appeals for the Fourth Circuit, by published opinion, affirmed the US Tax Court’s (Tax Court) earlier ruling in QinetiQ US Holdings, Inc. v. Commissioner. We previously wrote about the case here, here, and here. To refresh, the taxpayer had argued in Tax Court that the Notice of Deficiency issued by the Internal Revenue Service (IRS), which contained a one-sentence reason for the deficiency determination, violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the Notice of Deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law. The taxpayer appealed to the Fourth Circuit.

In an opinion written by Circuit Judge Barbara Keenan, the court concluded that the IRS complied with all applicable procedural requirements. The court reasoned that the Internal Revenue Code (Code) provided a unique system for judicial review that should govern the content requirements for a Notice of Deficiency. Per the court, it “is that specific body of law, rather than the more general provisions for judicial review authorized by the APA, that governs the content requirements of a Notice of Deficiency.” The court cited a Fourth Circuit opinion from 1959, in which it held that the Code’s provisions for de novo review are incompatible with limited judicial review of final agency actions allowed under the APA.

The court held that the APA’s requirement of a reasoned explanation in support of a “final” agency action does not apply to a Notice of Deficiency issued by the IRS. A Notice of Deficiency, the Court reasoned, cannot be a “final” agency action within the meaning of the APA, because the agency action is not one “by which rights or obligations have been determined, or from which legal consequences will flow.” After issuing a Notice of Deficiency, the IRS may later assert in Tax Court new theories and allege additional deficiencies. Moreover, a taxpayer may also raise new matters in Tax Court. In addition, the court cited to the Supreme Court’s 1988 opinion in Bowen v. Massachusetts, emphasizing that Congress did not intend for the APA “to duplicate the previously established special statutory procedures relating to specific agencies.”

The court also held that the Notice of Deficiency issued to QinetiQ satisfied the requirement of Code section 7522(a), which requires that the IRS “describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions [...]

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Court Opinions – A Year In Review

by Editorial Team | Jan 4, 2017 | Appellate Courts, IRS Guidance, Transfer Pricing Resource, Trial Courts, Uncategorized

Several notable court opinions were issued 2016 dealing with a variety of substantive and procedural matters. In our previous post – Tax Controversy 360 Year in Review: Court Procedure and Privilege – we discussed some of these matters. This post addresses some additional cases decided by the court during the year and highlights some other cases still in the pipeline.

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Court Holds that Willful Failure to File FBAR Standard is the Lesser Standard of Recklessness

by K. Christy Vouri-Misso | Dec 19, 2016 | Appellate Courts, Trial Courts, Uncategorized

On December 2, 2016, the US District Court for the Central District of California found that taxpayers who failed to file a Report of Foreign Bank and Financial Accounts (FBARs) for three foreign accounts, one of which, in the court’s view, was intentionally kept secret from all persons except their children, for over a decade were “at least recklessly indifferent to a statutory duty.” Read more about the case here. The court found that the taxpayers were “sophisticated,” pointing to evidence that they ran a successful camera shop, and that they lacked credibility having made several misrepresentations on their failed attempt to apply to the Offshore Voluntary Disclosure Program (OVDP) and for making unbelievable assertions at trial. The court did not apply the heightened standard of willfulness applicable to criminal trials, a violation of a known legal duty, finding that civil trials apply the lesser standard of reckless disregard of a statutory duty. Additionally, the court rejected the defendants’ argument that the government had to show willfulness under the clear and convincing standard of proof and applied the typical civil preponderance of the evidence standard of proof. The taxpayers’ lawyer has stated that they will appeal the decision.

Practice note: Ensuring that OVDP applications are complete and truthful is crucial to their acceptance and, as demonstrated here, can and will be used against the taxpayer in any later proceedings. The taxpayers in this case had a number of factors working against them, and, as shown here, offshore reporting cases will often turn on their own specific facts. As more and more FBAR enforcement cases are being docketed around the country, it will be interesting to see whether reviewing courts will apply a uniform standard for willfulness under the FBAR statute.

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