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Weekly IRS Roundup March 13 – March 17, 2023

By on Mar 20, 2023
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Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of March 13, 2023 – March 17, 2023.

March 13, 2023: The IRS released Internal Revenue Bulletin 2023-11, which highlights the following:

  • Notice 2023-21: This notice postpones the beginning of the lookback periods under Section 6511 for certain taxpayers to file a claim for refund. Affected taxpayers include those who had tax returns due from April 15, 2020 to July 15, 2020, or from April 15, 2021 to May 17, 2021, and due to the COVID-19 pandemic, those due dates were postponed by Notice 2020-23 or Notice 2021-21 to July 15, 2020 or May 17, 2021, respectively.
  • Treasury Decision 9972: These final regulations amend the rules for filing certain returns and statements electronically to reflect changes made by the Taxpayer First Act of 2019 and to promote electronic filing.
  • Notice 2023-19: This notice provides guidance on the corporate bond monthly yield curve, corresponding spot segment rates and the 24-month average segment rates for February 2023. The notice also provides guidance as to interest rates on 30-year Treasury securities and 30-year Treasury weighted average rates.
  • REG 122286-18: These proposed regulations provide rules relating to the use of forfeitures in qualified retirement plans, including a deadline for the use of forfeitures in defined contribution plans, and clarify that forfeitures arising in any defined contribution plan may be used for one or more of the following purposes, as specified in the plan, to (1) pay plan administrative expenses, (2) reduce employer contributions under the plan or (3) increase benefits in other participants’ accounts in accordance with plan terms.
  • Action on Decision 2023-2: The IRS announced nonacquiescence to the US Tax Court’s decision in Complex Media, Inc. v. Commissioner, T.C. Memo. 2021-14, that the parties’ failure to report transactions fully or consistently should not be a major factor in a decision of whether to allow a taxpayer to disavow the form of its transactions and to the standard the Court applied to allow a petitioner to disavow its form. The IRS also announced nonacquiescence to the court’s determination that the fair market value of a “Deferred Payment Right” for purposes of Section 351(b)(1) is not equal to its issue price.
  • Treasury Decision 9973: This document contains final regulations that treat members of a consolidated group as a single US shareholder in certain cases for purposes of Section 951(a)(2)(B). The final regulations affect consolidated groups that own stock of foreign corporations.

March 13, 2023: The IRS announced that Danny Werfel began work as the 50th Commissioner of the IRS. Werfel was confirmed by the US Senate on March 9, 2023, and his term will run through November 12, 2027. You can read more about his confirmation
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Tax Court Holds That Deficiency Petition 90-Day Time Limit Is Jurisdictional

By , and on Dec 1, 2022
Posted In , ,

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.



Tax Court to Host COVID-19 Webinar

By and on Oct 19, 2022
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On November 16, 2022, the US Tax Court will host an informative webinar panel discussion moderated by Chief Judge Kathleen Kerrigan from 12:00 – 1:00 pm (EST). The program will highlight changes to Tax Court practice that were made in response to the COVID-19 pandemic and include lessons learned, best practices and practical implications for ongoing controversy matters and trial calendars. The webinar is free and open to everyone—register here.

Practice Point: The COVID-19 pandemic has impacted the tax world significantly. For those with an active practice in the Tax Court, this webinar should be very informative and helpful. Additional COVID-19 resources for the Tax Court can be found here.

For some of our prior coverage on the impact of COVID-19 on the Tax Court’s operations, see here and here.



Former Tax Court Judge Herbert Chabot Passes Away

By and on Oct 17, 2022
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The US Tax Court announced that former Judge Herbert Chabot passed away on October 11, 2022.

Judge Chabot joined the Tax Court in 1978, serving as a regular judge and then as a senior judge for almost 40 years. Before being appointed to the Tax Court, he served on the staff of the Congressional Joint Committee on Taxation for over a dozen years. Prior to that, he clerked at the Tax Court, served on the Legal Staff of the American Jewish Congress and served in the US Army and the Army Reserves.

We both knew Judge Chabot well during our time clerking at the Tax Court. He was very thoughtful and cared deeply about reaching the correct result in each case. The Tax Court’s announcement aptly states: “He was a delightful storyteller and often regaled his colleagues and law clerks with wonderful stories. His charm, humor, and ubiquitous bowtie will be missed.”



Courts Split on Supervisory Approval Requirement for Tax Penalties

By , and on Sep 28, 2022
Posted In , , ,

Since Chai v. Commissioner, an opinion by the US Court of Appeals for the Second Circuit subsequently followed by the US Tax Court in several opinions, there has been a substantial number of cases litigating issues involving supervisory approval of federal civil tax penalties. Two recent additions to that list include decisions from the Ninth and Eleventh Circuits, where both Courts departed from the Tax Court’s analysis and ruling on the issue. The disagreement centers on when approval must occur. (Some of our prior discussions on this topic are linked below.)

LAIDLAW’S AND THE NINTH CIRCUIT

In Laidlaw’s Harley-Davidson Sales, Inc. v. Commissioner, the Ninth Circuit, reversing the Tax Court’s ruling, applied a textualist approach and held that approval is required only before the assessment of a tax penalty and not before the Internal Revenue Service (IRS) communicates a proposed penalty to the taxpayer. The Court reasoned that the “language of [Internal Revenue Code (Code) section 6571(b)] provides no reason to conclude that an ‘initial determination’ is transformed into ‘something more like a final determination’ simply because the revenue agent who made the initial determination subsequently mailed a letter to the taxpayer describing it.” While the Court was “troubled” by the manner in which the IRS communicated the potential imposition of the penalty, it explained that a court’s role is to “apply the law as it is written, not to devise alternative language.” In reaching its decision, the Ninth Circuit disagreed with the position developed by the Tax Court in recent years.

KRONER AND THE ELEVENTH CIRCUIT

In Kroner v. Commissioner, the Eleventh Circuit followed Laidlaw’s Harley Davidson Sales and similarly concluded that the IRS satisfies Code Section 6751(b) so long as a supervisor approves the penalty before it is assessed. The Court explained that this was the best reading of the statute because (1) it is more consistent with the meaning of the phrase “initial determination of such assessment,” (2) it reflects the absence of any express timing requirement in the statute, and (3) it is a workable reading in the light of the statute’s purpose. The Court suggested that the IRS may be wise “to have a supervisor approve proposed tax penalties at an early juncture…but the text of the statute does not impose an earlier deadline.”

The Eleventh Circuit was explicit in its departure from Chai and Tax Court precedent, stating that “the Chai court missed an important aspect of the statute’s purpose: it is not just about bargaining, it is also a check on the imposition of erroneous penalties.” The Court also explained that “appropriate penalties should be assessed and collected. Chai’s analysis of these competing interests leaned heavily on the former to the detriment of the latter when justifying its departure from the statutory text.”

Practice Point: It remains to be seen whether this issue will make its way to the Supreme Court of the United States given the apparent circuit split on the issue as [...]

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Tax Court Relaxes COVID-19 Protocols

By , and on Aug 25, 2022
Posted In , ,

Courts have been relaxing their COVID-19 protocols over the past several months, and on August 23, 2022, the US Tax Court announced its latest position. In Administrative Order No. 2022-01, the Tax Court detailed new protocols for entry into the Washington, DC, courthouse, as well as in-person proceedings at all the locations in which it holds court.

As of August 29, 2022, court personnel and contractors will no longer be required to show a COVID-19 attestation form, a vaccination card or a negative COVID-19 test to enter the Washington, DC, courthouse. Instead, anyone entering will be required to self-certify whether they have or have been exposed to COVID-19. Additionally, individuals who test positive for COVID-19 within five days of entering the Washington, DC, courthouse are requested to notify the Tax Court.

Trial participants, witnesses and members of the public attending in-person proceedings must complete the COVID-19 self-certification requirement via QR code for entry into a Tax Court proceeding at any location. Additionally, entrants to both the Washington, DC, courthouse and Tax Court in-person proceedings at any location are requested to follow the current guidelines provided in the Court Standards and Protocols to Protect Public Health.

Practice Point: COVID-19’s effects on the administration of Tax Court proceedings lingers on more than two years after the outbreak. If you plan to attend a court proceeding in person, we suggest checking the Tax Court’s website in advance to ensure that you are in compliance with its procedures before showing up.



Huge Win for Refined Coal: DC Appeals Court Permits Tax Credits

By and on Aug 16, 2022
Posted In , ,

On August 5, 2022, the US Court of Appeals for the District of Columbia Circuit upheld the US Tax Court’s bench opinion in favor of partners and investors in a refined coal business. The Internal Revenue Service (IRS) has consistently fought taxpayers’ attempts to claim a tax credit for refining coal despite a clear congressional mandate in Internal Revenue Code section 45(c)(7)(A). The IRS has repeatedly taken the position that the partnerships formed to utilize the tax credits generated by the refined coal business are not bona fide because the partnerships could never make an economic profit without the tax credits.

In Cross Refined Coal LLC, the IRS examined the partnership’s 2011 and 2012 tax years and disallowed $25.8 million of refined coal production tax credits and $25.7 million of claimed operating losses. The IRS argued that:

  • The partnership did not exist as a matter of fact.
  • The partnership was not, in substance, a partnership for federal income tax purposes because it was not formed to carry on a business or for the sharing of profits and losses from the production or sale of refined coal by its purported members/partners, but rather was created to facilitate the prohibited transaction of monetizing refined coal tax credits.
  • The transaction was entered into solely to purchase refined coal tax credits and other tax benefits.
  • Claimed expenses were not ordinary and necessary or credible expenses in connection with a trade or business or other activity engaged in for profit.

After a two-week trial involving several witnesses and thousands of exhibits, the Tax Court held that the partnership was legitimate because its partners made substantial contributions to the partnership, participated in its management and shared in its profits and losses. The IRS appealed to the DC Circuit.

In affirming the Tax Court, the DC Circuit held that the partners intended to form a partnership and had legitimate non-tax motives for the business. The Court diffused any concern that the partnership included tax benefits, explaining that “there was nothing untoward about seeking partners who could apply the refined-coal credits immediately, rather than carrying them forward to future tax years.” The Court also recognized that “Congress expressly provided for coal refiners to employ this investment strategy, for the tax code specifies how the credit must be divided when a refining facility has multiple owners.” The Court was not persuaded by the IRS’s concern that the partners did not enter the partnership to obtain a pre-tax profit: “[a]ccording to the Commissioner, Cross’s partners did not have the requisite intent to carry on a business together because Cross was not ‘undertaken for profit or for other legitimate nontax business purposes.’” The Court disagreed, explaining:

As a general matter, a partnership’s pursuit of after-tax profit can be legitimate business activity for partners to carry on together. This is especially true in the context of tax incentives, which exist precisely to encourage activity that would not otherwise be profitable.

The DC Circuit found [...]

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Is the IRS Finally Receiving Increased Funding?

By and on Jul 28, 2022
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After months of back and forth, it appears that additional funding is on its way to the Internal Revenue Service (IRS). Senate Majority Leader Chuck Schumer (D-NY) released a statement yesterday on his agreement with Senator Joe Manchin (D-WV) on the FY2022 Budget Reconciliation legislation and plans to hold a vote in the US Senate next week. A summary of the Inflation Reduction Act of 2022 (Act) provides the following topline estimates:

Total Revenue Raised $739 billion 15% Corporate Minimum Tax $313 billion* Prescription Drug Pricing Reform $288 billion** IRS Tax Enforcement $124 billion** Carried Interest Loophole $14 billion* Total Investments $433 billion Energy Security and Climate Change $369 billion** Affordable Care Act Extension $64 billion** Total Deficit Reduction $300+ billion * = Joint Committee on Taxation Estimate ** = Congressional Budget Office Estimate

 

With respect to taxes, the summary states that the Act will “[m]ake the biggest corporations and ultra-wealthy pay their fair share” and “[t]here are no new taxes on families making $400,000 or less and no new taxes on small business – we are closing tax loopholes and enforcing the tax code.”

Section 10301 of the Act, entitled “Enhancement of Internal Revenue Service Resources,” provides the following appropriations:

  • IRS: $78,911,000,000
    • Taxpayer Services: $3,181,500,000
      • Provide taxpayer services, including pre-filing assistance and education; filing and account services; taxpayer advocacy services; and other services authorized by 5 U.S.C. 3109 (relating to employment of excerpts and consultants on a temporary or intermittent basis)
    • Enforcement: $45,637,400,000
      • Conduct tax enforcement activities to determine and collect owed taxes; provide legal and litigation support; conduct criminal investigations; provide digital asset monitoring and compliance activities; enforce criminal statutes related to violations of internal revenue laws and other financial crimes; purchase and hire passenger motor vehicles; and provide other services authorized by 3109
    • Operations Support: $25,326,400,000
      • Support taxpayer services and enforcement programs, including rent payments; facilities services; printing; postage; physical security; headquarters and other IRS-wide administrative activities; research and statistics of income; telecommunications; information technology development, enhancement, operations, maintenance and security; hire of passenger motor vehicles, operations of the IRS Oversight Board; and other services authorized by 3109
    • Business Systems Modernization: $4,750,700,000
      • Improve the business systems modernization program, including development of callback technology and other technology to provide a more personalized customer service experience but do not include the operation and maintenance of legacy systems.
    • Report on IRS-Run Free “Direct Efile” Tax Return System: $15,000,000
      • Deliver to US Congress (within nine months) a report on the cost of developing and running a free direct efile tax return system; taxpayer opinions, expectations and level of trust—based on surveys—for such a system; and opinions of an independent third party on the overall feasibility, approach, schedule, cost, organizational design and the IRS’s capacity to deliver such a system
    • Treasury Inspector General for Tax Administration (TIGTA): $403,000,000


Sixth Circuit Denies Proceeds Regulation Rehearing Request, Sets Up a Circuit Split

By and on Jul 13, 2022
Posted In , , ,

The US Court of Appeals for the Sixth Circuit recently denied a taxpayer’s request for a rehearing en banc in Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117, leaving a highly contested conservation easement regulation in place and setting up a split between the Sixth and Eleventh Circuits.

In Oakbrook, the taxpayer argued that Treas. Reg. § 1.170A-14(g)(6)(ii), known as the “proceeds regulation,” was invalid because it did not satisfy the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. The regulation addresses how to allocate proceeds between donors and donees if an easement is judicially extinguished and the property is sold. In May 2020, the US Tax Court held that the regulation was “procedurally and substantively valid” under the APA. The Sixth Circuit agreed with the Tax Court, upholding the regulation.

The Sixth Circuit’s order issued July 6, 2022, indicated that neither the judges on the original panel nor any other judge on the full court requested a vote for a suggested rehearing. Last year, however, the Eleventh Circuit reached the opposite conclusion in Hewitt v. Commissioner, finding that the same regulation was invalid because it violated the APA. Thus, there is a clear circuit split on the issue.

Practice Point: The government did not seek a review of the Hewitt decision from the Supreme Court of the United States, so that ruling stands in the Eleventh Circuit. It remains to be seen whether the taxpayer in Oakbrook files a petition for a writ of certiorari to the Supreme Court. With a split between the Sixth and Eleventh Circuits, it is possible this conservation easement battle could be headed to the Supreme Court to determine the fate of the proceeds regulation.



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

By and on Jul 6, 2022
Posted In , , ,

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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