TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
IRS Guidance
Subscribe to IRS Guidance's Posts

Offshore Voluntary Disclosure Update

by and | Aug 10, 2016 | , , ,

The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs in which to report foreign assets and/or income and become compliant with US rules related to the disclosure of foreign assets. One option is the Offshore Voluntary Disclosure Program (OVDP).  Another is the Streamlined Filing Compliance Procedures (SFCP).  SFCP is further bifurcated into two sub-programs—one for US residents (Streamlined Domestic Offshore Procedures or “SDOP”) and one for non-US residents (Streamlined Foreign Offshore Procedures or “SFOP”).  Each program has its own set of tailored procedures and eligibility requirements.

The critical differences between OVDP and SFCP are: (1) the non-willfulness requirement; (2) the look-back period; and (3) the amounts of penalties the US taxpayer must pay.  Specifically, OVDP does not require the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful.  On the other hand, SFCP requires the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful and to also include a narrative explaining such non-willful conduct.  The incentive to demonstrate non-willfulness can be significant.  In general, US taxpayers who enroll in OVDP must pay a 27.5 percent penalty (and in some cases a 50 percent penalty) of the highest aggregate value of undisclosed foreign assets for the OVDP disclosure period (eight years).  However, US taxpayers who enter SDOP must only pay a five percent penalty of undisclosed foreign assets during the disclosure period (three years), and US taxpayers who enter SFOP pay no penalty. (more…)



read more

Proposed New IRS Rules for Valuing Interest in Family-Controlled Entities May Curb Discounts For Estate, Gift and Generation-Skipping Tax Purposes

by and | Aug 5, 2016 | ,

On August 2, 2016, the US Department of the Treasury issued long-awaited, proposed regulations on the valuation of interests in family-controlled entities for estate, gift and generation-skipping tax purposes. If finalized, these new rules are likely to substantially increase estate taxes payable by the estates of owners of family-controlled businesses, farms, real estate companies and investment companies. They would overturn well-settled law that for decades has allowed valuation discounts to be applied to these interests. Estate planners have long relied on the current rules in minimizing the transfer tax cost of passing family-controlled entities from one generation to the next.

The new rules are in proposed form and are not effective until issued in final form. This will probably not occur until sometime next year at the earliest. Proposed regulations often are changed, sometimes materially, before they are finalized. And sometimes they are not finalized quickly or at all. As a result, no one can be certain of the final form that these rules will take or when they will become effective, if at all.

That said, for some of you this may be an opportunity to plan your estate under current law for at least a few more months. We recommend that you discuss with your estate planner whether you should consider further steps now in light of these possible rule changes. If you have transactions in process, you may want to consider accelerating their completion. At a minimum, this possible law change may act as a prompt for families to have needed—perhaps long overdue—tax, succession and estate planning discussions with their professional advisers.

View recent press coverage of the proposed regulations.

Read our past discussions of these regulations and also our post on recent developments.



read more

Treasury to Publish Proposed Regulations Regarding Valuing Interests in Corporations and Partnerships for Gift and Estate Tax Purposes

by | Aug 4, 2016 | , ,

The IRS has just proposed regulations regarding the valuation of interests in corporations and partnerships for federal transfer tax purposes. The regulations address lapsing rights and restrictions on liquidation in an effort to prevent individuals from undervaluing transferred interests. A pdf of the proposed regulations is available here.

We will be commenting on the broader impact of the regulations over the next few weeks.

 



read more

Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

by | Aug 3, 2016 | , , ,

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use.  Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

Continue Reading



read more

Investment Tax Credit Lessee Income Inclusion Guidance Issued

by , , , and | Jul 26, 2016 | ,

New Internal Revenue Service temporary regulations provide guidance on the income inclusion rules that apply when a lessor elects to treat a lessee as having acquired investment credit property under Treas. Reg. § 1.48-4. As expected, the new temporary regulations also provide that a partner of a lessee partnership cannot increase its basis in its partnership interest for this income inclusion.

Read the full article.



read more

Protecting Confidential Taxpayer Information in Tax Court

by , and | Jul 21, 2016 | , , , , , , ,

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case.

In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that “[h]earings before the Tax Court . . . shall be open to the public.” Code Section 7461(b), however, provides several important exceptions. First, the court is afforded the flexibility to take any action “which is necessary to prevent the disclosure of trade secrets or other confidential information, including [placing items] under seal to be opened only as directed by the court.” Second, after a decision of the court becomes final, the court may, upon a party’s motion, allow a party to withdraw the original records and other materials introduced into evidence. In our experience, the trend appears to be erring on the side of protecting information from disclosure.

(more…)



read more

Tax Court Issues Five Discovery Orders Addressing Admissibility of Expert Reports

by and | Jul 20, 2016 | , , , ,

On July 13, 14, and 15, 2016, Judge Laro of the US Tax Court (Tax Court) ruled on five taxpayer-filed motions in limine to exclude expert reports in Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al. v. Commissioner. At issue in the case are a number of IRS transfer pricing adjustments to the taxpayer-corporation’s income under Section 482.

In support of its adjustments, the IRS offered numerous expert reports to the Tax Court, and the taxpayer sought to exclude these reports. The taxpayer raised the following major arguments:

Argument: The IRS expert reports failed to contain opinions.

The taxpayer argued that three of the reports should be excluded because they did not comply with Tax Court Rule 143(g)(1), which requires that expert witnesses generally prepare written reports, and requires that expert reports include “a complete statement of all opinions the witness expresses and the basis and reasons for them.” In federal district court practice (under somewhat different rules), this requirement generally means that an expert must separately state, and clearly delineate, his or her expert opinions in a written report—usually in a “conclusions” or “opinions” section. In Tax Court, the requirement for a clear and concise written expert report is even more significant than in federal district court practice because, under Rule 143(g)(1), expert reports are treated as direct testimony of the expert (although, in many cases, additional expert testimony and cross-examination may be helpful or necessary).

(more…)



read more

IRS Issues Safe Harbors under Which the IRS Will Not Assert That a Corporation Lacks the Requisite ‘Control’ for Purposes of Section 355(a)

by | Jul 18, 2016 | ,

On July 15, 2016, the Internal Revenue Service (IRS) released Rev. Proc. 2016-40. This revenue procedure provides safe harbors in which the IRS will not assert that a distributing corporation, D, lacks control of another corporation, C, within the meaning of Code section 355(a)(1)(A) when D acquires putative control of C through C’s issuance of stock and C subsequently engages in a transaction that actually or effectively reserves the effect of the stock issuance. In general, D can only distribute the stock of C to D shareholders in a tax-free spin-off under Code section 355 if D has control of C within the meaning of Code section 368(c) immediately before the spin-off. To satisfy the control requirement of section 368(c), D must have 80 percent of the vote and 80 percent of each nonvoting class of C stock. Historically, in situations in which D owned less than 80 percent of the stock of C, D would satisfy this requirement by having C recapitalize its stock into “high vote” and “low vote” classes of stock immediately before the spin-off. D would then distribute the “high vote” stock with more than 80 percent of the vote of all C stock to D shareholders in a tax-free spin-off under section 355. However, publicly traded corporations often dislike having multiple classes of stock with different voting rights outstanding. As a result, when C becomes an independent publicly traded corporation following the spin-off, it often seeks to recapitalize its “high vote” and “low vote” classes of stock into a single class with identical voting rights. Prior to 2013, the IRS issued a number of private letter rulings permitting C to engage in such recapitalizations following its first regularly scheduled board meeting after a spin-off without retroactively causing the spin-off to fail to be tax-free under section 355. In 2013, the IRS announced it would no longer issue such rulings while it studied the issue.

(more…)



read more

Tax Court Order Indicates That E-Discovery and Predictive Coding Are Here to Stay

by , , and | Jul 18, 2016 | , , , , ,

On July 13, 2016, Judge Buch of the US Tax Court denied an Internal Revenue Service (IRS) motion to compel the production of electronically stored information (ESI) by Dynamo Holdings Limited Partnership and Beekman Vista, Inc., which was not delivered as part of a discovery response based on the mutually agreed-upon use of “predictive coding.” Predictive coding is an electronic discovery method that permits an efficient and effective approach when reviewing for relevance a large amount of data and documents. It is a relatively new discovery method that is gaining acceptance by courts around the country as an alternative to the costly and laborious physical review of data and documents. Judge Buch previously authorized the use of predictive coding in Dynamo Holdings, Ltd. vs. Commissioner, 143 T.C. No. 9 (2014).

The IRS and the taxpayers had agreed that the taxpayers would run a search for terms determined by the IRS on the potentially relevant documents. The taxpayers provided the IRS with samples of randomly selected documents from the universe of potentially relevant documents, from which the IRS identified the relevant documents. These selections were used to create a predictive coding model, which a computer can use to identify conceptually similar documents.  The IRS also selected a “recall rate” of 95 percent. A search method’s recall rate is the percentage of all relevant documents in the search universe that are retrieved by that search method. The higher the recall rate, the fewer relevant but retrieved documents there will be. The taxpayers then delivered to the IRS all of the documents retrieved using the predictive coding model that were not privileged. More documents were identified in the initial search for terms than were identified using the predictive coding model. The IRS filed a motion to compel production of the documents identified in the initial terms search that were not produced.

The Tax Court denied the IRS’s motion, explaining that document review results are never perfect. The court stated that the IRS was seeking a perfect response, but that the Tax Court Rules and the Federal Rules of Civil Procedure require only that the responding party make a “reasonable inquiry” when making a discovery response. The court explained that “when the responding party is signing the response to a discovery demand, he is not certifying that he turned over everything, he is certifying that he made a reasonable inquiry and to the best of his knowledge, his response is complete.”  The use of predictive coding does not change this standard, and the court held that the taxpayers satisfied the reasonable inquiry standard when they responded using predictive coding.

Practice Note: Due to the amount of data and documents generated by taxpayers in the normal course of business, discovery of ESI can be extremely burdensome and expensive for taxpayers.  Nonetheless, it has become commonplace to see discovery requests for ESI.  Although there is a substantial amount of guidance on this subject in other courts, the Tax Court has issued [...]

Continue Reading



read more

IRS Finalizes Controversial Regulations Allowing Contractor Participation in Examinations

by and | Jul 14, 2016 | , , ,

On July 12, 2016, the Internal Revenue Service (IRS) finalized regulations allowing third-party contractors (i.e., outside economists, engineers, consultants and attorneys) to participate in audits of taxpayers.  The regulations are not limited to allowing outside parties to review taxpayers’ books and records, but extend to the full participation in summons interviews.  The final regulations replace proposed and temporary regulations issued in 2014.

The IRS’s position is highly controversial and several organizations submitted comments arguing against finalization of the regulations.  Additionally, the IRS’s position was the subject of a dispute between Microsoft and the IRS relating to the IRS’s use of the law firm of Quinn Emmanuel in an audit of Microsoft’s transfer pricing.  It appears highly likely that taxpayers will challenge the validity of the final regulations in court, and at some point a court will be required to decide the issue.  In the wake of the final regulations, taxpayers that are currently under audit should consider requesting that the IRS provide a list of all third-parties, including outside contractors that are being consulted with during an examination.  It is a good practice to request in writing a list of the third-parties that the IRS contacts during the course of an examination.



read more

EDITOR IN CHIEF

Edward Froelich

STAY CONNECTED

Subscribe

TOPICS

ARCHIVES

US Tax Disputes Firm of the Year 2025
2026 Best Law Firms - Law Firm of the Year (Tax Law)
jd supra readers choice top firm 2023 badge