Category Archives: Federal

Tax Court: Reliance on VP of Tax is Not Reasonable Cause to Avoid Penalties

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The Tax Court finds that a consolidated group of companies which hired a former outside consultant (both a CPA and an Attorney) as their Vice President of Taxes was subject to penalties under Section 6664 on unreported personal holding company tax for the tax years in which he was their in-house advisor. The taxpayer was able to rely upon the reasonable cause exception from penalties for the tax year in which the same consultant was an independent paid provider.

Read the opinion here:
7 W Enterprises v. Commissioner, 136 T.C. No. 26 (2011)

Court of Federal Claims Lacks Jurisdiction over Partner’s Outside Basis

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In what may very well be the last decision of many rendered to the plaintiff’s in Jade Trading, LLC, the Court of Federal Claims, on remand from the Court of Appeals for the Federal Circuit, determined that under the Tax Equity and Fiscal Responsibility Act (TEFRA) it did not have jurisdiction to impose penalties on partners which relied on the partner’s outside basis.

Read the opinion here:
Jade Trading, LLC v. United States, No. 03-2164T (Fed. Cl. April 29, 2011)

DOJ Advises Restraint on Some Chevron Deference Arguments

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Tax Analysts reports that the Department of Justice will no longer argue that Chevron deference should apply to revenue rulings and revenue procedures.   The report cites Gilbert Rothenberg, appellate section chief, Tax Division, Department of Justice, who made the announcement during his comments at the American Bar Association’s recent Section of Taxation meeting in Washington, D.C.  Following the U.S. Supreme Court’s decision in Mayo Foundation v. U.S., the standard for the deference given to Treasury Regulations is now governed by Chevron v. U.S.

Mr. Rothenberg did note, however, that the DOJ will continue to assert Chevron deference for temporary regulations. This is important for followers of the Intermountain issue, i.e., whether retroactive temporary regulations apply to taxpayers accused of participating in listed transactions. The interpretation and application of those temporary regulations (Treas. Regs. 301.6229(c)(2)-1T and 301.6501(e)-1T) has created a split in the Circuits and since the release of Mayo Foundation, the Department of Justice has argued that Chevron deference should apply in these cases.  It seems they will continue to do so.

Hat Tip (Tax Prof Blog and Daniel J. White, Esq.)

Tax Court: 6 Year Statute of Limitations Still Does Not Apply to Understated Basis Cases

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The U.S. Tax Court in a reviewed opinion, accompanied by two concurrences, rejects the applicability of final Treas. Reg. Sec. 301.6229(c)(2)-1(b) and follows its opinions in Intermountain Insurance Service of Vail v. Commissioner and Bakersfield Energy Partners, LP v. Commissioner to hold that the 6 year statute of limitations does not apply to an understatement of income. The majority opinion, sua sponte, considered the final regulations in light of the U.S. Supreme Court’s opinion in Mayo Foundation v. United States.

Read the Tax Court’s opinion here:
Carpenter Family Investments, LLC v. Commissioner, 136 T.C. No. 17 (2011)

Tax Court: Collection Due Process “Disregard” Letter is Sufficient for Jurisdiction

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The Tax Court, in a reviewed opinion authored by the indefatigable Judge Dawson, holds that a decision letter from the Office of Appeals disregarding the frivolous arguments of a taxpayer, along with other legitimate arguments, is a determination under Section 6330(d)(1) for jurisdictional purposes.

Read the opinion here:
Thornberry v. Commissioner, 136 T.C. No. 16 (2011)

9th Circuit: Cost Basis Allowed in Intangible Regulatory Rights

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The Ninth Circuit Court of Appeals reversed the District Court for the Western District of Washington and ruled for the taxpayers. The Court of Appeals held that banks who received regulatory rights when they took over failed saving and loans at the government’s direction where entitled to cost basis in the acquired intangible assets.

Read the opinion here:
Washington Mutual v. U.S., Docket 09-36109 (9th Cir. March 3, 2011)

Read the District Court’s opinion here:
Washington Mutual v. U.S., Docket CO6-1550-JCC (W.D. Wash 2008)

Read more from the team that litigated the case for the taxpayers at Tax Appellate Blog.

Tax Court: OTC Foreign Currency Options are not Section 1256 Contracts

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On a motion for summary judgment, the Tax Court rules that over the counter foreign currency options are not “foreign currency contracts” under Sec. 1256.

In some instances, and in this case, offsetting foreign currency options are used as part of a strategy to reduce federal income tax known as a major/minor transaction. Though not part of the court’s opinion here, the IRS might argue (and indeed may have argued) that this transaction is substantially similar to a “Son of Boss” transaction which it deems to be an abusive tax shelter. The effect of the court’s ruling in this case effectively denies the taxpayer the federal tax benefit realized by the transaction.

Read the opinion here:
Garcia v. Commissioner, TC Memo. 2011-85

See the IRS LB&I Division’s New Wealth Squad IDR

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All tax trials begin with a redetermination of tax, either by the taxpayer in a refund case, or by the government following an examination.

In the case of the latter, the primary tool of a revenue agent conducting an audit is the Information Document Request, IRS Form 4564. The recently reorganized Large Business & International division of the Internal Revenue Service has put together a team to target the activities of high net worth individuals.

In an effort that falls a bit short of being clever, the team calls itself “the Wealth Squad.” They already have started issuing IDRs like the one here to high net worth taxpayers.