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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The Second Circuit Clarifies the “Common Legal Enterprise” Doctrine
In a recent decision, the Court of Appeals for the Second Circuit found that certain documents sought by the IRS pursuant to a summons were protected from disclosure under the tax practitioner privilege and the work product doctrine. In particular, the Second Circuit found that there had been no waiver of the tax practitioner privilege when documents sought by the IRS were shared with another party because the taxpayer and that party were engaged in a “common legal enterprise.” As the IRS and taxpayers grow increasingly litigious, taxpayers may wish to consider whether tax opinions and tax memoranda may be shared with third parties in a manner that preserves the privilege under the common legal enterprise doctrine.
Ohio District Court Rules against Taxpayers Seeking Injunction to Stop FATCA Reporting
In a recent decision, Mark Crawford et al. v. United States Department of the Treasury, the U.S. District Court for the Southern District of Ohio ruled against a motion for preliminary injunction by Senator Rand Paul and six other plaintiffs. These individuals requested that the district court enjoin the U.S. Treasury Department from enforcing the Foreign Account Tax Compliance Act (“FATCA”), the intergovernmental agreements (or “IGAs”) negotiated by the Treasury to implement FATCA and the Report of Foreign Bank and Financial Accounts (“FBAR”) administered by the U.S. Financial Crimes Enforcement network (“FinCEN”). The decision is significant because if a preliminary injunction were granted, the extensive global network created over the last several years to implement FATCA would have been brought to a standstill. The decision also is of interest because it is a rare challenge to a tax law based on U.S. constitutional law.
United States Held Liable for Making False Statements to Foreign Tax Authority
In a recent case, Aloe Vera of America Incorporated, et al. v. United States of America, the United States was found liable for making false statements to the Japanese tax authority during a joint audit of a group of taxpayers. The opinion also reports that, in connection with the joint audit, the Japanese National Tax Administration (“NTA”) leaked information concerning the audit to Japanese media, which caused the taxpayer’s Japanese subsidiary to experience a decline in sales. This case is notable, not only because it sheds light on the simultaneous examination program authorized by U.S. income tax treaties, but because it shows the potential hazards, to the IRS and U.S. taxpayers, of exchanging taxpayer information with treaty partners.
Microsoft’s Cost Sharing Audit Moves to the Courts at Year-end
On December 11, 2014, the IRS filed a petition in the United States District Court for the Western District of Washington to enforce a summons served on Microsoft Corporation (“Microsoft”) to produce certain data and documents that the IRS has requested in connection with an audit of Microsoft for the tax years 2004 – 2006. The audit concerns two regional cost-sharing agreements entered into by Microsoft with certain foreign affiliates. This petition, as well as other public documents, illuminate the government’s attack on these cost-sharing arrangements, which have significantly reduced Microsoft’s U.S. income tax liability. The Microsoft audit is but one example of the IRS’s attack on cost-sharing arrangements entered into by major U.S. technology companies.
District Court Decision Illustrates Limitations on IRS Summons Power
A recent case in the United States District Court for the District of Delaware, United States v. Veolia Environment North American Operations, Inc., discusses some of the defenses that a taxpayer has to a summons issued by the IRS to a taxpayer to produce documents in the course of an audit. The decision also provides an example of the complex and lengthy nature of discovery in U.S. courts.