Thursday, February 10, 2022

Tax Court (Judge Lauber) Rejects Shareholders' Attempts to Reduce Transferee Liability (2/10/22)

In Slone v. Commissioner, T.C. Memo. 2022-6, TC Dkt Entry 107 *, here, and GS here, after two reversals by the Ninth Circuit, the last of which held the related taxpayers liable for transferee liability from a Midco transaction, the Tax Court was tasked with determining the amount of the liabilities of the related taxpayers in order to enter judgment (decision) for the Commissioner. Judge Lauber took over the case from Judge Vasquez on 10/19/21. See Dkt Entry 103 *. The related taxpayers raised various arguments to reduce the amount of the liabilities. Hence, as Judge Lauber noted (Slip Op. pp. 2 & 3),

The IRS has calculated these numbers to include a deficiency of $13,494,884, an accuracy-related penalty of $2,698,997, and interest of $8,559,729, for a total of $24,753,610.

* *  * *

             The parties have submitted dueling Rule 155 computations. They agree that the transferor corporation’s total tax liability is $24,753,610. But they disagree as to the extent to which petitioners are liable for this debt. Petitioners contend that they are not liable for the penalty or “prenotice” interest, that the IRS has “double counted” the transfers, and that they are entitled to reductions for “equitable recoupment.” Finding no merit in the arguments petitioners tender in support of their computations, we will enter decisions as requested by respondent.

 Judge Lauber helpfully provides readers a synthesized summary of the prototypical Midco transaction (Slip Op. p. 3, case citations omitted):

Thursday, February 3, 2022

In Midco Transaction Malpractice Case, Oregon Court Applies Issue Preclusion From Tax Court Opinion To Dismiss Accounting Firm But Not Law Firm (2/3/22)

A reader of this blog sent me two related opinions decided by the Oregon Court of Appeals in malpractice and related litigation against two advisors—a law firm and an accounting firm advising the shareholders in a firm with a large tax liability in a Midco transaction. The plaintiffs, the Marshalls, were shareholders selling in the Midco transaction that avoided tax liability. The advisers, the defendants, were Schwabe Williamson & Wyatt, P.C. (law firm) and PricewaterhouseCoopers (accounting firm) that advised the Marshalls in the transaction. The opinions are: Marshall v. PricewaterhouseCoopers, Ltd. Liab. P'ship, 316 Or. App. 610, 2021 Ore. App. LEXIS 1845 (2021), here (involving the accounting firm,  PWC); and Marshall v. Pricewaterhousecoopers, Ltd. Liab. P'ship, 316 Or. App. 416, 2021 Ore. App. LEXIS 1775 (2021), here (involving the law firm, Schwabe Williamson & Wyatt, P.C).

In part here pertinent, the Oregon Court of Appeals held that the findings in the Tax Court litigation holding the Marshalls liable for the tax as transferees were (i) issue preclusive as to the accounting firm but (ii) were not issue preclusive as to the law firm. The findings in question were Estate of Marshall v. Commissioner, T.C. Memo. 2016-119, here. The following overview of the Tax Court opinion is from the LEXIS-NEXIS report for the case summarizes the key holdings:

HOLDINGS: [1]-The record supported the Commissioner's decision requiring individual taxpayers who sold a construction company they owned to pay $15,482,046 in income tax the company owed, accuracy-related penalties of $6,192,818 under I.R.C. § 6662, and $9,592,446 in interest; [2]-The taxpayers knew or should have known that the sale of their company was constructively fraudulent under Or. Rev. Stat. § 95.240 because it left the company without sufficient assets to pay its federal tax liability, and the Commissioner had the power under I.R.C. § 6901(a)(1) to collect taxes the company owed from the taxpayers because the company's assets were transferred to them; [3]-The taxpayers' claim that they should not have to pay taxes the company owed because they acted in good faith lacked merit because, inter alia, the good faith defense in Or. Rev. Stat. § 95.270 did not apply to § 95.240.

The Tax Court’s opinion included damning fact-finding regarding the shareholders’ knowledge and/or constructive knowledge that the Midco promoter would strip the target company of assets from which to pay the tax. The Tax Court concluded from the facts that

The Marshalls, Schwabe, and PwC had constructive knowledge of the entire scheme. John [shareholders representative] knew that Essex [the promoter company] was interested 35*35 in buying MAC [the target company with the tax liability] only for its tax liability; that Essex intended to use high-basis low-value assets to offset MAC's income; that Essex intended to obtain a refund of MAC's prepaid taxes, a plan he was leery about; and that Essex was splitting MAC's avoided taxes with the Marshalls.

Wednesday, February 2, 2022

Tax Court (Judge Halpern) Discusses Chevron and Retroactivity Issues in Significant Opinion (2/2/22)

Caveat:  The Tax Court opinion was corrected on 2/8/22 (see TC here Dkt. 86 *).  There is no indication of the changes made in the opinion.  I have checked the quotes below against the corrected opinion; they do not appear to have been revised.  I don't know whether the changes will result in new posts to Casetext and Google Scholar.  I will check later and post updates if they are made to those services.  (I earlier sent a letter to the Tax Court Clerk suggesting that, when revising an opinion, the Court provide public notice of such revisions.  See My Suggestions to Tax Court on Procedure Related Matters (11/23/20), here (noting that the Supreme Court makes the revisions available).)

In TBL Licensing LLC v. Commissioner, 158 T.C. ___ No. 1 (1/31/21), TC here Dkt. 85 *, Casetext here, and GS here, the Court (Judge Halpern) determined that inter-company shuffling of assets among related U.S. and foreign entities constituted a reorganization in which a domestic entity made a taxable distribution of intangible assets to a foreign entity. The amount of the resulting increase in income is  $1,452,561,000. (Slip Op. 91.)  It is not clear whether that is just a timing difference; in any event, I don't propose to get into the nitty-gritty on the reorganization and resulting increase in income. Instead, I offer the case to discuss two procedural issues related to issues I have discussed before on this blog.

First, in broad strokes, the case involved the statute and regulations. In part relevant here, the regulations did not apply, so the Court resolved the relevant issue solely by interpreting the statute and applying the best interpretation. There is no Chevron issue there, and the IRS did not assert Chevron deference. But TBL apparently attempted to assert something sounding like Chevron into the analysis. The Court stated its confusion about that (Slip Op. 79-80):

            Petitioner suggests that respondent is to blame for the absence of a provision in the regulations that can be applied to petitioner's circumstances. The absence of an applicable regulatory provision, however, requires that we look to the statute alone to determine the tax consequences of petitioner's transaction. For the reasons explained supra part III, section 367(d)(2)(A)(ii)(II), interpreted in accordance with the legislative history, requires petitioner to recognize gain. The absence of a provision in the regulations providing otherwise is petitioner's problem — not respondent's.

            Because respondent's position is grounded in an interpretation of the applicable statutory provisions and not on any regulations, we do not understand petitioner's argument that respondent's "litigating position" is "impermissible" under Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988). Bowen stands for the proposition that an agency's litigating position is not entitled to the same deference a court would give to a position adopted through notice and comment rulemaking. See id. at 212-13; see also Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Respondent does not ask that we grant Chevron deference to the interpretation of the applicable statutes that he advances in this case.

Tuesday, February 1, 2022

Second Circuit Affirms Tax Court that IRS Withdrawal of Certification of Seriously Delinquent Tax Debt to Secretary of State Makes § 7435 Proceeding Moot (2/1/22)

In Ruesch v. Commissioner, 25 F. 4th 67 (2d Cir. 1/27/22), GS here, the Court affirmed the Tax Court's holding that the § 7345 proceeding was moot where the IRS withdrew the "seriously delinquent tax debt" certification to the Secretary of State. The Tax Court opinion is Ruesch v. Commissioner, 154 T.C. 289 (2020), TC here at Dkt #25 and GS here.

In addition to holding that the § 7345 proceeding was mooted by the withdrawal of the certification, the Tax Court also held (from the syllabus):

Held: We do not have jurisdiction, under IRC sec. 7345 or otherwise, to consider in this case petitioner's challenge to her underlying liability for the penalties.

 The Second Circuit addressed that issue as follows (emphasis supplied by JAT):

   Even if the Tax Court had jurisdiction to assess the validity of Ruesch's underlying debt, Ruesch had already received the only relief she could obtain under the statute, namely, reversal of her certification as an individual with "seriously delinquent tax debt." See 26 USC § 7345(e)(2). Since there was no further relief the Tax Court could have provided under the statute, and since the statute provided Ruesch's only claimed basis for relief, it should have determined that Ruesch's remaining claims were mootn3
   n3 We note that Ruesch may yet have the chance to challenge her underlying liability in Court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 USC § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to "petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS's position regarding her underlying liability, she will eventually have her day in Court. For now, however, there is nothing further for our Court or the Tax Court to do.

 Two points about this: