Taxpayer and Supporting Amicus Briefs Filed in Home Concrete
December 28, 2011
The taxpayer has filed its brief in Home Concrete. The brief argues forcefully that the case is controlled by Colony, characterizing the underlying statutory issue as “settled by stare decisis.” The brief disputes the government’s arguments that the changes made by Congress in the 1954 Code had the effect of extending the six-year statute to overstatements of basis outside the trade or business context, observing that the 1954 Code changes were all designed to favor taxpayers.
With respect to the regulations, the taxpayer first argues that Colony should be understood as having held that the statutory language was unambiguous, thus foreclosing Treasury from issuing regulations that would require a different statutory interpretation. (As we previously reported, this particular point was the focus of oral argument before the Federal Circuit in Grapevine, with the court ultimately resolving that point in favor of the government and deferring to the regulation.) Second, the brief argues that the regulation would in any event be invalid because of its retroactive effect on pending litigation. In addition, the brief makes some narrower arguments about this particular regulation, maintaining that by its terms the regulation does not cover cases like Home Concrete and that the regulation is procedurally defective.
At least eight amicus briefs were filed in support of the taxpayer. A brief filed by the American College of Tax Counsel focuses on the retroactive application of the regulations, elaborating on the taxpayer’s arguments in asserting that “retroactive fighting regulations” that are designed to change the outcome of pending litigation “are inconsistent with the highest traditions of the rule of law” and should not be afforded Chevron deference. The brief invokes general principles against retroactive legislation and also argues that Code section 7805(b)’s prohibition on retroactive regulations applies. The government argues that section 7805(b) does not apply to regulations interpreting statutes enacted before 1996, a position that was not heavily disputed by taxpayers in the court of appeals litigation of these cases.
Four other amicus briefs were filed by taxpayers who litigated the Home Concrete issues in other circuits and whose cases will be controlled by the outcome — one filed by Grapevine Imports (Federal Circuit), one filed by UTAM, Ltd. (D.C. Circuit), one filed jointly by Daniel Burks (5th Circuit) and Reynolds Properties (case pending in the 9th Circuit), and one filed by Bausch & Lomb (cases pending in the Second Circuit). The latter brief emphasizes that Bausch & Lomb’s case does not involve a son-of-BOSS tax shelter, but rather a more standard business transaction, and also that it involves only section 6229, which does not contain the statutory changes from the 1939 Code found in section 6501 and on which the government heavily relies to distinguish Colony. Amicus briefs were also filed by the Government of the U.S. Virgin Islands, the National Association of Home Builders, and the National Federation of Independent Business, Small Business Legal Center. Copies of the taxpayer’s brief and some of the amicus briefs are attached.
The oral argument in Home Concrete is scheduled for January 17. The government’s reply brief is due on January 10.
Tenth Circuit Affirms Tax Court in Anschutz
December 27, 2011
As we have previously reported (see here, here, and here), in Anschutz the Tax Court collapsed two transactions and held that they amounted to a taxable sale of stock. The Tenth Circuit was unmoved by the taxpayer’s appeal and has now affirmed, barely five weeks after hearing oral argument. In its decision, the court of appeals analyzes the transaction through the lens of the eight factors for determining a sale listed in Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237 (1981). With respect to the factor that assesses whether an equity interest was acquired in the property, the court quotes at length from the IRS’s Feb. 6, 2008, Coordinated Issues Paper on the topic, finding its analysis “compelling and applicable to the case before us.”
The court also rejects the taxpayer’s efforts to analogize its transactions to other approved transactions. The court explains that the transaction addressed in Rev. Rul. 2003-7 is distinguishable, in part because there was no borrowing of pledged shares. And the court holds that the taxpayers’ transactions in this case did not fall within the “safe harbor” of Code section 1058 because they “effectively eliminated [the] risk of loss and substantially reduced [the] opportunity for gain.”
Update on GI Holdings
December 13, 2011
In our earlier discussion of the disguised sale cases, we noted that the federal district court in New Jersey had issued an unpublished opinion in the GI Holdings case that applied the disguised sale rule of 26 U.S.C. § 707(a)(2)(B) to undo a transaction. We noted that there was not yet an appealable order in that case, but at some point an appeal to the Third Circuit was possible. It now appears that the case has been settled and will be formally dismissed in the coming weeks. Thus, there will be no appeal to the Third Circuit, and the Fourth Circuit’s recent decision in Virginia Historic (see our report here) remains as the sole appellate ruling on disguised sales.
Court of Federal Claims Construes “Same Taxpayer” Requirement for Interest Netting
December 9, 2011
In Magma Power v. United States, Case No. 09-419T, the Court of Federal Claims tackled the arcane topic of interest netting. The issue in Magma Power was a narrow question of statutory interpretation, but the broader topic of interest netting warrants a word of explanation.
The government charges interest on tax underpayments at a higher rate (under section 6601) than it pays on tax overpayments. Because it often takes several years or more to determine whether a taxpayer has an overpayment or underpayment for a particular tax year and the amount of that overpayment or underpayment, there are sometimes post-return periods during which a taxpayer has overlapping overpayments and underpayments. When this occurs, the taxpayer should owe no interest on the overlapping amount. If the overlapping amounts are not netted, however, the rate disparity results in net interest in the government’s favor. To correct this inequity, Congress enacted section 6621(d), which provides that “to the extent that, for any period, interest is payable . . . and allowable . . . on equivalent underpayments and overpayments for the same taxpayer, . . . the net rate of interest on such amounts shall be zero.”
The narrow statutory-interpretation issue in Magma Power is the meaning of the term “same taxpayer” under section 6621(d). The IRS had denied section 6621(d) relief to Magma Power on the theory that Magma Power was no longer the “same taxpayer” after becoming a member of a consolidated group.
Magma Power filed a return for its 1993 tax year sometime in 1994. In February 1995, CalEnergy Company acquired Magma Power and subsequently included Magma Power on its consolidated tax returns. The IRS later determined a deficiency for Magma Power’s 1993 tax year, and Magma Power paid that deficiency and over $9 million in associated underpayment interest in 2000 and 2002. The CalEnergy consolidated group overpaid its taxes in four consecutive tax years from 1995 through 1998. Despite some disagreement between the parties, the court found that some portion of these overpayments were attributable to Magma Power’s activities. In 2004 and 2005, the IRS refunded those overpayments plus the associated overpayment interest to the consolidated group agent (which by then was MidAmerican Energy Holdings Company). There were overlapping underpayments and overpayments for the period that began with the filing of the 1995-98 returns and ended with the satisfaction of Magma Power’s 1993 underpayment. Magma Power claimed interest-netting refunds for that period. The IRS denied the refund on the theory that the consolidated group could not net its overpayments with Magma Power’s underpayments because of the “same taxpayer” requirement of section 6621(d).
The court’s plain-language analysis of section 6621(d) is straightforward and decisively rebuts what appears to be a flimsy position taken by the IRS. The essence of the court’s conclusion is that becoming a member of a consolidated group does not fundamentally alter a taxpayer’s identity. The court rests this decision on the uncontroversial premise that the taxpayer identification number (or EIN, for corporations like Magma Power) is the sine qua non of taxpayer identity. And because Magma Power retained the same EIN (and therefore same identity) after its inclusion in the consolidated group, the court held that Magma Power was the same taxpayer for section 6621(d) purposes for the 1993 underpayment and its allocable portion of the 1995-98 overpayments.
Although the court addresses several arguments made by the government, the only notable bump in the court’s road to its conclusion was some language in another Court of Federal Claims decision, Energy East v. United States, 92 Fed. Cl. 29 (2010), aff’d 645 F.3d 1358 (Fed. Cir. 2011). Interpreting the meaning of “same taxpayer” for interest-netting purposes in Energy East, the lower court cited the dictionary definition of “same” and decided that section 6621(d) requires that the taxpayer must be “identical” and “without addition, change, or discontinuance.” (The issue on appeal was narrower and the Federal Circuit did not reject or adopt this aspect of the lower court’s opinion.)
The court in Magma Power had little difficulty distinguishing Energy East: Energy East was trying to net the overpayment years of acquired companies against its own underpayment years. The hitch was that both the underpayment years and overpayment years came before Energy East acquired those companies. In Magma Power, the court held that the Energy East situation was “radically different” than Magma Power’s attempt to net its own 1993 underpayment against its own later overpayments (albeit encompassed within the Cal Energy consolidated group).
The government may well appeal Magma Power based on the broad language in the lower court’s decision in Energy East. If they do, we’ll keep you posted.