Recent Developments

This blog will attempt to re-cap the following newsworthy stories:

  1. Transfer Pricing Backlash?
  2. Amazon v. IRS

Transfer Pricing Backlash?

As Previously discussed in this Blog, United States Multi-National Corporations (USMNCs) have been using transfer pricing to stash profits overseas and to avoid U.S. and State taxation.

Recently, one state treasurer is attempting to fight against the USMNCs.  In his April Newsletter, Illinois State Treasurer Michael Frerichs advocates for accountability for USMNCs that interact with his office.  Mr. Frerichs states that he is in the process of sponsoring a bill in the Illinois legislature that would prohibit companies from doing business with Illinois if it utilizes offshore accounts to avoid paying taxes.

Mr. Frerichs proposal raises several questions including:

  1. Are more states willing to undertake such measures to ensure that USMNCs pay their fair share?
  2. Is Illinois willing to enforce this law against companies that are based in Illinois and notorious for using foreign subsidiaries and accounts to hide profits from taxation?
  3. Why isn't the federal government utilizing this method to ensure better compliance by the USMNCs?
  4. Will this matte if the US lowers the corporate tax rate to permit USMNCs to bring back the amounts stashed offshore at a reduced rate?

While the answers to these questions are mere conjecture at this point, given the fact that the proposed law has not been passed to ensure compliance by USMNCs doing business with Illinois, it is still refreshing and a welcomed change of pace to the usual rhetoric of allowing USMNCs to continue to stash taxable income offshore.

Amazon v. IRS

In a recent Tax Court opinion (, Inc. v. Commissioner of Internal Revenue, 148 T.C. No. 8 (2017)), the Tax Court held that IRS overstepped its authority in applying a discounted cash flow method to value a cost sharing arrangement between Amazon and its subsidiaries.

This cash involved whether Amazon properly valued an intangible it sold to its offshore subsidiary. The IRS felt that Amazon did not properly value the intangible and sought to apply the discounted cash method to value the intangible.  Why did the IRS take this approach? Simple, because it meant that Amazon would have had to recognize more income from the sale of intangible in the US and therefore would also have had to pay more taxes.

Amazon disagreed with the IRS. Amazon stated that the IRS' method violated established precedent in Veritas Software v. Commissioner, 133 T.C. No. 14 (2009).  In Veritas, the issue before the Court was the proper buy in the subsidiary was required to pay as a result of a cost sharing arrangement.  In Veritas, the Court held that comparable uncontrolled transaction (CUT) was the proper valuation method.  Similar to Veritas, Amazon stated that the proper method utilized in its case should have been the CUT method.

The Court held in favor of Amazon.  See this synopsis of the case through the Journal of Accountancy.

Grassley, Wyden Introduce IRS Whistleblower Improvements Act of 2017

For Immediate Release

Wednesday, March 29, 2017

Grassley, Wyden Introduce IRS Whistleblower Improvements Act of 2017

WASHINGTON – Sen. Chuck Grassley and Sen. Ron Wyden today introduced bipartisan legislation to improve IRS communication with tax fraud whistleblowers and protect those whistleblowers from workplace retaliation.

“Whistleblowers have helped the IRS recover more than $3 billion for the taxpayers that otherwise would have been lost to fraud,” Grassley said.  “Whistleblowers have the potential to help even more.  They need assurances that putting their jobs at risk carries protections.  They also need better communication about where their cases stand so they’re not sitting in limbo.  This bill will offer a welcome mat to those who are too often treated like skunks at a picnic.”

“Whistleblowers are a crucial line of defense against waste, fraud and abuse,” said Wyden. “This legislation will strengthen protections for employees of companies who come forward to report tax evasion.  Empowering these whistleblowers is key to rooting out bad actors who are breaking the law by dodging their taxes.” 

The IRS Whistleblower Improvements Act of 2017 is based on the Grassley-Wyden amendment included in the Taxpayer Protection Act of 2016.  The Taxpayer Protection Act, along with the Grassley-Wyden amendment, passed the Finance Committee in April 2016 but was never considered by the full Senate. 

The measure would: (1) increase communication between the IRS and whistleblowers, while protecting taxpayer privacy, and (2) provide legal protections to whistleblowers from employers retaliating against them for disclosing tax abuses. 

To increase communication, the bill specifically would allow the IRS to exchange information with whistleblowers where doing so would be helpful to an investigation.  It would further require the IRS to provide status updates to whistleblowers at significant points in the review process and allow for further updates at the discretion of the IRS.  It does this while ensuring that the confidentiality of this information is maintained.  Whistleblowers have expressed concern and frustration in their inability to receive information from the IRS on the status of their cases, which may take years to resolve.  Since these individuals often put their livelihoods on the line to come forward, poor communication adds to their anxiety and is a disincentive to others with knowledge of high dollar tax fraud.

To protect whistleblowers from employer retaliation, the bill extends anti-retaliation provisions to IRS whistleblowers that are currently afforded to whistleblowers under other whistleblower laws, such as the False Claims Act and Sarbanes-Oxley.  Tax whistleblowers may be easily identified within their firms as having specific knowledge of tax fraud.  Extending the protections to tax whistleblowers that apply to whistleblowers in other fields is a matter of fairness and in the interest of U.S. taxpayers who benefit from such whistleblowing, Grassley and Wyden said.  

The IRS Whistleblower Improvements Act of 2017 will be assigned to the Finance Committee, where Grassley is a senior member and former chairman, and Wyden is ranking member.

Grassley successfully enacted much-needed updates to the IRS whistleblower program in 2006.  The improvements have led to the recovery of more than $3 billion in taxes that otherwise would have been lost to fraud.  The IRS has made some progress in improving its treatment of whistleblowers, due to congressional oversight, but challenges remain.  The potential is strong to recover much more in fraud proceeds if the IRS continues to improve its procedures, and Congress delivers the improvements in the Grassley-Wyden legislation.

Two well-known pro-whistleblower groups endorsed the legislation.

“Honest taxpayers are the true victim of every tax fraud.  This reform provides critical protection for those courageous enough to risk losing their jobs to report illegal tax schemes.  The legislation closes a loophole in whistleblower law that currently fails to provide any protection for those who report tax fraud. This bill is urgently needed,” said Stephen M. Kohn, Executive Director, National Whistleblower Center.

“These amendments will significantly strengthen the fraud-fighting potential of the IRS Whistleblower statute and promote the public-private partnerships that the law was originally enacted to foster,” said Robert Patten, President and CEO of Taxpayers Against Fraud.  “In particular, the anti-retaliation provisions will encourage more citizens to come forward and will result in the recovery of significant funds that would otherwise be lost to tax fraud.”

Grassley and Wyden are among the founding members of the bipartisan Senate Whistleblower Protection Caucus.  Grassley is chairman and Wyden is vice-chairman.

Tax Court Win for Whistleblowers

Tax Court Win for Whistleblowers

As previously discussed in these summaries, the Tax Court in Whistleblower 21276-13W determined that collected proceeds includes amounts collected outside of Title 26 (the Internal Revenue Code).  Since the August 3, 2016 opinion, the IRS filed a motion on September 2, 2016, requesting the Court to reconsider its opinion.  Petitioners then filed their response on September 13, 2016.  The Court then denied IRS' Motion for Reconsideration on December 20, 2016.

In the IRS' Motion for Reconsideration, the IRS stated that the basis of their motion was to resolve the inconsistency between the Court's opinion in Whistleblower 21276-13W and the Court's prior decision in Whistleblower 22716-13W (where the Court determined that under I.R.C. § 7623(b)(5)'s amounts in dispute determining additional amounts did not include penalties outside of Chapter 68 of Title 26). This inconsistency, as argued by the IRS, is a problem because how can cases that fail to meet the $2,000,000 threshold under I.R.C.§ 7623(b)(5) and which do not include the non-Title 26 penalties be different than cases that meet the "insignificant" $2,000,000 threshold which would include penalties previously excluded by I.R.C. § 7623(b)(5).

The IRS also makes the following points in its Motion for Reconsideration:

  1. IRS' position regarding collected proceeds is the best because collective proceeds are taxes, penalties, interest, additions to tax and additional amounts.
  2. Court improperly separates 7623(a) and 7623(b) programs as two separate programs.  Instead, the IRS reads the 7623(a) restriction on payments being derived solely from amounts collected as equally applicable to 7623(a) and 7623(b) cases.

In response to the IRS' Motion, the Petitioners made the following points in their Reply:

  1. IRS fails to raise new arguments in its Motion to Reconsider.
  2. Despite IRS claiming an inconsistency exists with the Court's opinion in 21276-13W, the Court has explained exactly why its opinion did not contradict 22716-13W.
  3. IRS' inconsistency argument is disguising its real argument that it does not have access to the funds to pay the whistleblowers.
  4. Court's position in prior opinion are correct.

As stated above, the Court denied IRS' Motion for Reconsideration, so the Court opinion and the positions in that opinion are still the Court's interpretation of the law.