On April 24, 2020, the US Court of Appeals for the Eighth Circuit published its opinion in Wells Fargo & Co. v. United States, No. 17-3578, affirming a district court’s holdings that the taxpayer was not entitled to certain foreign tax credits and was liable for the negligence penalty for claiming the credits. Much has been written about the substantive issue, which we will not discuss here. Instead, we focus on the Eighth Circuit’s divided analysis relating to the reasonable basis defense to the negligence penalty.

In Wells Fargo, the taxpayer relied solely on the reasonable basis defense to the government’s assertion of penalties. Under Internal Revenue Code (IRC) section 6662(b)(1), a taxpayer is liable for penalty of 20% of an underpayment of its taxes attributable to its “negligence.” Various defenses are potentially applicable to the negligence penalty, which we recently discussed in detail here. One such defense is if the taxpayer can show it had a “reasonable basis” for its position. Under Treas. Reg. § 1.6662-3(b), this defense applies if the taxpayer’s return position was “reasonably based on” certain authorities specified in the regulations.


Continue Reading Eighth Circuit Applies Subjective Standard to Reasonable Basis Penalty Defense

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, No. 19-50506, the United States Court of Appeals for the Fifth Circuit held that a Texas-based estate and tax-planning law firm (Firm) could not invoke the attorney-client privilege against an Internal Revenue Service (IRS) summons seeking the identity of its clients.

According to an IRS revenue agent’s declaration submitted in support of the summons, the Firm became a target for IRS investigation following an audit of one of its clients, an individual who had used the Firm’s services to establish and operate various foreign accounts and entities, through which the individual had funneled millions of dollars of unreported income. The IRS issued a John Doe summons to the Firm seeking, amongst other things, the identities of other clients for whom it had established foreign accounts or entities.


Continue Reading Fifth Circuit Rules that Law Firm Clients’ Identities Are Not Privileged

The United States Court of Appeals for the Tenth Circuit’s recent opinion in Standing Akimbo, LLC v. United States, No. 19-1049 (10th Cir. April 7, 2020), reminds us of the Internal Revenue Service’s (IRS) ability to obtain the information it needs to examine taxpayers’ returns using its powerful summons tool.

In May 2017, the IRS began auditing Standing Akimbo, LLC (Standing Akimbo), a Colorado limited liability company operating as a medical-marijuana dispensary. The audit focused on whether Standing Akimbo improperly claimed business deductions that were prohibited under Internal Revenue Code (IRC) section 280E. Generally, IRC section 280E provides that no deduction or credit is allowed for any amount paid or incurred in the carrying of a business if such business trafficks in controlled substances that are prohibited by Federal law. While legal under Colorado law, marijuana is still classified as a controlled substance under Federal law, and specifically the Controlled Substances Act. As a pass-through entity, any adjustments to Standing Akimbo’s returns would affect its owners’ (Taxpayers) individual tax returns.


Continue Reading IRS Flexes Its Administrative Summons Power in Recent Tax Case

In a recent order in the The Cannon Corp. v. Commissioner, No. 12466-16, the US Tax Court (Tax Court) held that a redacted email from a revenue agent’s supervisor to the agent regarding a notice of deficiency was not sufficient to satisfy the approval requirement under Internal Revenue Code (IRC) section 6751(b) for the assertion of accuracy-related penalties.

Under IRC section 6751(b), as interpreted by case law, the Internal Revenue Service (IRS) is permitted to assert penalties only if the initial determination to assert the penalty is approved in writing by the supervisor of the individual making such a determination. That provision has been litigated recently in several notable cases, for example, Chai v. Commissioner851 F.3d 190 (2d Cir. 2017), and Graev v. Commissioner149 T.C. 485 (2017). Since Graev, the Tax Court has issued a series of decisions on the requirements of IRC section 6751(b). Our recent article discussing these decisions can be found here.


Continue Reading IRS Failed to Prove Supervisory Approval For Penalty Based Upon Redacted Document

Recently, the US Federal District Court for the Southern District of Iowa in Meredith Corp. v. United States, No. 4:17-cv-00385 (S.D. Iowa Mar. 20, 2020), held that a magazine publisher was entitled to refund of federal income tax based for the Internal Revenue Code (IRC) section 199 domestic production deduction based upon the printing services performed by a contract manufacturer. At issue in the case was whether the publisher qualified as a printer of magazines for purposes of IRC section 199 despite hiring third-party printers to print its magazines. The Internal Revenue Service (IRS) argued that the third-party printers, not the magazine publisher, had the “benefits and burdens of ownership,” and thus only the third-party printers were eligible for the IRC section 199 deduction. The case involved tax years 2006 through 2012. The Tax Cuts and Jobs Act repealed IRC section 199 domestic production deduction for tax years after 2018.

Continue Reading Taxpayer Victory in an IRC Section 199 Contract Manufacturing Case

The United States Supreme Court has picked up the pace this week, already issuing eight regular opinions and four opinions relating to orders as of today. We discuss the tax-related items here.

In Rodriguez v. FDIC, the question was how to decide which member of a consolidated group of corporations is entitled to a

On November 6, 2019, President Trump announced his intent to nominate Ms. Alina Ionescu Marshall and Mr. Christian N. Weiler to serve as Judges on the United States Tax Court (Tax Court). Mr. Travis Greaves was previously approved by the Senate Finance Committee to be a Tax Court Judge and is awaiting confirmation by the