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IRS Announces Six New Campaigns

Yesterday, the Large Business and International Division (“LB&I”) of the IRS announced six new compliance campaigns. Faced with continued budget cuts, LB&I reprioritized its compliance work into designated “campaigns,” wherein it directs resources across taxpayers and industries on specific issues that face high risk of noncompliance. It announced the first 13 campaigns on January 31, 2017, added 11 more on November 3, 2017 and five more on March 13, 2018. The new campaigns focus on disparate foreign and domestic issues. They are:

(1) Interest Capitalization for Self-Constructed Assets
(2) F3520/3520-A Non-Compliance and Campus Assessed Penalties
(3) Forms 1042/1042-S Compliance
(4) Nonresident Alien Tax Treaty Exemptions
(5) Nonresident Alien Schedule A and Other Deductions
(6) Nonresident Alien Individual Tax Credits

In its announcement, the IRS describes each campaign in detail and how it may approach ensuring compliance with the campaign issue.

If a taxpayer has an item related to a campaign, it makes it that much more likely that her return will be selected for examination. Thus, it is important that taxpayers continue to keep up to date on the latest campaigns and make sure their files are audit-ready if a campaign may related to them.

Did Congress Unexpectedly Deny Healthcare Providers a Deduction for Billions in Medicare Overpayments? Maybe.

Before tax reform, under 162(f), a payment to the government for a violation of the law was deductible unless it was a fine or penalty. 162(f) only came into play when a fine or penalty was involved and excluded any routine payments made to the government.

Thanks to tax reform, it applies to so much more now. Now, 162(f) denies a deduction for a payment made to the government for a violation of the law unless such payment is restitution or made to come into compliance with the law and it is identified as such in a settlement agreement or court order. This means, for example, that the billions of dollars that flow back to Medicare for overpayments may now fall within section 162(f)’s ambit. These overpayments are most often made because of billing or other administrative errors that naturally occur in a complex system and health care providers are doing nothing more than returning the money back to the government. Yet, they will be treated the  same as if they paid a criminal penalty. Refunding a Medicare overpayment is just one of countless examples of whether section 162(f) may now come into play.

Luckily, a few weeks ago the IRS issued Notice 2018-23 requesting comment on the new section 162(f) and indicated it would be issuing proposed regulations later. Today, we, along with members of our Health Care & Life Sciences group, filed a comment alerting the IRS to this issue and requesting it issue proposed regulations that clarify and narrow the scope of 162(f). In the meantime, taxpayers would be advised, whenever they are making a payment to the government to consider whether section 162(f) applies and plan accordingly.

The comment we filed may be found here.

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IRS to end Offshore Voluntary Disclosure Program in September

The IRS has announced that it will begin winding down its Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. Under the OVDP, a taxpayer with undisclosed foreign assets or income could come forward to pay tax, interest and reduced penalties in exchange for immunity from criminal prosecution. The IRS will continue its separate Streamlined OVDP, which is only available to certain taxpayers unaware of their international reporting obligations.

The IRS made the announcement now in order to give taxpayers who may still want to come forward time to do so. “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter in a statement. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

The program has been very successful, collecting more than US$11 billion in tax, interest and penalties from more than 50,000 taxpayers. With advances in international reporting and information-sharing regimes, the IRS has also aggressive pursued taxpayers who have tried to hide assets abroad. Since 2009, it has indicted 1,545 taxpayers for criminal violations related to international activities with 671 indicted specifically on international criminal tax violations.

Even with the OVDP ending, the IRS will not stop vigorously pursuing international tax evaders. Any US taxpayer who may have unreported assets or income abroad should come forward now and take advantage of the OVDP while it is still available. Otherwise, come September, such taxpayers could face huge penalties and potentially even prison.

About Denton’s Tax Controversy

Dentons’ Tax Controversy team has successfully represented over 100 clients in various OVPD and streamlined OVPD proceedings, addressing a wide variety of tax compliance issues from taxpayers all across the globe. In addition, Dentons is one of few firms that has experience litigating Report of Foreign Bank and Financial Accounts (FBAR) penalties under the Bank Secrecy Act, which are almost always at issue in OVDP proceedings.

If you would like to discuss the above further, please contact any of the members of the Dentons Tax Controversy team.

Eleventh Circuit Holds that Taxpayer’s Affidavit Can Defeat Summary Judgment

In litigation, the IRS will often seek to short circuit a proceeding by filing an early, pre-discovery motion for summary judgment. Taxpayers, in turn, often resist those motions by submitting documentary evidence and affidavits to raise genuine issues of material fact or to highlight the need for further discovery.  Inevitably, the IRS argues in rebuttal that such affidavits should be disregarded because they are “self-serving” and (often) uncorroborated with independent evidence.  However, the IRS’s historically safe argument just became a whole lot harder to make due to a recent unanimous decision by the full U.S. Court of Appeals for the Eleventh Circuit.

In United States v. Stein, the government filed a pre-discovery motion for summary judgment to collect on outstanding tax assessments along with interest and penalties..  In opposition, the taxpayer proffered an affidavit attesting to the fact that she had already paid the taxes the government claimed she owed.  The district court granted the government’s motion and rejected the taxpayer’s affidavit.  The district court found the affidavit to be uncorroborated and not relevant.  A panel of the Eleventh Circuit agreed, holding that her “general and self-serving assertions . . . failed to rebut the presumption [of correctness] established by. . . the assessments.”  The panel’s holding was based on the court’s prior decision in Mays v. United States, 763 F.2d 1295 (11th Cir. 1985), which suggested that self-serving and uncorroborated statements in a taxpayer’s affidavit cannot defeat a summary judgment motion.

It was on this point that the full Eleventh Circuit disagreed and overruled Mays.  In doing so, the court held that under Federal Rule of Civil Procedure 56, an affidavit that is both self-serving and uncorroborated can raise a genuine issue of material fact and defeat an otherwise proper motion for summary judgment.  The text of the rule does not forbid such affidavits or require corroboration.  Because Tax Court Rule 121 closely mirrors Federal Rule of Civil Procedure 56, the court’s rationale will apply with equal force regardless of fora.

This is significant because experience has shown that the IRS will often rely on publically available statements (particularly financial statements) to file and win pre-discovery motions for summary judgment. Now, a taxpayer has strong authority with which to counter the IRS and force the litigation to move into discovery, thus, giving taxpayers the opportunity to more fully develop the record.  It is a significant victory for taxpayers.

Who Qualifies as a Partner under the New BBA Regulations

This is the first of a series of deeper dives into the newly finalized partnership audit regulations that cover who can elect out of the new centralized partnership audit regime. We have previously blogged about the regulations here.

In order for a partnership to elect out of the new centralized partnership audit regime (the “BBA regime”), there are several hurdles to overcome. The first of which is that the partnership wishing to elect out must be able to satisfy a two part test:  It must have 100 or fewer partners and those partners must be eligible partners

First, the partnership must have 100 or fewer partners. Treasury Regulation 301.6221(b)-1(b)(1)(i) states that a partnership has 100 or fewer partners if, under section 6031(b), it is required to issue 100 or fewer statements.

Who gets a statement?

While these rules seem straight forward, they could become problematic for partnerships with S corporations as partners.   Under new section 6221(b)(2)(A)(ii), the statements required to be furnished by an S Corp under section 6037(b) for its taxable year ending with or within the partnership’s taxable year will count towards the 100 or fewer partner threshold.  This is in addition to the statement that the S Corp partner received from the partnership.  The partnership must also provide the names and taxpayer identification numbers of each person to whom the S Corppartner was required to issue a statement under section 6037(b).  Thus, an S Corp partner and its shareholders will all count towards the 100 or fewer requirement.

A quick example:

A partnership has 50 partners, which are as follows:

  • 49 unmarried individuals
  • 1 S Corp which has 51 shareholders

At first blush, it would seem that this partnership qualifies. It has only 50 partners after all.  However, under the new rules,  the total number of partners for the 100-partner rule is 101 (49 individuals + 1 S Corp + 51 S Corp shareholders) and the partnership cannot elect out of the BBA regime.

So, while you may think you are under the 100 or fewer limit, you will want to make sure you tally and include the number of shareholders your S Corp partner has if you are attempting to elect out of the BBA regime. The presence of a single S Corp partner may defeat the election.

Who is an eligible partner?

Second, each of those partners must be an eligible partner.   Treasury Regulation 301.6221(b)-1(b)(3) describes the types of partners that are “eligible partners” as individuals, C corporations, foreign entities that would be a C corporation if domestic, S Corp, and estates of deceased partners. Partnerships, trusts, disregarded entities, nominees or other similar persons that hold an interest on behalf of another person, and estates other than the estate of a deceased partner are not considered eligible partners under the rules.   Drawing the rules so narrowly promotes the IRS’s goal of pushing as many partnerships as possible into the new regime.

To recap, when weighing the decision to elect out, be careful to ensure that your partnership has 100 or fewer partners (being mindful of the S Corp trap mentioned above), and that each of the partners are eligible partners under the regulations.

Lurking in the wings, however, is the potential for the IRS to use judicial doctrines to recognize constructive or de facto partners or partnerships.  We will discuss this other pitfall in greater detail next week.

IRS Issues Final Regulations on BBA Partnership Audit Regime

The IRS has issued final regulations regarding the new centralized partnership audit regime, referred to as the BBA regime. The regulations are effective as of yesterday, January 2, 2018.. We have blogged about the new rules here and here.

These regulations implement the rules for electing out of the new audit rules. Here, we address how the regulations were updated from the proposed regulations issued over the summer.  While it acknowledged that “the new rules are a significant change in the way partnerships have been traditionally audited,” the IRS rejected most of the suggestions made during the notice and comment period. It noted its inexperience in the operation of these new rules as the reason behind its rejecting most of the suggestions, but consistently left the door open for further rulemaking.  Unfortunately, this does not provide certainty for taxpayers and means in the near future taxpayers must carefully review the rules to ensure they are compliant.

This is especially true for taxpayers who may wish elect out of the BBA regime. A taxpayer wishing to elect out of the BBA regime may do so if 1) it has 100 or fewer partners, and 2) all partners are eligible partners.

The 100-or-fewer partner rule

Under section 6221, a partnership is eligible to elect out of the BBA rules if it has 100 or fewer partners. Under now-final Treas. Reg. 301.6221(b)-1(b)(1)(i), a partnership has 100 or fewer partners if it is required to furnish 100 or fewer statements under section 6031(b), which generally requires a partnership to furnish a statement to each person that is a partner in the partnership during the partnership’s taxable year. This is a key issue because a partnership that fails to elect out of the regime or a partnership that attempts to elect out of it but cannot will find itself unexpectedly bound by these new rules.

Notice Requirement

Several commentators had suggested that the IRS exclude pass-through entities or disregarded entities in determining whether a partnership meets the 100-partnership threshold. The IRS rejected those suggestions, noting that under section 6031, notice must be provided to each partner, regardless of whether the partner is a disregarded entity or a pass-through.

The IRS also rejected suggestions that it establish a pre-filing procedure to address qualification issues. It did, however, leave open the door to further regulations on this issue, noting that it “may reconsider whether a pre-filing procedure would be helpful after gaining experience with the election out procedures.” It also left open the door for further regulations on the issue of how a partnership may elect out of the regime if it is found to be a constructive partnership or a de facto partnership. Under the regulations, if such a partnership exists and it does not file an election on a timely filed return for that taxable year, it will be bound by the new BBA rules.

Eligible Partner Requirement

Treasury Regulation 301.6221(b)-1(b)(3) describes the types of partners that are “eligible partners” for the 100-or-fewer rule. Partnerships, trusts, disregarded entities, nominees or other similar persons that hold an interest on behalf of another person, and estates other than the estate of a deceased partner are not considered eligible partners under the rules.

Commentators had requested that the IRS expand the definition of eligible partners to include partnerships, disregarded entities, trusts, individual retirement accounts, nominees , qualified pension plans, profit sharing plans , and stock bonus plans. The IRS rejected these suggestions and did not expand the definition of eligible partners because in its view “the interests of efficient tax administration outweigh” any additional administrative burdens created by a narrower definition. It appears the IRS was concerned about allowing more partnerships to elect out of the new regime, because it would require deficiency proceedings for each of the partners in such partnerships and result in substantially more audits.

Making the election

The IRS also addressed comments it had received regarding the timing for making the election and how it may be revoked. It left unchanged, for example, a partnership would be required to obtain the consent of the IRS to revoke an election out. It also did not address whether the election may be timely made on amended returns, stating that other areas of the code address this issue.

Observations

In addressing these comments, the IRS has sent a strong signal that it favors the new BBA regime and may take an aggressive stance against those partnerships that attempt to elect out of it. It also broadcasts to the tax community that it cannot at this stage address all the issues that may arise under the new regime through regulations because it lacks experience with how these rules will work in the real world. This leave taxpayers in a bind because the IRS is uncertain how these rules will work in practice but is likely to favor one particular outcome.

It is important that partnerships plan carefully and particularly if you are thinking of opting out of the BBA regime to ensure you are ready if the IRS decides to challenge that decision.

If you have any questions about this post or how you can prepare for these rule changes, please contact Jeff Erney at (202) 496-7511 or jeffry.erney@dentons.com

Update on Tax Reform

The more-or-less final version of the tax reform bill is here and Congress is expected to vote on it this week.

Dentons has done an extensive write-up of the provisions of the bill, which can be found here.

 

 

Tax Reform is Here

Dentons is covering all of the latest news on the various tax reform plans that the United States Congress is currently considering.

The latest about the Senate’s plan can be found here.

Check back for more updates.

Substantial Changes to Partnership Tax Audit Procedures will Severely Impact Partner Liability and Rights Before the IRS

Does your client own an interest in a partnership or an entity treated as a partnership for US tax purposes?  If so, you better take notice because the new partnership tax audit rules are making drastic changes as of January 1, 2018.  The new rules, known as “BBA,” will administer a tax deficiency at  the partnership level, unless certain elections are made.  These rules are a significant departure from the old rules, known as “TEFRA”, which administered a tax deficiency at the individual partner level.  All partnerships will need to amend their respective partnership agreements to take the BBA changes into consideration.  What should a partnership or its partners be concerned about?

Below is a non-exhaustive list of some of the major concerns of these new procedures:

Have you chosen a Partnership Representative (“PR”) under the BBA rules? If so, have you set forth the limitations and obligations of the PR?

  • Once the BBA Rules are effective, all authority over the partnership tax audit lies with the PR
  • The BBA procedures give the PR statutory authority to bind all partners with respect to all actions taken by the partnership in the BBA administrative proceeding and in any judicial proceeding
  • Since the PR is the exclusive party to act on behalf of the partnership, the PR may also, in effect, bind all partners to extensions of the statute of limitations, settlements and available elections

Does your existing partnership agreement require the partnership or the PR to provide notice to all partners of a IRS audit?

  • The BBA procedures abolish all partner-level notices of IRS actions that existed under TEFRA
  • Unlike the TEFRA rules, under BBA there is no affirmative obligation for the Internal Revenue Service, the partnership or the PR to send a notice of an IRS audit to each partner
  • Without revising the partnership agreement, a partnership audit could occur and be resolved without the partners’ knowledge

Does your existing partnership agreement contemplate who will be responsible for tax deficiencies?

  • Under the BBA procedures, unless the PR takes certain actions, tax deficiencies are assessed against the partnership in the year the controversy is resolved (known as the adjustment year) and not in the year which generated the tax deficiency (known as the reviewed year)
  • In effect, the economic burden of a tax deficiency could be borne by partners who had no interest in the partnership when the income/deduction was generated

Does your existing partnership agreement provide for opting-out of the BBA procedures?  If so, does the PR have an affirmative obligation to opt-out?

  • The BBA procedures allow smaller partnerships (with fewer than 100 partners) to elect to opt-out of the BBA rules and have the audit be administered at the partner rather than partnership level
  • Do you desire to have the audit administered at the partner level?  Are you concerned about the IRS expanding the audit to other parts of your business?
  • Are you willing to continue to be responsible for tax deficiencies for the years in which you held an interest in a partnership, even if you later sell such interest.

Does your existing partnership agreement provide for pushing-out tax deficiencies to the reviewed year partners?

  • The push-out election allows the partnership to pass on an adjustment to a former partner without providing them an opportunity to comment, contest, or even receive notice of the adjustment
  • If you exit a partnership are you willing to leave this decision up to the current PR?
  • As a former partner would you desire some control over these decision for which you are ultimately responsible?

The above items address some of the questions partnerships and partners should be thinking about before the BBA procedures go into effect on January 1, 2018.  It is recommended that all partnerships work with their tax counsel to perform a thoughtful and thorough review of their partnership agreements.  The only way to control the results of these new procedures is to be pro-active now before the rules go into effect.

Please contact Jeff Erney at jeffry.erney@dentons.com or Sunny Dhaliwal at sunny.dhaliwal@dentons.com

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IRS To Revise Guidance for In-Person Appeals Conferences

According to Andrew Keyso, Acting Deputy Director of Appeals, the IRS will be issuing new guidance “within the next few weeks” regarding when it will hold an in-person appeals conferences.

Recently, the IRS made waves when it revised the Internal Revenue Manual to limit when a taxpayer was entitled to an in-person appeals conference. The guidance gave Appeals the discretion regarding when to hold an in-person. In making the decision, Appeals was to consider a limited set of facts and circumstances, such as whether a taxpayer had special needs or whether Appeals would have to consider the credibility of a witness. A taxpayer could request one but the decision rested with the Appeals.  The guidance was meant to dramatically limit the number of in-person conferences Appeals would hold.

According to Mr. Keyso, after receiving substantial feedback from the tax community, the IRS will issue new guidance expanding the scope of when in-person meetings will be held.

This is good news for the taxpayer.

Once the new guidance is issued, we will blog about it.  Please check back for updates.

Tax Court Disallows a $33 Million Charitable Donation Deduction Because Taxpayer Did Not Sufficiently Fill Out Form

Serving as a vivid reminder that it is vital that a taxpayer comply strictly and completely with the charitable deduction regulations, the Tax Court recently denied a $33 million charitable deduction in its entirety and imposed a gross valuation misstatement penalty because the taxpayer did not properly fill out Form 8283.

In Reri Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), a partnership donated an interest in a piece of property to the University of Michigan.  The donor retained an appraiser who assigned a fair market value of $33 million to the donation.  The taxpayer prepared a Form 8283 appraisal summary and included the form with its return.  The form indicated that the donor had acquired the donated interest through a purchase but did not include an amount for the donor’s “cost or other adjusted basis.”  Importantly, the Court does not state whether the taxpayer also attached the appraisal report prepared by the appraiser.

The Tax Court denied the entire deduction solely because the Form 8283 did not list the donor’s cost basis. According to the court, Congress prescribed strict substantiation requirements when claiming a charitable deduction over certain amounts in order “to alert the Commissioner to potential overvaluations of contributed property and thus deter taxpayers from claiming excessive deductions.”  A failure to comply with these requirements will result in a denial of the deduction, even if the amount of the deduction is correct.

A taxpayer can sometimes avoid this draconian result if it substantially complies with the regulations. Critically, a taxpayer does not do so if it fails to provide sufficient information to alert the IRS to a potential overvaluation.

That is precisely what the court determined happen here. By failing to list the adjusted cost basis of the property, as required by Treas. Reg. § 170A-13(c)(4)(ii)(E), the taxpayer did not comply with the regulations.  Omitting the cost basis “prevented the appraisal summary from achieving its intended purpose,” as “[t]he significant disparity between the claimed fair market value and the price [the taxpayer] paid to acquire [the property] just 17 months before it assigned [the property] to the University, had it been disclosed, would have alerted [the IRS] to a potential overvaluation of [the property].”  As such, the taxpayer did not substantially comply with the regulations and justified denying the entire deduction ab initio.

The Tax Court also imposed a 40% gross overvaluation penalty on the taxpayer. After finding the fair market value of the donation was only approximately $3 million, subjecting the taxpayer to the penalty, the court rejected the taxpayer’s reasonable cause defense.  Even though it had an appraisal, the court held that “a taxpayer must do more than simply accept the result of a qualified appraisal” and rejected, as immaterial, the taxpayer’s evidence of a second earlier appraisal that appeared to conform to the one prepared for the return.

Though not the subject of this litigation, it is important to note that there may be consequences to the appraiser, as well. With a judicial determination that the value claimed was grossly overstated, the appraiser may be subject to, among other things, a penalty pursuant to I.R.C. § 6695A.  If the IRS imposes a penalty on the appraiser, the IRS’s Office of Professional Responsibility (OPR) may also take action, see Circular 230 § 10.60, and can reprimand or even disqualify the appraiser.

If you have any questions about this post or about how to ensure that you comply with the substantiation requirements before donating property, please contact Jeff Erney at Jeffry.Erney@dentons.com or Peter Anthony at peter.anthony@dentons.com

Supreme Court Agrees to Review Sweeping Tax Obstruction of Justice Decision

In a decision that could have far reaching consequences in both the civil and criminal tax realms, on June 27th, the U.S. Supreme Court agreed to review the conviction of Carlo Marinello, who was found guilty of obstructing justice by failing to maintain proper books and records and failing to file tax returns.

The Supreme Court will likely settle a dispute that emerged among the lower courts about the proper scope of the obstruction statute under the Internal Revenue Code. The Supreme Court’s decision will have obvious consequences in the criminal tax world.  That is plain.  What is less apparent, is the power the decision could have in a civil audit.  Depending on how the Supreme Court rules, it could provide the IRS a substantial criminal hammer to wield against taxpayers who dispose of, or fail to maintain, business records, even if they have no knowledge that a criminal investigation has begun.

The Supreme Court will likely hear argument on this case in the fall and issue a decision sometime after that. We will keep you updated on the case, so be sure to check back.

Background

The below facts come from the opinion of the U.S. Court of Appeals for the Second Circuit.

In 1990, Carlos Marinello founded a freight service company that couriered packages between the United States and Canada. He kept little documentation of his income and expenses, and shredded or threw away any documentation that he may have had.  From 1992 onward, Mr. Marinello did not file personal or corporate tax returns.

In 2004, the IRS received an anonymous tip and opened a criminal investigation into Mr. Marinello and his company. That criminal investigation was closed the next year because the IRS could not determine if the unreported income was significant.  Mr. Marinello had no knowledge of that investigation.  Around that same time, he consulted with an attorney and an accountant who advised him he must file returns and maintain proper business records.  Despite that advice, Mr. Marinello did not do so.

The IRS was not done with Mr. Marinello yet. In 2009, the IRS re-opened the investigation and interviewed him. Mr. Marinello admitted to not filing returns and to shredding most of his business records.

The United States charged Mr. Marinello with nine counts of tax-related offenses. The conduct alleged in the indictment occurred prior to Mr. Marinello’s interview with the IRS in 2009.  One of the offenses charged was for obstruction of justice under 26 U.S.C. § 7212(a).  Section 7212(a) makes it a crime to “obstruct or impede . . . the due administration of this title.”  The government alleged that Mr. Marinello violated this section by, among other things, “failing to maintain corporate books and records for [his company]” and “destroying, shredding and discarding business records of [his company].” Mr. Marienllo was found guilty of the offense.

Decisions Below

Before the trial court, Mr. Marinello argued that to commit obstruction of justice under section 7212, one must have knowledge of a pending IRS investigation. The trial court rejected such an argument, holding that all that was necessary was for the jury to find that Mr. Marinello intended to obstruct the due administration of the Internal Revenue laws.  He appealed to the U.S. Court of Appeals in New York City.

Before the Appeals Court, Mr. Marinello again argued that the obstruction statute requires knowledge of a pending investigation. A panel of the Second Circuit disagreed, holding that the statute “criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation.”  In doing so, the Second Circuit aligned itself with 3 other appeals courts.  It also reinforced a circuit split, as the Sixth Circuit in Cincinnati, Ohio had reached a different conclusion on the same question.

Mr. Marinello sought review before the full Second Circuit. While the court declined to review the decision of the panel, two judges dissented from the denial of review and warned of the consequences of the court’s decision.  Judge Jacobs wrote ominously that if this decision was allowed to remain the law of the land, “nobody is safe: the jury charge allowed individual jurors to convict on the grounds, variously, that Marinello did not keep adequate records; that, having kept them, he destroyed them; or that, having kept them and preserved them from destruction, he failed to give them to his accountant.”  The decision affords, he wrote, “oppressive opportunity for prosecutorial abuse.”

Potential Consequences

As Judge Jacobs warned, should the Supreme Court uphold the decision, a taxpayer should be weary about engaging in any of the conduct, such as disposing of business records, that landed Mr. Marinello in jail. As Judge Jacobs so succinctly put it, “How easy it is under the panel’s opinion for an overzealous or partisan prosecutor to investigate, to threaten, to force into pleading, or perhaps (with luck) to convict anybody” (emphasis in the original).  Now, more than ever, it is important that taxpayers in civil cases are represented by competent counsel aware of the potential criminal pitfalls an otherwise cautious taxpayer may find themselves in.

Contact Jeff Erney for questions about this post.  Jeffry.Erney@dentons.com

IRS Urges Partnerships to Amend Partnership Agreements To Address Expanded Role of Partnership Representatives

The new partnership audit regime, enacted as part of the Bipartisan Budget Act of 2015 (“BBA”), allows the IRS to assess and collect  unpaid tax at the entity level, rather than from individual partners.   The BBA is effective for tax years after 2017 and replaces the Tax Equity and Fiscal Responsibility Act (“TEFRA”).  Under TEFRA, a partnership designates one of its partners as the “tax matters partner” (“TMP”) to act for the entity in proceedings with the IRS.  Instead, in the BBA regime, that person is called the “partnership representative” (“PR”) and has far greater authority than a TMP.  It is imperative that all partnerships understand the changes that are coming and prepare accordingly.

Most significantly, the PR is the exclusive point of contact with the IRS and has the sole responsibility to bind both the partnership and all of the partners to his or her actions.   At a conference on June 16, Brendan O’Dell, an attorney-adviser in the Treasury Department’s Office of Tax Policy, emphasized the significance of understanding the difference between the TMP and PR.

Under TEFRA, the TMP was required to be a partner, and was subject to numerous obligations to other partners with regards to the partnership’s interactions with IRS. Under TEFRA, all partners other than the TMP had significant rights during an audit, including notification rights, the right to participate in proceedings and contradict the actions taken by the TMP.  During the audit and administrative appeals, the TMP did not have the authority to bind the other partners.

Conversely, under the BBA regime, the PR is not required to be a partner with “skin in the game” but rather can be any person, including a non-partner, provided they have a substantial presence in the U.S. Moreover, the PR has sole authority to bind the partnership, and all partners and the partnership are bound by the actions of the PR and any final decision during all stages of the proceeding (audit, appeals and litigation).  This includes the power to bind the partnership and all partners to extensions of the statute of limitations and available elections.  Other partners no longer have a statutory right to notice of, or to participate in, the partnership-level audit proceeding.  Moreover, the decisions of the PR can economically impact the partnership, current partners, and former partners.  For example, a PR has the ability to unilaterally decide whether an audit adjustment must be borne by the partnership or by the partners.

Thus, this expanded authority granted to the PR is likely to lead to disputes, and potentially litigation, between partners and the PR. According to Mr. O’Dell, in the event of such a dispute, the IRS will not get involved and “will still treat the actions of the partnership representative as binding on the partnership and to those partners.”  In order to alleviate such issues, the IRS emphasized addressing the authority of the PR in the partnership agreement before the BBA regime becomes effective, as many, but not all, of the powers granted to the PR under BBA may be circumscribed by the partnership agreement.  These issues, thus, “put a lot of pressure on the front end for drafting agreements” and adding in adequate protections, O’Dell said.

The IRS has made clear that once the new partnership audit rules are effective, it will exclusively communicate with and seek consent from the PR. Thus, any protection or notice afforded to partners, former partners, and the partnership must come from the partnership agreement.

We highly recommend that all partnerships review and revise their partnership agreements before the BBA takes effect (years after December 31, 2017) in order to address the changes of the new law.  Contact Jeff Erney for questions about this post or how a partnership can best structure its partnership agreement now before the BBA takes effect.  Jeffry.Erney@dentons.com

Taxpayers Putting Pressure On Courts to Establish The IRS’s Burden Of Proof In Offshore Disclosure Cases

Recently, the U.S. Fifth Circuit Court of Appeals, in Bernard Gubser v. IRS, et al., was asked to overturn a recent U.S. District Court’s decision. The case involved the appropriate burden of proof the Internal Revenue Service (IRS) must meet when the IRS asserts a willful failure to file penalty for the Report of Foreign Bank and Financial Accounts (FBAR). At issue is whether the IRS must meet a clear and convincing evidence standard to establish willfulness or whether the appropriate measure is the lower preponderance of the evidence level of proof.

The District Court’s dismissed the initial suit for lack of standing. A group of taxpayers filed an amici curiae brief with the Fifth Circuit urging the Court to reverse the District Court’s decision due to the perceived harm that the uncertainty of the burden of proof could cause taxpayers who made an error in failing to file the FBAR, but who believe their oversight was not willful. This comes at a time when an unprecedented number of District Court cases will be filed for FBAR violations due to the inability of many taxpayers to achieve relief through the IRS Appeals process.

The Streamline Program Turns Two

The Streamlined Filing Compliance Procedure (SFCP) is now two years old. The SFCP was designed for taxpayers whose failure to disclose their offshore accounts was “non-willful,” due to a lack of understanding or knowledge of reporting requirements for U.S. persons. Unlike the full blown Offshore Voluntary Disclosure Program (“OVDP”), the SFCP places the burden of proving that the taxpayer’s noncompliance was willful on the IRS once the taxpayer has asserted that their non-compliance was not willful. Taxpayers who’s tax returns and informational filing requirements satisfy the SFCP are only required to file tax returns for the previous 3 years and FBAR’s for the previous 6 years while taxpayers in the OVDP must file tax and information returns and FBAR’s for the previous eight years.

One point of contention for taxpayers who entered into the OVDP before the SFCP was introduced in 2014, and whose noncompliance would have qualified them for the SFCP, is that they should be able to switch to the SFCP and take advantage of the reduced penalties on the income tax liability and file only 3 years of income tax returns. While the reduced miscellaneous penalty is available under the OVDP by requesting transitional relief, such relief is not guaranteed and often denied.

Recently, a group of taxpayers brought suit in the Washington D.C. District Court to challenge the IRS’s position that taxpayers who were enlisted in the OVDP prior to the implementation of the SFCP, cannot have their matter transferred to the SFCP. The taxpayers in this case contend they were being treated unfairly under this system as they were no different than those who came forward later in time and entered the SFCP.

Unfortunately, the court did not decide the merits of the case. Rather, the court held that the suit hinders the IRS’s ability to make decisions regarding the enforcement of tax liabilities and dismissed the suit as being barred under the Tax Anti-Injunction Act (26 U.S.C. § 7421), which prohibits suits that restrain the assessment and collection of taxes.   This case highlights the difficulties that can arise when the Service creates settlement programs independent from regulatory oversight and commentary.

Vox Tax: Global Protections for Tax Advice

Shortly before the end of 2014, Dentons published a new edition of Vox Tax. This edition of Vox Tax analyzes global protections available for tax advice and provides a high-level overview of legal privileges and protections that may preclude the production of sensitive tax advice in administrative tax examinations and judicial proceedings.

In the report, lawyers from Dentons’ Global Tax Team examine privileges and protections in 17 countries across North America, Europe, and Asia. The report addresses the applicable protections, the type of information subject to protection, and what may effectuate a waiver of those protections.

Additionally, the report analyzes the practices and trends of each local taxing authority with respect to information gathering and sharing. This report also includes a summary table comparing these 17 countries on several key intricacies of their respective tax laws.

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The Ninth Circuit Holds Equitable Recoupment Not Time-Barred

In a taxpayer win, the Ninth Circuit recently reversed the Tax Court and held equitable recoupment was not time barred.  Revah v. Comm’r, No. 11-70211 (9th Cir. Sept. 17, 2014) (unpublished opinion).  Relying on longstanding precedent, the Ninth Circuit held the taxpayers were not statutory barred from applying for equitable recoupment because it’s permitted even with respect to an untimely refund claim.  Thus, even though the taxpayers failed to timely file their refund claims, “untimeliness is not a ground upon which the tax court may deny equitable recoupment.”  Id.

Equitable recoupment is a judicial doctrine that applies where one transaction or event is subject to two taxes based on inconsistent theories.  The equitable recoupment doctrine “allows a litigant to avoid the bar of an expired statutory limitation period” and “prevents an inequitable windfall to a taxpayer or to the Government that would otherwise result from the inconsistent tax treatment of a single transaction, item, or event affecting the same taxpayer or a sufficiently related taxpayer.”  Menard, Inc. v. Comm’r, 130 T.C. 54, 62 (2008).  To establish equitable recoupment a taxpayer must prove: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.  Id. at 62-63.  In practice, taxpayers often have difficulty mounting arguments of equitable recoupment against the IRS, although the Government typically has more success in this area.

The IRS audited and made adjustments to the Revahs’ 1999 and 2000 tax returns related to inventory and bad debt, and resulting in a decrease in the net operated losses the taxpayers reported on their 1997 and 1998 returns.  The taxpayers accepted the adjustments assuming that, as the examiner acknowledged, they would be able to reduce income in 2001 through amended returns.  After the exam and in 2005, the taxpayers filed amended returns in accordance with the examiner’s adjustments, but the refund claims were denied as untimely.  The taxpayers petitioned the Tax Court for relief asserting the equitable recoupment doctrine.  The Tax Court (Judge Cohen) found the taxpayers’ inability to use the NOLs to reduce tax liabilities was not the result of the inequitable application of inconsistent theories of taxation contemplated by the equitable recoupment doctrine, and thereby denied the petition.  The Ninth Circuit reversed and remanded in favor of the doctrine’s application, illustrating that there is hope for future taxpayers seeking to offset current IRS liabilities with past credits under the doctrine.

Sixth Circuit Sharpens Ford’s Focus on Payment of Overpayment Interest

While it appears that Ford’s petition for certiorari to the Supreme Court yielded Ford some of the answers it was looking for, Ford is still without the approximately $470 million in what it argues is overpayment interest.  As we discussed in a previous article, the Supreme Court asked the Sixth Circuit to address the question of proper venue.  The Government had previously argued that the Tucker Act (28 U.S.C. § 1491(a)) is the only general waiver of sovereign immunity regarding overpayment interest.  As such, the Government urged a district court would not have jurisdiction under 28 U.S.C. § 1346(a)(1) as Ford was not seeking to recover money that was already paid.  In an opinion dated October 1, the Sixth Circuit denied the Government’s claim that refund claims for overpayment interest, as opposed to claims for tax, penalties, and interest on tax and penalties, must exclusively be brought in the Court of Federal Claims rather than an appropriate federal district court.  This issue had previously been decided by the Sixth Circuit in Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005).  In Scripps, the Sixth Circuit held that a suit to obtain overpayment interest includes a “recovery” of money as is described in 28 U.S.C. § 1346(a)(1).  The Sixth Circuit, in seeing no reason to revisit the Scripps decision, declined to revisit the issue and held against the Government’s jurisdiction claim.

Once the Sixth Circuit confirmed proper jurisdiction of the case, it then turned to the merits of the case.  The Sixth Circuit initially addressed whether Section 6611 (relating to overpayment of interest) constitutes a “waiver of sovereign immunity that must be strictly construed,” which would, in turn, require a narrow reading of the term “overpayment.”  The Government argued that Section 6611 constitutes a waiver of sovereign immunity, and as such, the term “overpayment” should be subject to the strict construction canon.  Ford argued that 28 U.S.C. § 1346(a)(1) was the appropriate waiver of sovereign immunity, and that Section 6611 was instead a substantive right underlying the claim.  The Sixth Circuit found that, during the years at issue, any distinction between overpayments of “deposits in the nature of a cash bond” and “advance tax payments” had been made by the Service and not by Congress.  As such, the Sixth Circuit held that the any distinction between deposits and advance tax payments are substantive only, and do not implicate sovereign immunity.

Next, the Sixth Circuit turned to the “date of overpayment,” and whether such date is properly determined as the day that Ford remitted deposits or, alternatively, the date that on which such deposits were converted into advance tax payments.  The Sixth Circuit determined that this issue turns on whether the payments were made by Ford “for the purpose of discharging its estimated tax obligations.”  The Sixth Circuit looked to the “tradeoffs” presented in Rev. Proc. 84-85 (which had been in effect during the years at issue).  In essence, the Sixth Circuit determined that in order for Ford to stop the accrual of underpayment interest, Ford had the ability to either (i) remit a cash-bond deposit which would not pay Ford potential overpayment interest, but which could be returned upon Ford’s demand, or (ii) make an advance tax payment, which would allow Ford to recoup interest with respect to an overpayment, but would deny Ford the immediate ability to recoup the funds.  The Sixth Circuit viewed the form of the remittances, either as a cash-bond deposit or an advance tax payment, as dispositive of the purpose of the payment.  As such, since Ford initially remitted cash-bond deposits, the Sixth Circuit found that Ford “did not remit those deposits to discharge its estimated tax deficiency.”  Thus, the Sixth Circuit held for the Government and found that the remittances were cash-bond deposits that were not entitled to overpayment interest, and that the “date of overpayment” did not begin until the date the payments were converted to advance tax payments.

While Ford received favorable rulings from the Sixth Circuit regarding both proper venue and whether Section 6611 constitutes a separate waiver of sovereign immunity, Ford ultimately lost regarding when an “overpayment” begins.  Ford now has the ability to file yet another petition for certiorari to the Supreme Court.  While any potential petition remains to be seen, it appears that the case at hand is finally narrowed down to the sole issue of when an “overpayment” begins.

First Shoe Drops for Corporate Inversions

Notice 2014-52, released by the US Treasury Department on September 22, 2014, is intended to disrupt, and in some cases prevent, so-called corporate inversion transactions that have not been completed prior to the notice’s release.

Although the notice includes very detailed rules, it very generally takes a two-pronged approach to discourage inversions after September 21, 2014.

Dentons’ Tax team explores the implications of Notice 2014-52 on cross-border acquisitions or mergers.

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German Federal Fiscal Court Ruling Potentially Provides Reduced Withholding Rates to Certain US Entities

In a decision dated June 26, 2013 (Doc No I R 48/12, original available here), the German Federal Fiscal Court (a court of last resort in Germany over tax and custom matters) was tasked with determining whether an “S” corporation (a US corporation that is a pass-through for US tax purposes but not for German tax purposes) is considered a US resident under the 2006 protocol of the German-US income tax treaty (the “Treaty”).  Article 10, Paragraph 2 of the Treaty provides in part that if a German company pays a dividend to a US resident, German withholding tax imposed on the receipt of such dividend shall not exceed (i) 5% if the beneficial owner of the dividend is a company that directly owns at least 10% of the voting stock of company paying the dividend, or (ii) 15% in all other cases.  Article 1, Paragraph 7 of the Treaty generally states that if “an item of income, . . . derived by or through a person that is fiscally transparent” pursuant to US or German law, then “such item shall be derived by a resident of a State to the extent that the item is treated for the purposes of the taxation law of such State as the income, profit or gain of a resident.”

In the case, the S corporation, a 50% shareholder of a German company, received dividends from the German company.  The German court held that the S corporation was considered a US resident for purposes of the Treaty and thus subject to a reduced withholding tax rate of 5%.  In interpreting Article 1, Paragraph 7 of the Treaty, the German Federal Fiscal Court determined that the two references to “resident” did not necessarily imply the same resident.  The German Federal Fiscal Court determined that the income may be considered derived by “a resident of a State” (here, the S corporation) so long as the income is treated by the US as “profit or gain of a resident” (i.e., the shareholders of the S corporation).  The German court reasoned that, because, under US federal income tax law, income derived by an S corporation is “income, profit or gain” of its shareholders, such items of income derived by or through the S corporation should be considered derived by a US resident.  Accordingly, the German Federal Fiscal Court held that the S corporation was a “US resident” for purposes of Article 1, Paragraph 7.

Additionally, the German court had to decide whether the S corporation is the beneficial owner of the respective dividends although under US federal income tax law, the respective income is attributed to the shareholders of the S corporation. The withholding tax reduction to 5% under Article 10, Paragraph 2 of the Treaty is only granted if (inter alia) the beneficial owner of the dividends is a company. The German court came to the conclusion that the term “beneficial owner” is not defined in the Treaty and, hence, has to be determined under German law. Under German law, the S corporation, irrespective of its tax treatment in the US, qualifies as a corporation so that income of the S corporation must under German law be attributed to the S corporation itself – not to its shareholders. Therefore the dividends were paid to a US resident corporation as beneficial owner (i.e., the S corporation). As a consequence, the withholding tax reduction to 5% was granted.

Whether this case could be extended to other US entities is unclear.  For example, a limited liability company provides corporate-like limited liability for its shareholders, but is fiscally transparent for US federal income tax purposes (unless a check-the-box election is filed for the LLC).  Therefore, the holding of this case may apply to an LLC if German tax law classifies a US LLC as a corporation, which mainly depends on the content of the articles of association of the respective US LLC.  However, this case should not apply to an entity that is a US partnership for state law purposes as, under Article 3, Paragraph 1 of the Treaty, a partnership is generally not treated as a “body corporate” and thus is not treated as the beneficial owner of dividends.

While in the case it was clear that the S corporation itself (and not its shareholders) could file for the refund, a recent change in German tax law enacted in 2013 may have changed this. However, the new provision in German tax law was not intended for cases such as US S corporations and the German tax authorities have not yet issued clear guidance on whether the S corporation or its shareholders should apply for the refund. For now it is therefore advisable for both the S corporation and its shareholders to file refund claims simultaneously to avoid a potential statute of limitations issue in the event that the German tax authorities interpret its refund provisions in a different manner.

Michael Graf, a partner in Dentons’ Frankfurt office specializing in Taxation, co-authored this article.

Thouron v. United States: Third Circuit Holds Reliance on Counsel may Relieve Penalties for Late Payment of Taxes.

In Thouron v. United States, No. 13-1603 (3d Cir. May 13, 2014) the Court of Appeals for the Third Circuit held that reliance on tax advice may establish a reasonable cause defense to failure to pay penalties.  (Slip. Op. at 9.) 

This case arises out of estate taxes originally due in 2007.  In his will, the decedent appointed a friend as executor of the estate and the friend hired a tax attorney to advise the estate on tax matters.  Relying on the advice of the attorney, the estate timely filed an extension for time to file the estate return and remitted a partial payment, but did not file for an extension to pay the remainder of the tax due.  The estate claimed its attorney advised it that the extension to pay was not due until the return was filed and that the tax due would be deferred under I.R.C. section 6166 because the bulk of the estate’s assets were illiquid.  The estate further claimed that the attorney advised it that no penalty would be imposed.  The IRS assessed the mandatory penalties of I.R.C. section 6651 and the estate filed a refund claim in district court asserting reasonable cause and reliance on its tax expert as a penalty defense.

The district court for the District of Pennsylvania held that reliance on the tax adviser was not reasonable cause for the late payment of the estate taxes and granted summary judgment in the government’s favor.  To support its conclusion, the lower court relied heavily on United States v. Boyle, 469 U.S. 241 (1985), a Supreme Court decision holding an estate could not rely on its attorney for the ministerial task of timely filing a return.  The district court read Boyle to preclude any finding of reasonable cause based on reliance on an expert or other agent in failure-to-file and failure-to-pay cases.

The Third Circuit reversed and remanded.  The court first established that the holding of Boyle, though a late-filing case, was applicable to failure-to-pay cases because of the similarity in the language in the statutes.  The Third Circuit held, however, that the district court misapplied Boyle to the facts at issue.  Distinguishing Boyle because it involved reliance on an adviser for merely the ministerial task of filing, the court noted the distinction drawn in Boyle between relying on an expert’s clerical action and relying on the expert’s advice: “taxpayers may rely on the advice of an expert but may not, for purposes of completing their statutory duty, rely on an agent to perform the task of filing and paying.”  (Slip. Op. at 9).

Ultimately, the Third Circuit held there was a material question as to whether the estate relied on the advice of counsel in not paying the tax due and remanded the case for that factual determination.  The court noted that the estate must also show either an inability to pay or undue hardship from paying at the deadline.  The court offered no insight as to how the estate can make such showing.

Are You Ready for FATCA?

July 1, 2014, marks the date when withholding under the US Foreign Account Tax Compliance Act (FATCA) first begins to apply. Aimed at addressing perceived tax evasion and avoidance by US persons through the use of offshore accounts, FATCA has a wide-ranging impact on non-US entities that receive, directly or indirectly, many types of US-source income. Additionally, US entities that make payments of many types of US-source income to non-US persons are also affected by the new rules.

In the video interview, Tax partner John Harrington, former international tax counsel for the Department of Treasury, provides an overview of FATCA. In the video, John explains why companies should be actively preparing for the new compliance provisions, even if 2014 and 2015 are considered a “transition period” by the IRS. More specifically, he examines:

  • The broad impact of FATCA and intergovernmental agreements (IGAs);
  • The importance of planning for FATCA’s series of compliance deadlines; and
  • New reporting requirements and expectations under the global information automatic exchange.

Opportunity to Claim Refund on WHT Overpayment on Dividends Received by Non-EU Investment Funds from Europe – Update

In a recently reported Emerging Markets Series of DFA Investment Trust Company case (C -190/12) the European Court of Justice confirmed that investment funds based outside EU should benefit from the free movement of capital rule regarding investments in Europe (see link for more details). This judgment opens up the opportunity for non-EU investors to claim withholding tax refunds in some EU jurisdictions (in particular Germany, Poland, Spain and the Czech Republic). Follow-up information on selected EU jurisdictions is set out below.

Czech Republic
Czech law imposes a favorable tax regime on certain investment funds established in the EU, Norway and Iceland. It offers investment funds the opportunity to claim tax refunds, which should be of particular interest to non-EU investment funds achieving capital gains or income derived from their Czech-based immovable property.

Peter Varga
peter.varga@dentons.com

France
Since 2012, further to the judgment in Santander Asset Management and others ruling (joined cases 338/11 to 347/11), non-resident undertakings for collective investment in transferable securities (UCITS) are no longer required to pay withholding taxes on dividends received from France. Any withholding taxes collected at source should open up the right to claim refunds under certain conditions.

This ECJ judgment could trigger a legislative response from France which is currently difficult to predict. It could mean the enactment of a specific tax for French UCITS and a specific withholding tax for non-French UCITS. This was in fact the route taken by France after the High Court ruled in 2009 that French WHT  charged on unearned income achieved by non-resident nonprofit organizations (where French nonprofit organizations were tax exempt) was illegitimate. The tax was set at 15%, instead of the original 25% rate that only applied to non-resident nonprofit organizations.

Jessie Gaston
jessie.gaston@dentons.com

Germany
Certain non-German investment funds investing in German companies should also benefit from this decision. German Investment Tax Act provides for a full WHT refund in case of capital income of the fund, but only for those established in Germany and not for comparable funds established abroad. Whether or not non-German funds can be considered comparable to German funds in terms of tax treatment needs a case-by-case analysis. The requirements for the applicability of the German Investment Tax Act changed recently due to the implementation of the AIFM Directive.

Thomas Voss
thomas.voss@dentons.com

Poland
A case was initiated by a Polish court which gives solid grounds for non-EU investors to claim refunds of overpaid WHT. Polish regulations offer income tax exemptions for domestic investment funds and funds based in the EU/EEA and there are exchange of tax information mechanisms with a number of jurisdictions. If tax has been paid on dividends from a Polish company, it should be analyzed if there are conditions for preferential treatment based on the EU principles of freedom of establishment and the free movement of capital.

Rafał Mikulski
rafal.mikulski@dentons.com

Romania
The principles of the case and their applicability are certain to be assessed on a case-by-case basis. It definitely sheds new light on European investments and should be explored especially in conjunction with the new Romanian law on exemption of tax for re-invested profits.

Delia Dragomir
delia.dragomir@dentons.com

Spain
Application of the case in Spain, along with other ECJ precedents (i.e. ECJ joined cases 338/11 to 347/11) would allow to investment funds located outside the EU/EEA to claim refunds of the withholding taxes paid on their Spanish sourced dividend income, on the amount exceeding the 1% tax rate applicable to Spanish resident investment funds. Chances of success would depend on fulfilling the requirements set by the ECJ in the case at hand.

Jose Ramon Vizcaino
joseramon.vizcaino@dentons.com

UK
As the UK does not impose withholding tax on dividends (other than REIT dividends), the impact of the case in the UK is limited.

Jeremy Cape
jeremy.cape@dentons.com

Cross-border exchange of information procedures

In this issue of Vox Tax, we analyze the recent wave of information sharing among national tax authorities.

As tax regimes around the world place an increased emphasis on transparency and international cooperation to combat tax evasion, a host of new laws, rules and regulations have been enacted.

In the report, lawyers from Dentons’ Global Tax Team examine the practices and policies in 15 countries across North America, Europe and Central Asia. Learn about the type of information that may be shared among nations, and what that means for your capital and tax strategies. For your reference, this report also includes a table comparing these 15 countries on several key intricacies of their respective tax laws.

Read the complete analysis

Opportunity to Claim Withholding Tax Overpayment on Dividends Received by Non-EU Investment Funds from Europe

In its verdict in Case C-190/12 (Emerging Markets Series of DFA Investment Trust Company), the European Court of Justice (ECJ) confirmed that investment funds based outside the EU should benefit from the EU’s free movement of capital rule regarding investments in Europe.

Dentons’ global Tax team discusses the implications of this verdict in Europe.

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Karina Furga-Dąbrowska, Cezary Przygodzki, and Rafał Mikulski, all members of Dentons’ Tax practice in Poland, co-authored this article.

Automatic Information Exchange: Did the Dog Just Catch the Bus?

John Harrington recently published an article in Tax Notes Today (available through the Lexis paywall) regarding eight potential challenges presented by an international automatic exchange system. 

On February 13, the OECD released details of its proposed common reporting standard, or CRS.  With the release of this report, the OECD and G-20, like the dog intent on catching a bus that it has long chased and finally caught, now have to figure out what do to with the prize they have captured.  Harrington discusses how an automatic information exchange could affect taxpayers, financial intermediaries, and governments.

IRS issues guidance regarding the Windsor decision’s application to qualified retirement plans

The US Internal Revenue Service (IRS) has issued much anticipated guidance on qualified plan requirements related to same-sex marriage. Last summer’s Supreme Court decision to invalidate the Defense of Marriage Act definition of marriage under Federal law left plan sponsors and administrators uncertain how, and importantly when, to apply the holding of the Court’s decision with respect to their employee benefit plans.

Dentons’ Pension, Benefits, and Executive Compensation lawyers discuss the IRS guidance provided since the Court’s decision offering insight about what affected plans must say and by when.

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Katharina E. Babich, Pamela Baker, and Martin J. Moderson, members of Dentons’ Pensions, Benefits, and Executive Compensations practice, co-authored this article.

US Treasury Releases Substantial FATCA Guidance

Continuing its implementation of the Foreign Account Tax Compliance Act (FATCA), the US Treasury Department recently released a package of proposed and temporary regulations.

According to a fact sheet released by the US Treasury Department along with a preliminary version of the temporary regulations on February 20, 2014, this is “the last substantial package of regulations necessary to implement [FATCA].”

Dentons’ tax lawyers analyze the latest on FATCA in this article.

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Managing Claims for ERISA Benefits

Very few areas involve more tax rules and more controversies (with many more opponents than just the Internal Revenue Service) than the area of employee benefits.  You may know this better as the realm of ERISA and ERISA plans.  Occasionally, I will be contributing posts to this blog from the perspective of controversies, tax and otherwise, involving ERISA matters.  This is my first.

There are a variety of ways that an ERISA plan can end up in court.  ERISA provides three basic jurisdictional paths to the courthouse, the most commonly used of which is a suit by a participant or beneficiary for benefits payable by an ERISA-covered benefit plan under section 502(a)(1)(B) of ERISA, 29 USC section 1132(a)(1)(B).  The jurisprudence governing suits of this nature is long and surprisingly complex, and it will provide grist for this blog on multiple occasions in the future.

The U.S. Supreme Court recently addressed a recurring problem area in the jurisprudence under section 502(a)(1)(B) of ERISA in a 9-0 opinion released on December 16, 2013.  In that opinion, the Court determined that a statute of limitations written into a plan document can be enforceable.   Heimeshoff v. Hartford Life & Accident Insurance Co.,  571 U.S. ___ , 2013 WL 6569594 (S. Ct. Dec. 16, 2013).

Julie Heimeshoff was covered under a long term disability plan  insured by Hartford and sponsored by Wal-Mart Stores, Inc.  On August 22, 2005, she filed a claim for LTD benefits under the plan.  For a lot of valid reasons, the final denial of her benefits was not issued until November 26, 2007.  Ms. Heimeshoff then filed suit for the unpaid benefits on November 18, 2010, almost three years to the day after the final denial was issued.  Experienced lawyers among you would look at a claim first asserted in 2005 and at a suit filed on that claim more than 5 years later and think, there has to be a statute of limitations defense in these facts.  You would be correct, but not as clearly as you might suspect.

ERISA has a statute of limitations provision for some lawsuits, but has no stated statute of limitations for actions brought under section 502(a)(1)(B) of ERISA.  The courts have developed a process for providing a statute of limitations for these suits to fill this statutory void.  Like many of its counterparts, the Wal-Mart LTD plan also had reacted to the void by creating its own statute of limitations for these suits.  It contained a provision that stated:  “Legal actions cannot be taken against The Hartford … [more than] 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.”  Ms. Heimeshoff’s lawsuit was filed more than three years after proof of loss was required, but within three years (barely) after the date of the last denial in the plan’s internal administrative review process under section 503 of ERISA.  The question answered by the U. S. Supreme Court was whether after considering these plan terms, Ms. Heimeshoff’s suit was filed too late.  The answer was, yes, it was filed too late.  This three year statute of limitations (that accrued on the date written proof of loss was required) was enforceable so long as the length of the limitations period was “reasonable” and there was no controlling statute to the contrary.

Here are some potentially intriguing action items for consideration:

(1) Seriously consider reviewing any of your existing ERISA plan terms that create a contractual statute of limitations for claims under section 502(a)(1)(B) of ERISA for that statute’s compliance with the requirements of Heimeshoff.  Be sure that during your review, you are differentiating between the plan’s deadline for initially filing a claim for benefits under the plan and the plan’s deadline for filing a lawsuit to attempt to recover unpaid, denied benefits. Only the latter has been affected by Heimeshoff.   Your plan’s new statute may overlap with the period of time needed to exhaust the plan’s administrative remedies under section 503 of ERISA, but it must leave time afterwards for filing suit, so integrate your plan’s new statute of limitations carefully with its internal administrative review procedures and time frames.  The fact that three years was a reasonable length for the statute does not mean that three years or fewer will always be reasonable or that longer than three years will always be unreasonable.  The fact that 9 Justices agreed that three years was reasonable in these circumstances provides no small amount of comfort that three years ought to be reasonable again.

(2)  In cases where it does not already exist in your ERISA plans, seriously consider adding a plan-based statute of limitations for suits brought under section 502(a)(1)(B) of ERISA to seek benefits under your ERISA plan.  In doing so, be careful to select an accrual date trigger (a start date) that will yield consistent results in a variety of circumstances, is as objective and easily discernable by a participant and court as possible and will be viewed by a disinterested trier of fact as being a reasonable way to begin the statute’s running.  For some insured plans, the trigger accrual date used in Heimeshoff – the “time written proof of loss is required” – will work for some insured plans, but not in all such plans, and it is more troublesome as an accrual date for an ERISA plan that is not funded with insurance.

(3)  Heimeshoff said that if the results from applying a plan’s statute of limitations were viewed as too harsh, equitable principles could be used to mitigate the impact.  Not too long ago, the U.S. Supreme Court said in U.S. Airways v. McCutchen that ERISA plans could by their terms limit the application of equitable principles to the plan.  Should your ERISA plan take up the invitations of Heimeshoff and McCutchen and revise its plan terms accordingly?

(4) Consider whether Heimeshoff can be extended to allow your ERISA plan to add and enforce a statute of limitations for suits brought under section 502(a)(3) of ERISA.

IRS Issues PFIC Regulations: A New Start to an Old Beginning

On December 30, 2013, the US Treasury Department (the “IRS”) published a package of proposed, temporary, and final regulations relating to Passive Foreign Investment Companies (“PFICs”) and their shareholders. The most significant component of the package is its guidance on the new annual filing requirements for PFIC shareholders, but the package also includes other, generally minor, changes to existing rules governing PFICs and their shareholders.

The IRS issued the regulations just in time to meet a self-imposed year-end deadline: the IRS wanted the new reporting rules to become effective before 2013 ended so that the new reporting rules would apply during the next filing season. Still, the package includes good news for some PFIC shareholders since the new regulations eliminate a retroactive filing requirement for 2011 and 2012 taxable years that had been threatened in a 2011 IRS notice.

The new regulations address in a limited way a package of technical PFIC regulations originally proposed by the IRS in 1992. Because the new package includes, in a modified form, a small portion of the 1992 proposed regulations, the new package withdraws that portion of the 1992 proposed regulations. The remaining (and outstanding) portion of the 1992 proposed regulations includes provisions that have been severely criticized. So, US investors and tax practitioners must await further IRS action to clarify the status of those proposed provisions and the interpretation of the applicable statutory rules.

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2014 Will Ring in Uncertainty for Many US Taxpayers

When 2013 ends, so will more than 50 US tax provisions. Nearly all of these expiring tax provisions have suffered this fate before, only to be extended retroactively after months of uncertainty for affected taxpayers.

Included among the list of expiring tax provisions are some widely used incentives, such as the research and experimentation tax credit and 50 percent “bonus” depreciation. The list of expiring tax provisions also contains a raft of energy incentives, including the production tax credit for wind energy, incentives for alternative and renewable fuels and credits for energy-efficient appliances and houses. Provisions important to individuals—such as the deduction for out-of-pocket expenses for teachers, higher exclusions for mass-transit benefits and the deduction for state and local sales taxes—will sunset at the end of this year. The same is true for provisions important to US companies with cross-border activities (for example, the “active financing exception” and the subpart F exception for dividends, interest, rents and royalties paid between related controlled foreign corporations) and businesses operating in certain designated or distressed areas. Despite their diversity, these expiring tax provisions have one thing in common: Taxpayers who use them are about to enter months of uncertainty as to their availability.

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Sander Lurie, a member of Dentons’ Public Policy and Regulation practice, co-authored this article.

SCOTUS Vacates and Remands Ford Decision to Determine Proper Jurisdiction

Did Ford commit a venue foot-fault?  The Government thinks so.  An opinion from the Supreme Court last week gives lawyers yet another illustration of the principle that jurisdictional challenges may be raised at any time – even in a court of last resort. In response to Ford Motor Company’s petition for certiorari to recover overpayment interest of approximately $470 million in deposits in the form of cash bonds remitted to the IRS before Ford converted them to payments (see our previous post), the Supreme Court of the United States vacated the Sixth Circuit’s judgment and remanded to the Sixth Circuit.  The opinion can be found here.  The Supreme Court is asking the Sixth Circuit to determine whether the district court lacked jurisdiction under 28 U.S.C. § 1491(a) (the “Tucker Act”), which requires claims against the U.S. founded insofar as relevant upon any Act of Congress be brought in the Court of Federal Claims.  Essentially, the Government argues that refund claims for overpayment interest, as opposed to claims for tax, penalties, and interest on tax and penalties, must exclusively be brought in the Court of Federal Claims rather than an appropriate federal district court.  To explain why it was raising this novel argument for the first time before the Supreme Court, the Government argued that it had failed to previously raise the issue due to controlling circuit precedent holding that 28 U.S.C. § 1346(a)(1) grants original jurisdiction over claims for overpayment interest both to district courts and the U.S. Court of Federal Claims.  Under this precedent, an award of overpayment interest is typically considered to be an essential component of the relief sought under a tax or penalty refund claim and is interpreted to fall within a district court’s refund jurisdiction under 28 U.S.C. § 1346.    

The Supreme Court determined that, because it is a court of “final review” and not one of “first view,” the Sixth Circuit should be the initial court to consider the Government’s claim.  The Supreme Court also urged the Sixth Circuit to consider if such determination impacts whether or not Section 6611 of the Internal Revenue Code (relating to overpayment interest) is a waiver of sovereign immunity that should be narrowly construed.  Interestingly, if the Sixth Circuit again determines that Section 6611 of the Code is the provision that waives sovereign immunity for claims of overpayment of interest, then presumably Ford is in the same place it was before the Supreme Court vacated and remanded the Sixth Circuit’s decision: seeking certiorari and “arguing that the Sixth Circuit was wrong to give [Section] 6611 a strict construction.”  Alternatively, if the Government is correct regarding its interpretation of the Tucker Act, and if the case cannot be transferred to the Court of Federal Claims, Ford may be time-barred from filing a claim for refund, potentially losing its claim to $445 million – an important reminder of the importance of choice of venue when filing suit.

Can the IRS Circumvent U.S. Law by Issuing a Treaty Request?

Shortcuts to identifying the “soft spots” of a tax return have long tempted the IRS. Those shortcuts are generally quite controversial and have included the aggressive use of penalties to force a reasonable cause defense and the resulting disclosure of privileged materials and, as another example, transparency programs such as Schedule UTP that arguably strain the credibility of the IRS’s policy of restraint with regard to tax accrual workpapers. More recently, with the increasing prevalence of complex, cross-border transactions having multi-jurisdictional tax consequences, there is often a paper trail of tax analysis strewn around the world that is providing the IRS with a new temptation. Would the IRS be tempted to quietly make a treaty request in an attempt to circumvent U.S. privilege protections and obtain the materials without the fuss of a privilege fight? Unfortunately, the IRS and foreign taxing authorities have succumbed to this temptation, and it is something that practitioners should be aware of. The propriety of any such request must be carefully scrutinized and the appropriate interventions should be considered.

Indeed, the IRS has used treaty requests in lieu of following the administrative summons process (as well as its own internal directives) in order to bypass procedural safeguards for the taxpayer to attempt to obtain privileged and protected documents that would otherwise be unavailable to the IRS under U.S. law. This premature and improper use of treaty requests violates two core principles contained in most bilateral tax treaties, and in articles 18-26 of the Convention on Mutual Administrative Assistance in Tax Matters and article 26 of the OECD Model Tax Convention and its Commentary.

First, the issuance of a treaty request to circumvent domestic law is improper and objectionable because the requested nation is not obligated to employ procedures or obtain information that is at variance with or not obtainable under the laws of either country. This means that, for example, where the U.S. issues a treaty request, the same procedural safeguards that exist in the U.S. would also effectively be available with respect to the request. Additionally, the privileges and protections that exist in the requested country also apply. Under U.S. law, the IRS has broad authority to issue a summons for the production of documents or testimony relevant to the purpose of ascertaining the correctness of a return or determining the liability of any person or any internal revenue tax. But the IRS is subject to specific limitations. Significantly, pursuant to United States v. Powell, 379 U.S. 48 (1964), a summons is not enforceable unless it is (1) issued for a legitimate purpose; (2) the material sought is relevant to that purpose; (3) the information sought is not already within the possession of the IRS; and (4) the administrative steps required by the Internal Revenue Code have been followed. Further, the IRS is limited to materials in the possession, custody, and control of the summonsed party and is not entitled to documents that are privileged or protected under U.S. law, including the attorney-client privilege, attorney work product protection, and the privilege against self-incrimination. A requested nation will not employ measures to circumvent these U.S. laws. As noted in the OECD Commentary, one nation cannot take advantage of its treaty partner’s information system merely because it is wider than its own. Thus, a treaty request at variance with the U.S. law, including those discussed above, should be denied.

Second, the issuance of a treaty request before exhausting domestic measures is a clear violation of the international authorities and is grounds for rejection of a request. Under U.S. law, a summons is not self-enforcing. Instead, if the summonsed party fails to comply with the summons, the U.S. government must bring an enforcement action in the appropriate federal district court. And, both the taxpayer and the recipient of a summons have the right to protest the enforcement of a summons by filing a petition to quash in federal district court. The administrative summons procedures thereby provide the prerequisite mechanisms for a court to review the legitimacy of the summons and/or whether the claims of privilege are well-founded. The IRS cannot circumvent a taxpayer’s privileges or right to have a court review these claims by simply pursuing the documents through a treaty request because a request made prior to exhausting the domestic administrative summons procedures should be denied.

The premature and improper issuance of a treaty request merely shifts the burden of potentially protracted and costly disputes to a foreign nation, attempting to force the foreign nation to interpret and decide U.S. law. In addition to the potentially resulting prejudice against the rights of the taxpayer, this shifting aspect is itself clearly an inappropriate imposition on a treaty partner. See article 26 of the OECD Model Tax Convention and its Commentary. Treaty partners are usually quite receptive to these arguments by the objecting taxpayer in intervention proceedings.

Cross-border tax structuring: Is there a common denominator for substance requirements?

Dentons is launching the next phase of  Vox Tax, a series of Dentons global reports dedicated to the most pressing tax matters facing CEOs, CFOs, general counsel and tax directors. Issued periodically throughout the year, Vox Tax reports will focus on a key current topic in the areas of international tax law and tax planning.

Vox Tax’s first report, authored by Dentons’ global Tax group, covers tax structuring in jurisdictions around the world. “Cross-border tax structuring: Is there a common denominator for substance requirements?” examines 14 nations and discusses critical current tax topics, such as treaty shopping and substance. The report was prepared in collaboration with Loyens & Loeff, a Dutch law firm which contributed a chapter on the Netherlands.  To access a digital version of the report, click here.

The Vox Tax report will be accompanied by three upcoming cluster webcasts, each focused on a different region. These brief, interactive seminars are designed to help practicioners reduce risks and optimize tax operations.

Webcast Schedule
Thursday, November 21, 2013
Western Europe: UK, Spain, France, Germany
Time: 9:00 AM PST / 12:00 PM EST / 17:00 GMT / 18:00 CET

Tuesday, November 26, 2013
Central and Eastern Europe / CIS:
Poland, Czech Republic, Slovakia, Romania, Ukraine, Russia
Time: 9:00 AM EST / 14:00 GMT / 15:00 CET

Thursday, December 5, 2013
North America: Canada and the US
Time: 9:00 AM PST / 12:00 PM EST / 17:00 GMT / 18:00 CET

To RSVP, click here.

US Treasury Department Releases Latest Round of FATCA Guidance

Notice 2013-69, released on October 29, 2013, is the latest effort by the US Treasury Department to provide guidance to US and foreign entities that will be subject to the new reporting and withholding rules imposed by the so-called Foreign Account Tax Compliance Act, or “FATCA.” For information on previous guidance issued by the US Treasury Department and background on FATCA, please see our previous alerts titled US Government Announces 6-Month Delay in Certain FATCA Rules and US Issues Final FATCA Regulations.

Notice 2013-69 basically does three things:

  1. publishes the draft Foreign Financial Institution (“FFI”) agreement with which participating FFIs and Model 2 FFIs must comply,
  2. provides updated information about the responsibilities of participating FFIs and Reporting Model 2 FFIs and the FATCA registration process, and
  3. announces the intent to make limited changes to the recently issued FATCA regulations and to other reporting regulations to coordinate with FATCA reporting.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

Ford Attempts to Catch the Ear of SCOTUS in Pursuit of Approximately $470 Million

Approximately five years after its Detroit counterparts received billions of dollars from the federal government, Ford Motor Company is attempting to recoup approximately $470 million in overpayment interest it believes it is owed from the federal government.  Ford has petitioned the Supreme Court of the United States claiming that the Sixth Circuit improperly extended the “narrow construction” of a waiver of sovereign immunity to a narrow construction of Section 6611 of the Internal Revenue Code (relating to interest on overpayment of taxes).  In arguing that certiorari is warranted, Ford noted that there is confusion among the circuit courts over the application of the strict construction canon to waivers of sovereign immunity.  The Supreme Court docket for Ford’s case can be found here, and the petition for certiorari is here.

Originally, for the tax years 1983-1989, 1992, and 1994, the IRS determined that Ford had underpaid its taxes.  In an effort to toll potential interest charges on its potential underpayment, Ford took advantage of a special rule in Rev. Proc. 84-58 that allowed it to make additional payments as a cash bond (i.e., a deposit), which had the effect of stopping the accrual of underpayment interest.  Years later, Ford converted the deposit into an “advance payment” to satisfy further tax liabilities.  However, the IRS subsequently determined that Ford had overpaid its taxes for the years in question.  Ford then received from the IRS the amount of the overpayment, plus interest.  The parties agree on the amount of the overpayment, but disagree as to when the overpayment interest should begin to accrue.

Ford argued, unsuccessfully, that the date of overpayment began once Ford had submitted the deposit.  The government argued that since the payments must be made with respect to a tax liability, the date of overpayment did not begin until Ford requested that the IRS treat the cash bonds as “advance payments” to satisfy further tax liabilities.   The district court agreed with the government, holding that Ford was not entitled to overpayment interest until it converted the deposit into an advance payment.  Ford Motor Co. v. United States, 105 A.F.T.R.2d 2010-2775 (E.D. Mich. 2010) (available through PACER and major commercial reporting services).

On appeal, the Sixth Circuit, acknowledging that Ford’s interpretation of Code Section 6611 was “strong,” applied a strict construction canon to Code Section 6611 and affirmed the holding of the district court.  Ford Motor Co. v. United States, 508 Fed. Appx. 506 (6th Cir. 2012) (not recommended for publication).  The Sixth Circuit found that that Code Section 6611 is the provision that waives sovereign immunity for claims of overpayment interest and that the canon of narrow construction should apply to resolve the interpretation of Code Section 6611 in the government’s favor.

Ford is now asserting that 28 U.S.C. § 1346(a)(1) is the provision that waives the government’s sovereign immunity with respect to overpayment interest, and Code Section 6611 is the provision that confers the substantive right underlying the claim for overpayment interest.  As such, and consistent with Supreme Court precedent, Code Section 6611 should not, Ford argues, be subject to the strict construction canon.  In Ford’s petition for certiorari, it argued that “in direct conflict with [the Supreme] Court’s precedents, the Sixth Circuit invoked the strict construction canon to construe not the waiver of sovereign immunity, but instead the separate, substantive provision.”  If the Supreme Court rules in Ford’s favor (and sends the case back to the Sixth Circuit on remand), the Sixth Circuit’s seemingly sympathetic view of Ford’s reading of Code Section 6611 may ultimately lead to a decision that could lead to some taxpayers seeking additional interest on overpayments.   However, in 2004 Congress enacted Code Section 6603, which provides, in general, that if a taxpayer follows certain procedures pursuant to a deposit made after October 22, 2004, interest may accrue from the date of the deposit so long as the deposit is with respect to a “disputable tax.”  Thus, even if Ford were to prevail, taxpayers that follow the requirements of Code Section 6603 (and corresponding Revenue Procedure 2005-18) will not have to rely on the Ford case.

SCOTUS Struggles with TEFRA Jurisdiction: Oral Arguments in United States v. Woods

On October 9, 2013, the U.S. Supreme Court heard oral arguments in United States v. Woods, 471 Fed. Appx. 320 (5th Cir. 2012), cert. granted, 133 S. Ct. 1632 (Mar. 25, 2013) (No. 12-562).  The original question presented to the Court by petitioner was whether the 40% gross valuation misstatement penalty applies to transactions that lack economic substance.  When the Court granted the certiorari petition, however, it expressly asked the parties to brief and argue the additional question of whether the district court had jurisdiction in the case under I.R.C. section 6226 to consider the substantial valuation misstatement penalty at issue.  And it was this jurisdictional question that dominated oral argument before the Court.

Both the parties and the Court focused on the statutory language granting a court jurisdiction at the partnership level.  Specifically, I.R.C. section 6226(f) grants a court jurisdiction to determine “all partnership items . . . and the applicability of any penalty . . . which relates to an adjustment to a partnership item.”  Justice Kagan attempted to narrow the issue to whether the penalty was directly or indirectly “related to” a partnership item, and accused both parties of adding something to the statute: the taxpayer requiring the penalty “directly” relate, and the government asking the Court to read the statute to include any penalties “indirectly” relating to a partnership item.  Counsel for the taxpayer-Respondent explained that Congress separately defined an “affected item”, which includes outside basis, and could have explicitly expanded the statute to include penalties related to the partnership item and affected items, but it did not.  Respondent later reminded the Court that tax penalties are strictly construed in favor of the taxpayer and that any ambiguity must be resolved in the taxpayer’s favor.

On the merits, Respondent’s counsel focused on Congress’ intent and the context of the statute, arguing that the statute deals with a different situation than the one before the Court: the statute addresses a misstatement of value, not an entirely disallowed transaction.  Respondent explained the distinction by analogy, “if I donate a painting that I say that is worth $1 million to a church and I put that on my return, but, in fact, it turns out that I didn’t donate the painting, I may have committed a fraud . . . but I haven’t made a valuation misstatement, nor have I misstated my basis.”  As multiple Justices recognized, Congress enacted a new statute in 2010 to directly address that problem, in a noneconomic substance penalty.  See I.R.C. § 7701(o).  Both parties before the Court agreed that the noneconomic substance penalty would apply to the current case had that penalty been on the books at the time of the transaction.

Neither advocate had much time to argue the merits of the case, and, interestingly, the Justices asked few questions during those parts of the arguments.  On the other hand, questions from the bench commanded the jurisdictional arguments.  While tax practitioners may be hoping for a decisive answer to the question on the merits, it is possible the Court will issue a more narrow ruling that it lacks jurisdiction in this case to answer that question.  Of course, predictions based on oral arguments alone are like writing in the wind and the running water.  It is difficult to predict whether the Justices will rule on the merits of the case, much less what that ruling may be.

Adam Pierson, a member of Dentons’ Litigation practice, co-authored this article.

Jurisdiction to Dispute Penalties: Partner v. Partnership-Level Proceedings

The U.S. Supreme Court recently heard oral arguments in United States v. Woods, 471 Fed. Appx. 320 (5th Cir. 2012), cert. granted, 133 S. Ct. 1632 (Mar. 25, 2013) (No. 12-562).  In addition to the heavily-disputed circuit split regarding the gross misstatement penalties, the Court may rule on a complicated jurisdictional question implicated in TEFRA partnership proceedings.  Although neither party nor the lower courts raised the issue, the Court directed the parties, without further detail, to brief and argue whether the district court had jurisdiction under I.R.C. § 6226 to consider the substantial misstatement penalty for an underpayment “attributable to” an overstatement of basis.  Accordingly, the Court may address the issue of whether penalties related to the overstatement of outside basis must be resolved in a partnership proceeding or must be raised in a subsequent partner-level claim.  It is possible that the Supreme Court may resolve the Woods case on jurisdictional grounds, without addressing the substantive circuit split on whether the 40% gross valuation misstatement penalty applies to transactions that lack economic substance, though most believe that it will also address the circuit split on the gross valuation misstatement penalty.

In either event, the fact that the Supreme Court directed the parties to brief and argue the jurisdictional issue is a pointed reminder that the TEFRA partnership audit procedures are outdated and in desperate need of a fix.  In fact, TEFRA jurisdictional issues have generated huge amounts of litigation about partnership tax procedure, often without addressing the underlying merits of a tax dispute.  So the Supreme Court’s guidance in Woods on TEFRA jurisdiction may have far reaching impact and either confirm or cast doubt on a whole series of ad hoc TEFRA procedural decisions over the past ten years.

In Woods, the particular TEFRA partnership procedures at issue involves penalties.  When TEFRA was originally enacted, penalties were not partnership items and had to be resolved in individual partner-level proceedings after the completion of the partnership audit and any resulting tax litigation.  In 1997, congress amended TEFRA to provide that penalties are determined at the partnership level without reclassifying penalties as partnership items.  As a result, significant confusion arose as to whether all or only a portion of the penalty issues (e.g., everything except the reasonable cause defense to penalties as this is specific to an individual partner’s state of mind) can be determined in a partnership proceeding.  Also, significant issues arose as to whether a court has jurisdiction in a partnership  proceeding over penalties if the underlying adjustment resulting in a partner-level underpayment of tax is itself not a partnership item.

Many courts have found that the reasonable cause defense to penalties is jurisdictionally appropriate at the partnership level when the defense involves the conduct and state of mind of the partnership’s managing member or when the defense is not personal to the partners or dependent on their separate returns.  Where the penalties imposed require a determination of non-partnership items, however, courts have found the defense properly raised at the partner level.  Thus, several courts have found no jurisdiction in a partnership-level proceeding when the penalties related to the outside bases of the individual partners because outside bases are generally not partnership items and must determined at the partner level.  It is this last point that the Supreme Court in Woods has focused its jurisdictional analysis on, even though the parties to the case did not raise jurisdictional questions.

After being directed to brief the issue, the taxpayers in Woods rely heavily on Tax Court decisions Jade Trading and Petaluma to argue that the district court lacked jurisdiction to impose the penalty because it relates to a nonpartnership item, i.e., the partner-by-partner determination of the partners’ outside (or tax) bases in the partnership interests.  See Petaluma FX Partners LLC v. Comm’r, 591 F.3d 649, 655-56 (D.C. Cir. 2010), on remand 135 T.C. 366; Jade Trading v. United States, 80 Fed. Cl. 11, 60 (2007), aff’d in part and vacated in part, 598 F.3d 1372 (Fed. Cir. 2010).  In contrast, the government argued that the district court had jurisdiction to impose the penalty because the issue was a partnership item.  Interestingly, the government previously conceded that its argument was wrong.  See Brief for Respondents, United States v. Woods, 133 S. Ct. 1632, 2013 WL 3816999, *21-24 (July 19, 2013) (citing Logan Trust v. Comm’r, No. 12-1148 (D.C. Cir. Oct. 25, 2012) (“We agree that outside basis is an affected item, not a partnership item . . .”)).

Hopefully, the Supreme Court’s jurisdictional decision in Woods clarifies—instead of further confuses—TEFRA jurisdictional rules.  Given the current political environment in Washington, D.C., it is unlikely that congress would take up a statutory fix to TEFRA, much less agree on what that fix should look like.  The current case-by-case, and often conflicting, judicial resolution of TEFRA issues is maddening to lawyers, judges, and especially taxpayers who simply want the merits of their tax cases decided.

Did the Tax Court Enforce Retroactive Penalties?

Taxpayers and practitioners alike were unsettled by recent language from a Tax Court opinion suggesting that retroactive penalties may be enforced.  See Soni v. Comm’r, T.C. Memo. 2013-30.   In Soni, the Tax Court summarily stated “[t]his Court has decided previously that taxpayers may be liable for a penalty arising from a transaction entered into before the penalty was enacted.”  Id. at *8.  In support, the Court cited Patin v. Comm’r, 88 T.C. 1086, 1127 n.34 (1987), aff’d without published opinion, 865 F.2d 1264 (5th Cir. 1989), and aff’d without published opinion sub nom. Hatheway v. Comm’r, 865 F.2d 186 (4th Cir. 1988), and aff’d sub nom. Skeen v. Comm’r, 864 F.2d 93 (9th Cir. 1989), and aff’d sub nom. Gomberg v. Comm’r, 868 F.2d 865 (6th Cir. 1989) (all available through major commercial case reporting services); McGehee Family Clinic, P.A. v. Comm’r, T.C. Memo. 2010-202, slip op. at 6.

Retroactive penalties conflict with Congress’ express recognition that taxpayers, as a general matter, should not be penalized if their tax return filing position is successfully challenged by the IRS if—at the time the return was originally filed—the taxpayer took the position reasonably and in good faith.  The primary exception to this fundamental proposition is the new and arguably strict liability penalty for transactions lacking economic substance.  Some would argue, and the IRS routinely does in fact argue, that if a transaction lacked economic substance, it necessarily was not entered into reasonably and in good faith.  Obviously, we disagree with this argument given the ever-shifting and vague economic substance doctrine.  Nonetheless, what to make of Soni and the cases it relied upon?

A close review of the facts and holding of Soni reveals that the Tax Court did not impose retroactive penalties.  In summary, the court enforced penalties arising from transactions entered into before the transaction was subject to penalty—not before the penalty was enacted.  This is a fine, but significant, distinction.

In Soni, the taxpayers engaged in a certain transaction beginning in 2001.  In a revenue ruling issued three years later, the IRS “listed” the transaction as an abusive tax shelter, arguably putting the taxpayer on notice that the transaction could not be entered into in good faith. (Obviously, this line of reasoning ignores the fact that the IRS has “delisted” certain transactions that it previously considered abusive.)  Even after the transaction was listed, the taxpayer continued to engaged in it.  For the taxable year ending after the revenue ruling was effective, the IRS sought to impose a penalty under I.R.C. section 6662A (for understatements with respect to reportable transactions) on the taxpayers for engaging in the listed transaction at issue.

Part of the taxpayers’ defense to the penalty was that they relied upon a favorable IRS determination letter issued in 2002, before the revenue ruling was issued.  In upholding the penalty, the court found that the revenue ruling should have put the taxpayers on notice that they could no longer rely upon such determination letter and that the transaction was now a listed transaction—“[i]gnorance of the law is no excuse for noncompliance with the applicable law.”  Id. at *10.

None of the cases cited by the court in Soni (listed above) actually applied penalties retroactively or stand for the proposition that a penalty can be applied prior to the enactment of the penalty statute.  In fact, in McGehee, the court explicitly stated that the penalty was not being applied retroactively and was applicable only to tax years ended after the date of enactment of the penalty at issue.  See McGehee, T.C. Memo. 2010-202.  So, despite the loose language in Soni, the Tax Court did not open the floodgates to retroactive penalties.

The Eighth Circuit Weighs in on Whether Outside Basis is an Affected Item at the Partner Level

As a part of the continuing TEFRA partnership audit proceeding litigation saga, the Eighth Circuit in Thompson v. Comm’r, (No. 12-1725) (Sept. 9, 2013), weighed in on the question of whether outside basis can be decided at the partnership level, or whether it is an affected item that must be determined subsequently at the partner level.  In Thompson, after partnership-level proceedings involving a SON-of-BOSS transaction were decided in favor of the government, the IRS issued a notice of deficiency to the partners explaining several adjustments made to their individual returns and imposing a 40% accuracy-related penalty.  When the taxpayers filed a petition in Tax Court to challenge the notice of deficiency, the IRS moved to dismiss for lack of jurisdiction and argued that the notice was issued in error and that the deficiency procedures of I.R.C. § 6230(a)(1) were inapplicable.  The Tax Court agreed with the IRS and dismissed the partners’ petition.  Writing for the majority, Judge Wherry held that computing the partners’ deficiency arising from the adjustments finalized in the partnership-proceeding did not require any partner-level determinations since the partnership activities “constituted an economic sham” that “foreclosed [the partners] from claiming any loss on liquidating a partnership interest in a disregarded partnership.”  On appeal, the Eighth Circuit reversed, holding that the Tax Court erred in determining that it lacked jurisdiction over the petition.

The Eighth Circuit’s focus, interestingly, was on whether the Tax Court actually made a determination of the partners’ outside basis in the partnership-level proceeding.  The Eighth Circuit held that because the Tax Court did not determine the partners’ outside basis in the partnership, the notice deficiency procedures were applicable and the Tax Court had jurisdiction to consider the taxpayers’ petition.  But, as Judge Gruender noted in his concurring opinion, the question is not whether the Tax Court made the determination; Judge Gruender argued that the Tax Court did in fact make a determination that the partners’ outside basis in the partnership was zero, but that this determination must be “determined at the partner level.”

In holding the Tax Court had jurisdiction, the Eighth Circuit agreed with other circuits to have addressed the question, citing Jade Trading, LLC v. United States, 598 F.3d 1372 (Fed. Cir. 2010) and Petaluma FX Partners, LLC v. Comm’r, 591 F.3d 649 (D.C. Cir. 2010).

The United States Supreme Court may rule on this issue in United States v. Woods, 471 Fed. Appx. 320 (5th Cir. 2012), cert. granted, 133 S. Ct. 1632 (Mar. 25, 2013) (No. 12-562), where, on its own initiative, the Court directed the parties to brief and argue whether the district court had jurisdiction to consider the substantial misstatement penalty for an underpayment “attributable to” an overstatement of basis.

US Government Announces 6-Month Delay in Certain FATCA Rules

Recognizing the practical and logistical problems faced by US withholding agents and foreign financial institutions (“FFIs”), and the uncertainty faced by many FFIs and foreign governments about whether an intergovernmental agreement (“IGA”) will be in effect by January 1, 2014, US tax authorities on July 12, 2013, issued Notice 2013-43. Notice 2013-43 states that the US Treasury Department and US Internal Revenue Service (“IRS”) will postpone by six months, to July 1, 2014, the start of withholding required by the so-called Foreign Account Tax Compliance Act, or “FATCA,” and make corresponding adjustments to various other time frames provided in the final regulations. The Notice states that its goal is to allow for a more orderly implementation of FATCA. The Notice gives affected entities more time to adjust to FATCA; it generally does not, however, relax the long-term, substantive withholding and reporting obligations imposed by FATCA.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

Major Deadline Approaching to Minimize Exposure for Unclaimed Property Liability

Delaware corporations and other business entities have a limited opportunity to minimize and liquidate exposure to Delaware unclaimed property liability by enrolling in Delaware’s Voluntary Disclosure Agreement Program. The VDA program permits companies not under audit to voluntarily disclose and pay the amount of unclaimed property without interest or penalties. To obtain the maximum benefit of the VDA program—a waiver of all interest and penalties on reported property from transactions in 1996 and later, and an exclusion of property arising from transactions that took place prior to 1996—a company must enroll by June 30, 2013. An audit could otherwise subject a company to liability for transactions that took place as far back as 1981, plus interest and penalties which could double the amount due.

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Kate F. Buckley and Sara R. Werner, members of Dentons’ Corporate practice, co-authored this article.

US Senate Passes Marketplace Fairness Act

On May 6, 2013, as anticipated when the Senate recessed last week, the US Senate passed the Marketplace Fairness Act of 2013 (S. 743). The bill’s passage was the culmination of a flurry of action by the Senate in recent weeks, including an April 25th procedural vote that ended debate on the bill and sent the bill to the floor of the Senate which passed the bill by an overwhelming majority.

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Sander Lurie and John R. Russell IV, members of Dentons’ Public Policy and Regulation practice, co-authored this article.

Changes Proposed to US Tax Reporting Rules for “Outbound” Transfers

On January 30, 2013, the US Treasury Department (IRS) proposed amendments to existing gain recognition agreement (“GRA”) regulations that apply to US persons who transfer stock of a US corporation or a foreign corporation to a foreign corporation. The proposed changes to the GRA regulations address the consequences to US persons for failing to file GRAs and related documents (failure to file), to comply in any material respect with the terms of, or rules governing, GRAs (failure to comply), or to satisfy other reporting obligations. The proposed changes would affect not only future reorganizations and contributions of stock to foreign corporations, but also prior transfers that continue to be subject to GRA reporting. The proposed changes also provide similar failure to comply rules with respect to liquidating distributions to foreign corporations and certain other document filing requirements arising with a US person’s transfer of stock or assets to certain foreign corporations.

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US Issues Final FATCA Regulations

On January 17, 2013, the US Treasury Department (IRS) released final regulations to implement the US reporting and withholding rules originally enacted in 2010 and frequently referred to as the Foreign Account Tax Compliance Act, or FATCA. Beginning on January 1, 2014, the FATCA rules generally impose a 30 percent withholding tax on many types of payments of US-source income to a foreign entity (“withholdable payments”) unless the foreign entity reports certain information about any US account holders or owners it possesses. The FATCA rules apply directly to withholding agents, foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs), but their indirect impact is far broader and often affects unsuspecting parties.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

Scuffling at the Edge of the Fiscal Cliff

On December 31, 2012, a host of tax and spending provisions were scheduled to expire. On January 2, 2013, substantial cuts to defense programs and to domestic discretionary spending also were scheduled to commence. Negotiations in Washington regarding these provisions had been taking place for weeks without resolution, with a sequence of different negotiating partners seeking, and failing, to reach agreement. Finally, on New Year’s Eve, Senate Minority Leader McConnell and Vice President Biden were able to work out a compromise package, and in an unusual New Year’s Eve session that stretched well into New Year’s Day, the Senate overwhelmingly passed the package. In an even more unusual New Year’s Day session, the House of Representatives passed the Senate package unchanged, with House Democrats voting overwhelmingly for it while a majority of House Republicans voted against it. The package, entitled the “American Taxpayer Relief Act of 2012,” now goes to the President who has stated that he will sign the bill.

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Michael E. Zolandz and Gary L. Goldberg, members of Dentons’ Public Policy and Regulation practice, co-authored this article.

IRS Updates FATCA Guidance

On October 24, 2012, the US Internal Revenue Service (“IRS”) issued Announcement 2012-42 along with a table (reproduced below) that summarizes certain Foreign Account Tax Compliance Act (“FATCA”) due diligence deadlines. The changes announced are limited, but they demonstrate that the IRS and the US Treasury Department continue to make modifications to the FATCA withholding and reporting rules in response to comments, especially comments focused on practical problems encountered by entities trying to implement and comply with FATCA.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

IRS Clarifies and Tightens New “Anti‑Inversion” Regulations

On June 7, 2012, the US Treasury Department (the “IRS”) issued new regulations interpreting the US tax rules that apply to “expatriated entities.” An expatriated entity, sometimes referred to as an “inverted company,” is a US company (usually the parent company of a group of US and foreign affiliates) that seeks to become a lower-taxed foreign company rather than a higher-taxed US company. In 2009, the IRS issued temporary regulations that were scheduled to expire on June 8, 2012 (the “2009 temporary regulations”), and the regulations released on June 7 were issued shortly before the 2009 temporary regulations lapsed.

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Looming Tax and Spending Changes Cause Mounting Uncertainty

It has been given different names: “fiscal cliff,” “taxmageddon,” all of which sound like the name of bad screenplays written by a tax lawyer or accountant.

However, the pending expiration of tax and spending provisions, implementation of across-the-board spending cuts, and need to raise the federal debt limit are real and will come to a head in the United States within the next several months.

This alert summarizes the possible consequences of these issues, especially the effect of their confluence, and analyzes possible outcomes.

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Mike McNamara and Michael E. Zolandz, members of Dentons’ Public Policy and Regulation practice, co-authored this article.

Fighting Back: Taxpayers Challenge State Tax Assessments Based on Contingent-Fee Transfer Pricing Audits

In today’s economic environment, it is no secret that many states face significant budget shortfalls. In response to these circumstances, certain state treasury departments have begun to propose new income tax assessments based on transfer pricing studies that they have “outsourced” to third-party audit firms, often on contingent-fee terms. These arrangements, however, have left many taxpayers concerned. A state department of revenue’s combination of broad powers to propose adjustments and enjoyment of significant deference from state trial courts has traditionally been tempered by an expectation that the department will carefully exercise its discretion in making its assessment. But taxpayers are left wondering whether this powerful check on what otherwise might be arbitrary or capricious assessments is effectively abandoned where that state turns to a third-party, operating without transparency and on a contingent-fee basis, to pursue assessments under a highly technical area of the law (i.e., transfer pricing) with which the state department of revenue may, itself, have only limited experience.

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US Treasury Department Issues Final “Bank Deposit” Interest Reporting Regulations

On April 17, 2012, the US Treasury Department released final regulations and a revenue procedure setting forth the requirements for US offices of certain financial institutions to report on the interest earned by nonresident individuals. Although the regulations, and the multiple sets of proposed regulations that preceded them, are often referred to as the “bank deposit” interest regulations, the preamble to the regulations notes that they will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits. The new reporting rules apply to interest paid on or after January 1, 2013.

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New Foreign Tax Credit Regulations Issued

On February 14, 2012, the US Treasury Department (“IRS”) published in the Federal Register regulations dealing with two separate but related foreign tax credit issues. One set of regulations, which are proposed and temporary, provide guidance to taxpayers on how to interpret section 909 of the US Internal Revenue Code which denies a foreign tax credit for certain “foreign tax credit splitting events.” The other set of regulations, which are final, provide guidance on which person is considered to pay a foreign tax and is therefore eligible to claim a credit for the foreign tax paid.

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US Department of the Treasury Releases Proposed Regulations Implementing FATCA

On February 8, 2012, the US Department of the Treasury (the “Treasury Department”) issued detailed proposed regulations to implement the withholding and reporting rules commonly referred to as the “Foreign Account Tax Compliance Act” or “FATCA.” The proposed regulations supplement and, in some cases, modify the rules the Treasury Department previously announced in a series of notices. The release of the new rules provide an opportunity, in advance of the implementation dates, for foreign financial institutions (“FFIs”) to, among other things, determine the impact of the reporting and withholding requirements on their operations, including how much due diligence is required, whether the FFI systems must be enhanced, whether FFI records are currently readily retrieveable, whether the current number of customer files require that due diligence commence now, whether the FFI has sufficient staffing levels, whether FFI staff is sufficiently trained to implement FATCA, and whether third party assistance is required.

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Edward Hickman and Jerome Walker, members of Dentons’ Corporate practice, co-authored this article.

IRS Announces Third Special Offshore Voluntary Disclosure Initiative

The Internal Revenue Service (IRS) announced on January 9, 2012 that it has reopened its voluntary disclosure initiative for the third time, in response to the US government’s continuously widening investigation of foreign banks relating to unreported offshore accounts of US persons. This third special disclosure initiative follows the IRS’s 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDPs) and is available to those taxpayers who did not file in time for the 2009 or 2011 OVDPs. As in the past the OVDPs are designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the possibility of criminal prosecution. Foreign accounts include assets held in offshore trusts, foundations, corporations and other entities.

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Specified Foreign Financial Assets: New Form Must Be Filed With US Tax Return

The US Department of the Treasury (the “IRS”) recently released temporary and proposed regulations (the “Temporary Regulations”), effective December 19, 2011, to implement the provisions of the Hiring Incentives to Restore Employment (HIRE) Act that require individuals to report specified foreign financial assets (“SFFAs”) to the IRS. The Temporary Regulations apply to individuals required to file Form 1040, “US Individual Income Tax Return,” and to certain individuals required to file Form 1040-NR, “Nonresident Alien Income Tax Return.” The reporting required under the Temporary Regulations must be made on Form 8938, Statement of Specified Foreign Financial Assets.

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“Strategies for Managing Parallel Proceedings with Fifth Amendment Implications,” Inside the Minds: Strategies for Criminal Tax Cases

The DOJ Tax Division has long recognized the efficacy of parallel criminal and civil proceedings and actively pursues them in its current endeavor at increased enforcement. Parallel proceedings often present complicated issues that create additional challenges for taxpayers and their attorneys. When a parallel proceeding is pending, the invocation of the Fifth Amendment by either the taxpayer, a tax advisor, or other non-party witness can create adverse implications in a subsequent proceeding.  Taxpayers and their attorneys must carefully navigate the risk of an adverse inference against the taxpayer under the circumstances of the particular case.  The well-informed attorney can prepare to face all of these issues and effectively navigate the specific facts of his or her case.  The following discussion will explain and analyze: the effect of a party’s invocation in independent proceedings, the effect of a party’s invocation in parallel proceedings, the implications of a non-party’s invocation, and whether an invoker can waive the privilege and later testify.

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The Erosion of the Fifth Amendment Privilege

“You’d have to be living in a hole not to know that the U.S. government is really focused on offshore tax evasion,” IRS Commissioner Shulman told Bloomberg News earlier this year. The Bank Secrecy Act of 1970 (“BSA”) permits civil and criminal penalties for U.S. taxpayers who fail to report interests in foreign financial accounts. In the past, however, civil and criminal enforcement was rare; between 1996 and 2002 only twelve indictments were reported. In 2001, heightened financial reporting requirements were enacted under the Patriot Act, which is expressly designed to help prosecute international crimes. The government’s formal declaration of war on foreign tax evasion was commemorated in 2008 when a district court authorized the IRS’s John Doe Summons on Swiss bank UBS, demanding documents identifying U.S. taxpayers with unreported accounts. This order followed the indictments and guilty pleas of a high-profile UBS customer and his private UBS banker. In 2009, the DOJ charged UBS with aiding U.S. taxpayers in tax evasion. The bank avoided prosecution by paying $780 million and disclosing account data. Shulman promised severe penalties as the government pursued “criminal avenues” for these targeted individuals. Criminal charges have since been filed against numerous taxpayers, bankers, financial advisers, and lawyers linked to the data. Still, earlier this year, the IRS threatened offshore bank account holders with the increasing risks of criminal prosecution.

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Qualified Offers and the Recovery of Administrative and Litigation Costs from the IRS

Taxpayers and taxpayers’ counsel may be able to proactively fit within the net worth requirements set forth in 28 U.S.C. § 2412(d)(1)(B), which sets forth the standard applicable to both recovery of litigation costs and shifting the burden of proof to the government in tax cases. For example, a taxpayer may be able to successfully fit within net worth requirements by making distributions at any time before the date the case is filed. The following discussion provides a summary of this taxpayer position in recent litigation, the government’s opposition to this position, and the taxpayer’s appropriate—and successful—reply. In addition, relevant portions of the court’s holding and the case law the Government relied upon is also attached for the convenience of the reader. This discussion contains excerpts from Southgate Master Fund, LLC v. United States651 F. Supp. 2d 596 (N.D. Tex. 2009).

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