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Tax Court Rejects IRS Argument that Corporate Taxpayer Failed to File Valid Return

by McDermott Will & Emery | Sep 13, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

The issue of whether a valid tax return has been filed usually comes up in the context of individuals. One common situation involves taxpayers who file so-called zero returns or returns with an altered jurat and protest paying any taxes. Another common situation, which has received substantial attention lately, involves whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code. We previously posted on the latter.

This post focuses on the uncommon situation where the IRS disputes whether a corporate taxpayer filed a valid return. As we have previously discussed, in the widely cited Beard v. Commissioner, 82 TC 766 (1984), the Tax Court defined a four-part test (the Beard Test) for determining whether a document constitutes a “return.” To be a return, a document must: (1) provide sufficient data to calculate tax liability; (2) purport to be a return; (3) be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) be executed by the taxpayer under penalties of perjury. This test applies to all types of taxpayers, and its application to corporate taxpayers was recently highlighted in New Capital Fire, Inc. v. Commissioner, TC Memo. 2017-177.

In New Capital Fire, Capital Fire Insurance Co. (Old Capital) merged into New Capital Fire, Inc. (New Capital), with New Capital surviving, on December 4, 2002. The merger was designed to be a tax-free reorganization under Internal Revenue Code (Code) Section 368(a)(1)(F). Old Capital did not file a tax return for any part of 2002 and New Capital filed a tax return for 2002 which included a pro forma Form 1120-PC, US Property and Casualty Insurance Company Income Tax Return, for Old Capital’s 2002 tax year. The IRS issued Old Capital a notice of deficiency in 2012 determining that Old Capital was required to file a return for the short tax year ending December 4, 2002, because the merger failed to meet to reorganization rules. (more…)

Motion Practice – Moving for Summary Adjudication

by McDermott Will & Emery | Sep 6, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

Summary judgment is a common practice in all courts, including courts hearing tax disputes. Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Full or partial summary judgment is appropriate where there is no genuine issue of material fact and a decision may be rendered as a matter of law on the issue presented. Summary judgment can be obtained by a party upon the filing of a motion if the pleadings and other evidence in the record, including any affidavits or declarations in support of or against the motion, demonstrate that no factual dispute exists. Each court has its own particular rules on motions for summary judgment, but all are grounded on the essential requirement that the pertinent facts not be in dispute. The party moving for summary judgment bears the burden of showing that no genuine issues exists as to any material fact and that it is entitled to judgment as a matter of law, with all factual materials and inferences drawn from them considered in the light most favorable to the nonmoving party. To defeat a motion for summary judgment, the nonmoving party must do more than merely allege or deny facts; it must set forth specific facts showing a genuine dispute for trial. Thus, facts that are not properly supported or that are irrelevant or unnecessary will not be counted.

The decision of whether to file a motion for summary judgment must be carefully made. In some cases the decision may be fairly straightforward because both sides agree on the pertinent facts and the issue is purely legal. However, in other cases, the factual record may not be as clear and the parties may differ on which facts are material and which properly remain in dispute. Further, a motion for summary judgment by one party may result in a cross-motion for summary judgment by the other party. Thus, the party initially moving for summary judgment needs to be confident that it will not need additional facts or supporting information from witnesses before seeking summary adjudication. (more…)

Tax Court Reinforces Plain Meaning Approach in Interpreting Tax Statutes

by Kevin Spencer and McDermott Will & Emery | Sep 1, 2017 | Tax Refunds, Trial Courts, Uncategorized

The Internal Revenue Service (IRS) and taxpayers frequently spar over the meaning and interpretation of tax statutes (and regulations). In some situations, one side will argue that the statutory text is clear while the other argues that it is not and that other evidence of Congress’ intent must be examined. Courts are often tasked with determining which side’s interpretation is correct, which is not always an easy task. This can be particularly difficult where the plain language of the statute dictates a result that may seem unfair or at odds with a court’s views as the proper result.

The Tax Court’s (Tax Court) recent opinion in Borenstein v. Commissioner, 149 TC No. 10 (August 30, 2017), discussed the standards to be applied in interpreting a statute and reinforces that the plain meaning of the language used by Congress should be followed absent an interpretation that would produce an absurd result.

In Borenstein, the taxpayer made tax payments for 2012 totaling $112,000, which were deemed made on April 15, 2013. However, she failed to file a timely return for that year and the IRS issued a notice of deficiency. Before filing a petition with the Tax Court, the taxpayer submitted return reporting a tax lability of $79,559. The parties agreed that this liability amount was correct and that the taxpayer had an overpayment of $32,441 due to the prior payments. However, the IRS argued that the taxpayer was not entitled to a credit or refund of the overpayment because, under the plain language of Internal Revenue Code Sections 6511(a) and (b)(2)(B), the tax payments were made outside the applicable “lookback” period keyed to the date the notice of deficiency was mailed. (more…)

Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage

by McDermott Will & Emery and McDermott Will & Emery | Aug 23, 2017 | Transfer Pricing Resource, Trial Courts, Uncategorized

On August 14, 2017, the United States District Court for the District of Columbia (DC District Court) decided Starr International Company, Inc. v. United States. In Starr International, the DC District Court held that the Internal Revenue Service (IRS) was not arbitrary or capricious in finding at least one of the taxpayer’s principal purposes for moving its residency to Switzerland was to obtain tax benefits under the US-Swiss Treaty.

Before discussing the facts and holding in Starr International, it is helpful to set the stage for the dispute. The United States has a bilateral tax treaty with a number of nations to avoid double taxation and encourage cross-border investments. Bilateral tax treaties provide benefits to residents of the two contracting states. The United States has a bilateral tax treaty with Switzerland (the US-Swiss Treaty). Treaty benefits under the US-Swiss Treaty are generally desirable for qualified taxpayers because treaty coverage reduces the tax on certain types of transactions, such as US-source dividend income for Swiss residents.

Article 1 of the US-Swiss Treaty provides, except as otherwise provided, the Treaty shall apply to persons who are residents of Switzerland. A person generally is treated as a resident of Switzerland if that person, under Swiss law, is liable to tax therein by reason of his domicile, residence or other similar criteria. However, Article 22, Limitation on Benefits, provides additional criteria to claim benefits provided for in the US-Swiss Treaty.

The Limitation on Benefits provision of the US-Swiss Treaty contains multiple objective tests to claim benefits provided for in the US-Swiss Treaty. All the tests provided in Article 22 aim to identify entities with legitimate, non-tax purposes for residency in Switzerland. This provision intends to stop taxpayers from “treaty shopping” and establishing residency in Switzerland with the principal purpose of obtaining benefits of the US-Swiss Treaty.

(more…)

Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

by Jeffrey M. Glassman and McDermott Will & Emery | Aug 17, 2017 | IRS Guidance, Trial Courts, Uncategorized

We recently wrote here about “John Doe” summonses and a case where an anonymous “John Doe” was allowed to intervene in a summons enforcement action. To refresh, under Internal Revenue Code (IRC) Section 7602 the Internal Revenue Service (IRS) has broad authority to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records would be covered by the summons, the IRS may issue a “John Doe” summons to a third party to produce documents related to the unidentified taxpayers.

In Hohman v. United States, Case No. 16-cv-11429 (E.D. Mich. July 11, 2017), two John Doe summonses directed a banking institution to deliver to the IRS records related to three accounts, which were identified only by account numbers. Two of the accounts were held by limited liability companies (LLCs) and the other was held by an individual. The banking institution notified some of the account-holders that it had received a John Doe summons that sought records for accounts relating to them.

The account-holders filed a civil action, alleging that the IRS’s efforts to obtain their financial records through the use of John Doe summonses violated the federal Right to Financial Privacy Act (RFPA). The RFPA accords customers of banks and similar financial institutions certain rights to be notified of and to challenge in court administrative subpoenas of financial records in the possession of banks. The individual account-holder did not allege that the IRS actually obtained or disclosed any records of account information as a result of the John Doe summons.

The government moved, under Rule 12(b)(1) of the Federal Rules of Civil Procedure (FRCP), to dismiss the RFPA claims for lack of subject-matter jurisdiction. The government asserted that it has sovereign immunity from the account-holders’ RFPA claims. The waiver of sovereign immunity under the RFPA applies only to claims that a government authority disclosed or obtained financial records.

The court agreed with the government. First, the court concluded that the RFPA’s waiver of sovereign immunity applies only to “customers,” and the LLCs were not “customers” as defined under the RFPA. The court reasoned that the plain language of the RFPA does not state that an LLC is either a “person” or a “customer” and the court was not at liberty to expand the definitions. Second, the court concluded that sovereign immunity was not waived with respect to the individual’s claim because the individual had not alleged that the IRS actually obtained or disclosed any financial records or information from the account as a result of the John Doe summons.

Practice Point: Although waivers of sovereign immunity are often construed strictly, taxpayers should consult with their advisors to determine whether their particular facts may allow an action against the government.

Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

by Kristen E. Hazel and Sandra P. McGill | Aug 16, 2017 | Court Procedure Matters, IRS Audits, IRS Guidance, Tax Refunds, Trial Courts, Uncategorized

In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.

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The IRS Is Struck Down Again in Privilege Dispute

by McDermott Will & Emery and McDermott Will & Emery | Aug 11, 2017 | Court Procedure Matters, IRS Guidance, Privilege and Non-Disclosure, Trial Courts, Uncategorized

Courts continue to strike down the Internal Revenue Service (IRS) as it continues to test the bounds of the attorney-client privilege and work product doctrine through the issuance of improper summonses. In the last several years, the IRS has filed numerous summons enforcement proceedings related to the production of documents generally protected by the attorney-client privilege, tax-practitioner privilege, and/or work product doctrine. These summonses include overt requests for “tax advice” and “tax analysis,” which several courts have refused to enforce. For example, see Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015).

Once again, in United States v. Micro Cap KY Insurance Co., Inc. (Eastern District of Kentucky), a federal district court rejected the IRS’s arguments and refused to enforce an inappropriate summons. The opinion is available here. The IRS filed this enforcement proceeding seeking to compel the production of confidential communications between taxpayers and the lawyers that assisted them in forming a captive insurance company. After conducting an in camera review (where the judge privately reviewed the documents without admitting them in the record), the judge found the taxpayers had properly invoked privilege since each document “predominately involve[d] legal advice within the retention of [] counsel.”

The court also rejected the government’s argument that the attorney-client privilege was waived by raising a reasonable cause and reliance on counsel defense to penalties in the taxpayers’ case filed in Tax Court. Because the government’s argument was untimely, it was waived and rejected outright. The court, however, proceeded to explain how the argument also failed on its merits. (more…)

President Trump Nominates Copeland and Urda to US Tax Court

by Jeffrey M. Glassman, Kevin Spencer and McDermott Will & Emery | Aug 7, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

On August 3, 2017, President Donald Trump nominated two judges to the US Tax Court. The nominations were received in the US Senate (Senate) and referred to the Committee on Finance.

One of the nominees, Elizabeth Copeland, was previously nominated by President Barack Obama. Her previous nomination expired with the conclusion of the 114th Congress in January 2017. The Committee on Finance unanimously approved her previous nomination, but the nomination was never voted on by the full Senate. Copeland is a partner at the law firm Strasburger & Price, LLP. If confirmed, she will be assuming the position left vacant by the 2015 retirement of Judge James S. Halpern. Judge Halpern still performs judicial duties as a Senior Judge on recall.

The second nominee, Patrick Urda, is counsel to the deputy assistant attorney general in the US Department of Justice’s Tax Division. If confirmed, he will be assuming the position left vacant by the 2014 retirement of Judge Diane L. Kroupa. We previously covered the circumstances of Judge Kroupa’s retirement and related criminal proceedings.

Tax Court Addresses “Issue of First Impression” Defense to Penalties

by McDermott Will & Emery | Aug 3, 2017 | Trial Courts, Uncategorized

We previously posted on what we called the “issue of first impression” defense to penalties and the recent application of this defense by the United States Tax Court (Tax Court) in Peterson v. Commissioner, a TC Opinion. We noted that taxpayers may want to consider raising this defense in cases where the substantive issue is one for which there is no clear guidance from the courts or the Internal Revenue Service. Yesterday’s Memorandum Opinion by the Tax Court in Curtis Investment Co., LLC v. Commissioner, addressed the issue of first impression defense in the context of the taxpayer’s argument that it acted with reasonable cause and good faith in its tax reporting position related to certain Custom Adjustable Rate Debt Structure (CARDS) transactions. For the difference between TC and Memorandum Opinions, see here.

The Tax Court (and some appellate courts) has addressed the tax consequences of CARDS transactions in several cases, each time siding with the Internal Revenue Service (IRS). In its opinions in those other cases, the Tax Court has found that the CARDS transaction lacks economic substance. The court in Curtis Investment concluded that the CARDS transactions before it was essentially the same as the CARDS transactions in the other cases with only immaterial differences. Applying an economic substance analysis, the Tax Court held the taxpayer issue lacked a genuine profit motive and did not have a business purpose for entering into the CARDS transactions. (more…)

Senate Attempts to Repeal Chevron Deference

by Macdonald Norman and Robin L. Greenhouse | Jul 31, 2017 | Court Procedure Matters, Trial Courts, Uncategorized

In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. 467 US 837 (1984), the Supreme Court of the United States established a framework for assessing an agency’s interpretation of statutory provisions. First, a reviewing court must ask whether Congress “delegated authority to the agency generally to make rules carrying the force of law,” and whether the agency’s interpretation was promulgated under that authority. United States v. Mead Corporation, 533 US 218, 226–27 (2001). Delegation may be shown in a variety of ways, including “an agency’s power to engage in adjudication or notice-and-comment rulemaking, or by some other indication of a comparable congressional intent.” Id. at 227. If an agency has been delegated the requisite authority, the analysis is segmented into two steps.

Under step one, the reviewing court asks whether Congress has clearly spoken on the precise question at issue. See Chevron, 467 US at 842. If so, both the court and agency must follow the “unambiguously expressed intent of Congress,” and the inquiry ends. Id. at 842–43.

If the statute under review is ambiguous or silent, the reviewing court moves to step two: whether the agency’s interpretation is based on “a permissible construction of the statute.” Id. at 842. This inquiry asks whether the interpretation is reasonable and not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 US at 843; see also Judulang v. Holder, 565 US 42, 53 n.7 (2011); Encino Motorcars, LLC v. Navarro, 579 US ____, 136 S. Ct. 2117, 2125 (2016). If the agency’s interpretation passes muster, then the agency’s interpretation is given Chevron deference, and afforded the force of law. The Chevron two-part analysis applies to tax regulations issued by the United States Department of the Treasury and the Internal Revenue Service. Mayo Foundation for Medical Education & Research v. United States, 562 US 44, 55 (2011). (more…)

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