Much Uncertainty About Uncertain Tax Positions

The Internal Revenue Service (IRS) announced in January 2010 a new initiative to require certain businesses to report “uncertain tax positions” on a new schedule filed with their annual tax returns. Draft schedules and instructions issued in April 2010 clarified some of the mechanical aspects of the new requirement but left many open issues and questions. The IRS proposal built on requirements by the Financial Accounting Standards Board (FASB) in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The standard requires companies, in their financial statements, to reserve some of the benefits from any position taken on their tax returns unless it is more likely than not that the IRS would fully concede the issue prior to litigation if it arose during an audit.The article describes the proposals and then discusses concerns and open issues. The most significant concerns include that, as a practical matter, information asymmetry may result in overly aggressive positions taken by the IRS and the IRS may not have the administrative capacity to use the additional information properly. The proposal also raises concerns about privilege and waiver, particularly with respect to the work-product doctrine and tax accrual workpapers

Indian Tribes, Civil Rights, and Federal Courts

A citizen’s civil rights include protections against certain actions by three different governments – federal, state, and tribal. If the federal or a state government violates your civil rights, you can seek a remedy in federal court, including injunctive or declaratory judgment and damages. But the Supreme Court decided in Santa Clara Pueblo v. Martinez that that – other than habeas corpus relief – you cannot challenge a civil rights violation by an Indian tribe in federal court. The decision has resulted in a significant amount of controversy and proposals that Congress explicitly grant such jurisdiction. This article reviews the Supreme Court’s decision and evaluates whether Congress should overturn the decision in Martinez.General considerations concerning whether access to federal courts is desirable include questions about the relative capabilities of other courts, invasion of the autonomy of subordinate sovereign governments, and the deterrence effect of federal jurisdiction. However, the article concludes that these considerations illuminate the issue but do not clearly resolve it.Finally, the article addresses whether the problem of civil rights violations by Indian tribes is serious. How frequent and severe must civil rights violations become before federal jurisdiction is warranted? A relevant comparison is to Congress’s decision to grant federal jurisdiction over civil rights violations by state governments. That comparison supports a conclusion that the answer given by Martinez should not be overturned. Based on the available evidence, violations by tribal officials are relatively infrequent. While the problem of civil rights violations by state governments was serious enough to outweigh concerns associated with federal jurisdiction over subordinate sovereigns, the problem of civil rights violations by tribal governments is not

Prosecuting Conduit Campaign Contributions - Hard Time for Soft Money

In recent years, there have been several high-profile prosecutions for violations of the Federal Election Campaign Act, involving contributions nominally by one individual but funded or reimbursed by another individual deemed to be the true contributor. Prosecutions of these “conduit contribution” cases have been surprising in at least three significant respects. First, the prosecutions have been based on violations of FECA’s reporting requirements and may not have involved any violations of the substantive prohibitions or limitations of contributions. Second, the defendants were the donors rather than campaign officials who actually filed reports with FECA. Third, the cases were prosecuted as felonies under general criminal statutes rather than FECA’s misdemeanor penalties for making contributions under a false name.The article analyzes the prosecutions and advances three independent arguments for the elimination or limitation of felony prosecutions for conduit campaign contributions.First, Supreme Court mens rea jurisprudence suggests that felony prosecutions regarding this specific behavior should, at a minimum, require a showing that the defendant was aware of the prohibition she is charged with violating. There are strong reasons for not relying on prosecutorial discretion in determining whether to prosecute a particular violation as a felony or as a misdemeanor.Second, the passage of the specific misdemeanor provisions in FECA strongly suggests that Congress preempted the application of general criminal statutes for false statements, mail fraud, or conspiracy to defraud. The preemption argument has been rejected by the courts based on incomplete analysis. This argument also introduces the concept of “greater included offense.”Third, criminal felony (and possibly misdemeanor) prosecutions of campaign contributions under a false name constitute a serious infringement of First Amendment rights of political speech and association. The Supreme Court’s decision in Buckley v. Valeo does not justify infringing on First Amendment rights in the specific context of conduit contributions. These concerns justify rethinking our approach to prosecutions related in federal election campaign law. Proponents of campaign regulation may be concerned about weakening enforcement, but enforcement is unlikely to be hampered substantially

Indian Tribes, Civil Rights, and Federal Courts

This Article reviews the Supreme Court\u27s decision and proposals for congressional enactment of such federal jurisdiction

Surviving IRS Examinations and Appeals

This article summarizes the statutory, regulatory and administrative rules and procedures that apply to IRS civil tax examinations and Appeals proceedings, including alternative dispute resolution procedures. The focus of this paper is on field examinations, rather than service center examinations, correspondence examinations, or office examinations. In addition, it attempts to answer some of the basic questions that taxpayers often ask their advisors and representatives when they are the subject of an IRS civil tax examination: Why was I selected by the IRS for audit? How long will this audit take? Why do the agents want all this information, documents, data, etc.? Do I have to give the agents all the information, documents, data, etc. they have requested? What can the IRS do if I don\u27t cooperate in the audit? Can I recover from the IRS the fees and expenses I incur in the audit an din the Appeals proceeding? Should I ask for an Appeals conference

Tax Shelter Disclosure and Penalties: New Requirements, New Exposures

One of the primary weapons in the battle against tax shelters has been mandatory disclosure to the IRS. The American Jobs Creation Act of 2004 built on this approach by clarifying and making consistent the various disclosure requirements and strengthening penalties for non-disclosure. To uncover abusive transactions, Congress drew the boundaries of disclosure so broadly that even legitimate tax planning transactions are covered. To understand the dangers in the new rules, one must look at the broad range of transactions covered, the participants covered, and the harsh penalties for nondisclosure. - Transactions Covered. The disclosure requirements apply to six categories of reportable transactions. Although the Service has established angel lists excluding some transactions from the broad definitions, many clearly legitimate transactions still will have to be disclosed. - Participants Covered. The disclosure requirements apply to participants in the transaction and material advisors, which are also broadly defined terms. For example, an exempt organization that is an accommodation party in a reportable transaction is a participant, even though the exempt organization does not receive any tax benefits from the transaction. - Penalties. The Act added a new penalty for a taxpayer\u27s failure to disclose a reportable transaction. This penalty applies even if a court rejects the Service\u27s view of the tax treatment of the transaction. The Act also strengthened the accuracy-related penalty for underpayments. However, this penalty is imposed only if the Service successfully challenges the tax treatment of the transaction. The new tax shelter disclosure and list maintenance requirements are complex, with significant penalties for non-compliance. The IRS is likely to apply these penalties strictly and aggressively. Anyone involved in virtually any capacity in any substantial transaction will need to evaluate their exposure carefull

Tax Court Find Stars Transaction Lacks Economic Substance

In Bank of New York Mellon Corp. v. Commissioner, the Tax Court found that a structured trust advantaged repackaged securities (“STARS”) transaction entered into by BNY Mellon lacked economic substance, and disallowed foreign tax credits of $199 million as well as transactional expenses of$8 million. BNY Mellon is the first test case to emerge from the IRS’s attempts to disallow tax benefits to several financial institutions that participated in the STARS transaction.The STARS transaction is one of a number of different transactions that the IRS refers to as “foreign tax credit generators.” These transactions generally rely on inconsistent treatment of the same transactions under the tax law of different jurisdictions. The inconsistent treatment may relate to the classification of an entity, the distinction between debt and equity, timing of income recognition, or various other aspects.Some foreign tax credit generators result in foreign tax credits being attributed to and used by a U.S. taxpayer who does not bear the economic burden of those taxes. In the STARS transaction, however, the U.S. taxpayer does bear the economic burden of the foreign taxes for which it claims a credit. The U.S. taxpayer also indirectly shares in the benefits the counterparty obtains in the U.K. tax system. The U.S. taxpayer’s tax position properly reflects the economics of the transaction, and the U.K. tax authority agrees with the treatment of the transaction for U.K. tax purposes. Nevertheless, the IRS has challenged these transactions and disallowed the U.S. taxpayer’s claimed foreign tax credits

TEFRA-Partnership Refunds: Five Steps to Protect a Partner’s Rights

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established a unified procedure for determining the tax treatment of partnership items at the partnership level rather than the partner level. The TEFRA-partnership refund procedures differ from the refund claim procedures that apply to other taxpayers. For a TEFRA partnership, a refund claim is an administrative adjustment request (AAF) and a notice of deficiency is a notice of final partnership administrative adjustment (FPAA). Procedures for the assessment of additional tax attributable to partnership items have received much attention in recent years, but the procedures concerning refunds are complex and full of traps.The tax matters partner (TMP) plays a key role in protecting the partners’ rights, but the TMP’s interests may differ significantly from those of other partners. Because of potential conflicts of interest, an individual partner should not rely entirely on the TMP. This article recommends five steps a taxpayer should take to protect its rights in a TEFRA partnership.First, file an AAR before the IRS issues an FPAA; otherwise, it will be too late. Outside of the TEFRA-partnership context, taxpayers can simply default on a notice of deficiency, pay the resulting assessment, and then file a refund claim. With a TEFRA-partnership, the partners may no longer file an AAR after the IRS issues an FPAA so the only way to pursue a taxpayer-favorable adjustment on other issues is to contest the FPAA in court. Failing to do so will permanently forfeit any such favorable adjustments.Second, review the complex statute of limitations for AARs carefully. There are significant differences between the statute of limitations concerning refund claims and refund suits, outside the TEFRA-partnership context, and the statute of limitations for AARs and related judicial review. Assumptions based on other statutes of limitations could easily result in forfeiting claims. Third, file a separate AAR and do not rely entirely on the AAR filed by the TMP. Individual partners can always contest an FPAA in court, even if the TMP chooses not to, so their rights are protected. But if the IRS disallows an AAR filed by the TMP, only the TMP can file a petition for judicial review and redetermination. Individual partners should consider filing their own AAR and not relying on the TMP’s. The duplicative AAR will likely be rejected but would preserve the partner’s right to judicial review if the TMP’s AAR is disallowed and the TMP does not file a petition in Tax Court.Fourth, consider extending the partner-level statute of limitations for assessments to avoid forfeiting potential refund claims. If the TMP consents to an extension of the statute of limitation for the assessment of tax attributable to partnership items, that will extend the statute of limitations for filing an AAR. If the TMP has not extended the statute of limitations, and an individual partner needs more item to prepare an AAR, the partner may need to extend the partner-level statute of limitations.Fifth, if beyond the statute of limitations for an AAR, consider alternative methods of recovery. For example, the partner may request a discretionary adjustment by the IRS under Section 6230(d). In appropriate circumstances, a partner can seek to apply the statutory mitigation provisions or the judicial doctrine of equitable recoupment.The TEFRA procedures for AARs provide all partners a way to recover overpayments attributable to partnership items. The procedures are complex, however, with many potential pitfalls. Any partner who identifies a potential refund item for the partnership should thoroughly review all of the applicable requirements and carefully assess what it must do to preserve its rights. In particular, a partner may find it beneficial to file its own AAR, or include refund items in a petition for readjustment of an FPAA, in case the TMP cannot or will not act in the partner’s interests. Under some circumstances, it may even be appropriate for a partner to extend its own statute of limitations to protect its interests

Navigating TEFRA Partnership Audits in Multi-Tiered Entity Structures

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established a unified procedure for determining the tax treatment of partnership items at the partnership level rather than the partner level. Although these rules addressed a serious and real administrative problem in the assessment of partnership level deficiencies, they also created a complex process with many new problems and potential traps. One particularly unique set of challenges arises in the context of multi-tiered entities.Multi-tiered entities are partnerships that have a partnership or other pass-through entity as a partner. The pass-through partner is commonly referred to as a “tier,” and the partnership in which it holds its interest is the “source” partnership. The partners who hold an interest in the source partnership through a pass-through partner are “indirect partners” of the source partnership. TEFRA procedures apply to all partners, whether direct partners, pass-through partners, and indirect partners. Pass-through partners and indirect partners face unique issues in navigating the TEFRA rules. This article highlights some common issues.The Internal Revenue Service (IRS) provides notices of the beginning of an audit to the partnership and “notice partners,” generally those partners identified on the partnership’s return. Pass-through partners are required to pass the information along to their partners, but any partnership proceedings and adjustments apply to indirect partners even if they did not receive notice of the proceedings. Indirect partners therefore may wish to follow the special procedure to become notice partners and therefore receive notifications directly from the IRS. This may be particularly important if the pass-through partner is in bankruptcy or the indirect partner holds less than 1% interest in a large partnership. All partners have a right to participate in certain administrative proceedings. However, some rights are limited to notice partners, such as the right to file a protest to a notice of final partnership administrative adjustment (FPAA) or the right to file a petition for redetermination in Tax Court. Further, the tax matters partner (TMP) can reach a settlement with the IRS that binds all partners who are not notice partners, while notice partners can accept the settlement or not. Thus, indirect partners may wish to protect these rights by follow the special procedure to become notice partners.Finally, the statute of limitations for assessment of taxes attributable to partnership items is longer for “unidentified partners”; it does not expire until one year after the unidentified partner is identified to the IRS. Becoming a notice partner may therefore prevent an indefinite extension of the statute of limitations for indirect partners. This is particularly important if the indirect partner, whether knowingly or unknowingly, takes a position on its tax return that is inconsistent with the partnership’s return.In many ways, TEFRA reduced the procedural burden on partners by streamlining the process and reducing overall audit costs. In exchange for this benefit, TEFRA’s procedures in many cases shift the notice burden to pass-through partners and limit an indirect partner’s right to control the resolution of its tax liability. Pass-through partners and indirect partners should approach a TEFRA audit with caution. A pass-through partner should take care to comply with TEFRA’s notice requirements to avoid potential liability to its partners. Likewise, indirect partners should protect their rights to participate in partnership-level proceedings and to control the resolution of their own tax liability

Computing Interest on Overpayments and Underpayments: How Difficult Can It Be? Very!

Taxpayers often assume that the difficult part of a tax dispute is resolving the tax liability and penalties, while interest computation is fairly straightforward. In the authors\u27 experience, however, interest determinations are as subject to controversy and prone to error as tax liability determinations. The Article explores some of the areas that taxpayers should review carefully in the process of finalizing interest computations. - Frequent Errors. The Article reviews twelve areas in which, even though the law is settled and the facts are usually clear, the Service\u27s interest computations frequently include mistakes. Taxpayers need to be aware of these provisions, gather the necessary facts to support their legal positions, and review interest computations carefully to make sure the Code is applied properly. - Disputed Issues. The Article also discusses five Code provisions for which the courts have not yet reached definitive interpretations. The Service has won some initial victories, but several taxpayers are continuing to litigate these issues under alternative theories or in different jurisdictions. The decision whether to pursue an issue, and the choice of the particular legal theory and strategy to use, will depend on a taxpayer\u27s particular facts and circumstances. At a minimum, taxpayers should carefully evaluate the issue so that a decision regarding a claim can be made before the statute of limitations expires. - Procedural Considerations. Finally, the Article discusses out a planning opportunity to maximize interest benefits, addresses statutes of limitations, and points out a potential problem from the interaction of interest computations with Tax Court Rule 155 computations. Just as it is rare for a large corporate tax audit to yield no change, it is equally unlikely the first evaluation of interest for a tax period will remain unchanged after careful scrutiny. It is always in the best interest of the taxpayer to review thoroughly the factual, computational, and legal basis for the interest computations presented. When the tax liability has been finally determined, the hard work of interest resolution has just begun