2020's Key Tax Controversy Developments

By Andrew Roberson and Kevin Spencer
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Law360 (December 10, 2020, 5:21 PM EST) --
Andrew Roberson
Andrew Roberson
Kevin Spencer
Kevin Spencer
2020 is almost over. What a heck of a year: COVID-19; working from home; virtual everything — school, birthdays, Thanksgiving, Christmas; no division between life and work.

In the face of the pandemic and despite all of the weirdness that will forever mark 2020, tax controversy marched on. We wanted to recount some of the highlights and give you our perspective.

Tax Litigation Developments

It is difficult to identify which cases were the most important in 2020. Subjects such as conservation easements and supervisory approval for penalties could take up this entire discussion, but we will leave that to others. For this article, we have selected a couple of important cases in other areas — either decided or still pending — as well as an update on transfer pricing litigation.

One of the most closely watched U.S. Supreme Court cases right now is CIC Services LLC v. Internal Revenue Service.[1] This case involves important questions regarding the scope of the Anti-Injunction Act and may impact the ability of taxpayers to engage in preenforcement challenges to regulations. Oral argument was held on Dec. 1, and based on the transcript it appears that the justices are leaning toward fashioning some type of remedy for the taxpayer. An opinion is anticipated in the first half of 2021.

In the international context, the U.S. Tax Court issued its opinion in Whirlpool Financial Corp. v. Commissioner.[2] The court held the taxpayer's sales income was foreign-based company sales income under the so-called branch rule, and upheld the validity of certain Subpart F regulations.

Some practitioners were surprised by the court's reasoning on certain points, and it is unclear how the opinion might impact other taxpayers with similar international structures. The case is currently on appeal to the U.S. Court of Appeals for the Sixth Circuit.

In the transfer pricing area, the two biggest pieces of news in 2020 were the U.S. Supreme Court's refusal to hear Altera Corp. v. Commissioner,[3] and the Tax Court's recent opinion in Coca-Cola Co. v. Commissioner.[4] The former leaves in place the U.S. Court of Appeals for the Ninth Circuit's decision in favor of the government; however, this is likely not the last word as the Tax Court may stick to its taxpayer favorable opinion in cases appealable to other circuits.

Coca-Cola Co. involved a multi-billion dollar dispute that was mostly a win for the Internal Revenue Service.[5] Many may not have noticed given that it was buried in the 200-plus page opinion, but the Tax Court punted on the so-called blocked-income issue that has been pending in 3M Co. v. Commissioner since 2016.[6] The 3M case remains an important one, which we will hopefully see decided in 2021.

Several other transfer pricing cases are pending in the Tax Court and in district court. These include Tax Court cases Medtronic Inc. v. Commissioner,[7] Facebook Inc. v. Commissioner,[8] and Western Digital Corp. v. Commissioner,[9] and Perrigo Co. v. United States in the U.S. District Court for the Western District of Michigan.[10]

Going forward, we are seeing an increased interest in advance pricing agreements seemingly as a way to avoid battles with the IRS and foreign governments over related-party transactions. This might be a good time to explore an advance pricing agreement, as taxpayers and governments alike are seeking consistency.

CAP Is Back

The Compliance Assurance Process, or CAP, program, is a real-time audit technique for identifying and resolving tax issues through open, cooperative and transparent interaction between the IRS and Large Business and International Division taxpayers prior to the filing of the tax return.[11]

Since its debut, CAP has undergone some changes, most recently due to an IRS' shift toward issue-focused examinations. In 2016, CAP was closed to new taxpayers as the IRS ironed out some issues with the program.

The CAP program started in 2005, and by all accounts was very successful. Indeed, taxpayers liked the certainty, and the IRS liked the currency. Of course, like all new IRS programs, there were some problems. Over time we discovered CAP might not be well-suited for taxpayers with transfer pricing and research tax credit issues. And, the CAP exam teams sometimes got hung up on what they perceived as aggressive tax planning.

In 2019, the IRS reopened CAP to new taxpayers.[12] To qualify, there are many hoops to jump through, including taxpayer eligibility criteria. For example, the taxpayer must have $10 million or more in assets; generally accepted accounting principles-audited financials; not be under investigation/litigation with the IRS; and if under audit, have only one open and one unfiled tax year.

Part of the CAP process is to identify material issues for the IRS based upon pre-agreed criteria including a materiality threshold. During the CAP audit, the taxpayer and the IRS regularly engage in discussions to resolve technical and factual issues. If the parties do not agree, the fast-track settlement process is generally available for resolution.

After the return is filed, the taxpayer makes post-filing representations about how the filing is in accordance with the parties' agreed treatment of items. The IRS will also engage in a post-filing review process to make sure all issues have been considered and dealt with as agreed by the parties.

The IRS' open invitation to join CAP may encourage more taxpayers to sign up. Query whether this is the right time to join CAP. The IRS' examination resources are still very thin, so generally we expect light audit touches in the near term. Because CAP requires full disclosure, going into the program invites scrutiny on your tax positions.

There are numerous unclear and unresolved issues associated with the Tax Cuts and Jobs Act, so CAP taxpayers tend to be IRS-examination guinea pigs. Indeed, CAP taxpayers were the first taxpayers to see canned information document requests relating to Internal Revenue Code Section 965.[13]

But CAP may be valuable when the taxpayer gets points with its auditor. Joining the program should reduce cost of financial audits and scrutiny, and reduce time spent on your reserve analysis.

CAP continues not to be ideal for taxpayers who are not regularly audited, have issues on their return that could be perceived as aggressive, or have complex transfer pricing or research tax credit issues.

What's Up with Revenue Procedure 94-69?

Revenue Procedure 94-69 allows taxpayers under continuous examination to disclose, at the start of an audit, erroneous tax positions on the return to avoid certain civil tax penalties. The procedure has grown into an informal mechanism to amend a return without filling out all of the paperwork. The idea is that the correction will be folded into the audit adjustment at the end of the examination.

This ability to fix tax return issues has been very popular with taxpayers, and often has been used by IRS agents to focus their examination on issues raised in the disclosure. As part of a recent change to the large corporate compliance program and the elimination of continuous audits, the IRS has questioned the continuing viability of Revenue Procedure 94-69 and on Aug. 19 requested taxpayers' comments.[14]

Various commentators — including the American Bar Association tax section and the Tax Executives Institute, to name a few — have chimed in. The general consensus is that the IRS should keep Revenue Procedure 94-69.[15]

The informal technique avoids the need to file a formal amended return, which is burdensome process with many corporate taxpayers' returns being in the hundreds or thousands of pages. Moreover, having to file a formal amended return can be a significant strain on taxpayer's resources, not to mention the need to deal with state and local tax filings.

Other points in favor of keeping Revenue Procedure 94-69 include allowing all mistakes to be fixed at once (i.e., avoiding multiple amended returns), the ease of reporting on Schedules K-1 are that are issued after the original tax return is filed, incorporating carryover adjustments from prior examinations, and potentially avoiding strict liability for penalties relating to transfer pricing adjustments.

For large corporate taxpayers, this disclosure mechanism benefits both parties. We are hopeful that the IRS realizes that what is not broken should not be fixed.

The IRS' Campaign Assault Continues

In January 2017, LB&I released its much-anticipated campaign audit technique and the first group of campaigns. The IRS' campaign audit program is a centralized risk identification strategy meant to leverage the IRS' knowledge about specific issues.

The idea was that with less resources and personnel, the IRS had to find a more efficient and effective way to audit taxpayers. The campaigns identify what the IRS believes are the most serious tax issues and allocates resources specifically to those issues.

Since 2017, LB&I has continued to release campaigns targeting perceived compliance risks while also retiring other campaigns. Presently, there are over 50 active campaigns. The newest campaigns are focused on TCJA-specific issues (e.g., Internal Revenue Code Section 965).[16]

What can you expect during the audit of a campaign issue? Expect a focused audit by specifically trained IRS agents who have a centralized knowledge base on the issue. The audit will be implemented by canned information document requests and audit processes with the goal of reaching uniform settlements/disposition of the issue across the country.

What does this mean for you? Preparation is the best way deal with campaign audit issues efficiently and effectively. Get your documents and story together now — don't wait until the IRS shows up. For positions that are contrary to IRS regulations, be prepared for a fight!

LB&I officials have recently stated that the IRS' examination agents will not settle any case involving disputes over the validity of regulations. Appeals also may not offer to settle any regulation challenge.

IRS Appeals Office Is (Still) Open for Business

With the pandemic, we definitely saw a slow down at the IRS. Heck, many of IRS' offices are still not up and running. But much to the IRS' credit, it did an amazing job getting its employees and agents the tools they needed to keep moving matters forward, albeit working from home.

The IRS Independent Office of Appeals is one of the shining stars of the pandemic. IRS appeals conferences continue, for the most part, as before, albeit via WebEx.[17]

Here are some things to consider if you have an appeals conference scheduled in the near term. WebEx is great because it focuses everyone's attention. Facial gestures are noticed and noticeable. The virtual conference permits more frequent and less expensive interactions with the appeals office. The appeals conference no longer requires travel. The cost of bringing other parties to the conference, like people from the business units or an expert, is more approachable.

But with all good things comes some downsides. We noticed a desire on the part of appeals officers to dispose of cases more quickly, and to not allow the normal back-and-forth process.

So, the lesson may be, try to slow things down and allow more time for consideration of the issues. This should be easier as there is no need for travel to have a conference. Settlements are best when issues are given time to sink in and you get buy in from the appeals officer.

On to 2021

2020 is almost over — thank goodness — but we have learned much. Taxpayers and the IRS can, and will continue to, work effectively from home and remotely. Business travel will be the exception, and not the rule, going forward. We hope with this new form of interaction, we will have more face-to-face opportunities to work with our counterparts at the IRS on effectively and efficiently resolving tax controversies.



Andrew R. Roberson and Kevin Spencer are partners at McDermott Will & Emery LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Supreme Court No. 19-930 .

[2] 154 T.C. No. 9 (2020) .

[3] Supreme Court No. 19-1009 .

[4] 155 T.C. No. 10 (Nov. 18, 2020).

[5] For further discussion of this case, see https://www.law360.com/articles/1330303/tax-court-sides-with-irs-in-3-3b-coke-transfer-pricing-row.

[6] For further discussion of the blocked income issue, see https://www.taxcontroversy360.com/2016/09/3m-company-irs-file-reply-briefs-in-blocked-income-case-tax-court-orders-oral-argument/.

[7] Tax Court No. 6944-11 (Kerrigan, J.) (further trial on remand from the Court of Appeals for the Eighth Circuit scheduled for June 7, 2021).

[8] Tax Court Docket No. 21959-16 (Pugh, J.) (trial scheduled for June 2, 2021).

[9] Tax Court Docket No. 18948-18 (Urda, J.) (partial summary judgment motions pending; trial scheduled for May 16, 2022).

[10] W.D. Michigan Docket No. 1:17-cv-00737-RJJ-PJG (Jonker, CJ) (trial scheduled for January 26, 2021).

[11] Information about the Compliance Assurance Process program is available on the IRS website at https://www.irs.gov/businesses/corporations/compliance-assurance-process.

[12] See https://www.taxcontroversy360.com/2019/09/the-internal-revenue-service-is-expanding-the-2020-compliance-assurance-process/#:~:text=The%20Large%20Business%20and%20International%20Division%20of%20the,meet%20the%20eligibility%20requirements%20for%20the%20CAP%20program.

[13] Internal Revenue Code Section 965 .

[14] https://www.irs.gov/newsroom/irs-seeks-comments-on-revenue-procedure-94-69.

[15] Some of the comments can be found at the following links: https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/2020/102020comments.pdf; https://www.tei.org/sites/default/files/advocacy_pdfs/10162020-Final-comments-on-proposed-elimination-of-Rev-Proc-94-69.pdf; https://www.uschamber.com/sites/default/files/rev_proc_94-69_comment_letter_10.19.2020_final.pdf; https://assets.kpmg/content/dam/kpmg/us/pdf/2020/10/tnf-rp-94-69-comments.pdf.

[16] The list and description of active LB&I campaigns can be found at https://www.irs.gov/businesses/corporations/lbi-active-campaigns.

[17] Currently, the IRS is conducting all Appeals conferences virtually. See https://www.irs.gov/appeals/irs-independent-office-of-appeals-and-in-person-conferences. Information on Webex conferences is also available on the IRS website. See https://www.irs.gov/appeals/appeals-virtual-conferences-webex.

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