Tax Procedure: The Impact of Bankruptcy on Refund Claims

bankruptcy-tax-returnLast week, a district court addressed a series of refund claims that had an unusual jurisdictional complication: The Taxpayers initiated the refund claims while they were debtors in a Chapter 7 bankruptcy case, and the refunds they sought were property of the bankruptcy estate. The government sought to dismiss their refund action on a variety of grounds; while the motion was denied, the resulting opinion addresses a number of interesting issues concerning the complications that a bankruptcy case can add to a refund claim. Martin v. United States, No. 3:13-cv-03130, 2017 U.S. Dist. LEXIS 1285 (C.D. Ill. Jan. 5, 2017).… Read More

Tax Procedure: More on Divisible Taxes and the Full Payment Rule

divisible-taxes-and-the-full-payment-ruleNot all federal tax assessments are subject to the Tax Court’s jurisdiction, which means that in some cases the taxpayer is left with a refund claim as the sole source of judicial review. Full payment of the disputed tax assessment is a jurisdictional prerequisite for a refund claim. Flora v. United States, 362 U.S. 145, 150-51 (1960). There is a limited exception to this requirement: If a tax is divisible, then a payment of the tax for one or more individual transactions will suffice to establish jurisdiction. See, e.g., Psaty v. United States, 442 F.2d 1154, 1159 (3d Cir.… Read More

Tax Shelters: The Government Prevails Against Santander

Santander Holdings United States v. United StatesThe IRS and the Tax Division of the Department of Justice have expended significant effort fighting tax shelters, and they have enjoyed many successes in that endeavor. One transaction that the government challenged was known as “STARS,” an acronym for Structured Trust Advantaged Repackaged Securities. STARS was a transaction that Barclays promoted to a number of U.S. banks; it gave Barclays tax benefits in the United Kingdom, while the U.S. counterparties claimed significant foreign tax credits with minimal risk.

The IRS and the Tax Division pursued a series of cases attacking the STARS transaction as a tax shelter. Deploying the economic substance doctrine, the government obtained favorable rulings in two cases:

  • In Bank of New York Mellon Corp.
Read More

Death Is Not a Tax Dodge: A Look at the Tax Benefit Rule

tax-benefit-ruleBecause tax accounting is done annually, taxes are assessed on a basis that may prove inaccurate if a particular transaction is altered after the tax year has closed. For example, if a corporation deducts a state tax that it paid in one year, it would receive a windfall if the tax is invalidated and refunded in a later year. To rectify these situations, the tax benefit rule may apply to trigger income recognition if subsequent events are “fundamentally inconsistent” with a prior deduction. Hillsboro Nat’l Bank v. Comm’r, 460 U.S. 370, 383 (1983).

Last week, the Tax Court addressed the tax benefit rule, holding that death is not fundamentally inconsistent with a prior deduction for purchases of seed and other agricultural inputs associated with a farm; as a consequence, the farmer and his wife were able to deduct the same expenses twice in two consecutive years.… Read More

Tax Procedure: The Tax Court Looks at Closing Agreements

closing-agreement-taxUnder section 7121(a) of the Internal Revenue Code, the IRS is authorized to enter into a closing agreement with a taxpayer. Once a closing agreement is executed, it is “final and conclusive” and will be binding on both the taxpayer and the government in the absence of “fraud or malfeasance, or misrepresentation of a material fact.” I.R.C. § 7121(b). There are two types of closing agreements:

  • Closing agreements that conclusively determine tax liability for a particular year or series of years; these are recorded on Form 866. Most closing agreements fit this model.
  • There are also narrower closing agreements that resolve one or more specific issues; these are recorded on Form 906.
Read More

Tax Procedure: Naked Assessments, New Matter, and the Burden of Proof, a Procedural Grab Bag

shutterstock_449681443The burden of proof is important in any litigation. While this is equally true in tax cases, there are some special rules that apply. For example, a tax assessment issued by the IRS is subject to a presumption of correctness, leaving the taxpayer to establish, by a preponderance of the evidence, that the assessment is incorrect. See Helvering v Taylor, 293 U.S. 507, 515 (1935). But that presumption may not apply if the assessment is “naked” and lacks any foundation. See United States v. Janis, 428 U.S. 433, 441-42 (1976). In a similar vein, while the burden of proof is generally on the taxpayer, if the IRS asserts new matter in its answer, the government will bear the burden of proof.… Read More

Jurisdiction: The Full Payment Rule for Refund Claims and Divisible Taxes

divisible-taxesIf a tax is not subject to Tax Court review, the taxpayer is free to pursue a refund claim, but full payment is a jurisdictional prerequisite. Flora v. United States, 362 U.S. 145, 150-51 (1960). In some contexts the full payment requirement is relaxed because the tax is divisible; for example, a corporate officer challenging a trust fund recovery penalty assessment need only pay the tax for one employee to establish jurisdiction. Psaty v. United States, 442 F.2d 1154, 1159 (3d Cir. 1971). While the trust fund recovery penalty is recognized as a divisible tax, the question whether a tax is divisible remains open in a number of other contexts.… Read More

Tax Shelters: The IRS Identifies Micro-Captive Insurance Schemes as a Transaction of Interest.

tax-shelters-micro-captive-trasactionsThe IRS periodically identifies tax strategies it considers abusive as “reportable transactions,” a designation that triggers disclosure obligations for material advisors involved in the transactions. See I.R.C. § 6111(a). They also must maintain lists of participants involved in reportable transactions. See I.R.C. § 6112(a). And individual taxpayers must make disclosures with their returns. See Treas. Reg. § 1.6011-4(a).

Reportable transactions come in a variety of forms. Where the IRS determines that a particular type of transaction is a tax avoidance scheme, it will designate it as a listed transaction, making all substantially similar transactions subject to the reporting and record-keeping requirements outlined above.… Read More

Tax Procedure: A Look at the U.S. Role in Collecting Foreign Taxes

united-states-and-canadaThe United States has entered into bilateral tax treaties with a significant number of countries. The general goal of these arrangements is to increase trade by eliminating double taxation. As a consequence, they have rules to determine the residence of taxpayers and provisions limiting the ability of the treaty partners to impose taxes in certain cases.

A few of these treaties include provisions for collection assistance; earlier this year, a district court addressed a challenge to a request for collection assistance received from the Kingdom of Denmark. See Dileng v. Comm’r, 157 F. Supp. 2d 1336 (N.D. Ga. 2016). Recently, a district judge in North Carolina addressed the collection assistance provisions of the U.S.-Canada treaty.… Read More

Tax Crimes: Employment Taxes, Section 7202, and the Statute of Limitations

employment taxesEmployers are required to withhold FICA and income tax from employees’ pay checks and make periodic deposits of the amounts withheld. If the taxes are not withheld and paid over to the IRS, the employer is subject to monetary penalties and individuals affiliated with the employer may face personal liability for the trust fund recovery penalty. See I.R.C. §§ 6656 (employer penalty); 6672 (trust fund recovery penalty).

The failure “to collect, account for, and pay over” these taxes is also a felony. I.R.C. § 7202. While payroll tax violations were rarely prosecuted historically, times have changed, and the Tax Division has made employment tax prosecutions a priority.… Read More