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
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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 As a technical matter, district court opinions are not precedential.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.



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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.


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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.


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Supreme Court Justice Kennedy Retires in Wake of Wayfair

by and | Jun 28, 2018 | , , ,

On June 27, Supreme Court Justice Anthony Kennedy announced his retirement, effective July 31, 2018. This announcement follows last week’s 5-4 decision in South Dakota v. Wayfair, authored by Justice Kennedy, which reversed the physical presence requirement originally established in National Bellas Hess and reaffirmed in Quill. Other important tax (and tax-related) cases have decided by the Supreme Court during Justice Kennedy’s tenure include: Commissioner v. Clark, 489 US 726 (1989); United States v. Goodyear, 493 US 132 (1989); Commissioner v. Soliman, 506 US 168 (1993); Commissioner v. Banks, 543 US 426 (2005); United States v. Home Concrete & Supply, LLC, 566 US 478 (2012); Obergefell v. Hodges, Sup. Ct. Dkt. No. 14-566 (2015); and Pereira v. Sessions, No. 17-459 (2018).

Justice Kennedy was appointed by President Ronald Reagan, and sworn in on February 18, 1988. He won unanimous confirmation. Although considered a conservative jurist, he was also the swing vote in favor of various social issues including same-sex marriage and the right to seek an abortion.

President Trump has already begun the search for Justice Kennedy’s replacement, but confirmation of the president’s nomination will not come without a serious fight. Indeed, whomever President Trump nominates, we can expect the same level of bipartisan animosity for the confirmation hearings as has marred his presidency thus far. Of course, any confirmation will require the Senate’s approval, and given the erosion of a conservative majority in the Senate, confirmation will be no small feat!



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Don’t File Fraudulent Returns Because Amending Them Will Not Help

by , and | Jun 22, 2018 | , , ,

The US Tax Court (Tax Court), in a short opinion, provided a reminder to taxpayers that penalties for filing fraudulent returns cannot be avoided by subsequently filing amended returns. In Gaskin v. Commissioner, TC Memo 2018-89, the taxpayer admitted his original returns were fraudulent. While under criminal investigation, he attempted to cure the fraudulent filings by filing amended returns, reporting more than $100,000 of additional tax. Ultimately, the tax due exceeded the amount reported on the amended returns.

Despite admitting his original fraud, the taxpayer argued that the fraud penalty did not apply because the tax due only modestly exceeded the tax reported on his amended returns. The Tax Court disagreed. Relying on the regulations and Supreme Court precedent, the court held that the amount of the underpayment and the fraudulent intent are both determined by reference to original—not amended—returns. It therefore upheld imposition of the fraud penalty.

Practice Point: Don’t file fraudulent returns! All joking aside, this case reminds us that although filing an amended return can cure some infirmities on your return, you have to be very careful in choosing whether to amend a return. As long as you did your best to accurately calculate your tax due on your original return, you are not required to amend that return if you later find out you were wrong. This is true even if the statute of limitations is still open. Indeed, there is no requirement to amend a return. However, there may be reasons to file an amended return; for example, if you know that you will need to base a future return’s position on a previous return’s position (e.g., the amount of earnings and profits stated on the return). Taxpayers need to be mindful, however, that if you amend your return, it must be accurate to the best of your knowledge when you sign it as to all items and any other errors discovered after the original return was filed must also be corrected. Accordingly, you cannot amend only the favorable positions discovered after you filed your original return.



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Judge Foley Assumes The Reins as New Chief Judge of US Tax Court

by | Jun 1, 2018 | ,

Following up on our prior post, Judge Maurice B. Foley takes over today as Chief Judge of the US Tax Court (Tax Court). The term as Chief Judge spans two years and involves several statutory and administrative duties, including but not limited to the assignment of cases, appointment of Special Trial Judges, review of draft opinions, and determination of which cases will be reviewed by the full court. For those interested in a historical analysis of the Tax Court, which was recently revised in 2014, see here.



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Tax in the City® Seattle Proves to be the Largest Turnout to Date

by | May 31, 2018 | , ,

The second meeting of McDermott’s Tax in the City® initiative in Seattle was held on May 22, 2018 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. With the highest attendance rate of any Tax in the City® event to date, the May meeting featured a CLE/CPE presentation about Ethical Considerations around Tax Reform by Elizabeth Chao, Kirsten Hazel, Jane May and Erin Turley, followed by a roundtable discussion about recent tax reform insights led by Britt Haxton, Sandra McGill and Diann Smith.

Here’s what we covered at last week’s Tax in the City® Seattle:

  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 & 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance, including by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS/state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand when the IRS has longer than three years to assess tax, including when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • Supreme Court Update: Wayfair – Jurisdiction to Tax – Following the Wayfair oral arguments, it is difficult to predict whether the Supreme Court will uphold as constitutional South Dakota’s tax on online retailers. Wayfair raises the fundamental question of when the courts should settle tax issues, and when they should wait for Congress to act.
  • Interaction of Cross-Border Tax Reform Provisions – Income of a US multinational is subject to varying rates of US tax depending on where it is earned. The US parent’s income from selling to US customers will be subject to the full rate of 21 percent and its income from selling to foreign customers will generally be subject to the foreign derived intangible income (FDII) rate of 13.125 percent. If the income is earned by a [...]

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Tax Court Judge Holmes Reappointed

by and | Apr 25, 2018 | , ,

In a press release on April 24, 2018, the White House stated that President Trump has reappointed Tax Court Judge Mark Holmes for a second 15-year term.  Judge Holmes was originally appointed by President George W. Bush on June 30, 2003, for a term ending June 29, 2018.  Instead of seeking “senior status” on the Tax Court, Judge Holmes sought to be reappointed for a second term.



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President Trump Announces Intent to Nominate Emin Toro to Tax Court

by | Apr 10, 2018 | ,

In a press release this morning, President Trump announced his intent to nominate Emin Toro to serve as a judge on the United States Tax Court (Tax Court). This is the latest in a wave of nominations to high-level tax positions within the government, as we have previously covered here and here.

Mr. Toro is currently a partner in the Washington, DC, office of Covington & Burling LLP. His practice focuses on the needs of multinational companies, including both tax controversies and counseling. Mr. Toro’s experience includes audits, administrative appeals, litigation and transfer pricing matters. He received his JD from the University of North Carolina School of Law in 2000 and clerked for the Honorable Karen LeCraft Henderson, US Court of Appeals for the District of Columbia (2000–2001) and the Honorable Clarence Thomas, US Supreme Court (2002–2003).



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