Ninth Circuit Hears Altera Tomorrow

We welcome back guest bloggers Professor Susan C. Morse from University of Texas School of Law and my colleague Senior Lecturer on Law Stephen E. Shay from Harvard.  Professors Morse and Shay, building on an earlier post as well as their amicus brief, explain that the Tax Court went too far in striking down Treasury regulations requiring the sharing of stock-based compensation costs in Altera.  The underlying issue as well as the procedural issue make this a case to watch. We have previously blogged about Altera here and here.   Keith

On Wednesday of this week, October 11, the Ninth Circuit will hear argument in Altera, a case about transfer pricing and administrative law. Politically, Altera is a case about big multinational technology companies and under-resourced government regulators. Technically, it is about the transfer of intellectual property rights from U.S. affiliates of a multinational firm (a “U.S. group”) to one or more non-U.S. offshore subsidiaries under a qualified cost sharing arrangement (QCSA).

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Firms from Google and Apple to Altera, a semiconductor company owned by Intel, use the QCSA “cost sharing” strategy to support the attribution of intellectual property for tax purposes to low-tax offshore subsidiaries and thereby justify allocation of substantial taxable income to those subsidiaries. The smaller the amount of U.S. group costs included in the pool, the more tax revenue the U.S. loses with respect to the cost-shared IP. Billions of dollars are at stake. Two amicus briefs prepared pro bono by academics and former tax practitioners support the government and multiple amicus briefs on behalf of interested business groups support the taxpayer in this important litigation.

Altera challenged a final Treasury regulation that requires multinationals who enter into QCSAs with offshore affiliates to include the cost of stock options granted to employees who develop the IP (among other expenses) in the pool of costs to be shared. Under cost sharing, if net costs are borne by the U.S. group the non-U.S. affiliates must reimburse the U.S. group for that amount. Prior regulations did not specifically address the issue of stock option cost allocation in a QCSA. In a prior case, Xilinx, the Tax Court and Ninth Circuit held that the government could not make offshore affiliates pay a share of stock option expense under these earlier regulations.

The revised final regulation requires taxpayers to include stock option costs in the pool of expenses for determining cost sharing payments. They provide that this is required under the arm’s length standard and, consistent with the directive of Section 482 of the Internal Revenue Code, is necessary clearly to reflect the income of the U.S. group.

Taxpayers challenged the final regulation and won in Tax Court in a reviewed decision that was unanimous among the judges that participated. The Court held that the regulations departed from the historic understanding of “arm’s length standard” which required the use of data about unrelated party transactions. The Tax Court proceeded to conclude, under a review based on State Farm (US 1983), that the regulatory change was arbitrary and capricious under § 706(2)(A) of the Administrative Procedure Act.

The misconception in the Tax Court’s decision is fundamental. One reason is that the historic understanding of “arm’s length standard” does not require the starting point of data about unrelated party transactions. Sometimes an application of the arm’s length standard uses unrelated party data. For example, if a taxpayer sells a commodity to related affiliates and unrelated firms, the unrelated firm price is the right starting point for the related affiliate price, because it is sufficiently comparable. But in other cases, unrelated party transactions are not comparable enough to serve as good starting points.

The arm’s length standard has always been a counterfactual inquiry. It has always asked how a related party transaction would be treated if, contrary to fact, the same transaction (including the actual relationships presented in fact) were conducted by unrelated parties (i..e, as though the relationship did not exist). This does not mean insisting that the reasoning begin with an unrelated party transaction if that transaction has sufficiently different facts and is not comparable.

Several transfer pricing methods, including the comparable and residual profit split methods, do not require use of unrelated party prices as starting points.   Moreover, large chunks of the 482 rules prove that the arm’s length standard is not a brittle instruction to use whatever unrelated party information is available. The 482 regs include many pages of comparability adjustments which at every turn show that a starting unrelated party price, even if available, often needs a lot of work before it can be considered a comparable.

Altera and other multinational tech companies want to avoid paying for the stock option cost component of technology by arguing that unrelated firms that share technology do not require payment for stock option costs. They say that the arm’s length standard requires a starting unrelated party data point, and further that any departure from the unrelated party data point requirement is a significant regulatory change.

One reason that Altera should lose in the Ninth Circuit is because the arm’s length standard does not, and never has, required a starting unrelated party data point in all cases. Government briefs include this argument. They show that uncontrolled joint development agreements were not relevant to the question of whether to include stock option costs in QCSAs because clear reflection of income for high-profit intangibles cannot succeed if it relies on uncontrolled party data.  One amicus brief points out that Section 482’s reference to pricing “commensurate with income” only makes sense if the arm’s length standard embraces transfer pricing that is not bound to unrelated party pricing.

Another amicus brief (ours, with coauthors) explains that unrelated party data points cannot be starting points for an arm’s length analysis if the unrelated information is wholly incomparable to the related party situation. This is the case for the evidence that Altera points to, which consists of technology sharing deals among unrelated parties that do not mention stock option costs. This evidence is not relevant for QCSAs because it is not comparable.

The facts of Example 2 in our brief illustrate the lack of comparability between unrelated party joint ventures and related party technology transfer agreements:

Assume that Company C and Company D are unrelated and want to share the R&D costs and benefits for a new innovation on a 50/50 basis.

Company C pays cash compensation of 80 and grants stock options with an expected cost of 20 for its R&D employees. Company D pays cash compensation of 20 and grants stock options with an expected cost of 80 for its R&D employees. There are two possible ways of looking at the R&D costs in this deal:

Option 1: If stock option expenses are included, the pool of expenses is 200, and each company pays 100. No transfer between C and D is required to achieve a 50/50 split of expenses.

Option 2: If stock option expenses are not included, the pool of expenses is 100: 80 contributed by Company C and 20 contributed by Company D. D would transfer 30 to C to achieve a 50/50 split of expenses.

The correct answer is Option 1. Any rational economic actor would estimate and incorporate the stock option expense cost. Note that Company C and Company D do not need to mention stock option costs in order to consider and incorporate them into their transaction. The lack of a specific mention of stock options in the unrelated party deal document does not mean that stock option costs are priced at zero or intentionally disregarded.

The arm’s length standard has always recognized the absence of comparable third-party transactions in some areas of transfer pricing, including the large-scale licensing of IP among related parties. Thus the revised regulation at issue in Altera does not revolutionize the meaning of arm’s length. Instead it stays true to the meaning of clear reflection of income.

Tune in again after October 11 to hear how the taxpayer, the government and the judges of the Ninth Circuit approached this case at oral argument.

 

Tax Court Order Sets Out Quick Peek Process in Discovery Dispute

A couple of weeks ago the Tax Court issued an order in the ongoing dispute between IRS and Guidant relating to over billions in adjustments for the years 2001-07 involving transfer pricing and the transfer of intangibles to foreign corporations (as well an accuracy-related penalty). We have on occasion in the blog discussed the high stakes and intense battles surrounding privilege disputes (see for example DOJ and Davis Polk Take off the Gloves in Recent Discovery Dispute Involving GE’s $660 Million Tax Refund Suit).

There have been a series of discovery disputes in the Guidant case, which is not surprising for a case of this size. In the latest dispute, Guidant has been seeking documents from IRS, and IRS has claimed deliberative process privilege for over 4,000 documents. Guidant filed a motion to compel. IRS had sent across privilege logs and Guidant thought the logs were “inadequate and fail to provide the necessary information to support the privilege or at the minimum are deficient in a number of formatting and practical issues or have missing essential information.” The taxpayers argued that “hundreds of entries on respondent’s logs fail to identify the deliberative process involved and fail to identify the decision to which they relate.” The taxpayers suggested that the Court “issue a Protective Order for the benefit of respondent if respondent would release the documents to petitioners during discovery.” IRS felt that the Protective Order “would not adequately protect respondent and suggested “that a sampling of the thousands of documents claimed to be subject to the privilege be examined in camera by the Court.” The taxpayers objected to the sampling because they felt that it “would be inherently biased because respondent would know what the documents contained because they had possession of them but petitioners would not know.”

With that impasse, the order notes that the parties agreed to use a “quick peek” procedure to resolve the dispute, with the requirement that the parties file a status report. I was not familiar with that process, and briefly describe it below.

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A 2015 New York Law Journal article from attorneys Christopher Boehning and Daniel Toal at Paul Weiss discusses their use and defines them as follows:

Under “quick peek” agreements, parties to a litigation may produce documents after little to no privilege review, subject to the understanding that any privileged documents disclosed will be returned to the party who produced them free from the recipient’s assertion of waiver.

Quick peek agreements grew out of 2008 changes to the Federal Rules of Evidence (FRE) that sought to mitigate the risks of inadvertent waivers of privilege. FRE 502(b) provides that if a party takes reasonable steps to prevent disclosure a mistaken production of privileged material does not waive the privilege. The FRE 502(b) change resolved conflicts in common law and were significant. In addition to FRE 502(b), as the 2015 NY Law Journal article states “FRE 502(d) is even more sweeping. Under that provision, parties may ask a court to enter an order specifying that the parties’ production of privileged material does not constitute waiver, even if the parties fail to take reasonable steps to prevent its disclosure.”

From FRE 502(d) (and Advisory Committee Notes accompanying Federal Rule of Civil Procedure 26(b)(2)) is how we get to quick peek. The Paul Weiss authors state that FRE 502(d) has encouraged the use of quick peek agreements, which has the potential to speed discovery because it reduces the amount of privilege review before production.

Observations on the Procedure

As my recent Tax Court experience is in tax clinic cases where discovery was rare, I sought thoughts on the process from Sean Akins, Special Counsel at Covington, co-author of Thomson Reuters’ Litigation of Federal Tax Controversies and former Procedurally Taxing guest poster. While Sean likewise has no direct experience with the process, he does have significant insight, noting that quick peek “is consistent with the Tax Court’s practice of seeking to have the parties communicate and cooperate to the greatest extent possible” and that he “suspects that the Court hopes that the parties will be able to agree that certain documents are truly protected by the deliberative process privilege, some are not, and as to the others there remains a fair dispute.” As Sean observes, even if the parties still may dispute whether privilege attaches, it could lessen the need for further court intervention “because Petitioners will have the opportunity to review the substance of the documents, and it may be that they elect not to challenge the privilege claim if they determine some of the documents lack relevance/materiality.”

Sean also however expressed “a little surprise” at its use in the context of the government claiming deliberative process privilege:

[T]the quick peek method was utilized concerning documents purportedly subject to the deliberative process privilege.  The theory behind that privilege, as I understand it, is that assuring government employees of confidentiality with respect to their decision-making process should permit those individuals to provide more candid advice.  Allowing a quick peek, even if the privilege attaches and remains unwaived, cuts against this, as the decision-making process is revealed.  Somewhat ironically, the IRS resisted the notion that a protective order would adequately protect the IRS should the documents be produced to Petitioners.  But, nothing in the Order that the Court issued would preclude Petitioners or their counsel from disclosing to others the substance of what they learned during the quick peek process.  In the absence of protections against such disclosure, I would have opted for a protective order.

Sean adds that “he would be interested to keep an eye on this and see how it is ultimately resolved, and whether the parties are again before the Court with a more narrow set of documents requiring an in camera review.” We will keep an eye on the Guidant case and also for other orders where the Tax Court uses this approach.

For those interested I include the language from the order setting out the procedure:

  1. Respondent does not waive any privilege it has asserted with respect to deliberative due process or any other privilege it has previously asserted in this case. The privilege is not waived in this litigation and any disclosure is also not a waiver in any other Federal or State proceeding.
  2. Counsel for respondent shall disclose each document for which he claims privilege and counsel for petitioners shall review such document but is not permitted to retain or copy such document unless both counsel agree otherwise or except as provided.
  3. All documents which both counsel agree are properly claimed as privileged shall remain so and respondent shall not be required to produce that document further. All documents which both counsel believe are not properly claimed as privileged shall be immediately produced and given to petitioners.
  4. The parties shall file a status report after they have concluded their quick peek procedure.

Summary Opinions for August 1st to 14th And ABA Tax Section Fellowships

Before getting to the tax procedure, we wanted to let everyone know the application for the ABA Tax Section fellowships is now open.  Here is a link to the release regarding the applications and the Christine A. Brunswick Public Service Fellowships.   Here is another link regarding the process, which also highlights recent winners.   I’ve had the pleasure of meeting many of the recipients, and it is an esteemed group providing amazing services thanks to the ABA Tax Section.

A few quick follow ups to some items from last week.  We had a wonderful post from Robin Greenhouse on the BASR Partnership case dealing with the statute of limitations and fraud of the tax preparer, which can be found here.  Ms. Greenhouse and Les were both also quoted in a story on the topic for Law360, which can be found here (may be behind a subscription wall, sorry).  Keith posted on the Ryscamp case, which dealt with jurisdiction to review a determination that a taxpayer’s position is frivolous.  Keith was also quoted about the case in the Tax Notes article, which can be found here (also behind subscription wall, sorry again).

Here are some of the other tax procedure items we didn’t otherwise cover:

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  • We flagged earlier in the month that Congress has overturned Home Concrete with the new Highway Bill.  The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 has a few other changes to tax procedure laws.  Probably the biggest news is that partnerships and s-corps will need to file tax returns three months and fifteen days after the close of their tax years (for calendar filers, that will be March 15).  This is a change for partnerships, but not s-corps.  C-corporations, however, will not have to file until four months and fifteen days after the close of the tax year (April 15 for calendar year filers).  The goal of this is to get k-1s to individuals prior to the April 15 filing deadline.  I assume c-corps were pushed back a month on work flow concerns for preparers.  The act also revised the extended due dates for various types of returns.  In addition, next year, FBARs will be due April 15, and there will be a possible six month extension.
  • The District Court for the District of New Jersey decided a lien priority case where a bank recorded a mortgage regarding a home equity line of credit (HELOC), some portion of which may have been withdrawn after a federal tax lien was filed.  In US v. Balice, the bank argued that the withdrawal date of the funds on the HELOC was irrelevant and state law directed that the date related back to the original recording date (the Court declined to offer an opinion about whether or not this is the actual NJ law).  The government argued that federal law applied, which held first in time is first in right, but only to the extent the funds were already withdrawn.  The Court held that state law defined the property rights, but federal law governed the lien priority.  Under federal the federal statute, the security interest was only perfected when the funds were actually borrowed.  See Section 6323(a).
  • The IRS has issued two important Revenue Rulings in the international arena.  The first outlines the procedures for making competent authority requests.  The second is for taxpayers seeking advanced pricing agreements, and can be found here.
  • Jack Townsend on his Federal Tax Procedure blog has a discussion of Sissel v. US Dept. HHS, where the majority, concurring and dissenting opinions all review the Originations Clause of the Constitution and its application to Obamacare.
  • I unabashedly praised John Oliver’s sultry singing about the IRS with Michael Bolton previously in our pages.  In that ditty, Oliver pointed out we should be hating on Congress, not the IRS.  Peter Reilly over at Forbes makes a good point that in Oliver’s new IRS bit, he should probably be complaining about Congress again and not the IRS about the lack of church audits (check out Section 7611, which is Congress’ doing).
  • Service issued guidance to its new international practice unit on transactions that might generate foreign personal holding company income under subpart F.  Caplin & Drysdale have coverage here.
  • The Tax Court seems to have just thrown an assist to the Service in Summit Vineyard Holdings v. Comm’r, holding that an individual had apparent authority to execute an extension for the statute of limitations, even though the individual lacked actual authority.  The Court somewhat saved the Service, because it probably should have known that the TMP was a different entity in the year in question, as it had been informed of the switch.  The Court noted the auditing agent had very limited TEFRA knowledge (I’m not sure that excuses the IRS from properly following the rules).  The agent had the manager of the then current TMP sign, instead of the TMP for the year in question.  There appears to be somewhat of a split on this, but the Court determined that the Ninth Circuit (where the appeal would lie) would apply state law and find apparent authority based on the evidence and actions taken by the individual.  Saved by the Court!  Based on the facts, it does not seem that unfair though, as the individual was the manager of both TMPs, and it seems like he also thought he was properly executing the paperwork and extending the SOL.
  • In Chief Counsel Advice, the Service has concluded it can only apply the Section 6701 aiding and abetting penalty one time against a person who submitted false retirement plan application documents.  This is the case even though multiple documents could be submitted with fraudulent information, and even though it could result in an understatement for the plan and each participant.
  • The Service has also released PMTA 2015-11, which outlines the application of the penalty under Section 6662A(c) for taxpayers who failed to disclose participation in listed transactions involving cash value life insurance to provide welfare benefits.  This is a very specific issue, so I won’t go into much detail, but the guidance is fairly thorough and provides good insight into the Service’s thoughts on the matter.
  • And another Section 7434 case.  I wrote about the Angelopolous case earlier in the week, which dealt with who was the “filer” of the information return.  In US v. Bigley, the District Court for the District of Arizona reviewed whether an employee’s claim against his employer for false returns was time-barred.  The suit was well past the six year statute, and the employee clearly had knowledge over the last year.  Section 7343(c) outlines the statute of limitations, and states the statute is the later of six years or one year after the return is discovered by exercise of reasonable care.    The Court found that the employee received the information returns upon filing, so the six year statute clearly applied, and it would be impossible to have the one year statute in that situation.  The actual language is “1 year after the date such fraudulent information return would have been discovered by exercise of reasonable care.”  I wonder if it would be possible to create a larger fraudulent scheme, whereby the recipient would receive the information return but not realize it was fraudulent until a later date.  Would the one year statute then apply?
  • My brother-in-law just got a Ph.D. (congrats Alex! I doubt he will ever read this).  In honor of that esteemed accomplishment, here is an infographic highlighting all kinds of negative financial and other statics related to Ph.Ds.  I make no assurances to the veracity of the graphic’s claims, and I am generally in favor of graduate degrees, but I found the stats interesting.

 

Summary Opinions for 03/28/14

This week’s report contains lots of interesting statistics from the Service, including a look into the APA program, and filing and enforcement statistics.  There is also a recap of a recent tax court case looking at material participation by a trust in real estate activities, which is going to be a very big deal this year due to Obamacare. Plus an interesting Service loss in a bankruptcy case, where the Court found the Service incorrectly determined a taxpayer’s business when reallocating income under Section 482.  Also, more West Coast administrators failing to file estate tax returns.  To the roundup:

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  • The Bankruptcy Court for the Middle District of North Carolina had an interesting ruling in In Re: Decoro USA, LTD  (couldn’t find for free yet).  The Court sustained the taxpayer’s objections that additional tax allocated to it in a Section 482 adjustment were inappropriate because the transfer pricing analysis by the Service was unreasonable.  Section 482 allows the Service to reallocate tax items between related entities doing business together.  Here, the Service took the position that the taxpayer acted as a distributor for its parent in selling leather furniture, and then increased the taxpayer’s income to be more in line with a distributor.  The taxpayer argued it was more of a “facilitator” to distributors, and its income was in line with similar businesses that did the same.  The Court looked a variety of factors and found that the taxpayer’s interpretation of its business was more accurate, resulting in the IRS allocation losing the presumption of correctness.
  • Announcement 2014-14 issued by the Service this week reports on the status of the advanced pricing agreement programs.  Highlights include increased efficiency and a greater use of the program.  Part 1 of the report has a comprehensive summary of the programs, part 2 has the 2013 statistics, and part 3 discusses the types of items resolved by APAs.  Interestingly, more than 50% of the APAs executed were with Japan.
  • More stats, the Service has also issued its 2013 IRS Data Book, which generated headlines about the rich not getting audited as much (apparently, the Service didn’t care for the GAO report last year arguing the Service should audit the wealthy more often).  Table 9b shows that less than 1% of individuals were audited.  Those making over $10MM a year get a hard look the most, followed by those making over $5M.  Individuals making over $1MM, but less than $5M are audited at a 9% rate.  The next highest group to be audited are those making no money, with 6% audited.
  • Estate administration lawyers in California apparently don’t understand the filing deadline for estate tax returns.  In American Contractors Indemnity Company v. United States, the District for Northern CA denied the Service’s motion for summary judgment in a case where an administrator of an estate was claiming reliance on an attorney as reasonable cause for penalties for failure to file and failure to pay estate tax.  The named party in this case is the surety company that ended up stepping into the shoes of the administrator.  The Court found there was a genuine dispute as to whether the administrator relied on the attorney to file or relied on erroneous advice on filing or when to file.  In coming to the conclusion and looking at the distinction, the Court reviewed Boyle, Baccei, and Knappe (the last two are also Cali or West Coast cases of executors failing to file), which we covered before in great detail here and here.
  • Joe Kristan on his Roth & Co. blog has a good write up of the Frank  Aragona Trust case decided by the Tax Court this week, which allowed a trustee to “materially participate” in rental activities.  This used to be only a huge deal for passive activity gains and losses, but the Obamacare 3.8% net investment income tax follows the same rules.  The trust “materially participating” allows the net income to be exempt from tax.  There is a lot of interest in this right now.  I have two clients going through this analysis for trusts, and a call with an accountant on a third this afternoon.  If you have clients with trusts that hold majority interests in closely held companies, this is probably worth a look.

Summary Opinions for 11/29/2013

Happy Holidays!  Sorry for the delay in posting, hectic weekend, but what a great weekend.  Thanksgiving, the start of Hanukkah, Keith had his first grandson, and it seemed like every third car had a Christmas tree tied to the top.  Although it was a short week, there was still some excellent procedure news.  Let’s start with a few Thanksgiving related items.

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  • I found this estimate of the amount of taxes paid on the average Thanksgiving dinner on Accounting Today.  The Tax Foundation has a summary of travel taxes and tolls (road taxes) for travel along the northeast found here.  I’m not sure how accurate either are, but interesting posts about Thanksgiving and taxes.
  • Jack Townsend’s Tax Procedure Blog has a summary of Eichelburg v. Comm’r, where the taxpayer’s claim was tossed for failing to timely file under the timely mailing is timely filing rule in Section 7502.  His sin—thriftiness (and not following the rules).  He went for the FedEx Express Saver, which is not an enumerated acceptable private delivery service under Notice 2004-83.
  • From the Freakanomics blog, a podcast regarding fighting poverty. This post has to do with charity, but I think the concepts apply to the reallocation of assets (EITC) under the Code and the incentives that could raise a family up the socioeconomic ladder (student loan interest deduction, mortgage interest deduction).  Oversimplifying the post, cash infusions are great at doing certain things like eliminating a current need, but not very good at assisting a family in moving out of poverty.  Although this is not a stunning revelation, the stories and examples are very interesting, and made me wonder if we had good evidence behind a lot of the incentives and deterrents under the code.  More behavioral economics.  Perhaps we should change this to a behavioral economics blog.
  • MauledAgain has a discussion of the Tax Court’s holding in Jibril v. Comm’r, where the Court disallowed dependency exemptions for a taxpayer’s cousins.  The Court held that cousins did not fall within “qualifying children” under Section 152(c)(2) or “qualifying relatives” under Section 152(d)(2).  Although this is not a novel holding, the last paragraph of Jim Maule’s post highlights the Court’s comments regarding the “sympathetic” taxpayer, and outlines some suggestions  from Professor Maule on how to eliminate the harsh application of the statue when family members are supporting family members not specifically outlined in the statute.
  • Messrs. Lipton, Richardson, and Jenner, attorneys at Baker & McKenzie, have written an article published at 119 Journal of Taxation 267 (December 2013), about the Tax Court holding in Barnes Group, Inc. v. Comm’r, concluding that the Tax Court wrongly applied the step transaction doctrine and discussing the imposition of penalties even though the taxpayer had a “substantial authority” opinion from PWC.  The Baker attorneys disagree with the collapsing of the transaction under step-transaction, arguing that the transaction was very similar to a Rev. Rul. previously issued, and the differences were minor technicalities. What caught my eye was the discussion regarding the imposition of penalties even though PWC had issued a substantial authority opinion.  Initially, I thought this was going to be more like the Canal Corp case, where the Court found the messy, aggressive opinion by PWC was not reasonable to rely upon.  However, upon reviewing Barnes, the holding regarding the penalty was that Barnes failed to follow PWC’s advice when it did not comply with the “mere technicalities”, and waived its right to rely on PWC’s opinion.  The Baker attorneys felt reasonable cause should be available, since the taxpayer relied on a competent advisor and that this opinion created substantial issues regarding advisor reliance.  I, personally, thought the step-transaction doctrine was the key, and the case did not tread any new ground on advisor reliance.
  • The Tax Court, in Meyer v. Comm’r, remanded a case back to Appeals for review after the SO failed to properly verify that statutory notice had been issued after the IRS issued a substitute for return.  The case has a good discussion of the IRS procedures in this area, including how an SFR relates to a stat notice and how Appeals is supposed to verify that the IRS issued a stat notice when the taxpayer claims to have not received it.  In light of Appeals not having adequately verified the stat notice’s issuance, there was also a discussion regarding whether the Court should remand or simply hold for the taxpayer. In this case, the Tax Court remanded, though it suggested that in the future, it may toss not remand and find for the taxpayer, and invalidate the assessment. If time permits, we may have more on this case later in the week or next week.
  • Chief Counsel has issued advice, found here, regarding whether the Service must apply restitution payments required because of corporate income tax to the income tax, or whether it may be applied to other unpaid liabilities.  Counsel determined that the Service can apply the payments as involuntary payments, in the Service’s best interests.  Counsel relied on US v. Pepperman, out of the Third Circuit, which held that involuntary payments are defined as “any payment received by…the United States as a result of distrait or levy or from a legal proceeding in which the Government is seeking to collect its delinquent taxes or file a claim therefor.”  Counsel determined that restitution only comes from court orders or settlements, and therefore was an involuntary payment.  I would be surprised if there was not some argument to the contrary. This notice relates to restitution that arose prior to the effective date of Section 6201(a)(4), which allows IRS to assess certain orders of restitution.  Either way, practitioners should be cognizant of this issue. Saltzman and Book Chapter 10 (revised and coming out next month) has a thorough discussion on the new restitution provisions, and I suspect a post on this coming up soon.
  • Last week we touched on Notices 2013-78 and 2013-79, which contained draft procedures for seeking competent authority assistance and advance pricing agreements.  KPMG provides a small summary of some of the changes in the new notices. I will either try to provide more information regarding these notices in the coming days and weeks, or find other good summaries, as the changes are substantial and important.