Life grants few chances at true redemption. The Internal Revenue Code, likewise, is not known for facilitating taxpayer salvation. Sure, under certain circumstances, taxpayers have an opportunity to file late tax-related elections to rectify an oversight, and other forms of clemency exist. However, the general rule is that taxpayers are stuck with a position once they take it on a tax return filed the IRS. One obscure exception to this rule is the qualified amended return (“QAR”), which can be a powerful self-help remedy for taxpayers who experience the “oh-shoot” moment. This event often occurs when taxpayers realize that, oh shoot, they forget to include certain income items on their tax return or, oh shoot, they cannot sleep because the stance they took on their tax return was too aggressive. Filing a QAR in these situations may allow a taxpayer to sidestep penalties stemming from the inaccurate tax return. The QAR rules, like most things tax, are complex. A recent Tax Court case, Bergmann v. Commissioner, 137 T.C. No. 10 (2011), provides us an opportunity to analyze the purpose, application, intricacies, and evolution of the QAR rules. The attached article, called “The Parameters of Qualified Amended Returns Examined by Tax Court in Case of First Impression,” examines the issues in Bergmann v. Commissioner. It was published in the most recent edition of the Journal of Taxation.
Posted tagged ‘Tax Court’
Back in the era of beepers, being “on call” evoked imagery of importance. Indeed, those people required by their job to carry a beeper, along with those who did so voluntary, displayed the devices with a noticeable degree of smugness. The positive aspects of this status symbol aside, anyone who has been obligated to carry a beeper or its modern equivalent (e.g., BlackBerry, iPhone, PalmPilot, etc.) understands that being constantly reachable is often more of a curse than a blessing.
Many jobs mandate that a person respond to messages within a certain period of time, minimize travel so that one can be at the office quickly if necessary, avoid alcohol at all times to ensure constant preparedness to work, etc. Given this reality, it is understandable that many people who are perpetually “on call” feel that they are always working, continuously performing.
This concept is at the core of a recent Tax Court case, Moss v. Commissioner, 135 T.C. No. 18 (Sept. 20, 2010), where the taxpayer claimed that all the time he spent “on call” with respect to his rental real estate business should be counted in determining whether he met the necessary participation standards. The attached article, called “If You’re On Call, You’re Out of Luck in Passive Activity Cases,” analyzes Moss v. Commissioner and the three important rulings this case contains: (i) in determining whether a taxpayer “materially participates” in an activity, only time the taxpayer actually spends performing services can be counted; (ii) the fact that a taxpayer is “on call” and thus available to field inquiries, take actions, etc. does not constitute performing services; and (iii) the regulations permit a taxpayer to establish participation by “any reasonable means,” but simply allocating an arbitrary portion of the total “on call” time is not reasonable. The article was published in Practical Tax Strategies.
Always Say Never: Does Financial Distress Create Reasonable Cause Sufficient To Abate Tax Penalties?February 6, 2012
Nearly all taxpayers will face penalties by the IRS at some point, regardless of their sophistication level and size. Accordingly, tax practitioners, even those who claim not to get involved in traditional “collection” activities, must understand key aspects of abatement and collection procedures in order to effectively advise their clients. This is particularly true given that the IRS persists in taking extreme positions in the Tax Court, such as the always-say-never approach, that are contrary to the majority of existing legal authorities. A recent example is Custom Stairs & Trim, Ltd., Inc. v. Commissioner, T.C. Memo 2011-155, a case in which the IRS unsuccessfully argued that financial distress caused by events beyond the taxpayer’s control can “never” constitute reasonable cause for abating late payment and federal tax deposit penalties. The attached article, called “Always Say Never: Tax Court Rejects IRS’s Extreme Litigation Position in Penalty Cases,” analyzes Custom Stairs and the valuable lessons that it contains for taxpayers and their advisors. The article was published in the most recent issue of Journal of Tax Practice & Procedure.
As Tax Blawg readers know, after the Supreme Court’s Mayo decision adopted the deferential Chevron standard for determining the validity of Treasury regulations (instead of the less deferential National Muffler standard that taxpayers preferred), taxpayers and practitioners have speculated that seeking to invalidate a regulation may be a fool’s errand. Since Mayo, many of the U.S. Circuit Court of Appeals (but not all) have shown a proclivity towards deference. Extrapolating from these precedents, on the heels of the Mayo decision, it appears that the pendulum has swung heavily toward courts routinely deferring to Treasury regulations. The question thus arises: is there a litigating forum where a challenge to regulatory deference might be more favorably received? Surprisingly, the answer may be the U.S. Tax Court.
As reported in Tax Notes yesterday (subscription required), Judge Holmes of the Tax Court recently shared with practitioners a list of rarely utilized strategies for challenging the validity of Treasury regulations. While the content of the Judge’s speech is useful information regardless of the litigating forum, the speech also reinforces a pattern that has emerged this year. Despite the decision in Mayo, the Tax Court has exhibited a stubborn streak in resisting the routine deference towards Treasury Regulations that other courts now seem to prefer.
The Tax Court’s resistance to regulatory deference has been demonstrated in at least two opinions issued this year since Mayo. In April, the Tax Court stuck to its guns in Carpenter Family Investments, LLC v. Commissioner by striking down for the second time Treasury regulations promulgated under section 6501(e), even though two Circuit Courts that deferred to the regulations did so while criticizing the Tax Court’s first opinion in Intermountain Insurance Services v. Commissioner. Likewise, last month, in Pullins v. Commissioner, the Tax Court struck down regulations imposing an uncodified, two-year statute of limitations on innocent spouse cases under section 6015(f), even though the Seventh Circuit had reversed a 2009 opinion in which the Tax Court reached the same result.
Moreover, further reflecting the Tax Court’s general reluctance to defer to the IRS, Judge Holmes’ remarks were not limited solely to challenging the validity of Treasury Regulations. In his speech, he also criticized so-called Auer deference, under which courts will generally defer to an agency’s interpretation of its own rules. Although Auer has historically been accepted as well-settled, Judge Holmes cited a recent concurring opinion by Justice Scalia in Talk America, Inc. v. Michigan Bell Telephone Co., in which the Justice wrote that he would consider overturning Auer on separation-of-power grounds.
Challenging the validity of Treasury regulations has always been an uphill battle. Nonetheless, Judge Holmes’ comments, coming on the heels of these recent decisions, demonstrates the Tax Court’s apparent reluctance to follow the trend of regulatory deference, which is important information to consider when choosing a litigating forum involving a regulatory challenge.
A final word of caution is that taxpayers would be well-advised to consider the law of the circuit to which an appeal of a favorable Tax Court result may lie, as reversals in cases such as Intermountain demonstrate. Despite these concerns, the recent Tax Court developments suggest that, like any pendulum that has swung too far in one direction, the deference pendulum may eventually swing back the other way. Perhaps the Tax Court is where it is swinging back first.
For better or worse, many a tax dispute has been won or lost on procedure, often on the question of whether a document – be it a tax return, refund claim, or petition – was timely filed. The centrality of this issue helps explain the renown of the otherwise unremarkable “mailbox rule” (a.k.a. the “timely-mailing-is-timely-filing rule”).
The attached article, published in the International Tax Review, examines a recent case, Dietsche v. Commissioner, in which the Tax Court ruled that a petition mailed from New Zealand and postmarked the day after its due date was not timely filed, even though, measured by the Tax Court’s time zone, the petition was timely.
Dietsche v. Commissioner offers a chance to review the mailbox rule, discover how this rule has evolved to address international issues and foreign postmarks, and gauge the Tax Court’s threshold for novel arguments. The attached article explores these topics in hopes of helping taxpayers (and their advisers) avoid potential pitfalls.
Many practitioners were taken aback by the recent Tax Court decision in Canal Corp. v. Commissioner, where Judge Kroupa issued a stinging opinion that not only recast a leveraged partnership distribution as a disguised sale, but also upheld penalties against the taxpayer for what the judge characterized as the taxpayer’s unreasonable reliance on the opinion of its tax advisor. Judge Kroupa’s analysis, which should be on the forefront of every tax advisor’s mind, raises a number of interesting, if thorny, questions, including:
- Should a fixed and/or contingent fee arrangement necessarily render tax advice unreliable for purposes of avoiding a substantial understatement penalty under the “reasonable cause and good faith” exception?
- Has the enactment of section 6694 undercut the rationale for prohibiting taxpayers from relying on advisors that have a conflict of interest?
- When (if at all) should courts defer to the opinion of a reputable tax advisor in deciding whether to uphold an assessment of penalties against a taxpayer?
Today, we tackle the first of these three questions.
Last summer, the Ninth Circuit Court of Appeals handed the IRS a defeat that the IRS did not take lightly. The Ninth Circuit ruled that an overstated basis, no matter how large, is simply not omitted income. See Bakersfield Energy Partners, LP v. Commissioner , 568 F.3d 767 (2009). The key to the decision is the definition of a four letter word, omit, which means “left out,” whereas an overstated basis by definition is stated on the return, i.e., not left out. Without an omission of income, the three year statute of limitations applies, not the extended six year period. The Ninth Circuit relied heavily upon a Supreme Court decision that came to the same conclusion. Colony, Inc. v. Commissioner, 357 U.S. 28 (1958).
After Bakersfield, the IRS suffered a series of losses. Not one to stand idly by, the IRS took matters into its own hands and seized upon a small opening left in the Ninth Circuit’s decision: “The IRS may have the authority to promulgate a reasonable reinterpretation of an ambiguous provision of the tax code, even if its interpretation runs contrary to the Supreme Court’s ‘opinion as to the best reading’ of the provision. . . . We do not.” Bakersfield, 568 F.3d at 778 (citations omitted). With that, the Treasury Department issued Temp. Reg. §§ 301.6229(c)(2)-1T and 301.6501(e)-1T, which provided “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income.” With the new regulation in hand, the IRS went about attempting to overturn a series of unfavorable decisions.
In her column last Monday, Lee Sheppard criticized Judge Holmes of the Tax Court for, as she put it, “strain[ing] to find a reason to hold for the taxpayer” in the recent case of Container Corp. v. Comm’r, 134. T.C. No. 5. (For our prior discussion of this case, see here. For the text of the opinion, see here.) According to Ms. Sheppard, Judge Holmes “appears to have assumed equitable powers in deciding” the case, and “the tax law is the worse for it.”
The basic issue in Container Corp. was whether guarantee fees paid by a U.S. corporation to its Mexican parent in respect of a debt guarantee provided by the parent should be treated as U.S.-source income (and therefore subject to withholding tax on payment to the Mexican parent). Because the rules for sourcing income don’t address how guarantees are to be treated, the court framed its analysis as whether the guarantee fees were more like interest (which is sourced to the location of the borrower) or more like services (which are sourced to the location of the provider).
Ms. Sheppard excoriated Judge Holmes for even contemplating that a debt guarantee could be treated as a service. To her, it “[s]ounds pretty obvious” that the parent corporation was simply protecting its investment in the subsidiary, not providing a service to the subsidiary.