Amazon Wins Transfer Pricing Dispute on Regulations Interpretation (8/18/19)

In Amazon.com, Inc. v. Commissioner, ___ F.3d ___ (9th Cir. 2019), here, a transfer pricing case, the Court held that, under the applicable regulations (but superseded for later years as noted in footnote 1 discussed below) did not require that residual business assets (like workforce in place, going concern value) be included in the required buy-in for a cost sharing agreement between related parties because they were not independently transferable assets. 

Here is the Court's summary (not part of the opinion):

The panel affirmed the Tax Court’s decision on a petition for redetermination of federal income tax deficiencies, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement. 

In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. 

At issue is the correct method for valuing the pre-existing intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation (sic), the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets.

I won't get into the weeds on the opinion because it appears to be an unexceptional application of standard rules of interpretation of the regulation (a similar exercise to interpreting the text of a statute).  The IRS's interpretation of its own regulation was not entitled to Auer deference, which is now substantially constrained by the decision in Kisor v. Willkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here].

The important point on the substance of the IRS position is that the IRS changed the regulation.  In footnote 1 (Slip Op. p. 6]:

   n1 This case is governed by regulations promulgated in 1994 and 1995. In 2009, more than three years after the tax years at issue here, the Department of Treasury issued temporary regulations broadening the scope of contributions for which compensation must be made as part of the buy-in payment. See 74 Fed. Reg. 340 (Jan. 5, 2009). In 2017, Congress amended the definition of “intangible property” in 26 U.S.C. § 936(h)(3)(B) (which is incorporated by reference in 26 U.S.C. § 482). Tax Cuts and Jobs Act of 2017, Pub. L. 115-97, § 14221(a), 131 Stat. 2054, 2218 (2017). If this case were governed by the 2009 regulations or by the 2017 statutory amendment, there is no doubt the Commissioner’s position would be correct.

So, except for the dollars involved (bit, as is the way with Amazon), the case would be unexceptional.

Procedurally Taxing Offering and Discussion of IRS Graphic on Tax Litigation (8/14/19)

Students and Practitioners reading this blog (and the Federal Tax Procedure Book) will know that I recommend the Procedurally Taxing Blog, here.

There is a new offering today that has graphics with important data on tax litigation.  Keith Fogg, Statistics on Cases in Litigation from ABA Tax Section Meeting in May (ProcedurallyTaxing 8/14/19), here.  The actual graphic is linked on the PT blog with Keith's brief discussion of the graphics, but here is a link to the graphic.

2019 Federal Tax Procedure Book Editions Available (8/12/19)

The 2019 editions of the Tax Procedure Book (Student Edition and Practitioner Edition) are available for download on SSRN as of 8/12/18.  The SSRN postings are linked on the page on the right of my Federal Tax Procedure Blog titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

As always in posting the annual editions (and, indeed in posting entries on the FTP Blog), I encourage readers to make comments.  Comments can range from the substantive to any other that can make the next editions of the FTP Book better.  Corrections of grammar and syntax would be appreciated because I do not have a proof reader for the book, and I am a poor proof reader of my own work.

Comments on the blog entries can be made below the entries.  Comments on the FTP Book Editions may be made on the Page titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

Thank you.

IRS Release on Passport Denial and Revocation for Seriously Delinquent Tax Debt (8/9/19)

The IRS released IR-2019-141 (8/8/19), here, titled: "Individuals with significant tax debt should act promptly to avoid revocation of passports."  The release has very useful information and should be read by all persons with significant tax debts who travel internationally.  For example, taxpayers who have had their passport application denied because of the IRS's certification can apply for prompt processing "to resolve their tax issues and expedite reversal of their certification to State [Department]."

Here is the discussion of the passport denial or revocation procedure from the 2019 Federal Tax Procedure Book pending publication on SSRN (footnotes omitted):

XIII. Denial or Revocation of Passport for Seriously Delinquent Tax Debt.

Section 7345 and 22 U.S.C. § 2714a, added in 2015, require that, upon the IRS certification transmitted to the Secretary of State (through the Secretary of the Treasury) that an individual has “a seriously delinquent tax debt,” the Secretary of State “shall not issue a passport” to the individual and, if a passport has already been issued, "may revoke" the individual's passport.   A “seriously delinquent tax debt” is an assessed tax debt greater than $50,000 (as adjusted for inflation, $52,000)  if a notice of  tax lien has been filed with CDP rights exhausted or lapsed or a levy under § 6331 has been made.  Once certified, paying the account below the threshold amount will not result in decertification.

Exceptions are made for debts that are being paid “in a timely manner” pursuant to agreement with the IRS or which are subject to either a CDP hearing or an election for innocent spouse relief under § 6015.  The Secretary of State may approve exceptions to these requirements in “emergency circumstances” or for “humanitarian reasons” or may limit the passport only for return to the U.S.

The IRS must “contemporaneously notify an individual of any certification under subsection (a).”  The notice of the certification must include notice of the certification and of the right to bring a civil action in the district court or Tax Court to contest whether the certification was erroneous. The certification must be reversed if the certification was erroneous, the tax debt is fully satisfied, or the tax debt ceases to be a seriously delinquent tax debt as defined. This judicial remedy is the sole remedy for improper certification or failure to reverse a certification; the taxpayer may request IRS administrative relief but does not have an Appeals Office review of any action or nonaction pursuant to the request.

The required earlier notices of tax liens and notices of levy must include notice of § 6345's authority to deny or revoke passports.

Apart from a seriously delinquent tax debt certification, the Secretary of State may deny a passport for failure to provide a valid Social Security Number.

The certification will not prevent return travel to the U.S., although the passport may be confiscated upon re-entry.

Since the provision is relatively new, the procedures were not implemented immediately.  Persons interested in the implementation should check for more recent IRS actions or pronouncements and practitioner or scholarly comment.  The IRS has a website that indicates that certifications to the State Department began in February, 2018.

[Note:  the FTP 2019 edition pending  publication on SSRN said that the amount of the seriously delinquent tax debt as adjusted for inflation was $53,000.  It is $52,000; I have changed that above and in the working draft  for the FTP 2020 edition.]

District Court Invalidates Interpretive Regulation at Chevron Step One (8/8/19; 3/11/19)

In Mayo Clinic v. United States (D. Minn. No. 16-cv-03113 Opinion and Order dated 8/6/19), here, the Court invalidated an IRS "interpretive" regulation which interprets the statutory text "educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."

As an interpretation of the statutory text (an interpretive regulation), the Court applied the Chevron framework.  As I understand the Court's reasoning, it stopped at Chevron Step One, finding that, based upon statutory interpretation in the statutory text in question, the regulations interpretation was not within the scope of ambiguity in the statutory text.

The Court stopped the Chevron inquiry at Step one because Congress "intended not to include' the regulations tests--"primary-function" and "merely-incidental"--in the scope of the statutory text. (Slip Op. 2.)   On that interpretation, the statutory text was not "silent or ambiguous."

Basically, as I understand the reasoning, the Court discerned some intent of Congress (certainly not a stated intent) because it inferred that Congress knew how to articulate in the statute a test such as the regulations' tests and did not do so.  Therefore, the Court reasoned, Congress must have intended that the tests not apply.  Of course, the Court has discussion of other statutes, some related, where Congress in the statutory text specifically articulated some such tests.  The Court found those persuasive that, if Congress meant that Treasury was to have interpretive authority of that nature, Congress would have put it in the statutory text or at least put some ambiguity in the statutory.  Its absence in the statutory text means that the tests were not intended by Congress to be within the scope of ambiguity of the statutory text and therefore the interpretation fails at Chevron Step One.  The Court never reaches Chevron Step Two to determine whether the interpretation was reasonable.  (I guess one could say that an interpretation is not reasonable if it is not within the scope of the ambiguity in the statutory text.)

I don't think the Court's reasoning is compelling.  The conclusion may be right.  I just don't think the reasoning articulated by the Court compels the conclusion that the statutory text does not offer sufficient ambiguity to permit the interpretation adopted by the IRS.

I suspect that there will be an appeal to the Eighth Circuit Court of Appeals.  I won't try to predict an outcome there.

Pre-Enforcement Litigation of IRS Guidance (8/6/19)

I just finished today my 2019 editions (Practitioner and Student) of my Federal Tax Procedure Book.  I have submitted those editions to SSRN and expect that they will be published there in the next few days.  I will post the SSRN links on this blog for download and on the page titled 2018 Federal Tax Procedure Book & Supplements, here, in the right hand column.

In the meantime, I offer the following which is new to the 2019 editions.  I offer some (but not all of the footnotes).

Litigating IRS Interpretations in Guidance Documents.

For most agency guidance, particularly guidance in a binding format such as legislative regulations, affected parties have an opportunity to raise procedural challenges in court under the APA upon promulgation of the guidance and before the agency attempts to enforce the guidance against the affected parties. n371  The statute of limitations for such review is the general six-year statute of limitations in 28 U.S.C. § 2401(a).  However, for Treasury guidance documents, such pre-enforcement litigation challenges are prohibited under the Anti-Injunction Act (“AIA”), § 7421(a), and related statutory and common law prohibitions which have historically channeled tax litigation, including challenges to agency guidance, into post-enforcement litigation venues such as deficiency, refund or collection suits.  Those post-enforcement venues have their own statutes of limitations triggered by the enforcement being challenged (e.g., a deficiency notice, denial of a claim for refund, or collection action).  Accordingly, historically, IRS guidance has not been allowed for pre-enforcement procedural challenges to agency guidance. n375 If § 2401(a) were applicable, post-enforcement review would not be adequate for APA procedural challenges in tax litigation because, in most cases, the six-year statute would have expired before IRS enforcement action made the case ripe for the traditional tax challenge venues.  As a result, the general six-year statute of statute of limitations in § 2401(a) has not barred procedural challenges to IRS guidance in post-enforcement cases outside the six-year period in § 2401(a).

  n371 See Altera Corp. v. Commissioner, 926 F.3d 1061, 1075 n. 6 (9th Cir. 2018); see generally Kristin E. Hickman & Gerald Kerska, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683 (2017) (referred to in the footnotes in this section as Hickman & Kerska, supra.
  n375 See generally Hickman & Kerska, supra.  As noted in the article, there have been cracks in this pre-enforcement prohibition scheme, citing Chamber of Commerce v. IRS, No. 1:16-cv-944-LY, 2017 WL 4682050 (W.D. Tex. Oct. 6, 2017), where the IRS appeal to the Fifth Circuit was withdrawn as moot.  But see CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019) (holding pre-enforcement procedural challenge to an IRS Notice was barred).
In Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2018), the taxpayer challenged in a straight-forward Tax Court deficiency redetermination case a regulations interpretation of § 482.  The challenge was well after six years from the date the regulation was adopted.  The Ninth Circuit panel on the reargument in Altera asked the parties to brief the issue of whether § 2401(a) was a potential bar to the suit, because Altera was raising procedural challenges. DOJ Tax responded that § 2401(a) 's six-year statute of limitations did not apply from the date of the regulation and that, rather, the statutes of limitation normally applying to post-enforcement tax litigation applied.  Under this position, Altera Corp’s challenge to the regulation in a deficiency redetermination proceeding in the Tax Court was clearly timely.  In any event, DOJ Tax argued that the Commissioner had waived the statute of limitations defense.  In the final opinion, the Court relegated the issue to a footnote (p. 1075, n. 6), concluding that the Commissioner had waived the statute of limitations defense by not asserting it.  The Court seems to have skirted the issue of whether there was a defense that could be waived.  It is not at all clear that, given the well-established methods for contesting the validity of regulations in post-enforcement proceedings (such as deficiency proceedings in the Tax Court and refund suits), a pre-enforcement post promulgation review is available for tax regulations because of § 7421(a), the Anti Injunction Act and related statutes and concepts pushing litigation to the standard post-enforcement procedures.  One could argue that the Court could not have gotten to waiver without a defense in the first place and there could be a defense in the first place only if the taxpayer had a post-promulgation, pre-enforcement right to contest the regulation, thus invoking the six-year statute that could be waived.  Under that way of thinking, the Court decided the issue.  But, I don’t think that is what the Court intended to do, because it concludes “Therefore, we need not address it.”  The “it,” I think, is whether § 2401 applied in the first place, which would have required that there be some post-promulgation, pre-enforcement remedy.  For a succinct discussion of the issue, see Kristin Hickman, Altera Meets Chamber Of Commerce (Tax Prof Blog 10/17/17) and for more detail see Alan Horwitz, Supplemental Briefing Completed in Altera (Tax Appellate Blog 10/10/18) (with links to the supplemental briefing in Altera and a Government Statute of Limitations Letter Brief).  Now, tax procedure students should thank me for relegating this to a footnote, and a long one at that, which even practitioners are unlikely to encounter.
Finally, in Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019), prompt APA review was allowed but not in a context where the aggrieved parties (States of Montana and New Jersey) had  traditional post-enforcement review.

Restitution Based Assessment--Some Issues of Interest (8/3/19; 8/7/19)

Readers of this blog will likely be interested in a recent post on Procedurally Taxing Blog:  Keith Fogg, Interest and Penalties on Restitution-Based Assessments (Procedurally Taxing Blog 7/31/19).  Highly recommended.  The context is the relationship between restitution as ordered by the court in a criminal case and the restitution based assessment that the IRS is mandated to make, particularly as related to interest on the restitution.

After some emailing with Keith, I thought I would add some related material and comments that readers of this blog might find interesting or useful.

1.  The amount of the restitution can include an interest factor from the date of the loss through the date of the restitution order by judgment in the criminal case.  The DOJ Criminal Tax Manual thus says:  "Prosecutors should seek prejudgment Title 26 interest in restitution in order to
fully compensate the IRS."  DOJ CTM 44.00 RESTITUTION IN CRIMINAL TAX CASES (last edited January 2019), here.

The U.S. Attorneys Manual (now called Justice Manual after renaming in 2018) had a template in the Tax Resource Manual that would include interest under 6601 and/or 6621 in the restitution order as of the date of sentencing.

• https://www.justice.gov/archives/usam/tax-resource-manual-20-optional-restitution-paragraphs
• https://www.justice.gov/archives/usam/tax-resource-manual-21-proposed-restitution-order

The Tax Resource Manual seems to have dropped off the current Manual (called the Justice Manual), although the prior Tax Resource Manual is still available per the links above.  (Perhaps it will be added back later.)  So, diligent US Attorneys should be aware of it.  And, of course, DOJ Tax CES attorneys should be aware of the CTM provision.  And, since the IRS makes the calculations, the IRS agents should be aware of as well.  (By contrast, interest is not included on tax loss for Sentencing Guidelines purposes except in the case of evasion of payment, when interest was included in the amount the defendant sought to evade.)

My understanding, though, is that courts sometimes (perhaps even often) do not include interest in restitution.  (See discussion of recent case in paragraph 3 below.)

2.  I have just updated the text and a footnote in the working draft of my Federal Tax Procedure Book (will be published on SSRN by mid-August 2019) dealing with some of the nuance.  Here is a cut and paste of the text and the key text amd footnote: