TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
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What to Expect During a Change of Administration

by , , and | Jan 25, 2017 | , , ,

With the inauguration of President Trump, and the accompanying change of administration, the American people have been promised great change in all areas of the federal government. One question we at McDermott have been frequently asked since the election is: what should a taxpayer expect from the Internal Revenue Service (IRS) and the Department of Justice (DOJ) Tax Division while the transitions in the executive branch are taking place? Major tax policy changes are being discussed, but what about the immediate practical effects of a turnover in high-level personnel within these agencies, particularly if a taxpayer is under audit or investigation?

During a change in administration, taxpayers may be affected by any of the following:

  • If under audit, the exam team may ask for longer statute extensions than would otherwise apply, to account for possible delays in internal managerial-level approvals.
  • If a taxpayer is negotiating a settlement, and that settlement requires approval by the IRS National Office or the Assistant Attorney General for Tax, settlement approvals may be delayed due to personnel changes.
  • This applies to civil settlements reached with IRS Appeals, in Tax Court litigation, or in federal district court litigation. Delays are also possible for criminal agreements, including plea agreements, deferred prosecution agreements and non-prosecution agreements.
  • Ongoing litigation (particularly appellate litigation) may be stayed or delayed, to the extent a case involves a policy position that the administration may want to change.
  • The regulatory freeze enacted by the Trump administration also affects procedural regulations, including proposed regulations related to the new partnership audit rules.

Initial comments from prospective Secretary of Treasury Steven Mnuchin indicate that he believes IRS staffing should be increased, which would be a welcome change.  Any significant changes like this are likely to be long-term, however, so we are unlikely to see their effect for some time.



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Circuit Courts Agree Timely Filing Requirement for a Tax Court Petition is Jurisdictional

by and | Jan 23, 2017 | , , , ,

Arguably the most important aspect of litigating a case in the Tax Court or in a refund forum is the timely filing of the petition or complaint.  Absent timely filing, the court may not have jurisdiction and the case could be dismissed without the court ever reaching the substantive issues.  On January 13, 2017, the Seventh Circuit joined several other circuit courts in confirming that the time for filing a petition in Tax Court is jurisdictional, not a claims processing rule.

In Tilden v. Commissioner, No. 15-3838 (available here), the taxpayer’s petition was mailed on the last day of the 90-day filing deadline.  It was not stamped and bore no postmark; instead, a USPS print-at-home postage label was attached by legal staff, and it was delivered to the post office the same day.  The Internal Revenue Service (IRS) argued this was insufficient for timelymailing under the “mailbox rule” of Internal Revenue Code (Code) Section 7502.  The Tax Court disagreed with both parties about what section of the regulations applied, and used the date the envelope was entered into the postal service’s tracking system as the date of postmark and filing—which was two days late.  Thus, the Tax Court dismissed the petition for lack of jurisdiction (available here).

On appeal, the Seventh Circuit raised sua sponte the issue of whether the filing deadline for a Tax Court petition is jurisdictional or a claims processing rule.  The proper characterization of the filing deadline is extremely important.  If the deadline is considered jurisdictional, then late filing automatically precludes the taxpayer from seeking relief in the Tax Court.  But, the taxpayer may still pay the tax due, file a claim for refund with the IRS, and file a complaint in a refund forum (if the IRS denies or fails to timely act on the claim).  On the other hand, if the deadline is a claims processing rule, the taxpayer’s options may be limited.  Although the taxpayer that files a late petition might be able to demonstrate that the Tax Court should hear its case, if the court were to determine that the petition was untimely, it arguably would be required under the Code to enter a decision on the merits for the IRS, rather than a dismissal for lack of jurisdiction.  That result eliminates the alternative refund forum.

In Tilden, the Seventh Circuit considered the Supreme Court’s current approach in non-tax cases for determining whether deadlines are jurisdictional or claims processing rules, but decided that the language of the relevant statute and the body of Tax Court and circuit court precedent compelled a finding that the 90-day deadline is jurisdictional.  Finding it “imprudent to reject that body of precedent” under principles of stare decisis, the Seventh Circuit followed the Tax Court and other circuit court precedent.  The Seventh Circuit further disagreed with the Tax Court’s holding on the relevant postmark regulations to conclude that the petition was timely filed.

Practice Point: The Seventh Circuit’s opinion is a good reminder as to the [...]

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APA Challenge to Notice of Deficiency: QinetiQ Affirmed

by and | Jan 10, 2017 | , , ,

On January 6, 2017, the US Court of Appeals for the Fourth Circuit, by published opinion, affirmed the US Tax Court’s (Tax Court) earlier ruling in QinetiQ US Holdings, Inc. v. Commissioner.  We previously wrote about the case here, here, and here.  To refresh, the taxpayer had argued in Tax Court that the Notice of Deficiency issued by the Internal Revenue Service (IRS), which contained a one-sentence reason for the deficiency determination, violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”  The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the Notice of Deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law.  The taxpayer appealed to the Fourth Circuit.

In an opinion written by Circuit Judge Barbara Keenan, the court concluded that the IRS complied with all applicable procedural requirements.  The court reasoned that the Internal Revenue Code (Code) provided a unique system for judicial review that should govern the content requirements for a Notice of Deficiency.  Per the court, it “is that specific body of law, rather than the more general provisions for judicial review authorized by the APA, that governs the content requirements of a Notice of Deficiency.”  The court cited a Fourth Circuit opinion from 1959, in which it held that the Code’s provisions for de novo review are incompatible with limited judicial review of final agency actions allowed under the APA.

The court held that the APA’s requirement of a reasoned explanation in support of a “final” agency action does not apply to a Notice of Deficiency issued by the IRS.  A Notice of Deficiency, the Court reasoned, cannot be a “final” agency action within the meaning of the APA, because the agency action is not one “by which rights or obligations have been determined, or from which legal consequences will flow.”  After issuing a Notice of Deficiency, the IRS may later assert in Tax Court new theories and allege additional deficiencies.  Moreover, a taxpayer may also raise new matters in Tax Court.  In addition, the court cited to the Supreme Court’s 1988 opinion in Bowen v. Massachusetts, emphasizing that Congress did not intend for the APA “to duplicate the previously established special statutory procedures relating to specific agencies.”

The court also held that the Notice of Deficiency issued to QinetiQ satisfied the requirement of Code section 7522(a), which requires that the IRS “describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions [...]

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Former Tax Court Judge Pleads Guilty to Tax Crimes

by and | Oct 24, 2016 | ,

Following up on our prior coverage (see here), former US Tax Court Judge Diane L. Kroupa pleaded guilty on Friday to multiple tax criminal charges related to her tax returns and interactions with the Internal Revenue Service. The government stipulated during the hearing that all charges except defrauding the United States would be dropped if Kroupa agreed to be sentenced on the fraud charge. Based on sentencing guidelines, the recommended sentence is between 30-37 months, although the judge may ultimately sentence Kroupa to more or less time. A copy of the Change of Plea Hearing can be found here.



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Timing of a US Federal Tax Controversy

by | Oct 18, 2016 | , ,

Understanding the timing of a US Federal tax controversy is helpful in creating a sound and efficient strategy. This timeline shows the typical timing of a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.



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Tax Controversy Options

by | Oct 11, 2016 | , , , , , , ,

Knowing your options for a US Federal tax controversy is helpful in creating a sound and efficient strategy. The attached chart depicts the typical options involved in a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.



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Altera Corporation Files Answering Brief in Commissioner’s Ninth Circuit Appeal of Altera

by | Sep 19, 2016 | , , ,

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (“QCSA”) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because Treasury and the IRS did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. The Commissioner of Internal Revenue (“Commissioner”) appealed this holding to the Ninth Circuit Court of Appeals, Dkt. Nos. 16-70496, 16-70497. The Commissioner filed his opening brief on June 27, 2016. Two groups of law school professors filed amicus briefs in support of the Commissioner’s position. On September 9, 2016, Altera Corporation (“Altera”) filed its answering brief with the Ninth Circuit.

Altera begins with the observation that the Commissioner “has remarkably little to say” about the Tax Court’s rationale in holding the QCSA regulation invalid. According to Altera, the Commissioner either did not respond to the salient points in the Tax Court’s analysis or, more often, actually admitted that those points were correct. Instead, the Commissioner advanced a “new, litigation-driven position” that Section 482’s “commensurate with income” requirement is an independent “internal standard” that “does not require consideration of transactions between unrelated parties.” Indeed, Altera notes, the Commissioner now argues “that the arm’s-length standard may be applied without considering any facts at all.” Thus, rather than engage with the Tax Court’s reasoning, the Commissioner “mistakenly accuses the Tax Court of overlooking an argument that is missing from the administrative record.”

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Sixth Circuit Defines ‘Corporation’ for Purposes of Overpayment Interest

by | Aug 22, 2016 | , , ,

The US Court of Appeals for the Sixth Circuit recently held in U.S. v. Detroit Medical Center that a nonprofit entity incorporated under state law falls within the definition of a ‘corporation’ for purposes of determining the interest rate applicable to tax refunds. The case is worth reading for its plain meaning analysis as well as its reliance on prior case law dating back hundreds of years.

In Detroit Medical, a not-for-profit corporation overpaid its taxes, entitling it to a refund plus interest. Under the Internal Revenue Code (Code), ‘corporations’ receive lower interest rates on refund than other taxpayers. The taxpayer claimed that, as a not-for-profit corporation, it should not be treated as a ‘corporation’ and thus was eligible for the higher interest rate resulting in an extra $9.1 million in refunds. The Sixth Circuit found nothing in the relevant statute that excludes a not-for-profit corporation from the definition of “corporation.” In reaching its holding, the court relied on various statutory construction principles, including: (1) in the absence of any statutory definition to the contrary, courts presume that Congress adopts the customary meaning of the terms it uses; (2) the word “includes” is a term of inclusion, not exclusion; (3) dictionary definitions (both old and new) are appropriate tools to determine the meaning of a word used in the Code; and (4) when Congress uses particular language in one section of a statute but omits it in another part of the same Act, the general rule is that Congress acted intentionally and purposely in the disparate inclusion or exclusion.

As further support for its plain meaning analysis, the Sixth Circuit relied primarily on an 1819 opinion by Chief Justice Marshal in Dartmouth College that permitted charitable organizations to be treated as corporations.  The court further noted that in 1612, Sir Edward Coke wrote in The Case of Sutton’s Hospital that a charitable hospital and school founded at the London Charterhouse was as valid a corporation as any other because it possessed all the characteristics that are of the essence of a corporation. Finally, the court cited to commentaries by William Blackstone from 1753 that charitable corporations are one of three basic kinds of corporations.

The Sixth Circuit’s approach of applying a strict plain meaning analysis is consistent with its approach in prior tax cases, including its interpretation of Code section 956 in The Limited and Code section 1256 in Wright  Additionally, the opinion highlights the importance in tax litigation of not limiting one’s argument to just the most recent cases and searching for useful authority outside the tax context. In a recent opinion involving the interpretation of Code section 6662, the Tax Court in Rand employed a similar approach by applying the rule of lenity and relying on an 1820 Supreme Court opinion dealing with homicide at sea.



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Protecting Confidential Taxpayer Information in Tax Court

by , and | Jul 21, 2016 | , , , , , , ,

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case.

In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that “[h]earings before the Tax Court . . . shall be open to the public.” Code Section 7461(b), however, provides several important exceptions. First, the court is afforded the flexibility to take any action “which is necessary to prevent the disclosure of trade secrets or other confidential information, including [placing items] under seal to be opened only as directed by the court.” Second, after a decision of the court becomes final, the court may, upon a party’s motion, allow a party to withdraw the original records and other materials introduced into evidence. In our experience, the trend appears to be erring on the side of protecting information from disclosure.

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Senate Finance Committee Approves Tax Court Nominees Copeland and Stoll

by and | Apr 19, 2016 | , ,

Senate Finance Committee Ranking Member Ron Wyden (D-Oregon) issued an April 18, 2016 statement noting the committee’s approval of Tax Court nominees Elizabeth Copeland and Vik Stoll.  In 2015, President Obama nominated Copeland and Stoll to be judges at the US Tax Court.

Copeland is a partner at the law firm Strasburger & Price, LLP. If confirmed, she will be assuming the position left vacant by the 2014 retirement of Judge Diane L. Kroupa.

Stoll is Deputy Chief Administrative Officer and Director of Collections for Jackson County, Missouri. If confirmed, he will be assuming the position left vacant by Judge James S. Halpern, who took senior status in late 2015.



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