The outline of pending tax reform provisions remain vague, but a significant impact on M&A activity is expected by way of corporate tax cuts, interest deductibility, changes to the expensing of capital investments, a reduction of the pass-through tax rate and changes to our international (territorial) tax system.
“[W]e are not inclined to carve out an approach to administrative review good for tax law only.” Mayo Found. for Medical Educ. & Research v. United States, 562 US 44, 55 (2011).
With this language, the US Supreme Court put taxpayers and the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury) on notice that administrative law applies equally to tax law. Since this announcement, administrative law issues have figured prominently in several tax cases with the result that certain practices of the IRS and Treasury in issuing regulations have been called into question. (Please see our most recent post on the Administrative Procedures Act [APA] as applied to notices of deficiency issued by the IRS.) One such practice is the issuance of temporary regulations—without prior opportunity for comment by the public—that the IRS and Treasury treat as binding rules of law. One such example is the temporary anti-inversion regulations issued in April 2016 that address transactions that the IRS and Treasury believe are structured to avoid the purposes of Internal Revenue Code (Code) Section 7874 and 367.
As is common practice by the IRS and Treasury, the regulations were simultaneously issued in both proposed and temporary form. The regulations include the rules described in prior Notices, as well as new rules designed to address issues not covered by the Notices. The regulations totaled more than 200 pages, addressing many issues in the area. Continue Reading District Court Holds Anti-Inversion Regulation Unlawfully Issued
As we have recently discussed, Internal Revenue Service (IRS) Appeals has been making a number of changes to their administrative review process in the last few years. While many of these changes have been driven by lack of resources, others—like the standing invitation of Exam into the Appeals process—have the potential to undermine the independence of Appeals, which has historically been a vital component of the taxpayer’s right of redress with the Service.
In this week’s American Bar Association conference in Austin, Texas, IRS Appeals clarified that, for field cases worked by revenue agents, taxpayers may still receive in-person conferences, despite recent pronouncements that phone conferences are the preferred or default method. Conferences in campus cases (or correspondence audit cases) will still be generally handled by telephone, but there will eventually be a move to in-person conferences by request. Campus cases are being treated differently because they are often managed in locations remote from the taxpayer without adequate facilities for in-person meetings. Guidance will be issued to IRS employees regarding these changes.
As Taxpayer Advocate Nina E. Olson noted, these changes are helpful but not enough. In particular, Olson expressed dismay that campus cases were not being included in the change. Roughly 75 to 80 percent of IRS examinations are conducted by correspondence. In these cases, there is a great need for personal contact with the taxpayer, but no single person within the Service is assigned to a case.
Practice Point: The new announcement provides practitioners with additional support for their requests for in-person Appeals conferences. In our experience, an in-person conference is frequently much more productive than one by phone, and practitioners should request these whenever possible.
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 not readily available from other sources.
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 cause defense.
Another defense available to taxpayers is what we will refer to as the “issue of first impression” defense. The Tax Court’s recent opinion in Peterson v. Commissioner, 148 T.C. No. 22, reconfirms the availability of this defense. In that case, the substantive issue was the application of section 267(a) to employers and employee stock ownership plan (ESOP) participants. The court, in a published T.C. opinion (see here for our prior discussion of the types of Tax Court opinions) held in the IRS’s favor on the substantive issue but rejected the IRS’s assertion of an accuracy-related penalty for a substantial understatement of tax on the ground that it had previously declined to impose a penalty in situations where the issue was one not previously considered by the Tax Court and the statutory language was not entirely clear.
The Tax Court’s opinion in Peterson is consistent with prior opinions by the court in situations involving the assertion of penalties in cases of first impression. In Williams v. Commissioner, 123 T.C. 144 (2004), for instance, the substantive issue was whether filing bankruptcy alters the normal Subchapter S rules for allocating and deducting certain losses. The Tax Court agreed with the IRS’s position, but it declined to impose the accuracy-related penalty because the case was an issue of first impression with no clear authority to guide the taxpayer. The court found that the taxpayer made a reasonable attempt to comply with the code and that the position was reasonably debatable.
Similarly, in Hitchens v. Commissioner, 103 T.C. 711 (1994), the court addressed, for the first time, an issue related to the computation of a taxpayer’s basis in an entity. Despite holding for the IRS, the court rejected the accuracy-related penalty. It stated “[w]e have specifically refused to impose additions to tax for negligence, etc., where it appeared that the issue was one not previously considered by the Court and the statutory language was not entirely clear.” Other cases are in accord. See Braddock v. Commissioner, 95 T.C. 639, 645 (1990) (“as we have previously noted, this issue has never before, as far as we can ascertain, been considered by any court, and the answer is not entirely clear from the statutory language”); Wofford v. Commissioner, 5 T.C. 1152, 1166-67 (1945) (“If the petitioner was mistaken, as he evidently was, as to the controversial question of what the legal effect of the assignment for income tax purposes was, that is not a sufficient reason for holding that he was negligent.”).
Practice Point: As noted above, the IRS is more frequently asserting penalties against taxpayers. To the extent the substantive issue is one for which there is no clear guidance from the courts or the IRS, taxpayers may want to consider using the “issue of first impression” defense. This defense may avoid the potential pitfalls associated with the waiver of privilege when other penalty defenses are raised.
Taxpayers can choose whether to litigate tax disputes with the Internal Revenue Service (IRS) in the US Tax Court (Tax Court), federal district court or the Court of Federal Claims. Claims brought in federal district court and the Court of Federal Claims are tax refund litigation: the taxpayer must first pay the tax, file a claim for refund, and file a complaint against the United States if the claim is not allowed. Claims brought in the Tax Court are deficiency cases: the taxpayer can file a petition against the IRS Commissioner after receiving a notice of deficiency and does not need to pay the tax beforehand.
As demonstrated in the chart below, approximately 97 percent of tax claims are instituted in the Tax Court. It should be noted that, after a taxpayer files a petition in Tax Court, the taxpayer no longer has the option of bringing the claim in any other court for the year(s) at issue.
Tax Court Versus Tax Refund Litigation
On March 28, 2017, EY and the Internal Revenue Service (IRS) held a joint webcast presenting the Large Business & International’s (LB&I) new “Campaign” examination process. This was the IRS’s second in a planned eight-part series about Campaigns. The IRS speakers for the presentation were Tina Meaux (Assistant Deputy Commissioner Compliance Integration) and Kathy Robbins (Enterprise Activity Practice Area). We previously blogged about Campaigns on February 1, 2017 (link), and the first Campaigns webinar on March 8, 2017 (link).
Amicus–or “friend of the court”–briefs are not uncommon in Supreme Court and appellate court cases. The purpose of an amicus brief is generally to provide assistance to the court by presenting additional arguments either in support or opposition of one of the litigant’s positions. Amicus briefs should not rehash the same arguments presented by one of the parties, but rather should provide insights and a different perspective that is not presented by the parties, and to inform the court of the impact of the issues in the case on other affected parties. The Federal Rules of Appellate Procedure provide detailed rules on how and when to file an amicus brief. See here for Federal Rule of Appellate Procedure 29, which governs amicus filings.
Sometimes, amicus parties want to get involved at the trial court level before the trial record is fixed. Thus, increasingly, amicus briefs are being filed in trial courts, and in particular in the United States Tax Court (Tax Court). When, why and how to file an amicus brief in a trial court is not clear. Indeed, most trial courts do not have procedural rules that directly address those filings. This post provides an overview of some of the considerations and procedures for filing such briefs in a Tax Court case.
Whether to allow an amicus to participate in a case is within the sound discretion of the court. Because the filing of an amicus brief is discretionary, the typical practice is to file a motion seeking permission or“leave” of the court to file an amicus brief accompanied with a statement stating that the litigants do, or do not, object to the filing of the amicus brief.
In deciding whether to grant permission to file anamicus brief, the Tax Court generally examines whether “the proffered information is timely, useful or otherwise helpful.” The court also considers whether amici are advocates for one of the parties, have an interest in the outcome of the case and possess unique information or perspective. This is consistent with the standards applied by other courts in making the determination.
Practice Point: Several factors should be considered by taxpayers in deciding whether to file an amicus brief in Tax Court. In addition to the cost, taxpayers may want to consider whether their position is being adequately represented by another taxpayer’s case and whether they believe that they can provide arguments that might persuade the court to adopt their position. Participation as an amicus can also be helpful to taxpayers in coordinating legal positions and ensuring that the best possible arguments are presented on issues of first impression. An effective amicus brief has the potential to persuade the court, and can be an effective tool to resolve an issue favorably. This is especially true when, because of the specific facts of the taxpayer, the perspectives of other taxpayers are not adequately addressed.
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 potential consequences of missing a filing deadline. Taxpayers (and their lawyers) should not wait until the last minute to file their petitions and should also take care to ensure they use the proper method of delivery. The “unnecessary risk [of] waiting until the last day” carries with it potentially serious consequences that can, and should, be avoided.
William J. Wilkins has tendered his resignation as Chief Counsel effective as of noon on January 20, 2017. Mr. Wilkins was nominated by President Obama to replace Donald L. Korb, who resigned from the position in late 2008. Mr. Wilkins was confirmed by the Senate to serve as Chief Counsel in July 2009. Prior to becoming Chief Counsel, Mr. Wilkins was a partner with WilmerHale and previously worked for the United States Senate Committee on Finance and as an associate at King & Spalding. He previously served as Chair of the Section of Taxation of the American Bar Association. William M. Paul has been named as Acting Chief Counsel.
The Chief Counsel is appointed by the President of the United States with the advice and consent of the United States Senate. The Chief Counsel is the chief legal advisor to the Commissioner of Internal Revenue on all matters pertaining to the interpretation, administration and enforcement of the Internal Revenue Laws and provides legal guidance and interpretive advice to the Internal Revenue Service, Treasury and taxpayers.