The book has closed on 2023, but several recent tax-related rulings are sure to have ripple effects into 2024 and beyond—particularly with respect to transfer pricing and foreign tax credits. Here are five cases that will continue to shape the tax landscape in the coming year and affect how you do business.
Look ahead to 2024 with more valuable tax insights or contact Fenwick’s Tax Practice.
Moore Unrealized Income Case
Charles G. Moore, et ux., Petitioners v. United States
After oral arguments in December, the U.S. Supreme Court (SCOTUS) is poised to answer a question that’s potentially worth hundreds of billions of dollars to taxpayers: What is the true definition of “income” under the Sixteenth Amendment? Since the ratification of the Sixteenth Amendment, courts have consistently interpreted “income” as referring to amounts that the taxpayer realized in a particular accounting period. Moore v. United States is the first case in a half-century to raise the issue, after a Washington State couple challenged a tax bill under § 965 on undistributed profits from shares of an Indian corporation they own claiming that the tax is levied on accumulated wealth and not on income. Depending on how broad the holding is, the decision in this case may affect other areas of the tax code.
Liberty Global Inc. Economic Substance Doctrine Case
Liberty Global Inc. v. United States, No. 1:20-cv-03501
A late-October U.S. District Court ruling out of Colorado held for the Department of Justice, which alleged telecommunications company Liberty Global engaged in transactions that satisfied the technical tax rules but lacked economic substance under the economic substance doctrine (ESD). Using circular logic, the court concluded that “the economic substance doctrine applies when a transaction lacks economic substance,” and the court disregarded the “relevancy” statutory requirement in § 7701(o), which states that the ESD only applies “[i]n the case of any transaction to which the economic substance doctrine is relevant.” Liberty has stated that it will take the case to the Tenth Circuit Court of Appeals, where an adverse ruling could open the door for wider government application of the ESD when analyzing transactions. Taxpayers should be prepared for a more aggressive approach to ESD and take steps to mitigate potential exposure under the ESD.
Loper Bright Enterprises Chevron Doctrine Case
Loper Bright Enterprises, et al., Petitioners v. Gina Raimondo, Secretary of Commerce, et al.
In January, SCOTUS will hear arguments in a case that could completely alter the administrative law landscape by overturning Chevron deference for federal agency regulations, including the Treasury Department and the Internal Revenue Service. As it stands, courts typically defer to agency interpretations of the law when federal statues are ambiguous. But petitioners—and in some cases the justices themselves—have argued that the 40-year-old doctrine affords agencies too much freedom to decide what powers Congress gave them. In recent years, for example, Treasury and the IRS have taken full advantage of Chevron’s lenient review standard to write rules increasingly at odds with the statutory provisions they purport to interpret. In a brief, the government has argued an adverse ruling would cause “convulsive shock to the legal system.”
Coca-Cola Company Transfer Pricing Case
Coca-Cola Company v. Commissioner, T.C. No. 31183-15
The U.S. Tax Court ruled in favor of the IRS on Nov. 8, sustaining in full an $882 million transfer pricing adjustment under § 482 after Coca-Cola argued that Brazilian restrictions on paying royalties should prevent the IRS from imputing the royalties. Coca-Cola licensed IP to a Brazilian subsidiary, and—to conform with Brazilian law—that subsidiary paid it in dividends instead of royalties. Companies doing business in countries that impose foreign restrictions on royalties, such as China and Brazil, should look at their current practices in light of the ruling.
YA Global Investment Funds Case
YA Global Investments, LP v. Commissioner, 161 T.C. No. 11
The IRS is getting more aggressive in asserting withholding tax and agency effectively connected income issues. YA Global—a Cayman Islands investment fund—engaged a U.S. investment manager who took fees from clients and passed them along to YA Global. Based on that arrangement, the U.S. Tax Court concluded on Nov. 15 that the U.S. investment manager was an agent of YA Global and therefor YA Global was engaged in in a U.S. trade or business—and the fees effectively connected income subject to withholding under § 1446. Clients with offshore treasury centers may want to look at this case and then look at the relationship between the offshore treasury center and the people in the U.S. who likely manage that center to avoid risking effectively connected income. U.S. companies should also be careful about creating withholding tax risk under 1446 by acting as an agent doing business in the U.S. for a foreign company.
Many of these cases were discussed at length by Fenwick partners in a recent session of our CLE Speaker Series. The full recording can be found here.