Trial Courts Archives | Page 25 of 41

Tax Court Announces New Chief Judge and Special Trial Judge

by McDermott Will & Schulte | Mar 25, 2016 | Trial Courts, Uncategorized

On March 24, 2016, the Tax Court announced that Diana L. Leyden has been selected as a Special Trial Judge scheduled to assume her duties in June 2016. Ms. Leyden most recently has been the Taxpayer Advocate in the New York City Department of Finance, but previously spent over 15 years as the Director of the Low Income Taxpayer Clinic at the University of Connecticut School of Law. She received the American Bar Association Tax Section Janet Spragens Pro Bono Award in 2005 for her work on behalf of low-income taxpayers. Ms. Leyden, who previously clerked at the Tax Court and spent several years in private practice, should be a welcomed addition to the bench. The Tax Court’s press release can be found here.

As previously announced by the Tax Court on February 29, 2016, Judge L. Paige Marvel will begin serving a two-year term as Chief Judge of the Tax Court beginning June 1, 2016. Judge Marvel was appointed to the Court in 1998. Prior to joining the Court, she focused on federal and state tax matters and controversies. As readers of this blog may know, Judge Marvel was the authoring Judge of the Court’s recent fully-reviewed opinion in Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), which struck down cost-sharing regulations under the Administrative Procedure Act. The Tax Court’s press release can be found here.

IRS Loses Summary Judgment In Mylan Case

by Chelsea Hess and Kevin Spencer | Mar 16, 2016 | Court Procedure Matters, Trial Courts, Uncategorized

On March 10, 2016, Tax Court Judge Laro denied the Internal Revenue Service’s (IRS) motion for summary judgment in Mylan’s challenge of the IRS’s determination that approximately $372 million should be treated as ordinary income. See Mylan Inc. and Subsidiaries v. Commissioner of Internal Revenue, T.C.M. 2016-45. In its Tax Court petition, Mylan seeks a redetermination of tax deficiencies related to proceeds from the sale of “all substantial rights” in a patent that Mylan treated as capital gain. The IRS recharacterized the income as ordinary income received under a sublicense of patent rights.

Mylan entered into a number of agreements, including a 2008 agreement in the form of an “exclusive license,” that Mylan contends effectuated a sale of patent rights and entitles it to capital gain treatment. In deciding the motion for summary judgment, the Tax Court considered whether the tax treatment should be determined based upon Mylan’s licensing agreements. The IRS argued that pursuant to Commissioner v. Danielson, 378 F.2d 771,775 (3d Cir. 1967), taxpayers are bound by the terms of their agreements. Mylan argued that Danielson does not apply because the Third Circuit has previously examined not only the terms of the contracts but also the intent of the parties in determining whether “all substantial rights” under a patent were transferred, relying on such authorities as Merck & Co. v. Smith, 261 F.2d 162 (3d Cir. 1958) and E.I. du Pont de Nemours & Co. v. United States, 432 F.2d 1052 (3d Cir. 1970).

The Tax Court, however, determined that there is no inconsistency between Danielson, Merck and E.I. du Pont:

We do not see the inconsistency here. In Danielson, a taxpayer sought to change the tax consequences of a transaction by challenging the validity of the underlying contract’s terms, specifically, allocation of consideration between the sale of stock and the covenant not to compete, because the taxpayer believed these terms did not reflect the agreement of the parties. In Merck and E.I. du Pont de Nemours the taxpayers did not seek to alter or challenge the agreements in question. Instead, the taxpayers disagreed with the Commissioner’s interpretation of those contracts and characterization of the related payments for tax purposes. Here, unlike in Danielson, petitioners do not seek to change the tax consequences of the transaction by challenging the underlying agreements and reforming the contractual terms. On the record before us, the facts here resemble those in Merck and E.I. du Pont de Nemours. The question presented here is a question of proper tax characterization of the proceeds of valid and enforceable contracts, and we are mindful that the Commissioner and taxpayers often disagree on this issue.

The Tax Court found that there are issues of material fact in dispute, and denied the IRS’s motion for summary judgment.

Now that the Tax Court has denied summary disposition of the case, the parties will litigate the capital vs. ordinary tax treatment of transfers of patents. We will report back as developments occur in this hotly contested area [...]

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IRS and Taxpayers Continue Fight over Regulations Intended to Overrule Judicial Precedent

by McDermott Will & Schulte | Mar 15, 2016 | Appellate Courts, Transfer Pricing Resource, Trial Courts, Uncategorized

In March 2013, 3M filed a petition with the US Tax Court challenging the Internal Revenue Service’s (IRS) determination that additional royalty income should be allocated to 3M’s US headquarters from its Brazilian subsidiary. See 3M Co. v. Commissioner, T.C. Dkt. No. 5186-13. Specifically, the IRS determined that Brazilian legal restrictions on the payment of royalties to the US parent should not be taken into account in determining the arm’s-length price between 3M and the subsidiary under Treas. Reg. § 1.482-1(h)(2). 3M’s position will require the Tax Court to revisit its earlier, pre-regulations holdings on the subject and to decide whether the Supreme Court of the United States has already resolved the issue.

The parties recently submitted the case fully stipulated under Tax Court Rule 122, with simultaneous opening briefs due on March 21, 2016. The parties will then have the opportunity to submit reply briefs responding to each other’s arguments.

More than 40 years ago, the Supreme Court in Commissioner v. First Sec. Bank of Utah, 405 U.S. 394 (1972), rejected the IRS’s attempt to apply section 482 where federal law prohibited the taxpayer from receiving the income the IRS was seeking to allocate to it. Subsequent Tax Court and appellate court decisions applied the Supreme Court’s holding to restrictions under foreign and state law. In 1994, the IRS promulgated current Treas. Reg. § 1.482-1(h)(2), which provides, in part, that “a foreign legal restriction will be taken into account only to the extent that it is shown that the restriction affected an uncontrolled taxpayer under comparable circumstances for a comparable period of time.” Although the regulation also contains a deferred income election that permits the deferred recognition of restricted income, subject to a matching deferral of deductions, it may be difficult in most situations to meet these requirements.

Whether 3M succeeds may depend on how the Tax Court applies the recent Supreme Court decision in U.S. v. Home Concrete & Supply LLC, 132 S.Ct. 1836 (2012). There, the Supreme Court held that its prior interpretation of a statute meant that “there is no longer any different construction that is consistent with [the prior opinion] and available for adoption by the agency.” This is an important case for all taxpayers, not just those dealing with the blocked income issue, and the Tax Court’s determination may have a broad impact on future challenges to tax regulations.