On August 16, 2019, the Ninth Circuit upheld Amazon’s cost-sharing arrangement and valuation of its intangible assets, affirming the Tax Court’s 2017 decision. In essence, the holding confirms that U.S. companies transferring all intangibles to foreign subsidiaries need not include global goodwill and going concern value of the business when calculating the mandatory buy-in payment (at least with respect to pre-2009 cost-sharing regulations).

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It is no secret that cryptocurrency holders are facing increased scrutiny by the IRS. In 2018, the agency announced a virtual currency compliance campaign that included outreach and examinations. As part of its latest sequence this summer, the IRS recently publicized that it has begun sending letters to cryptocurrency holders advising them of their reporting and payment obligations and warning that failure to properly report transactions or pay taxes owed might result in penalties or criminal enforcement. Following on the heels of this announcement, the IRS also began sending notices to taxpayers that claim a discrepancy in the income reported on tax returns. The IRS expects to send up to 10,000 letters to cryptocurrency holders by the end of August 2019, but there is no information on the number of notices that will be issued.

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In the wake of the IRS’ Ninth Circuit victory in Altera Corporation v. Commissioner, 926 F.3d 1061 (9th Circuit 2019), the IRS’ Large Business and International (LB&I) Division issued Memorandum LB&I-04-0719-008, informing examiners that they may once again open examinations to require taxpayers to include stock-based compensation costs as intangible development costs under Treasury Regulations §§ 1.482-7A(d)(2) and 1.482-7(d)(3). In Altera, a Ninth Circuit panel reversed a 2015 Tax Court decision invalidating the Treasury Regulation § 1.482-7A(d)(2) requirement that related parties allocate stock-based compensation costs when entering into cost-sharing arrangements to develop intangible assets. For more about the Altera decision, including prior actions by the Ninth Circuit, click here.

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In Law360, tax partner and tax controversy group co-founder Kat Gregor discusses the top summer book recommendations for tax attorneys, including “First: Sandra Day O’Connor” by Evan Thomas and “How to Win in a Winner-Take-All World: The Definitive Guide to Adapting and Succeeding in High-Performance Careers” by Neil Irwin.

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In “The Practitioner’s Guide to Global Investigations” half-year update, Global Investigations Review published a piece authored by litigation and enforcement partner Judith Seddon titled “HMRC outlines benefits of self-reporting tax offences, while SFO fraud guidance expected to reward privilege waiver and compliance programmes.” Judith and litigation and enforcement partner Ama Adams served as editors.

This piece is an extract from the half-year update to the third edition of GIR’s The Practitioner’s Guide to Global Investigations. The half-year update is available here and the whole Guide is available here.

  • IFA New England Breakfast Meeting: Ropes & Gray hosted an IFA Breakfast on May 23, which featured a presentation on the recent Danish beneficial ownership cases by Eric Fort, tax partner at Arendt & Medernach.
  • 12th Annual U.S. and Latin American Tax Practice Trends Conference: Kat Gregor recently spoke on a panel of leading experts on “Hidden Wealth”: The Global Campaign for Tax Transparency –the Latin Response” on June 13 in Miami, Florida. Topics included the Common Reporting System (CRS); Golden Passports; Economic Substance Requirements for Shell Companies; Beneficial Ownership Disclosure; Tax Haven Black Lists; and the OECD Global Forum on Tax Transparency.
  • ABA Section of Taxation May Meeting: Elizabeth Smith moderated a panel of leading experts on “Administrative Practice Committee Important Developments” on May 10 in Washington D.C. Topics included Treasury and IRS guidance and regulations, court decisions, and other items germane to tax administration.
  • 19th  Annual U.S.-Europe Tax Practice Trends Conference: On April 3, Ropes & Gray, Kostelanetz & Fink, Katten Muchin Rosenman and Bougartchev Moyne Associés co-hosted a cocktail event, which allowed U.S. and international law firms, accounting firms and government representatives to network.
  • FBA Tax Boston and Ropes & Gray Co-Hosted Event with Speaker Judge Joseph Nega of the United States Tax Court. On April 1, attendees were provided the opportunity to network and connect with practitioners from Boston area law and accounting firms, the Internal Revenue Service, local non-profit organizations and local law school students.

In its 2019 Spring Term, the Supreme Court published five decisions regarding tax matters, three of which limit states’ taxing authority. In a February decision, Dawson v. Steager, the Court held that a state cannot tax a federal retiree’s pension benefits while declining to tax a similarly situated state retiree. The March decision in BNSF Railway Co. v. Loos held that lost wages paid to a worker who was injured on the job constitute taxable compensation under the Railroad Retirement Tax Act. Later in March, the Court held in Washington State Department of Licensing v. Cougar Den that a state tax imposed on a member of the Yakama Nation on importation of fuel via public highway is pre-empted by the 1855 Treaty Between the United States and the Yakama Nation of Indians. Then, in May, in Franchise Tax Board of California v. Hyatt, the Court held that a state may not be sued in another state’s court in a private suit, unless it waives immunity. Finally, the Court issued its decision in North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, covered in a separate Disputing Tax post available here.

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On June 21, 2019, the U.S. Supreme Court unanimously held that a state cannot tax trust income solely because the beneficiaries are state residents.

At issue in North Carolina Dep’t of Revenue v. Kimberly Rice Kaestner 1992 Family Trust (“Kaestner”) was North Carolina’s law imposing tax on any trust income that “is for the benefit of” a North Carolina resident. North Carolina’s Department of Revenue relied on this statute to tax the income of a trust purely because the beneficiaries were residents of North Carolina. No other connections between the trust and North Carolina existed: neither the trustee nor the settlor was a resident of North Carolina; the trust was administered in New York and Massachusetts; and there were no direct investments in North Carolina. Moreover, during the years in question, the beneficiaries received no distributions, had no right to demand trust income or to control trust assets, and had no assurance of ever receiving trust income; the out-of-state trustee had “absolute discretion” over the trust, including its termination.

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The IRS will continue to focus its compliance efforts on taxpayers’ offshore activities in the coming months.

At the June 2019 New York University Tax Controversy Forum, acting director of IRS field operations (foreign payments practice) Kimberly A. Schoenbacher stated that the IRS will soon launch a compliance campaign targeting foreign banks that have not reported foreign assets of their U.S. account holders on a Form 8966, as required under the Foreign Account Tax Compliance Act (“FATCA”).
Separately, on April 16, 2019, the IRS Large Business & International Division (“LB&I”) announced three compliance campaigns, bringing the total number of announced campaigns to 53.1 The stated goals of the new campaigns are to “improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.”

Please click here to read the full article authored by Elizabeth Smith and Ropes & Gray summer associate Lucas Follett.

On May 16, 2019, the Large Business and International (LB&I) Division of the IRS unveiled the Large Corporate Compliance (LCC) program. The LCC uses data analytics to automatically target the largest and most complex corporate taxpayers having the most compliance risks for examination. The LCC is part of a larger push toward “portfolio management”—ensuring that the IRS’s limited resources are spent on tax returns with the highest compliance risk.

Please click here to read the full article authored by tax controversy counsel Elizabeth Smith and Ropes & Gray summer associate Michael Rochford.