Pending Cert Petition in Altera: Tax Law in an Administrative Law Wrapper

Susan Morse & Stephen Shay return to discuss the Altera case. This piece is cross posted at JREG’s Notice & Comment blog. Keith

Each day of the COVID crisis we see unprecedented administrative action to respond to the pandemic. At the same time, litigants continue to ask courts to consider whether administrative agencies have exceeded their authority, sometimes relying on claims of deficient process. One such case is Altera v. Commissioner, in which the taxpayer filed a cert petition that asks the Supreme Court to review a Ninth Circuit decision upholding a tax regulation. The government submitted its brief in response on May 14, and the Court will presumably consider the case in conference before its summer recess. The taxpayer has not filed a reply as of this writing.

In its brief, the government stays squarely on the administrative law playing field laid out by the taxpayer’s petition. The government’s reply takes on – and, we think, successfully defeats – the core premise that underlies the taxpayer’s administrative law arguments.

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In 2015, Altera won a unanimous decision in the Tax Court, which invalidated a 2003 regulation as arbitrary and capricious under State Farm. Then the government won in the Ninth Circuit before the original three-judge panel in 2018 (withdrawn because of the death of Judge Reinhardt), before a revised three-judge panel in 2019, and when the Ninth Circuit denied the taxpayer’s request for a rehearing en banc in 2019. We contributed amicus briefs [here (with coauthors Leandra Lederman and Clint Wallace), here and here] on behalf of the government before the Ninth Circuit, and have blogged previously about the case here and here. In February, the taxpayer submitted a petition for certiorari to the Supreme Court.

The tax issue in Altera involves a final Treasury regulation promulgated in 2003. The reg applies to qualified cost-sharing agreements, or QCSAs, made between U.S. firms and their offshore subsidiaries. A QCSA requires an offshore subsidiary to pay its share of the costs of developing IP. If QCSA requirements are met, the offshore subsidiary owns non-U.S. rights to intangible property developed by its U.S. parent company for tax purposes. Then the firm can shelter resulting offshore profit from U.S. tax. As relevant here, the 2003 regulation at issue in Altera conditions the favorable tax treatment available for QCSAs on the inclusion of stock-based compensation costs in the pool of shared costs.  

Technology and other multinational firms that use stock option compensation (and use strategies to shift profit from intellectual property across borders) have had an understandable and longstanding interest in this issue. An appendix to Altera’s cert petition lists 82 companies that noted the Altera issue in their public financial statements. One entry alone – that of Alphabet, Inc. – reports $4.4 billion at stake.

We think the regulation gets it right as a matter of tax policy. It properly prevents stock-based compensation deductions from reducing U.S. taxable income when these expenses support foreign profit. The regulation falls securely under the Commissioner’s statutory discretion (under I.R.C. Section 482) and responsibility to ensure clear reflection of income. It squares with modern financial accounting rules. And it aligns with OECD and other international efforts to combat base erosion and profit shifting to low-tax jurisdictions.

But the hook in the cert petition is not the tax issue. It is an administrative law issue. The taxpayer hopes to persuade four justices that Altera is an attractive opportunity to rein in an administrative agency’s power and further limit the case law that supports administrative agency discretion. Perhaps it appears particularly juicy because the administrative agency at issue is the Treasury, given the complicated history and relationship between Treasury regulations and administrative law. Indeed, the regulation in this case was promulgated well before the Supreme Court held, in its 2011 Mayo case, that Chevron deference (rather than National Muffler review) applies to tax regulations just as it applies to other federal regulations.

The taxpayer’s administrative procedure argument includes two main claims. The first is that Treasury did not provide a reasoned explanation for the regulation and that the regulation was therefore arbitrary and capricious under State Farm. The second is that the government engaged in post hoc rationalization to defend the regulation, in violation of Chenery I. (A third claim, derivative of the first two, asks whether, assuming a regulation is held procedurally defective, a court may nevertheless uphold it under Chevron.)

Five out of six filings submitted to the Supreme Court on behalf of the taxpayer – including the primary cert petition and four out of five amicus briefs – hang their respective hats on a single premise. This premise is that Treasury first suggested that comparability analysis was relevant under the stock-based compensation QCSA regulation, and then Treasury broke its word. The government’s brief takes this premise head-on and, we think, persuasively disproves it.

Altera’s petition claims that in 2002 and 2003, “the government never said it was … adopting a new approach to cost-sharing” (8) and that the rationale that the “commensurate with the income” language supported the new approach “appeared nowhere in the rulemaking record.” (10-11) Amicus briefs argue that the government advances “a new statutory interpretation” in litigation (Chamber of Commerce 16), describe the government’s allegedly “newfound litigation position that comparables are irrelevant” (Cisco 11), assert a “transparent post hoc rationalization” (National Association of Manufacturers 15) and claim that there would have been comments on “the applicability and scope of the arm’s length standard” in notice-and-comment if taxpayers had only been aware that the government meant to make comparability analysis irrelevant to the determination of an arm’s-length result for stock-based compensation costs in the QCSA context. (PricewaterhouseCoopers 16).

Interestingly, the fifth of five amicus contributions supporting Altera – a brief filed by a group of former foreign tax officials – paints a picture of continuity, rather than change, in arguments made by Treasury and the IRS. It acknowledges that both in 2002 and 2003 and also in litigation before the Ninth Circuit, the government “ignor[ed] … potentially comparable transactions” and simultaneously “claim[ed] that its approach comported with the arm’s length standard.” (9-10) 

The government argues as follows in its brief in opposition to Altera’s cert petition: The taxpayer’s arguments “conflate (i) the arm’s length standard … and (ii) the use of comparability analysis” and “misunderstan[d] the relationship between the two concepts.” (19) In its rulemaking, the government did not suggest that empirical analysis and comparability were relevant to the determination of an arm’s length result in this context. Rather, the internal method adopted by the regulation is “an alternative to comparability analysis as a means of achieving an arm’s length result,”(20) consistent with the statute, as “Section 482 does not require any analysis of identified comparable transactions between unrelated parties.” (21) Moreover, the rulemaking and litigation record shows a constant commitment to a method that is not based on evidence of comparables. The government’s rulemaking record, as well as its arguments in litigation, consistently references the “commensurate with income” statutory language added in 1986. (24) So the “commensurate with income” argument made in litigation was not new either.

The government’s narrative gets this right. As the government’s brief explains, the regulatory history – not to mention the plain language of the regulation describing an arm’s-length result in this context – makes clear that interested taxpayers and tax advisers knew that “the proposed regulation would make any evidence of comparable transactions irrelevant” in the context of QCSAs. (22) Taxpayers certainly understood the proposed regs’ departure from comparability analysis. They just didn’t agree with it. Indeed, the battle lines over comparability analysis in the context of stock-based compensation costs were already clearly drawn, well before Treasury issued its Notice of Proposed Rulemaking in 2002. As the Software Finance and Tax Executives Council explained during the 2002 notice and comment period: 

On audit, in Advance Pricing Agreement negotiations, in docketed Tax Court cases, in published field service advice, and in speeches by Service officials … the Service has taken the position that stock-based compensation … must be included in related parties’ cost sharing pools. … Taxpayers have steadfastly and vehemently disagreed[, … absent] any evidence that unrelated parties … share stock option “costs” in their own cost sharing pools. 

This disagreement between taxpayers and the government was a tax policy dispute over the role of comparables in transfer pricing between related parties. Taxpayers argued that the arm’s length principle required comparables, even in the specific case covered by the QCSA regulation. The government consistently took the opposite position, beginning well before 2002 and continuing through the present cert petition in Altera.

Taxpayers may still disagree with the government on the tax policy issue. But that ship has sailed. Indeed, there are other examples of transfer pricing methods that do not rely on comparable transactions. One is the 1994 promulgation of the residual profit split method, also contained in a final regulation issued under I.R.C. Section 482.  

The issue before the Supreme Court is an administrative law issue. A necessary premise of Altera’s argument is that Treasury started with, but then abandoned, a commitment to empirical comparables analysis for its rule covering stock-based compensation in QCSAs. And as the government explains, this premise does not hold up.

Executive Order on Regulatory Relief to Support Economic Recovery

Monte Jackel returns to discuss an executive order issued this week by the President. Keith

On May 19, 2020, the President signed an executive order (Order) relating to regulatory relief to support economic recovery from the coronavirus crisis. Section 1 of the Order states:

“Agencies should address this [crisis] by rescinding, modifying, waiving, or providing exemptions from regulations and other requirements that may inhibit economic recovery, consistent with applicable law and with protection of the public health and safety, with national and homeland security, and with budgetary priorities and operational feasibility. They should also give businesses, especially small businesses, the confidence they need to re-open by providing guidance on what the law requires; by recognizing the efforts of businesses to comply with often-complex regulations in complicated and swiftly changing circumstances; and by committing to fairness in administrative enforcement and adjudication.”

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The reference to “regulations” is to EO 13892, section 2(g), which states that the term means a legislative rule under section 553 of 5 USC, the Administrative Procedure Act (APA). This means that the executive order would only apply to tax regulations to the extent they are legislative rules and not interpretative rules. The IRS view is that most tax regulations are interpretative and not legislative but the courts have recently deviated from following the IRS view. [see this prior post here on PT for further discussion].

The Order then states:

“The heads of all agencies are directed to use, to the fullest extent possible and consistent with applicable law, any emergency authorities that I have previously invoked in response to the COVID-19 outbreak or that are otherwise available to them to support the economic response to the COVID-19 outbreak. The heads of all agencies are also encouraged to promote economic recovery through non-regulatory actions.”

This provision of the Order, as it could apply to federal tax matters, seems to authorize continued and expanded use of the tax related provisions of sections 7508 and 7508A. See below.

The Order then states:

“The heads of all agencies shall identify regulatory standards that may inhibit economic recovery and shall consider taking appropriate action, consistent with applicable law, including by issuing proposed rules as necessary, to temporarily or permanently rescind, modify, waive, or exempt persons or entities from those requirements, and to consider exercising appropriate temporary enforcement discretion or appropriate temporary extensions of time as provided for in enforceable agreements with respect to those requirements, for the purpose of promoting job creation and economic growth, insofar as doing so is consistent with the law and with the policy considerations identified in… this order.”

Does the Order apply to tax regulations and, if so, how? In cases outside of tax, it is relatively easy to determine what is and is not a legislative rule. Outside of FAQs not being legislative rules because they are not “authority” under section 6662 in the first place, the determination of what is a legislative rule in the tax realm at present is being determined by the courts on a case-by-case basis. Essentially, from where we stand right now, legislative rules are those that impose substantive rights and duties not directly dealt with in the applicable statute.

Assuming that there is some uniform approach taken by the Treasury Secretary to implement the Order on the issue of tax legislative rules, the next question is what action can the Treasury Secretary take with tax regulations and other items considered legislative rules for this purpose?

The following are possibilities:

  1. Tax regulations that raise revenue because of the substance of the rule would seem to impede economic growth and recovery because the taxpayer has less net after-tax cash than if the rule provided otherwise. Does this mean that all tax regulations, if deemed legislative rules, should be rescinded or suspended if such action would reduce the taxpayer’s net after-tax economic position? That is not likely to be how the IRS views the situation but guidance may be needed to flush this out.
  2. As briefly noted earlier above, the Order seems to lean in favor of the IRS issuing more extensions of applicable due dates pursuant to the authority of section 7508A due to the March 1, 2020 emergency presidential declaration on the coronavirus. This would mean that the IRS’s announced position that tax due dates will not be extended beyond July 15, 2020 may need to be re-examined by that agency. How else could the Order be interpreted in this area of law?
  3. There was a prior regulatory effort under executive orders previously issued by the president relating to withdrawing regulations deemed too burdensome or perhaps lacking legal authority and limiting the use of new regulations generally, among other matters.  A limited list of regulations was produced by the IRS and Treasury a few years back and action was taken on a number of those items. Does the subject Order mean that this process will need to be repeated by Treasury and the IRS, perhaps more thoroughly than previously? Guidance should perhaps be issued on that as well.

As Professor Hickman and others have espoused over the years, due to the long period where tax regulations were, more or less, given a free pass under the APA, it is often not clear today how regulatory edicts generally, such as the subject Order, are to be applied to tax regulations given that the process of how and to what extent tax regulations are subject to the APA continues to be a developing area of law. Now would appear to be a good time to push this process along.

Conservation Easement Donation and the Validity of Tax Regulations

Monte Jackel returns to discuss the Tax Court’s latest attempt at squaring the APA and the tax regulation process. Les

In Oakbrook Land Holdings LLC (154 T.C. No. 10, May 12, 2020), the Tax Court, in a reviewed opinion, upheld the validity of a Treasury regulation (reg. §1.170A-14(g)(6)) issued under section 170 of the Code relating to conservation easement donations and the perpetuity requirement. A concurrently issued memorandum opinion issued the same day (T.C. Memo 2020-54) had held that if the regulation was valid, the taxpayer was in violation of it. 

At issue in the opinion was the validity of the regulation at issue. This commentary focuses its attention on the requirement of the Administrative Procedure Act (APA) that a “legislative rule” contain a concise statement of the basis and purpose of the proposed rule. The Chevron doctrine, also addressed by the court, is not discussed here. 

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The majority opinion first stated that the regulation at issue was a legislative rule and not an interpretative one because it set forth a substantive requirement (sharing of proceeds if easement terminated) that was not set forth in the statute and which, if violated, would cause loss of the deduction. 

Underlying this conclusion was the majority’s view of a legislative rule:

“Administrative law distinguishes between interpretive and legislative agency rules. “An interpretive rule merely clarifies or explains preexisting substantive law or regulations….A legislative rule, on the other hand, “creates rights, assigns duties, or imposes obligations, the basic tenor of which is not already outlined in the law itself.”…Legislative rules have “the force and effect of law.”….

The majority then turned to the APA that sets forth the notice and comment requirement for legislative rules:

“Legislative rules are subject to APA notice-and-comment rulemaking procedures. See 5 U.S.C. sec. 553(b)…To issue a legislative regulation consistently with the APA an agency must: (1) publish a notice of proposed rulemaking in the Federal Register; (2) provide “interested persons an opportunity to participate…through submission of written data, views, or arguments”; and (3) “[a]fter consideration of the relevant matter presented,…incorporate in the rules adopted a concise general statement of their basis and purpose.” See 5 U.S.C. sec. 553(b) and (c).”

It was the third requirement that was in dispute in the case (the “concise general statement of basis and purpose requirement”). The majority opinion concluded that the concise general statement of basis and purpose requirement was satisfied in this case. 

“The APA provides that a reviewing court shall set aside agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. sec. 706(2)(a). The scope of our review “is a narrow one” because “[t]he court is not empowered to substitute its judgment for that of the agency.”…We consider only whether the agency “articulate[d] a satisfactory explanation for its action.”…. While we cannot provide a reasoned basis for agency action that the agency itself did not supply, we will “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.”….“So long as an agency’s rationale can reasonably be discerned and that rationale coincides with the agency’s authority and obligations under the relevant statute, a reviewing court may not ‘broadly require an agency to consider all policy alternatives in reaching decision.’” …Indeed, “regulations with no statement of basis and purpose have been upheld where the basis and purpose w[ere] considered obvious.”….

The majority concluded that this test had been met even though the final regulation preamble did not specifically address the comment that pertained specifically to the regulation provision at issue. This was so principally because the point raised in the comments was only one comment out of many submitted and that specific comment did not fully address the provision at issue and alternatives to what was proposed. The majority stated:

“[A]n agency cannot reasonably be expected to address every comment it received. The APA “has never been interpreted to require the agency to respond to every comment, or to analyze every issue or alternative raised by the comments, no matter how insubstantial.” …“We do not expect the agency to discuss every item of fact or opinion included in the submissions made to it.” …“An agency need not respond to every comment.”…. In any event, “[t]he administrative record reflects that no substantive alternatives to the final rules were presented for Treasury’s consideration.” …“A comment is * * * more likely to be significant if the commenter suggests a remedy for the purported problem it identifies.”…. The APA requires “consideration of the relevant matter presented” during the rulemaking process. 5 U.S.C. sec. 553(c). 

The majority then laid out the reasons for denying the assertion of an APA violation:

“Our review of the administrative record leaves us with no doubt that Treasury considered the relevant matter presented to it…. And we find equally little merit in petitioner’s assertion that Treasury failed to “incorporate in the rules adopted a concise general statement of their basis and purpose.” See 5 U.S.C. sec. 553(c)…. No court has ever construed the APA to mandate that an agency explain the basis and purpose of each individual component of a regulation separately. “[T]he detail required in a statement of basis and purpose depends on the subject of the regulation and the nature of the comments received.” …This statement need only “contain sufficient information to allow a court to exercise judicial review.”….

There was also a concurring opinion and a dissenting opinion in the case. 

The concurring opinion, among other issues, separately addressed the APA procedural point. After concluding that the text of the statute precluded the deduction, the concurring opinion nevertheless set forth its views on both Chevron and the APA. 

On the latter point, which is the focus of this commentary, the concurrence states:

“Treasury might not have found itself in this predicament under Chevron if it had followed more carefully the APA’s procedural requirements, which are designed to help agencies consider exactly this type of issue before a rule becomes final. 

And then came the dissenting opinion. The dissent, as one would expect, disagreed with the majority’s reasoning on the APA procedural point. It states:

“In today’s case, we hold that the Treasury Department gets to ignore basic principles of administrative law that require an agency “to give reasoned responses to all significant comments in a rulemaking proceeding.” ….A court is supposed to ensure that an agency has taken “a ‘hard look’ at all relevant issues and considered reasonable alternatives.”…But if the majority is right, the Treasury Department can get by with the administrative-state equivalent of a quiet shrug, a knowing wink, and a silent fleeting glance from across a crowded room…. [T]he majority, I fear, has missed the main root of [the taxpayer’s] argument–that at the time of the regulation’s promulgation, commenters made significant comments, and Treasury failed to address them in its statement of the regulation’s basis and purpose…. The Final Rule’s statement of basis and purpose shows absolutely no mention of the [regulation provision at issue]–and no reasoned response to any of the public’s comments on those provisions…. 

The dissent then zeroed in on its objections to the conclusions of the majority:

“[W]hile we don’t demand a perfect explanation for Treasury’s decisionmaking, …we should demand some,… And here, there wasn’t any….. [T]he analysis shouldn’t stop there–what is the nature of a comment that triggers an agency’s obligation to respond? The caselaw tells us to look at a comment’s significance. Agencies must “give reasoned responses to all significant comments in a rulemaking proceeding.”….This is because “the opportunity to comment is meaningless unless the agency responds to significant points raised by the public.”….“It is not in keeping with the rational process [of APA section 553(c)] to leave vital questions, raised by comments which are of cogent materiality, completely unanswered”). So, though an agency doesn’t have to respond to all comments, it must respond to all significant comments.

The dissent then cites a series of Treasury decisions that, as a matter of fact, make the same statement that “all comments were considered” or words of similar import. But, as the dissent states, “the APA,…has no provision for agencies to use ritual incantations to ward off judicial review.” 

Where does this take us? This case shows that the Treasury and IRS need to pay more attention as to (1) what is a legislative rule as compared to an interpretative rule, and (2) has it considered all “significant” public comments and fully addressed them in the final rule. 

And for commenters to regulations, this case seems to indicate that a comment letter should state that the issue is material, fully discuss the issue, and propose a practical alternative if one is available.

All of this is clearly an area to watch in the near future.

The IRS Cracks Open the Door to Electronic Communications

In 2016 the IRS released its Future State vision, featuring seamless electronic interactions between the agency and taxpayers or their representatives. Progress towards this vision has been slow, as IRSAC noted in its 2018 and 2019 reports. (Les also wrote several posts on the Future State, its implications, and related developments.) Today the IRS remains far behind lenders, brokers and banks in the digital customer interactions it offers. While the IRS’s privacy concerns with electronic communications have not abated, faced with the coronavirus pandemic the agency adapted quickly, recognizing the need for digital communications if taxpayers’ matters are to progress as people shelter in place. In today’s post, guest blogger James Creech describes important new IRS parameters for email correspondence and electronic signatures. Christine

On March 27, 2020 as part of the IRS’s response to COVID-19 the IRS issued an internal memorandum temporarily modifying the existing prohibitions against the acceptance of electronic signatures and use of email to send and receive documents. For the Service these modifications were a necessary adjustment to the realities of remote work. It allows many of the cases in progress prior to the People First Initiative to continue to move forward even if it is just to avoid a statute of limitations expiring. It is also an acceptance that many taxpayers who must interact with IRS employees are sheltering in place and may lack access to any technology beyond a smartphone. It is interesting to note that the memorandum does not specify an end date for these temporary procedures unlike many of the other aspects of COVID-19 that expire on July 15, 2020.

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Electronic Signatures

The most important part of the IRS accepting electronic signatures is not how they accept them but rather what types of documents have been approved for electronic signatures. Electronic signatures are temporarily permitted on documents required to extend a statute of limitations or to close an agreed upon matter such as Forms 870 and 872. Beyond those forms, the memorandum only lists a few specific forms by number but it appears that it should be interpreted broadly. As a catch all, it states that long as the form is not normally subject to standard filing procedures, ie a 1040x or 8832, an electronic signature is permitted and the document can be submitted electronically. An IRS employee can request further guidance from their internal policy office on the specific email acceptance policy. Given that the internal guidance is vague it might be incumbent on a practitioner to remind an IRS employee that this option is available should there be some hesitation about accepting particular form.

One other routine document specifically listed by the memorandum is a power of attorney. On the surface the inclusion of the 2848 seems of limited utility. The CAF units are located in service centers that are currently closed, new matters are not being assigned to the field, and adding a power of attorney midway through working through an issue with a Revenue Agent is relatively rare. However for tax clinics and taxpayers who need to either add or change a representative mid stream specifically stating a power of attorney can be filed with an electronic signature is a useful inclusion.

If a document is eligible for an original electronic signature, the signature itself can be submitted in a number of widely used file formats including pdf and jpeg file types.

The real value for practitioners in the modification is the ability to send in photographs of a signature, or to have a client electronically sign a document on smartphone without the need to print the document at all, and still have it accepted by the IRS. Without this ability many taxpayers could potentially have to either have to physically meet their representative in order to sign a document, or worse yet many pro se taxpayers could be unable to meaningfully participate in moving cases forward because they lack access to a printer or a scanner.

Emailed Documents

The IRS now allows employees to both send and receive emails, including emails with attachments. For practitioners receiving emails the procedures are similar to receiving a physical copy of information from the IRS. The attachment is sent as a standalone email in an encrypted SecureZip. The 12 character password is then relayed to the practitioner over the phone, or by some other means than email, and the attachment can then be opened.

Sending documents to the IRS is a little more complicated. In order to protect the IRS, incoming email is not being accepted without an established relationship between the taxpayer or their representative. The IRS employee must also first request that the documents be sent through the normal e-fax channels prior to offering the use of email.

If the taxpayer is unable to send an e-fax or wishes to use email the employee must still take steps to dissuade them from doing so. They must advise the taxpayer that email is not secure. They must request that all attachments should be encrypted to the best of the taxpayer’s ability and baring that any information must be in a valid format. Links to files in the cloud are not accepted. Finally they should advise the body and subject line of the email must not contain any sensitive or identifying information. All of these steps are perfectly reasonable for security purposes but may be intimidating to some taxpayers.

If the taxpayer is sending a document that contains an electronic signature the taxpayer must attest to the signature by including a statement similar to “The attached [name of document] includes [name of taxpayer]’s valid signature and the taxpayer intends to transmit the attached document to the IRS.” It is worth noting that if there are technical issues with the .gov email address, IRS employees are prohibited from using personal email addresses as a back up.

Privacy Concerns

Part of the reluctance on behalf of the Service to accept emailed documents in the past has been a well-founded worry about introducing viruses into a secure system. From the IRS’s point of view requiring a known taxpayer to opt in to email, and follow the required procedures and formats, should greatly reduce this risk.

Email for the practitioner has its own set of privacy concerns. From a technical perspective sending an email to the IRS is no different than an e-fax. E-faxes are routed to IRS employees’ email addresses so the only difference is the terms of service for the e-fax vs the email provider.

Slightly different is what happens to the data once it is on a laptop in the IRS employee’s home. Fortunately for taxpayers the IRS has a robust set of data privacy protections that can be found in Section 6103. Generally speaking the IRS has done a good job of training employees on the importance of Section 6103. Without going into much detail, Section 6103 prohibits the disclosure or inspection of sensitive taxpayer information by anyone who is not authorized to view the material. The punishment for violations of Section 6103 can range from potential criminal charges for willful disclosures to administrative sanctions, including termination, for less serious breaches. Violations of Section 6103 also give taxpayers a right to a civil cause of action against the United States under IRC Section 7431.

Section 7431 was given additional teeth in the Taxpayer First Act of 2019 that is especially relevant right now given that all IRS employees are working remotely. Even though the IRS has safeguards in place to protect taxpayer information, such as requiring that laptops containing sensitive data are encrypted, accidents do happen.

Prior to the Taxpayer First Act taxpayers were only notified of a Section 6103 disclosure violation if the violation resulted in criminal charges. This left many taxpayers in the dark if return information was disclosed in a non willful manner. The Taxpayer First Act significantly broadened this disclosure to impacted taxpayers, including when IRS “proposes an administrative determination as to disciplinary or adverse action against an employee arising from the employee’s unauthorized inspection or disclosure of the taxpayer’s return or return information” and it requires that the IRS affirmatively inform taxpayers of the civil cause of action against the government. It remains to be seen whether there will be an uptick in Section 6103 violations but if expanded use of email does not trigger a wave of taxpayer notifications, then privacy may not be such a barrier to making this modification permanent.

While the limited acceptance of electronic signatures and use of email was expanded to benefit IRS employees during this difficult time, it is impossible to see this as anything but beneficial for taxpayers. Even with the required hurdles it makes engagement with the IRS easier, quicker, and more approachable to anyone who does not have a scanner and an e-fax service.

Of Mountains and Molehills: A Further Analysis of EIP To Dead People

Earlier today Nina Olson discussed EIP being issued to deceased taxpayers. Professor Bryan Camp responds to that post below. Les

I agree with much of Nina Olson’s thoughtful post this morning on PT.  However, I also think both Nina’s analysis and the IRS FAQ may be wrong to make no distinction between people who died before or after January 1, 2020.  

This post will first explain why date of death may be an important distinction.  It will then argue that concerns about the IRS making erroneous EIP payments to dead people is making a mountain out of a molehill.

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(1) It May Matter When Death Occurred

Section 6428(a) creates an entitlement to a refundable credit for tax years starting in 2020.  My take is to start with the entitlement.  The question of who is entitled to what amount of refundable credit is covered by (a).  It allows an “eligible individual” a “credit against the tax imposed by subtitle A for the first taxable year beginning in 2020.”  

I do not read §6428(f) as creating an entitlement separate from subsection (a). Its purpose is to authorize the advance payment of that to which an “eligible individual” is entitled.  It both authorizes the IRS to send out a payment of the 2020 refundable credit in advance of taxpayers claiming the credit and it requires the IRS to figure to whom it should send the advance credit based on 2019 or 2018 returns.    

Supporting my reading of how these two subsections work together is the true-up language in subsection (e).  It creates a one-way ratchet that directs taxpayers to offset their claimed 2020 credits against the advanced payments they actually received.  Thus advanced payments will reduce the amount of credit taxpayers can claim on the 2020 returns.  Importantly, however, the amount offset cannot reduce their 2020 credit below zero.  That permits taxpayers to keep excess advance payments while being able to claim underpaid credits. 

The true up provisions are the reasons why taxpayers whose 2018 or 2019 returns show the existence of a dependent do not have to return the $500 they receive if the dependent has ceased being a dependent in 2020, for whatever reason (including death of the dependent).  The $500 will have turned out to have been erroneous because—again go to (a)—the basic entitlement is that this is a refundable credit for tax year 2020.  

I think it important to note that the true-up (and consequent forgiveness of erroneous advance payment) occurs only when determining the tax obligations for 2020, which for most people will happen on a 2020 return.

Folks who died before January 1, 2020, are not entitled to the refundable credit authorized by subsection (a).  Perhaps obviously, neither will such folks be able to file a return for 2020 on which to have errors forgiven by the subsection (f) true up provisions.  

Ms. Olson references the definition of “eligible individual” in §6428(d)(1).  That provision says that an “eligible individual” must actually be an individual.  It seems to me pretty plain that taxpayers who died before 2020 are no longer individuals in 2020.  Therefore, they cannot be “eligible” individuals.   

In short, I do not agree that (f) creates a separate entitlement to an amount.  It creates an entitlement to timing of an amount.  But that is just my reading.  I think Ms. Olson and others have a reasonable position that taxpayers who died in 2018 or 2019 are indeed eligible to receive the advance payment of the 2020 refundable credit.  You get there by reading subsection (f) as creating an entirely separate entitlement from subsection (a).  The strongest support for doing that is the language in subsection (f)(1) and (f)(2) that seems to create a counter-factual that pretends the credit allowed by (a) “would have been allowed as a credit under this section for such taxable year.”  

I disagree with that interpretation but for purposes of keeping this post short let’s just leave it that this: I think everyone agrees (or should agree) that EIP payments sent to taxpayers who died after January 1, 2020 are proper but there is disagreement about the legality of payments made to taxpayers who died before January 1, 2020.  Given that, the more important question is perhaps, what should be done?

Here’s my answer.

(2) Chill

Assuming some payments to dead people are erroneous, what should the IRS or Congress do about it and what should taxpayers do about it?

(A) IRS and Congress

The IRS does an amazing and fantastic job in determining and collection the correct tax for taxpayers.   But when you are dealing with over 150 million individual taxpayers and trillions of tax dollars, a small percentage of error looks like a really big number.  That is the political game that Congress and others repeatedly and disingenuously play with the IRS.  Various so-called “oversight” functions repeatedly express horror! horror! that the IRS either erroneously over-collects or erroneously under-collects billions of dollars per year. 

Get a grip.  Chill out.  If you want perfection, die and go to Heaven.  Otherwise, you have to evaluate the nature of the errors and what it costs to fix them.  

So it is here.  In 2018 this CDC report said about 2.8 million people died.  Let’s say 2.5 million of them were taxpayers.  And let’s say another 2.5 million died in 2019.  So that’s 5 million erroneous payments of $1,200 each.  Looking at the back of my envelope that adds up to $6 billion in erroneous refunds.  Max.  Heck, I bet that’s just a drop compared to the money Congress wastes in spending each year. 

The IRS has more important matters to deal with than to go chasing some theoretical 5 million payments made to taxpayers who died in 2018 or 2019.    

Also, the IRS has extremely limited tools to collect back those amounts.  That is because these erroneous EIP payments are very much like non-rebate erroneous refunds.  When the IRS sends an erroneous refund because of some error in determining a taxpayer’s correct tax (such as mistakenly allowing a deduction or exclusion that should not have been allowed) such refunds create a deficiency that the IRS can get back by either acting with the appropriate limitation period to re-assess the tax (and then collect administratively by offset or lien or levy) or by filing suit to recover the erroneous refund under §7422 within the time permitted by §6532.  

In contrast, erroneous refunds that result from some action that is not connected to a determination of liability (such as a clerical error in inputting a $100 as $1,000 and sending $900 back to the taxpayer) are called non-rebate erroneous refunds and those may only be collected by filing suit. United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995)(“The money the O’Bryants have now is not the money that the IRS’ original assessment contemplated, since that amount was already paid.  Rather, it is a payment the IRS accidentally sent them. They owe it to the government because they have been unjustly enriched by it, not because they have not paid their taxes.”).

I think the EIPs sent to folks who died before 2020 would be, technically, rebate refunds because they would be connected to a substantive determination that they were entitled to the refund, based on their 2018 or 2019 filed returns.  The determination would be erroneous.  But they would be, functionally, like non-rebate refunds because a TP who died before Jan 2020 cannot, by definition, have a deficiency of tax for 2020.  So forget re-assessment. Also, fun fact: that also means there is no transferee liability for the heir or family member who cashed the EIP check and used the erroneous EIP payment.

So if my reading is correct, there is no opportunity to re-assess and the only action the IRS can take is to beg the Department of Justice Tax Division to file suit.

Good luck with that.  The DOJ is unlikely to file suit.  It’s a busy place and filing a suit for $1,200 is just not worth their time and effort.  

So to the IRS I would say: Chill out.  Let it go.  To Congress I say: move on.  Go do some actual oversight on the huge opportunities you have created for graft and corruption in the distribution of various relief funds you created.  Leave the dead alone.  

(B) Taxpayers 

Just because the IRS may not have the proper tools to collect an erroneous refund, however, does not mean a taxpayer has no legal duty to return it.  

I would advise a client who received an EIP check or direct deposit for a taxpayer who died before January 1, 2020 to contact the Service for instructions on how to return the EIP.  My reading of the law is that the client has a legal duty to return the money.  The notion that there is no legal duty to return a payment made to you in error by the federal government is not only a dangerous notion, it is flat out wrong.  Taking something that is not yours and to which you have no right to is generally called stealing.  The notion that you cannot steal from the federal government denigrates the rule of law by suggesting legal rules do not apply as between a citizen and the government.  

More importantly the notion is also belied by 18 USC §641.  That statute makes it a felony to steal more than $1,000 from the federal government.  

This type of scenario is not limited to EIP.  The IRS sends out billions of non-rebate erroneous refunds each year.  I tell my students that they need to advise their clients who receive a non-rebate erroneous refund to contact the Service for instructions on how to return the money.  They should explain 18 USC 641 to their clients.  There is, in fact, a legal duty to return that to which you are not entitled.  

So yes, taxpayers who got EIP payments for folks who died in 2018 or 2019 do, IMHO, have a legal duty to return the money. However, the IRS is unlikely to be able to enforce it.  That is why the FAQ uses the word “should” which is similar to the language that the Service uses in letters to TPs asking them to return non-rebate erroneous refunds.  

But to say that a taxpayer has no legal duty just because the IRS cannot easily enforce the duty is not good.  It undermines the rule of law to say one need not comply with the law just because one is unlikely to get caught or punished.  We already have a HUUUGE problem with the guy currently stinking up the White House undermining the rule of law in this country.  Just because he is corrupt does not mean we have to be.  

The Proper Role of FAQs

Monte A. Jackel, a practitioner at Jackel Tax Law, Silver Spring, returns for a timely guest post on the IRS’s use of frequently asked questions (FAQ’s). The IRS’s growing use of FAQ’s, rather than guidance documents published in the Internal Revenue Bulletin or through regulations, has drawn attention in the past. See, for example, the former NTA Nina Olson’s blog post from a few years ago, IRS Frequently Asked Questions Can Be a Trap for the Unwary. The issue is getting renewed attention given the pressures on the IRS to push information out quickly as Congress passes fast moving tax legislation in response to the pandemic. Les

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

So said a recent update to the frequently asked questions (FAQs) with respect to the employee retention credit under the CARES Act. FAQs have been a frequent tool, most recently in relation to the CARES Act, to aid the government in issuing guidance to the public without going through the detailed, rigorous and time-consuming process of issuing regulations. With FAQs, gone are the headaches of soliciting comments from the public, of publishing proposed versions of the rules before finalizing them, and of making changes to the rules after initial issuance without input from the public. 

This all seems like a good thing. And, provided that the public is advised of the limitations of FAQs, as the IRS has started to do, see above, the tax system would seem to be the better for it. The question at hand is whether this situation is acceptable or needs to be either modified or rejected.

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A recent report issued by the Government Accountability Office (GAO) states that the IRS should have added a disclaimer to the FAQs on virtual currency, stating that the FAQs “were not legally binding”. The GAO report states that “The Commissioner of Internal Revenue should update the FAQs issued in 2019 to include a statement that the FAQs may serve as a source of general information but cannot be relied upon by taxpayers as authoritative since they are not binding on the IRS.” To this, the IRS responded that “We disagree with this recommendation. The FAQs are illustrative of how longstanding tax principles apply to property transactions. Further, the IRS does not take positions contrary to public FAQs.” 

How reassuring! I am sure that we have all heard the “trust us” slogan from the IRS and Treasury before. 

Section 6662 imposes what is known as an accuracy related penalty for certain underpayments attributable to positions taken on a tax return. Generally, this penalty generally applies, absent reasonable cause and good faith, unless the position is either disclosed on the tax return (or deemed to be so disclosed) or there is what is known as “substantial authority” for the position taken. 

Substantial authority exists for a position if the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment. The pertinent regulations list the types of authority that may be taken into account, including applicable provisions of the Internal Revenue Code, proposed, temporary and final regulations, revenue rulings and revenue procedures, court cases, legislative history to statutes, various forms of guidance published in the Internal Revenue Bulletin, and other enumerated items. FAQs are not one of the listed items of authority. FAQs can apparently be “authority” if incorporated into an IRS notice because the latter is published in the Internal Revenue Bulletin. Otherwise, tough luck. 

Section 6011(a) provides that when required by the regulations, every person subject to tax shall make a return or statement “according to the forms and regulations prescribed”, and such person “shall include therein the information required by such forms or regulations”. Note that this regulation only requires that tax returns include information required either by regulations or by an IRS form. This  should include instructions to that form. 

FAQs are not listed in either the pertinent statute or the section 6011 regulations as information that must be included on a tax return. As such, a taxpayer can file a true, accurate and complete tax return without complying with any information putatively required by FAQs. 

In a policy statement (Policy Statement) issued on March 5, 2019, the Treasury Department stated, with respect to so-called “sub-regulatory guidance”, that “Unlike statutes and regulations, sub-regulatory guidance does not have the force and effect of law. Taxpayers can have confidence, however, that the IRS will not take positions inconsistent with its sub-regulatory guidance when such guidance is in effect.” Once again, there is that “trust me” slogan again.

The Policy Statement defines sub-regulatory guidance so as to not include FAQs, which are not mentioned or even cited there because such guidance “means sub-regulatory guidance published in the Internal Revenue Bulletin.” Included in this list are revenue rulings, revenue procedures, notices, and announcements, but not FAQs. 

Which raises the question…Are FAQs rules subject to prior notice and comment under section 553 of the Administrative Procedure Act (APA)? The APA makes a critical distinction between rules that must first be published for comment in the Federal Register before going into effect so as to obtain public comment first, and so-called “interpretative rules” where prior notice and comment are not required. 

Given their lack of authority status, FAQs should not be treated as rules subject to the APA. Although I am not aware of any guidance that says so expressly, logically, a non-authority for purposes of section 6662 should not qualify as a rule, much less a legislative rule under the APA. This is so even if the IRS promises it will follow it and not revoke it retroactively. 

But future developments in the courts could end up changing that conclusion. Two fairly recent court cases come to mind in this regard.

First, in Bullock v. IRS401 F. Supp. 1144 (Dist. Ct. Mt. 2019), the district court set aside an IRS revenue procedure that effectively amended the terms of a final regulation (as apparently authorized in that final regulation by granting the power to provide exceptions to the regulation to the IRS Commissioner) because the court deemed the revenue procedure to be a rule that was a legislative rule and not an interpretative rule. The court stated that “The APA requires federal agencies to follow the notice-and-comment rulemaking procedures before it creates or amends legislative rules and regulations. …An interpretive rule remains consistent with the regulation that it seeks to interpret….A legislative rule “effectively amends a prior legislative rule.” ….[The revenue procedure at issue] effectively amends the previous rule that required tax-exempt organizations to file substantial-contributor information annually….[The revenue procedure at issue]…, as a legislative rule, requires the IRS to follow the notice-and-comment procedures pursuant to the APA.” Setting aside a revenue procedure deemed to be a legislative rule because it amended a prior legislative rule (the regulations themselves) is not the only recent development of note pertaining to the APA and tax regulations and rules. Putting aside questions relating to standing, the second case I wanted to mention is a U.S. district court opinion  in Texas. Chamber of Commerce v. IRS, No. 1:16-cv-00944 (Dist. Ct. W.D. TX., 2017), held that an immediately effective temporary regulation was invalid under the APA for failure to give prior notice and opportunity to comment to the public. [note: Les discussed the Chamber of Commerce litigation and linked to the case and PT’s prior coverage in Challenges to Regulations Update: Government Withdraws Appeal in Chamber of Commerce and New Oral Argument Set for Altera]

The case dealt with an immediately effective temporary regulation that was issued contemporaneously with proposed regulations, a common practice by the IRS. The court invalidated the regulation because it believed that the regulation at issue was a legislative or substantive rule, and not an interpretative rule, thus triggering the prior public notice and comment requirement of the APA. This was because the court believed that the regulation at issue affected substantive rights that expanded upon what was provided in the statute at issue.  

True. FAQs are neither a revenue procedure or a temporary regulation or even sub-regulatory guidance. Still, the IRS has promised to follow them although recent caveats added to FAQs warns that they are not authoritative. That is a distinction that most average taxpayers will not understand.

To make matters worse. FAQs on a particular subject are not easy to find on IRS.gov. There is no subject matter or code section index with the limited exception of an easy to find listing of items relating specifically to the coronavirus pandemic. Why is there no separate database containing only FAQs that could be found on the IRS website? Also, when FAQs are changed the prior versions are no longer posted on IRS.gov. Only the date last reviewed is given. 

Issuing FAQs, although easy and convenient for the IRS and providing fast guidance to taxpayers and their advisors, lack both prior public notice and prior public comment before the “rule” is issued to the public. FAQs are not even “sub-regulatory guidance” within the meaning of the Policy Statement. What gives?

Yes, issuing FAQs allows the IRS to get information out to the public in a very quick fashion and FAQs are easily changed, supplemented and amended, unlike regulations. Witness the IRS’s recent outstanding performance in getting out guidance under the CARES Act through the use, in substantial part, of FAQs.

But FAQs, unlike the traditional form of sub-regulatory guidance, are not “authority” under section 6662 and, if the practice of issuing FAQs is to be continued by the IRS, the regulations under section 6662 must be amended to count FAQs as authority under that section. At a minimum, a disclaimer about the limited usefulness of FAQs should be appended to each series of FAQs as a standardized practice of the IRS in issuing FAQs on a going forward basis.

Michael Desmond, IRS Chief Counsel, was recently quoted as saying during a May 6 Tax Analysts’ webinar that “The IRS isn’t planning to turn every FAQ on the Coronavirus Aid, Relief, and Economic Security Act….and the Families First Coronavirus Response Act….into a “full-blown notice or a Treasury decision or proposed regulation”…. 

I found this statement by the IRS Chief Counsel to be both interesting and curious at the same time. IRS notices are documents that are subject to review before issuance. So are FAQs, which are reviewed before issuance. 

It should be noted, however, that Internal Revenue Manual (IRM) 32.2.2, entitled “Summary of the Published Guidance Process”, does not discuss, cite or mention FAQs. There is now a subject matter listing for FAQs on the IRS website, but it does not discuss whether FAQs are authority or not and, as noted, FAQs do not make an appearance in the IRM discussion of what is the published guidance process. So, what does this say about FAQs? 

FAQs are easily added to, changed and supplemented. Notices, on the other hand,  need to be modified by other notices or perhaps by revenue rulings, revenue procedures or the like. FAQs do not leave a researchable trail of prior amendments and changes-only the latest version is available to the public on the IRS website. 

Notices are authority under section 6662 but FAQs that are not incorporated in notices are not authority. Putting aside IRS motives one way or another in deciding between which of the two to issue, it seems that FAQs are preferred because they are very easily amendable, supplemented or replaced.

Originally issued guidance in a notice seems to be amenable to speed more or less the same way as FAQs are, except that the writing style of FAQs is easier to do whereas notices are more formalized. That makes FAQs faster to get out to the public. 

But how much faster… because the cost of that speed is the lack of taxpayer reliance on the FAQs. And you can make legal errors in FAQs that are easily correctable, giving even more speed to the process. Given all of that, which one would you choose?In the end, the IRS and Treasury need to decide whether to keep FAQs, in which case I think that they need to be elevated to “authority” status. In addition, FAQs should be subject in some form to prior public notice and comment absent truly exceptional circumstances (such as the coronavirus pandemic). 

The Newest Time Machine

Yesterday in Part 1Monte A. Jackel, discussed issues relating to the extension of deadlines due to COVID-19. In today’s post Monte considers whether in light of retroactive law changes in CARES the IRS can force a partner to amend a return when the original tax return filed was correct. Les

Revenue Procedure 2020-23 (originally discussed on PT by Marilyn Ames) sets forth the terms and conditions for a partnership subject to the BBA audit regime to file an amended tax return for the 2018 and 2019 tax years. The revenue procedure provides welcome relief for cases where the retroactive law changes allowing 5-year loss carrybacks and the technical correction for QIP (qualified improvement property) would not otherwise have been available because section 6031(b) generally disallows amended returns by such partnerships; AARs are the preferred route. 

The revenue procedure, however, assumes that all partners would favor such retroactive relief. However, that may not always be the case. This brings to the forefront the issue of whether one or more partners of such a partnership that wants to file an amended form 1065 must also ensure that all of its partners file amended form 1040s. That is not directly addressed in the revenue procedure. There is only a reference to section 6222 and the amended form 1065 substituting for the original form 1065. This strongly suggests that the IRS believes that the partners have a legal duty to file amended form 1040s. 

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Revenue Procedure 2020-25 sets forth the options for taxpayers, including partnerships, to obtain relief due to the retroactive law change making QIP eligible for bonus depreciation under section 168(k). This revenue procedure essentially provides for amended forms 1040 or 1065 or automatic changes via a form 3115 to obtain relief due to the retroactive QIP change in the law. The revenue procedure assumes, without citing any supporting law, that when the law relating to a timing of income statute, such as section 168(k), is retroactively changed by Congress, that the taxpayer is now using an impermissible method of accounting. There does not appear to be any law that expressly supports that treatment although it may be the correct policy result. 

Further, there does not appear to be any law that expressly supports mandating the filing of an amended tax return where the original return  was true and correct at the time it was filed. Both reg. §§1.451-1(a) and 1.461-1(a)(3) state that to correctly treat an item of income or deduction in a different tax year than originally reported, the taxpayer “should”, if within the period of limitations, file an amended return. The word “shall” is not in the regulations; only “should”. (See, also, reg.§1.453-11(d) (an amended return for an earlier year “may” not “must” be filed.)

Further, under sections 6662 and 6694, the taxpayer tests a position of substantial authority either at the end of the tax year or when the tax return is filed, and the return preparer tests the level of authority when the tax return is filed. And, at those times, the method of accounting for QIP over a long useful life was the only permissible method to use. The retroactive law change does not change that. And neither Circular 230 or the ABA model rules of professional conduct change that result either.

If the taxpayer does not want to amend either a form 1040 or a form 1065 and the government cannot force the taxpayer to amend its tax return, what is the government remedy? There has been no change in method initiated by the taxpayer and the taxpayer properly adopted the original method and never changed that method. How is the government to force the taxpayer from the retroactively determined impermissible method to the now permissible method? And AARs are voluntary. It is not uncommon for revenue procedures to mandate accounting method changes where there is a prospective change in the law. And, at times, accounting method changes have been mandated (such as the Rule of 78s issue in the 1980s) where the method change applies to a tax year but a return for the prior year may or not have been already filed before the mandate to change (the issue is not discussed). However, I am not aware and could not find any authority that deals with a statutory retroactive law change and applying that change to a prior year where a true and correct tax return containing the prior treatment has already been filed. 

If the taxpayer  cannot be forced off the 39-year method, what does the taxpayer report for future years? Zero or 1/39? If the property is sold after year one but before year 39, section 1245 will only recapture the depreciation actually taken. It would seem that the duty of consistency would mandate continuing to depreciate over a 39-year period although the same tax adviser for year one may not be able to continue to advise the taxpayer because that person would arguably be perpetuating an error. 

The solution may be to mandate the filing of an amended return because the government can only collect from the partnership an imputed underpayment spread over the remaining years in the 39-year period because presumably there is no underpayment in year one by imposing bonus depreciation in that earlier year. But forcing an amended return will create a huge quagmire.

AndA, as noted earlier, what if one or more partners do not want to amend their 1040s but the partnership does amend its form 1065 under Rev. Proc. 2020-23? This revenue procedure does reference the duty to file consistent returns under section 6222, but is this to be read as mandating the filing of an amended tax return? It seems so but doing that would be an issue of first impression to me under existing law. A true time machine.

The Wavering Due Date For Tax Returns

Today’s guest post is by Monte A. Jackel, a practitioner at Jackel Tax Law, Silver Spring, Maryland, with decades of experience in the private and public sector whose expertise includes procedural issues and a deep knowledge of Subchapter K. Part 2 of this post will run tomorrow. Les

Introduction

I will be addressing two recent developments. First, in Part 1, I will discuss the relevant extended due dates for filing returns, paying tax and related matters due to the coronavirus pandemic. And second, which will run tomorrow in Part 2, I will discuss the ability of the IRS to force a taxpayer to make a retroactive law change when the tax return when filed was true, correct and consistent with applicable law at that time. 

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Extended Due Dates

Section 7508A(a) authorizes the Treasury Secretary or his delegate to extend the due date of certain acts, such as the filing of the individual income tax return and the payment of the tax, for up to one year in the case of a federally declared disaster. In addition, added as part of P.L. 116-94 in December 2019, new section 7508A(d) mandates a sixty-day period after the latest incident date to perform such acts. 

Both the Joint Committee on Taxation explanation (JCX-30-19, June 18, 2019, pp. 86-88) and the House Report to P.L. 116-94 (H.R. Rpt. 116-379, Jan. 21, 2020, pp. 97-100) indicate that the 60-day period referred to in section 7508A(d) “is in addition to, or concurrent with, as the case may be, any period of suspension provided by the Secretary [under section 7508A(a) and (b)].” 

Section 7508A(d) generally provides that, in the case of any qualifying taxpayer, the period beginning on the earliest incident date specified in the disaster area declaration and ending on the date that is 60 days after the latest incident date shall not count in determining the due dates for the acts specified in section 7508(a). Generally, a qualifying taxpayer is a person whose principal connection is with the United States. 

The president declared a national disaster for the coronavirus on March 13, 2020. The declaration consisted of a one-page declaration and a three-page letter. Together, these documents indicate a beginning date for the emergency of March 1, 2020, and indicate coverage throughout the United States.

FEMA followed up by issuing more specific guidance. However, it is not perfectly clear that the FEMA noticeshave the legal effect of modifying the terms of the presidential disaster declaration although that is presumably the end result that makes the most sense. 

The language used in section 7508A(d) does not appear amenable to an emergency such as a pandemic which is continuing in nature with no objectively determinable beginning or ending dates. For example, if there is no ending incident date for the emergency, it would appear that the ending date would remain perpetually open and the specified due dates would never occur. 

This, of course, makes no sense. And yet, recently issued pension regulations relating to the coronaviruscontain examples assuming both a beginning and ending date for the coronavirus pandemic and contain a general 60 day extension rule. Although section 7508A(d) is not cited in these regulations, the 60-day period seems more than a coincidence. 

On April 29, the ABA Tax Section submitted a letter to the IRS with comments on the extension of various due dates relating to the coronavirus pandemic. It is a good and thorough letter. However, I would note that if the due dates are extended to the later of July 15, 2020 or 60 days from the end of the pandemic, as the report recommends, the IRS notices and revenue procedures already issued would need to be rewritten, supplemented and revised. For example, Notice 2020-23 is the key date extension guidance. It provides for a July 15 extended due date and does not cite or mention in any way section 7508A(d).

I was told from reliable informed sources inside the government that section 7508A(d) did not apply to the coronavirus pandemic because there was no “declaration date” in the presidential declaration and there was no “incident date” in this crisis like there would be for a hurricane or other natural disaster that is objectively determinable. That proposition is debatable. The JCT explanation, JCX-30-19, at pp. 87-88, discusses the statute but does not address a case like this although, literally, the JCT report could be read as mandatorily tacking on another 60 days at the end of the period regardless of the definitional terms in section 7508A(d) (incident date and declaration date). The House Report, H.R. Rep. 116-379, at p. 100, says more or less the same thing and does not clarify matters. 

How likely is that to be done on a voluntary basis? Section 7508A(d) uses terms of art that specifically address specific objectively determinable disaster situations, such as a hurricane. I would not plan into using section 7508A(d) to obtain a date beyond July 15, 2020, but I would clearly raise the issue in an audit or in court. It is likely that a court will push to apply section 7508A(d) because, in cases such as the pandemic, the provision could otherwise be completely neutered.