Monthly Archives: November 2023

According to Law360,  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, the U.S. government told the D.C. Circuit in he case is Rawat v. Commissioner of Internal Revenue, case number 23-1142, in the U.S. Court of Appeals for the District of Columbia Circuit.

While Indu Rawat claimed that the inventory gains, like her partnership interest, should have been taxed as her personal property in the country where she lives, the government argued in a brief Tuesday that the gains were subject to an exception for inventory property.

Income from personal property sales, including partnership interests, by nonresidents is generally sourced to the country where the taxpayer lives and is therefore not taxable under Internal Revenue Code Section 865(a)(2), according to the brief. However, Rawat's gains are governed by an exception under IRC Section 865(b)(1) , which says income from the sale of inventory is subject to taxation according to the location where the inventory was produced, purchased or sold — in Rawat's case, in the U.S., the government said.

Furthermore, IRC Sections 751 and 741, which govern inventory items and gains and losses, require that in a partnership sale, the income from inventory sales should be severed from the gain of the sale and treated separately and as an inventory sale, the government said.

Rawat, a Canadian citizen who lived in India, sold her 29% interest in Innovation Ventures LLC, a U.S. partnership that sold consumer products including the energy drinks, in 2008 for a $438 million promissory note, according to the brief. The partnership later sold inventory for $22.3 million, of which $6.5 million was Rawat's share.

After an IRS audit of the partnership's returns, the agency determined Rawat owed $2.3 million in taxes on the inventory gain. Rawat paid the tax, plus penalties and interest, and challenged the agency's determination in U.S. Tax Court, which in May sided with the IRS and denied Rawat a $2.9 million refund.

Rawat's appeal of the decision to the D.C. Circuit incorrectly argues that IRC Section 741 allows her partnership interest to be classified as a single interest in a capital asset, the government said. Rawat's argument ignores the law's explicit exemption for inventory items, according to the government.

Furthermore, Rawat wrongly claims that her sale of the partnership stake wasn't connected to the U.S.-based business of selling energy drinks, relieving her of the requirement to pay tax to the U.S., the government said. She argued that while she is considered to be in the energy drink business, her gain was derived from the sale of the partnership interest.

But That Is Only True With Respect To Her Noninventory
Gain Under The Inventory Exception Laid Out In
IRC Section 865, The Government Said.

Rawat also incorrectly invoked "the entity theory" of partnership law to conclude that the income from her property shouldn't be separated from the rest of her profits for tax purposes, the government said. However, the Tax Court correctly held that the exception for inventory property applies, according to the government.

Read more at: Tax Times blog

According to Law360, House Republicans passed legislation to rescind $14.3 billion in IRS funding to pay for an aid package for Israel, but resistance in the Democratic-led Senate and public support for the agency's recent changes will likely insulate the agency from the latest attempt to cut its funding.

The Israel Security Supplemental Appropriations Act, which the House passed 226-196 on Thursday, would rescind unobligated funding that the Inflation Reduction Act provided to the Internal Revenue Service for enforcement and operations support. It would also claw back funding for the agency's task force that is designing an IRS-run free electronic tax return filing system, which the agency has said will launch in the 2024 filing season.

• The IRS already has seen $21.4 billion of the Inflation Reduction Act's original $80 billion funding boost clawed back under the Fiscal Responsibility Act. 
• While $1.4 billion was immediately rescinded, President Joe Biden and then-House Speaker Kevin McCarthy, R-Calif., also agreed to cut $10 billion of the agency's funding in each of the 2024 and 2025 fiscal years.

While newly elected House Speaker Mike Johnson, R-La., has said he's hopeful the bill will get Democrats' votes, Senate Majority Leader Chuck Schumer, D-N.Y., has said lawmakers in his chamber will work on their own emergency aid bill for Israel that will also include aid for Ukraine and humanitarian aid for Gaza. 

Read more at: Tax Times blog

On August 9, 2023 we posted Deadline To File TC Petition is Midnight EST on the Last Day To File & TC Dismisses 11 Second Late e-Filed Petition, where we discussed that in Sanders, (6/20/2023) 160 TC 16, the Tax Court dismissed a pro se taxpayer's petition because it was e-filed 11seconds late. 

Now The Tax Court Has Held That The 90-Day
Deadline For Filing Petitions With The Court
In Deficiency Cases Is Jurisdictional.

The Court pointed out that any appeal of its decision would presumptively lie in the Court of Appeals for the Fourth Circuit, which has not yet issued a precedential, published opinion as to whether the 90-day deadline is jurisdictional. (Sanders, 161 TC 8 (2023))

The IRS had issued a notice of deficiency to a taxpayer. The taxpayer filed her petition with the Tax Court three days after the expiration of the 90-day period, as extended by Code Sec. 7503, to file a petition disputing the notice of deficiency under Code Sec. 6213(a).

The IRS moved to dismiss the case for lack of jurisdiction.

The Tax Court held that the 90-day deadline for filing petitions with this Court in deficiency cases is jurisdictional. Hence, the petition in this case was untimely filed, and the Court dismissed the case for lack of jurisdiction.

The Tax Court noted that it was reaffirming its prior holding in Hallmark Research Collective v. Commissioner, 159 TC 126 (2022).

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Read more at: Tax Times blog

According to Law360, the Internal Revenue Service and several international partners created well over 50 leads on potential tax crimes and money laundering involving cryptocurrency during a joint action this week, the agency's Criminal Investigation chief said Thursday.

The Joint Chiefs of Global Tax Enforcement, or J5, gathered criminal investigators and financial intelligence units from Canada, Australia, the Netherlands, the United Kingdom and the U.S. for a "cyber challenge," Jim Lee, chief of IRS Criminal Investigation, said during a virtual news briefing. The group's fifth challenge to drive leads on tax crimes focused on data mining and financial reports with the help of data scientists and industry experts from cryptocurrency companies Chainalysis, BlockTrace, and AnChain, according to Lee.

"These Are What I Consider, After A Briefing,
High-Dollar, High-Impact Leads That Have
Cross-Jurisdiction Representation," Lee Said."

We're not fighting for a split decision; we're fighting for the knockout punch."

The Canada Revenue Agency is hosting the challenge in Ottawa. Sharing the same room significantly expedites how quickly information is shared, which creates more leads, Oleg Pobereyko, J5 project lead for the U.S. and the J5's cyber group lead, said during the briefing.

"The main priorities are tax crime," Pobereyko said, but the team also looked into individuals who made significant amounts of crypto potentially from drug trafficking, human trafficking and child exploitation.

A paper summarizing the results of the current challenge is expected to be published next week by the group's financial intelligence units, or FIU. It was the first time that the FIUs participated in a J5 challenge, according to the release.

Cryptocurrency allows investigators to follow suspects' transactions over a longer time frame compared to traditional financial crime investigations, even with old data, according to Ron Willemse, strategic advisor to the Dutch Fiscal Intelligence and Investigation Service.

The J5 helped to track diverted funds and make arrests following an indictment, charging three founders of a cryptocurrency called SafeMoon with a conspiracy to misappropriate millions of dollars,  that the U.S. Attorney's Office for the Eastern District of New York unsealed Wednesday,November 1, 2023.

Over 83% of IRS-CI's investigations that are recommended for prosecution have a primary suspect with a BSA filing, the report said.

Since the J5's inception in 2018 its challenges have helped track down people who make a living out of facilitating "international tax crime," Eric Ferron, director general of the CRA's Criminal Investigations Directorate, said during the briefing. 

Have An IRS Tax Problem?

 

Read more at: Tax Times blog