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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.

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.

Read more at: Tax Times blog

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."

Read more at: Tax Times blog

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.

Read more at: Tax Times blog

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.

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Read more at: Tax Times blog