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Federal Tax Research Bulletin - The Latest Tax and Accounting Articles


Parker's Federal Tax Bulletin

    
July 08, 2024    

 

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 1. In This Issue ... 


Tax Briefs

Final Regs Provide Guidance on Reporting and Payment of Stock Repurchase Excise Tax; Proposed Regs Address Recapture of Interest on Excess COVID-19 Tax Credits; IRS Publishes Inflation Adjustment Factors for Clean Hydrogen Credit ...

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IRS Provides Guidance on Exceptions to Penalty on Early Retirement Plan Distributions

The IRS issued a notice providing guidance in question-and-answer format on the application of the exceptions to the 10 percent additional tax under Code Sec. 72(t) for (1) emergency personal expense distributions and (2) domestic abuse victim distributions, both of which were added to Code Sec. 72(t)(2) by the SECURE 2.0 Act of 2022 (Pub. L. 117-328). The IRS stated that it anticipates issuing regulations under Code Sec. 72(t) and requests comments with respect to all aspects of Code Sec. 72(t). Notice 2024-55.

Read more ...

Supreme Court Overrules Chevron, Opening the Door to Extensive Challenges to Tax Regulations

The Supreme Court overruled Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), under which courts generally defer to permissible agency interpretations of ambiguous statutes those agencies administer, potentially opening the door to challenges to even longstanding IRS regulations. The Court held that when interpreting statutes administered by federal agencies, courts are required to exercise their independent judgment and may not defer to an agency interpretation of the law simply because a statute is ambiguous. Loper Bright Enterprises, et al. v. Raimondo; Relentless, Inc. et al. v. Dept. of Commerce, et al., 2024 PTC 237 (S. Ct. 2024).

Read more ...

Supreme Court Upholds Mandatory Repatriation Tax on CFC Owners

The Supreme Court affirmed a decision by the Ninth Circuit and held that the Mandatory Repatriation Tax (MRT), which attributes the realized and undistributed income of an American controlled foreign corporation (CFC) to the entity's American shareholders and then taxes the American shareholders on their portions of that income, does not exceed Congress's constitutional authority. The Court concluded that under longstanding precedents, when dealing with an entity's undistributed income Congress may either tax the entity or tax its shareholders or partners and, whichever method Congress chooses, the tax remains a tax on income. Moore v. U.S., 2024 PTC 220 (S. Ct. 2024).

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IRS Issues Final Regulations and Other Guidance on Digital Asset Transactions

The IRS issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency, that take place beginning in calendar year 2025; the regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. In addition, the IRS issued a notice providing transitional relief from reporting penalties for brokers during calendar year 2025; a notice providing that until further guidance is issued, brokers will not have to file information returns or furnish payee statements on certain specified digital asset transactions; and a procedure that generally permits taxpayers to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units. T.D. 10000; Notice 2024-56; Notice 2024-57; Rev. Proc. 2024-28.

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IRS Issues Final Regulations on Disallowance of Conservation Easement Deductions

The IRS issued final regulations concerning the statutory disallowance rule enacted by the SECURE 2.0 Act of 2022 to disallow a deduction for a qualified conservation contribution made by a partnership or an S corporation after December 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis. The final regulations provide guidance regarding this statutory disallowance rule, including definitions, appropriate methods to calculate the relevant basis of a partner or an S corporation shareholder, the three statutory exceptions to the statutory disallowance rule, and related reporting requirements. T.D. 9999.

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Fourth Circuit: Biotech Company Overstated Expenses in Computing Research Credit

The Fourth Circuit affirmed the Tax Court and held that a biotechnology company that claimed both the research credit under Code Sec. 41 and the orphan drug credit under Code Sec. 45C, and had expenses that qualified as both qualified research expenses under Code Sec. 41 and qualified clinical testing expenses under Code Sec.45C, improperly excluded the expenses it treated as qualified clinical testing expenses for the three-year reference period described in Code Sec. 45(c)(5)(A). The Fourth Circuit rejected the taxpayer's argument that Code Sec. 45C(c)(2), which requires that any qualified clinical testing expenses which are also qualified research expenses be taken into account in determining base period research expenses for purposes of applying Code Sec. 41 to subsequent tax years, lost effect as a result of amendments made to Code Sec. 41 in 1989. United Therapeutics Corp. v. Comm'r, 2024 PTC 228 (4th Cir. 2024).

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Tax Court Has Jurisdiction Where Code Fails to Clearly State a Deadline Is Jurisdictional

The Tax Court held that, because Congress did not clearly state that the 90-day deadline in Code Sec. 7436(b)(2) to petition the Tax Court for a redetermination of employment status is jurisdictional, it was not deprived of jurisdiction in the case before it because of a taxpayer's late filing. As a result, the court denied an IRS motion to dismiss the case for lack of jurisdiction and said it would reserve judgment on whether the 90-day deadline is subject to equitable tolling, and thus a pause in the running of the statute of limitations, until the parties raise such issue in an appropriate motion. Belagio Fine Jewelry, Inc. v. Comm'r, 162 T.C. No. 11 (2024).

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Ninth Circuit: Deadline for IRS to Recover Erroneous Refund Starts When Check Clears

A panel of the Ninth Circuit held, as a matter of first impression in that circuit, that the two-year limitations period for the IRS to file a lawsuit to recover an erroneous refund under Code Sec. 6532(b) starts on the date the erroneous refund check clears the Federal Reserve and payment to the taxpayer is authorized by the Treasury. The Ninth Circuit therefore reversed a district court's dismissal, as time-barred, of a complaint brought by the government to recover an erroneous tax refund and remanded the case. U.S. v. Page, 2024 PTC 236 (9th Cir. 2024).

Read more ...



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 2. Tax Briefs 


Corporations

Final Regs Provide Guidance on Reporting and Payment of Stock Repurchase Excise Tax: In T.D. 10002, the IRS issued final regulations that provide guidance regarding the reporting and payment of the Code Sec. 4501 excise tax on repurchases of corporate stock made after December 31, 2022. The regulations affect certain publicly traded corporations that repurchase their stock or whose stock is acquired by certain specified affiliates.


Credits

Proposed Regs Address Recapture of Interest on Excess COVID-19 Tax Credits: In REG-109032-23, the IRS issued proposed regulations providing that the IRS will assess as an underpayment of tax any overpayment interest paid under Code Sec. 6611 to a taxpayer on an erroneous refund of the employment tax credits provided under the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act, and the American Rescue Plan Act of 2021 (COVID-19 credits). The proposed regulations apply to all interest amounts paid under Code Sec. 6611 on or after the date of publication in the Federal Register for any erroneous refund of the COVID-19 credits.

IRS Publishes Inflation Adjustment Factors for Clean Hydrogen Credit: In Notice 2024-45, the IRS published the inflation adjustment factors for the credit for production of clean hydrogen under Code Sec. 45V and the corresponding amounts for calendar years 2023 and 2024. The inflation adjustment factor and applicable amount are used to determine the amount of the credit allowable under Code Sec. 45V.

IRS Publishes Reference Price for Nonconventional Source Production Credit: In Notice 2024-51, the IRS published the reference price for the nonconventional source production credit under Code Sec. 45K for calendar year 2023. Code Sec. 45K(d)(2)(A) generally provides that the Treasury Department shall determine and publish the inflation adjustment factor and the reference price for the preceding calendar year for purposes of the nonconventional source production credit under Code Sec. 45K.

IRS Releases Revised Draft Form 6765, Credit for Increasing Research Activities: In IR-2024-171, the IRS announced the release of draft Form 6765, Credit for Increasing Research Activities, which is used to figure and claim the research credit under Code Sec. 41. The changes to the form include optional reporting for certain qualified small business taxpayers of Section G (previously labeled Section F) which requests the Business Component Detail, and a reduced number of business components that must be reported on Section G; the IRS also notes that revised Section G will be option for all filers for tax year 2024 (processing year 2025) to allow time to transition to the Section G format.


Deductions

IRS Reminds Taxpayers That Code Sec. 280E Still Applies to Marijuana Businesses: In IR-2024-177, the IRS stated that until a final federal rule is published, marijuana remains a Schedule I controlled substance and Code Sec. 280E, which disallows all deductions or credits for amounts incurred in carrying on a trade or business of illegally trafficking in a Schedule I or II controlled substance, still applies. The IRS noted that although the law has not changed, and Code Sec. 280E applies to businesses that sell marijuana - even if they operated legally under state law - some taxpayers are filing amended returns seeks refunds; the IRS said that these claims are not valid and that it is taking steps to address these claims.


Foreign

IRS Announces Suspension of U.S.-Russia Tax Treaty: In Announcement 2024-26, the IRS announced that the United States provided formal notice to the Russian Federation on June 17, 2024, to confirm the suspension of the operation of paragraph 4 of Article 1 and Articles 5-21 and 23 of the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Washington on June 17, 1992 (Convention), as well as the operation of its accompanying Protocol, by mutual agreement. The announcement states that the suspension will take effect both for taxes withheld at source and in respect of other taxes on August 16, 2024, and will continue until otherwise decided by the two governments.


Procedure

Proposed Regs Allow IRS to Directly Accept Payments by Credit Card: In REG-120137-19, the IRS issued proposed amendments to regulations regarding the payment of tax by commercially acceptable means. The proposed amendments reflect changes to the law made by the Taxpayer First Act that allow the IRS to directly accept payments of tax by credit or debit card, without having to connect taxpayers to third-party payment processors.

Certain Participants in Syndicated Conservations Easements To Receive Settlement Offers: In IR-2024-174, the IRS announced the mailing of a time-limited settlement offer for certain taxpayers who participated in Syndicated Conservation Easements and substantially similar transactions that are under audit in the IRS's Large Business &ernational and Small Business and Self-Employed divisions. The IRS noted that it will notify eligible taxpayers by letter with the applicable terms and timelines to respond, and taxpayers who do not receive a letter are not eligible for this resolution.

Court Dismisses Employee's Lawsuit Against Employer for Complying With IRS Levy: In Thomas v. Pilgrim Pride Corporation, 2024 PTC 227 (11th Cir. 2024), the Eleventh Circuit affirmed the dismissal of a lawsuit brought by an individual seeking damages against his employer for its compliance, through the levying of payroll funds, with an IRS lien for back taxes. The Eleventh Circuit found that under Code Sec. 6332(e), the employer was exempt from liability for honoring the levy even if the levy was in some way defective.

CFO's Whistleblower Retaliation Claim Survives Summary Judgment: In Branson v. Jackson Municipal Airport Authority, et al., 2024 PTC 231 (S.D. Miss. 2024), a district court denied summary judgment to the former employer of an individual who filed a lawsuit under Code Sec. 7623(d) claiming she was fired for insisting that members of the board fill out Forms W-9 for their per diem payments and for issuing Forms 1099 for the payments. The court denied the employer's motion after finding there was ample evidence that the individual was fired for reporting the income to the IRS, including the close proximity of time between her reporting the income and her termination.


Tax Accounting

Automatic Consent Procedure Provided for Allowance Charge-off Method: In Rev. Proc. 2024-30, the IRS modified Rev. Proc. 2024-23 to provide procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) for regulated financial companies and members of regulated financial groups to obtain automatic consent to change methods of accounting to the Allowance Charge-off Method described in Prop. Reg. Sec. 1.166-2, issued in REG-121010-17. The procedure was issued in response to requests for guidance on how taxpayers may change to the Allowance Charge-off Method for tax years ending on or after December 28, 2023.


Tax Return Preparers

Taxpayers' Nondelegable Duty to File Does Not Foreclose Recourse Against Tax Preparer: In Gagliardi v. Prager Metis CPAs LLC, 2024 PTC 240 (S.D. N.Y. 2024), a district court rejected a CPA firm's motion to dismiss an action brought by taxpayers for allegedly failing to file multiple years of their tax returns, resulting in the taxpayers incurring over half a million dollars in fees and penalties. The court found that the taxpayers' nondelegable duty to the government file returns did not preclude their claim for malpractice against their accountants.



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 3. In-Depth Articles 

IRS Provides Guidance on Exceptions to Penalty on Early Retirement Plan Distributions

The IRS issued a notice providing guidance in question-and-answer format on the application of the exceptions to the 10 percent additional tax under Code Sec. 72(t) for (1) emergency personal expense distributions and (2) domestic abuse victim distributions, both of which were added to Code Sec. 72(t)(2) by the SECURE 2.0 Act of 2022 (Pub. L. 117-328). The IRS stated that it anticipates issuing regulations under Code Sec. 72(t) and requests comments with respect to all aspects of Code Sec. 72(t). Notice 2024-55.

Background

The SECURE 2.0 Act of 2022 (Pub. L. 117-328) was enacted on December 29, 2022. Sections 115 and 314 of the SECURE 2.0 Act amended Code Sec. 72(t) to add exceptions to the 10 percent additional tax on early distributions from a qualified retirement plan for (1) emergency personal expense distributions and (2) domestic abuse victim distributions.

Section 115 of the SECURE 2.0 Act added Code Sec. 72(t)(2)(I), which provides an exception for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. An emergency personal expense distribution is includible in gross income but is not subject to the 10 percent additional tax under Code Sec. 72(t)(1). Under Code Sec. 72(t)(2)(I)(iv), the term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. Emergency personal expense distributions are subject to three limitations. First, Code Sec. 72(t)(2)(I)(ii) provides that not more than one distribution per calendar year is permitted to be treated as an emergency personal expense distribution by any individual. Second, Code Sec. 72(t)(2)(I)(iii) permits an individual to treat a distribution as an emergency personal expense distribution in any calendar year in an amount up to a maximum of $1,000. Third, Code Sec. 72(t)(2)(I)(vii) provides rules that limit taking subsequent emergency personal expense distributions. The amendment to Code Sec. 72(t)(2) by Section 115 of the SECURE 2.0 Act applies to emergency personal expense distributions made after December 31, 2023.

Section 314 of the SECURE 2.0 Act added Code Sec. 72(t)(2)(K), which provides an exception for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). A domestic abuse victim distribution is includible in gross income but is not subject to the 10 percent additional tax under Code Sec. 72(t)(1). A "domestic abuse victim distribution" is defined in Code Sec.72(t)(2)(K)(iii)(I) as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. The term "domestic abuse" is defined in Code Sec. 72(t)(2)(K)(iii)(II) as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim's ability to reason independently, including by means of abuse of the victim's child or another family member living in the household. Code Sec. 72(t)(2)(K)(ii) permits an individual to receive a distribution from an applicable eligible retirement plan of up to $10,000 (indexed for inflation) without application of the 10 percent additional tax if the distribution meets the requirements to be a domestic abuse victim distribution. This provision applies to domestic abuse victim distributions made after December 31, 2023.

Notice 2024-55

On June 20, the IRS issued guidance in Notice 2024-55 on the application of the exceptions to the 10 percent additional tax for emergency personal expense distributions and domestic abuse victim distributions. The IRS stated that it anticipates issuing regulations under Code Sec. 72(t) and invites general comments as well as specific comments on issues relating to Code Sec. 72(t).

Guidance Relating to Emergency Personal Expense Distributions

According to the IRS, whether an individual has an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses is determined by the relevant facts and circumstances for each individual. Factors to be considered include, but are not limited to, whether the individual (or a family member of the individual) has expenses relating to:

(1) medical care (including the cost of medicine or treatment that would be deductible under Code Sec. 213(d), determined without regard to the 7.5 percent of adjusted gross income limitation in Code Sec. 213(a));

(2) accident or loss of property due to casualty;

(3) imminent foreclosure or eviction from a primary residence;

(4) the need to pay for burial or funeral expenses;

(5) auto repairs; or

(6) any other necessary emergency personal expenses.

For purposes of determining whether an individual has an unforeseeable or immediate financial need, the administrator may rely on an employee's written certification that the employee is eligible for an emergency personal expense distribution.

The IRS further advises that the amount that may be treated as an emergency personal expense distribution by an individual in any calendar year shall not exceed the lesser of $1,000 or an amount equal to the excess of (1) the individual's total nonforfeitable accrued benefit under the plan (in the case of an IRA, the individual's total interest in the IRA), determined as of the date of each such distribution, over (2) $1,000.

Example: Plan C is a Code Sec. 401(k) plan that permits emergency personal expense distributions, and Alan is a participant in Plan C. On July 1, 2025, Alan has a vested account balance of $1,500 in Plan C. On July 1, 2025, Alan requests an emergency personal expense distribution of $500 from Plan C. Alan has not previously received an emergency personal expense distribution. The excess of Alan's nonforfeitable interest in Plan C over $1,000 is $1,500 - $1,000, or $500. Alan is permitted to treat $500 from Plan C as an emergency personal expense distribution (the lesser of $1,000 or the amount equal to $1,500 - $1,000 ($500).

The IRS notes that an individual is permitted to treat only on distribution per calendar year as an emergency personal expense distribution. Notwithstanding that limitation, if an individual treats a distribution as an emergency personal expense distribution in any calendar year with respect to an applicable eligible retirement plan, no amount of any subsequent distribution can be treated as an emergency personal expense distribution during the immediately following 3 calendar years with respect to that plan unless:

(1) the previous emergency personal expense distribution is fully repaid to the plan, or

(2) the aggregate of the individual's elective deferrals and employee contributions to the plan (in the case of an IRA, the total amounts that the individual contributed to the IRA) after the previous emergency personal expense distribution is at least equal to the amount of the previous emergency personal expense distribution that has not been repaid.

Example: Considering the same facts as in the example above (Alan requests from Plan C an emergency personal expense distribution of $500 on July 1, 2025). Alan does not repay the emergency personal expense distribution but continues to make elective deferrals to Plan C. On August 1, 2027, Alan has an account balance in the amount of $5,000. With respect to the $5,000 account balance, Alan contributed $3,500 in elective deferrals since the July 1, 2025, distribution. On August 1, 2027, Alan requests an emergency personal expense distribution of $1,000 from Plan C. This distribution meets the requirements of Notice 2024-55 regarding the annual limitation, the dollar limitation, and the limitation on subsequent distributions.

Guidance Relating to Domestic Abuse Victim Distributions

According to the guidance provided in Notice 2024-55, the aggregate amount that an individual may treat as a domestic abuse victim distribution cannot exceed the lesser of: (1) $10,000 (indexed for inflation), or (2) 50 percent of the present value of the nonforfeitable accrued benefit (vested accrued benefit of the employee under the plan.

Example: Plan E is a Code Sec. 403(b) plan that permits domestic abuse victim distributions, and Daryl is a participant in Plan E. On August 15, 2024, Daryl is eligible to receive a domestic abuse victim distribution from Plan E because Daryl was a victim of domestic abuse on January 15, 2024. August 15, 2024, is less than one year after the January 15, 2024, incident. On August 15, 2024, Daryl has a $15,000 vested account balance in Plan E ($7,500 is 50 percent of Daryl's vested account balance). Daryl requests a $7,500 domestic abuse victim distribution from Plan E. Daryl is permitted to take a domestic abuse victim distribution of $7,500 from Plan E (the lesser of $7,500 (50 percent of Daryl's vested account balance) and $10,000).

Regarding the certification requirements for a domestic abuse victim distribution, the IRS notes that under Code Sec. 72(t)(2)(K)(vi)(IIII), any distribution that an employee or participant certifies as a domestic abuse victim distribution will be treated as meeting the distribution restriction requirements for the applicable eligible retirement plan. According to the IRS guidance, to meet the certification requirements of Code Sec. 72(t)(2)(K)(vi)(III), the employee or participant could check the box on the distribution request form to certify that (1) the employee or participant is eligible for a domestic abuse victim distribution and (2) the distribution is made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse. The certification must be provided in writing and the employee or participant may use the electronic delivery rules in Reg. Sec. 1.401(a)-21(d) to provide the certification.

Responding to the question of whether an individual may treat a distribution as a domestic abuse victim distribution if the applicable eligible retirement plan does not permit such distributions, the IRS advised that the individual may treat the distribution as a domestic abuse victim distribution on the individual's tax return to the extent the distribution meets the limitation a domestic abuse victim distribution described above. As part of the individual's tax return, the individual will claim on Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, that the distribution is a domestic abuse victim distribution, in accordance with the form's instructions. The distribution, while includible in gross income, is not subject to the 10 percent additional tax under Code Sec. 72(t)(1) pursuant to Code Sec. 72(t)(2)(K). If the individual decides to repay the amount to an eligible retirement plan, the individual may, at any time during the 3-year period beginning on the day after the date on which the distribution was received, repay the amount to an IRA.

For a discussion of the tax on early distributions from qualified plans, see Parker Tax ¶131,560. For a discussion of early distributions from IRAs, see Parker Tax ¶134,555.

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Supreme Court Overrules Chevron, Opening the Door to Extensive Challenges to Tax Regulations

The Supreme Court overruled Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), under which courts generally defer to permissible agency interpretations of ambiguous statutes those agencies administer, potentially opening the door to challenges to even longstanding IRS regulations. The Court held that when interpreting statutes administered by federal agencies, courts are required to exercise their independent judgment and may not defer to an agency interpretation of the law simply because a statute is ambiguous. Loper Bright Enterprises, et al. v. Raimondo; Relentless, Inc. et al. v. Dept. of Commerce, et al., 2024 PTC 237 (S. Ct. 2024).

The Chevron Doctrine

In determining whether an administrative agency (the IRS, for example) has exceeded its statutory authority in promulgating a rule or regulation, courts applied the two-step analysis set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). First, the court determined "whether Congress has directly spoken to the precise question at issue." If congressional intent was clear, that was the end of the inquiry. But if the court determined that the statute is silent or ambiguous with respect to the specific issue at hand, the court was required, at Chevron's second step, to defer to the agency's interpretation if it "is based on a permissible construction of the statute."

An example of a recent case involving the application of the Chevron rule in the tax context is a case decided earlier this year by the Southern District of New York: State of New Jersey, State of New York, and State of Connecticut v. Mnuchin; Village of Scarsdale, N.Y. v. IRS, 2024 PTC 120 (S.D. N.Y. 2024). In that case, several states and a locality sought to invalidate a 2019 IRS regulation that generally prevented them from using state or local tax credits as a "workaround" for the $10,000 limit on the state and local tax (SALT) deduction enacted by the Tax Cuts and Jobs Act (TCJA). Applying Step 1 of Chevron, the court found that the Code does not unambiguously address the specific question of whether contributions made to state and local governments in exchange for tax credits are deductible as charitable contributions under Code Sec. 170. Proceeding to Step 2, the court found that the IRS's interpretation of "contribution or gift" as being offset by the amount of any "return benefit" was a permissible construction of Code Sec. 170. The court said that under the "rather minimal requirement" of Chevron, the IRS had provided a reasoned explanation for its promulgation of the final regulations.

Loper Bright Enterprises

For years, conservative legal scholars and interest groups have argued that Chevron gave administrative agencies too much power and impermissibly reduced the role that courts play in interpreting federal statutes.

In 2023, the Supreme Court agreed to reconsider Chevron when it granted certiorari in two cases involving challenges to a regulation on fishing vessels that operate in the Atlantic herring fishery. The fishing vessels objected to a federal regulation that required them to pay for observers on board their vessels for the purpose of collecting data necessary for conservation and management of the fishery. In two separate cases, the D.C. Circuit and the First Circuit applied the Chevron doctrine and upheld the validity of regulation. In granting certiorari, the Supreme Court limited its review to the question whether Chevron should be overruled or clarified.

Supreme Court's Analysis

In an opinion delivered by Chief Justice Roberts, a 6-3 majority of the Supreme Court overruled Chevron. The Court held that the Administrative Procedure Act (APA) requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority and may not defer to an agency interpretation of the law simply because a statute is ambiguous.

The Court began by noting that that the Constitution gives the federal judiciary the responsibility and power to adjudicate "Cases" and "Controversies." According to the Court, it was the Framers' understanding that the final "interpretation of the laws" would be the province of the courts. This understanding was embraced by the Supreme Court in the foundational decision of Marbury v. Madison, where Chief Justice Marshall famously declared that it is the duty of the courts "to say what the law is." The Court observed that, even as the New Deal ushered in a rapid expansion of the administrative state and new agencies with new powers proliferated, the Court continued to adhere to the traditional understanding that questions of law were for courts to decide, exercising their independent judgment.

The Court also found that when Congress enacted the APA in 1946, it provided procedures for agency action but also delineated the basic contours of judicial review of such action. Section 706 of the APA directs that "to the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action." Section 706 further requires courts to "hold unlawful and set aside agency action, findings, and conclusions found to be ... not in accordance with law." In the Court's view, Section 706 makes clear that agency interpretations of statutes - like agency interpretations of the Constitution - are not entitled to deference. The Court stated that the APA, in short, incorporates the traditional understanding of the judicial function, under which courts must exercise independent judgment in determining the meaning of statutory provisions.

The deference that Chevron requires of courts reviewing agency action cannot, in the Court's view, be squared with the APA. The Court said that Chevron, decided in 1984 by a bare quorum of six Justices, triggered a marked departure from the traditional approach. In the Court's view, Chevron defies the command of the APA that "the reviewing court" - not the agency whose action it reviews - is to "decide all relevant questions of law" and "interpret statutory provisions." Chevron requires a court to ignore, not follow, "the reading the court would have reached" had it exercised its independent judgment as required by the APA. Moreover, the Court noted that Chevron demands that courts mechanically afford binding deference to agency interpretations, including those that have been inconsistent over time. This is true, the Court noted, even when a pre-existing judicial precedent holds that the statute means something else - unless the prior court happened to also say that the statute is "unambiguous."

The Court noted that under Skidmore v. Swift & Co., 323 U.S. 134 (1944), courts exercising their independent judgment may seek aid from the interpretations of those responsible for implementing particular statutes. In Skidmore, the Court found that such interpretations "constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance" consistent with the APA. In a case involving an agency, the Court said that the statute's meaning may well be that the agency is authorized to exercise a degree of discretion. Congress has often enacted such statutes - for example, some statutes expressly delegate to an agency the authority to give meaning to statutory terms, and others empower an agency to prescribe rules to fill in the details of a statutory scheme or to regulate subject to the limits imposed by the statute. According to the Court, when the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits.

The contention advanced by the government and the dissent that statutory ambiguities are implicit delegations to agencies was rejected by the Court. Ambiguities may, the Court found, result from an inability on the part of Congress to squarely answer the question at hand, or from a failure to even consider the question with the requisite precision. According to the Court, Chevron's presumption is perhaps most fundamentally misguided because "agencies have no special competence in resolving statutory ambiguities. Courts do." The point of the traditional tools of statutory construction, the Court said, is to resolve statutory ambiguities, and that is no less true when the ambiguity is about the scope of an agency's own power. The Court said that in that context, abdication in favor of the agency is perhaps least appropriate.

The Court clarified that its ruling does not mean that Congress cannot confer discretionary authority on agencies. Congress may do so, the Court noted, and often has. But to ensure that courts do not engage in discretionary policymaking that is the province of the political branches, the Court said that judges need only to fulfill their obligations under the APA to independently identify and respect such delegations of authority, police the outer statutory boundaries of those delegations, and ensure that agencies exercise their discretion consistent with the APA.

Observation: Regulations issued under a specific grant of authority from Congress (legislative regulations) are more likely to withstand taxpayer challenges than regulations that simply provide the IRS's interpretation of the controlling statute (interpretive regulations). In addition, under Skidmore (which remains good law), courts will continue to take into account the IRS's expertise when considering challenges to regulations. In this vein, Tax Court Judge Elizabeth A. Copeland stated at a June 28 tax controversy forum at New York University that "Treasury and the IRS have special expertise in interpreting tax statutes" and that she would "continue to give substantial weight to statutory interpretations in Treasury regulations."

The Court noted that, although it overruled Chevron, it did not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful are still subject to statutory stare decisis despite the Court's change in interpretive methodology. Mere reliance on Chevron, the Court stated, cannot constitute a "special justification" for overruling such a holding.

In a dissenting opinion joined by Justices Sotomayor and Jackson, Justice Kagan wrote that for 40 years, Chevron deference was understood by the Court to be rooted in a presumption of legislative intent. Justice Kagan said that Congress knows it does not - in fact cannot - write perfectly complete regulatory statutes. Inevitably, Justice Kagan reasoned, those statutes will contain ambiguities that some other actor will have to resolve. And in the view of Justice Kagan, Congress would usually prefer that actor to be the responsible agency, not a court, given that interpretive issues often involve scientific or technical subject matter about which agencies have expertise and courts do not. Justice Kagan also said that statutory interpretations often involve policy tradeoffs and observed that agencies report to a President, who is politically accountable, whereas courts have no such accountability and no proper basis for making policy.

Observation: In another case decided just days after Loper Bright, the Supreme Court held that a lawsuit under the APA challenging the validity of a regulation does not accrue for purposes of the six-year statute of limitations under 28 U.S.C. Section 2401(a) until the plaintiff is "injured by final agency action" (Corner Post, Inc. v. Board of Governors of the Federal Reserve System, 2024 PTC 239 (S. Ct. 2024)). Previously, some courts had held that the six-year period of limitations began to run when the final regulation was published. Under Corner Post, even longstanding IRS regulations may be subject to taxpayer challenges if those challenges are brought within six years of a taxpayer's having been "injured" by the final rule.

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Supreme Court Upholds Mandatory Repatriation Tax on CFC Owners

The Supreme Court affirmed a decision by the Ninth Circuit and held that the Mandatory Repatriation Tax (MRT), which attributes the realized and undistributed income of an American controlled foreign corporation (CFC) to the entity's American shareholders and then taxes the American shareholders on their portions of that income, does not exceed Congress's constitutional authority. The Court concluded that under longstanding precedents, when dealing with an entity's undistributed income Congress may either tax the entity or tax its shareholders or partners and, whichever method Congress chooses, the tax remains a tax on income. Moore v. U.S., 2024 PTC 220 (S. Ct. 2024).

Background

In 2005, Charles Moore and his wife, Kathleen, paid $40,000 for an 11 percent interest in KisanKraft, a controlled foreign corporation (CFC). A CFC is a foreign corporation whose ownership or voting rights are more than 50 percent owned by U.S. persons. From 2006 to 2017, KisanKraft generated a great deal of income but did not distribute that income to its U.S. shareholders.

Before 2018, U.S. taxpayers generally did not pay U.S. taxes on foreign earnings until those earnings were distributed to them. However, when certain categories of undistributed earnings were repatriated to the U.S. - through a distribution or loan to U.S. shareholders, or an investment in U.S. property - U.S. shareholders who owned at least 10 percent of a CFC could be taxed on a proportionate share of those earnings. The primary method used to tax a CFC's U.S. shareholders on foreign earnings held offshore was a provision of the Code called subpart F.

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, broadened the types of CFC income subject to subpart F to include current earnings and profits from a business. Before the TCJA, current earnings and profits from a CFC's trade or business were not considered subpart F income and, therefore, were not subject to U.S. tax until distributed to a U.S. taxpayer. Under the TCJA, Code Sec. 952 taxes such income even if not distributed. The TCJA also enacted a one-time Mandatory Repatriation Tax (MRT), a "transition tax" intended to ensure that a CFC's past earnings and profits did not permanently escape U.S. tax by virtue of the TCJA's changes to subpart F. The MRT applies to the undistributed earnings and profits that a CFC earned between January 1, 1987, and December 31, 2017. The tax is levied on a U.S. shareholder's ratable share of a CFC's undistributed earnings and profits during this period and treats the entire amount as subpart F income in 2017.

At the end of the 2017 tax year, application of the new MRT resulted in a tax bill of $14,729 on the Moores' pro rata share of the KisanKraft's accumulated income from 2006 to 2017. The Moores challenged the constitutionality of the MRT, claiming, among other things, that the MRT violated the Direct Tax Clause of the Constitution because, in their view, the MRT was an unapportioned direct tax on their shares of the CFC's stock. In Moore v. U.S., 2020 PTC 409 (W.D. Wash. 2020), a district court dismissed the action for failure to state a claim and denied the Moores' cross-motion for summary judgment. The Moores appealed to the Ninth Circuit.

Observation: The Direct Tax Clause of the Constitution provides: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." The Constitution does not expressly identify any tax as direct other than a "Capitation." A "capitation" (also called a "poll tax") is "[a] fixed tax levied on each person within a jurisdiction."

In Moore v. U.S., >2022 PTC 166 (9th Cir. 2022), a unanimous Ninth Circuit panel affirmed the district court's dismissal. In Moore v. U.S., 2022 PTC 369 (9th Cir. 2022), a Ninth Circuit panel subsequently denied a petition for a panel rehearing and denied a petition for a rehearing en banc. Four judges dissented from the denial of an en banc rehearing, arguing that (1) the panel erred in disregarding the realization requirement of the Sixteenth Amendment by allowing an unapportioned direct tax on unrealized income (i.e., undistributed earnings of a foreign corporation owned by a U.S. taxpayer) without offering any other limiting principle, and (2) the opinion opens the door to new federal taxes on other types of wealth and property being categorized as an "income tax" without the constitutional requirement of apportionment.

The Moores appealed to the Supreme Court raising the Direct Tax Clause argument and the Court granted certiorari. The Moores argued that the MRT is a tax on property and is therefore unconstitutional because it is not apportioned. Income, the Moores contended, requires realization, and the MRT was not taxing any income that they had realized. In making their argument, the Moores invoked the decision in Eisner v. Macomber, 252 U.S. 189 (S. Ct. 1920), in which the Supreme Court held that a distribution by a corporation of additional stock to all existing shareholders was not taxable income because there was no change in the value of the shareholders' total stock holdings in the corporation before and after the stock distribution. The Court said separately in dicta that "what is called the stockholder's share in the accumulated profits of the company is capital, not income."

The government, on the other hand, cited longstanding precedents such as Burk-Waggoner Oil Assn v. Hopkins, 269 U.S 110 (S. Ct. 1925), Heiner v Mellon, 304 U.S. 271 (S. Ct. 1938), and Helvering v. National Grocery Co., 304 U.S. 282 (S. Ct. 1938) for the proposition that the MRT is a tax on income and therefore need not be apportioned.

Analysis

In a 7-2 decision, delivered by Justice Kavanaugh, the Supreme Court held that Congress did not exceed its constitutional authority when it enacted the MRT.

Observation: Justices Roberts, Sotomayor, Kagan, and Jackson joined in Kavanaugh's decision. Justice Jackson filed a concurring opinion and Justice Barrett filed an opinion concurring in the judgment, in which Justice Alito joined. Justice Thomas filed a dissenting opinion in which Justice Gorsuch joined.

The MRT, the Court said, attributes the undistributed income of American CFCs to their American shareholders, and then taxes the American shareholders on that income. By doing so, the court observed, the MRT operates in the same basic way as Congress's longstanding taxation of partnerships, S corporations, and subpart F income. Thus, the MRT is consistent with the principles that the Court has previously articulated in upholding those kinds of taxes and the MRT therefore falls squarely within Congress's constitutional authority to tax.

The Court rejected the Moores' argument that the MRT is an unconstitutional tax on property. The Court observed that the MRT does in fact tax realized income - namely, the income realized by the CFC, which the MRT attributes to the CFC shareholders. Longstanding precedents, the court stated, confirm that Congress may attribute an entity's realized and undistributed income to the entity's shareholders or partners and then tax the shareholders or partners on their portions of that income.

In the Court's view, the Moores' reliance on the Eisner decision was misplaced as that decision predated its decisions in cases such as Burk-Waggoner, Heiner, and Helvering. In Burk-Waggoner, the Court held that the status of a business entity under state law could not limit Congress's power to tax a partnership's income as it chose, taxing either the partnership or the partners. In Heiner, the Court reaffirmed that Congress may choose to tax either the partnership or the partners on a partnership's undistributed income, even where state law did not allow the partners to personally receive the income. In Helvering, the Court concluded that Heiner also applied to corporations. This line of precedents, the Court said, remains good law and establishes the clear principle that Congress can attribute the undistributed income of an entity to the entity's shareholders or partners and tax the shareholders or partners on their pro rata share of the entity's undistributed income.

In his dissenting opinion, Justice Thomas wrote that the Ninth Circuit wrongly rejected the Moores' challenge on the grounds that realization of income is not a constitutional requirement. According to Justice Thomas, the majority upheld the MRT by relying on unrelated precedent to derive a clear rule that Congress can attribute the undistributed income of an entity to the entity's shareholders or partners. The Ninth Circuit, he said, erred by concluding that realization is not a constitutional requirement for income taxes and said the majority's "attribution" doctrine is an unsupported invention.

Observation: Addressing the dissenting opinion, the majority said the dissent and the opinion concurring in the judgment were focusing primarily on the realization issue - namely, whether realization is required for an income tax. The majority noted that it was not deciding that question. The majority emphasized that its holding is limited to: (1) taxation of the shareholders of an entity, (2) on the undistributed income realized by the entity, (3) which has been attributed to the shareholders, (4) when the entity itself has not been taxed on that income. In other words, its holding applies when Congress treats the entity as a pass-through. Further, the majority noted that its decision does not address the distinct issues that would be raised by (1) an attempt by Congress to tax both the entity and the shareholders or partners on the entity's undistributed income; (2) taxes on holdings, wealth, or net worth; or (3) taxes on appreciation.

For a discussion of the taxation of U.S. shareholders in controlled foreign corporations, see Parker Tax ¶201,510.

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IRS Issues Final Regulations and Other Guidance on Digital Asset Transactions

The IRS issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency, that take place beginning in calendar year 2025; the regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. In addition, the IRS issued a notice providing transitional relief from reporting penalties for brokers during calendar year 2025; a notice providing that until further guidance is issued, brokers will not have to file information returns or furnish payee statements on certain specified digital asset transactions; and a procedure that generally permits taxpayers to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units. T.D. 10000; Notice 2024-56; Notice 2024-57; Rev. Proc. 2024-28.

Background

Section 80603 of the Infrastructure Investment and Jobs Act (Infrastructure Act) (Pub. L. 117-58), enacted in 2021, made several changes to the broker reporting provisions under Code Sec. 6045 to clarify the rules regarding how certain digital asset transactions should be reported by brokers, and to expand the categories of assets for which basis reporting is required to include all digital assets.

Specifically, the Infrastructure Act clarified the rules regarding how certain digital asset transactions should be reported by brokers, expanded the categories of assets for which basis reporting is required to include all digital assets, and provided a definition for the term digital assets. Additionally, the Infrastructure Act clarified that transfer statement reporting under Code Sec. 6045A(a) applies to covered securities that are digital assets and added a new information reporting provision under Code Sec. 6045A(d) to require brokers to report on transfers of digital assets that are covered securities, provided the transfer is not a sale and is not to an account maintained by a person that the broker knows or has reason to know is also a broker. Finally, the Infrastructure Act provided that these amendments apply to returns required to be filed, and statements required to be furnished, after December 31, 2023.

In August 2023, the IRS published proposed regulations in REG-122793-19 that generally required broker reporting of sales and exchanges of digital assets beginning in 2025 and provided other proposed rules, including rules for taxpayers to determine the basis and gain or loss on dispositions of digital assets. The IRS received over 44,000 comments in response to the proposed regulations.

T.D. 10000

On June 28, the IRS issued final regulations in T.D. 10000 that adopt the proposed regulations as amended in response to comments.

The final regulations require custodial brokers to report sales and exchanges of digital assets, including cryptocurrency, that take place beginning on or after January 1, 2025. Brokers will report sales and exchanges of digital assets on Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The final regulations require reporting by brokers who take possession of the digital assets being sold by their customers. These brokers include operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers. The IRS stated that it intends to provide rules for these brokers in a different set of final regulations.

The final regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. Backup withholding rules are also provided. In addition, real estate professionals are also required to report the fair market value of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after January 1, 2026.

For certain sales of stablecoins and non-fungible tokens (NFTs) exceeding de minimis thresholds, the final regulations provide for an optional, aggregate reporting method. For PDAP transactions, the regulations require reporting on a transactional basis only if the customer's sales are above a de minimis threshold.

Under the final regulations, reporting of basis will be required by certain brokers for digital asset transactions occurring on or after January 1, 2026.

Notice 2024-56

In Notice 2024-56, the IRS provides transition relief from penalties for brokers who fail to report sales of digital assets, other than digital assets not required to be reported as digital assets pursuant under the final regulations. This penalty relief is available for information returns required to be filed and payee statements required to be furnished in 2026 for sales of digital assets effected in calendar year 2025, provided that the broker makes a good faith effort to file the appropriate information return and furnish the associated payee statement accurately.

The notice also provides transitional relief from the liability for the payment of backup withholding tax, as well as from penalties for brokers who fail to pay withholding tax with respect to certain sales of digital assets required to be reported under Code Sec. 6045. In addition, Notice 2024-56 provides transitional relief from penalties for brokers who fail to backup withhold and pay the full backup withholding tax due if such failure is due to a decrease in the value of withheld digital assets in a sale of digital assets in return for different digital assets effected on or before December 31, 2026, and the broker immediately liquidates the withheld digital assets for cash.

Notice 2024-57

In Notice 2024-57, the IRS announced that brokers are not required to report certain identified digital asset transactions under Code Sec. 6045 until further notice and the IRS will not assert penalties with respect to these identified transactions. The delay on information reporting provided in Notice 2024-57 applies to the following six types of transactions:

(1) Wrapping and unwrapping transactions,

(2) Liquidity provider transactions,

(3) Staking transactions,

(4) Transactions described by digital asset market participants as lending of digital assets,

(5) Transactions described by digital asset market participants as short sales of digital assets, and

(6) Notional principal contract transactions.

The IRS stated that these transactions require further study to determine how to facilitate proper reporting. Accordingly, until that determination is made, brokers are not required to make a return on these identified transactions under Code Sec. 6045(a), and the IRS will not impose penalties under Code Secs. 6721 or 6722 for failure to file correct information returns or failure to furnish correct payee statements with respect to these identified transactions.

Rev. Proc. 2024-28

In Rev. Proc. 2024-28, the IRS provides a safe harbor under Code Sec. 1012(c)(1) on which taxpayers may rely to allocate unused basis of digital assets to digital assets held within each wallet or account of the taxpayer as of January 1, 2025. Rev. Proc. 2024-28 generally allows taxpayers to rely on any reasonable allocation of units of unused basis to a wallet or account that holds the same number of remaining digital asset units based on the taxpayer's records of such unused basis and remaining units. The allocation generally must be a reasonable allocation and must be made as of January 1, 2025.

For a discussion of sales, exchanges, or other dispositions of virtual currency, see Parker Tax ¶119,610. For a discussion of broker information reporting requirements, see Parker Tax 116,180.

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IRS Issues Final Regulations on Disallowance of Conservation Easement Deductions

The IRS issued final regulations concerning the statutory disallowance rule enacted by the SECURE 2.0 Act of 2022 to disallow a deduction for a qualified conservation contribution made by a partnership or an S corporation after December 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis. The final regulations provide guidance regarding this statutory disallowance rule, including definitions, appropriate methods to calculate the relevant basis of a partner or an S corporation shareholder, the three statutory exceptions to the statutory disallowance rule, and related reporting requirements. T.D. 9999.

Background

Under Code Sec. 170(f)(3)(A), a deduction is generally not allowed for a charitable contribution of an interest in property that consists of less than the taxpayer's entire interest in such property. However, Code Sec.170(f)(3)(B)(iii) provides that Code Sec. 170(f)(3)(A) does not apply to a qualified conservation contribution. The term "qualified conservation contribution" is defined in Code Sec. 170(h)(1) as a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. In general, a qualified conservation contribution may include a contribution of a conservation easement.

The existing regulations under Reg. Sec. 1.170A-14 provide rules for qualified conservation contributions described in Code Sec. 170(h). Consistent with Code Sec. 170(f)(3), Reg. Sec. 1.170A-14(a) provides that a deduction generally is not allowed for a charitable contribution of any interest in property that consists of less than the donor's entire interest in the property other than certain transfers in trust. However, by reason of Code Sec. 170(f)(3)(B)(iii), a deduction may be allowed for the value of a qualified conservation contribution if the requirements of Reg. Sec. 1.170A-14 are met. To be eligible for a deduction under Reg. Sec. 1.170A-14, the conservation purpose of the contribution must be protected in perpetuity.

Code Sec. 170(f)(19) and Code Sec. 170(h)(7) were added to the Code by the SECURE 2.0 Act of 2022 (Pub. L. 117-328). Code Sec. 170(h)(7)(A) states that a contribution by a partnership (whether directly or as a distributive share of a contribution of another partnership) is not treated as a qualified conservation contribution for purposes of Code Sec. 170 if the amount of such contribution exceeds 2.5 times the sum of each partner's relevant basis in such partnership (Disallowance Rule). Thus, a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes is not a qualified conservation contribution if the Disallowance Rule applies. Code Sec. 170(h)(7)(F) generally provides that the rules of Code Sec. 170(h)(7) "apply to S corporations and other pass-through entities in the same manner as such rules apply to partnerships."

Code Sec. 170(f)(19) provides that, in the case of a partnership or S corporation claiming a qualified conservation contribution for the preservation of a building that is a certified historic structure in an amount that exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis, no deduction under Code Sec. 170 is allowedunless the partnership or S corporation includes on its return for the tax year a statement that such contribution was made and any other information as the IRS may require. A contribution to preserve a certified historic structure is one of the three exceptions to the Disallowance Rule.

In November 2023, the IRS issued proposed regulations (REG-112916-23) that provided guidance under Code Sec. 170(f)(19) and (h)(7). The proposed regulations under Prop. Reg. Sec. 1.170A-14(j) through (n), Prop. Reg. Sec. 1.706-3, and Prop. Reg. Sec. 1.706-4 were proposed to apply to contributions made after December 29, 2022. To align the reporting requirements under Prop. Reg. Sec. 1.170A-16 with the publication of the revised Form 8283, Noncash Charitable Contributions, and its instructions, the proposed regulations under Prop. Reg. Sec. 1.170A-16 were proposed to apply to contributions made in tax years ending on or after November 20, 2023 (the date the proposed regulations were published in the Federal Register).

T.D. 9999

On June 28, the IRS published final regulations in T.D. 9999 that adopt the proposed regulations with modifications in response to practitioners' comments.

Amount of Qualified Conservation Contribution

Prop. Reg. Sec. 1.170A-14(j)(3)(ii) defined "amount of qualified conservation contribution" as the amount claimed as a qualified conservation contribution on the return of the contributing partnership or contributing S corporation for the tax year in which the contribution is made.

The proposed regulation further provided, "if the contributing partnership or contributing S corporation files an amended return or administrative adjustment request under section 6227 of the Code claiming a different amount with respect to the qualified conservation contribution, the rules of [Reg. Sec. 1.170A-14] must be re-applied with respect to such different amount to determine the application of section 170(h)(7) and [Reg. Sec. 1.170A-14.]" One practitioner commented that this sentence seemed to inappropriately allow partnerships or S corporations to file administrative adjustment requests (AARs) or amended returns after they had been notified of an IRS examination.

In the preamble to T.D. 9999, the IRS responded that the proposed regulation was not intended to allow for the filing of an amended return or AAR in situations in which the partnership or S corporation would not otherwise be allowed to do so. Moreover, the IRS agrees that the re-application provision in Reg. Sec. 1.170A-14(j)(3)(ii) should not be understood to allow a partnership or S corporation to avoid the Disallowance Rule by filing an amended return or AAR claiming a lower amount with respect to a qualified conservation contribution after being contacted by the IRS concerning an examination regarding the return.

Therefore, the final regulations limit the re-application provision by providing that, if the contributing partnership or contributing S corporation files an amended return or timely AAR claiming a lower amount with respect to the qualified conservation contribution, the rules of Reg. Sec. 1.170A-14 will be re-applied with respect to such lower amount to determine the application of Code Sec. 170(h)(7) and Reg. Sec. 1.170A-14 if and only if the amended return or timely AAR is filed before the contributing partnership or contributing S corporation is put "on notice" of an IRS examination relating to the qualified conservation contribution. A contributing partnership or contributing S corporation is considered to be on notice after the earlier of: (1) the date the contributing partnership or contributing S corporation is first contacted by the IRS in connection with any examination of a return that relates to the qualified conservation contribution, or (2) the date any person is first contacted by the IRS concerning an examination of that person under Code Sec. 6700 (relating to the penalty for promoting abusive tax shelters) for an activity that relates to the qualified conservation contribution.

Effect of Section 704(c) Property on the Allocation of Modified Basis

The proposed regulations allocated modified basis by reference, in part, to the partners' interests in the partnership, which is a concept under Code Sec. 704(b). Specifically, under Prop. Reg. Sec. 1.170A-14(m)(2)(iii)(B), to determine a partner's portion of the adjusted basis in all the contributing partnership's properties, the contributing partnership would apportion among its partners in accordance with their interests in the partnership under Code Sec. 704(b) its adjusted basis in each of its properties (except the portion of the real property with respect to which the qualified conservation contribution is made), using the adjusted bases immediately before the qualified conservation contribution, without duplication or omission of any property, and by treating the adjusted basis in each property as not less than zero.

The proposed regulations did not explicitly address the impact of Code Sec. 704(c) amounts. Generally, Code Sec. 704(c) provides rules for partnership allocations with respect to property that has built-in gain. One practitioner commented that the final regulations should discuss what impact, if any, Code Sec. 704(c) may have with respect to conservation easement transactions in the context of Code Sec. 170(h)(7).

The IRS agreed that it may be unclear how the presence of Code Sec. 704(c) property affects the partnership's apportionment of its basis in its properties among its partners for purposes of the computation of relevant basis. Thus, Reg. Sec. 1.170A-14(m)(2)(iii)(B), as finalized, provides that to determine a partner's portion of the adjusted basis in all of a contributing partnership's properties, the contributing partnership must apportion among its partners its adjusted basis in each of its properties (except the portion of the real property with respect to which the qualified conservation contribution is made), using the adjusted basis immediately before the qualified conservation contribution, without duplication or omission of any property, and by treating the adjusted basis in each property as not less than zero. Consistent with the proposed regulations, the final regulations provide that this apportionment must be done under principles similar to the determination of the partners' interests in the partnership under Code Sec. 704(b), but add a cross reference to Reg. Sec. 1.704-1(b)(3)(ii), which provides factors to consider in determining a partner's interest in a partnership. These factors include: the partners' relative contributions to the partnership, the interests of the partners in economic profits and losses (if different than that in taxable income or loss), the interests of the partners in cash flow and other non-liquidating distributions, and the rights of the partners to distributions of capital upon liquidation. In addition, Reg. Sec. 1.170A-14(m)(2)(iii)(B), as finalized, provides that the apportionment must reflect Code Sec. 704(c) principles.

Observation: For example, if a partnership property has built-in loss (i.e., the adjusted basis of the property exceeds its fair market value), and Code Sec. 704(c) would require that built-in loss to be allocated to a certain partner if that property were sold, then under the final regulations, all of the basis in the property that exceeds the property's fair market value must be apportioned to the partner to whom the loss would be allocated if the property was sold.

Qualified Conservation Contributions Made by Joint Tenancies

One practitioner commented that the proposed regulations lacked clarity as to which provisions apply to every contributing partnership or contributing S corporation and requested that the final regulations include a preliminary explanation of scope. The practitioner recommended that the final regulations explicitly state that Reg. Sec. 1.170A-14(j) through (n) does not apply to qualified conservation contributions made by individuals, joint tenancies, tenancies in common, or C corporations.

The IRS agreed in part with this request. The IRS noted that Code Sec. 170(h)(7)(A) and (F) provide that the Disallowance Rule applies only to certain qualified conservation contributions made by partnerships, S corporations, and other pass-through entities; thus, it does not apply to qualified conservation contributions made by individuals or C corporations. However, the IRS observed that in certain cases an arrangement that is a joint tenancy or tenancy in common under state law may be considered a partnership for federal tax purposes under Reg. Sec. 301.7701-1(a)(2). If so, a qualified conservation contribution by such an arrangement would be subject to the Disallowance Rule. Accordingly, Reg. Sec. 1.170A-14(j)(1) includes a statement that the Disallowance Rule does not apply to qualified conservation contributions made directly by landowners that are not pass-through entities, such as individuals or C corporations.

For a discussion of the limitation on deductions for qualified conservation contributions made by pass-through entities, see Parker Tax ¶84,155.

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Fourth Circuit: Biotech Company Overstated Expenses in Computing Research Credit

The Fourth Circuit affirmed the Tax Court and held that a biotechnology company that claimed both the research credit under Code Sec. 41 and the orphan drug credit under Code Sec. 45C, and had expenses that qualified as both qualified research expenses under Code Sec. 41 and qualified clinical testing expenses under Code Sec.45C, improperly excluded the expenses it treated as qualified clinical testing expenses for the three-year reference period described in Code Sec. 45(c)(5)(A). The Fourth Circuit rejected the taxpayer's argument that Code Sec. 45C(c)(2), which requires that any qualified clinical testing expenses which are also qualified research expenses be taken into account in determining base period research expenses for purposes of applying Code Sec. 41 to subsequent tax years, lost effect as a result of amendments made to Code Sec. 41 in 1989. United Therapeutics Corp. v. Comm'r, 2024 PTC 228 (4th Cir. 2024).

Background

United Therapeutics Corp. is a biotechnology company that develops products to address the unmet medical needs of patients with chronic and life-threatening conditions. For each of the tax years 2011 through 2014, United Therapeutics computed and claimed both the research credit under Code Sec. 41 and the orphan drug credit under Code Sec. 45C. Some of the company's expenses during those years qualified both as "qualified research expenses" under Code Sec. 41 and as "qualified clinical testing expenses" under Code Sec. 45C. With respect to such expenses, United Therapeutics elected to claim the orphan drug credit under Code Sec. 45C.

Code Sec. 41 offers a menu of ways to calculate its credit. In 2014 - the year at issue - United Therapeutics elected to use the "alternative simplified method " under Code Sec. 41(c)(5) (as in effect in 2014). Code Sec. 41(c)(5)(A) provides that under that method, the company's credit is equal to 14 percent "of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding" the credit year. With respect to its overlapping expenses (i.e., expenses that are simultaneously "qualified research expenses" under Code Sec. 41 and "qualified clinical testing expenses" under Code Sec. 45C), United Therapeutics elected to claim the more generous Code Sec. 45C credit. That decision triggered a coordination provision in Code Sec. 45C(c). The question in this case is whether United Therapeutics properly accounted for that provision.

When calculating its "qualified research expenses" for the 2014 tax year under Code Sec. 41(c)(5)(A), United Therapeutics followed Code Sec. 45C(c)(1), which states that, except as provided in Code Sec. 45C(c)(2), any qualified clinical testing expenses for a tax year to which an orphan drug credit applies is not taken into account for purposes of the research credit for that tax year. Thus, United Therapeutics excluded the 2014 expenses it was claiming as qualified clinical testing expenses.

However, United Therapeutics also excluded the overlapping expenses it had treated as qualified clinical testing expenses for the three preceding tax years, 2011 through 2013, when it calculated its baseline "average qualified research expenses for the 3 taxable years preceding" 2014 under Code Sec. 41(c)(5)(A). That made the company's past investment in research appear smaller, which in turn made its 2014 investment look like a more dramatic increase.

According to the IRS, this latter exclusion ran afoul of the "coordination provision" of Code Sec. 45C(c)(2), which instructs taxpayers to take into account any qualified clinical testing expenses which are qualified research expenses in determining base period research expenses for purposes of applying Code Sec. 41 to subsequent tax years. After auditing United Therapeutics, the IRS issued a notice of deficiency. The company's disregard for Code Sec. 45C(c)(2), the IRS concluded, improperly inflated its Code Sec. 41 credit by about $1.2 million. United Therapeutics took its case to the Tax Court.

Before the Tax Court, United Therapeutics argued that changes to Code Sec. 41 since its enactment rendered Code Sec. 45C(c)(2) a dead letter. That result, the company argued, was compelled by 1989 amendments to Code Sec. 41. As noted above, Code Sec. 45C(c)(2) instructs taxpayers to include overlapping expenses "in determining base period research expenses" for purposes of Code Sec. 41. In 2014 as today, neither the coordination provision nor Code Sec. 41 defined "base period research expenses." But an earlier version of Code Sec. 41 did: In Code Section 41(c)(1)-(2), it defined "base period research expenses" as "the average of the qualified research expenses for each year in the base period" and defined "base period" as "the 3 taxable years immediately preceding" the credit year. Congress removed that definition in a 1989 overhaul of the provision. And when it did so, United Therapeutics argued, Congress also intended - but forgot - to eliminate Code Sec. 45C(c)(2).

Tax Court's Analysis

In United Therapeutics Corp. v. Comm'r, 160 T.C. No. 12 (2023), the Tax Court rejected United Therapeutics' argument and resolved the case in the IRS's favor. The Tax Court reasoned that, although the phrase "base period research expenses" was undefined in the 2014 statute, its ordinary meaning supported the IRS's reading, under which it applied to expenses incurred during the 3 preceding tax years Code Sec. 41(c)(5)(A) uses as a benchmark in calculating the research credit.

The term "base period," the Tax Court explained, has consistently meant "a period of time used as a standard of comparison in measuring changes . . . at other periods of time." Moreover, that is how Congress has used the term in other tax-code contexts, including the one provision (Code Sec. 41(e)(7)(B)) in which Code Sec. 41 defines the term. So the Tax Court concluded that the reference in Code Sec. 45C(c)(2) to "base period research expenses" means research expenses that are incurred during the base period - i.e., the period of time Code Sec. 41 employs as a standard of comparison.

United Therapeutics appealed to the Fourth Circuit.

Fourth Circuit's Analysis

The Fourth Circuit affirmed the judgment of the Tax Court. The Fourth Circuit agreed with the Tax Court's conclusion the ordinary meaning of "base period research expenses" was clear enough to resolve the question in this case.

The Fourth Circuit reasoned that "base period" refers to a period of time used as a standard of comparison or a reference point to measure change over time. According to the court, that is an exact match for the phrase "3 [preceding] taxable years" in Code Sec. 41(c)(5)(A) - i.e., a three-year period that functions as the benchmark against which change over time (here, subsequent increases in research expenditures) are measured. And that interpretation is consistent, the Fourth Circuit found, not only with the plain text but also with the statutory structure, enabling both halves of the coordination provision in Code Sec. 45C(c) to operate according to their terms.

And like the Tax Court, the Fourth Circuit found support for this reading in Code Sec.41(e), where the term "base period" is used to mean a benchmark for comparison. The Fourth Circuit rejected United Therapeutics' argument that, because Congress defined "base period" only for purposes of Code Sec. 41(e), the reference in Code Sec. 45C(c)(2) to "base period research expenses" must be read as applying only to the Code Sec. 41(e) portion of the credit - and not to the Code Sec. 41(c)(5)(A) credit for "qualified research expenses" at issue here. The Fourth Circuit found that Code Sec. 45C(c)(2) mandates accounting for overlapping expenses in applying Code Sec. 41 generally to subsequent tax years. And Code Sec. 41(e) expressly defines "base period" only for the limited purpose of applying that subsection. The Fourth Circuit did not see how the plain meaning of "base period" in Code Sec. 45(C)(c)(2) could be overridden by a definition in a different Code provision that is limited to that provision alone.

The Fourth Circuit concluded that, construed according to its ordinary meaning, the reference in Code Sec. 45C(c)(2) to "base period research expenses" encompassed United Therapeutics' overlapping expenses during the three-year period used as a temporal comparison point by Code Sec. 41(c)(5)(A). In the court's view, that reading is consistent with the plain text as well as the statutory context and structure. Further, the court found that unlike United Therapeutics' position, under which Code Sec. 45C(c)(2) is ignored altogether, the court's reading contravened neither the presumption against repeal by implication nor the principle of interpretation giving effect, if possible, to every word in the statute.

For a discussion of the Code Sec. 41 credit for qualified research expenses, see Parker Tax ¶104,905. For a discussion of the orphan drug credit under Code Sec. 45C, see Parker Tax ¶106,101.

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Tax Court Has Jurisdiction Where Code Fails to Clearly State a Deadline Is Jurisdictional

The Tax Court held that, because Congress did not clearly state that the 90-day deadline in Code Sec. 7436(b)(2) to petition the Tax Court for a redetermination of employment status is jurisdictional, it was not deprived of jurisdiction in the case before it because of a taxpayer's late filing. As a result, the court denied an IRS motion to dismiss the case for lack of jurisdiction and said it would reserve judgment on whether the 90-day deadline is subject to equitable tolling, and thus a pause in the running of the statute of limitations, until the parties raise such issue in an appropriate motion. Belagio Fine Jewelry, Inc. v. Comm'r, 162 T.C. No. 11 (2024).

Background

Belagio Fine Jewelry, Inc. (Belagio) did not file quarterly employment tax returns during 2016 and 2017 (i.e., the periods at issue). Following an audit, the IRS issued a notice of employment tax determination under Code Sec. 7436, wherein the IRS determined that Belagio had an employee during the periods at issue. The IRS assessed employment tax deficiencies, additions to tax for failing to timely file and pay under Code Sec. 6651(a)(1) and (2), and penalties for failing to make a deposit of taxes under Code Sec. 6656. The notice stated that the last day to file a petition with the Tax Court was November 22, 2021. Belagio mailed a petition for redetermination of employment status to the Tax Court via FedEx Express Saver on November 18, 2021. The petition arrived at the Tax Court on November 23, 2021.

Under Code Sec. 7436(a), a taxpayer who is not entitled to employment tax relief under Section 530(a) of the Revenue Act of 1978 may petition the Tax Court for review after the IRS either issues a notice of employment tax determination or makes a determination regarding a taxpayer's employment tax liability. Code Sec. 7436(b)(2) provides that if the IRS sends a notice by certified or registered mail regarding a determination under Code Sec 7436(a), no proceeding may be initiated under Code Sec. 7436 with respect to such determination unless the pleading is filed before the 91st day after the date of such mailing.

In March of 2022, the IRS filed a motion to dismiss Belagio's petition on the grounds that it was filed after the 90-day deadline prescribed by Code Sec. 7436(b)(2). According to the IRS, the 90-day period to petition the Tax Court for redetermination of employment status is jurisdictional, and therefore Belagio's failure to file within that period deprived the Tax Court of jurisdiction. Belagio objected to the motion arguing that the 90-day deadline is not jurisdictional, but rather is a nonjurisdictional claim-processing rule subject to equitable tolling and, thus, a pause in the running of the statute of limitations.

Code Sec. 7502(a) treats a petition that arrives at the Tax Court after a deadline as timely if the taxpayer delivered the petition to the U.S. Postal Service (USPS) on or before the due date. Code Sec. 7502(f) expands this rule to certain private delivery services if such service is designated by the IRS. In Notice 2016-30, the IRS lists all private delivery services that meet the applicable requirements. This list does not include FedEx Express Saver.

The issue before the Tax Court was the timeliness of Belagio's petition and whether the Tax Court has jurisdiction to hear Belagio's late-filed petition.

Analysis

The Tax Court held that the text, context, and relevant historical treatment of Code Sec. 7436(b)(2) did not support a finding that the 90-day deadline to file a petition for redetermination of employment status is jurisdictional and thus concluded that the provision is nonjurisdictional.

The court began by noting that Belagio filed its Tax Court petition one day late and, because FedEx Express Saver is not a "designated private delivery service," Belagio could not avail itself of the "timely mailed, timely filed" rule in Code Sec. 7502. In addressing Belagio's argument that the 90-day deadline is not jurisdictional and is subject to equitable tolling, the Tax Court reviewed several Supreme Court decisions. Citing Arbaugh v. Y & H Corp., 648 U.S. 500 (S. Ct. 2006), the court observed that a procedural requirement is treated as jurisdictional only if Congress "clearly states" that the deadline is jurisdictional. Further, citing the Supreme Court's decision in U.S. v. Kwai Fun Wong, 575 U.S. 402 (S. Ct. 2015), the court determined that Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and to prohibit a court from tolling it. The traditional tools of statutory construction, the court stated, must plainly show that Congress imbued a procedural bar with jurisdictional consequences.

The Tax Court also focused on the wording in Code Sec. 7436(b)(2), which provides that "no proceeding may be initiated under this section with respect to such determination unless the pleading is filed before the 91st day after the date of such mailing." According to the court, the use of the word "initiated," focuses on the consequences to the taxpayer, namely the inability to begin a case. Nothing in the text, the court noted, restricts the court's ability to hear a case, to consider pleadings, or to act upon motions.

In fact, the court observed, Code Sec. 7436(b)(2) does not reference the Tax Court at all. The court found that the absence of such text cut against a finding that Congress clearly intended the 90-day deadline in Code Sec. 7436(b)(2) to be jurisdictional. According to the court, the broader statutory context supported the conclusion that Congress did not clearly state that the 90-day deadline in Code Sec. 7436(b)(2) is jurisdictional. Congress's separation of a filing deadline from a jurisdictional grant, the court said, typically indicates that a deadline is not jurisdictional.

Thus, the Tax Court held that the 90-day deadline in Code Sec. 7436(b)(2) for filing a petition for redetermination of employment status is not jurisdictional. Therefore, it denied the IRS's motion to dismiss. The court also reserved judgment on whether the 90-day deadline is subject to equitable tolling until it is presented in a proper dispositive motion.

For a discussion of IRS notices to taxpayers relating to employment tax determinations, see Parker Tax ¶210,115.

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Ninth Circuit: Deadline for IRS to Recover Erroneous Refund Starts When Check Clears

A panel of the Ninth Circuit held, as a matter of first impression in that circuit, that the two-year limitations period for the IRS to file a lawsuit to recover an erroneous refund under Code Sec. 6532(b) starts on the date the erroneous refund check clears the Federal Reserve and payment to the taxpayer is authorized by the Treasury. The Ninth Circuit therefore reversed a district court's dismissal, as time-barred, of a complaint brought by the government to recover an erroneous tax refund and remanded the case. U.S. v. Page, 2024 PTC 236 (9th Cir. 2024).

Background

On May 5, 2017, the IRS mailed Jeffrey Page a $491,104 check for his 2016 tax refund. Page's refund should have been $3,463, but the IRS made a clerical error. About a year later, on April 5, 2018, Page cashed the check. After the government discovered the error, it sent letters over several months demanding that Page return the erroneous refund. Page eventually returned $210,000 but kept the remaining $277,641.

On March 31, 2020, the government sued Page under Code Sec. 7405 to recover the outstanding balance. Page did not answer the complaint, and the government moved for default under Federal Rule of Civil Procedure 55(a). After the clerk entered default, the government moved for a default judgment under Rule 55(b). The district court denied the motion. It held that the statute of limitations on the government's claim began to run when Page received the refund check and, despite not knowing the date of receipt, suggested that the complaint was likely untimely. The district court thus ordered the government to show cause why the case "should not be dismissed with prejudice as barred by" the statute of limitations.

The government responded to the order to show cause, arguing that the check-clearance date - not the check-receipt date - triggered the statute of limitations, and the complaint was timely because Page cashed the check less than two years before the government sued. The district court rejected the government's arguments and dismissed the complaint. It again held that the check-receipt date triggered the statute of limitations. Despite acknowledging that the complaint did not allege (and Page "d[id] not know") the check-receipt date, the district court relied on "common sense" to hold that the complaint was untimely. The government appealed the dismissal to the Ninth Circuit.

Under Code Sec. 7405(b), the government may bring a claim after a tax payment "has been erroneously refunded." Code Sec. 6532(b) provides that a complaint to recover an erroneous refund under Code Sec. 7405(b)> must be filed "within 2 years after the making of such refund." Thus, to determine whether the government's complaint against Page is timely, the Ninth Circuit had to decide when the erroneous refund was "made." The parties offered two competing definitions of when a refund is "made": the check-receipt date and the check-clearance date.

Analysis

The Ninth Circuit held, as a matter of first impression in that circuit, that a refund is "made" under Code Sec. 6532(b) when a refund check clears. The court therefore held that the government's complaint was timely on its face, and the district court erred by dismissing it.

The Ninth Circuit began its analysis with the longstanding principle, articulated by the Supreme Court in U.S. v. Wurts, 303 U.S. 414 (1938), that a refund is "made" when it is paid. In Wurts, the Supreme Court considered whether the government's suit to recover an erroneous refund was timely under the identical precursor to Code Sec. 6532(b). The parties disputed whether a refund was made when it was "allowed" or when it was "paid." The Court noted that the "common understanding" of refund is "repayment" or "to return money in restitution," and "only by ignoring the common understanding of words could 'making a refund' be considered synonymous with 'allowing a refund.'" And because the government "[o]bviously" has "no right to sue [a] taxpayer to recover money before money had been paid to him," the Court rejected the taxpayer's "construction . . . [that] would allow[] the statute of limitations to begin to run against recovery on an erroneous payment before any such payment is made." The Supreme Court thus held that the statute of limitations "begins to run from the date of payment."

The Court reaffirmed this principle in O'Gilvie v. U.S., 519 U.S. 79 (1996). There, taxpayers argued that the limitations period under Code Sec. 6532(b) began to run when the government mailed them a refund check. The Court disagreed. Relying on Wurts, common law principles, and the "Court's normal practice of construing ambiguous statutes of limitations in Government action in the Government's favor," the Supreme Court held that the statute of limitations begins to run "upon the receipt of payment." Because the government sued within two years after the taxpayers received the refund check, the Court did not decide whether "payment" is made when a check is received or when a check clears. But it noted that "[t]he date the check clears . . . sets an outer bound."

The Ninth Circuit found that, though Wurts and O'Gilvie did not decide the precision question before it, they both made clear that payment triggers the statute of limitations under Code Sec. 6532(b). The court disagreed with Page's contention that a refund is paid when the taxpayer receives the refund check. The date the check clears is, in the view of the Ninth Circuit, the more appropriate benchmark for defining when a refund is paid - or, put another way, the date the check clears is the date the refund is made. The court reasoned that payment cannot be made until the funds change hands. Even after a taxpayer receives a refund check, the government can cancel it. In other words, the Treasury has no obligation to pay the taxpayer until after the check is presented to the Federal Reserve Bank and the Secretary authorizes payment. The court found that until that moment, the Treasury has not parted with any funds and the taxpayer has not received any refund.

The Ninth Circuit reasoned that the check-clearance rule ensures that the statute of limitations does not begin to run before the government can sue to recover the erroneous refund. As the court explained, if Page had returned or shredded the erroneous refund check after he received it, or if the government had canceled the check before Page cashed it, the government obviously could not sue Page because nothing was "refunded" when Page merely received the check. The court found nothing in the language of Code Sec. 6532(b) to suggest that Congress intended the statute of limitations to begin before the government can sue. To the contrary, the court found that the statutory language confirms that the same event - payment of the erroneous refund - triggers both the start of the statute of limitations and the government's right to sue.

In addition, the court found that the check-clearance date is the most certain date for determining when the statute of limitations starts. When the government sends an erroneous refund check, it cannot know when the taxpayer received it (here, even Page claimed he did not know when he received it). But the court found that the date the check clears the Federal Reserve is a documented, ascertainable event. Moreover, the taxpayer will know with certainty that the government has two years to sue after the taxpayer cashes the check and receives the funds. The court also found that the check-clearance also gives courts the most clarity when calculating the statute of limitations.

Applying the check-clearance rule, the Ninth Circuit determined that the government's complaint was timely on its face. The complaint alleged that Page cashed the erroneous refund check on April 5, 2018, meaning the check cleared on or after that date. The government filed its complaint less than two years later, on March 31, 2020. The Ninth Circuit concluded that the complaint was therefore timely and should not have been dismissed.

For a discussion of the statute of limitations on bringing a civil action to recover an erroneous refund, see Parker Tax ¶261,180.

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