Tax Blog/Blawg

As we’ve discussed previously at the TaxBlawg, a minor provision of the Patient Protection and Affordable Care Act – Section 9006, which dramatically expands the requirements for reporting payments on Form 1099 – has become a hot-button issue in Congress.  Prior to the law, Form 1099 reporting was not required for payments for goods or (with some exceptions) payments to corporations.  Section 9006 expanded the Form 1099 requirement to cover such payments made to a single payee if the payments exceed an aggregate of $600 or more during a calendar year.

Over the summer, the small business lobby called foul, arguing that the expansion imposed an oppressive paperwork burden on small businesses.  Consequently, earlier this week, Senate Democrats and Republicans proposed dueling amendments to the Small Business Jobs Act of 2010 to “fix” the expanded Form 1099 reporting requirement of Section 9006.  In the eternal spirit of politics, each party’s amendment failed because neither wanted to give the other credit for being the savior of small businesses.  Despite the failure of these amendments to Section 9006, the Senate passed the bill this afternoon, foreshadowing its likely enactment in the near future.

Last week, the IRS issued a proposed regulation that would generally require corporations to attach Schedule UTP (Uncertain Tax Position Statement) to their returns.  The regulation effectively would give the IRS authority to require that the schedule be filed; but the issuance of the regulation raises an interesting question: is the IRS setting the stage to argue that the requirement to file Schedule UTP should be permitted on the basis of deference to the IRS’s regulatory authority?

We now tackle the third question raised by our original post about Canal Corp. v. Comm’r: when (if at all) should courts defer to the opinion of a reputable tax advisor in deciding whether to uphold an assessment of penalties against a taxpayer?

To be clear, deference in this context does not mean that courts should defer to an advisor’s opinion regarding the substantive merits of a transaction.  If penalties are at issue, the substantive merits (or lack thereof) of a transaction have already been decided.  Instead, deference in this context refers to whether courts should presume that a taxpayer's receipt of an opinion written by a reputable advisor is sufficient to avoid the imposition of penalties on a transaction, notwithstanding a perceived conflict of interest on the advisor's part.

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

The financial press can’t stop talking about the amount of cash on corporate balance sheets. Journalists and arm-chair analysts alike point to the $1.84 trillion in cash on the balance sheets of non-financial U.S. companies as a reason to be bullish on the stock market, figuring that eventually cash-rich companies will splurge on dividends and stock buy-backs, if not on pursuing growth opportunities. There’s probably truth to that, but there is also a good chance that some of the cash will never be spent. Why? Because much of this largesse has been earned outside the United States in low tax jurisdictions, and repatriating this would cost billions in cash taxes and earnings.

The Chief Tax Officer (“CTO”), CFO and Corporate Treasurer have many discussions on the desire to return cash to the U.S. and the amount of the resulting “hit” to income that would result. Some companies may have more of a tolerance for the reduction in earnings per share attendant with repatriation of low taxed earnings than others, but the growth in cash in corporate balance sheets suggests that earnings per share still trumps the desire to return cash to the U.S. when the tax burden is too great.

Following up on our earlier post, Deconstructing Canal Corp. v. Commissioner – Part I, we now examine the second question raised by Judge Kroupa’s opinion.  Specifically, where a taxpayer relies on the opinion of an advisor to establish a “reasonable cause and good faith” defense to the imposition of penalties, have the modifications to the penalty preparer rules of Code section 6694 obviated the need for a judicial rule disallowing taxpayer reliance on the opinion of an advisor who has a conflict of interest?

Many practitioners were taken aback by the recent Tax Court decision in Canal Corp. v. Commissioner, where Judge Kroupa issued a stinging opinion that not only recast a leveraged partnership distribution as a disguised sale, but also upheld penalties against the taxpayer for what the judge characterized as the taxpayer’s unreasonable reliance on the opinion of its tax advisor.  Judge Kroupa’s analysis, which should be on the forefront of every tax advisor’s mind, raises a number of interesting, if thorny, questions, including:

• Should a fixed and/or contingent fee arrangement necessarily render tax advice unreliable for purposes of avoiding a substantial understatement penalty under the “reasonable cause and good faith” exception?

• Has the enactment of section 6694 undercut the rationale for prohibiting taxpayers from relying on advisors that have a conflict of interest?

• When (if at all) should courts defer to the opinion of a reputable tax advisor in deciding whether to uphold an assessment of penalties against a taxpayer?

Today, we tackle the first of these three questions.

The House of Representatives passed, and the President signed into law, H.R. 1586, the "FAA Air Transportation Modernization and Safety Improvement Act," which curiously became the chosen vehicle for Congress and the Administration to provide assistance to states with budget shortfalls while paying for that assistance with changes in a number of international tax provisions.  The final bill is available in pdf here.  See here for our prior summary of the relevant international tax provisions.

Although the changes are largely similar to what was proposed in earlier legislation, it ...

Although death and taxes might, according to Benjamin Franklin, be the only certainties in this world, Congress is surely striving to add another - that is, the certainty of uncertainty.  Congress, it seems, is committed to keeping taxpayers in as much doubt as possible for as long as possible about the status of a variety of important provisions that will affect both substantive tax liabilities and compliance obligations.

This is a question I hear from a lot of clients who owe the IRS money, because either they were not able to pay everything on their tax return when it was filed, or they endured an IRS audit and adjustments were unfavorable to them.  The fact of the matter is that, outside the confines of an Offer in Compromise based on doubt as to collectability, which is governed by I.R.C. § 7122 and an analysis of the taxpayer's ability to pay the liability in full, the IRS has a lot less discretion in this area than most people think.

Let's look at interest first.  Pursuant to I.R.C. § 6601, interest generally runs from the time a tax return is due until the time the tax is paid.  One exception is an “assessable” penalty, for which case the interest runs from the date the penalty is assessed.  Internal Revenue Code § 6404(g) permits the IRS to waive interest, but two circumstances must be present.  First, this only relates to interest on income tax, so that if we're talking about estate tax, excise tax, or employment tax, there is no legal authority for the IRS to "waive" interest.  Second, there must be a showing that the interest ran as a result of some error or delay on the part of the Internal Revenue Service in the performance of a "ministerial" act.  As you can imagine, the IRS rarely admits that such a mistake has occurred, and there are disappointingly few cases in which taxpayers have successfully gone to Court and had this position overturned as an abuse of discretion.

In the last article, we focused on overcoming an accuracy penalty when the taxpayer uses and relies on tax preparation software.  Let’s see what the “rules of the road” are if he instead relies on professionals.

The case of Curcio v. Commissioner, T.C. Memo 2010-115, decided May 2010, provided a challenging situation.  It involved four taxpayers whose companies had participated in a "Section 419 Plan" where they claimed deductions as business expenses for significant life insurance premiums, and the Court rejected the deductions under the Plan.  The 419 Plan at issue was created by Daniel Carpenter, a lawyer with experience in tax and employee benefits law.  He designed the plan, drafted and approved all amendments, and secured a legal opinion by a separate lawyer.  These Taxpayers, however, did not just buy the Plan from him and rely upon his representations.