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The Slow Death of the Section 385 Regulations

Internal Revenue Code (Code) Section 385 provides that the US Department of the Treasury (Treasury) is authorized to issue regulations to determine whether an interest in a corporation is to be treated for purposes of the Code as stock or indebtedness. After decades of inaction, proposed regulations were issued on April 14, 2016. The proposed regulations were not well-received; the tax bar had serious and substantial comments to the proposed regulations. Among the most important critiques, there were criticisms for the potential overbreadth of the regulations’ application to foreign-to-foreign transactions, the lack of a de minimis exception for smaller companies and for the anticipated burden of the contemporaneous documentation requirements. Treasury released final regulations under Code Section 385, which are effective as of October 21, 2016. Although the proposed regulations were changed in some respects, the final regulations retained strict...

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

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...

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IRS Rules (Again) That Taxpayers Are Not Entitled to Claimed Refined Coal Credits

In a highly-anticipated Technical Advice Memorandum (TAM) dated March 23, 2017 and released on July 21, 2017, the Internal Revenue Service (IRS) ruled that two taxpayers who had invested in a Limited Liability Company that owned and operated a refined coal facility (the LLC) were not entitled to refined coal production credits they had claimed because their investment in the LLC was structured “solely to facilitate the prohibited purchase of refined coal tax credits.” This analysis marks a departure from the position staked out by the IRS in a number of recent refined coal credit cases, which focused on whether taxpayers claiming refined coal credits were partners in a partnership that owned and operated a refined coal facility. Congress enacted the refined coal production tax credit under Internal Revenue Code (IRC) section 45(c)(7) and (e)(8) to encourage investment in the development of refined coal facilities and the use of refined coal, which would...

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BEWARE: Whistleblowers Can “Out” You to the IRS!

Not only should companies worry about the Internal Revenue Service (IRS) auditing their returns, but they also have to be aware of a potential assault from within. Indeed, current and former employees have an incentive to air all of your tax issues with the hope of being rewarded for the information. Section 7623(b) was added to the Internal Revenue Code (IRC) in 2005, and pays potentially large monetary rewards for so-called tax whistleblowers. To qualify for remuneration, a whistleblower must meet several conditions to qualify for the Section 7623(b) award program: (1) submit the confidential information under penalties of perjury to the IRS’s Whistleblower Office; (2) the information must relate to a tax issue for which the taxpayer (if the IRS found out) would be liable for tax, penalties and/or interest of more than $2 million; and (3) involve a taxpayer whose gross income exceeds $200,000 the tax year at issue. If the information substantially...

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John Doe Intervenes in Virtual Currency Summons Enforcement Case

The Internal Revenue Service (IRS) has broad authority under Internal Revenue Code (IRC) Section 7602 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 are covered by the summons, the IRS may issue a “John Doe” summons only upon receipt of a court order. The court will issue the order if the IRS has satisfied the three criteria provided in IRC Section 7609(f): The summons relates to the investigation of a particular person or ascertainable group or class of persons, There is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and The information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability the summons is issued) is...

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The Bruins Score! Court Rules Away from Home Meals Are 100 Percent Deductible

In a surprising decision, the US Tax Court (Tax Court) concluded that the pregame away-city meals provided to the Boston Bruins hockey team was not subject to the 50 percent deduction disallowance on the basis that the meals were both for the “convenience of the employer” and were provided at an “employer operated eating facility.” In Jacobs v. Commissioner, 148 TC No 24 (June 26, 2017), the court found that meals—consisting of dinner, breakfast, lunch and snacks—were served in a room provided without charge by the hotel and to all employees of the Bruins traveling to the games. Most businesses are well aware of the 50 percent deduction disallowance provided in Internal Revenue Code (IRC) Section 274(n)(1), which applies to meals provided to executives or other employees traveling for the business purpose of the employer. “De-minimis” meals (those which are provided infrequently and low in value), however, are excepted from the 50 percent disallowance. Also...

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The “Issue of First Impression” Defense to Penalties

The Internal Revenue Code (Code) contains various provisions regarding the imposition of penalties and additions to tax. The accuracy-related penalty under section 6662(a), which imposes a penalty equal to 20 percent of the amount of any understatement of tax, is commonly asserted on the grounds that the taxpayer was negligent, disregarded rules or regulations, or had a substantial understatement of tax. Over the years, the Internal Revenue Service (IRS) has become increasingly aggressive in asserting penalties and generally requires that taxpayers affirmatively demonstrate why penalties should not apply, as opposed to the IRS first developing the necessary facts to support the imposition of penalties. There are many different defenses available to taxpayers depending on the type and grounds upon which the penalty is asserted. These defenses include the reasonable basis and adequate disclosure defense, the substantial authority defense, and the reasonable...

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The IRS’s Assault on Section 199 (Computer Software) Doesn’t Compute

Internal Revenue Code Section 199 permits taxpayers to claim a 9 percent deduction related to the costs to develop software within the U.S. The relevant regulations and their interpretation, however, place substantial restrictions on claiming the benefit. Moreover, the regulations and the government's position haven't kept up with the technological advances in computer software. Before claiming the deduction on your return, consider that the Internal Revenue Service has this issue within its sights, and perhaps it will be the subject of one of their new “campaigns.” In 2004, Congress enacted I.R.C. Section 199 to tip the scales of global competitiveness more in favor of American business. The main motivation of the statute was to create jobs by encouraging businesses to manufacture and produce their products in the U.S. The tax benefit, however, isn't available for services, a theme that pervades many of the provisions in the statute and regulations. Continue...

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IRS Opposes Granting of Certiorari in Cases Addressing Definition of Return

Two petitions for certiorari pending before the Supreme Court of the United States ask the Court to resolve the question of whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code (BC). The answer to this question will determine whether a bankrupt taxpayer’s tax debts can be discharged or are permanently barred from discharge. According to these petitions, the courts of appeal are divided as to the answer. BC § 523(a) generally allows a debtor to discharge unsecured debt, except for, inter alia, tax debts of debtors who: (1) failed to file tax returns; (2) filed fraudulent tax returns; or (3) filed late tax returns, where a bankruptcy petition is filed within two years of the date the late return was filed. See BC § 523(a)(1)(B)(i), (B)(ii), (C). Before 2005, the BC did not define a “return” for purposes of the non-dischargeability rules, and the Internal Revenue Code (IRC)...

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Fourth Circuit Clarifies the Role of the Collection Due Process Hearing

In Iames v. Commissioner, No. 16-1154, the US Court of Appeals for the Fourth Circuit upheld the US Tax Court’s ruling that once a taxpayer has unsuccessfully challenged his tax liability in a preassessment hearing before the Internal Revenue Service (IRS) Office of Appeals, he is precluded from challenging his tax liability in a collection due process (CDP) hearing under Internal Revenue Code (IRC) Section 6330. IRC Section 6330, enacted by Congress to protect taxpayers from abusive or arbitrary collection practices, provides a set of procedural safeguards for taxpayers facing a potential levy action by the IRS: notice, an administrative hearing and judicial review. More specifically, before collecting a delinquent tax through a levy on a taxpayer’s property, the IRS must notify the taxpayer at least thirty days in advance of his right to an administrative hearing before the IRS Office of Appeals. IRC Section 6330(a) and (b). After the Office of Appeals...

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