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A Split U.S. Supreme Court Abandoned 50 Years of Precedent and Holds States Can Tax Internet Companies

In a 5-4 decision just issued this morning, the Court upended 50 years of precedent and renounced the “physical presence” standard it had long held in determining when a remote taxpayer’s presence in a state triggered the requirement to collect tax. In an opinion delivered by Justice Kennedy, the Court held that the physical presence rule affirmed in Quill is “unsound and incorrect” and thus its prior decisions, Quill (1992) and National Bellas Hess (1967), are overruled.

In Quill v. North Dakota, the US Supreme Court affirmed the existence of a bright-line “physical presence” standard for substantial nexus under the Commerce Clause as the jurisdictional basis before a state or locality could impose a duty on a remote retailer to collect use tax from its customers. In a direct challenge to that decision, South Dakota enacted a law in 2016 imposing a tax collection requirement on remote sellers having a mere “economic presence” in the state (i.e., merely having sales to South Dakota customers exceeding $100,000 in a calendar year, or 200 or more separate sales, no matter what size, into the state in a calendar year).

In September 2017, the South Dakota Supreme Court affirmed a lower court holding which had struck down the South Dakota law as unconstitutional in violation of the Quill physical presence requirement. The US Supreme Court accepted cert. this past January, essentially addressing whether in light of today’s electronic age and the “legal and practical developments over the last 25 years”, its 1992 Quill decision (and before that its decision in National Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967)) should still be the law of the land.

In its decision this morning overturning Quill, Justice Kennedy articulated the decision of the Court making the following points:

(1) Quill is flawed on its own terms. The physical presence rule is not a necessary interpretation of the prior case law, in particular Complete Auto’s substantial nexus requirement. (Complete Auto Transit, Inc. v. Brady, 430 U. S. 274.)

(2) Quill creates rather than resolves market distortions. In effect, it is a judicially created tax shelter for businesses that decide to limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced.

(3) The physical presence rule of National Bellas Hess and Quill is also an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions citing that forty-one States, two Territories, and the District of Columbia have asked the Court to reject Quill’s test.

Again citing the Court’s own language: When the day-to-day functions of marketing and distribution in the modern economy are considered, it becomes evident that Quill’s physical presence rule is artificial, not just “at its edges,” 504 U.S. at 315, but in its entirety. Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. And the Court should not maintain a rule that ignores substantial virtual connections to the State. As the Court states: It is not clear why a single employee or a single warehouse should create a substantial nexus while “physical” aspects of pervasive modern technology should not.

Further quoting the Court: The Quill Court (in 1992) did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. When it decided Quill, the Court could not have envisioned a world in which the world’s largest retailer would be a remote seller. The Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes, leading the South Dakota Legislature to declare an emergency.

As the Court indicates, the argument that the physical presence rule is clear and easy to apply is unsound, as attempts to apply the physical presence rule to online retail sales have proved unworkable. Because the physical presence rule as defined by Quill is no longer a clear or easily applicable standard, arguments for reliance based on its clarity are misplaced. Stare decisis may accommodate “legitimate reliance interest[s],” United States v. Ross, 456 U. S. 798, 824, but a business “is in no position to found a constitutional right on the practical opportunities for tax avoidance,” Nelson v. Sears, Roebuck & Co., 312 U. S. 359, 366. For these reasons the Court concludes that the physical presence rule of Quill is unsound and incorrect.

Justice Kennedy’s decision was matched with short concurring opinions by Justice Thomas and Justice Gorsuch.

Chief Justice Roberts along with Justices Breyer, Sotomayor, and Justice Kagan filed a dissent.

Yet even as the Court erases 50 years of precedent in a “poof” major questions abound:

And so, what are now the rules, and to what extent may the States seek to impose their own jurisdictional requirements? The Court does not answer these questions. As it indicates: The question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the S Dakota law at issue here. As the Court indicates: “Because the Quill physical presence rule was an obvious barrier to the Act’s validity, these issues have not yet been litigated or briefed, and so the Court need not resolve them here.”

Also, as a separate matter, under the Commerce Clause Congress has the ultimately authority to “regulate commerce among the several states”. However, thus far it has not exercised its power in this area. It remains an open question as to what extent if any Congress may now decide to act.

Stay tuned for more, we are quite sure that we are far from hearing the last on this issue.

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.

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

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.

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.

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.

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.

“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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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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