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Read the October Issue of Focus on Tax Strategies & Developments

by McDermott Will & Emery, Alejandro Ruiz, David G. Noren, Jean A. Pawlow, Kevin Spencer, Kristen E. Hazel, Robin L. Greenhouse, Sandra P. McGill and Timothy S. Shuman | Nov 1, 2017 | Court Procedure Matters, IRS Guidance, State Controversy, Tax Reform, Tax Refunds, Transfer Pricing Resource, Trial Courts, Uncategorized

The October 2017 issue of Focus on Tax Strategies & Developments has been published. This issue includes five articles that provide insight into US federal and international tax developments and trends across a range of industries, as well as strategies for navigating these complex issues.

Republican Leaders Release Tax Reform Framework
By David G. Noren Alexander Lee

M&A Tax Aspects of Republican Tax Reform Framework
By Alexander Lee, Alejandro Ruiz and Timothy S. Shuman

State and Local Tax Aspects of Republican Tax Reform Framework
By Peter L. Faber

Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest
Kristen E. Hazel, Sandra P. McGill and Susan O’Banion

The IRS Attacks Taxpayers’ Section 199 (Computer Software) Deductions
Kevin Spencer, Robin L. Greenhouse and Jean A. Pawlow

Read the full issue of Focus on Tax Strategies & Developments.

Tax Court Considering Allowing Remote Testimony

by Kevin Spencer and McDermott Will & Emery | Oct 31, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

We have previously reported on the various forums in which taxpayers can litigate tax cases, noting that the vast majority of tax cases are litigated in the US Tax Court (Tax Court). The Tax Court is the preferred forum for several reasons, including that the judges are all tax specialists, and taxpayers can litigate their case without having to pay the tax beforehand. Trial sessions and other work of the Tax court are conducted by presidentially appointed judges, senior judges serving on recall and Special Trial Judges. These judges travel nationwide to conduct trials in designated cities.

We have also previously noted important procedural developments and other news from the Tax Court, such as proposals to changes the Court’s rules: Tax Court Considering Requiring Notice of Non-Party Subpoenas, Tax Court Anticipates Releasing Revisions to its Rules in the Near Future and Tax Court Adopts Rules for Judicial Conduct and Judicial Disability Complaints. According to recent media reports, the Tax Court is currently considering whether to use teleconference technology to take testimony from witnesses remotely, rather than requiring a witness’ physical appearance in Court. (more…)

Refined Coal Tax Credit Case Filed

by Kevin Spencer, Philip Tingle and Roger J. Jones | Oct 24, 2017 | Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

On September 14, 2017, Cross Refined Coal LLC (Partnership) (and USA Refined Coal LLC as the Tax Matters Partner) filed a Petition in the US Tax Court seeking a redetermination of partnership adjustments determined by the Internal Revenue Service (IRS). According to the Petition, during audit of the 2011 and 2012 tax years, the IRS reduced the Partnership’s and certain partners’ Internal Revenue Code Section 45(e)(8) refined coal production tax credits by several million dollars and disallowed several million dollars more of claimed losses. The Notice of Deficiency, a copy of which is attached to the Petition, provides the following reasons for the adjustments:

Neither the Partnership nor the partners have established the existence of the partnership as a matter of fact;
The formation of the Partnership was not, in substance, a partnership for federal income tax purposes because it was not formed to carry on a business or for the sharing of profits and losses from the production or sale of refined coal by its purported members/partners, but rather was created to facilitate the prohibited transaction of monetizing refined coal tax credits;
The refined coal tax credits are disallowed because the transaction was entered into solely to purchase refined coal tax credits and other tax benefits; and
Ordinary losses were disallowed because it has not been established that they were ordinary and necessary or credible expenses in connection with a trade or business or other activity engaged in for profit.

As we have previously reported, the IRS has issued negative guidance concerning refined coal transactions and has denied the tax benefits associated with some of those transactions.

We will be watching this case closely and will report back on any developments.

Statutes of Limitation in the International Tax Context

by Elizabeth Chao and Lowell D. Yoder | Oct 19, 2017 | IRS Audits, IRS Guidance, Trial Courts, Uncategorized

As most taxpayers know, under Internal Revenue Code (Code) Section 6501(a), the Internal Revenue Service (IRS) generally has three years after a tax return is filed to assess any additional tax. However, Code Section 6501 provides several exceptions to this rule, including but not limited to the following.

False or fraudulent returns with the intent to evade tax (unlimited assessment period)
Willful attempt to defeat or evade tax (unlimited assessment period)
Failure to file a return (unlimited assessment period)
Extension by agreement (open-ended or for a specific period)
Adjustments for certain income and estate tax credits (separately provided in specific statutes)
Termination of private foundation status (unlimited assessment period)
Valuation of gifts of property (unlimited assessment period)
Listed transactions (assessment period remains open for one year after certain information is furnished)
Substantial omission of items (six-year assessment period)
Failure to include certain information on a personal holding company return (six-year assessment period)

If the IRS issues a notice of deficiency and the taxpayer files a petition in the Tax Court, the statute of limitations on assessment is extended until after the Tax Court’s decision becomes final. See Code Section 6503(a); see also Roberson and Spencer, “11th Circuit Allows Invalid Notice to Suspend Assessment Period,” 136 Tax Notes 709 (August 6, 2012). (more…)

When Can a Taxpayer Dismiss a Tax Court Case as Moot?

by McDermott Will & Emery and McDermott Will & Emery | Oct 13, 2017 | Settlements, Trial Courts, Uncategorized

Faced with the prospect of potential tax liability after an unsuccessful audit, taxpayers are faced with the options of filing a petition in the US Tax Court (Tax Court) prior to paying the liability or paying the liability, making a claim for refund, and (if denied or more than six months have passed) suing the government for a refund in local district court or the Court of Federal Claims. For taxpayers that select the Tax Court route, sometimes a question later arises as to whether they can seek to dismiss their case in order to refile in a different forum. The problem that arises is that Internal Revenue Code (Code) Section 7459(d) provides that if a Tax Court petition in a deficiency proceeding is dismissed (other than for lack of jurisdiction), the dismissal is considered as a decision that the deficiency is the amount determined by the Internal Revenue Service (IRS).

Taxpayers have attempted to avoid this rule in the past, presumably so that they could refile a lawsuit in another forum either because they believe that forum would be more favorable or because they desire a jury trial (Tax Court cases are bench trial; no juries are allowed). More than 40 years ago, the Tax Court rejected this tactic in Estate of Ming v. Commissioner, 62 TC 519 (1974), holding that under Code Section 7459(d), a taxpayer who petitions the court for a redetermination of a deficiency may not withdraw a petition to avoid the entry of decision. Specifically, the court held: “It is now a settled principle that a taxpayer may not unilaterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.” Since Ming, the Tax Court has distinguished its holding in collection due process cases which involve the review of the IRS’s collection action, not the redetermination of a tax deficiency. See Wagner v. Commissioner, 118 TC 330 (2002). The Tax Court has further extended Wagner to non-deficiency cases involving whistleblower claims under Code Section 7623(b)(4) and stand-alone innocent spouse cases under Code Section 6015(e)(1). See Jacobson v. Commissioner, 148 TC No. 4 (Feb. 8, 2017); Davidson v. Commissioner, 144 TC 273 (2015). (more…)

District Court Holds Anti-Inversion Regulation Unlawfully Issued

by McDermott Will & Emery and McDermott Will & Emery | Oct 4, 2017 | Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

“[W]e are not inclined to carve out an approach to administrative review good for tax law only.” Mayo Found. for Medical Educ. & Research v. United States, 562 US 44, 55 (2011).

With this language, the US Supreme Court put taxpayers and the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury) on notice that administrative law applies equally to tax law. Since this announcement, administrative law issues have figured prominently in several tax cases with the result that certain practices of the IRS and Treasury in issuing regulations have been called into question. (Please see our most recent post on the Administrative Procedures Act [APA] as applied to notices of deficiency issued by the IRS.) One such practice is the issuance of temporary regulations—without prior opportunity for comment by the public—that the IRS and Treasury treat as binding rules of law. One such example is the temporary anti-inversion regulations issued in April 2016 that address transactions that the IRS and Treasury believe are structured to avoid the purposes of Internal Revenue Code (Code) Section 7874 and 367.

As is common practice by the IRS and Treasury, the regulations were simultaneously issued in both proposed and temporary form. The regulations include the rules described in prior Notices, as well as new rules designed to address issues not covered by the Notices. The regulations totaled more than 200 pages, addressing many issues in the area. (more…)

IRS Valuation Expert for Michael Jackson Estate Case Almost Thrown Out!

by Kevin Spencer and McDermott Will & Emery | Oct 2, 2017 | Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

On September 29, 2017, Judge Mark Holmes of the United States Tax Court (Tax Court) issued an order in the estate tax valuation case brought by the Estate of Michael Jackson (the Estate). In the case, the Estate moved to strike the testimony of the Internal Revenue Service’s (IRS) valuation expert witness on the grounds that he lied. The IRS acknowledged that its expert “did not tell the truth when he testified that he did not work on or write a valuation report for the IRS Examination Division in the third-party taxpayer audit.” Apparently, the expert had worked on the valuation of Whitney Houston’s Estate on behalf of the IRS, and failed to list the engagement in his report. He also omitted one publication that he wrote and one case in which he provided expert-witness testimony at a deposition.

The question for the Court was the proper remedy for the omissions, with sanctions ranging from striking all of the expert’s testimony (and thereby depriving the IRS of the only evidence in its favor on the key issues in the case) to discounting the expert’s testimony and weight to be given to his opinions. The Court decided to take the latter route.

The Court explained that striking expert testimony pursuant to Tax Court Practice and Procedure Rule 143(g) (governing expert witness reports) occurs when a putative expert omits information from the report without good cause for the omission. In this case, the Court explained that the IRS’s expert failed to disclose his valuation work on his long list of expert-testimony engagements attached to his resume, but ruled that the omission was merely a “clerical error.” However, the expert did provide false testimony at trial when he testified he did not work on or write a valuation report in the matter involving Whitney Houston’s Estate. The Court determined that there had to be some negative consequences for the expert’s false testimony, and settled on discounting his credibility and opinions.

Practice Point: The order in Estate of Michael Jackson, as well as the Tax Court’s prior opinion in Tucker v. Commissioner, TC Memo. 2017-183, highlight a very important aspect of preparing an expert report for submission in Tax Court: it must be complete and accurate at the time of its submission. It is good practice to run a litigation database search (e.g., Lexis or Westlaw) on your expert’s testimony experience as a check on what the expert has listed in his report.

Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity

by McDermott Will & Emery and McDermott Will & Emery | Sep 28, 2017 | Privilege and Non-Disclosure, Trial Courts, Uncategorized

In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions. Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously. In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity. Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.” (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5). However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted. See Tax Court Rule 345(b). (more…)

Tax Court Holds Payment from Qualified Settlement Fund is Includable in Taxpayer’s Gross Income

by Gale E. Chan | Sep 25, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

In Ritter v. Commissioner, TC Memo. 2017-185 (September 19, 2017), the Tax Court held that a taxpayer’s receipt of a payment from a section 468B qualified settlement fund (QSF) was includable in gross income for the 2013 taxable year. The QSF was established pursuant to a settlement agreement between a federal banking regulator and the taxpayer’s former mortgage servicer (Bank) in which the Bank agreed to take certain actions to remedy deficiencies and unsafe or unsound practices in (i) the Bank’s residential mortgage servicing and (ii) the Bank’s initiation and handling of foreclosure proceedings. The Bank foreclosed on the taxpayer’s principal residence in 2010 while the taxpayer was in bankruptcy proceedings and protected by federal bankruptcy law. (more…)

Tax Court Announces 2018 Judicial Conference in Chicago on March 26-28, 2018

by Kevin Spencer and McDermott Will & Emery | Sep 19, 2017 | Trial Courts, Uncategorized

On Friday, September 15, the Tax Court announced that it will be holding its 2018 Judicial Conference in Chicago, Illinois, on the campus of Northwestern University’s Pritzker School of Law on March 26-28, 2018. The press release provides:

The 2018 Tax Court Judicial Conference will be held in Chicago, Illinois, on the campus of Northwestern University’s Pritzker School of Law on Monday evening, March 26, 2018, Tuesday, March 27, 2018 (entire day), and Wednesday, March 28, 2018 (half day). The purpose of the judicial conference is to provide attendees with the opportunity to (1) review and discuss issues of material interest regarding the tax litigation process, (2) discuss ways in which the tax litigation process in the Court may be improved, and (3) network with fellow Tax Court practitioners. In addition to the Judges of the United States Tax Court, the Court intends to invite representatives from the Internal Revenue Service, the Department of Justice, private practice, low-income taxpayer clinics, academia, Capitol Hill, and other courts. A variety of plenary and breakout sessions will address issues relevant to practice before the Court.

Applications to attend the 2018 Tax Court Judicial Conference will be accepted from September 15, 2017, through November 15, 2017. An application form is available on the Court’s website at https://www.ustaxcourt.gov/judicial_conference_application.pdf. Please note that space is limited, and the Court may not be able to extend an invitation to all those who apply.

We have attended the Tax Court Judicial Conference on several occasions and have spoken on panels at the conference. The material presented is extremely informative and provides a unique opportunity to personally interact with judges and fellow Tax Court practitioners. Applications are being accepted from now through November 15, 2017, either by email or regular mail. If you plan to attend, please send us an email so we can say hello!

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