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Monthly Tax Roundup (Volume 1, Issue 3)

Tax Alert


Welcome to the third edition of Miller & Chevalier's Monthly Tax Roundup, providing you a quick overview of the most significant tax developments from the past month.

Tax Facts:

  • APAs in 2021: IRS says it executed 124 advance pricing agreements last year, with 461 still pending. That's a slight increase in the number executed in 2020. In 2021, the agency saw 145 new APA applications (24 more than in 2020).
  • Home stretch: Charles Rettig's term as IRS Commissioner ends on November 12, 2022.

Senate Finance Committee Proposes to Deny Foreign Tax Credits and Other Tax Benefits for Companies Operating in Russia and Belarus 

Layla Asali, Rocco Femia, and Caroline Reaves

On April 7, Senators Ron Wyden (D-OR) and Rob Portman (R-OH) introduced draft legislation that would deny foreign income tax credits or deductions for taxes paid to the Russian or Belarusian government. Section 901(j) denies a foreign tax credit for any income tax paid or deemed paid to certain foreign countries with which the U.S. has severed diplomatic relations, and treats income derived in such countries as income in a separate category (sanction period income) for foreign tax credit purposes. The bipartisan bill would amend section 901(j) to apply to taxes paid to Russia or Belarus 30 days after enactment and ending when normal trade relations resume under the Suspending Normal Trade Relations with Russia and Belarus Act. In addition, income earned in Russia or Belarus would be treated as subpart F income and taxed at the full corporate rate under section 952(a)(5), and accordingly, losses could not be used to offset global intangible low-taxed income (GILTI). The proposed legislation would also deny a deduction for any foreign income tax paid to Russia or Belarus and include such taxes in a U.S. shareholder's income under the section 78 gross-up. 

Under a transition rule for taxpayers exiting Russia and Belarus, income derived in these countries is not treated as per se subpart F income (and therefore losses can be used to offset GILTI income) and is not treated as sanction period income for foreign tax credit purposes. The transition rule applies if gross receipts attributable to Russia or Belarus drop by at least 85 percent in 2022 and 95 percent in 2023 and later compared to gross receipts earned in Russia or Belarus in 2021. However, even if the transition rule applies, foreign taxes paid to Russia or Belarus would remain uncreditable under section 901(j).

The bill also denies certain tax benefits to persons already sanctioned in relation to the Ukrainian invasion including denial of tax treaty benefits, the exemption from withholding for foreign governments or portfolio interest, exemption of shipping and Foreign Investment in Real Property Tax Act (FIRPTA) income, and the availability of the trading safe harbor under section 864(b). 

The amendments would apply without regard to any treaty obligations of the United States. 

Companies would be well advised to review the proposed legislation and consider its potential impact, in particular the scope of relief under the transition rule for companies exiting Russia and Belarus.

Read the press release and summary.

Congress May Consider a Number of Tax Legislative Vehicles in the Next Few Weeks

Jorge Castro, Marc Gerson, and Loren Ponds
Congress returned last week from a two-week recess to face a busy legislative agenda, particularly from a tax perspective. It will be important to monitor the conference committee negotiating the China competition bill (known as USICA/America COMPETES) to see if a tax title including items such as the research and development amortization fix is added. The Senate Finance Committee will reportedly markup a retirement savings incentives package (being referred to as Secure 2.0) that could be positioned for consideration later this year, potentially as part of a post-election lame duck package (which also could include tax extenders and other items). And, of course, consideration of a modified Build Back Better Act (BBBA) package continues as the ultimate September 30 deadline for the underlying budget reconciliation instructions draws closer. 

Supreme Court Holds that Tax Court Filing Deadline is Not Jurisdictional and so Potentially Subject to Equitable Tolling

George Hani, Kevin Kenworthy, and Samuel Lapin

A unanimous Supreme Court breathed new life into a taxpayer's case in Boechler P.C. v. Commissioner, holding that a statutory deadline for petitioning the Tax Court was not jurisdictional and thus potentially eligible for equitable tolling. The taxpayer had requested and received a "collection due process" hearing with IRS Appeals, but Appeals sustained the proposed levy. Under section 6330(d)(1), the taxpayer had 30 days to file a petition with the Tax Court to review that determination. The taxpayer filed one day late and the Tax Court dismissed for lack of jurisdiction. The Eighth Circuit affirmed, holding that the statutory filing deadline was a jurisdictional requirement and as such equitable tolling was unavailable.  

The Supreme Court disagreed, finding that the requirements in section 6330(d)(1) are not jurisdictional and so could be subject to equitable tolling. Jurisdictional requirements cannot be waived or forfeited, must be raised by the courts on their own, and do not allow for equitable exceptions. A procedural requirement is only treated as jurisdictional if Congress "clearly states" that it is. The Supreme Court closely parsed the language in section 6330(d)(1) and similar provisions, including consideration of rules of grammar, and found the language subject to multiple interpretations. As the Court pointed out "Where multiple plausible interpretations exist – only one of which is jurisdictional – it is difficult to make the case that the jurisdictional reading is clear." The Court further held that the filing deadline could be subject to equitable tolling and remanded the case for consideration of that issue.

This decision is certainly welcome news for taxpayers with collection due process hearings. The availability of equitable tolling, however, won't mean an automatic pass for late filers. Taxpayers will have to marshal their facts to show good reason for filing late. The decision also reflects the trend by the Supreme Court to interpret jurisdictional requirements narrowly. As the Court noted in Boechler, it has "endeavored 'to bring some discipline' to use of the jurisdictional label." Other procedural requirements in the tax area will undergo greater scrutiny, so we shall see if those provisions will be amenable to Boechler-type argument. Another case raised similar arguments with respect to the timing for filing a petition in Tax Court under former section 6226, the provision addressing judicial review of final partnership administrative adjustments (FPAAs) in a Tax Equity and Fiscal Responsibility Act (TEFRA) proceeding. In that case, the Ninth Circuit rejected the taxpayer's contention that the filing deadline was not jurisdictional. Absent an extension, the taxpayer in that case has until early June to petition the Supreme Court for review.

Tax Court Questions IRS Discretion under Clear-Reflection Doctrine

Jim Gadwood and George Hani

In Continuing Life Communities Thousand Oaks LLC v. Commissioner, T.C. Memo. 2022-31, the Tax Court rejected an IRS-imposed accounting method change and upheld the taxpayer's accounting method. The taxpayer provides housing and care to senior citizens under "life-care contracts." These contracts require a resident to make an upfront payment to a trust. Upon the earlier of the resident's death or voluntary departure, the trustee pays a predetermined portion of this upfront payment (the Deferred Fee) to the taxpayer and returns the remainder to the resident or the resident's estate. The Deferred Fee increases over time to a maximum of 25 percent of the upfront payment after four years from the date of the life-care contract. For book and tax purposes, the taxpayer included the Deferred Fee in income over the resident's actuarially determined expected life (adjusted annually). The IRS stipulated that the taxpayer's method followed applicable Generally Accepted Accounting Principles (GAAP) but nevertheless sought to accelerate the Deferred Fee for tax purposes to the first four years of each life-care contract.

The four-part opinion authored by Judge Mark V. Holmes meticulously analyzes decades of tax accounting authorities. 

  • First, the court undertook a textual analysis and concluded that (1) there is no reason to exclude the taxpayer from the regulatory rule that consistent compliance with GAAP "will ordinarily be regarded as clearly reflecting income" and (2) the taxpayer's obligation to provide continuing care meant that the requisite performance for the taxpayer to have a fixed right to the Deferred Fees under Section 451 had not yet occurred. 
  • Second, the court acknowledged that financial accounting and tax accounting have different objectives but found no way in which the taxpayer's tax method "contradicts the purpose of tax accounting's treatment of income recognition." 
  • Third, the court evaluated potential analogous case law but found it either not analogous or otherwise distinguishable. 
  • Fourth, the court refused to defer to the IRS's determination that the taxpayer's accounting method failed to clearly reflect income.

While the court's refusal to defer to the IRS determination regarding clear reflection is newsworthy on its own, the court's analysis in reaching this conclusion has potentially seismic implications for the tax accounting world. Not only did the Tax Court effectively invite a future administrative law challenge to Treasury regulations, but the court went on to lay out what such a challenge might look like. The court began by observing a contradiction between section 446 and Treas. Reg. § 1.446-1(a)(2). The former is conditional: "If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, then computation of taxable income shall be made under such method as, in the opinion of the secretary, does clearly reflect income" (emphasis added). The latter is unconditional: "However, no method of accounting is acceptable unless, in the opinion of the Commissioner, it clearly reflects income." The court referred to this contradiction as "plain" but observed that neither party had questioned the regulation's validity under Chevron step one. 

The court then turned to nearly century-old case law that is often cited as supporting IRS discretion under the clear reflection doctrine and concluded that, as a matter of historical fact, this case law granted such discretion to the Tax Court's predecessor — the Board of Tax Appeals — rather than to the IRS. Subsequent case law giving this discretion to the IRS has led to "the peculiarity of discretion in the Commissioner to change accounting methods that courts can review for abuse of discretion in a de novo deficiency proceeding unbound and unjustified by any record that the Commissioner prepares." While questioning this state of affairs, the Tax Court concluded that "[t]his evolution is beyond our power as a trial court to change."

Given the Tax Court's provocative analysis and seeming appeal to an appellate court to change the longstanding landscape regarding IRS discretion under the clear-reflection doctrine, it is unclear whether the IRS will appeal this decision or instead simply issue a non-acquiescence. Regardless of the IRS's next steps in this case, we anticipate that a trial court will face a direct challenge to the validity of Treas. Reg. § 1.446-1(a)(2) in due course.

Liberty Global Secures Partial Win and Treasury's Good Cause Claim Gets Questioned

Loren Ponds and Marissa Lee*

On April 4, the U.S. District Court for the District of Colorado granted summary judgment in part in favor of Liberty Global and held that Treasury's temporary regulations under section 245A were invalid for failing to comply with the notice and comment requirement of the Administrative Procedure Act (APA). Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. Apr. 4, 2022). Liberty Global sought a refund of more than $109 million, an amount representing the taxes paid and penalties and interest assessed in connection with a December 2018 transaction in which Liberty Global claimed a section 245A deduction. Treasury issued the temporary regulations in June 2019, which retroactively denied a section 245A deduction for certain "extraordinary" transactions. After concluding that the APA's notice and comment requirements indeed apply to the promulgation of temporary regulations, the court next found that Treasury failed to show good cause for not complying with those requirements. 

The district court noted that notwithstanding its ruling on the summary judgment motion, there are still factual issues to be addressed. The district court also did not reach the issue of whether the temporary regulations were valid under a substantive Chevron analysis. While the government may seek an interlocutory appeal to the U.S. Court of Appeals for the Tenth Circuit, the appellate court may be inclined to deny the request on the basis that all issues have not been disposed of at the district court level. Assuming the district court's decision disposing of all outstanding issues is ultimately appealed, it is possible that the Tenth Circuit could cabin its review to the substantive issues and not address the temporary regulations' validity. Interested taxpayers should continue to track developments in the case as they arise. See our alert on the Liberty Global decision here.

Greenbook Proposes Reporting of Crypto Held Abroad 

Andy Howlett, Colin Handzo,* and George Hani

Taxpayers holding cryptocurrencies in foreign wallets are currently faced with uncertainty as to whether they need to report those assets on Form 8938, "Statement of Specified Foreign Financial Assets." In the recently published Greenbook, Treasury introduced a proposal seeking to change that by explicitly requiring certain U.S. taxpayers to report accounts that hold digital assets maintained by a foreign digital asset exchange or service provider or else face stiff penalties. Information reporting of digital assets is undoubtedly a focus of the IRS in recent years, as evidenced by the new question added to the top half of page 1 of the 2021 Form 1040: "[D]id you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" In the Greenbook, Treasury acknowledged that tax compliance and enforcement with respect to digital assets is "a rapidly growing problem," and this proposal is part of their efforts to catch up with the globally popular and quickly developing cryptocurrency phenomenon. 

Current section 6038D requires certain U.S. taxpayers to report "specified foreign financial assets" in which they have an interest if such interests exceed, in the aggregate, $50,000. Form 8938 is used to comply with this reporting requirement. Specified foreign financial assets include financial accounts maintained by a foreign financial institution and foreign non-account assets held for investment, including foreign stocks, securities, financial instruments, contracts with non-U.S. persons, and interests in foreign entities. It is unclear in many cases whether section 6038D currently requires reporting of cryptocurrency held in wallets maintained by foreign-based "institutions" due to a variety of considerations. 

In the Greenbook, Treasury proposed that the definition of "specified foreign financial assets" is expanded to explicitly include any account that holds digital assets maintained by a "foreign digital asset exchange" or "other foreign digital asset service provider," thereby resolving an ambiguity under current law. This would expand reporting to include, for instance, digital wallets maintained by a cryptocurrency exchange organized or established abroad. While this proposal — which if adopted would be effective for returns filed after 2022 — would provide some clarity, it would also come with potential for hefty penalties. Failure to provide information required under Section 6038D is generally subject to a penalty of between $10,000 to $60,000 for each failure and double the accuracy-related penalty on underpayment of tax for transactions involving undisclosed foreign financial assets. 

These changes could be accompanied by updates to other reporting regimes, including, for instance, to the Foreign Bank and Financial Accounts (FBAR) reports that every U.S. person holding foreign accounts in excess of $10,000 must file with Treasury every October. FBAR is administered under Title 31's Bank Secrecy Act (not the Internal Revenue Code) and it comes with its own set of draconian penalties. In 2020, the Financial Crimes Enforcement Network (FinCEN) issued Notice 2020-2, which indicated that foreign accounts holding virtual currency are not generally reportable on the FBAR, but that FinCEN intends to amend regulations to include foreign accounts holding virtual currency as reportable accounts. 

*Former Miller & Chevalier attorney

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