On August 27, 2018, President Trump announced his intent to nominate Mr. Travis A. Greaves to serve as a judge on the United States Tax Court (Tax Court). This marks the fifth new person that President Trump has nominated to the Tax Court since becoming president, joining Elizabeth Copeland, Patrick Urda, Courtney Dunbar Jones and Emin Toro. President Trump also nominated for reappointment current Tax Court Judge Mark Holmes. To date, two of the five nominees—Ms. Copeland and Mr. Urda—have been approved by the Senate Finance Committee and confirmed by the Senate. No action, however, has been taken on the other nominees.

Mr. Greaves currently serves as Deputy Assistant Attorney General for Appellate and Review in the US Department of Justice Tax Division where he oversees all civil tax appellate litigation, including appeals from the US Tax Court. He has held that role since May 2017. From January 2017 to May 2017, Mr. Greaves was a partner at Greaves & Wu, LLP, and from September 2013 to January 2017, he was a lawyer at Caplin & Drysdale, Chartered, where his practice focused on civil and criminal tax controversy matters. From May 2011 to January 2013, he was an associate at Reed Smith LLP. Additionally, from September 2009 to May 2011, Mr. Greaves was an attorney advisor at the US Tax Court for Judge Diane Kroupa. From September 2010 to January 2015, he served as an adjunct professor at Georgetown University Law Center. Mr. Greaves received his BA from the University of Tennessee, his JD, cum laude, from South Texas College of Law, and an LLM in Taxation, with distinction, from Georgetown University Law Center.

Summer is winding down and fall is approaching. Here are a few of the significant tax cases from the last few weeks.

Tax Court

  • YA Global Investments, LP v. Commissioner, 151 TC No. 2 (Aug. 8, 2018): The Tax Court held that withholding tax liability on effectively connected income of foreign partners is a partnership liability that constitutes a partnership item. The Tax Court has jurisdiction over the issue in a partnership-level proceeding.
  • Illinois Tool Works Inc. & Subsidiaries v. Commissioner, TC Memo 2018-121 (Aug. 6, 2018): The Tax Court held that intercompany loans constituted bona fide debt for US federal income tax purposes.
  • Becnel v. Commissioner, TC Memo. 2018-120 (Aug. 2, 2018): The Tax Court holds that a property developer’s yacht related expenses are non-deductible entertainment facility expenses under Code section 274.
  • Kane v. Commissioner, TC Memo. 2018-122 (Aug. 6, 2018): Code section 6672 trust fund recovery penalties were imposed on a third-party vendor that performed bookkeeping services and held signature authority over certain accounts for a taxpayer delinquent on employment taxes. The Tax Court found that a collection officer did not abuse their discretion in denying a collection alternative during the collection due process proceeding, particularly when the taxpayer failed to submit an offer in compromise and already disputed the merits of the penalty during the appeals process.

Continue Reading Recent Developments in US Federal Income Tax Litigation

On July 27, 2018, the US Court of Appeals for the Federal Circuit in Alta Wind v. United States, reversed and remanded what had been a resounding victory for renewable energy. The US Court of Federal Claims had ruled that the plaintiff was entitled to claim a Section 1603 cash grant on the total amount paid for wind energy assets, including the value of certain power purchase agreements (PPAs).

We have reported on the Alta Wind case several times in the past two years:

Government Appeal of Alta Wind Supports Decision to File Suit Now

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Act Now To Preserve Your Section 1603 Grant

SOL and the 1603 Cash Grant – File Now or Forever Hold Your Peace

In reversing the trial court, the appellate court failed to answer the substantive question of whether a PPA that is part of the sale of a renewable energy facility is creditable for purposes of the Section 1603 cash grant.

Trial Court Decision

The Court of Federal Claims awarded the plaintiff damages of more than $206 million with respect to the cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). The court held that the government had underpaid the plaintiff its Section 1603 Grants arising from the development and purchase of large wind facilities when it refused to include the value of certain PPAs in the plaintiffs’ eligible basis for the cash grants. The trial court rejected the government’s argument that the plaintiffs’ basis was limited solely to development and construction costs. Instead, the court agreed with the plaintiffs that the arm’s-length purchase price of the projects prior to their placed-in-service date informed the projects’ creditable value. The court also determined that the PPAs specific to the wind facilities should not be treated as ineligible intangible property for purposes of the Section 1603 Grant. This meant that any value associated with the PPAs would be creditable for purposes of the Section 1603 Grant.

Federal Circuit Reverses and Remands 

The government appealed its loss to the Federal Circuit. In its opinion, the Federal Circuit reversed the trial court’s decision, and remanded the case back to the trial court with instructions. The Federal Circuit held that the purchase of the wind facilities should be properly treated as “applicable asset acquisitions” for purposes of Internal Revenue Code (IRC) section 1060, and the purchase prices must be allocated using the so-called “residual method.” The residual method requires a taxpayer to allocate the purchase price among seven categories. The purpose of the allocation is to discern what amount of a purchase price should be ascribed to each category of assets, which may have significance for other parts of the IRC. For example, if the purchase price includes depreciable plant equipment and non-depreciable property (e.g., cash and marketable securities), the residual method asks the taxpayer to allocate the total purchase price between the property classes.

The Federal Circuit remanded the case back to the Claims Court to determine the proper allocation of the purchase prices of the wind facilities.

Why Is This Case Important?  

If you are in the renewable energy industry, this decision is likely very important. Indeed, there are numerous taxpayers who did not receive the full amount of their Section 1603 Grant based upon the government’s reduction of the claim for the value of a PPA. This case will have precedential effect on those taxpayers’ claims. Moreover, the decision will affect how the industry prices deals for renewable facilities. These transactions have historically involved substantial financial modeling based upon cash flows.

The Federal Circuit Left the Primary Issue Unanswered

The Federal Circuit left the primary issue in the case, whether the PPA is creditable for purposes of the Section 1603 Grant, to the trial court to decide on remand. Accordingly, if the trial court determines that the PPAs cannot be divorced from the wind farm facilities assets, they will be correctly allocated to “Class V” in IRC section 1060, and will be credit able for purposes of the Section 1603 Grant. Implicitly, this is what the trial court had already decided, and the result would obtain the same economic result for the plaintiff as its original ruling. We will continue to follow this matter to see whether the trial court follows the prevailing thinking on this issue and of a decade of legal support.

On March 28, 2017, the US Tax Court (Tax Court) issued its opinion in Good Fortune Shipping SA v. Commissioner, 148 T.C. No. 10, upholding the validity of Treas. Reg. § 1.883-4. The taxpayer had challenged the validity of the regulation’s provision that stock in the form of “bearer shares” cannot be counted for purposes of determining the more-than-50-percent ownership test under Internal Revenue Code (Code) section 883(c)(1), but the Tax Court held that the regulation was valid under the two-step analysis of Chevron USA, Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), and applied it in ruling for the Internal Revenue Service (IRS). We previously discussed the Tax Court’s opinion here. The taxpayer appealed the Tax Court’s decision to the US Court of Appeals for the District of Columbia Circuit (DC Circuit).

Continue Reading DC Circuit Reverses Tax Court and Holds Section 883 Regulations Invalid under Chevron Test

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.

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.

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.

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!

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.

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.