In a case dealing with much the same issue as the Maines v. Commissioner (144 TC No. 8) case decided the preceding week, the Tax Court in Elbaz v. Commissioner, TC Memo 2015-49 found that a taxpayer was taxable under the tax benefit rule for a refundable state tax credit (the New York QEZE Credit for Property Taxes) even though the refund was of property taxes that had been paid by passthrough entities and not the taxpayers. The Court did not find it relevant that the taxpayer claimed the IRS had taken an inconsistent position in a prior Chief Counsel Advice.
As the Court had in Maines, the Tax Court found that since the taxpayers’ income from the passthrough entities had been reduced by the payment of property taxes by the entities in which they owned interests in earlier years, a payment they received from the state of New York that was tied to those property taxes had to be recognized as income under the tax benefit rule. That is, they could not hide behind the argument that since they hadn’t paid the property taxes, the tax benefit rule didn’t impact them.
But the taxpayers tried one additional argument that was not discussed in the Maines case. The taxpayers claimed that the IRS’s analysis in Chief Counsel Advice 200842002 should be considered, as they had relied on that ruling in taking the position they did.
That CCA looked at this very credit and generally addressed the tax benefit rule from the perspective of the taxpayer receiving the refund being the taxpayer who had actually paid the tax. However the CCA concluded with the following:
In order to furnish a timely response to the central questions, we have not discussed in detail other potential situations, such as the treatment of partners and S corporation shareholders, other than to state that the general principles discussed above would apply.
Although not directly addressed by the Court’s opinion, it appears the taxpayers argued that based on that caveat the IRS had conceded the result would be different in the situation of a passthrough. Such a reading appears, to the author of this article, to be more than a bit of stretch—rather, the IRS appears to rather clearly say they are saying nothing about the treatment of a passthrough aside from a vague reference to using similar principles.
However, the Tax Court pointed out, regardless of whether the taxpayer was or was not reading the memorandum correctly, the memorandum cannot be used against the IRS in this case.
As the Court stated:
Petitioners rely on IRS Chief Counsel Advice 200842002. However, a “written determination” of the Commissioner may not be used or cited as precedent, sec. 6110(k)(3), and written determinations are defined to include Chief Counsel advice, sec. 6110(b)(1)(A); see also Ellison v. Commissioner, T.C. Memo. 2004-57, slip op. at 18 (“Parties are statutorily proscribed from citing chief counsel advice as precedent.”). Thus, we may not use or cite as precedent IRS Chief Counsel Advice 200842002 in deciding this case.
What’s important about this case is not the specific issue of law decided on the topic of refundability of the credit—the earlier Maines case decided that issue. Rather the case is instructive with regard to the limits of the use of certain IRS materials—including Chief Counsel Advices.
You may protest that the very author of this article has discussed Chief Counsel Advices in the past and you would be correct. However this ruling does not say a CPA should not read and consider such memorandums—rather, what it states is that such a memorandum is simply to be read as a legal analysis undertaken by counsel for the party that would be the one the taxpayer would have to face across the table if the taxpayer’s position is attacked.
The memorandum tells us the likely response of the National Office and also generally provides an analysis that the adviser can study, tracing it back to the support the author of the memorandum relied upon.
But, as the Court notes, the memorandum does not bind the IRS at all in any future proceeding. Rather the taxpayer will need to be able to defend the analysis presented in the memorandum his/herself if the taxpayer wishes to use the position in question. And, as this case makes clear, the IRS may disagree with the taxpayer’s reading of that position and, as well, the Court may agree with the IRS that the position advanced by the taxpayer is in error—even if it does agree with the position taken in the memorandum.