Faced with the prospect of potential tax liability after an unsuccessful audit, taxpayers are faced with the options of filing a petition in the US Tax Court (Tax Court) prior to paying the liability or paying the liability, making a claim for refund, and (if denied or more than six months have passed) suing the government for a refund in local district court or the Court of Federal Claims. For taxpayers that select the Tax Court route, sometimes a question later arises as to whether they can seek to dismiss their case in order to refile in a different forum. The problem that arises is that Internal Revenue Code (Code) Section 7459(d) provides that if a Tax Court petition in a deficiency proceeding is dismissed (other than for lack of jurisdiction), the dismissal is considered as a decision that the deficiency is the amount determined by the Internal Revenue Service (IRS).

Taxpayers have attempted to avoid this rule in the past, presumably so that they could refile a lawsuit in another forum either because they believe that forum would be more favorable or because they desire a jury trial (Tax Court cases are bench trial; no juries are allowed). More than 40 years ago, the Tax Court rejected this tactic in Estate of Ming v. Commissioner, 62 TC 519 (1974),  holding that under Code Section 7459(d), a taxpayer who petitions the court for a redetermination of a deficiency may not withdraw a petition to avoid the entry of decision. Specifically, the court held: “It is now a settled principle that a taxpayer may not unilaterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.” Since Ming, the Tax Court has distinguished its holding in collection due process cases which involve the review of the IRS’s collection action, not the redetermination of a tax deficiency. See Wagner v. Commissioner, 118 TC 330 (2002). The Tax Court has further extended Wagner to non-deficiency cases involving whistleblower claims under Code Section 7623(b)(4) and stand-alone innocent spouse cases under Code Section 6015(e)(1). See Jacobson v. Commissioner, 148 TC No. 4 (Feb. 8, 2017); Davidson v. Commissioner, 144 TC 273 (2015). Continue Reading When Can a Taxpayer Dismiss a Tax Court Case as Moot?

In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions.  Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously.  In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity.  Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.”  (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5).  However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted.  See Tax Court Rule 345(b). Continue Reading Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity

Upcoming Tax Controversy Activities in September:

September 13, 2017: Tom Jones is presenting an update on Captive Tax in Charleston, South Carolina, at the South Carolina Captive Insurance Association Annual Conference.

September 14, 2017: Robin Greenhouse and Kristen Hazel will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about tax ethics.

September 18, 2017: Justin Jesse is speaking at the PLI Basics of International Taxation session in San Francisco about “Tax Concerns for US Persons Investing or Operating Outside of the US (Outbound Investments) – Active Business Operations.”

Wrapping up August:.

Our August 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on tax controversy news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

August 3, 2017: Tax Court Addresses “Issue of First Impression” Defense to Penalties

August 7, 2017: President Trump Nominates Copeland and Urda to US Tax Court

August 8, 2017: Record Numbers Are Giving Up US Citizenship

August 9, 2017: TIGTA Pounces on IRS Federal Records Retention Policies; Recommends Changes

August 11, 2017: The IRS Is Struck Down Again in Privilege Dispute

August 14, 2017: McDermott Named “Law Firm of the Year” at 2017 US Captive Services Awards

August 16, 2017: Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

August 17, 2017: Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

August 23, 2017: Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage

August 24, 2017: Internal Revenue Service Updates Golden Parachute Payments Audit Technique Guide, Signaling Key Items IRS May Review on Audit

August 25, 2017: IRS Criminal Investigation Division Announces Two New Initiatives

In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.

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On August 3, 2017, President Donald Trump nominated two judges to the US Tax Court. The nominations were received in the US Senate (Senate) and referred to the Committee on Finance.

One of the nominees, Elizabeth Copeland, was previously nominated by President Barack Obama. Her previous nomination expired with the conclusion of the 114th Congress in January 2017. The Committee on Finance unanimously approved her previous nomination, but the nomination was never voted on by the full Senate. Copeland is a partner at the law firm Strasburger & Price, LLP. If confirmed, she will be assuming the position left vacant by the 2015 retirement of Judge James S. Halpern. Judge Halpern still performs judicial duties as a Senior Judge on recall.

The second nominee, Patrick Urda, is counsel to the deputy assistant attorney general in the US Department of Justice’s Tax Division. If confirmed, he will be assuming the position left vacant by the 2014 retirement of Judge Diane L. Kroupa. We previously covered the circumstances of Judge Kroupa’s retirement and related criminal proceedings.

In a surprising decision, the US Tax Court (Tax Court) concluded that the pregame away-city meals provided to the Boston Bruins hockey team was not subject to the 50 percent deduction disallowance on the basis that the meals were both for the “convenience of the employer” and were provided at an “employer operated eating facility.” In Jacobs v. Commissioner, 148 TC No 24 (June 26, 2017), the court found that meals—consisting of dinner, breakfast, lunch and snacks—were served in a room provided without charge by the hotel and to all employees of the Bruins traveling to the games.

Most businesses are well aware of the 50 percent deduction disallowance provided in Internal Revenue Code (IRC) Section 274(n)(1), which applies to meals provided to executives or other employees traveling for the business purpose of the employer. “De-minimis” meals (those which are provided infrequently and low in value), however, are excepted from the 50 percent disallowance. Also exempt are those meals provided at employer-operated eating facilities, (e.g., the company cafeteria) and meeting the following requirements:

  • the facility is located on or near the business premises of the employer;
  • the revenue derived from the facility normally equals or exceeds the direct operating costs of the facility; and
  • the facility is available on substantially the same terms to each member of a group of employees that is defined under a reasonable classification which does not discriminate in favor of highly compensated employees.

IRC Section 119(a) allows an employee to exclude the value of any meals furnished by or on behalf of his employer if the meals are furnished on the employer’s business premise for the convenience of the employer. Generally, the expenses of IRC Section 119 meals can be used to satisfy the requirement that the revenue from the eating facility equal direct operating costs.

In Jacobs, the Tax Court concluded that the group meals served in the away-city hotel rooms provided at the hotels where the Bruins hockey team stayed for the games was an “employer operated eating facility,” which deems the rooms as the “eating facility” and “on the business premises of the employer” for purposes of the requirements. The rooms were also considered the business premises of the employer for purposes of the IRC Section 119 requirement. In light of its holding, the Tax Court did not need to address the taxpayer’s alternative argument that the meals were expenses for entertainment sold to customers under IRC Section 274(n)(2)(A).

Practice Point: The decision in Jacobs is seemingly expansive in permitting employers to deduct meals provided away from what has traditionally been considered an employer facility. The decision may provide an opportunity to employers to seek additional expense deductions.

We previously wrote about the lack of a US Tax Court (Tax Court) rule requiring notice to other parties before service of non-party subpoenas for the production of documents, information, or tangible things and inconsistent practices for Judges at the Tax Court. See here and here. To recap, Tax Court Rule 147 allows a party to issue a subpoena to a non-party but does not require that prior notice be given to the other side of the issuance. Prior notice is required under the Federal Rules of Civil Procedure, which govern federal cases before the US district courts. As previously discussed, this absence of a Tax Court rule has led to inconsistent orders from the Tax Court on the subject.

Change may be coming soon, according to comments from Tax Court Chief Judge Marvel on June 16, 2017 at the New York University School of Professional Studies Tax Controversy Forum. Judge Marvel indicated that the Tax Court is considering amendments to Tax Court Rule 147 to conform to the Federal Rules of Civil Procedure. This would be a welcome development for taxpayers, as the Internal Revenue Service (IRS) would no longer be able to issue subpoenas and gather information from non-parties without a taxpayer’s knowledge and access to the same materials.

Practice Point: The Tax Court has not indicated when the next amendments to its Rules will be released. Until that time, taxpayers in litigation should not expect that the IRS will provide notice of subpoenas issued to non-parties. As we have pointed out before, taxpayers should routinely and regularly issue discovery requests on the IRS seeking: (1) a list of all third-party contacts, including the documents sent and received; (2) copies of all subpoenas, including a copy of all documents sent and received; and (3) a list of the dates on which the third-party contacts occurred, including phone calls and meetings. These requests should be made at the beginning of every case, and it should be stated that the requests are continuing in nature.

We have previously blogged on the criminal tax proceedings related to former US Tax Court Judge Kroupa (see here and here). In October 2016, Judge Kroupa pleaded guilty to multiple tax criminal charges related to her tax returns and interactions with the Internal Revenue Service. Based on sentencing guidelines, the recommended sentence was between 30‒37 months. Judge Kroupa and the government submitted filings on the appropriate sentence, in which Judge Kroupa provided detailed reasons why she believed the court should impose a sentence of 20 months imprisonment. These filings can be found here and here. According to a report in today’s BNA Daily Tax Report, the court sentenced Judge Kroupa to 34 months in prison and ordered her to pay $457,000 in restitution, which is owed jointly with her former husband. She was also sentenced to three years of supervised release. Judge Kroupa’s former husband was sentenced to 24 months in prison and one year of supervised release.

Taxpayers often enter into tax sharing agreements to agree on how the parties may allocate current or future tax liabilities or potential refund. Sometimes these agreements are heavily negotiated (e.g., a corporation acquiring a subsidiary of an unrelated party); sometime they are not (e.g., marital settlement agreements among individuals with little assets). A recent US Tax Court (Tax Court) opinion is a reminder that such agreements between private parties are not binding on the Internal Revenue Service (IRS) in a tax proceeding.

In Asad v. Commissioner, the IRS disallowed certain deductions for rental-property losses claimed by the taxpayers on their joint returns for two years. The taxpayers, who had since divorced, both sought relief from joint and several liability under Internal Revenue Code (Code) Section 6015. In their divorce agreement, the taxpayers agreed that each would be liable for 50 percent of the tax liabilities for the two years. The IRS conceded that each taxpayer should be relieved of joint and several liability for a fraction of the liabilities (28 percent and 41 percent for the ex-wife and 72 percent and 59 percent for the ex-husband). At trial, the taxpayers argued that they should each be liable for 50 percent of the tax liabilities in accordance with the divorce agreement.

The Tax Court disagreed.  It reasoned that although the divorce agreement established the taxpayers’ rights against each other under state law, it did not control their liabilities to the IRS.  The court noted that case law, legislative committee reports, and reports issued by the Department of Treasury and the General Accounting Office have all observed that though divorce decrees may provide for an allocation of liabilities, such an allocation is not binding on creditors who do not participate in the divorce proceeding, and binding the IRS to such a divorce decree was impractical. Accordingly, in this case, though the taxpayers would have agreed to a 50/50 split on the tax liability, their divorce agreement did not alter their liabilities to the IRS.

Practice point:  When negotiating agreement containing a sharing of tax liabilities, taxpayers should remember that such agreement is not binding on the IRS, which is not a party to that agreement.  In the event one party is ultimately found liable for more than the amount or percentage dictated in an agreement, that party must seek contribution from the other party and cannot force the IRS to collect from the other party.

Last week, the US Tax Court (Tax Court) announced that Chief Special Trial Judge (STJ) Peter J. Panuthos has decided to step down as Chief STJ, effective September 1, 2017. STJ Lewis R. Carluzzo will take over as Chief STJ beginning September 1, 2017. STJ Panuthos has been Chief STJ for the past 25 years, and has a long list of accomplishments, including assisting in the expansion of pro bono services to unrepresented taxpayers. The Tax Court’s press release provides more background on STJs Panuthos and Carluzzo.

STJs are an important part of the Tax Court, and perform many different functions for the Court. The statutory authority for STJs is found in Internal Revenue Code (Code) Section 7443A(a), which authorizes the Chief Judge of the Tax Court to appoint STJs. Code Section 7442A(b) provides that the Chief Judge may assign a variety of proceedings to be heard by STJs, any declaratory judgment proceeding, any proceeding under Code Section 7463 (relating to small tax case procedures), any proceeding where the amount in dispute does not exceed $50,000, lien/levy proceedings, certain employment status proceedings, whistleblower proceedings and any other proceedings which the Chief Judge may designate. Although STJs may potentially hear a wide variety of matters, most cases conducted by STJs related to small tax proceedings where the amount in dispute is less than $50,000. These cases are conducted as informally as possible and the rules of evidence are relaxed; however, the trade-off is that these types of cases are not appealable by either party and may not be treated as precedent for any other case (although there is no prohibition against citing such cases for their persuasive value). For more information on the statutory and Tax Court rules on STJs, see here.