Monthly Archives: November 2023

The Tax Court has determined that a failure to file information returns penalty, assessed by the IRS' Combined Annual Wage Reporting (CAWR) computer program, doesn't require supervisory approval under Code Sec. 6751(b)(1). (Piper Trucking & Leasing, LLC, (2023) 161 TC No. 3)

Piper Trucking & Leasing, LLC, a single-member limited liability company, failed to file Forms W-2 for its employees with the Social Security Administration. The SSA sent Piper two notices regarding the missing forms, but the business never responded. The SSA then referred the matter to the IRS to enforce compliance and assess any penalties.

The referral from SSA and to IRS was conducted via the CAWR program, which automatically sends delinquent employers a Letter 98C asserting a failure to file information returns penalty. If the employer does not respond to the 98C letter, the IRS' CAWR computer program, without any human intervention or supervisory approval, assesses the failure to file penalty.

Piper failed to respond to the IRS' Letter 98C. So, the CAWR program assessed the failure to file information returns penalty against Piper. When Piper failed to pay the penalties, the IRS filed a lien notice, which Piper then protested in a CDP hearing. The Appeals Officer upheld the lien notice. 

Piper was represented throughout the proceedings by its single member. Piper failed to cooperate in the CDP process. And, while Piper timely filed its Tax Court petition protesting the CDP determination, it failed to respond to the IRS' motions and to comply with other court requirements. 

Generally, the IRS can't assess penalties unless the initial determination to assert the penalties is approved in writing by the immediate supervisor of the person making the penalty determination. However, this rule doesn't apply to penalties "automatically calculated through electronic means."

The Tax Court determined that the failure to file penalty was automatically calculated through the CAWR program and, therefore, the penalty assessment didn't require supervisory approval.

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According to Law360, the U.S. Supreme Court should conclude that a one-time mandatory repatriation tax enacted under the 2017 Tax Cuts and Jobs Act is unconstitutional, a couple said Wednesday, urging the justices to reject the federal government's claims that the 16th Amendment allows a levy on unrealized gains.

The government's claims that Congress can impose a tax on any "gain" as income regardless of taxpayer realization throws out the key restriction on federal taxing authority set by the 16th Amendment in the U.S. Constitution, Charles and Kathleen Moore said in a reply brief.

Congress Understood That "These Enormous Pots of
Potential Revenue" Are Not Income And, Therefore,
Are Beyond The Reach Of Taxation, The Couple Said.

That argument, they said, also rejects the precedent the high court established in a 1920 landmark decision in Eisner v. Macomber, which affirmed that the realization of gain is the key attribute of income under the 16th Amendment.

In its own brief filed in October, the government said the Macomber decision has been watered down in subsequent rulings and should play no controlling role in the couple's case.

"That Dictum Was Poorly Reasoned And Has Been Abrogated By Many Later Decisions Limiting Macomber To The Stock-Dividend Context In Which It Arose," The Government Said.

The Moores' latest filing came just weeks before the Dec. 5 oral arguments from parties in the case. In June, the high court agreed to review the case. At issue is the mandatory repatriation tax under Internal Revenue Code Section 965, enacted as part of the 2017 tax reform. 

The Moores were hit with the levy on their investment in a controlled foreign corporation, KisanKraft Ltd., that provides equipment to small-scale farmers in India. They paid about $15,000 on their small stake, and the tax liability was based on earnings retained and invested by the company on earnings the Moores said they never received.

A Washington federal court tossed the Moores' first challenge, a decision that was later affirmed in 2022 by the Ninth Circuit, which said the one-time repatriation tax served a legitimate purpose.

The couple then asked the Supreme Court to review its challenge, filing a petition in February to reverse the Ninth Circuit decision. Since the justices agreed this summer to review the challenge, the case has drawn attention from several stakeholders, some in support of the couple, others in support of the government, and a few that were in support of neither party.

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The Internal Revenue Service expects to issue long-awaited proposed regulations on how to treat offshore profits that already have been taxed in the U.S. during the first half of next year, an agency lawyer said Tuesday.

Paul McLaughlin, special counsel for the IRS Office of Associate Chief Counsel, International, said the agency plans to publish those proposed rules sometime in the first half of 2024. McLaughlin spoke during a tax conference hosted by the American Bar Association in Philadelphia.

According to Law360,  while the rules won't be exhaustive, the rules for repatriating previously taxed earnings and profits, or PTEP, foreign income immediately taxed in the U.S., will address several important issues, including how to account for PTEP at both the U.S. shareholder and foreign corporation level, he said.

The rules will also address how to account for currency loss or gain when calculating PTEP and various other issues dealing with controlled foreign corporations owned by partnerships, McLaughlin said.

Officials have been indicating since at least 2020 that the PTEP regulations would be published as rulemakers have grappled with a bevy of complicated issues related to interactions between tax laws.

The general regulations would follow anti-abuse rules that Treasury has already released for Internal Revenue Code Section 245A, a measure enacted under the 2017 Tax Cuts and Jobs Act that lets companies bring home certain foreign-sourced earnings tax-free with a 100% dividends-received deduction.

Jones said that the agency expects to issue rules on those this provision by the end of the year.

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According to Law360, a securities partnership based in the Cayman Islands owes federal income taxes on earnings connected with the management of its assets by a New Jersey advisory firm, the U.S. Tax Court ruled in YA Global Investments LP et al. v. Commissioner of Internal Revenue, docket numbers 14546-15 and 28751-15, saying the relationship constitutes engagement in a U.S. business.

The advisory firm's regular participation qualified the offshore partnership, YA Global Investments LP, as being engaged in a U.S. business, making it liable for withholding taxes, the Tax Court said in an opinion. Under Internal Revenue Code Section 1446, the partnership is required to pay tax on the portion of its income effectively connected with its U.S. business that was allocated to foreign partners, according to the opinion, which upheld partnership adjustments by the Internal Revenue Service for 2006 through 2008.

The IRS Had Argued That The Activities Of The Advisory Firm, Yorkville Advisors GP LLC, Were Attributable To YA Global Because The Partnership Had No Employees And Couldn't Perform Any Activities Itself, According To The Opinion.

YA Global had argued that Yorkville was its service provider rather than an agent whose activities could be attributed to the partnership for determining whether it was engaged in a U.S. business.

The court reasoned that YA Global, which provided funding to portfolio companies in exchange for stock and other securities, maintained control over Yorkville and expressly appointed the advisory firm as the partnership's agent in its investment management agreements. 

Furthermore, the activities that Yorkville performed on behalf of the partnership were "continuous, regular, and engaged in for the primary purpose of income or profit," meeting the requirements for engagement in a U.S. business as defined by case law and under IRC Section 864(b), the court said.

Planning Point - Need to staff foreign entities for them to be recognized as separate from US affiliates.

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