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Supreme Court Grants Certiorari in One Tax Case, Denies it in Several Others

Historically, the Supreme Court of the United States rarely grants petitions for certiorari in tax cases, and it appears this trend continues in the current term.

On September 30, 2021, the Supreme Court granted the petition for certiorari in Boechler, P.C. v. Commissioner. The case presents the question of whether Internal Revenue Code Section 6330(d)(1), which establishes a 30-day time limit for filing a petition in the US Tax Court to review a notice of determination by the Internal Revenue Service (IRS) in a collection due process matter, is a jurisdictional requirement or a claim-processing rule subject to the equitable tolling doctrine.

On October 4, 2021, the Supreme Court denied petitions for certiorari in Healthcare Distribution Alliance v. James and Taylor Lohmeyer Law Firm PLLC v. United States. The former involved a challenge to a US Court of Appeals for the Second Circuit decision that held that an opioid stewardship surcharge was a tax within the meaning of the Tax Injunction Act. The Court also found that the district court lacked subject matter jurisdiction to rule on the challenge to the payment. The latter case involved a law firm’s challenge to the US Court of Appeals for the Fifth Circuit’s decision that the IRS could use a “John Doe” summons to seek the identifies of taxpayers who it believed may have taken the firm’s advice to hide income offshore.

The Supreme Court also denied petitions for certiorari in the following cases:

  • Perkins v. Commissioner: A case regarding the taxability of income derived from the sale of land and gravel mined from treaty-protected land by an enrolled member of the Seneca Nation
  • Kimble v. United States: A case focused on Report of Foreign Bank and Financial Accounts penalties and
  • Razzouk v. United States: A case involving restitution for tax and bribery convictions

Still pending are petitions in Willis v. United States (which involves the value of collectible coins seized by the government and deposited into an IRS account) and Clay v. Commissioner (which deals with a dispute over whether to follow guidance from the Bureau of Indian Affairs or the IRS).

Practice Point: Although the Supreme Court rarely reviews tax cases, when it does, the decision is usually important because it’s applicable to numerous taxpayers. For example, cases such as Mayo Found. for Med. Educ. & Research v. United States and United States v. Home Concrete & Supply LLC both provided significant guidance for taxpayers regarding the IRS’s scope of regulatory authority. Additionally, non-tax cases from the Supreme Court can contain general principles that are also applicable and impact tax positions taken, or being considered, by taxpayers. Thus, it is important that taxpayers and their representatives stay abreast on what is happening at the Supreme Court.




What are the Time Limits for Assessing Additional Federal Tax and Filing a Refund Claim?

The Internal Revenue Service (IRS) must follow the “statute of limitations” as stated in Internal Revenue Code (IRC) Section 6501 to “assess” additional federal tax. Likewise, taxpayers must seek a tax overpayment or refund within the statutory period stated in IRC Section 6511. In this article, we’ll answer some of the most common questions regarding when the IRS can assess additional federal tax and when taxpayers must file a refund claim.

WHEN DOES THE STATUTE OF LIMITATIONS FOR ASSESSING ADDITIONAL TAXES START?

Typically, the period during which the IRS can seek additional tax starts when the taxpayer files their tax return. A taxpayer “self-assesses” when the amount of tax is stated on the return, but tax assessment can also occur when the IRS creates a “substitute for return” under IRC Section 6020. (For example, when the taxpayer fails to timely file a return.) Assessment merely means that the IRS records the tax liability on its official ledger for each taxpayer. An assessment is significant because it is legally considered a debt of the taxpayer for which the IRS can commence collection activities, like placing a lien and levy on property.

Self-Assessment Example: The taxpayer reports on a timely filed return a tax liability of $10,000 and submits payment of $5,000. The $10,000 tax is automatically assessed and constitutes a tax debt of the taxpayer, despite only a partial payment. In this case, the IRS would seek to collect the balance due ($5,000) from the taxpayer under the collection rules.

WHAT IS A TAX ASSESSMENT?

The IRS assesses tax by recording the amount owed in its official records. The assessment establishes the fact and amount of the tax liability that’s due to the IRS and starts the period during which the IRS can collect the amounts due and owing. Generally, the IRS may not lien or levy a taxpayer’s property until after an assessment is made.

There are three primary types of assessments:

  1. A “summary assessment” occurs automatically when the taxpayer reports an amount of tax on a return.
  2. A “jeopardy assessment” occurs when the IRS determines that the taxpayer may abscond with property that the IRS may need to lien and/or levy to satisfy a tax deficiency.
  3. A “tax deficiency assessment” occurs after the IRS determines the amount owed by the taxpayer and follows its procedures to permit the taxpayer to challenge its determination (usually after an audit).

STATUTORY NOTICE OF DEFICIENCY (THE 90-DAY LETTER)

If the IRS audits a return and determines that the taxpayer owes additional tax, it generally cannot assess the tax before sending the taxpayer a statutory notice of deficiency, or the so-called “90 day letter.” The letter must be sent by certified or registered mail to the last known address of the taxpayer (which is usually the address listed on the last return filed with the IRS). If the taxpayer does not file a timely petition with the US Tax Court in response to the 90-day letter, the IRS may then assess [...]

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Weekly IRS Roundup April 26 – April 30, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of April 26, 2021 – April 30, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

April 26, 2021: The IRS issued Revenue Procedure 2021-23, making superseding changes to earlier Revenue Procedures related to the Child Tax Credit under section 24 of the Code, the Earned Income Credit under section 32 of the Code and the Premium Tax Credit under section 36B of the Code in order to reflect statutory amendments made by the American Rescue Plan Act of 2021 (ARPA).

April 26, 2021: The IRS issued a news release reporting the results of its March 2021 inaugural National Virtual Settlement Month, an IRS-coordinated nationwide initiative to provide pro bono legal advice to pro se US Tax Court litigants.

April 27, 2021: The IRS issued corrections to final regulations published in December 2020 regarding the elimination of the deduction for expenses associated with certain employer-provided transportation and commuting benefits under section 274 of the Code.

April 27, 2021: The IRS issued a news release, describing various electronic services it provides and urging taxpayers and tax professionals to use such services to speed up the processing of tax returns, payments and refunds.

April 28, 2021: The IRS issued a news release announcing a seventh round of Economic Impact Payments consisting of nearly two million payments totaling more than $4.3 billion, bringing the total amount of disbursements under ARPA to approximately 163 million payments worth approximately $384 billion.

April 29, 2021: The IRS issued a news release, providing information and resources to assist with tax compliance by gig economy workers and taxpayers who claimed unemployment compensation in 2020.

April 29, 2021: The IRS issued a news release, reminding taxpayers of the availability of tax-filing extensions upon request and listing certain categories of taxpayers who automatically obtain extensions without request.

April 30, 2021: The IRS issued Announcement 2021-8, listing attorneys, Certified Public Accountants (CPAs) and other practitioners who have received disciplinary sanctions for violating the regulations governing practice before the IRS.

April 30, 2021: The IRS issued a news release announcing the release of updated 2021 versions of Schedules K-2 and K-3 for Forms 1065, 1120-S and 8865. The updated Schedules are intended to provide greater clarity regarding the reporting of certain international tax items with respect to pass-through entities.

April 30, 2021: The IRS issued a news release announcing that it is now accepting grant applications by eligible organizations under the Tax Counseling for the Elderly (TCE) and Volunteer Income Tax Assistance (VITA) programs, which provide tax assistance services to elderly taxpayers and underserved communities, respectively.

April 30, 2021: The IRS released its weekly list of written determinations (e.g., [...]

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Exxon Prevails in $200 Million Tax Penalty Case

On January 13, 2021, the US District Court for the Northern District of Texas ruled in favor of Exxon Mobil Corporation (“Exxon”) in its battle against the government over tax penalties. Exxon filed amended returns for its 2006-2009 tax years seeking a $1.35 billion tax refund based upon a change of character of certain transactions (from mineral leases to purchase transactions). The government disallowed the refund claims and imposed a $200 million penalty pursuant to Internal Revenue Code (IRC) section 6676. Exxon paid the penalty and filed suit for a refund.

We have written extensively concerning IRC section 6676, warning taxpayers of this potential landmine. See, e.g., Taxpayers Should Prepare for the Next Penalty Battleground” Roberson, Spencer and Walters, Law360 (May 21, 2019) and “Expect More Civil Tax Penalties—So, Now What?” Roberson and Spencer, Tax Executive (Sept. 27, 2019). To recap, IRC Section 6676 was enacted in 2007 in response to the high number of meritless refund claims being filed at the time. It imposes a 20% penalty to the extent that a claim for refund or credit with respect to income tax is made for an “excessive amount.” An “excessive amount” is defined as the difference between the amount of the claim for credit or refund sought and the amount that is actually allowable. For example, if the taxpayer claims a refund of $2 million and the Internal Revenue Service (IRS) allows only $1 million, the taxpayer can still be penalized $200,000.Significantly, IRC section 6676 does not require the IRS to show any fault or culpability on the part of the taxpayer—e.g., negligence, disregard of rules or regulations, etc. IRC section 6676(a) originally provided a “reasonable basis” defense (which is applicable to the Exxon case), but in 2015 Congress amended the statute and now requires a showing of “reasonable cause.” Neither the Code nor the regulations provide for any other defense to the IRC section 6676 penalty. Moreover, the penalty is immediately assessable, meaning taxpayers cannot fight the IRS in a pre-payment forum like the US Tax Court but must first pay the penalty and seek redress in a refund form.

In Exxon, the government argued that the court should overlay a subjective element on “reasonable basis,” as the US Circuit Court for the Eighth Circuit did in Wells Fargo & Co. v. United States, 957 F.3d 840 (8th Cir. 2020). Our prior coverage of this case can be found here. The Exxon court declined the invitation. Instead, the court explained IRC section 6676 “focuses on whether the claim had a reasonable basis, not on whether the taxpayer had a reasonable basis.” The court agreed with Exxon that its position in the refund claim that its transactions were purchases was reasonable based on the relevant authorities. It further found that the company had “colorable support for its legal contention that a change that affects whether, not when, an item comes into income is not [...]

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Weekly IRS Roundup June 22 – June 26, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 22 – June 26, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 24, 2020: The IRS issued final regulations permitting a regulated investment company (RIC) that receives qualified real estate investment trust (REIT) dividends to report dividends the RIC pays to its shareholders as section 199A dividends.

June 25, 2020: The IRS Office of Chief Counsel announced a limited settlement offer to certain taxpayers with pending docketed US Tax Court cases involving syndicated conservation easement transactions. The settlement offer requires a concession of the income tax benefits claimed by the taxpayer and imposes penalties.

June 26, 2020: The IRS will begin to reopen Taxpayer Assistance Centers starting on June 29, 2020. In-person appointments will be available for certain items.

June 26, 2020: The IRS issued a reminder to taxpayers and businesses that income tax liabilities as well as postponed April 15 and June 15, 2020, estimated tax payments are due July 15, 2020. Taxpayers who owe a 2019 income tax liability, as well as estimated tax for 2020, must make two separate payments on or by July 15, 2020. One payment should be for their 2019 income tax liability and one payment for their 2020 estimated tax payments.

June 26, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.




Tax Court Records Accessible Again

When the US Tax Court (Tax Court) shut down in March, the public was unable to request copies of Tax Court records. That changed effective June 1, 2020, as non-parties may now call and request copies of court records which will then be sent via email. The cost for copy requests is $0.50 per page, with a per-document cap of $3.00. The Tax Court’s press release on this subject can be found here.

Practice Point: It can be extremely beneficial to taxpayers and their advisors to see arguments being made by other taxpayers and the Internal Revenue Service in cases with similar legal issues. The ability to now directly call the Tax Court to request briefs or other filings in a docketed case, and to receive such documents electronically, is significant. Moreover, the cap of $3.00 per document may provide an incentive to request documents where the price per page, without a cap, was previously financially burdensome.




Tax Court Holds That Form 870-AD Is Not a Binding Settlement Agreement

A recent US Tax Court Memorandum Opinion held that a settlement agreement embodied in Internal Revenue Service (IRS) Form 870-AD does not preclude the IRS from reopening an audit and issuing a notice of deficiency.

In Howe v. Commissioner, T.C. Memo 2020-78, the Tax Court held that equitable estoppel did not bind the Commissioner to an agreement in Form 870-AD. Only settlements that comply with Internal Revenue Code (IRC) sections 7121 and 7122 are binding on both the taxpayer and government, and an IRS Form 870-AD does not comply with those provisions. Further, the Court held that equitable estoppel did not bar the IRS from asserting a larger deficiency against the taxpayer because, even if true, the alleged failures to follow internal IRS procedures would not rise to the level of affirmative misconduct.

An IRS revenue agent initially began an audit of the 2008 tax return for the taxpayer, who was CEO and majority shareholder of a healthcare company, in 2011. At the conclusion of the audit, the revenue agent issued a Notice of Proposed Adjustment (NOPA) and IRS Form 886-A. The taxpayer responded to the NOPA by filing a protest letter at the IRS Appeals Office. In settlement of the issue during the IRS Appeals Office review, the taxpayer and the IRS appeals officer (on behalf of the IRS) signed a Form 870-AD that reduced the asserted tax deficiency and eliminated the IRC section 6662 accuracy-related penalty. The IRS Appeals Officer filed an IRS Appeals Case Memorandum (ACM) summarizing the facts and legal arguments.

In response to the ACM, the revenue agent who conducted the audit, in consultation with her supervisor and local IRS counsel, internally filed a Dissent for Appeals Decision. The Dissent for Appeals Decision sought to reopen the case against the taxpayer on the grounds that the taxpayer made material factual misrepresentations during the IRS Appeals process. The IRS Appeals Director approved reopening the case, and the IRS issued a Notice of Deficiency.

The taxpayer sought review in the Tax Court on the grounds that the IRS improperly reopened the case and that the settlement represented in Form 870-AD equitably estopped the Commissioner from issuing the Notice of Deficiency. The Tax Court rejected the taxpayer’s argument. Following its holding in Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974), the Tax Court will only look behind a Notice of Deficiency when there is “substantial evidence of unconstitutional conduct on the Commissioner’s part and the integrity of our judicial process would be impugned if we were to let the Commissioner benefit from such conduct.” (Howe, at *12.) The Tax Court found there was no substantial evidence of unconstitutional conduct by the IRS.

Further, there is a heightened standard for applying equitable estoppel against the IRS. In addition to the traditional detrimental reliance elements, asserting equitable estoppel claims against the government requires a showing that: “(1) the government engaged in affirmative misconduct going beyond mere negligence; (2) the government’s wrongful acts will cause a serious [...]

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Weekly IRS Roundup June 1 – June 5, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 1 – June 5, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 2, 2020: The IRS reminded taxpayers who live and work abroad that they have until July 15, 2020, to file their 2019 federal income tax return and pay any tax due. Typically, the deadline for such returns is June 15.

June 3, 2020: The IRS issued Notice 2020-42 to provide temporary relief from the physical presence requirement in Treasury Regulations § 1.401(a)-21(d)(6) for participant elections required to be witnessed by a plan representative or a notary public, including a spousal consent required under IRC § 417.

June 4, 2020: The IRS issued Notice 2020-39 and updated the Qualified Opportunity Zones frequently asked questions (FAQs). Notice 2020-39 answers questions regarding relief from certain requirements under IRC § 1400Z-2, particularly providing that if a taxpayer’s 180th day to invest in a qualified opportunity zone would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020, to invest that gain into a qualified opportunity fund (QOF). In addition, Notice 2020-39 provides that the period between April 1, 2020, and December 31, 2020, is suspended for purposes of the 30-month period during which property may be substantially improved.

June 4, 2020: The IRS announced that the Office of Chief Counsel will be expanding its Virtual Settlement Days program. Settlement Days events are organized in effort to resolve US Tax Court cases by providing taxpayers not represented by counsel the opportunity to receive free tax advice from certain pro bono groups such as the Low Income Taxpayer Clinics (LITCs) and American Bar Association (ABA).Through this program, taxpayers can also discuss their Tax Court cases and resolve related tax issues with members of the IRS Office of Chief Counsel, the Independent Office of Appeals and Collection.Due to COVID-19, Settlement Days events are now virtual and allow for taxpayers and volunteers to join from any location. 

June 5, 2020: The IRS issued Notice 2020-43 to seek public comment on a proposed requirement for partnerships to use only one of two alternative methods described in Notice 2020-43 to satisfy the Tax Capital Reporting Requirement with respect to partnership taxable years that end on or after December 31, 2020. The two methods that a partnership may use to report, for each partner, are either (i) the partner’s basis in its partnership interest, reduced by the partner’s allocable share of partnership liabilities, as determined under IRC § 752 (Modified Outside Basis Method); or (ii) the partner’s share of previously taxed capital, as calculated under a modified version of Treas. Reg. § 1.743-1(d) (Modified Previously Taxed Capital Method).

June 5, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, [...]

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Tax Court Holds IRS Chief Counsel Attorneys May Make Initial Penalty Determination

In general, section 6751 requires that a supervisor give written approval before penalties can be asserted against a taxpayer. In Koh v. Commissioner, T.C. Memo. 2020-77, authored by the US Tax Court’s (Tax Court) most recent addition—Judge Travis Greaves—the Tax Court affirmed that an attorney from Internal Revenue Service (IRS) Chief Counsel may be authorized to assert such penalties in an answer to a Tax Court petition.

In Koh, the IRS sent the taxpayer a notice of deficiency that included a determination related to penalties under section 6662(j). The taxpayer filed a petition with the Tax Court contesting the IRS’s determination. In its answer, the IRS Chief Counsel attorney asserted that the taxpayer was liable for accuracy-related penalties under section 6662(b)(1) or (2), in the alternative to the section 6662(j) penalties assessed in the original deficiency notice.

The taxpayer sought partial judgment on the pleadings on the grounds that IRS Chief Counsel attorneys are not authorized to assert penalties in the answer. Under section 6751(b)(1), a penalty may not be assessed unless the “the initial determination of such assessment” was “personally approved (in writing) by the immediate supervisor of the individual making such determination.”

The Tax Court reasoned that as the IRS’s representative, the Chief Counsel attorney (or a delegate) may assert additional penalties in an answer to a Tax Court petition. Moreover, the Tax Court ruled that Chief Counsel attorneys had authority to assert penalties in an answer in Roth v. Commissioner, T.C. Memo. 2017-248, aff’d, 922 F.3d 1126 (10th Cir. 2019). That opinion was based on numerous cases holding that the IRS may assert penalties in an answer. However, Roth pre-dated the Tax Court’s opinion in Clay v. Commissioner, 152 T.C. 223 (2019), which cited US Court of Appeals for the Second Circuit authority for the proposition that “written approval is required no later than the issuance of the notice of deficiency rather than the assessment of the tax.”

Practice Point: Taxpayers continue to face risk from penalties being asserted for the first time in an answer in a Tax Court Proceeding. We believe that there is a strong likelihood that Koh will be appealed to the US Court of Appeals for the Third Circuit. We will continue to follow new developments related to penalties and the supervisory approval requirement.




Tax Court Zooms into Remote Proceedings

On May 29, 2020, the US Tax Court (Tax Court) announced that to accommodate continuing uncertainties relating to the COVID-19 pandemic, and until further notice, all court proceedings would be conducted remotely. The Tax Court also issued Administrative Order 2020-02 regarding the conduct of remote proceedings and Administrative Order 2020-03 regarding limited entries of appearance. The Orders are effective until terminated by the Tax Court.

Administrative Order 2020-02 contains sample forms, which are also available under the “Forms” tab on the Tax Court’s website, providing more information on how Tax Court proceedings will be conducted during the pandemic. The updated forms include:

The forms make clear certain requirements that are contained in the Tax Court Rules of Practice and Procedure but were not contained in a prior version of the Standing Pretrial Order. One notable change is that stipulations of fact, which are many times not filed until the day of trial, must now be filed at least 14 days before the trial commences.

Remote proceedings will be conducted using Zoomgov, and access information will be provided to the parties via a meeting identification number and a password. The parties must take steps to ensure that they and their witnesses have adequate technology and internet resources to participate in a remote proceeding. Personal Zoom accounts are not required.

Like most all court proceedings, remote proceedings will be open to the public. The Tax Court will post dial-in information on its website for each trial session, which will allow real-time audio access to proceedings to the general public.

Practice Point:  The Tax Court’s decision to conduct remote proceedings reflects the changing times. Being able to effectively present one’s case in person to a Tax Court Judge requires substantial preparation to tell the taxpayer’s story and advocate for the desired result. Taxpayers and their counsel must now prepare to do the same over videoconference, an arguably much more difficult task. We plan to explore the new rules in more detail in a future article and will keep our readers posted. Taxpayers should be mindful that the general public and the press will be able to virtually attend more court proceedings. Accordingly, your tax issues will be more open and accessible than ever before.




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