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Supreme Court Punts on Attorney-Client Privilege Question

by Kevin Spencer, Sarah M. Raben and McDermott Will & Emery | Feb 2, 2023 | Appellate Courts, Court Procedure Matters, IRS Audits, Privilege and Non-Disclosure, Trial Courts

In a surprising move, the Supreme Court of the United States (SCOTUS) dismissed a dispute involving the proper test to apply when determining whether an unnamed law firm’s mixed bag of communications involving both legal advice and discussions of tax preparation was privilege. The dismissal came less than two weeks after oral arguments, with SCOTUS stating that “[t]he writ of certiorari is dismissed as improvidently granted” (commonly known as a “DIG,” which infrequently happens when SCOTUS determines there is no conflict warranting review, one or both parties have changed their position, or no consensus can be reached by the Justices and dismissal is preferable to fractured opinions with no controlling rationale).

BACKGROUND

The law firm and an unnamed company were each served with subpoenas for documents and communication related to a criminal investigation. Both produced some documents but withheld others on the grounds of attorney-client privilege and the work-product doctrine. The government moved to compel production, which the district court granted in part, explaining that the documents were not protected by any privilege, and they were discoverable under the crime-fraud exception. The company and law firm continued to withhold the documents, and the government filed motions to hold them in contempt. The district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice. On appeal to the US Court of Appeals for the Ninth Circuit, the law firm and the company argued that the court should have relied on a broader, “because of” test, not the “primary purpose” test. The Ninth Circuit disagreed and concluded that the “primary purpose” test governs, and the primary purpose of the communications was tax advice. SCOTUS granted certiorari in October 2022.

SUPREME COURT

In its brief, the law firm asked SCOTUS to adopt a more expansive “significant purpose” test, which was applied by the US Court of Appeals for the District of Columbia Circuit in In re Kellogg Brown & Root, Inc. The law firm argued that the test applied in Kellogg “appropriately protects attorney-client dual purpose communications” and that the test “asks a single question that arises directly from the long-established test for attorney-client privilege: whether a client is seeking or obtaining confidential legal advice from his or her lawyer.”

The government argued that courts consistently emphasize the need to construe the attorney-client privilege narrowly and that the primary or predominant purpose test “thus molds the scope of the privilege to its purpose of encouraging effective legal advice, while avoiding sweeping in communications predominantly about a nonlegal matter.”

During oral argument, the Justices seemed skeptical of a need to change the test and expressed some confusion as to how any privilege analysis would change from a practice perspective. Justice Kagan invoked the saying “if it ain’t broke, don’t fix it.” Shortly thereafter, SCOTUS issued the DIG.

Practice Point: More [...]

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Tax Court Holds That Deficiency Petition 90-Day Time Limit Is Jurisdictional

by Kevin Spencer, Sarah M. Raben and McDermott Will & Emery | Dec 1, 2022 | Appellate Courts, Court Procedure Matters, Trial Courts

Last summer, the Supreme Court of the United States held that the 30-day time limit to file a Collection Due Process (CDP) petition is a non-jurisdictional deadline subject to equitable tolling (Boechler, P.C. v. Commissioner). (Our prior discussion of Boechler can be found here.) The natural follow-up issue was whether this holding extended to the 90-day limit for deficiency petitions.

On November 29, 2022, in a unanimous 17-0 opinion in Hallmark Research Collective v. Commissioner, the US Tax Court held that the 90-day time limit is jurisdictional not subject to equitable tolling. The taxpayer in that case filed its deficiency petition one day late but argued that the 90-day limit is non-jurisdictional under Boechler and that it should be allowed to show cause for equitable tolling of the limitations period.

The Tax Court analyzed the relevant statute (Internal Revenue Code (IRC) Section 6213(a)) and found that the statutory text, context and relevant historical treatment all confirmed that the 90-day time limit clearly provided that the deadline was jurisdictional. Its analysis started with the US Constitution and tracked the deficiency procedures from the days of its predecessor (the Board of Tax Appeals) through various statutory changes and the overall framework of the procedures. Based on its analysis of almost 100 years of statutory and judicial precedent, the Tax Court concluded that it and the US Courts of Appeals have expressly and uniformly treated the 90-day time limit as jurisdictional, and the US Congress was presumptively aware of this treatment and had acquiesced in it.

The Tax Court rejected the taxpayer’s arguments to the contrary. It noted that the Supreme Court in Boechler rejected the analogy of the statutory 30-day limit for a CDP petition to the statutory 90-day limit for a deficiency petition. The Court also provided separate reasons why the statutory 30-day time limit was different, both in its text and in prior judicial constructions from the 90-day time limit.

Practice Point: The Tax Court’s opinion in Hallmark will not be the last word on the issue, and we expect further developments in this area. Additionally, there are other types of petitions that can be filed in the Tax Court (e.g., so-called “innocent spouse” petitions filed in non-deficiency cases) that contain language different from the statutes addressed in Boechler and Hallmark. We will continue to follow this area and provide relevant updates as they develop.

Supreme Court Denies Certiorari in Whirlpool

by Kevin Spencer and McDermott Will & Emery | Nov 21, 2022 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts

On November 21, 2022, the Supreme Court of the United States denied certiorari in Whirlpool Financial Corp., et al., Petitioners v. Commissioner of Internal Revenue, No. 22-9. This means that the US Court of Appeals for the Sixth Circuit’s decision remains in effect and is binding on the taxpayers who reside in that circuit. However, for taxpayers in other circuits, the Sixth Circuit’s decision is only persuasive authority and not binding precedent. Thus, it remains to be seen whether taxpayers in other jurisdictions will challenge the result reached in Whirlpool, and if they do, how appellate courts outside the Sixth Circuit will rule.

Prior coverage of this case can be found below:

Whirlpool Update: New Filings and Distribution for Supreme Court Conference

by Lowell D. Yoder, David G. Noren, Elizabeth C. Lu and Jonathan D. Lockhart | Nov 4, 2022 | Appellate Courts, Court Procedure Matters, Trial Courts

On November 2, 2022, the Supreme Court of the United States announced that the case of Whirlpool Financial Corp., et al., Petitioners v. Commissioner of Internal Revenue, No. 22-9, has been distributed for consideration at its upcoming conference on November 18, 2022. Meaning, we should have an answer in the next few weeks as to whether the Supreme Court will hear the case.

The Supreme Court’s distribution for the conference follows the government’s brief, submitted on October 19, 2022, in opposition to Whirlpool’s petition for a writ of certiorari.

In its brief, the government summarizes its position as follows:

Petitioners contend (Pet. 17) that 26 U.S.C. 954(d)(2) is “conditioned on the promulgation of regulations” by the Treasury Department and thus may not “be enforced without regard to such regulations.” But as the court of appeals correctly held, Section 954(d)(2)’s text itself establishes clear “conditions” and “consequences,” Pet. App. 12a, and when applied to this case, that text “mandate[s]” that the income at issue is FBCSI, id. at 18a. The phrase “‘under regulations prescribed by the Secretary’” delegates to the Treasury Department authority to “implement the statute’s commands,” but not to “vary from them,” ibid., so the court permissibly declined to articulate a separate rationale in this case based on the implementing regulations. Petitioners concede (Pet. 33) that the decision below does not conflict with that of any other court of appeals. Nor does it conflict with this Court’s precedent because petitioners’ cited cases involved meaningfully distinct statutory schemes. And resolving the question presented lacks practical importance because the Treasury Department’s former regulations would dictate the same result as the statutory text, and the revisions that were made to the regulations in 2008 removed any potential doubt about that result. This Court’s review is unwarranted.

The government’s position is an interesting one. It seems to accept that a court is free to ignore regulations relied on by the public if the court determines that the government’s position is supported by the statutory language and the statute is not entirely conditioned on the operation of a regulation. Additionally, the government believes here that US Congress did not entirely condition operation of Internal Revenue Code (Code) Section 954(d)(2) on regulations.

Perhaps sensing the difficulty in prevailing on this argument, the government (similar to what it did in the rehearing proceedings in the US Court of Appeals for the Sixth Circuit) seeks to limit Whirlpool to the specific statute at issue. However, this ignores the fact that the same or substantially the same language is used in other Code provisions, making it difficult to limit the government’s argument to Code Section 954(d)(2).

In another attempt to discourage review, the government essentially argues that the substantive issue is an issue of first-and-last impression because the regulations at issue were amended for tax years subsequent to Whirlpool’s. Again, this ignores the fact that Whirlpool involves important administrative law issues that will remain regardless of the amendment.

Finally, [...]

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

by Kevin Spencer and McDermott Will & Emery | Sep 21, 2022 | Appellate Courts, Court Procedure Matters, IRS Appeals, IRS Guidance, Tax Reform, Trial Courts

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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Supreme Court Requests Government Response to Whirlpool’s Petition

by McDermott Will & Emery | Aug 19, 2022 | Appellate Courts, Court Procedure Matters, Trial Courts

We previously discussed the petition for writ of certiorari that was filed in the Supreme Court of the United States by Whirlpool Financial Corporation & Consolidated Subsidiaries and Whirlpool International Holdings S.a.r.l. & Consolidated Subsidiaries (collectively, Whirlpool); the amici briefs filed by The National Association of Manufacturers, the Silicon Valley Tax Directors Group, and three of the “Big 4” accounting firms in support of Whirlpool’s petition; and how the case is now up for consideration at the Supreme Court’s upcoming conference on September 28, 2022. We also noted how the US government waived its right to file a response to Whirlpool’s petition.

In the latest update regarding Whirlpool’s petition, in a minute entry on the docket sheet, the Supreme Court has requested that the government provide a response by September 19, 2022. That response will then be considered by the Supreme Court at its September 28 conference, absent a relisting of the matter for a later conference. We will continue to monitor further developments in Whirlpool’s case and provide any further updates as they are made available.

Amici Support Whirlpool’s Request for Supreme Court Review

by Robert Levin and McDermott Will & Emery | Aug 8, 2022 | Appellate Courts, Court Procedure Matters, Trial Courts

As we previously discussed, toward the end of June Whirlpool Financial Corporation & Consolidated Subsidiaries and Whirlpool International Holdings S.a.r.l. & Consolidated Subsidiaries (collectively, 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.” (For an excellent dissection of the Sixth Circuit’s decision, please see our colleagues’ article, “Implications of the Sixth Circuit’s Whirlpool Opinion.”)

Several amici recently filed briefs with the Supreme Court supporting Whirlpool. The docket sheet for the case, titled Whirlpool Financial Corp. et al., Petitioners, v. Commissioner of Internal Revenue, No. 22-9, is available here.

On August 3, 2022, the National Association of Manufacturers (NAM) submitted its brief, setting forth two arguments:

First, the Sixth Circuit applied an entirely novel interpretation—not found anywhere in the Code or Treasury regulations and not advanced by the agency nor adopted by the Tax Court—that conflicts with decades-old regulations promulgated contemporaneously with the underlying statute and at Congress’s express command in section 954(d)(2) itself.

Second, reliance on validly promulgated regulations—and therefore regulated parties’ ability to comply with the laws—is the bedrock of administrative law. If taxpayers must follow regulations or face the prospect of civil (and perhaps even criminal) penalties, then so too must the government be held to its binding, published actions.

On August 4, 2022, PricewaterhouseCoopers LLP, Deloitte Tax LLP and KPMG LLP (collectively, Accounting Firms) joined forces to bring the “exceptionally important” nature of the case to the Supreme Court’s attention. (The brief states that Ernst & Young LLP did not participate as amicus curiae because it is Whirlpool’s financial statement auditor.) In their brief, the Accounting Firms assert:

The Sixth Circuit’s disregard of the regulations in its attempt to interpret the requirements of the statute creates substantial uncertainty with respect to the efforts to comply with the Internal Revenue Code and the Amici who advise them. Review by this Court is necessary to reassure taxpayers that when Congress expressly conditions tax provisions on the issuance of Treasury Regulations, courts will take those regulations into account in interpreting the requirements of the Internal Revenue Code.

Also on August 4, a third brief was submitted by the Silicon Valley Tax Directors Group, the National Foreign Trade Council, the Information Technology Industry Council and TechNet. These amici assert:

This Court should alleviate [the] disparate treatment among taxpayers—or even the same taxpayer in different federal courts—by recognizing the importance of the clear statutory command that branch income “shall constitute” FBCSI only “under regulations prescribed by the Secretary [of the Treasury].” 26 U.S.C. § 954(d)(2). Restoring taxpayer reliance on those regulations is crucial for preserving Congress’s desired uniform scheme and [...]

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

by Kevin Spencer and McDermott Will & Emery | Jul 6, 2022 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts

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 Kevin Spencer and McDermott Will & Emery | Jul 1, 2022 | Court Procedure Matters, State Controversy

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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Late CDP Petitions May Still Be Entitled to Tax Court Review

by Sarah M. Raben and McDermott Will & Emery | Apr 22, 2022 | Appellate Courts, Court Procedure Matters, IRS Appeals, Trial Courts
In a unanimous decision in Boechler, P.C. v. Commissioner issued on April 21, 2022, the Supreme Court of the United States reversed the US Court of Appeals for the Eighth Circuit’s ruling (which affirmed the US Tax Court) and held that the 30-day time limit to file a petition with the Tax Court in a collection due process (CDP) case is a non-jurisdictional deadline subject to equitable tolling. The Supreme Court remanded the case to determine whether the taxpayer is entitled to equitable tolling.

The one-day-late showdown started in 2015, when the Internal Revenue Service (IRS) notified Boechler, P.C. (Boechler), a North Dakota law firm, of a tax discrepancy. Boechler did not respond, which triggered the assessment of an “intentional disregard” penalty along with a notice that the IRS intended to seize Boechler’s property to satisfy the penalty. Boechler requested a CDP hearing before the IRS Independent Office of Appeals (IRS Appeals), arguing that: (1) there was no discrepancy in its tax filings and (2) the penalty was excessive. IRS Appeals rejected these arguments and sustained the proposed levy. Boechler then had 30 days to file its Tax Court petition but missed the deadline by one day. The Tax Court dismissed the petition for lack of jurisdiction, holding that the 30-day filing deadline is jurisdictional and cannot be equitably tolled. The Eighth Circuit affirmed.

The Supreme Court granted certiorari. The US government argued that the deadline was jurisdictional and the Tax Court lacks the power to accept a tardy filing by applying the doctrine of equitable tolling. Boechler argued that equitable tolling applied, and the Tax Court had jurisdiction over its case. The Supreme Court, continuing a trend of distinguishing between claim processing rules and jurisdictional rules, agreed with Boechler.

Internal Revenue Code (Code) Section 6330(d)(1) states, “[t]he person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” The Supreme Court explained that a procedural requirement is treated as jurisdictional “only if Congress ‘clearly states’ that it is” Arbaugh v. Y & H Corp., 546 U. S. 500, 515 (2006), although US Congress need not “incant magic words.” Sebelius v. Auburn Regional Medical Center, 568 U. S. 145, 153 (2013).

The Supreme Court clarified that the question was whether the statutory language limits the Tax Court’s jurisdiction to petitions filed within that timeframe. That answer turned on the meaning of the phrase “such matters.” The first independent clause explains what a taxpayer may do, (“The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination.”) However, the phrase “such matters” does not clearly mandate the jurisdictional reading and lacks clear antecedent. In addition, the Supreme Court also explained that Code Section 6330(d)(1) lacked in comparable clarity as to other tax provisions enacted around the same time. Finally, the Supreme [...]

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