Mr. Cope monitors the development of U.S. tax law daily through postings on government websites, daily tax publications, monthly tax journals, tax newsletters, tax conferences and meetings of professionals organizations in New York and Washington. Each month he publishes the Tax Insights Blog, which describes and analyzes significant U.S. tax developments (e.g., judicial decisions, regulations, proposed tax legislation) having cross-border tax consequences. The blog's content should be of interest to U.S. businesses with foreign operations and businesses headquarted outside the United States with U.S. investments or U.S. operations.
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D.C. District Court Finds Denial of Treaty Benefits by IRS is Subject to Judicial Review
On September 18, 2015, the United States District Court for the District of Columbia issued a memorandum opinion in Starr International Company v. United States holding that a decision by the U.S. competent authority to deny the benefits of the 1996 Switzerland-USA Income Tax Convention (the 1996 Treaty”) to the plaintiff, Starr International Company (“Starr”), was reviewable by the court. The decision overturns the position of the IRS announced last month in Rev. Proc. 2015-40 that the U.S. competent authority determines whether a taxpayer qualifies for such discretionary benefits in its “sole discretion.” If this decision is upheld by the Court of Appeals for the District of Columbia, non-U.S. taxpayers who are denied treaty benefits by the U.S. competent authority under the discretionary relief provision found in the limitation on benefits article of most U.S. income tax treaties will be able to look to the courts for relief. Thus, in many cases, the courts would become the ultimate arbiter as to whether relief is available to a resident of another country under a U.S. income tax treaty.
Altera Decision Raises the Bar for Treasury Regulations
The recent decision of the Tax Court in Altera v. Commissioner characterizes a Treasury regulation issued under the Treasury’s general rule making authority, section 7805(a), as a “legislative regulation,” which, under the Administrative Procedure Act (“APA”) generally is subject to certain mandatory notice and comment requirements. In addition, under the APA and the relevant case law, legislative regulations generally are subject to a different standard of review by the courts than has been applied to tax regulations. The Tax Court found the regulations at issue in Altera to be “arbitrary and capricious” and therefore invalid. Should other courts adopt the Tax Court’s analysis when reviewing Treasury regulations, some existing Treasury regulations may be held invalid by the courts, and the Treasury and IRS will need to be more careful in following the APA’s requirements when promulgating regulations. This surprising decision is likely to be appealed to the Court of Appeals for the Ninth Circuit, and in the author’s view, it stands a good chance of being affirmed.
Loving Shows Limits of IRS’s Authority to Write Regulations
On February 11, 2014 the U.S. Court of Appeals for the District of Columbia issued its opinion in Sabrina Loving, et al. v. IRS
ruling that the IRS lacks statutory authority under 31 U.S.C. § 330 to issue regulations governing tax-return preparers. Although the scope of the IRS’s authority to issue regulations was clarified and broadened by the Supreme Court’s 2011 decision in Mayo Foundation for Medical Education and Research v. United States
the decision in Loving
shows that the IRS’s authority to issue regulations is not without limits, even in cases where the facts are sympathetic to the government’s position.
Supreme Court Requires Chevron Deference in Review of Treasury Regulations
In an opinion issued on January 11, 2011, the US Supreme Court, in Mayo Foundation for Medical Education and Research v. United States, upheld the validity of a U.S. Treasury regulation that defined the term "student" to exclude medical residents for purposes of determining whether those individuals were employees and their wages were therefore subject to tax under the Federal Insurance Contributions Act (FICA). The opinion is significant because in reaching its decision the Supreme Court addressed an apparent conflict in its prior decisions as to the degree of deference that US courts should accord US Treasury Regulations that come before them for review.