DC Cir. Reverses TC - Foreign Partner Not Subject To Tax In US on Sale of Her US Partnership Interest - 5-hour Energy

On November 9, 2023 we posted DC Circ.Told Foreign Partner Liable For $6.5M In Gains Attributable To Inventory where we discussed that the Tax Court held that  a foreign citizen living abroad who sold her share in a U.S. partnership that sold 5-Hour Energy drinks owed federal income tax on $6.5 million in gains stemming from the partnership's sale of inventory.

Now according to Law360, The D.C. Circuit found On July 23, 2024 that a Canadian citizen's $6.5 million in gains from her sale of a U.S. partnership interest in a company that sold 5-hour Energy drinks was not federally taxable as inventory income, reversing a U.S. Tax Court ruling.

In a per curiam decision, a three-judge panel including Chief Judge Sri Srinivasan said Indu Rawat's gain under Internal Revenue Code Section 751(a) was a gain from the sale of a partnership interest, not a gain from the sale of inventory, and therefore exempt from U.S. tax.

"The Inventory Gain Rawat Realized When She Sold 
Her Partnership Interest Is Foreign-Source Income,
As To Which She Owes No Taxes,"
Judge Srinivasan Wrote In The Opinion For The Panel.

Rawat, a nonresident alien, had asked the appellate court to overturn the Tax Court's denial last year of her request for a $2.9 million refund for taxes and penalties she paid on gains connected with selling her 29% interest in a partnership, Innovation Ventures LLC. Her partnership interest is her personal property, which should make the inventory gain also her personal property, which should be taxed where she lived, she had argued.

The Tax Court had adopted the Internal Revenue Service's understanding of Section 751's language, which says inventory items from a partnership "shall be considered as an amount realized from the sale or exchange of property."

But the appellate court found the IRS' argument "difficult to square with the text of Section 751(a), properly understood," Judge Srinivasan said in the opinion.

"A mandate that inventory gain be considered 'ordinary income' differs from a mandate that inventory gain be considered income 'from the sale of inventory,'" the judge said.

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The IRS Still Has 3 Defenses To Fall Back On After Chevron's Demise

According to Law360, the U.S. Supreme Court's landmark decision to eliminate federal agencies' ability to rely on the 40-year-old Chevron doctrine to defend their interpretations of ambiguous laws will likely trigger more litigation against the IRS, but that doesn't mean the agency is completely defenseless against such suits.

The three defense options for the IRS following Chevron's demise include:

1. Administrative Procedure Act

The IRS has recently learned a major lesson in rulemaking after losing several suits brought by taxpayers that criticized its promulgation of certain regulations: Strictly adhere to the APA, including its notice-and-comment procedures.

For a long time, the IRS believed it was immune from most of the requirements of APA because the agency ascribed to the theory known as tax exceptionalism, which is the idea that much of its rulemaking is spared from administrative law requirements.

"Treasury and the IRS, however well-intentioned, have not always been as transparent in their decision-making, as the APA requires," Hickman said. "They haven't always been quite so careful about following the procedural requirements of the APA."

The IRS has since continued to carefully promulgate rules that follow administration law, including those concern the Malta retirement funds as listed transactions and rules that implement the Inflation Reduction Act's clean energy tax provisions.

2. State Farm

As the IRS continues to adhere to administrative law, it will likely look to an APA framework that was set in a Supreme Court's 1983 decision in the State Farm case, which challenged the National Highway Transportation Safety Administration's repeal of safety rules for new vehicles, experts said.

In that decision, the high court said agencies should examine relevant information and provide a satisfactory explanation in implementing a regulation that can meet the APA's arbitrary-and-capricious test, also known as the "hard look" review.

"If you can show the reasoned decision-making and the rational connection between the facts found and the decision made, then the regulation should withstand scrutiny," said Michelle Levin, a shareholder at Dentons Sirote.

However, pursuing this process will likely be time-consuming, Levin said. The IRS is resource-constrained, so "it'll take longer for regulations to get out," she said.

3. National Muffler

The outcome in the Loper Bright case may revive a multifactor test to determine the validity of an IRS regulation that the Supreme Court set in its 1979 decision in the National Muffler case.

In that ruling, the court established a complicated set of factors that judges had to consider in reviewing interpretative regulations, including whether the IRS' construction of the statute was contemporaneous with the law's passage, and the consistency of the commissioner's interpretation.

Courts then relied on the 1979 opinion to determine the validity of IRS regulations when statutes were not clear, even after the Supreme Court established Chevron deference five years later, which was in a case that did not address tax regulations.

That changed in the 2011 opinion in the Mayo Foundation case, in which the justices clarified that Chevron's two-step analysis, rather than National Muffler opinion's multifactor test, applied to ambiguous tax regulations, according to Gil Rothenberg, former chief of the Appellate Section of the U.S. Department of Justice, Tax Division.

Because of the Supreme Court's emphasis on contemporaneousness and consistency in the Loper Bright decision, the courts may return to using the National Muffler case's multifactor test in tax cases, said Rothenberg.

The National Muffler factors, which used to be irrelevant under Chevron, may be coming back to life.

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Think About Adding Challenging Treasury Regulations To Your IRS Audit Strategy?

We previously posted on July 2, 2024 The Demise of Chevron Will Result In Increased Treasury Regulation Challenges, which discussed the demise of Chevron deference as "misguided because agencies have no special competence in resolving statutory ambiguities. Courts do," the Supreme Court's majority opinion said in  Loper Bright case and a similar one called Relentless v. Department of Commer.

Now the US Supreme Court decided Corner Post, Inc. v. Board of Governors of the Federal Reserve System which further exposes regulations to challenge.

This case involved a challenge by Corner Post, Inc., a North Dakota truck stop, to a 2011 regulation issued by the Federal Reserve. This regulation set a cap on the fees that large banks could charge merchants for debit-card transactions. The key issue before the Supreme Court was whether the six-year statute of limitations under 28 U.S.C. § 2401(a) began at the time the regulation was enacted or when the plaintiff was first injured by it.

Background

• In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, specifically through the Durbin Amendment, required the Federal Reserve to set limits on debit-card interchange fees. The final rule was published in 2011.
• Corner Post, Inc. was founded in 2018 and challenged the regulation in 2021, arguing that their claim was timely since they were first affected by the regulation upon their establishment.
• The Federal Reserve contended that the statute of limitations began when the rule was enacted in 2011, not when Corner Post was injured in 2018. Both the district court and the Eighth Circuit sided with the Federal Reserve, leading to an appeal to the Supreme Court.

Supreme Court Decision

• The Supreme Court ruled in a 6-3 decision, holding that a claim under the Administrative Procedure Act accrues when the plaintiff is first injured by the final agency action, not when the rule was first promulgated. Justice Barrett authored the majority opinion, reversing the lower court's dismissal and remanding the case for further proceedings.
• The ruling clarifies that for the purposes of the statute of limitations, the clock starts ticking when a plaintiff suffers a legal wrong due to the agency's action, thus allowing challenges to older regulations if the plaintiff is newly affected.

Implications

• This decision potentially opens the door for other businesses and individuals to challenge older federal regulations, provided they can show they were first injured within the six-year window prior to filing suit, as part of their legal strategy during deficiency or refund proceedings.

Have an IRS Tax Problem?

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Marini & Associates, P.A. 

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or Toll Free at 888 8TAXAID (888-882-9243)

 

IRS Collects $1 Billion in Past-Due Taxes From Millionaires as Compliance Efforts of High-Wealth Groups Continue , corporations, partnerships

On October 20, 2023 we posted IRS Using Inflation Reduction Act Funding To Ensure Large Corporations & High Income Earners Pay Taxes Owed where we discussed that the IRS announced new initiatives to ensure large corporations pay taxes owed. This is in addition to the initiatives to improve compliance among high-income individuals and complex partnerships.

Now according to IR-2024-185 dated July 11, 2024, as part of continuing compliance efforts under the Inflation Reduction Act, the Internal Revenue Service announced the agency has surpassed the $1 billion mark in collections from high-wealth taxpayers with past-due taxes.

As part of larger efforts taking place, the IRS has stepped up activity specifically on 1,600 individuals whose incomes were more than $1 million per year and who each owed the IRS more than $250,000 in recognized tax debt. Since last fall, this IRS compliance effort has generated more than $1 billion in collections from this group, with work continuing in this area.

“With this collection activity, the IRS passed an important milestone in our effort to improve compliance and ensure fairness in the tax system,” said IRS Commissioner Danny Werfel. 

“Our Increased Work In This Area Means These Past-Due 
Tax Bills From High-End Taxpayers Are No Longer Being
Left On The Table, Like They Were Too Often In The Past.”

"The Collection Results Achieved In Less Than A Year Reveal The Magnitude Of What Can Be Achieved Over The Long
Run As Our Inflation Reduction Enforcement Continues
To Ramp Up In The Months Ahead.”

“We continue working to add staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law,” Werfel said. “The additional resources the IRS received under the Inflation Reduction Act are making a difference, both for taxpayers who play by the rules and those who don’t.”

Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated maneuvers that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is continuing to take action to close this gap.

Out of a total of 1,600 of these cases, the IRS has assigned 1,500 to revenue officers, with over $1 billion collected so far. The $1 billion collected through spring represents payments from over 1,200 individuals, with the IRS anticipating the figure to grow in the months ahead.

Have an IRS Tax Problem?

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Marini & Associates, P.A. 

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Fishermen's Sea-Duction Results in Jail Time

According to the DoJ, a Connecticut man pleaded guilty today to evading taxes on income he earned as a commercial fisherman.

According to court documents and statements made in court, Brian Kobus, of Durham, Connecticut, worked as a commercial fisherman and deckhand for fishing companies in Massachusetts. 

After each fishing trip, the companies paid him by check. Despite receiving over $1.4 million in fishing income between 2011 through 2013, and 2017 through 2021, Kobus did not file federal income tax returns or pay the taxes that he owed. 

To conceal the source and disposition of his income from the IRS, Kobus regularly cashed his paychecks from the fishing companies and used the cash to fund his lifestyle. In total, he caused a tax loss to the IRS of approximately $377,839.90.

Korbus is scheduled to be sentenced on October 16, 2024 and faces a maximum penalty of five (5) years in prison. He also faces a period of supervised release, restitution and monetary penalties. 

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

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or Toll Free at 888 8TAXAID (888-882-9243)

 

The Demise of Chevron Will Result In Increased Treasury Regulation Challenges

According to Law360, many tax practitioners had been eagerly awaiting the decision in the Loper Bright case because the IRS has long relied on the Chevron doctrine, established in a 1984 opinion to defend tax regulations in litigation.

The Supreme Court decided to weigh in on the fate of Chevron last year after fishing industry plaintiffs in the Loper Bright case and a similar one called Relentless v. Department of Commerce asked the justices to overturn Chevron to undermine a 2018 National Marine Fisheries Service rule that required fishers to pay part of the cost of having federal compliance monitors aboard their ships.

In Siding With The Fishing Groups, A Majority Of Justices
Held That Chevron Improperly Prioritized The Executive Branch's Legal Interpretations Over The Judicial Branch.

Chevron deference was "misguided because agencies have no special competence in resolving statutory ambiguities. Courts do," the Supreme Court's majority opinion said.

In response to the opinion, U.S. Tax Court Judge Elizabeth Ann Copeland, speaking On June 28, 2024 at New York University School of Professional Studies' tax controversy forum in New York said Treasury and the IRS do have special competence in tax law. 

The Tax Court, She Said, Will Continue To Give 

Considerable Credence To The Agencies' Rules.

Meanwhile, practitioners said the decision will likely embolden more people to file lawsuits against tax regulations they dislike because the IRS no longer has Chevron to lean on.

"Now the IRS will have to defend its regulations on the merits based on what the tax code actually says," said Rob Kovacev, a member at Miller & Chevalier Chtd said.

However, while the Loper Bright decision provides ammunition for taxpayers to dispute regulatory interpretations they disagree with, Tom Cullinan, who was counselor to former IRS Commissioner Chuck Rettig and is now with Chamberlain Hrdlicka White Williams & Aughtry, said that outcome may come at the cost of reduced tax certainty.

One option for the IRS to try to quickly provide some certainty and clarity on tax laws is to issue so-called subregulatory guidance such as notices, announcements, revenue rulings and revenue procedures. 

However, such regulatory guidance does not have the force of law, Michelle Abroms Levin, shareholder at Dentons Sirote, said.

Subregulatory guidance can also be "susceptible to a challenge because there won't be as much of a record to support it unless the IRS makes the record internally," Levin said.

Another option for taxpayers seeking certainty about tax laws and regulations is to challenge them in court and let the judges decide, she said. But there's no guarantee they will get the answer they want, Levin said.

Moving forward, practitioners said, when promulgating rules, the IRS may have to build upon its recent process of actively soliciting public feedback and providing an elaborate explanation in the preamble to regulations explaining why the agency wrote the rules the way it did. 

The IRS has pursued this process in response to recent losses in several lawsuits that challenged tax guidance, such as the listing notices on syndicated conservation easements, for failure to follow the public comment requirements under the Administrative Procedure Act.

JUST IN: The U.S. Supreme Court vacated and remanded on July 2, 2024 a decision denying a whistleblower award to a tipster who reported an improper $60 million tax deduction to the IRS, saying the D.C. Circuit should reconsider its decision following the high court's ruling that overturned the Chevron doctrine.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)