Tax Court Dissects Complex Acquisition Transaction With Senior and Subordinated Debt Characterization in Issue (10/27/21)

In Tribune Media Co. v. Commissioner, T.C. Memo. 2021-122, here, issued yesterday, the Tax Court addressed a complex acquisition of the Chicago Cubs and held (in a 127 page opinion), that

• Certain debt (subordinated debt (called “sub debt”)) was equity rather than debt for tax purposes (slip op. 56-90.)  The result of holding the sub debt to be equity was that, under the partnership disguised sale rules, gain was recognized to the extent of the sub debt.  Specifically, and more precisely, since the parties agreed that the partnership disguised sale rules applied, the Court held that the treatment of the sub debt as equity meant that the exception for debt-financed distributions did not apply to that debt.  (This aspect of the transaction planning had been designed to qualify as debt-financed distributions.)  This holding turned upon the debt-equity distinction familiar to tax practitioners and even students of tax law.  The Court held (Slip op. 90) that “Although the sub debt had the superficial appearance of bona fide debt, it more closely resembles equity.”

• The senior debt in the transaction was bona fide recourse debt that could be allocated to support the debt-financed distribution exception to the disguised sale rules.  (Slip op. 91-119.)  With respect to the senior debt (slip op. pp. 118-119) the Court concluded (Slip op. 118-119, footnote omitted):

The Cubs transaction was a disguised sale in both form and substance. The economic reality of this transaction lies squarely within the intent of the disguised sale statute. The parties to the transaction formed a bona fide partnership that operates the Cubs franchise with assets contributed by Tribune. And the partnership in fact distributed cash to Tribune. This transaction also substantively fits into the debt-financed distribution exception for a disguised sale, receiving the distribution tax free up to the amount of the senior debt guaranteed by Tribune. CBH borrowed the senior debt, and Tribune guaranteed the senior debt. When such a transaction is explicitly provided for by Congress and followed by a taxpayer in both substance and form, we will not recharacterize it.The doctrine of substance over form is applied to prevent taxpayers from mislabeling transactions to achieve a desired tax consequence. Petitioners did not mislabel the transaction here; the economic substance of the Cubs transaction is a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations.

Freeman Law International Tax Symposium on 11/18 and 11/19 (10/19/21)

The following international tax program may be of interest to FTPB readers:  Freeman Law International Tax Symposium on November 18 and 19 (link for information and registration here).  The Symposium has some great participants, some well-known to tax procedure and tax controversy enthusiasts, and covers topics such as international tax topics, including civil and criminal penalty enforcement, cryptocurrency enforcement trends, and global tax reform.

District Court Enforces Summons to Delaware Dept of Insurance for Micro-Captive Information (10/4/21)

The district court has enforced the IRS summons issued to the Delaware Department of Insurance (“DDOI”) for information and documents on about 200 micro-captive insurance companies that DDOI issued certificates of authority.  United States v. Del. Dep't of Ins., No. 20-829, 2021 U.S. Dist. LEXIS 186623 (D. Del. Sep. 29, 2021), CL here.  I previously wrote on the Magistrate’s Report and Recommendation (“Report”) to enforce the summons.  Magistrate Judge Recommends Enforcement of IRS Summons to Delaware Dept of Insurance for Information Filed by Micro-Captives (Federal Tax Procedure Blog 7/19/21), here.  Substantial portions of the district court’s Background are simply a copy and paste from the Magistrate’s Report.

DDOI raised arguments of error in the Magistrate’s Report related to the interpretation and application of the McCarran-Ferguson Act (“MFA”):

(1) by applying a “threshold test” of whether the conduct at issue constitutes the business of insurance for a non-antitrust case; and (2) by determining that the challenged conduct does not constitute the “business of insurance.” DDOI also argues that the Report erred by failing to recommend dismissal of the Petition on the grounds that the MFA reverse-preempted the Summons.

The resolution of this issue gets into arcana of the MFA, so I won’t delve into it here in detail.  In summary, the district court held that, in non-antitrust cases, there was a threshold requirement for MFA that the activity in question constitute the business of insurance.  In doing so, the district court has an interesting discussion of precedential authority in the Third Circuit regarding whether a subsequent panel opinion that seems inconsistent with an earlier panel precedential decision can reverse the earlier holding without en banc consideration.  The Court finds that, under Third Circuit, authority, the prior precedential opinion controls.  Interesting.

The district court also affirmed the Magistrate’s Report’s finding that the activity in question was record maintenance rather than insurance subject to MFA.

The district court then summarily rejected the DDOI argument for reverse preemption under the MFA.

Supreme Court Grants Cert on Issue of Whether CDP 30-day Time Limit is Jurisdictional (9/30/21)

The Supreme Court granted the petition for writ of certiorari in Boechler v. Commissioner, 2020 U.S. App. LEXIS 23306 (8^th Cir. 2020) to consider the following question:

Whether the time limit in Section 6330(d)(1) is a jurisdictional requirement or a claim processing rule subject to equitable tolling.

The Procedurally Taxing Blog has a good discussion on the grant of cert:  Christine Speidel, Supreme Court Agrees to Decide Whether the CDP Petition Filing Deadline Is Jurisdictional (Procedurally Taxing Blog 9/30/21), here.

There are other time limits in the IRC for the taxpayers and the IRS to act.  The quintessential time limit is the 90-day period for filing a petition for redetermination of a deficiency.  That has always been deemed jurisdictional, meaning that a taxpayer either complies with it or does not; there is no equitable relief for failure to file in the time period.  Another quintessential time limit is for filing a claim for refund, which the Court held in United States v. Brockamp, 519 U.S. 347 (1997) did not permit equitable tolling.  Congress thereafter enacted § 6511(h), here, to permit some equitable factors to toll the refund claim time period requirement.

Two reasonable inferences from Brockamp and § 6511(h) are:

• Some time periods in the IRC are jurisdictional in the sense that equitable tolling is not permitted.
• When Congress wants time periods, particularly those required for orderly functioning of the ubiquitous tax system, to be subject to equitable tolling, it provides specifically for that relief.

In this context, the § 6330(d)(1) time limitation is hard to distinguish between the petition for redetermination and claim for refund time periods.

More on Footnotes (9/28/21)

In prior editions of my Federal Tax Procedure Book, I offered Appendix C as a digression on footnotes.  I posted a blog entry with that Appendix C in its final version before I dropped the Appendix from the FTPB.  See On Footnotes and the Demise of Appendix C from FTPB (7/28/21), here.  Still, I continue my interest in footnotes and the uses and abuses of footnotes.  So this posting caught my eye:  Eugene Volokh, Footnotes and Exile (The Volokh Conspiracy 9/26/21), here.  It is very short, which tempts me to “copy and paste” it,  I don’t want to come close to some copyright or other infringement, so I just link the offering.  I will offer this quote (fair use):  “Footnotes are the Siberia of your article or your brief—and endnotes, I suppose, the Kamchatka (the peninsula, not the vodka).”

On the endnote thing, I have to say that I generally do not like endnotes.  Like much of life, the benefits of choices are mixed.  Footnotes are easier to read because one need only glance down to the bottom of the page, rather than having to turn to the end of the publication for the endnote.  Endnotes require some extra effort and thus are less distracting than footnotes simply because a reader may not take the trouble to read the endnote.  The downside of footnotes is that they are too easy to read, simply a downward glance will work.  If they are easy to read, the reader may be tempted to read the footnote which usually distracts from the flow of the text.  So the question is whether your footnotes are of such quality that you want to discourage most readers from reading them; if so, use endnotes.  If, however, you want your readers to sometimes actually read the note, use footnotes.

At one time I offered my FTPB with notes as footnotes and endnotes (two separate versions).  It was easy to turn the footnotes version into an endnoted version.  I finally concluded that, if a reader does not want to be distracted by footnotes or endnotes (most students), then get the Student edition without footnotes or endnotes.  If a reader sometimes or often reads footnotes, then the footnoted Practitioner edition is the way to go.  I just felt that few would be interested in endnotes, so I quit generating an endnote edition.

DOJ OIG Reports on DOJ Tax Expert Contracting (9/26/21)

The DOJ Office of the Inspector General (“OIG”) issued this press release of a new report:  DOJ OIG Releases Report on the Audit of Certain Tax Division Contracts Awarded for Expert Witness Services (9/23/21), here.  The report is here.  I quickly browsed the report.  Most of the report relates to internal process requirements, probably of little interest most readers of this blog.  Still, those who encounter DOJ Tax Division experts in their practice might be interested in the report and might even find some use of the information in the report.

The Executive Summary of the Report is on the introductory pages I & ii.

Some interesting points:

• The contracted high hourly rate for the contracts reviewed was $850 for the expert.
• The following observation was made regarding description of the services for the time increments charged (a phenomenon also true of lawyer’s billing on a time basis):

For example, on one invoice, an expert witness described 10 hours of work as “review materials, think about the issues, talk with staff, and prepare for call.” While we are not questioning any amounts associated with the vague invoice  descriptions, we believe it is important for the invoices to contain sufficient details to tie the services to the contract deliverables. Therefore, we recommend that the Tax Division require future invoices for contracted expert witness services to contain adequate descriptions that clearly tie to contract deliverables.

IRS Enjoined from Enforcing Tax Shelter Notice Requirement for Material Advisor for Microcaptive Transactions (9/22/21)

In CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here, the Court held that the Anti-Injunction Act (§ 7421(a)) did not preclude a contest by a “material advisor” of IRS  Notice 2016–66 requirement to report micro-captive transactions.  See Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.  Accordingly, the Supreme Court remanded the case to the Court of Appeals which remanded it to the district court. 

In CIC Services, LLC v. IRS (E.D. Tenn. No. 3:17-cv-110 9/21/21), CL here, the district court held that the Notice was a legislative rule that required promulgation by notice and comment regulation.  Based on that holding, the court found the requirements for an injunction were met and that the injunction should be applied with respect to CIC.  I suppose that means, practically, that the IRS cannot impose penalties for any failure by CIC to comply with the requirements of the Notice  (Note, however, that the opinion says that “CIC also notes that, to date, it has complied with the Notice’s requirements, expending hundreds of hours of employee labor and thousands of dollars in costs per year.”).

This is a major win for the tax shelter industry but probably not the last word in this saga.

Without getting into the nitty-gritty on the application of the APA’s legislative/interpretive distinction (upon which turns the notice and comment regulation requirement), I suppose that the going forward solution for the IRS would be to use the immediate effect Temporary Regulation, with "good cause statement," process with contemporaneous Proposed Regulations for the notice and comment process.  The APA requirement for good cause is “when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553(b)(B).  Potentially abusive tax shelters should be sufficient for immediate effect under this provision. 

I am not sure that the court correctly determined that the Notice was a legislative rule requiring notice and comment (or good cause statement).  Because the court made the legislative determination with sound bites rather than detailed analysis, I won’t address that here.  I suppose the Government will appeal to the Sixth Circuit on an expedited basis because of the injunction.

The CourtListener (CL) docket entries for the case are here.

JAT Comments (added 9/22/21 2:30pm:

Revised Federal Tax Procedure (2021 Student Ed.) with Links (9/20/21)

I have posted a revised version of Federal Tax Procedure (2021 Student Ed.) on SSRN, here https://ssrn.com/abstract=3897432.  The principal revision is to provide links to the cases cited, the Code sections cited, and links for the table of contents and cross references in the text, so that it is more user-friendly for students.

I will not prepare a similar revision for the 2021 Practitioner Edition, but will incorporate that feature in both 2022 Editions which I expect to publish in early August 2022.

Court Sustains Almost $350 Million Jeopardy Assessment Arising from Sham / Bullshit Tax Shelter (9/18/21)

In Kalkhoven v. United States, 2021 U.S. Dist. LEXIS 175844 (E.D. Cal. 9/15/21), CL here, the Court sustained the IRS’s jeopardy assessment against Kevin Kalkhoven, a venture capitalist (Wikipedia, here).   Section 6861 allows the IRS to assess tax, such as income tax, which is otherwise subject to the prohibition on assessment in § 6213(a).  Students will recall that § 6213(a), the central feature of the deficiency notice preassessment litigation system, prohibits assessment before the issuance of a notice of deficiency and, if the taxpayer petitions the Tax Court for redetermination, until the Tax Court decision becomes final.  The delay in assessment, particularly if a Tax Court petition is filed, can be substantial.  And, when the tax liability relates to a TEFRA partnership, as here, further delays are encountered if the partnership litigates as it did here.

Section 6861 allows a jeopardy assessment to permit immediate assessment where the IRS determines that the collection of the as yet unassessed tax is in jeopardy.  The IRS determined that collection of tax was in jeopardy because of the large amount of tax to be assessed in the future because of Kalkhoven’s investment in the Son-of-Boss sham (aka, in my words, bullshit) tax shelter in BCP Trading and Investments, LLC v. Commissioner, 991 F.3d 1253 (D.C. Cir. 2021).  He had also invested in another such shelter, Woodside Partners v. Commissioner, docket no. 5685-16 (expected to generate a $25 million tax for Kalkhoven).

As a result of expected tax liabilities from these “investments,” the IRS made jeopardy assessments, under § 6861, totaling almost $350 million  (Gov’t response, Dkt # 22, p. 1.)  The IRS followed the procedure in § 7429 for appropriate approvals.  Kalkhoven invoked his right for expedited internal review in Appeals and then, upon obtaining no relief, for expedited judicial review in the district court.  The Court rejected his claim to relief, thereby sustaining the IRS’s jeopardy assessment.  The opinion is short (12 pages), so I recommend it, particularly for tax procedure students.  

Sustaining the jeopardy assessment is not a determination that the taxpayer actually owes tax in the amount assessed; it is just a determination that, on the facts known to the IRS, it is reasonable to believe that tax is due and collection is in jeopardy.  For more on the jeopardy assessment process, see the discussion on my 2021 Federal Tax Procedure Book (Practitioner Edition), here.

For further background, readers might want to review the docket entries in the case (CourtListener here, which permits some of the key documents to be viewed or downloaded).

 

On Complexity and Algorithms in Tax Administration (9/8/21)

The Procedurally Taxing Blog has a good post this morning, Bob Probasco (Guest Blogger), Complications from Extensions and Unprocessible Returns (Procedurally Taxing Blog 9/8/21), here.  It delves into the interaction of  (i) the Beard test for a valid return (Beard v. Commissioner, 82 T.C. 766 (1984), affd. 793 F.2d 139 (6th Cir. 1986)), (ii) the differences between a Beard-valid return and a processible return, and (iii) the arcana of interest computations based on those differences and the interaction of § 7508A disaster relief.  Bob does a great job weaving through that stuff, so I won’t even try to summarize it here (too great a risk of showing my ignorance).  Rather, I found Bob’s conclusion in this dance through tax arcana should resonate with students of the tax law and tax procedure:

Two Final Thoughts

            First, I think the PMTA is clearly right under the Code.  That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading.  I double-checked and triple-checked when I worked my way through the PMTA.  This was actually a relatively mild instance of a common problem with tax.  Code provisions are written in a very odd manner.  They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them.  I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”.  My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners.  Which group are you in?

            Second, that (relative) complexity leads to mistakes.  I assume that these interest computations have to be done by algorithm.  There are simply too many returns affected to have manual review and intervention for more than a small percentage.  An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year.  Even when the law is clear, there is a lot of opportunity for mistakes to creep in.  (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.)  Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpretation and may not have included enough interest.  Is the IRS proactively correcting such errors?  If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate. 

 JAT Comments: