Posted tagged ‘tax law’

Who’s Afraid of the APA?: The Application Of Administrative Law To Tax Regulations

February 15, 2012

By David Shakow

The Supreme Court’s decision in Mayo Foundation for Medical Education and Research v. United States means that tax practitioners must be more sensitive to administrative law and judicial deference to administrative rules.  This includes gaining some familiarity with the Administrative Procedure Act (APA) and the major cases that deal with judicial deference to administrative action, starting with Chevron USA Inc. v. Natural Resources Defense Council Inc.  While the Supreme Court spends a lot more time considering issues of administrative law rather than tax law, the many decisions don’t result in a clear set of rules as to how courts are to treat administrative pronouncements.

In “Who’s Afraid of the APA?,” I identify the important issues in the application of general rules of administrative law to tax regulations.  The discussion should help tax practitioners identify the issues that are raised when the validity of an IRS pronouncement is open to question.  Further guidance may be available when the Supreme Court hands down its decision in Home Concrete & Supply LLC v. United States, which was argued before the Supreme Court in January.  This article appeared in 134 Tax Notes 825 (Feb. 13, 2012).

When Is Debt No Longer Debt? Treasury Proposes To Ease Debt-Modification Regulations

June 18, 2010

By Jonathan Prokup

Times are tough, and many troubled companies are facing the need to modify debts that were issued when times were better (and the companies were financially much stronger).  For companies that wish to modify their debts, and for investors that hold those debts, federal tax law imposes an unfortunate limitation.  An outstanding debt that undergoes a “significant modification” is treated as having been exchanged for a new instrument with the modified terms.  See Treas. Reg. § 1.1001-3.  As a result, holders of the debt will generally be required to recognize gain or loss on the deemed exchange of the debt and, in some instances, the issuer may be forced to recognize income as well.  Thus, the question of whether a modification will result in a deemed exchange of the debt for federal income tax purposes has the potential to complicate, or even derail, potentially beneficial debt modifications.

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A Four-Letter Word Causes The IRS Trouble

May 12, 2010

By Buck Buchanan

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.

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