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Court Procedure Matters
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Court Rules That Wind Farm Did Not Provide Proof of Development Fee to Receive 1603 Cash Grant

by , and | Jul 2, 2019 | , , ,

On June 20, 2019, the United States Court of Federal Claims published its long-awaited opinion in California Ridge Wind Energy, LLC v. United States, No. 14-250 C. The opinion addressed how taxpayers engaging in related party transactions may appropriately determine the cost basis with respect to a wind energy project under the Internal Revenue Code (IRC). Central to the case was whether the taxpayer was allowed to include a $50 million development fee paid by a project entity to a related developer in the cost basis of a wind project for purposes of calculating the cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603). Section 1603 allowed taxpayers to take a cash grant in lieu of the production tax credit of up to 30% of the eligible cost basis of a wind project. The eligible cost basis under Section 1603 is determined in the same manner as under Section 45 for purposes of the investment tax credit (ITC). The Justice Department disagreed with the taxpayer’s position that the development fee should be included in the cost basis for calculating the Section 1603 cash grant. The Justice Department argued that the development fee was a “sham.”

The court agreed, and held for the government. The court’s opinion focused on the taxpayer’s failure to provide evidence that the payment of the development fee had “economic substance.” Indeed, the court was troubled that none of the taxpayer’s witnesses could explain what was actually done to earn the $50 million development fee. Other than a three‑page development agreement and the taxpayer’s bank statements identifying the wire transfers for payment of the development fee, which started and ended with the same entity, the court found that the taxpayer provided no other factual evidence to support the payment of the fee. Indeed, the court pointed to the taxpayer’s trial testimony, which the court found lacked the specificity needed to support the development fee. Because the taxpayer failed to carry its burden of proof and persuasion, the court concluded that the taxpayer was not entitled to include the $50 million development fee in the cost basis of the wind project for purposes of computing the Section 1603 cash grant.

Importantly, the court did not, however, rule that a development fee paid to a related party is not permitted to be included in the cost basis of a facility for purposes of determining the Section 1603 cash grant. Instead, the court simply ruled that the taxpayer failed to provide it with sufficient proof that in substance the taxpayer performed development services for which a development fee is appropriately considered part of the cost basis of a facility for purposes of determining the Section 1603 cash grant.

Practice Point: In court, the plaintiff has the burden of proving its entitlement to the relief sought. Before filing a case, it’s best to make sure that you have all of the evidence you need to prove your case. Without substantial and [...]

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Trust Wins Due Process Challenge to North Carolina State Income Tax

by and | Jun 26, 2019 | , , ,

Last week, the US Supreme Court ruled that North Carolina may not tax a trust’s income when the trust’s only contact with the state is the in-state residence of discretionary beneficiaries. The Due Process Clause requires a minimum connection between a state and the person it seeks to tax. The mere residency of the discretionary beneficiaries of a trust is not sufficient to satisfy this requirement.

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Tax Court Announces Limited Entries of Appearance

by , and | May 29, 2019 | ,

The concept of limited scope representation is not a new one in the legal arena. Rule 1.2(c) of the ABA Model Rules of Professional Conduct provides that “A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.” This rule has been broadly embraced by states. The idea of limited representation in Tax Court cases has been floating around for years. It has mostly come up in the context of pro se taxpayers who appear at calendars calls. There may be one or more volunteers willing to assist the taxpayer but are unable to enter an appearance on the spot for various reasons (e.g., inability to conduct a conflicts search, uncertainty as to whether the taxpayer will be responsive in the future, inability to determine whether case has merit). In this situation, the volunteer is usually not allowed to speak on the taxpayer’s behalf to the Court to try to assist with resolving the case and handling procedural matters.

In 2018, Special Trial Judge Carluzzo and Special Trial Judge Panuthos invited suggestions for better assisting unrepresented and low-income taxpayers in the Tax Court. In response, the American Bar Association Section of Taxation recommended that the Tax Court consider amending its rules to permit counsel to enter an appearance for a limited time or purpose. At the time of the recommendation, approximately 69% of all Tax Court petitioners and 91% of petitioners in small tax cases were self-represented. The Section of Taxation pointed out that many self-represented petitioners before the Tax Court do not understand the law or court rules and therefore are unable to make an effective legal argument. This results in inefficiencies in the Tax Court, as well as inequality because the IRS is always represented by counsel. (more…)



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Sacked in Tax Court! Procedural Missteps by the IRS Leave the Government’s Blindside Exposed

by | May 23, 2019 | , , ,

In Kearse v. Commissioner, T.C. Memo 2019-53, the Tax Court held the Internal Revenue Service (IRS) abused its discretion as part of the taxpayer’s Collection Due Process hearing (CDP hearing) because the Appeals officer failed to properly verify that the assessment of the taxpayer’s unpaid 2010 liability was preceded by a duly mailed notice of deficiency.

The taxpayer, well-known to sports fans, was Jevon Kearse. Mr. Kearse, nicknamed “The Freak” for his athletic ability, played for 11 seasons in the National Football League and tallied 74 career sacks as a dominating defensive end. Based on the description of events by the Tax Court, Mr. Kearse’s attorneys outmaneuvered the IRS similar to the way Mr. Kearse had offensive tackles tripping over their shoestrings. (more…)



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What Happens At Exam, Stays At Exam!

by and | Apr 25, 2019 | , , , , ,

A recent case decided by the US Tax Court reminds us that when you litigate a case in Tax Court, what happened during the Internal Revenue Service (IRS) examination and Appeals bears very little relevance (if any) once you get to court. Generally, Tax Court’s proceedings are de novo, and the court looks solely to the IRS’s position in the Notice of Deficiency (Notice). The Revenue Agent’s Report and other statements made by the IRS before the issuance of the Notice are typically ignored.

In Moya v. Commissioner, 152 TC No. 11 (Apr. 17, 2019), the IRS determined deficiencies related to the disallowance of certain business expense deductions. The taxpayer did not assign error to the disallowance, but instead argued that the Notice was invalid because the IRS had violated her right to be informed and her right to be heard under an IRS news release and an IRS publication outlining various rights of taxpayers. Specifically, the taxpayer asserted that she had requested that her examination proceedings be transferred to California after she had moved from Las Vegas to Santa Cruz, and that the IRS had violated the her rights by providing vague and inconsistent responses to, and by ultimately denying, her request. (more…)



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Tax Court Rules State Corporate Incentives Are NOT Taxable Income Under Federal Law

by and | Apr 11, 2019 | , , ,

Many states and localities give incentives for business to move or transact in their locations. There has always been a question of whether these incentives are taxable income under federal income tax law. Internal Revenue Code (IRC) section 118, as amended by the Tax Cuts and Jobs Act, P.L. 115-97, provides that “[i]n the case of a corporation, gross income does not include any contribution to the capital of the taxpayer….(b) For purposes of subsection (a), the term “contribution to the capital of the taxpayer” does not include—…(2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such).”

In a recent case, the US Tax Court ruled that certain cash grants given by the State of New Jersey fit squarely within IRC section 118, and were not taxable to the corporate taxpayer. Brokertec Holdings, Inc. v. Commissioner, T.C. Memo. 2019-32.

(more…)



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Reasonable Cause for E-Filing Errors?

by | Mar 7, 2019 | , , ,

Tax return filing season is fast approaching, and taxpayers big and small are preparing to file their returns. A recent US Court of Appeals for the Fifth Circuit decision, Haynes v. United States, No. 17-50816 (5th Cir. Jan. 29, 2019), indicates that many of those taxpayers will face uncertainty if their returns are late due to preparer errors or technological issues when electronically filed (e-filed).

The court in Haynes declined to rule on whether the Supreme Court decision in United States v. Boyle, 469 US 241 (1985), applied to e-filing a tax return. The court instead remanded the case to resolve factual issues. In declining to examine the application of Boyle, the decision leaves in place uncertainty for many taxpayers who e-file their returns.

Internal Revenue Code Section 6651(a)(1) excuses a taxpayer from penalties for failure to file a return on time if they show the failure was “due to reasonable cause and not due to willful neglect.” In Boyle, an estate executor hired an experienced lawyer to prepare estate tax returns, but the lawyer failed to put the filing date on the calendar. Nevertheless, the court held that determining a deadline and meeting it did not require any special skills, and therefore relying on an agent was unreasonable. Accordingly, the Court in Boyle did not excuse late filing, and the taxpayer was subject to penalty. (more…)



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Government Files Its Brief in Auer Deference Case

by and | Feb 27, 2019 | , ,

As we discussed in a prior post and in our article for Law360, the Supreme Court is poised to decide in Kisor v. Wilkie whether to overrule the Auer deference doctrine. This doctrine, which originated in the 1945 Seminole Rock case, generally affords controlling deference to an agency’s interpretation of its own ambiguous regulations. To date, the petitioner has filed its brief, several amici have filed briefs and the government has filed its brief (links to these documents can be found here). Argument is currently scheduled for March 27, 2019, and an opinion is anticipated by the end of June 2019.

The government’s brief, filed on February 25, 2019, acknowledges that Auer deference raises serious concerns. Specifically, the government states that the basis for the doctrine is unclear, the doctrine is in tension with the Administrative Procedures Act (APA) and overly broad deference to agency interpretations can have harmful practical consequences. However, relying on principles of stare decisis, the government advocates for maintaining Auer deference subject to certain prerequisites that would limit the doctrine. These prerequisites include applying deference only after all traditional tools of construction have been exhausted and only if the agency’s interpretation has reasonably interpreted any ambiguity. In deciding whether to defer to the agency’s interpretation, a reviewing court should look at whether the interpretation: (1) was issued with fair notice to regulated parties, (2) is not inconsistent with the agency’s prior views, (3) rests on the agency’s expertise and (4) represents the agency’s considered view (i.e., not merely the views of “mere field officials or other low-level employees”). Presumably these limits would curtail the application of Auer deference in circumstances where the agency’s interpretation is first widely known only because of a litigating position.

Practice Point: The Supreme Court’s decision in Kisor v. Wilkie will be important for taxpayers and their representatives in light of the substantial regulatory guidance issued in the wake of tax reform. We will continue to follow this case and provide updates after argument is held and the case is decided.



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Big Change for Witness Privilege in House Investigations

by and | Feb 15, 2019 | , ,

On Jan. 25, 2019, U.S. House of Representatives Rules Committee Chairman James P. McGovern, D-Mass., issued regulations governing staff deposition authority in the 116th Congress, pursuant to his authority under H. Res. 6. In passing H. Res. 6, the newly empowered House Democratic majority drastically increased House committees’ investigative power by allowing committee staff to conduct depositions without members present — a stark departure from precedent. This change was a dramatic first step in the House Democratic majority’s efforts to ramp up oversight of both the executive branch and the private sector.

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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.



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