Baker Botts' tax controversy and litigation practice lawyers for decades have successfully represented clients across the country in all manner of substantial, complex tax controversies before

• the Internal Revenue Service, at its Examination and Appeals divisions and its National Office;
• the Department of the Treasury;
• the Tax Court, Court of Federal Claims, and federal district courts and courts of appeals; and
• the Texas Comptroller of Public Accounts, the taxing authorities of Texas localities and the taxing authorities of other states.

While we have represented taxpayers of all forms, the majority of our federal tax controversy practice entails the representation of large corporate taxpayers under the Internal Revenue Service's Large Case Program, Coordinated Examination Program, Industry Specialization Program and Market Segment Specialization Program.

We are nationally recognized for our experience in representing taxpayers in estate and gift tax controversies, especially those involving difficult-to-value assets, such as interests in closely held businesses, family limited partnerships and limited liability companies. We have victoriously represented taxpayers in some of the most significant estate and gift tax controversies in the last twenty years.

We also have extensive experience with state and local tax controversies at the audit, administrative, state and federal court levels. We have successfully represented taxpayers in disputes involving state income, franchise, sales, fuels, excise and other taxes, as well as local property taxes and franchise fees.

Experience shows us that, with effective and aggressive representation, many tax controversies can be resolved advantageously without the necessity of trial. With that in mind, we encourage clients to involve our tax controversy and litigation practice at the audit level to identify significant issues, develop key audit strategies, provide advice in responding to information document requests and IRS summonses, establish procedures to identify and protect privileged documents, and establish appropriate document retention procedures in order to preserve evidence. The extent of our visible role at the audit level depends on the circumstances of each case. In many instances, we are asked by the client to interface with IRS examiners throughout the examination, whereas in others, strategic reasons dictate that we provide advice while remaining in the background.

The partners in Baker Botts' tax controversy and litigation practice have broad substantive experience in:

• corporate, partnership and real estate tax,
• tax accounting methods,
• financial products,
• energy tax issues and regulated utilities,
• estate and gift tax, and
• state and local tax.

Our experience enable us to thoroughly evaluate the merits of complex tax issues and develop creative arguments in defense of proposed adjustments. They also provide significant advantage in preparing detailed, persuasive responses to the IRS' proposed adjustments and written protests for those examinations that proceed to IRS Appeals. 

The tax controversy and litigation practice lawyers generally find that a detailed written protest, in which the pertinent facts are fully developed and all viable legal arguments are advanced, best positions the case for quick and successful resolution at Appeals. By effectively setting forth, in essence, the facts and legal arguments that would be established at trial, our tax controversy and litigation practice lawyers have achieved extraordinary resolutions of innumerable large cases at Appeals. While we strive to maintain good relationships with Appeals officers based upon trust and mutual respect, our tax controversy and litigation practice lawyers have an established reputation among Appeals officers across the country of being formidable adversaries.

While this approach normally takes the form of a request for technical advice or a private letter ruling, when we believe that positions advanced or maintained by IRS Exam or Appeals personnel are at odds with more reasoned or technical positions of the IRS National Office or the Treasury Department, we have in many instances presented industrywide issues through trade associations or on behalf of several key industry taxpayers. Stated differently, our tax controversy and litigation practice lawyers creatively and strategically determine the appropriate forum in which to bring about a successful resolution of substantial tax controversies in the most effective and efficient manner.

Where, for whatever reason, an advantageous and successful resolution of a tax controversy cannot be achieved administratively, our tax controversy and litigation practice lawyers have substantial experience in tax litigation in all forums. Fortunately, again because of our experience and reputation, most cases are settled without the necessity of trial; however, we have successfully tried many large cases involving sophisticated issues and hundreds of millions of dollars in controversy. We believe that tax litigation is conducted most effectively and efficiently by lawyers whose practice focuses on tax controversy matters, and each partner in the tax controversy and litigation practice devotes substantially all of his practice to the representation of clients in tax controversy and litigation matters.

Tax Controversy and Litigation - Representative Matters

Federal Income Tax Controversies

Tax Accounting Methods

• Represented industry trade association and numerous commercial airlines with respect to industrywide challenge to the deductibility of cyclical aircraft maintenance costs. Presented issue jointly to Treasury Department and IRS National Office, resulting in issuance of Rev. Rul. 2001-4, holding maintenance costs to be currently deductible.
• Southwest Airlines Co. v. Commissioner. IRS conceded Tax Court case involving the deductibility of heavy aircraft maintenance following substantial discovery, fact stipulations and development of expert witness testimony.
• United Air Lines, Inc. v. Commissioner. Obtained complete concession of Tax Court case involving cyclical aircraft maintenance following issuance of Rev. Rul. 2001-4.
• CNF Transportation Inc. v. Commissioner. Obtained very favorable settlement of Tax Court case involving wide array of aircraft maintenance issues following joint negotiations with IRS Appeals and district counsel.
• United Parcel Service of America, Inc. v. Commissioner. Achieved very favorable settlement of issue involving the deductibility of cyclical maintenance following three years of intensive factual discovery and preparation of case for trial.
• Southwest Airlines Co. v. Commissioner. Case currently pending in Tax Court involving IRS challenge to tax accounting method for frequent flyer program.
• Houston Industries, Inc. v. United States. Successfully litigated tax refund suit before Court of Federal Claims and Federal Circuit involving issue of whether utility's excess fuel cost recoveries constituted income or were excluded from income under Indianapolis Power. See 125 F.3d 1442 (Fed. Cir. 1997), aff'g 32 Fed. Cl. 202 (1994). Decision led to issuance of Rev. Rul. 2003 39, 2003 1 C.B. 811.

LIFO Inventory Issues

• Represented an international manufacturer in case involving the proposed termination of LIFO accounting method. Submitted detailed protest with respect to this highly complex issue. Proposed adjustment of approximately $100 million was conceded by IRS Exam after case was sent back by Appeals with notice that issue would be conceded by Appeals if not settled.
• Assumed representation of international retailer in IRS proposed termination of LIFO inventory method. Following successful resolution of criminal referral of company officers, proposed tax deficiency in excess of $250 million was settled for $7 million following implementation of strategy to cause replacement of entire IRS examination team due to extreme acrimony between taxpayer and IRS.
• Represented large franchisee of commercial equipment manufacturer before Appeals in successful settlement of issue involving proposed termination of LIFO inventory method.

Transfer Pricing and Foreign Tax Issues

• Represented an international manufacturer in a section 482 transfer pricing case, settling a proposed adjustment of $30 million for an agreed adjustment of $225,000 following extensive factual development overseas in order to rework an accounting firm's transfer pricing study and preparation of detailed response to Form 5701.
• Represented U.S. party to international leveraged buyout financing secured by controlled foreign corporation stock. Resulting sections 338 and 956 issues conceded by IRS Exam after case was sent back by Appeals with notice that issue would be conceded by Appeals if not settled.

Cross-Border Leasing Transactions

• Represented major commercial airline in challenge to cross-border aircraft leasing transactions. Issue was presented to Treasury Department through Air Transport Association and ultimately converted to request for technical advice. Issue was conceded by IRS Appeals following issuance of favorable TAM.

Sales vs. Lease

• Represented professional sports team and achieved concession from IRS Appeals of numerous proposed adjustments, including some related to stadium suite leases.

Subchapter C Issues

• Represented an international manufacturer in a case involving a defective section 351 transaction devised by an accounting firm where tax planning failed to take into account outstanding class of preferred stock. Proposed adjustment of $150 million was settled for $7 million after case was sent back by Appeals to Exam following submission of written protest.

Statutory Construction

• Represented major commercial airline in case involving application of binding contract ITC transition rule to aircraft purchases following repeal of investment tax credit. Issue was presented to Treasury Department through Air Transport Association and ultimately converted to request for technical advice. Issue was conceded by IRS Appeals following issuance of favorable TAM.

Litigation Settlement Payments

• Schlumberger Technology Corporation v. United States. Successfully litigated case in the U.S. District Court and before the Fifth Circuit involving the timing of income recognition with respect to foreign arbitration award against agency of foreign government. See 195 F.3d 215 (5th Cir. 1999), aff'g 99-2 U.S.T.C. 50,957 (S.D. Tex. 1998).
• Representing large multinational corporation before Appeals on tax character of amounts paid to resolve False Claims Act litigation.

Straddle Issues

• Represented large international oil and gas corporation successfully before Appeals related to application of straddle and interest disallowance rules to exchangeable debentures. Appeals conceded case in full.
• Representing large energy company before Appeals with respect to the application of straddle and interest disallowance rules to exchangeable debentures.

Cancellation of Indebtedness

• Represented exploration and production company related to relationship between section 108 cancellation of indebtedness rules applied to an S corporation. Appeals conceded issue in full.

Tax Shelters

• Represented Son-of-BOSS investor in successful effort to transfer jurisdiction to Appeals, at which a favorable settlement was achieved and documented in a unique closing agreement.
• Representing numerous Son-of-BOSS investors contesting challenge to asserted tax consequences of currency option transactions.

Charitable Contributions

• Represented taxpayer in federal district court and successfully settled refund suit without trial in a dispute between the taxpayer and the IRS Art Advisory Panel regarding the value of donated artwork.

Section 195

• Represented large energy company before Appeals regarding applicability of section 195 to expenses of approximately $200 million incurred in connection with acquisition of new business.

Involuntary Conversions

• Represented Pennzoil Company in successful settlement before Appeals based upon argument that $3 billion in proceeds received in settlement of tortious interference of contract suit against Texaco qualified under section 1033 to the extent Pennzoil invested such proceeds in Chevron stock.
• Represented large corporate conglomerate in successful settlement achieved through post-Appeals mediation of issue relating to qualification of break-up fees under section 1033.
• Represented large bank before Appeals in favorable settlement of issue related to qualification of break-up fee under section 1033.

Statutory Interest

• Kerr McGee Corporation v. United States. Represented multinational oil and gas company in a refund suit in the Claims Court involving overpayments of deficiency interest and the right to additional interest on tax overpayments. Government essentially conceded the case immediately prior to trial.
• Represented large exploration and production company before IRS Appeals in favorable settlement of issue involving application of specified liability loss rules under section 172(f) to interest on tax deficiencies.

Federal Estate and Gift Tax Controversies

Section 2036, Partnership, and LLC Valuation Issues

• Schutt v. Commissioner. Successfully defended estate against IRS claim that two Delaware business trusts should be ignored under section 2036 (T.C.M. 2005-126 (May 26, 2005)).
• Bongard v. Commissioner. Successfully defended estate against IRS claim that limited liability company should be ignored under section 2036 (124 T.C. No. 8 (March 15, 2005)).
• Stone v. Commissioner. Successfully defended estate against IRS claim that five family limited partnerships should be ignored under section 2036 (86 T.C.M (CCH) 551 (2003)).
• Coulter v. Commissioner. Achieved successful settlement with Appeals prior to trial against an IRS assertion of a $113 million estate tax deficiency in a Tax Court case involving the IRS's first attempt to apply section 2036(b) to a partnership in which decedent was a general partner and that owned fifty-five percent of stock in health care industry corporation (T.C. Docket No. 17458-99; TAM. 199938005 (September 24, 1999)).
• Davis v. Commissioner. Successfully defended estate in a case where the Tax Court first recognized the "unrealized capital gains discount" when valuing stock in a C corporation (110 T.C. 530 (1998)).
• Roy Rogers and Dale Evans Rogers v. Commissioner. Successfully defended taxpayers in a Tax Court case involving an IRS challenge to the gift tax value of family limited partnership interests; IRS conceded the case thirty days before trial (T.C. Docket No. 011557-98).
• Harrison v. Commissioner. Successfully defended estate against IRS attempt to apply section 2036 to a limited partnership and the valuation effect of lapsing liquidation rights possessed by the decedent. Case resulted in Congress passing "Anti-Harrison Rule" in section 2704(a) (52 T.C.M. (CCH) 1306 (1987)).

Operating Entity Valuation Issues

• Dunn v. Commissioner. Successful Fifth Circuit appeal and reversal of a Tax Court decision regarding the valuation of a closely held heavy equipment leasing corporation. Appeal resulted in an award of attorney's fees to estate (301 F.3d 339 (5th Cir. 2002)).
• Crowell v. Commissioner. Achieved successful settlement with IRS district counsel in a case involving the valuation of a one-third partnership interest in a partnership owning and operating 125,000 acres of Louisiana timber property (T.C. Docket No. 10551-98 and 10552-98).
• Hughes v. Commissioner. Achieved successful settlement with IRS Appeals in a case involving the valuation of 100 percent of the stock of an oil field services S corporation sold for approximately seven times the estate tax return value 18 months after the decedent's death (T.C. Docket No. 6649 01).
• Jameson v. Commissioner. Successful representation of estate in a Tax Court trial and Fifth Circuit appeal of a case resulting in a full, unrealized capital gains discount when valuing stock in a closely held C corporation engaged in the timber business (267 F.3d 366 (5th Cir. 2001)).
• Segerstrom v. Commissioner. Successfully represented estate in federal district court in response to an IRS summons of attorney-client privileged documents, and successful settlement of an $18 million dispute with IRS Appeals before trial regarding the estate tax value of tiered California real estate partnerships (2001 WL 263449 (N.D. Cal.)).
• Drewry v. Commissioner. Achieved successful settlement with IRS district counsel of case in which the IRS asserted a $30 million estate tax deficiency in a case involving recognition of private annuities and value of interests in a family limited partnership operating cable, radio and television properties (T.C. Docket No. 10328-00).
• Monteleone v. Commissioner. Achieved successful settlement with IRS appeals before trial in a case involving closely held stock in a C corporation operating New Orleans hotels, oil field equipment manufacturing business and other assets. Case involved effect of buy-sell agreement on fair market value and effective unrealized capital gains on value of stock (T.C. Docket No. 972-97).

Real Estate Undivided Interest Valuation Issues

• East v. Commissioner. Achieved successful settlement with IRS district counsel in a case involving valuation of an undivided one-half interest in 240,000 acres of South Texas ranch property. (T.C. Docket No. 16150 97).
• Fay v. Commissioner. Achieved successful settlement with IRS district counsel involving valuation of undivided one-eighth interest in 90,000 acres of Louisiana timber property. Undivided interest discount of sixty-five percent agreed to prior to trial (T.C. Docket No. 1527-96).

Chapter 14 Cases

• Kerr v. Commissioner. Successfully defended taxpayers in a Tax Court and Fifth Circuit appeal of a case of first impression where the IRS attempted to apply section 2704(b) in valuing an interest in a family limited partnership for gift tax purposes (292 F.3d 490 (5th Cir. 2002)).
• White v. Commissioner. Successfully defended estate in case of first impression addressing IRS TAM position regarding section 2703. IRS conceded all issues related to valuation of partnership interest after summary judgment motion filed on section 2703 issue (T.C. Docket No. 14412-97).

State and Local Tax Controversies

Public Utility Deregulation Issues

• Represented CenterPoint Energy before the Texas Public Utility Commission in its true-up proceeding in connection with electric utility deregulation, in which CenterPoint sought over $4 billion in recovery for stranded costs. Intervenors sought to reduce CenterPoint's recovery by $1.8 billion related to certain tax issues involving the tax normalization rules governing investment tax credits and accelerated depreciation, with related issues centered on deferred income taxes and excess deferred income taxes. The Commission decided to reduce CenterPoint's recovery by $145 million related to tax issues. The issue is now on appeal with the Texas courts.

Income/Franchise Tax

• D.D.I. v. State. Represented taxpayer before North Dakota courts, leading to a unanimous decision by the North Dakota Supreme Court that taxation of dividends received by a nonresident company violated the Commerce Clause. 657 N.W.2d 228 (2003).
• Represented Pennzoil Company and obtained summary judgment in state district court on proper franchise tax character of $3 billion in settlement proceeds received in Pennzoil/Texaco litigation.
• Represented major commercial airline in administrative dispute before Texas comptroller of public accounts regarding franchise tax treatment of air traffic liability accounts. Comptroller conceded issue in full.

Sales and Use Tax

• Represented large for-profit health care provider in successful resolution before arbitration panel regarding the proper sharing of state sales tax benefits, which turned on federal tax law issues related to partnerships between for-profit and tax-exempt entities.
• Submitted position paper to Texas Attorney General's Office as to proper meaning of state sales tax law in connection with downtown convention center hotel project. Texas attorney general issued opinion confirming assessment set forth in position paper.
• Represented national medical testing services provider in successful dismissal of sales and income tax assessments in 22 states.
• Achieved successful settlements of Texas sales and use tax assessments, a majority of which have been for no tax liability, on behalf of a number of purchasers of large aircraft.
• Achieved successful settlement on behalf of Texas advertising agency in case involving sales tax assessment on advertising materials.

Local Property Taxes and Fees

• Obtained favorable settlement for large natural gas marketer in connection with Texas property tax dispute involving stored gas.
• Represented Houston Lighting & Power and obtained summary judgment in state district court with respect to issue of whether sales tax collections were includable in gross receipts subject to city franchise fee.
• Represented owner of large aircraft in successful settlement of Texas property tax dispute involving allocation of aircraft value to Texas.

Fuels Tax

• Represented major electric power generator in administrative hearing before Texas Comptroller of Public Accounts regarding validity of Comptroller diesel fuels refund policies. Comptroller conceded issue in full following hearing.

Voluntary Disclosure Agreements

• Represented a variety of taxpayers, both in Texas and in other states, in obtaining favorable tax settlements, along with interest and penalty waivers, through voluntary disclosure agreements.