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On July 3, 2024 we posted "The Demise of Chevron Will Result In Increased Treasury Regulation Challenges" where we discussed that the decision in the Loper Bright case because the IRS has long relied on the Chevron doctrine, established in a 1984 opinion to defend tax regulations in litigation that it's demise may result in additional challenges to regulations and tax litigation.

One Regulation That May Be Challenged Concerns Late Filed Form 1120 F - U.S. Income Tax Return of A Foreign Corporation.

Under section 882, a foreign corporation engaged in a U.S. trade or business is subject to U.S. tax on its taxable income effectively connected with the conduct of the U.S. taxable business. Section 882(c)(2) ties the corporation’s ability to claim deductions against its gross income to its filing of a U.S. tax return. Reg. section 1.882-4 generally provides that deductions (and credits) otherwise allowed are available only for taxpayers that timely file a return within 18 months of the due date in section 6072.

Swallows Holding Ltd., a foreign corporation, failed to file within that time frame and was later denied the ability to claim deductions. It sued, arguing that the rule setting out an 18-month deadline was an invalid exercise of Treasury’s rulemaking authority. 

The Tax Court Agreed That The Reg Was Invalid, 
Concluding That The Statute Did Not Reflect An Intention
By Congress That The Requirement That A Foreign
Corporation File A Tax Return Included A Filing Deadline 
(Swallows Holding Ltd. v. Commissioner, 126 T.C. 96 (2006)).

The Third Circuit overruled, finding that the reg should be given Chevron deference and applying the Chevron two-step process, that the 18-month time frame was a reasonable exercise of the secretary’s authority (515 F.3d 162 (3d Cir. 2008)). 

The Swallows Holding decision presents an opportunity for taxpayers to challenge Reg. section 1.882-4's requirement that the return must be filed within 18 months of the due date.

Whether it opens an opportunity for taxpayers who made a similar mistake to bring the same claim for prior years, despite the majority’s statement in Loper Bright that it wasn’t questioning prior cases that relied on the Chevron framework, and that holdings in those cases are subject to statutory stare decisis, Remains to be seen?

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Read more at: Tax Times blog

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.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

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."

3. National Muffler

The outcome in the Loper Bright case may revive a multifactor test to determine the validity of an IRS regulation that the Supreme Court set in its 1979 decision in the National Muffler case.

In that ruling, the court established a complicated set of factors that judges had to consider in reviewing interpretative regulations, including whether the IRS' construction of the statute was contemporaneous with the law's passage, and the consistency of the commissioner's interpretation.

Courts then relied on the 1979 opinion to determine the validity of IRS regulations when statutes were not clear, even after the Supreme Court established Chevron deference five years later, which was in a case that did not address tax regulations.

That changed in the 2011 opinion in the Mayo Foundation case, in which the justices clarified that Chevron's two-step analysis, rather than National Muffler opinion's multifactor test, applied to ambiguous tax regulations, according to Gil Rothenberg, former chief of the Appellate Section of the U.S. Department of Justice, Tax Division.

Because of the Supreme Court's emphasis on contemporaneousness and consistency in the Loper Bright decision, the courts may return to using the National Muffler case's multifactor test in tax cases, said Rothenberg.

The National Muffler factors, which used to be irrelevant under Chevron, may be coming back to life.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

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.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

Read more at: Tax Times blog