Thought Leadership

Baker Botts Quarterly Tax Controversy Update

Client Updates

Welcome to the first Baker Botts Tax Controversy Update! We will provide quarterly updates on matters affecting our friends and clients, including cases of note, proposed and new legislation, and procedural updates with the Internal Revenue Service, state and local taxing authorities, and the courts. If you have a colleague who would like to be added to the distribution list, please click here. For substantive questions, please contact one of the authors listed below.

Income Tax Controversy and Litigation

IRS Appeals Conference Pilot Program to Run Through May 2020

Effective October 1, 2016, the IRS updated its Internal Revenue Manual (current Section to allow the Office of Appeals to invite the IRS Examination team and IRS counsel to taxpayer conferences with Appeals. On May 1, 2017, the IRS began a pilot program implementing this provision by inviting IRS Examination teams to Appeals conferences in certain cases. The program was initially set to expire in May 2019, but was subsequently extended. The pilot program is currently set to expire in May 2020.

At the 15th Biennial Parker C. Fielder Oil and Gas Tax Conference held in Houston on November 21-22, 2019, Richard Husseini, head of the Tax Department at Baker Botts, commented on the program, explaining the program’s beneficial effect on a recent audit that Baker Botts favorably settled at the Appeals stage last year: “For some cases, this has been masterful . . . only with the three parties there were we able to reach a resolution, and it’s been wonderful.” Yet Mr. Husseini also cautioned that inviting IRS personnel to Appeals proceedings may have mixed results, stating that, if the pilot program is made permanent, Appeals should be given discretion to determine not to invite IRS Exam personnel when doing so would be counterproductive to resolving a case.

IRS Implements Changes to AOF IDR Process

The IRS updated Section of its Internal Revenue Manual (IRM) at the end of 2018 to require the IRS Examination team to include a full draft Form 886-A when issuing the Acknowledgment of Facts (AOF) Information Document Request (IDR) to a taxpayer for an unagreed issue. The draft Form 886-A should now include not only a fulsome facts section but also an analysis of the applicable law. The IRM had previously encouraged IRS Examination teams to prepare a full Form 886-A when issuing the AOF IDR but had not explicitly directed it. At the 15th Biennial Parker C. Fielder Oil and Gas Tax Conference held in Houston on November 21-22, 2019, IRS Appeals officer, Andrew J. Keyso Jr., confirmed that LB&I Examination teams are rolling out this new procedure when issuing the AOF IDR. Taxpayers should see this as a welcome change to the AOF IDR process as it gives them the opportunity to determine which facts are important in the context of the IRS’s view of the applicable law.

IRS Increases Efforts to Collect Virtual Currency Information

The IRS is exercising its power to gather information from digital currency exchanges (such as Coinbase or Bitstamp) for purposes of investigating cryptocurrency tax compliance. As recently addressed in Zietzke v. United States, the IRS can issue a third-party summons to a digital currency exchange with relative ease, provided the IRS limits its request to only the tax years under investigation. C19-1234-JCC (W.D. Wash. Nov. 25, 2019).

The IRS has also added a new question to Form 1040: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

These efforts mean that cryptocurrency owners should assume that the IRS has the ability to discover, or at least will continue to seek to uncover, all cryptocurrency transactions. If you suspect you have unreported or misreported virtual currency transactions, or have questions regarding the tax treatment of virtual currency generally, please contact any member of the Baker Botts Virtual Currency IRS Task Force, listed here.


Baker Botts tax controversy and litigation lawyers are both tax lawyers and litigation lawyers. We have underlying knowledge of tax law, combined with a deep bench of substantive tax professionals, providing the highest caliber of service to clients. Our team is experienced at settlements short of litigation with significant, varied administrative practice before IRS Exam and IRS Appeals. We have negotiated settlements on tax matters for both non-docketed and docketed tax cases. Baker Botts tax lawyers are also well known to IRS exam teams, appeals officers and counsel and to the Department of Justice and are effective in working with them on settlements. We also have a strong record of advocacy in convincing appellate courts on tax positions.


State and Local Tax

Texas Supreme Court Poised to Bring Texas into Step with Other States’ Uniform Franchise-Tax Sourcing Practice

Almost every state has adopted provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA § 16 sets a uniform test for identifying in-state sales for apportioning receipts for state income- and franchise-tax purposes: Sales are deemed in state if “the property is delivered or shipped to a purchaser . . . within this state.” As tax agencies in many other states have done, the Texas Comptroller interprets Texas’s UDITPA-derived sourcing statute to ignore the buyer’s location (the product’s ultimate destination) and focus instead on the seller’s initial delivery point. State courts across the country have roundly rejected identical agency rules as being contrary to the text of their states’ uniform sourcing statutes. Those courts have held that the statute’s term “within this state” modifies its immediate antecedent, “purchaser,” not the more remote antecedent, “delivered or shipped.” As a textual matter, therefore, only sales to in-state buyers, i.e., sales with an in-state ultimate destination, are in-state sales—regardless of the seller’s initial delivery point. This issue has only now come before the Texas Supreme Court.

Lockheed Martin v. Hegar, No. 18-0566, now presents the issue squarely. Lockheed Martin sells fighter-jets to foreign governments through the Foreign Military Sale (FMS) program. The FMS program requires such sensitive sales to go through the U.S. Government, to provide maximum oversight. Because government oversight does not change their nature as sales to foreign buyers, Lockheed Martin sought a refund of franchise tax paid for several such sales. The Comptroller denied the refund and Lockheed Martin’s appeal to the district court and court of appeals failed because those courts held that the U.S. Government, not the foreign buyer, was the actual buyer. Because the Government took delivery of the jets in Texas, the sales were Texas sales regardless of the validity of the Comptroller’s sourcing rule.

Lockheed Martin petitioned the Texas Supreme Court for review. It argued that the Comptroller’s place-of-delivery test is inconsistent with the ultimate-destination test set forth by the statute’s text, as state courts across the country have uniformly held when construing their states’ respective uniform sourcing statutes. The Texas Supreme Court granted review and heard oral argument on January 30. If it holds that Lockheed Martin’s foreign buyers are the relevant buyers for franchise-tax purposes, it likely will follow the consensus among state courts and will invalidate the Comptroller’s place-of-delivery rule as inconsistent with the Texas Tax Code’s text. Texas would thus join other states in sourcing sales receipts for state-tax purposes based on the buyer’s location rather than where the seller initially relinquishes control of the goods.

For additional information, contact Ben Geslison or Evan Young, who represent Lockheed Martin before the Texas Supreme Court.

New Texas Property Tax Protest Payment Requirements

Effective September 1, 2019, the Texas Legislature amended Texas Tax Code § 42.42 in a manner that allows taxpayers who appeal property tax valuations to district court to avoid paying penalty and interest on taxes for which they are ultimately found liable. Prior to the amendment, a taxpayer was typically required to pay all of the property taxes imposed on property subject to a pending lawsuit prior to the February 1 delinquency date in order to avoid penalty and interest. Following the amendment, a taxpayer may be able to avoid interest and penalty while paying only the lowest of the following three amounts:

  1. the amount of taxes due on the portion of the taxable value of the property that is not in dispute;
  2. the amount of taxes due on the property under the order from which the appeal is taken; or
  3. the amount of taxes imposed on the property in the preceding tax year.

Prior to the amendment, if a taxpayer paid less than it was determined to owe at the conclusion of its appeal, it would owe penalty (capped at 12%) and interest (1% per month, no cap) on the additional tax it owed. Following the amendment, so long as the taxpayer avoids a delinquency by paying at least one of the above amounts prior to the February 1 delinquency date, it will have at least 21 days to pay any additional tax due before penalty and interest begin to accrue. If the taxpayer fails to pay any additional tax due before the deadline for doing so, it will owe penalty and interest calculated from the original delinquency date (February 1 of the year after the year to which the taxes relate).


Baker Botts’ dynamic state and local tax practice has deep experience providing state and local tax controversy, planning, and transactional services throughout the United States. Our state tax lawyers help businesses create structures to minimize state and local taxes, including income, franchise, sales, property and excise taxes. The section also works with taxing authorities throughout the U.S. to address important tax issues for clients in a variety of business sectors. We represent clients in audits, redetermination hearings and litigation throughout the U.S. Our state tax lawyers team with our seasoned appellate lawyers to provide an appellate tax practice. We also represent clients in “nontraditional” controversies, including managed audits, Multistate Tax Commission audits, voluntary disclosure, unclaimed property audits and reversing adverse policies of tax agencies.


Private Clients

The Importance of Flow-Through Status in Valuation

One of the fundamental questions in determining the value of an interest in a pass-through entity is whether owner-level taxes affect the value of the interest. The IRS position long has been that the owner-level taxes should not be considered. The United States Tax Court recently dealt a blow to the IRS’s position, finding that the taxpayer’s analysis, which considered the tax consequences of the pass-through entity, was more accurate than the IRS’s position that a zero tax rate was appropriate.

In Estate of Jones v. Commissioner, T.C. Memo. 2019-101 (August 26, 2019), the Tax Court was faced with determining the appropriate valuation of interests in a closely held timber operating entity, which was a flow-through for tax purposes. After valuing the entity using the income approach, the taxpayer’s valuation expert also took into account the tax consequences the hypothetical willing buyer would face in the transaction. While the expert’s tax-affecting “may not be exact,” the court found it “more complete and more convincing than respondent’s zero tax rate.”

The Jones case follows six cases over twenty years of Tax Court jurisprudence that the IRS traditionally used to justify not tax-affecting the cash flows of a flow-through entity. However, those six cases were decided by only three judges, and in each case, the holding was that in that particular case, it was not appropriate to tax-affect the earnings.

Jones follows the recent district court decision, Kress v. United States, 16-C-795, 2019 WL 1352944 (E.D. Wisc. Mar. 25, 2019), which also supports the tax-affecting approach to interests in a flow-through entity. In Kress, both experts tax-affected the S corporation’s earnings. The only question was whether a premium for flow-through status should be applied; the court declined to do so.

Estate of Jones and Kress each highlight the need for valuation experts to explain, in detail, why tax-affecting is appropriate and to determine the benefit, if any, of flow-through status.

Applicable Exclusion Amounts

For 2020, the annual exclusion amount remains $15,000, while the estate exclusion amount increased to $11,580,000.


Baker Botts has a nationally-prominent Private Clients practice, and we are the only Am Law 100 firm to receive a Band 1 designation in 2019 from Chambers High Net Worth for Texas: Private Wealth Law. We focus on very high net worth individuals in all aspects of their estate planning and administration, as well as tax litigation and fiduciary litigation. We focus on extremely complicated situations or those involving vast amounts of wealth, or both. Our team has developed a heralded specialization in the areas of family business structuring and restructuring, closely-held entities such as family limited partnerships, and advanced asset transfer techniques, as well as the defense of those techniques against IRS challenges.



  • February 27 - Richard Husseini and Leah Patrick are speaking at the Winter TEI Tax School, hosted by the Houston Chapter of the Tax Executive Institute, on competent authorities developments.
  • February 28 - Renn Neilson is speaking at the Winter TEI Tax School, hosted by the Houston Chapter of the Tax Executive Institute, on noteworthy sales & use tax cases.
  • March 8 - Keri Brown is speaking at the American College of Trust and Estate Counsel 2020 Annual Meeting in Boca Raton, Florida about recent developments that impact the trust and estate practice.
  • March 17 - John Porter is speaking at the Philadelphia Estate Planning Council about current issues in estate and gift tax audits and litigation.
  • March 30 - Derek Young is speaking at the Unclaimed Property Professionals Organization's 2020 Annual Conference in Tucson, Arizona about unclaimed property due diligence.
  • April 16 - John Porter is speaking at the State Bar of Texas’s Advanced Estate Planning Strategies Conference in Santa Fe, New Mexico about business planning with family members.
  • May 4 - Richard Husseini and Jon Nelsen are speaking at the Spring TEI Tax School, hosted by the Houston Chapter of the Tax Executive Institute, on the impact of tax reform on controversy issues.

Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit

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