Monthly Archives: August 2021

The Court of Federal Claims has held in, McCaffery v. U.S., (Ct Fed Cl 8/9/2021) 128 AFTR 2d ¶2021-5115, that the Code and regs are clear that when an envelope does not contain a postmark, the taxpayer cannot use extrinsic evidence to prove when they mailed it. The court disagreed with a Tax Court case that had found that a taxpayer could use extrinsic evidence in the absence of a postmark.

The Code Sec. 7502(a)(1) deemed delivery rule provides that the date of the US Postal Service (USPS) postmark stamped on the cover a return, claim, payment, etc. ("claim") is mailed is deemed to be the date of delivery to the IRS.

If the postmark does not bear a date on or before the last date for filing the claim, the claim is considered not to be timely filed, regardless of when the claim is deposited in the mail. (Reg §301.7502-1(c)(1)(iii))

If the postmark on the envelope is made by the USPS but is not legible, then the person who is required to file the claim has the burden of proving the date that the postmark was made. (Reg §301.7502-1(c)(1)(iii)) The court here said that this reg allows the taxpayer to provide extrinsic evidence of the date of mailing.

But, regardless of Reg §301.7502-1(c)(1)(iii), the Tax Court has held that if there is no postmark, then a taxpayer can use extrinsic evidence to prove the date of mailing. "There is nothing at all in the statute or legislative history indicating what Congress intended where no postmark is affixed due to oversight or malfunction of a machine... [I]n these circumstances, [the Court's] task... is to ask what Congress would have intended on a point not presented to its mind, if the point had been present. The Court concluded that extrinsic evidence should be admitted to prove the date of mailing for purposes of the deemed delivery rule not only when a postmark is illegible, but where it is absent. (Sylvan, (1975) 65 TC 548)

The Tax Court has reiterated its holding in Sylvan numerous times. (Williams, (2019) TC Memo 2019-66)

Mr. McCaffery had until April 18, 2017 to file a refund claim. He alleged that he mailed the claim to the IRS via the USPS on April 17. The IRS received the claim on April 24.

The claim's envelope had postage stamps that had been printed at a USPS kiosk with the phrase "Sold on April 17, 2017." McCaffery had an email that showed he emailed his accountant on April 17 saying that he had just mailed the claim.

But the envelope did not contain a postmark.

The IRS denied the claim since the envelope did not have a postmark and the IRS received the claim after the deadline.

McCaffery argued that, as per Sylvan, he should be able to use extrinsic evidence (the date printed on the stamps and the email to the accountant) to show that the envelope was mailed on April 17.

The Court of Federal Claims agreed with the IRS that the claim was not timely filed. The court said that the plain text of Code Sec. 7502(a) says that the deemed delivery rule only applies if a postmark or equivalent marking was made, that is, the date of the postmark is what matters, not the date of the mailing. 

The court said the Sylvan was erroneous for two reasons. One, the Tax Court was mistaken that the IRC contains "nothing at all... indicating what Congress intended" in cases of absent postmarks. Code Sec. 7502 contains a deemed-delivery rule that is textually inapplicable when a postmark is missing. There is thus no gap to be filled; a late-received envelope lacking a postmark is simply untimely, whatever the extrinsic evidence might be, the court said. The court added that, "when a court treats circumstances covered by a general rule as falling into a gap, the court is not really asking what Congress would have intended, but presuming that the statute should say something different."

Two, when Sylvan was decided, the IRS had already promulgated Reg §301.7502-1(c)(1)(iii) providing for extrinsic evidence of the contents of illegible postmarks, but not absent ones. The court here said that by sanctioning proof by extrinsic evidence in other circumstances, the Tax Court merely created a new exception that neither Congress nor the administering agency authorized.

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The Tax Court has held in Toulouse, 157 TC No. 4 (8/16/2021), that neither article 24(2)(a) of the U.S. income tax treaty with France nor article 23(2)(a) of the U.S. income tax treaty with Italy, allows a taxpayer to use a foreign tax credit to offset IRC §1411 net investment income tax.

IRC 

§

27 

provides for a credit against "the amount of taxes imposed by foreign countries * * * against the tax imposed by this chapter." IRC §27 is in chapter 1 of the Code. This credit is often referred to as the foreign tax credit.

IRC §1411 provides for a tax on net investment income (NII). Code Sec. 1411 is in chapter 2A of the Code.

Article 24(2)(a) of the U.S.-France Tax Treaty provides: "In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen * * * of the United States as a credit against the United States income tax: * * *the French income tax paid by or on behalf of such citizen." Similar language is found in article 23(2)(a) of the U.S.-Italy Tax Treaty. Both treaties are referred to below as the Tax Treaty.

Ms. Toulouse, a US citizen living in France, claimed a foreign tax credit on her US tax return for income taxes she paid in France and Italy. The credit was used to offset her net investment income tax (NIIT).

The IRS denied the credit.

The Tax Court agreed with the IRS that neither the Code nor the Tax Treaties allow a taxpayer to offset NIIT with foreign taxes paid.

First The Court Said That Clearly The Code Does Not Allow A IRC §27 Foreign Tax Credit To Be Used To Offset NIIT.

The foreign tax credit only applies to taxes impose in chapter 1. The NIIT is found in chapter 2A. Ms. Toulouse had argued that the placement of the NIIT in chapter 2A was mere happenstance and a clerical choice. But the Court said that the enactment the NIIT as part of chapter 2A is a clear expression of congressional intent that credits against section 1 will not apply against the NIIT.

Second, the Tax Treaties do not allow a credit against NIIT for foreign taxes paid. The terms of the Tax Treaties say that such a credit is only allowed "in accordance with the provisions... of [U.S.] law." The Court said that U.S. law, in this case the Code, doesn't allow a credit against NIIT for foreign taxes paid.

Ms. Toulouse questioned the purpose of the Tax Treaties if there is no independent, treaty-based credit and a credit is allowable only if it is provided in the Code. But the Court pointed out that other provisions of the Tax Treaties may well provide for credits that are unavailable under the Code. But the provisions cited by Toulouse, by their express terms, do not so provide.

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According to Law360, Federal legislation that would require cryptocurrency brokers to report transactions to the Internal Revenue Service marks the latest step in the government's effort to regulate the industry, and it could signal a future push for international reporting requirements as well.

Crypto brokers, including asset exchanges such as Coinbase and Kraken, may experience some growing pains as they adjust to the new rules, which would apply the current tax reporting requirements for stockbrokers to those that carry out crypto transactions on behalf of others. Although the measure was an unexpected addition to a $1.2 trillion infrastructure bill, the policy goals underlying the legislation shouldn't have been a surprise, specialists say.

The measure is part of the government's larger effort to take the third-party reporting rules that exist for more established areas of the financial industry and apply these requirements to the cryptocurrency world. When it comes to expanding current bank disclosure rules, for example, the U.S. Treasury Department recently proposed creating an international exchange system for cryptocurrency account information that's similar to the Foreign Account Tax Compliance Act.

The basic structure of FATCA will likely end up applying to cryptocurrency, but the timing is unclear, according to Joshua Smeltzer, counsel at Gray Reed & McGraw LLP.

The digital asset reporting measure is part of the Infrastructure Investment and Jobs Act, a bipartisan spending proposal that includes $550 billion to improve public transportation and utilities. The crypto provision is expected to raise about $27.9 billion over the next decade by expanding Internal Revenue Code Section 6045, a measure that currently covers tax reporting requirements for brokers working with stocks, bonds or other financial instruments.

Specifically, the bill would amend Section 6045 to include "digital assets" as items that brokers must report when they carry out transactions on behalf of others. The legislation stems from the IRS' treatment of cryptocurrency as property, meaning that gains and losses must be reported by the digital assets' owners and now, under the bill, by the brokers as well.

In June, before the introduction of the crypto measure, IRS Commissioner Chuck Rettig stressed the need for a legislative mandate for third-party tax information reporting on cryptocurrency. Such a mandate would help the IRS go beyond the line it added to Form 1040 for tax year 2020 requiring confirmation of the sale, delivery, exchange or acquisition of any cryptocurrency, he said.

In the meantime, the provision has come under attack from the crypto industry following the circulation of draft language in late July. One industry group executive decried the legislation as "a last-minute tax provision buried in a massive must-pass infrastructure bill."

Although asset exchanges, or at least, the more established ones, have already been collecting customer information in anticipation of third-party rules, they're expected to encounter a transition period as they gather more data to comply with this new requirement. The degree of difficulty that's predicted during this time, however, is up for debate.

As some see it, the IRS' successful enforcement of John Doe summonses against Coinbase and Kraken signaled to the crypto industry that asset exchanges needed to start collecting information under anti-money laundering and know-your-customer, or AML/KYC, requirements for the financial industry.

A court document related to the IRS' summons against Coinbase in 2017 highlighted the dearth of information that existed about crypto users at the time. According to a filing from the IRS agent, virtual currency transactions could be conducted through aliases, pseudonyms and email addresses.

Meanwhile, Coinbase co-founder and CEO Brian Armstrong tweeted on Aug. 10 that "our goal here is simply parity with traditional finance."

He added, "We should ensure that true brokers report tax info, but every other crypto ecosystem participant (of which there are many, with new ones being created all the time) are not penalized."

As for layering W-9 requirements on top of the information that exchanges are already collecting, there are varying takes on the challenges that these trading platforms may face.

Trading platforms may also face some challenges with getting taxpayer information — at least from existing customers, according to Jonathan Sambur, a partner at Eversheds Sutherland.

Although the crypto reporting measure would only affect U.S. exchanges, some specialists are also eyeing international reporting efforts on the horizon, including Treasury's FATCA-esque proposal and a similar project at the Paris-based Organization for Economic Cooperation and Development.

Meanwhile, the OECD is working on a cryptocurrency version of its common reporting standard, an information sharing system that's designed to build on FATCA by providing a template for other countries to exchange and collect taxpayer data.

Although the details may not yet be clear for potential future reporting requirements, either international or domestic, the overall outlook seems to be heading in the direction of additional disclosure rules.

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The IRS has released a new draft of Form 8857, Request for Innocent Spouse Relief, and accompanying draft instructions. Among other changes, the 2021 draft Form 8857 and draft instructions reflect the Taxpayer First Act’s (TFA; PL 116-25) limitation on the Tax Court’s review of IRS innocent spouse determinations.

When married individuals file a joint return ("joint filers"), they become jointly and severally liable for any tax due on that joint return. Joint and several liability means that the IRS can collect the entire amount of any tax due from either spouse who signed the joint return. (Instructions to Form 8857)

IRC Sec. 6015 provides different types of relief from this joint and several liability (innocent spouse relief). A joint filer uses Form 8857 to request innocent spouse relief. (Instructions to Form 8857)

Married people who did not file joint returns, but who lived in community property states, may request relief from liability for tax attributable to an item of community income. (Instructions to Form 8857)

The TFA added Code Sec. 6015(e)(7), which changed the scope of the Tax Court's review of requests for innocent spouse relief. Under Code Sec. 6015(e)(7), the Tax Court's review of an IRS determination denying a request for innocent spouse relief is limited to (a) the administrative record "established at the time of the determination," and (b) any additional newly discovered or previously unavailable evidence.

Both the 2021 draft of Form 8857 and the 2021 draft instructions alert requesting spouses that they need to make the administrative record as complete as possible because Code Sec. 6015(e)(7) limits the Tax Court's review of IRS denials of innocent spouse relief requests.

Both draft form and instructions also reference IRS Publication 971, Innocent Spouse Relief. Pub 971 contains descriptions of the factors the IRS considers when evaluating claims for innocent spouse relief, as well as other helpful information for requesting spouses.

Also, the 2021 draft Form 8857 :

• allows requesting spouses to change their address of record by checking a box,

• provides the requesting spouse with the ability to authorize the IRS to leave a voice message at the phone number they provided,

• allows the requesting spouse to indicate their primary or preferred language for communicating with the IRS,

• allows the requesting spouse to provide their "best or safest" phone number,

• replaces various checkboxes with spaces for narrative descriptions and explanations about the requesting spouse's situation, and 

• modifies the question "did you sign a joint return" to read "did you intend to file a joint return."

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