Friday, July 14, 2017

4TH Cir DCA Denies Taxpayers Right to Switch from OVDP to Streamlined

On May 30, 2017 we posted Offshore Tax Suit To Switch From OVDP To Streamline Doesn’t Block Collection  where we discussed that three taxpayers seeking to switch over to the IRS’ new “streamlined” compliance program for unreported offshore income argued to a D.C. Circuit panel  that their lawsuit is not foreclosed by the Anti-Injunction Act's bar on pre-enforcement tax challenges, attacking the government’s key defense in the case. The case is Maze et al. v. Internal Revenue Service et al., case number 16-5265, in the U.S. Court of Appeals for the District of Columbia Circuit.

Eva Maze, Suzanne Batra and Margot Lichtenstein have asked the appeals court to reverse a lower court’s ruling dismissing their suit, which aims to allow the taxpayers to jump from an older compliance program, known as the IRS Offshore Voluntary Disclosure Program, to a streamlined procedure with several advantages by eliminating strict transition rules they claim run afoul of the Administrative Procedure Act.
U.S. District Judge Colleen Kollar-Kotelly held in July that the taxpayers’ consolidated suit would violate the Anti-Injunction Act that prohibits federal courts from taking actions that would restrict the collection of taxes. If the plaintiffs successfully jumped from one disclosure program to another, as they sued to do, it would prevent the IRS from collecting accurate penalties for the tax years at issue and make it more difficult for the agency to backtrack and collect penalties the agency was otherwise entitled to for previous years, Judge Kollar-Kotelly said.

Representing the taxpayers, George M. Clarke III of Baker McKenzie said that all the taxpayers’ suit aims to do is get an injunction blocking the rules that are preventing them from applying to the streamlined program, not stop the IRS from collecting taxes.

U.S. Circuit Judge Thomas B. Griffith seemed unconvinced by the argument. The lawsuit, he said, “seems to me to be in the wheelhouse of what the Anti-Injunction Act is talking about.”
Now the United States Court of Appeals for the Fourth District denied the taxpayers appeal of their denial to switch between the OVDP program and the Streamline Program on July 14, 2017.
The account holders’ lawsuit was barred under the Anti-Injunction Act, because it “would have the effect of restraining, fully stopping the IRS from collecting accuracy-based penalties for which they are currently liable,” the federal appeals court ruled.
If the account holders don’t like the situation, they could opt out of the IRS’s 2012 offshore voluntary disclosure program, allow the Internal Revenue Service to determine their liabilities by audit, pay the assessed liabilities, and file an administrative refund claim for the difference between the determined liability and what they would have owed under the 2014 streamlined procedure that the IRS wouldn’t let them into, Judge Karen LeCraft Henderson said, citing the trial court decision in the case.
LeCraft, added that the account holders could then file a refund lawsuit in federal court if the IRS denied their refund claim.
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Greek Co. Not Liable For $4M Gain From Sale of US Partnership Interest

The Tax Court has concluded that a foreign corporation's proceeds from the redemption of a U.S. limited liability company that was treated as a partnership for U.S. income tax purposes was not U.S.-source income and was not effectively connected with a U.S. trade or business.

Grecian Magnesite Mining, Industrial & Shipping Co. SA had already conceded that it was liable to the IRS for $2.2 million of the $6.2 million it made on the redemption of its 12.6 percent stake in Pennsylvania-based magnesite mining company Premier Magnesia LLC. That left Tax Court Judge David Gustafson to deal only with the remaining $4 million, which he said cannot be treated as piecemeal sales of Premier’s assets but must be addressed wholesale.

The IRS can’t treat the $10.6 million buyout as an “aggregation” where GMM’s gain would be attributable to a sale of its interest in Premier’s physical assets and would thus be liable to the IRS, Judge Gustafson said, in part, because payments of this type must be treated as partnership distributions and those distributions went to a company outside the country.

The Tax Court Judge said in its ruling for the company that “Accordingly, GMM’s gain from the redemption of its partnership interest is gain from the sale or exchange of an indivisible capital asset, i.e. GMM’s interest in the partnership,”

The reason GMM is liable for the $2.2 million chunk, according to the ruling, is precisely because that money, spread between 2008 and 2009, was tied to Premier’s physical assets in the U.S.

As for the rest of the money however, Judge Gustafson held that the IRS can’t attribute it to GMM’s U.S. office, meaning Premier’s office since the Greek company has no other U.S. presence, instead of properly treating it as foreign income. The “U.S. office rule” would only work, according to the 55-page ruling, if the income in question, from the redemption, could be traced to Premier’s office.

“We conclude that, for the partnership’s U.S. office to be a ‘material factor’ in the relevant sense, that office must be material to the redemption transaction itself and the gain realized therein, rather than simply being a material factor in ongoing, distributive share income from regular business operations,” the judge said. “Consequently, the commissioner’s argument that Premier’s U.S. office would have been a material factor for a hypothetical sale of underlying partnership assets misses the mark.”

Nor can Premier’s own U.S. efforts to increase its value be considered part of the gain GMM realized, according to the ruling, because those investments are separate from the money the Greek company made in the buyout.

Even if Premier’s office was considered a material part of producing the gain GMM realized, Judge Gustafson said he’d still need to find that the money came in the “ordinary course of Premier’s business conducted through its U.S. office” to be attributed there and not in Greece.

The judge found that the IRS “again conflates” Premier’s ongoing business activities with the redemption of GMM’s partnership stake, which the ruling held to be “an extraordinary event” not easily tied in with normal business.

“Premier’s business did regularly produce income (and GMM paid tax on its distributive share of that income each year),” Judge Gustafson said. “However, contrary to the commissioner’s assertion, Premier was not engaged in the business of buying or selling interests in itself and did not do so in the ordinary course of its business.”

The judge also rejected any penalties in the more than $2.1 million challenged deficiency GMM had been facing from 2008 and 2009 after an IRS audit. While the company should have reported making over $1 million in Foreign Investment in Real Property Tax Act gain in 2008, instead of the zero it put down, and it should have filed a 2009 return but did not, Judge Gustafson held the company properly relied on its American advisors.

An important part of the decision Thursday was in the judge’s refusal to defer to a 1991 IRS revenue ruling holding that gains like the ones here can be effectively tied to U.S. businesses.

“Rev. Rul. 91-32 is not simply an interpretation of the IRS’s own ambiguous regulations, and we find that it lacks the power to persuade. Its treatment of the partnership provisions discussed above in part II.B is cursory in the extreme,” Judge Gustafson said, noting that the ruling doesn’t even cite Section 731 of the Internal Revenue Code, which deals with partnership distributions.

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Thursday, July 13, 2017

Private Debt Collectors Threatening Taxpayers To Pay Their Debts?

On Tuesday, April 4, 2017 ,we posted Private Debt Collection of Some Overdue Federal Taxes Starts in April! where we discussed that the IRS announced that it plans to begin private collection of certain overdue federal tax debts next spring and has selected four contractors to implement the new program. 

According to the IRS  the Internal Revenue Service began sending letters to a relatively small group of taxpayers whose overdue federal tax accounts are being assigned to one of four private-sector collection agencies starting April 2017.
The program which started April 2017 with a few hundred taxpayers receiving mailings and subsequent phone calls, with the program growing to thousands a week later in the spring and summer.
Taxpayers with overdue taxes will always receive multiple contacts, letters and phone calls, first from the IRS, not private debt collectors.
Only four private groups are participating in this program:
  1. CBE Group of Cedar Falls, Iowa;
  2. Conserve of Fairport, N.Y.;
  3. Performant of Livermore, Calif.; and
  4. Pioneer of Horseheads, N.Y. 

The taxpayer’s account will only be assigned to one of these agencies, never to all four. No other private group is authorized to represent the IRS.

Now Sen. Elizabeth Warren of Massachusetts and three other Democratic senators are urging the Federal Trade Commission to review the debt collection practices of four private companies contracted by the Internal Revenue Service, citing concerns of threats to taxpayers and violations of taxpayers’ privacy.

Warren and Sens. Cory Booker of New Jersey, Benjamin Cardin of Maryland and Sherrod Brown of Ohio said in a letter to the FTC that the call scripts of the four companies used by the IRS warrants review because the scripts may contain implied threats, violate taxpayers’ privacy through information sharing with third parties, and inadequate responses to cease-and-desist requests from taxpayers.

“Taxpayers contacted by IRS contractors are at serious risk of abuse,” the lawmakers wrote. “The Taxpayer Advocate has reported that more than half of the initial accounts referred to these private debt collectors are for taxpayers below 250% of the federal poverty level.”
Noting that the FTC, which has a dual mission to protect consumers and promote competition, is responsible for enforcing compliance under the Fair Debt Collections Practices Act, the senators asked the agency to also report back on whether it previously reviewed the private debt collectors’ call scripts, actively monitors complaints against the four contractors, or had received complaints against them.
Federal Trade Commission: Protecting America's Consumers
The legislators requested the results of the FTC review to be delivered by Sept. 1, along with details on what actions have been taken to date based on any complaints that may have been received.

The PATH Act of 2015 included a provision requiring the IRS to hire private debt collection agencies, even though the IRS has twice before discontinued such programs after finding that the private companies failed to collect as much tax revenue as originally envisioned and after hearing complaints of taxpayer harassment. But after Congress required it to give the private debt collection program another try, the IRS selected four private contractors last September:
Warren and some of the same senators sent a letter last month to Pioneer after receiving complaints that some of its employees encouraged people to use money from their 401(k) retirement funds or take out a second mortgage to pay off their tax debts. In the new letter, Warren and the other lawmakers asked the FTC to review the call scripts used by all four debt collection agencies and to answer several questions, including whether the FTC is actively monitoring complaints against the four contractors hired by the IRS to collect tax debts, whether the FTC has received any such complaints and what the nature of them is.
The National Treasury Employees Union, which represents IRS workers, supported the senators’ call for an FTC investigation of the contractors. It pointed out that the companies collect a commission of up to 25 percent and argued that the private debt collection program opens new doors for scammers to impersonate IRS personnel, disproportionately targets low-income taxpayers, and exposes taxpayers’ private data.
“This is a job for the dedicated, professional civil servants of the IRS because, unlike private contractors, they are specially trained to help bring taxpayers into compliance with compassion and fairness,” said NTEU national president Tony Reardon in a statement. “We are glad that some in Congress are aware of the harm that can come from privatizing certain government functions, and we believe Congress will once again abandon this bad idea.”
The lawmakers said in the June letter that they were generally concerned about taxpayer risks from all the debt collectors, but about Pioneer in particular because of “the abuse of federal student loan borrowers by its parent company, Navient, through its Education Department student loan servicing contracts.”

Pioneer’s scripts may contain “intimidating language that shouldn’t be there about marking accounts as unwilling to voluntarily satisfy debts, that letter said. The company may also be violating the Internal Revenue Code by offering installment plans of up to seven years when they are supposed to be capped at five, according to the letter.

The lawmakers also pointed to Pioneer’s contractual obligation to tell taxpayers about their right to help from the Taxpayer Advocate Service.

“But there is no evidence in the Pioneer call scripts, which contain numerous disclosures and examples of legal requirements, that the collector intends to provide this information to taxpayers,” the letter said. 

Don’t Wait to Hear from the IRS or a Contractor

As always, the IRS encourages taxpayers behind on their tax obligations to come forward and either pay what they owe or set up a suitable payment plan. This means there’s no need to wait for a phone call or letter from the IRS or any of its contractors.

Frequently, taxpayers qualify for one of several payment options, and taking advantage of them is often easier than many people think. For more on YOUR OPTIONS see our Blog Post dated April 4, 2017 Choices for Taxpayers Who Can Not Pay Their Tax Bill(s). 
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Monday, July 10, 2017

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IRS Agree On Tax Refund Due Amazon In $1.5B Dispute

we previously posted on March 27, 2017 Amazon Defends It's Pricing and Tax Court Issues the IRS its 2nd Large §482 Defeat On January 5, 2015 we where we discussed that the US Tax Court ruled against the IRS in this $1.5 billion transfer pricing dispute with Amazon, which currently has experts calling for a re-examination of the agency's valuation methodologies in order to prevent it from wasting its own resources and those of taxpayers.
Using methodologies the U.S. Tax Court had already knocked down in another transfer pricing lawsuit against Veritas Software Corp. in 2009, the IRS made substantial transfer pricing adjustments that reallocated more income from Amazon’s European subsidiary to its U.S. operations and assessed more than $234 million in deficiencies for the 2005 and 2006 tax years. The IRS’ position could have resulted in an overall tax liability of $1.5 billion, plus interest, Amazon estimated.
Now according to Law360,, the IRS agreed that it owes the online retail giant $9.5 million for the 2005 tax year, but that there is an income tax deficiency of $2.5 million from the following year.

In a stipulation entered by the court, the IRS and Amazon agreed that the company had overpaid its taxes in the amount of $9.55 million for the tax year ending on Dec. 31, 2005, and that there is a deficiency of $2.54 million in income tax due from Amazon for the tax year ending on Dec. 31, 2006. The computations do not include interest payments due.

Amazon had previously estimated that the IRS’ notices of proposed adjustments issued for a seven-year period, starting in 2005, could have resulted in a tax liability of $1.5 billion plus interest.

The case is Inc. & Subsidiaries v. Commissioner of Internal Revenue, case number 31197-12, in the U.S. Tax Court.
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Friday, July 7, 2017

Apple States That Its Irish Subsidiaries Should be Taxed in the US & US Gov't Agrees To Intervene In Apple's €13B EU Tax Case

Apple has published its defense to the European Commission's accusation that it obtained unfair commercial advantage from its corporation tax agreement with Ireland.
The company states that its profit-making activities were controlled and managed in the US, and so should be taxed there and not in Ireland; and that the Commission has breached Apple's 'fundamental rights' by ordering Ireland to charge it EUR13 billion in taxes.
Now the U.S. government is planning on intervening in Apple Inc.'s lawsuit challenging an approximately €13 billion ($14.85 billion) tax bill in Ireland ordered by the European Union’s competition watchdog, a source familiar with the case said Thursday.

Apple is appealing the European Commission’s August 2016 ruling, which concluded that it had entered into a sweetheart tax deal with the Irish government to “substantially and artificially” lower its taxes.

The commission’s investigations into Apple’s tax arrangements, as well as those of Starbucks Corp., had previously drawn the attention of the Obama administration, which complained that the commission appeared to be unfairly targeting U.S. businesses and that American taxpayers may end up having to foot the bill for foreign tax credits that the companies may be able to claim following a retroactive imposition of taxes.

A source confirmed to Law360 that the federal government has now filed an application with the European Union General Court to have its say on the retroactive application of state aid rules to Apple. The application has not been made publicly available.

The European Commission found that two tax rulings Ireland had issued to Apple in 1991 and 2007, allowing the software giant to allocate almost all of its sales profits to “head offices” that existed only on paper, were in violation of the EU’s state aid rules.

The allocation of profits to head offices, with no employees or physical locations, allowed Apple’s effective corporate tax rate to go down from 1 percent in 2003 to 0.005 percent in 2014 on the profits of the Irish-incorporated subsidiary Apple Sales International, the commission said.

Apple has refuted the commission’s findings, saying that the watchdog misunderstood Irish law and the role of its Irish units in developing intellectual property and failed to recognize that its main “profit-driving activities,” especially the development and commercialization of IP, were controlled and managed in the U.S.

The commission only considered the minutes of board meetings and did not properly assess “extensive expert evidence” that Apple’s profits were not attributable to activities in Ireland, the software giant said.

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