Editor's Note

Dewey & LeBoeuf will hold its Sixth Annual Year-End Tax Conference and Celebration on Wednesday and Thursday, December 1 and 2, 2010. The conference will feature presentations by Dewey & LeBoeuf tax partners as well as top tax executives who will discuss this year's significant tax developments. Specific panel topics and speakers will be announced shortly. We hope to see you there!

The IRS Changes Its Litigation Position with Respect to the Tax Treatment of Interchange Fees Earned by Credit Card Issuers

On September 27, 2010, the Office of Chief Counsel released Notice 2010-181 (the "Notice"), in which it announced a change in its litigating position with respect to the US federal income tax treatment of interchange fee income earned by issuers of credit cards. The decision to change the litigating position is a response to the Tax Court's decision in Capital One Financial Corp. v. Commissioner.2

In Capital One, the Internal Revenue Service ("IRS"), in part, challenged the taxpayer's treatment of interchange fees as creating or increasing original issue discount ("OID") with respect to the underlying credit card loans that generated the fees.3 By treating the interchange fee as creating or increasing OID, the taxpayer, pursuant to section 1272(a)(6)(C)(iii),4 was able to recognize the interchange fee income over time. The IRS argued that the interchange fee was not OID and, instead, that it was a fee for a service paid by the merchant, not the credit card holder. The Tax Court held in favor of the taxpayer with respect to this issue and found that the interchange fee was akin to interest on a loan that should be treated as OID.

In response to the holding in Capital One, the Office of Chief Counsel announced in the Notice that the IRS will no longer litigate whether interchange fee income earned by credit card issuers is OID. The Notice, however, does not address any of the other issues decided by the Tax Court in Capital One.

Switzerland and United Kingdom to Negotiate Withholding Tax

In an effort to improve its worldwide reputation following last year's much-publicized US-UBS litigation, the French and German governments' purchases of stolen Swiss bank data, and raids launched by the Italian authorities on Swiss banks in Italy,5 Switzerland announced its agreement with the United Kingdom to negotiate a new tax agreement on October 25, 2010.6 The new agreement will incorporate a Swiss withholding tax that will be collected on the assets (including interest earnings, dividends, capital gains, and interest from collective investments) of UK nationals held in Swiss banks. The amount withheld will then be paid to the UK. Additionally, the negotiations would allow UK officials to more easily seek assistance from the Swiss government in cases of suspected tax evasion by UK nationals. Switzerland, in return, is expected to receive greater access to the UK financial services market and the decriminalization under UK law of certain actions by Swiss banks and their employees. A similar agreement to be entered into with Germany was announced on October 27, 2010, and Switzerland has offered to enter into similar agreements with other countries.7

Last September the Swiss Bankers Association ("SBA") proposed a universal withholding tax system that would require Swiss banks to levy a flat rate tax on all European Union ("EU") citizens (i.e., private individuals and other legal entities) with Swiss bank accounts.8 The levied tax would then be given to the account holder's country of domicile, but the account holder's identity would be withheld. The idea behind this proposal was continued privacy for Swiss bank clients and the generation of tax revenue for the EU nations without the need for increased information exchange requirements.

Currently, Switzerland has an agreement with the EU that is similar to the one proposed by the SBA. Under that agreement, EU nationals with Swiss bank accounts are required to either (1) report details of their accounts to the tax authorities of the jurisdictions in which they are nationals or (2) agree to a withholding tax on interest earned on those accounts. If the latter option is chosen, the account the amount withheld is sent to the account holder's home country.

The mechanics of the Switzerland-UK agreement under consideration are somewhat similar to the SBA proposed universal withholding tax system and Switzerland's agreement with the EU. Specifically, the agreement will tax at source assets of UK nationals held in Swiss bank accounts, and the amounts withheld will be turned over to the UK (as discussed above). The rate at which the tax is withheld has yet to be determined.9 Additionally, Switzerland will implement administrative procedures to prevent avoidance of the withholding tax, including allowing the UK authorities to state only the name of the client for which administrative assistance is sought (as opposed to the name and the name of the holder's identity is withheld, and 75 percent of bank, as currently required under the revised double taxation agreement between the UK and Switzerland that was signed in September 2009). However, there are to be no fishing expeditions; the number of requests that can be submitted will be limited and must be well founded.

The agreement, once negotiated and finalized, will not be applied retroactively.

Fifth Circuit Affirms District Court's Ruling that It Lacked Jurisdiction in Son of BOSS Refund Suit

On October 12, 2010, the U.S. Court of Appeals for the Fifth Circuit affirmed a Texas district court's grant of summary judgment in favor of the government in a tax refund suit involving a Son of BOSS (bond and option sale strategy) transaction.10 In the unpublished opinion, the Fifth Circuit agreed with the district court's conclusion that the district court lacked jurisdiction to consider the taxpayer's refund suit because the suit concerned partnership-level items which, under the Tax Equity and Fiscal Responsibility Act ("TEFRA"), cannot be contested after the IRS issues a final partnership administrative adjustment ("FPAA").

In his tax returns for 2002 and 2003, taxpayer J. Winston Krause reported a total of $2.79 million in pass-through losses incurred by a partnership that he controlled through related entities.11 The partnership's losses related to the sale of property that had been contributed to it by its limited partner (controlled by Krause) in which the partnership had overstated basis. In 2006, the IRS determined that Krause's losses were attributable to a tax shelter and issued an FPAA to the partnership's general partner (also controlled by Krause).

In the FPAA, the IRS adjusted the deductions claimed by the partnership and applied accuracy-related penalties.12 After issuing the FPAA to Krause's partnership, the IRS sent Krause a notice of deficiency for the tax, interest, and penalties attributable to the partnership-level adjustments in the FPAA.13 Without contesting the FPAA or the notice of deficiency, Krause paid the entire amount asserted by the IRS and then submitted a refund claim for the penalties and interest. After the IRS failed to respond to his refund claim, Krause filed a refund suit in the U.S. District Court for the Western District of Texas.

The government filed a motion for summary judgment in the district court, arguing that Krause could not litigate the penalties because, under TEFRA, penalties are partnership-level items which can only be contested at the partnership level; additionally, FPAA adjustments become final if not timely contested by a partner.14 The district court agreed with the government and granted its motion for summary judgment.15

Krause appealed to the Fifth Circuit, arguing that TEFRA did not bar his refund suit because the penalties imposed on him "were not attributable to partnership-level items." In affirming the district court's ruling, the Fifth Circuit rejected Krause's argument, noting that "partnership items include all items of income, gain, loss, deduction, or credit to the partnership," along with certain basis adjustments (including the type at issue in the case). In addition, the Fifth Circuit noted that the penalties imposed upon Krause were directly related to the partnership-level items that the IRS adjusted in the FPAA. The court stated, "In this regard the Code is clear: these are items that must be contested before the IRS finalizes an FPAA."

LMSB Directive Allows Taxpayers to Correct Incomplete Gain Recognition Agreements

On July 26, 2010, the IRS released a "Directive on Examination Action with Respect to Certain Gain Recognition Agreements" to Large and Mid-Size Business ("LMSB") Division Industry Directors.16 The directive, written by Michael Danilack, then-Deputy Commissioner (International) of the LMSB Division (now the Large Business and International Division), provides that the IRS will not require taxpayers to request reasonable cause relief if they timely filed a document that purports to be a gain recognition agreement ("GRA") with respect to an initial transfer but does not satisfy the requirements of Treasury regulation section 1.367(a)-8(c)(2). A GRA is an agreement entered into by a United States person in connection with a transfer of stock or securities to a foreign corporation pursuant to an exchange that would otherwise be subject to section 367(a)(1) (providing that, for purposes of determining gain recognized on certain exchanges, a foreign corporation generally is not considered a corporation).

The regulations under section 367 require GRAs to provide information about, among other things, the basis and fair market value of the transferred stock or securities. If, for example, a taxpayer provided that such information is "available upon request," the directive provides a mechanism for taxpayers to submit a complete and accurate filing without providing an explanation of the reasons for the failure to comply.

The LMSB directive does not apply to GRAs required to be filed with respect to initial transfers that were not timely filed. In addition, the directive is only effective until further notice is provided. The IRS is currently considering the possibility of issuing further guidance on GRA filing requirements. The directive merely provides direction for the efficient use of examination resources until further notice; it "contains no legal conclusion as to whether taxpayers have complied with the requirements in [Treasury regulation section] 1.367(a)-8, or whether they have demonstrated that the failure to comply was due to reasonable cause and not willful neglect."17

Tax Court Finds Trust Beneficiary Not Liable as Transferee in Purported MIDCO Transaction

On October 26, 2010, the Tax Court held that a trust beneficiary was not liable as a transferee under section 6901 in a case involving what the IRS sought to characterize as a "MIDCO" transaction.18

The petitioner, Dorothy Diebold, was one of three trustees and the sole beneficiary of the Dorothy R. Diebold Marital Trust (the "marital trust"). The marital trust was the sole owner of Double-D Ranch, Inc. ("Double-D Ranch") until the marital trust distributed approximately one-third of its shares in Double-D Ranch to The Diebold Foundation (the "foundation"), a section 501(c)(3) corporation. Double-D Ranch's assets consisted primarily of highly appreciated publicly held stock and other properties. The marital trust and the foundation entered into an agreement with a purchaser to sell all of the stock in Double-D Ranch for the fair market value of Double-D Ranch's assets less an agreed upon discount. The trust and the foundation sold all of the stock in Double-D Ranch to Shap II, a corporation created by the purchaser to acquire the stock.19 Immediately following the purchase of the stock, Shap II sold Double-D Ranch's marketable securities to a third party bank, resulting in a substantial capital gain. The maritable trust also reported a capital gain on the sale of the Double-D Ranch stock. Shap II filed a consolidated Form 1120 for itself and Double-D Ranch in which Shap II claimed a loss from an unrelated transaction (which the court referred to as generating "artificial losses") that offset the gain from the sale of Double-D Ranch's assets. The IRS issued a notice of deficiency to Double-D Ranch, which defaulted on the notice and did not file a Tax Court petition. The IRS also issued a notice of transferee liability to the petitioner as a transferee of Double-D Ranch for Double-D Ranch's unpaid tax liabilities after recharacterizing the transaction as first a sale of Double-D Ranch's assets followed by a liquidating distribution to its shareholders.


MIDCO transactions, also known as "Intermediary Transaction Tax Shelters," were first identified as a "listed transaction" by the IRS in Notice 2001-16,20 later clarified by Notice 2008-111.21 In a basic MIDCO transaction, an intermediary company ("M") buys the stock of a target corporation ("T") from the shareholders ("X") and then sells the newly-acquired company's assets to a buyer ("Y") under a predetermined plan. Y then claims a tax basis in the assets equal to the price paid and M uses one or more tax strategies to offset the otherwise reportable gain on the sale of T assets. In Notice 2001-16, the IRS stated its intent to challenge such results by recharacterizing the transaction as a sale of T stock to Y by X, as a sale of T's assets while T is still owned by X, or as otherwise appropriate depending on the particular facts involved. The Notice also provided that a number of different penalties could be applied against participants or their advisors.

On December 19, 2002, the IRS classified MIDCO transactions as a "coordinated issue" and instructed auditors to use the economic substance and step transaction doctrines to disallow losses claimed to offset the gains from the sale of T assets. The IRS issued a coordinated issue paper directing auditors to consider all facts and circumstances to determine if a transaction should be characterized as a stock sale or an asset sale, focusing on which party was responsible for involving the intermediate party and paying its fees. 22 After it became apparent to the IRS that the intermediary parties would provide insufficient sources for collection, the IRS directed auditors to focus on the potential liability of other parties involved in these transactions.23 One potential source for collection was to develop cases of transferee liability under section 6901 against the selling shareholders or buyers in these transactions.24

In Notice 2008-111, the IRS clarified that any person who participates in an Intermediary Transaction pursuant to a "Plan" may be subject to transferee liability for the unpaid corporate level tax of T. A person engages in an Intermediary Transaction if the person knows or has reason to know that the transaction is structured to effectuate the Plan, even if the person does not know the actual mechanics of the transaction or the relationships among the parties involved.

In pursuing a MIDCO case on the basis of transferee liability the IRS must first determine the transferor's liability and the amount of such liability. In addition, the burden of proof is on the IRS rather than the taxpayer to establish the technical requirements under section 6901 for transferee liability.


The Tax Court noted that the IRS's assertion of transferee liability was governed by State law, which in this case was New York law. The Tax Court began its analysis by stating that under New York law properly created marital trusts are independent legal entities and noted that the marital trust and the foundation, rather than the petitioner, had received the proceeds of the stock sale. Therefore, the Tax Court determined that unless the marital trust should be disregarded under New York law, the court would respect the separate legal existence of the marital trust in determining transferee liability from Double-D Ranch to the petitioner. Under New York law, the court may disregard the form of a trust when the trust was formed for an illegal purpose or if there is insufficient separation between the beneficiary and the trustee.

The IRS argued that the marital trust should be disregarded on three grounds.

First, the IRS argued that the marital trust should be disregarded because it acted as a mere conduit for transferring the proceeds of the Double-D Ranch stock sale to the petitioner. The IRS pointed to the marital trust's fiduciary tax returns which listed the petitioner as the "grantor/owner" of the marital trust. The IRS maintained that the petitioner should be treated as the "owner" of the marital trust assets for federal income tax purposes and therefore treated as the owner of the marital trust assets for the purposes of transferee liability.

The Tax Court rejected this argument. The court noted that even if the marital trust were characterized as a grantor trust, there was no case law in New York or elsewhere that would place transferee liability on the grantor on the basis of the trust being a grantor trust. In any event, the court determined that the marital trust was not a grantor trust because the petitioner did not create the trust and did not possess the authority to unilaterally direct the use of the marital trust's assets for the petitioner's own benefit.

The IRS's second argument was that the petitioner was the beneficial owner of the marital trust's assets because the petitioner exercised full control over those assets and the discretionary approval of the marital trust's co-trustees was only a formality. As support for this position, the IRS claimed that the petitioner used the word "directed" rather than "requested" several times when the petitioner asked the trustees to distribute assets from the marital trust. The court found that the petitioner did not exercise sole authority over the marital trust's assets and noted that in relation to each transaction the co-trustees were notified of the petitioner's requests in writing and that the co-trustees agreed to them. Furthermore, the court found that each of the petitioner's requests were reasonable given that the charitable trust was established to provide for the petitioner's care and support.

The third argument made by the IRS was that the marital trust should be disregarded because it participated in a fraudulent transfer of assets with Double-D Ranch because there was a de facto liquidation plan in place from the start of the marital trust's sale of the Double-D Ranch stock. In rejecting this argument, the court found that even if the marital trust's sale of Double-D Ranch stock was treated as a plan of liquidation, the IRS did not prove that the petitioner engaged in a fraudulent conveyance of the stock in connection with a plan of liquidation of Double-D Ranch.

In rejecting the IRS's arguments the Tax Court determined that the marital trust should not be disregarded for the purposes of transferee liability and therefore the petitioner was not liable as a transferee of Double-D Ranch under the IRS's theory because the petitioner did not receive the proceeds of the sale of Double-D Ranch stock.

Finally, the court noted that the IRS did not directly address whether the petitioner was a transferee of a transferee (with the marital trust as the initial transferee). Nonetheless, the court stated that the burden is on the IRS to prove that the petitioner was a transferee of the marital trust and that merely asserting that distributions were made from the marital trust is insufficient. The court held that the IRS must prove that the distributions caused the marital trust to become insolvent at the time the distributions were made and that the distributions from the marital trust should be treated as fraudulent under New York law. The court held that the IRS had presented no evidence to this effect and had not satisfied its burden.

This is the second consecutive loss for the IRS in a case it presented as a MIDCO transaction. Last month, the Tax Court rejected the IRS's assertion of transferee liability in LR Development v. Commissioner25 in which the IRS attacked the transaction from the perspective of the ultimate purchaser of the seller's assets from an intermediary. The decision in Diebold was the IRS's effort to attack such a transaction from the perspective of the initial seller, although the Tax Court found that the IRS had essentially identified the wrong party as the seller in issuing the notice of liability.

IRS Releases Guidance on Referrals of Foreign Captive Insurance Companies to the International Excise Tax Group

On September 14, 2010, the IRS issued a memorandum to its excise tax territory managers outlining procedures for those managers to follow when encountering cases with foreign captive insurance companies in order to ensure that such cases are forwarded to the International Excise Tax Group (the "Group") for examination. The focus of the referral is to uncover cases where foreign captive insurance companies are further reinsuring their risks with other foreign insurance companies and thus potentially subject to the so-called "cascading" federal excise tax on insurance premiums.

Section 4371 imposes a federal excise tax on insurance and reinsurance premiums (the "FET") on insurance and reinsurance policies issued by non-US insurers and reinsurers, unless otherwise exempt by treaty. The FET only covers insurance for "insureds" which are either (i) a US individual or entity against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States or (ii) a non-US individual or entity engaged in a trade or business within the United States against, or with respect to, hazards, risks, losses, or liabilities within the United States. The FET does not apply to premiums that are effectively connected with the conduct of a trade or business within the United States and, thus, subject to US income tax in respect of the insurer or reinsurer.

Section 4374 places the liability for the FET on "any person who makes, signs, issues, or sells any of the documents and instruments subject to the [FET], or for whose use or benefit the same are made, signed, issued, or sold." In order for a US payor of premium, whether it be a US broker, policyholder, or insurer, to be relieved of any liability to pay the FET on premiums paid to a non-US insurer or reinsurer, the IRS generally requires that the non-US insurer or reinsurer pay the FET or establish its eligibility for an FET waiver pursuant to a US income tax treaty.

The IRS issued Revenue Ruling 2008-1527 on March 24, 2008, setting forth the IRS's position that the FET is a "cascading" tax and is due on reinsurance premiums paid by a non-US insurer or reinsurer to another non-US reinsurer. This position holds even if the initial premium paid by the US insured to the non-US insurer was exempt by operation of a US income tax treaty. Under this "cascading tax" theory, any additional reinsurance of the US risks would also be subject to FET.28 Revenue Ruling 2008-15 was attached to the September 14, 2010 memorandum.

The Group, which was established in 2009 to examine foreign entities for cascading FET issues, and the September 14, 2010 memorandum ask Excise Tax Examiners to forward certain information on captive insurance companies to the Group. The Group will then decide whether there are possible cascading FET issues with the foreign captive that require additional examination.

FinCEN Proposes Rules for Reporting of Cross-Border Electronic Transmittal of Funds

On September 27, 2010, the Financial Crimes Enforcement Network ("FinCEN") issued a notice of proposed rule making that proposes to increase the reporting requirements for banks and money transmitters for all cross-border wire transfers.29 The proposed rule, if adopted, would require banks to submit money transmittal orders or equivalent information for all international incoming and outgoing wire transfers. In addition, money transmitters, such as Western Union, would be required to report all incoming and outgoing transfers above $1,000. This rule would affect as many as 300 banks and 700 money transmitters.30

The banks and money transmitters would be able to satisfy the reporting requirement by submitting copies of a standard format transmittal order. All such reports would have to be filed within five business days of sending or receiving the transmittal order. In addition, the banks would have to file with FinCEN on an annual basis a list of taxpayer identification numbers of account holders who either sent or received a cross-border electronic wire and the account number that was either credited or debited with respect to that transaction. The annual report would have to be filed with FinCEN by April 15 of the year following the year of the transaction. FinCEN solicited comments on the proposed rules that are due 90 days after the date of publication of the proposed rules in the Federal Register.

FinCEN does not anticipate issuing the final rule before 2012 due to the time required to implement adequate technological systems for accepting reports from the reporting financial institutions and to allow reporting financial institutions ample time to adjust their technological systems that would generate the reports in compliance with the final rules.

Legal Professional Privilege Exclusive to Lawyers Under English Law

A recent decision of the UK Court of Appeal in Prudential Plc. v. Special Commissioner of Income Tax31 has confirmed that under English law legal professional privilege ("LPP") only attaches to tax law advice provided by a lawyer32 and not by any other advisor such as an accountant.


LPP is an absolute rule of law in the UK which provides that the exchange of information between a client and his legal advisors in relation to that client's legal rights and obligations cannot be disclosed to a third party without the client's express consent. Once privilege has been established (subject to limited exceptions), no third party can insist on the disclosure of such information, including Her Majesty's Revenue & Customs ("HMRC") or the courts.

LPP covers legal advice privilege and litigation privilege. Legal advice privilege covers confidential communications between a lawyer and his client where such communications are for the dominant purpose of seeking and receiving legal advice. It does not cover advice of a purely commercial or strategic nature. Litigation privilege, on the other hand, attaches to communications between the lawyer and his client and may extend to related communications with third parties where such communications are created for the dominant purpose of actual or contemplated litigation. The Prudential case concerned legal advice privilege.

The Prudential case arose in respect of a request by HMRC for the disclosure of certain documents in relation to a commercially marketed tax avoidance scheme. Prudential Plc. ("Prudential") brought judicial review proceedings, alleging that those documents were protected by LPP.

The documents sought by HMRC under the statutory notices included documents covering tax law advice received not only from Prudential's lawyers but also from their accountants, PricewaterhouseCoopers. Prudential sought to quash or limit the scope of the notices requiring the production of the documents on the grounds that LPP should be available for tax law advice given by accountants, on the basis that privilege should be determined on the basis of the function for which the advisor was engaged rather than the advisor's professional status.

Court of Appeal Decision

The Court of Appeal refused Prudential's appeal holding that the tax advice received from PricewaterhouseCoopers was not protected by privilege. The court reiterated the principle that LPP (which belongs to the client and attaches both to what the client tells his lawyer and to the legal advice received) "is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law..., a fundamental condition on which the administration of justice as a whole rests."

The court acknowledged that the effect of the rule requires it to be subject to strict limitations because it "creates a real conflict with the general public policy that cases should be decided by reference to all available relevant evidence" and held that, as such, the "nature of the rule is that it needs to be certain in its nature and content."

The court was bound by previous Court of Appeal authority in the case of Wilden Pump Engineering Co. v. Fusfeld33 (and this position was unaffected by the subsequent enactment of the Human Rights Act 1998), that LPP is at common law limited to advice from members of the legal profession. The court rejected Prudential's arguments based on the Human Rights Act 1998, finding that whilst Article 8 of the European Convention on Human Rights guaranteed the privacy of communication between a lawyer and his client, it did not extend to protect communications with any other professional for the purpose of obtaining legal advice.

However, the court went on to say that:

"[E]ven if it were not so bound by previous authority it would conclude that it was not open for the court to hold that LPP applied outside the legal profession, except as a result of relevant statutory provisions. It is of the essence of the rule that it should be clear and certain in its application, since it is not the subject of any ad hoc balancing exercise but is, to all intents and purposes, absolute.... If it were to apply to members of other professions who gave advice on points of law in the course of their professional activity, serious questions would arise as to its scope and application."

Thus as a matter of public policy the Court of Appeal felt that extending the scope of LPP was a question which only Parliament should consider and, accordingly, the courts were not the appropriate forum for such an extension of the rule. It was held that widening the scope of the rule would render the rule uncertain in its application, particularly since there was no "recognised" profession of accountant. There are several professional bodies within the UK to which an accountant may belong but no centralised regulatory body. The Court of Appeal's reluctance to extend the rule was also influenced by the fact that it was clear that, on past occasions, Parliament had considered extending LPP in a limited form to advice provided by other professions and, whilst it had done so in relation to certain professions such as licensed conveyancers, patent agents, and trade mark agents, it had deliberately not legislated in favour of advice provided by accountants.

Implications of the Decision

It is not known as yet whether Prudential will appeal the decision to the Supreme Court. The importance of the case lies in the Court of Appeal's affirmation of the well established rule that legal advice privilege only applies to advice given by a professionally qualified lawyer.

Accordingly, there is a clear distinction between the degree of protection from disclosure afforded to tax law advice provided by a lawyer and that provided by an accountant; the former enjoys a higher level of protection in the form of legal advice privilege whilst advice by non-lawyers does not.


Upcoming Events

On November 8, 2010, Lawrence M. Hill will participate in a panel at the Wall Street Tax Association's Fall Tax Seminar in New York, NY. The panel will discuss current audit issues, including the Compliance Assurance Process program and other resolution forums, Tier 1 issues, mark-to-market coordination with non-U.S. governments, equity swaps, Schedule UTP, and codification of the economic substance doctrine.

On December 1-2, 2010, Dewey & LeBoeuf will host its Sixth Annual Year-End Tax Conference and Celebration. Panel topics and speakers will be announced shortly.

On December 10, 2010, Lawrence M. Hill will speak at the BNA Council for International Tax Education's "Introduction to U.S. Taxation of Financial Products & Derivatives" in New York, NY. Mr. Hill will discuss "Avoiding IRS Controversies Involving Financial Products."

Notable Personnel Changes

On September 28, 2010, the IRS announced the selection of Rosemary Sereti as Director, International Individual Compliance, a new position in the realigned Large Business and International (LB&I) Division. Ms. Sereti, who was previously the Director, Field Operations, Financial Services (Manhattan), will oversee individual compliance field operations, including international individual compliance strategies and program initiatives.

On October 26, 2010, IRS Commissioner Douglas Shulman announced the creation of a Return Preparer Office within the IRS to oversee the implementation of new return preparer rules and procedures. The office will be led by David R. Williams, who was previously the Director of Electronic Tax Administration and Refundable Credits.

Alexandra Minkovich has been appointed as an Attorney Advisor to the Treasury Department's Office of Tax Policy. She will be responsible for procedural and administrative matters. Alexandra will join the Treasury next month after spending four years in Dewey & LeBoeuf's tax controversy and litigation practice. We would like to congratulate Alexandra on her appointment and wish her much continued success!


1. IRS Chief Counsel Notice 2010-18 (Sept. 27, 2010).

2. 133 T.C. No. 8 (2009).

3. For a more detailed discussion of the various issues involved in Capital One, see "Tax Court Rules that Credit Card Issuer's Interchange Income is Properly Treated as OID," Focus on Tax Controversy and Litigation, Oct. 2009, at 25.

4. Unless otherwise indicated, section references are to sections of the Internal Revenue Code of 1986, as amended (the "Code"), and references to regulations are to the regulations promulgated thereunder.

5. For previous coverage of the US-UBS litigation, including coverage of the stolen bank data and the Italian raids, see "Swiss Government Adopts New Regulation in Connection with New and Amended Double Taxation Agreements, Faces Lawsuit Over Information Disclosed to the United States," Focus on Tax Controversy and Litigation, Sept. 2010, at 28; "Swiss Parliament Approves UBS Pact," Focus on Tax Controversy and Litigation, June 2010, at 14; "United States and Switzerland Sign Protocol to Apply UBS Pact Provisionally, Swiss Parliament's Upper House Approves Revised Double Taxation Treaty with the United States," Focus on Tax Controversy and Litigation, Apr. 2010, at 15; "Swiss Government to Seek Parliamentary Approval of UBS Pact, German State Receives Secret Account Data," Focus on Tax Controversy and Litigation, Mar. 2010, at 21; "Switzerland Reacts to Setback to Agreement with United States, Stolen Bank Data," Focus on Tax Controversy and Litigation, Feb. 2010, at 6; "Swiss Court Prevents Disclosure of Some UBS Data to the US; Same Court Earlier Found FINMA Exceeded Authority by Releasing Names of UBS Clients," Focus on Tax Controversy and Litigation, Jan. 2010, at 3; "Details of Criteria Used to Identify Individuals to Be Turned Over to the US Government in UBS Litigation; United States Looking to Conduct Joint Audits with Treaty Partners," Focus on Tax Controversy and Litigation, Dec. 2009, at 8; "UBS Updates, US Government's Focus on Offshore Tax Evasion, and Related Developments," Focus on Tax Controversy and Litigation, Nov. 2009, at 14; "Recent Developments Related to the UBS Litigation and Voluntary Disclosure," Focus on Tax Controversy and Litigation, Oct. 2009, at 5; "Details of the UBS-IRS Settlement Released," Focus on Tax Controversy and Litigation, Sept. 2009, at 2; "Current Developments in UBS Litigation," Focus on Tax Controversy and Litigation, July 2009, at 4; "Court Allows Additional Amicus Brief in Swiss Banking Case," Focus on Tax Controversy and Litigation, June 2009, at 7; "Briefs Filed in Swiss Banking Case," Focus on Tax Controversy and Litigation, May 2009, at 9.

6. See Press Release, Federal Department of Finance, Switzerland and the UK Sign Declaration on the Initiation of Negotiations on Tax Matters (Oct. 25, 2010), available at http://www.admin.ch/aktuell/00089/index.html?lang=en&msg-id=35860 ; Daniel Pruzin, "Switzerland, United Kingdom to Negotiate Withholding Taxes on Swiss-Based Assets," BNA Daily Tax Report, Oct. 26, 2010.

7. See "Germany, Switzerland Sign Agreement to Negotiate Double Taxation Treaty," BNA Daily Tax Report, Oct. 28, 2010; Daniel Pruzin, "Swiss, German Officials Near Agreement to Begin Formal Talks on Double Tax Pact," BNA Daily Tax Report, Oct. 25, 2010.

8. For previous coverage of the proposed universal withholding tax model, see "Swiss Banks Trying to Safeguard Bank Secrecy by Proposing a Universal Withholding Tax Model,"

9. The amount of the withholding tax required under the EU agreement is set to rise to 35 percent in 2011.

10. Krause v. United States, No. 10-50312 (5th Cir. 2010). In 2000, the IRS identified the Son of BOSS transaction as a "listed transaction." See Notice 2000-44, 2000-2 C.B.

11. For simplicity, the taxpayer's wife – who was named in the case and filed joint returns with the taxpayer but was not part of the tax planning – has been omitted from this article.

12. The IRS's adjustments were due to (1) substantial understatements of income tax, (2) gross valuation misstatement(s), or (3) negligence or disregard of rules or regulations.

13. The court stated, "Although penalties are determined at the partnership level . . . they are assessed against the individual partners, who ultimately are responsible for payment." See also Treas. Reg. § 1.6662-5(h).

14. See I.R.C. §§ 6221–6232. An FPAA adjustment becomes final within 150 days of the date it was mailed unless a partner files a Tax Court petition requesting an adjustment. I.R.C. § 6225(a).

15. Krause v. United States, 105 A.F.T.R.2d 1899 (W.D. Tex. 2010).

16 Michael Danilack, "Directive on Examination Action With Respect to Certain Gain Recognition Agreements," IRS LMSB Directive, July 26, 2010, available at http://www.irs.gov/businesses/article/0,,id=226046,00.html.

17. Id.

18. Diebold v. Comm'r, T.C. Memo 2010-238 (Oct. 26, 2010).

19. Dewey & LeBoeuf represented one of the members of Shap II in the litigation of these proceedings.

20. Notice 2001-16, 2001-1 C.B. 730 (Jan. 19, 2001).

21. Notice 2008-111, 2008-51 I.R.B. 1299 (Dec. 1, 2008).

22. Coordinated Issue Paper, Internal Revenue Service, "Intermediary Transaction Tax Shelters" (Dec. 19, 2002), available at http://www.irs.gov/businesses/article/0,,id=182138,00.html .

23. Memorandum, Internal Revenue Service, "Examination of Multiple Parties in Intermediary Transaction Tax Shelters as described in Notice 2001-16" (Jan. 12, 2006), available at http://www.irs.gov/businesses/article/0,,id=153182,00.html .

24. Id.

25. T.C. Memo. 2010-203 (Sept. 16, 2010). For previous coverage of the LR Development case, see "Tax Court Finds Taxpayer Not Liable as Transferee in MIDCO Transaction Case," Focus on Tax Controversy and Litigation, Sept. 2010, at 19.

26. Alexander Roberts is an associate in Dewey & LeBoeuf's New York office.

27. I.R.B. 2008-12.

28. A number of taxpayers and commentators have challenged the imposition of the FET on a cascading basis for several reasons. The most basic is the question of jurisdiction over companies that have no US nexus. A further question is to what extent the reinsurance or retrocession of a non-US company really constitutes a transaction covering US risks, even if some previous transaction in the chain covered a US risk. It is anticipated that one or more taxpayers may choose to challenge the IRS's position in a US court.

29. Financial Crimes Enforcement Network; Cross-Border Electronic Transmittals of Funds, 75 Fed. Reg. 60377 (proposed Sept. 27, 2010; published in the Federal Register Sept. 30, 2010).

30. Sewell Chan, "Proposal Would Expand Money Transfer Reports," N.Y. Times, Sept. 28, 2010, at B3.

31. The Queen on the Application of Prudential Plc. & Prudential (Gibraltar) Ltd. v. Special Commissioner of Income Tax & Philip Pandolfo (HM Inspector of Taxes), [2010] EWCA Civ. 1094.

32. The term "lawyer" includes a UK qualified solicitor, barrister, or a non-UK qualified lawyer who is appropriately qualified in his home jurisdiction.

33. [1985] FSR 159.

34. Farheen Raza and Graham Brough are associates in Dewey & LeBoeuf's London office.

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