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A divided U.S. Tax Court ruled on August 1, 2024 that it lacked authority to review an Internal Revenue Service decision preventing a woman from challenging a federal tax lien the agency issued on behalf of the Canadian government to secure her tax debt to that country.

In a 7-6 vote, the Tax Court said it lacked jurisdiction over J.E. Ryckman's petition to review the agency's denial of a collections hearing in which she hoped to challenge a lien issued in response to a request from the Canada Revenue Agency under the Canada-U.S. Income Tax Treaty.

The question of the court's authority in the case was one of first impression, Judge Elizabeth A. Copeland wrote in the majority opinion, which drew both concurring and dissenting opinions about the interplay between the treaty and provisions of the Internal Revenue Code affording the right to collection due process hearings.

The court only has jurisdiction to review an agency determination regarding a collections hearing if the IRS was subject to obligations under Internal Revenue Code sections 6320 or 6330 affording rights to those hearings and granting jurisdiction to the Tax Court, the court said.

According to Canadian tax authorities, Ryckman owes about $200,000 in Canadian tax for 1993 and 1994, the court said. She lived in the U.S. in 2017 when the country's tax collector asked the IRS for mutual collection assistance under the tax treaty.

A dissenting opinion written by Judge Patrick J. Urda on behalf of six judges on the court agreed with Ryckman's argument that the CDP hearing statutes, which were added in 1998, should have trumped the requirements of the treaty because those statutes were enacted later. "The opinion of the court fails to pay due heed to the long-established rules governing the resolution of such conflicts, which dictate that the later-in-time statute applies to render the treaty provisions null to the extent of the conflict," Judge Urda said.

Judge Copeland said in the opinion that the provisions in the treaty shouldn't be overtaken "by the more general CDP statutes." She cited the U.S. Supreme Court ruling in Radzanower v. Touche Ross & Co. from 1976, which said, regarding statutory construction, "that a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum."

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Read more at: Tax Times blog

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?

Have an IRS Tax Problem?

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

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