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With the IRS, Mail Delivery Counts!

by and | Jun 29, 2023 | , , ,

Over the years, case law has developed around when a mail delivery method is acceptable to prove that a tax filing was made.

The US Court of Appeals for the Fourth Circuit’s recent decision in Pond v. United States[1]  addresses how a taxpayer can prove delivery of a filing where the Internal Revenue Service (IRS) disputes physical delivery.

Stephen Pond, the taxpayer, filed two claims for refund in the same envelope. One claim pertained to his 2012 tax year and the other pertained to his 2013 tax year. The government acknowledged receipt of Pond’s 2012 claim. An IRS agent contacted Pond for more information in September 2017, after which Pond faxed a duplicate copy of his 2012 claim for refund but not his 2013 claim. In March 2018, the government issued a refund to Pond for his 2012 claim. However, after receiving no response about his 2013 claim, Pond again contacted the IRS. The IRS could not locate his claim for refund, so he faxed a duplicate copy of the 2013 claim.[2] Pond later received a “Notice of Denial” from the IRS informing him that it denied his 2013 claim for refund because the statute of limitations on claiming a refund or credit had expired.

Pond filed a refund suit in US federal district court, where the court dismissed his claim pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to allege facts upon which the court’s subject matter jurisdiction could be based. Stated differently, assuming all reasonable inferences in favor of the taxpayer, the district court ruled that the taxpayer’s pleadings did not sufficiently establish that he timely filed his 2013 claim for refund, a statutory requirement for the district court to have jurisdiction.

IRC Section 7502(a) creates a presumption of timeliness if a mailing sent by US Mail is postmarked before the deadline.[3] IRC Section 7502(c) creates a presumption of delivery, but only if the mailing is sent by US Postal Service (USPS) registered or certified mail.[4] Unfortunately, Pond sent his refund claims via USPS first-class mail, rather than registered or certified mail. Thus, he was not entitled to the presumption of delivery under IRC Section 7502. Further, according to the Fourth Circuit (and consistent with case law in the Second and Sixth Circuits), Pond could not rely upon federal common law principles because IRC Section 7502 supplanted the common law rule.[5] Thus, Pond needed more than the postmark alone to establish that he actually filed his 2013 claim for refund. He had to show that the claim for refund was physically delivered.

Nonetheless, Pond was entitled to present evidence to establish physical delivery. The Fourth Circuit cited three factual allegations that could establish a triable issue of fact. First, the envelope he claimed included the claim for a refund was postmarked. Although this fact is not sufficient in the case of mail sent by means other than USPS registered or certified, it was still evidence of [...]

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IRS Appeals Will Not Consider Regulatory Invalidity and Subregulatory Procedural Invalidity Challenges

by and | Sep 21, 2022 | , , , , ,

In Mayo Found. for Med. Educ. & Rsch. v. United States, 131 S.Ct. 704 (2011), the Supreme Court of the United States made clear that administrative law rules apply to tax guidance like they do to other federal agency guidance. Since Mayo, the Supreme Court and other courts have provided further guidance—both in the tax and non-tax contexts—regarding the proper analysis in determining the validity of, and deference to, regulatory guidance.

Over the past decade, the number of taxpayer challenges to guidance issued by the Internal Revenue Service (IRS), whether in the form of regulations or subregulatory guidance (i.e., revenue rulings, revenue procedures, notices and announcements), has increased significantly. These challenges have taken a variety of forms, such as regulatory invalidity under Chevron USA, Inc. v. NRDC, 467 U.S. 837 (1984) and procedural invalidity under the Administrative Procedure Act (APA). Some successful challenges to the validity of IRS guidance and the ability to challenge such guidance in a pre-enforcement context include CIC Servs., LLC v. IRS, 141 S.Ct. 1582 (2021); United States v. Home Concrete & Supply, LLC, 132 S.Ct. 1836 (2012); Mann Construction, Inc. v. Commissioner, 27 F. 4th 1138 (6th Cir. 2022); Good Fortune Shipping SA v. Commissioner, 897 F.3d 256 (2018) and Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. 2022). Many other challenges are pending both at the administrative level and in court.

The IRS and the US Department of the Treasury (Treasury) have noticed the increase in challenges to its published guidance. One important change is the more detailed discussions in preambles to final regulations regarding comments received and how the IRS views and incorporates said comments. This is a welcome development, although sometimes a tortuous one for taxpayers who must wade through hundreds of pages of preambles in some regulation packages. Another change, and the subject of this post, is the IRS’s views on how to deal with such challenges during the administrative process.

A federal tax controversy can involve three levels of review: Examination, Appeals and litigation. At the Examination stage, revenue agents and other IRS personnel develop the facts and determine whether an adjustment is warranted. Importantly, “hazards of litigation” are not considered at the Examination level, meaning, issues are viewed as binary—in favor of the IRS or the taxpayer—and not negotiated as a percentage of the item. However, at the Appeals level, the Appeals team weighs “hazards of litigation” to determine whether a case can be settled by the parties. Hazards of litigation are also considered at the litigation level.

Validly promulgated tax regulations are approved at the highest levels of the IRS, Treasury generally carry the force and effect of law and are binding on taxpayers and the IRS. Subregulatory guidance is also approved at senior levels of the IRS and the Treasury. At the Examination level, the IRS will not entertain challenges to the validity of [...]

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Will the Supreme Court Rule on Whirlpool’s Subpart F Income Case?

by and | Jul 6, 2022 | , , ,

A war is currently waging in the tax world over when courts should give deference to the US Department of the Treasury’s regulations. (We have written extensively on this subject here and here.) However, another potential war looms: Can courts disregard validly promulgated regulations relied on by taxpayers in favor of their own statutory interpretation? This question lies at the heart of the Whirlpool case.

On June 30, 2022, Whirlpool asked the Supreme Court of the United States to review the US Federal Circuit Court of Appeals for the Sixth Circuit’s decision that income earned by a Luxembourg controlled foreign corporation was foreign base company sales income (FBCSI) under the branch rule of Internal Revenue Code (IRC) section 954(d)(2) and taxable to the corporation as “subpart F income.”

During the trial phase of the litigation, the US Tax Court held that the branch income regulations (and the regulatory manufacturing exception therein), were validly promulgated and interpreted the regulations in a manner favorable to the Internal Revenue Service (IRS). (See 154 T.C. 142 (2020).)

Whirlpool appealed, and the Sixth Circuit affirmed in a 2-1 decision. (See 19 F.4th 944 (6th Cir. 2021).) Unlike the Tax Court, which reached its decision by harmoniously reading the statute and regulations, the Sixth Circuit ruled in favor of the IRS based solely on its interpretation of IRC section 954(d)(2), ignoring the relevant regulations and how the IRS and other courts have interpreted them. For an excellent dissection of the Court’s ruling, please see our colleagues’ article, “Implications of the Sixth Circuit’s Whirlpool Opinion.”

Whirlpool sought rehearing and rehearing en banc in the Sixth Circuit. The National Association of Manufacturers (NAM) and the Silicon Valley Tax Directors Group also filed amicus briefs supporting Whirlpool (McDermott acted as counsel for NAM in this capacity). However, the Sixth Circuit denied Whirlpool’s request for rehearing and rehearing en banc.

Now, Whirlpool is seeking the guidance of the Supreme Court, asking “whether or in what circumstances a statute that is expressly conditioned on regulations to be promulgated by an agency may be enforced without regard to such regulations.” In seeking certiorari, Whirlpool argues:

The divided Sixth Circuit below held that a tax statute explicitly conditioned on regulations to be promulgated by the Secretary of the Treasury delineating the income subject to taxation could be enforced without consulting the Secretary’s regulations, even though the regulations bound the Internal Revenue Service (“IRS”) and the IRS actually imposed tax based on the regulations. That decision directly contravenes [the Supreme] Court’s precedents and settled administrative-law principles. It upsets the reliance interests of taxpayers who, for more than 50 years, have relied on the regulations in structuring their operations. And this issue is outcome-determinative because — as the dissent below concluded — the income at issue is not taxable under a proper reading of the regulations (emphasis in original).

Whirlpool further argues that left unchecked, the Sixth Circuit’s decision [...]

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The “Major Questions Doctrine”: Another Tool to Challenge Tax Regulations?

by and | Jul 1, 2022 | ,

Debates have raged in recent years over the future of Chevron deference, particularly given the change in the makeup and views of the Supreme Court of the United States. We have written extensively on Chevron deference in the past (see here, here and here, for example). Although the Court has not addressed the continuing viability of Chevron, it has recently found ways to avoid applying Chevron deference to questions involving the interpretation of agency regulations.

In West Virginia v. EPA, No. 20-1530 (June 30, 2022), the Supreme Court did not address Chevron deference directly. However, it reconfirmed and applied what is known as the “major questions doctrine.” Under this judicial doctrine, which originated in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), a federal agency must point to clear congressional authorization for the authority it claims. Meaning, when a statute confers authority upon an agency to promulgate rules, a court must determine whether US Congress wanted to give the agency the power to make decisions of vast economic and political significance. Accordingly, “[a]gencies have only those powers given to them by Congress and it must be presumed that major policy decisions are left with Congress, not agencies.”

The Supreme Court’s recent decision is not limited to a particular agency. Indeed, the major questions doctrine has been applied in a tax context before. In King v. Burwell, 576 U.S. 473 (2015), for example, the Court applied the major questions doctrine in declining to defer to tax regulations interpreting the Affordable Care Act (internal references omitted):

In extraordinary cases … there may be reason to hesitate before concluding that Congress has intended [] an implicit delegation [to the agency to fill in the statutory gaps]. … This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep economic and political significant that is central to this statutory scheme; had Congress wished to assign that question to the agency, it surely would have done so expressly. It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.

Thus, it appears that the major questions doctrine is now firmly entrenched as another tool of statutory construction and should be considered in any analysis of whether tax regulations have been validly promulgated and are entitled to deference.

Practice Point: It will be interesting to see how the Supreme Court’s recent decision will impact future challenges to tax regulations. In the not too distant past, Administrative Procedure Act challenges to tax regulations and other published guidance were rare, but the Court’s 2011 decision in Mayo Found. for Med. Educ. & Research v. United [...]

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Eighth Circuit Holds the Mayo in Tax Regulation Invalidity Case

by and | May 17, 2021 | , , ,

In the latest tax regulation deference case, the Eighth Circuit provided guidance to taxpayers and tax practitioners on the “analytical path” to resolve the question of whether a tax regulation is a valid interpretation of the Internal Revenue Code. The court held that the regulation was invalid in part because it unreasonably added conditions to the statutory requirements for qualified educational organizations, however, it was valid as to its interpretation regarding the permissible scope of the taxpayer’s activities to fit within the applicable statute. The opinion is noteworthy for its detailed examination of statutory and legislative history, judicial interpretations and agency position during legislation in its analysis of Congress’ intent.

Deference is one topic that captivates many, and tax cases referencing Chevron, Skidmore and Auer (and more recently Kisor) always grab attention. The latest deference case in the tax area is Mayo Clinic v. United States, No. 19-3189 (8th Cir. May 13, 2021). For some background on deference, including the district court proceedings in the Mayo Clinic case, see here.

In the Mayo Clinic case, the question was whether the taxpayer was a “qualified organization” exempted from paying unrelated business income tax (UBIT) on unrelated debt-financed income under Internal Revenue Code (Code) Section 514(c)(9)(C)(i). Answering this question required determining whether the taxpayer was an “educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activity are regularly carried on” within the meaning of Code Section 170(b)(1)(A)(ii). Relying in part on Treasury Regulation Section 1.170A-9(c)(1), the government asserted that the taxpayer was not a qualified organization because it was not an educational organization because its primary function was not the presentation of formal instruction (primary-function requirement) and its noneducational activities were not merely incidental to the educational activities (merely-incidental requirement). The district court – Mayo Clinic v. United States, 412 F.Supp.3d 1038 (D. Minn. 2019) – held in favor of the taxpayer and invalidated the regulation, holding that the primary-function requirement and the merely-incidental requirement were not intended by Congress to be included in the statute. The Eighth Circuit reversed and remanded the decision. Implementing the longstanding two-pronged deference test under Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984) and acknowledging recent precedent in Kisor v. Wilkie, 139 S.Ct. 2400 (2019), the Mayo Clinic court emphasized that the question before it was whether the government “stayed within the bounds of its statutory authority.” To answer this question, the court stated that to determine whether the statute was unambiguous required examining the statutory history and applying traditional tools of statutory construction. This led the Eighth Circuit to trace the evolution of the Code over more than a century, focusing on changes to statutory language, legislative history, agency positions during the legislative process and judicial interpretations of the law.

Based on this exhaustive analysis of the evolution of [...]

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The Legal Effect of IRS Pronouncements on Virtual Currency

by | Jul 29, 2020 | , ,

Given limited guidance by US tax authorities regarding taxation of virtual currency activities, taxpayers with such holdings may find themselves in uncharted territory as to whether to take positions that are contrary to IRS pronouncements. This article explores relevant notices, rulings and FAQs, and reviews the types of deference that courts tend to put on different types of IRS interpretations and guidance.

Access the full article here.



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Eighth Circuit Applies Subjective Standard to Reasonable Basis Penalty Defense

by and | May 4, 2020 | , ,

On April 24, 2020, the US Court of Appeals for the Eighth Circuit published its opinion in Wells Fargo & Co. v. United States, No. 17-3578, affirming a district court’s holdings that the taxpayer was not entitled to certain foreign tax credits and was liable for the negligence penalty for claiming the credits. Much has been written about the substantive issue, which we will not discuss here. Instead, we focus on the Eighth Circuit’s divided analysis relating to the reasonable basis defense to the negligence penalty.

In Wells Fargo, the taxpayer relied solely on the reasonable basis defense to the government’s assertion of penalties. Under Internal Revenue Code (IRC) section 6662(b)(1), a taxpayer is liable for penalty of 20% of an underpayment of its taxes attributable to its “negligence.” Various defenses are potentially applicable to the negligence penalty, which we recently discussed in detail here. One such defense is if the taxpayer can show it had a “reasonable basis” for its position. Under Treas. Reg. § 1.6662-3(b), this defense applies if the taxpayer’s return position was “reasonably based on” certain authorities specified in the regulations.

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Supreme Court Tackles Tax-Related Cases

by and | Feb 26, 2020 | , , , , ,

The United States Supreme Court has picked up the pace this week, already issuing eight regular opinions and four opinions relating to orders as of today. We discuss the tax-related items here.

In Rodriguez v. FDIC, the question was how to decide which member of a consolidated group of corporations is entitled to a tax refund. The Internal Revenue Service (IRS) issued a refund to the designated agent of an affiliated group, but the dispute centered on how that refund should be distributed among the group’s members. Some courts have looked at state law to resolve the distribution issue while others crafted a federal common law rule providing that, in the absence of an unambiguous tax allocation agreement, the refund belongs to the group member responsible for the losses that led to the refund. The Supreme Court rejected the latter common law rule, finding that it was not a legitimate exercise of federal common lawmaking. In reaching its decision, the Court noted that federal judges may craft such types of rules only in limited areas and it must be “necessary to protect uniquely federal interest.” The Court, however, did not decide who, in the case before it, was entitled to the refund, but remanded the case for further proceedings.

In Baldwin v. United States, Justice Thomas dissented from the denial of certiorari in a case asking the Court to reconsider National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005). We previously discussed Baldwin here, in which the US Court of Appeals for the Ninth Circuit held that, under Brand X, its prior construction of Internal Revenue Code section 7502 did not preclude a different interpretation by the IRS because the prior construction was based on filling a statutory gap in a reasonable manner. Because the IRS’s subsequent regulatory interpretation was reasonable (in light of ambiguous statutory language), the Ninth Circuit effectively overruled its prior precedent and accepted the IRS’s subsequent contrary interpretation.

Justice Thomas, the author of Brand X, had a change of heart and wrote that his dissent that the prior opinion appeared to be inconsistent with the Constitution, the Administrative Procedure Act (APA) and traditional tools of statutory construction. In his dissent, he called into question the continuing viability of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), expressing the view that Chevron “is in serious tension with the Constitution, the APA, and over 100 years of judicial decisions.”

Practice Point: These latest developments from the Supreme Court should be noted by taxpayers and practitioners. As with the highly contested opinion in Kisor v. Wilkie last term, it is clear that many Justices are uncomfortable with granting a high level of deference to government agencies. Deference issues continue to be in the forefront in several tax cases, and likely will continue to be highly relevant in forthcoming challenges to many regulations in the wake of tax reform in 2017.



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IRS Is “All Hands on Deck” to Provide Guidance Related to Tax Reform

by and | Jun 20, 2018 | , ,

In the wake of tax reform, taxpayers and practitioners alike are anxious for guidance and clarification on how the new laws impact transactions and reporting positions. The Internal Revenue Service (IRS) has previously stated that implementing tax reform is its highest priority, but that issuing guidance on the entire bill would likely take a substantial amount of time. Since December 2017, the IRS has published a host of notices, revenue procedures and administrative guidance. In some instances, the guidance was mechanical (e.g., Notice 2018-38), and in others it was more substantive (e.g., Notice 2018-28, Notice 2018-18, Rev. Proc. 2018-26).

On May 31, 2018, the IRS announced an “all hands on deck” effort to implement tax reform through 11 groups working closely with the Treasury Department. The IRS originally stated that it did not plan to release any more proposed regulations before the end of the year. Instead, it would issue tax Forms (with instructions) that would need to be filed by taxpayers before the end of the year. On June 7, 2018, the IRS explained that it does plan to issue proposed regulations “covering all major portions” of the bill starting in September and ending in December 2018 (the IRS specifically plans to finalize the temporary aggregation regulations by September to stop them from sunsetting). The IRS reported it is in “very good shape” to meet these deadlines. Additionally, at a recent American Bar Association Section of Taxation meeting, IRS international counsel acknowledged year-end financial reporting for global companies and stated that international tax regulations are intended to be released in the fall instead of the end of the year. Regulations under Internal Code Section 965 are planned for issuance this summer, and other areas of guidance include global intangible low-tax income, also known as the GILTI tax.

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Senior Tax Court Judge Robert A. Wherry, Jr. Retires

by | Jan 8, 2018 | , ,

On January 3, 2018, Chief Judge Marvel of the US Tax Court (Tax Court) announced that Senior Judge Robert A. Wherry, Jr. fully retired as of January 1, 2018, and would no longer be recalled for judicial service.

Judge Wherry was appointed on April 23, 2003, by President George W. Bush. In 2014, Judge Wherry took senior status and continued to try cases. By statute, the Tax Court is composed of 19 presidentially appointed judges. Judges are appointed for a term of 15 years and after an appointed term has expired, or they reach a specified age, may serve as a “senior judge” if recalled by the Tax Court. The Tax Court also has several special trial judges, who generally preside over small tax cases. (more…)



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