Ninth Circuit to Scrutinize Tax Court’s Invocation of Substance-Over-Form Doctrine in Light of Apparently Conflicting Decisions From Three Different Courts of Appeals

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January 15, 2019

We present here a guest post from our colleague Nicholas Metcalf.

In Mazzei v. Commissioner, a divided Tax Court (12-4) relied on the substance-over-form doctrine to disregard transactions between the taxpayers, their Roth IRAs, and an FSC purportedly owned by the Roth IRAs. The Mazzei decision is at odds with three recent appellate decisions that rejected the IRS’s use of the substance-over-form doctrine to recharacterize similar transactions.

The Mazzei Decision.  The taxpayers—a husband, wife, and their daughter—owned and operated a company (“Injector Co.”) that sold and distributed injectors in both the United States and foreign markets. The husband … Read More

Briefing Completed in SIH Partners

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December 14, 2018

The final briefs have now been filed in the SIH Partners case.  The government’s response to the taxpayer’s opening brief is long, but hammers extensively on one point — namely, that the regulation is “categorical” in establishing that a loan guarantee issued by a CFC will be treated as taxable.  (The word “categorical” appears 29 times in the government’s brief.).  And the government maintains that this “bright-line” rule flows directly from the statutory text.  Given that premise, the government is able to give most of the taxpayer’s arguments short shrift.

In particular, the government says that the settled legal landscape … Read More

Supreme Court to Reconsider Important Administrative Law Precedent

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December 10, 2018

The Supreme Court granted certiorari this morning in a non-tax case that should be of considerable interest to tax litigators because of the important administrative law principle that will be decided.  In Kisor v. Shulkin, the Federal Circuit applied the government’s interpretation of the governing regulation in ruling against a veteran’s claim for disability benefits.  The court found that the regulation was ambiguous, and therefore it ruled that it should defer to the government’s interpretation under the longstanding Supreme Court precedents of Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), and Auer v. Robbins, … Read More

Third Circuit to Consider Validity of Subpart F Regulations Governing Loan Guarantees

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October 25, 2018

In SIH Partners v. Commissioner, the Tax Court upheld the IRS’s determination that loan guarantees by two controlled foreign corporations (CFCs) resulted in income inclusions subject to taxation in the U.S. as ordinary income under subpart F. The CFC earnings were actually distributed to the U.S. shareholder in 2010 and 2011 and reported then as qualified dividends taxable at 15 percent. But the IRS determined that, under the section 956 regulations, those earnings should have been taxed at the 35 percent ordinary income rate in 2007 and 2008 when the CFCs served as co-guarantors of loans.

The taxpayer raised … Read More

Altera Case Submitted for Decision

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October 22, 2018

The reargument of the Altera case was held on October 16. Chief Judge Thomas, who penned the original majority decision, was quiet during the argument, asking only one question. But both Judge O’Malley, who wrote the original dissent, and Judge Graber, who is the new judge on the panel and who might reasonably be expected to cast the deciding vote, were very active questioners. A video tape of the argument can be viewed at this link.

The oral argument was not quite the last gasp in the parties’ presentations to the panel. At the end of the week, counsel … Read More

Supplemental Briefing Completed in Altera

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October 10, 2018

Attached are the four supplemental briefs filed by the parties in the Altera case.  First, in anticipation of the reargument of the case, with Judge Graber now sitting on the panel in place of the deceased Judge Reinhardt, the court invited the parties to file supplemental briefs limited to half of the length of a normal court of appeals brief.  This briefing opportunity was designed to give the parties the chance to restate or add to their arguments on the issues previously addressed in the case, having now had the opportunity to read the competing opinions of Judges Reinhardt and … Read More

Altera Set for October 16 Reargument

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August 17, 2018

The Ninth Circuit has announced that the panel (with Judge Graber substituted for the deceased Judge Reinhardt) will hear a new oral argument in the Altera case on the afternoon of October 16.  This announcement eliminates the possibility that Judge Graber would simply review the materials in the case and decide to join the prior majority opinion.  The outcome of the case now appears to be up for grabs, and most likely in the hands of Judge Graber unless either Judge Thomas or Judge O’Malley changes his or her mind in the case.… Read More

Altera Opinion Withdrawn

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August 7, 2018

In a surprising move, the Ninth Circuit announced today that it has withdrawn its opinion in Altera “to allow time for the reconstituted panel to confer on this appeal,” even though no petition for rehearing has been filed yet.  See our prior report on the Altera decision here.  The mention of  the “reconstituted panel” refers to an order issued by the court last week that appointed Judge Graber as a replacement judge for Judge Reinhardt, who passed away in March.

At the time, the order appointing Judge Graber seemed to be an exercise in closing the barn door after … Read More

Chamber of Commerce Appeal Dismissed

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July 27, 2018

We reported earlier that it was likely the government would dismiss its appeal in the Chamber of Commerce case once final regulations were issued addressing inversion transactions.  Those regulations were issued on July 11.  Yesterday, the government moved to dismiss the appeal with prejudice as moot (without specifying the final regulations as the cause), and the court immediately entered an order dismissing it.  Thus, there will be no appellate review of the novel issues raised by the district court’s decision in this case regarding temporary regulations and the Administrative Procedure Act.  See our prior report here.

It is possible … Read More

Ninth Circuit Reverses Altera and Revives Cost-Sharing Regulations

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July 24, 2018

The Ninth Circuit today by a 2-1 vote reversed the Tax Court’s Altera decision that had invalidated Treasury regulations requiring taxpayers to include employee stock options in the pool of costs shared under a cost-sharing agreement. See our previous reports here. The court’s decision (authored by Chief Judge Thomas) held that the regulations were a permissible interpretation of Code section 482 in imposing that requirement even in the absence of any evidence that taxpayers operating at arm’s length actually share such costs in similar arrangements. The court also held that Treasury’s rulemaking did not violate the Administrative Procedure Act … Read More

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