Daily Tax Update - March 07, 2005

Supreme Court Rules That Special Trial Judge Reports Must Be Disclosed in U.S. Tax Court Proceedings
Today, in a 7-2 decision, (Ballard v. Commissioner of Internal Revenue), the Supreme Court ruled that the reports by special trial judges in United States Tax Court proceedings must be disclosed to the parties and must be part of the record on appeal. Since 1983, the Tax Court has adopted a practice whereby modifications to a special trial judge's report by Tax Court judges are excluded from the record, even though the Tax Court judge is required by court rules to give "due regard" to the special trial judge's report and "presume to be correct" factual findings by the special trial judge. The Supreme Court held that the Tax Court's review procedure is inconsistent with the Tax Court's own rules (Rule 183), is not warranted by any statutory provision, and impedes fully informed appellate review of the Tax Court's decision. The Supreme Court declined to rule on the petitioner's assertion that the Tax Court's practice was in violation of the due process clause of the Constitution.

  • In Justice Ruth Bader Ginsburg’s majority opinion, she said, "However efficient the Tax Court's practice may be, we find no warrant for it in the rules the Tax Court publishes. The commissioner may not rely on the Tax Court's arbitrary construction of its own rules to insulate special trial judges from disclosure."
  • In a dissent joined by Justice Thomas, Chief Justice William H. Rehnquist reasoned that the Supreme Court should defer to the Tax Court's interpretation of its own rules, stating that: "An agency's interpretation of its own rule or regulation is entitled to controlling weight unless it is plainly erroneous."
  • The ruling can be accessed here.

New Circular 230 Regulations Impose Strict Standards for Tax Practitioners
In an article published in the Tax Executives Institute’s February journal, the authors, Arthur Bailey and Alexis MacIvor of Steptoe & Johnson LLP discuss how to avoid (and at what cost) the more stringent practice standards in the final Circular 230 regulations, areas where guidance would be helpful to clarify that certain routine, non-significant tax advice is exempt from the new practice standards, and how the new rules treat in-house tax professionals.  

  • The final Circular 230 regulations apply to all written federal tax advice, either under the stringent "covered opinion" standard in section 10.35 or the "other written advice" standards in section 10.37.
  • A "covered opinion" is written advice that concerns one or more federal tax issues arising from (1) a listed transaction, (2) a plan or arrangement, the principal purpose of which is the avoidance or evasion of any tax, or (3) any plan or arrangement, a significant purpose of which is avoidance or evasion of tax if the written advice is (a) a reliance opinion (i.e., concludes with at least a more likely than not standard), (b) a marketed opinion, (c) subject to conditions of confidentiality, or (d) subject to contractual protection.
  • "Other written advice" is any written advice that is not a covered opinion.
  • The article suggests that practitioners should consider using an "opt-out," when appropriate, to reduce the standard from the stringent "covered opinion" standard to the facts and circumstances test found in the "other written advice" provisions.
  • The article describes how the new practice standards apply, by the terms of the existing Circular 230 regulations, to in-house tax practitioners but suggests that the Treasury Department should clarify that the new standards were not intended to apply generally to employee tax advisors. After the completion of this article, IRS representatives informally commented that the new Circular 230 rules do apply to in-house tax advisors.
  • Authors Arthur L. Bailey via e-mail and Alexis A. MacIvor via e-mail are assembling a list of situations where the new rules may affect employee tax advisors and welcome any comments, questions, or examples from the readers of the Daily Tax Update. As the authors learn more about the government’s intent to apply the new regulations to employee tax advisors and the government’s response to specific factual inquiries, the authors may submit a follow-up article for publication.
  • The article can be accessed here.

Tax Bill Introduced March 3

  • S. 533 sponsored by Sen. Kay Bailey Hutchison (R-TX) would clarify that a NADBank guarantee is not considered a Federal guarantee for purposes of determining the tax-exempt status of bonds.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice