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IRS Requires “Whole Story” from Taxpayers Seeking to Qualify under Streamlined Filing Compliance Procedures

by and | Apr 7, 2016 | , ,

The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).  One requirement under the SFCP is that that the taxpayer certify that his or her failure to disclose foreign assets was not due to willful conduct.  Before the recent change, the IRS only provided minimal direction, which caused it to receive non-willfulness narratives that did not provide adequate information.  This resulted in certifications that were either questioned or rejected.

On February 16, 2016, the IRS revised the certification forms to include more robust direction and instructed the taxpayer to draft his or her non-willfulness narrative to include the whole story including favorable and unfavorable facts.  A more detailed analysis of the recent changes can be found here.



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Former Tax Court Judge Indicted for Tax Evasion

by and | Apr 5, 2016 | ,

On April 4, 2016, the US Attorney for the District of Minnesota announced a federal grand jury indictment charging former US Tax Court Judge Diane L. Kroupa and her husband with conspiring to evade the assessment of taxes. In a multi-count indictment, both were charged with conspiracy, tax evasion, making and subscribing false tax returns and obstruction of an IRS audit. According to the indictment and documents filed in court, Kroupa and her husband fraudulently claimed personal expenses as business deductions, failed to report income from a land sale, and falsely claimed financial insolvency. They also allegedly concealed certain documents from their taxpayer preparer and an IRS agent during an audit, and caused misleading documents to be delivered to the IRS. The indictment alleges that between 2004 and 2010, Kroupa and her husband purposely understated their taxable income by approximately $1 million and the amount of tax owed by at least $400,000.

Judge Kroupa was appointed to the Tax Court in June 2003, and retired from the court in June 2014. While she was on the bench, Kroupa was very active—the Tax Court’s website indicates that she authored 234 opinions, including 31 division or “T.C.” opinions, 180 “memorandum” opinions, and 23 “summary” opinions. Some of her more notable opinions were Canal Corp., Bank of NY Mellon, BMC Software, Samueli and Eaton.

Here is a link to a press release issued by the U.S. Department of Justice: Former United States Tax Court Judge and Husband Indicted for Conspiracy to Commit Tax Evasion and Obstruction of an IRS Audit.



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Tax Court Amends Evidence Rules

by , and | Apr 4, 2016 | ,

On March 28, 2016, the U.S. Tax Court announced interim changes to its Rule of Practice and Procedure to incorporate changes made by Congress at the end of 2015.  The interim changes impact several areas of the Tax Court’s Rules, including the impact of bankruptcy proceedings on the court’s jurisdiction, actions for review of failure to abate interest,  partnership actions and jurisdiction related to passport certification actions.  Additionally, the changes amend the rule regarding the application of the rules of evidence in Tax Court proceedings, which is summarized below.

Pursuant to IRC § 7453, the Tax Court has historically followed the rules of evidence as applied by the United States District Court of the District of Columbia in trials without a jury.  Congress’s recent amendment to IRC § 7453 removed the reference to the rules of the United States District Court of the District of Columbia, and added a reference to the Federal Rules of Evidence.

To incorporate Congress’s change, the Tax Court amended Rule 143 regarding evidence that is effective immediately and a final proposed amendment that is subject to public comment.  Tax Court Rule 143 now states that:

Trials before the court will be conducted in accordance with the Federal Rules of Evidence.

The amendment applies to all proceedings commenced after December 18, 2015, and also applies to all other proceedings pending on that date to the extent it is just and practicable.

The effect of the amendment to IRC § 7453 and Tax Court Rule 143 is to extend the so-called Golsen rule (named for Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971)) to evidence issues.  Pursuant to this rule, the Tax Court chooses to follow the case law of the circuit to which a case is properly appealed.  In prior cases and unpublished orders, the Tax Court had cited to both D.C. Circuit opinions and opinions of the circuit where any appeal in the specific case would normally lie in deciding evidentiary issues.  This change may cause controversy where there is a split in the circuits on a particular evidence issue, for example in the case of the attorney-client privilege and the work-product doctrine.  However, the change ensures that, as with other legal issues presented, the court will follow the law of the circuit to which the case is appealable.



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Preparing for Country-by-Country Reporting in 2016

by | Mar 30, 2016 | , ,

Country-by Country (CbC) reporting is on the horizon for large US multi-national enterprises (MNE).  As part of the broader Base Erosion Profit Shifting (BEPS) project undertaken by the Group of 20 (G20) and the Organisation for Economic Co-operation and Development (OECD), the United States will soon require the parent entity of large US MNE groups to file with the Internal Revenue Service (IRS) a new annual report that requires information regarding income earned and taxes paid by the group on a country-by-country basis.  The new reporting requirements would generally apply to US MNE groups with annual revenues of $850 million or more.

Late last December, Treasury published proposed regulations detailing the future reporting process.  Recently, Robert Stack, Treasury deputy assistant secretary (international tax affairs) indicated that Treasury anticipates issuing final regulations by June 30, 2016, which would be effective for US MNEs with tax years beginning after that date. (Stack’s comments are available at Tax Notes, here and here.)  Because the US reporting requirements will go into effect in the middle of 2016, some US MNE groups have expressed concern that other tax jurisdictions may require subsidiaries to file CbC reports.

Both Treasury and the IRS believe that CbC reporting will assist in better enforcement of the US tax laws, though there is some concern that information collected may be too readily shared with other tax jurisdictions that may not safeguard such information as carefully as the United States.  Indeed, the Preamble to the new CbC reporting regulations states that CbC reports filed with the IRS may be exchanged with other reciprocating tax jurisdictions in which the US MNE group has operations, and Treasury expects that the competent authority will enter into competent authority agreements for the automatic exchange of CbC reports under the authority of information agreements to which the US is a party.  The Preamble also provides that information exchanged may not be disclosed or used for non-tax purposes.

Mr. Stack recently affirmed the priority of the confidentiality of information gathered through CbC reporting, stating that the United States would have the right to stop sharing information if the other tax jurisdiction were to disclose it.  The issue of confidentiality of CbC reporting was recently highlighted by efforts in the European Union to provide for the public disclosure of CbC reporting.



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Deference Principles in Tax Cases and the Unique Challenges of Auer Deference

by and | Mar 28, 2016 | , ,

The Federal Lawyer recently published an article we wrote which discusses how deference principles are applied in tax cases. The article can be accessed here. The Supreme Court of the United States, in Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 55 (2011), confirmed that tax laws are subject to the same deference principles as other federal laws.

In general, these deference principles can be grouped into three levels, commonly referred to as Chevron, Skidmore, and Auer deference.  Chevron is often regarded as the strongest level of deference, and can apply where Congress explicitly leaves a gap for an agency to fill and the agency intends for its interpretation to have the force of law. Tax regulations can be entitled to Chevron deference. Skidmore deference, which is limited to an interpretation’s persuasive power, can apply to other IRS interpretations that are thoroughly considered, well-reasoned, and consistent with earlier and later IRS pronouncements.  Skidmore deference, which is generally considered a lesser level of deference than Chevron, can apply to revenue rulings and revenue procedures. The last level of deference, Auer, is a special level of deference that can apply when an agency interprets its own regulations. In Auer v. Robbins, U.S. 452, 461 (1997), the Supreme Court accorded deference to an agency’s amicus brief. The theory behind Auer is that an agency is uniquely positioned to interpret any ambiguity in its own regulations.  Courts have increasingly placed limitations on Auer and its continuing validity has been questioned by sitting members of the Supreme Court.

When we wrote the article, Justice Scalia was the leading member of the Supreme Court advocating for the abandonment of Auer. But he was not alone. Other justices have openly either written about the risks of Auer or indicated a willingness to reconsider the principles of Auer. In addition, all current justices have either written or joined in an opinion that casts serious doubts about Auer or expressed an indication to revisit the deference standard in an appropriate case. With Justice Scalia’s passing, it remains to be seen whether the Court will continue to seek such a case. But considering the increasing wave of limitations being placed on Auer, it would not come as a surprise if further limitations were issued.



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IRS Updates Appeals Procedures for Tax Court Cases

by and | Mar 25, 2016 | , , , , , ,

On March 23, 2016, the Internal Revenue Service (IRS) issued Rev. Proc. 2016-22, 2016-15 IRB 1, which clarifies and describes the practices for the administrative appeals process in cases docketed in the Tax Court.  The stated purpose of the revenue procedure is to facilitate effective utilization of appeals and to achieve earlier development and resolution of Tax Court cases.

Previously, the procedures for the appeals process of Tax Court cases was contained in Rev. Proc. 87-24, 1987-1 C.B. 720.  In October 2015, the IRS released a proposed revenue procedure updating the rules and requesting public comments.  Three substantive comments were received and considered by the IRS, resulting in changes to the proposed revenue procedure.  Rev. Proc. 2016-22 states that some of the suggestions that were not adopted may be addressed in other IRS guidance materials.

The general rule followed by the IRS is that all cases docketed in the Tax Court that have not previously been considered by IRS Appeals will be transferred to Appeals unless the taxpayer notifies IRS counsel that it wants to forego settlement consideration by Appeals.  This rule is subject to certain exceptions, most notably if the case has been designated for litigation by the IRS.  The revenue procedure also provides that “[i]n limited circumstances, a docketed case or issue will not be referred if Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.”  Although no definition is provided, examples are provided of: (1) a case involving a significant issue common to other cases in litigation for which the IRS maintains a consistent position; or (2) cases related to a case over which the Department of Justice has jurisdiction.  Referral to IRS Appeals will generally occur within 30 days of the case becoming at issue in the Tax Court, which can be either the date the Answer is filed by the IRS or a Reply (if required) is filed by the taxpayer.

The revenue procedure clarifies, and limits, the role of IRS counsel when a case is referred to Appeals.  Unlike Rev. Proc. 87-24, the new revenue procedure provides that Appeals has sole discretion to determine whether IRS counsel may participate in any settlement conference and will consider input from the taxpayer on this point.  It also clarifies that when a case is forwarded to Appeals for consideration, “Appeals has the sole authority to resolve the case through settlement until the case is returned to Counsel.”  In the past, taxpayers were concerned about the ability of IRS counsel to disrupt a settlement reached with Appeals.  If a settlement is reached with Appeals, IRS counsel’s involvement is ministerial in that counsel should only review any decision document signed by the taxpayer for accuracy and completeness before signing the decision document on behalf of the IRS and filing it with the Tax Court.

The new revenue procedure should also be a welcome development for estate tax cases given that there is no statutory provision to extend the [...]

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Tax Court Announces New Chief Judge and Special Trial Judge

by | Mar 25, 2016 | ,

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.



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IRS Determines Refined Coal Transaction Doesn’t Have Economic Substance

by , and | Mar 24, 2016 | ,

On March 17, 2016, the Internal Revenue Service (IRS) issued a Field Attorney Advice Memorandum, 20161101F (Dec. 3, 2015) (the FAA).  In the FAA, the IRS concluded that an investment in a partnership designed to deliver a tax credit allocation did not have a potential for profit or risk of loss, was not a meaningful interest in the venture and, as such, was not a bona fide partnership interest. In analyzing whether the arrangement was in substance a prohibited sale of tax benefits, the IRS determined that promotional materials and the partnership agreement indicated the investors were only interested in creating tax credits, not in operating a profitable refined coal business. The IRS relied heavily on Commissioner v. Culbertson, 337 U.S. 733 (1949), and Historic Boardwalk Hall LLC v. Commissioner, 694 F.3d 425 (3rd Cir. 2012), to determine that the investor did not have the requisite risk of loss or profit potential irrespective of creating tax credits, and that the partnership agreement indicated that the purported partner was to be indemnified for disallowed tax credits and deductions. An important fact for the IRS’analysis was that the payments to be made by the investor were nonrecourse, meaning the investor could walk away at any time. The IRS ruled that because “purported capital contributions are largely to be made in the future and only in relation to the amount of refined coal, and by extension tax credits generated, we believe that the payments are in exchange for tax benefits and do not constitute capital contributions in substance.”

Although a FAA is merely the opinion of one attorney at the IRS, it may be indicative of how the IRS evaluates these issues.



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The IRS Releases CCA 201606027

by and | Mar 23, 2016 | ,

On February 5, 2016, the IRS released Chief Counsel Advice 201606027 (the 2016 CCA) in which the IRS concluded, among other things, that guarantees by a partner of a partnership’s liabilities that could only be called by the partnership’s lenders in certain narrow circumstances (commonly referred to as “nonrecourse carve-outs” or “bad boy” guarantees), caused the guaranteed liabilities to be treated as “recourse liabilities” allocable solely to the guarantor partner under Treasury Regulation § 1.752-2

Read the full article.



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IRS Releases Practice Unit on Allocation of Interest Expense

by and | Mar 21, 2016 | , ,

On February 19, 2016, the Internal Revenue Service (IRS) released a 30-plus-page practice unit regarding interest expense of a foreign corporation engaged in a U.S. trade or business. As is the case with all practice units, the IRS cautions that practice units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such.  Even so, the IRS generally acknowledges that practice units provide a general discussion of a concept, process or transaction. This can be helpful from a taxpayer’s perspective. This is especially true for interest expense allocation calculations under Treasury Regulation § 1.882-5, one of the more complicated calculations for taxpayers to make.

The practice unit begins with a graph that illustrates possible circumstances where the interest expense allocation process described in the practice unit can apply. The practice unit then breaks down the four steps for determining interest expense allocations.  The four steps are:

  1. Determine the amount of U.S. assets.
  2. Determine the amount of U.S. booked liabilities.
  3. Determine what elections the taxpayer has made to compute the interest expense deduction.
  4. Calculate the allocable interest expense to the U.S. trade or business.

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