Has the Challenge Lost its Fizz? The Commonwealth Court Upholds the Soda Tax

Philadelphia Soda TaxWhatever you may think about the wisdom of Philadelphia’s “Soda Tax,” the City has certainly done well against some fairly stiff opposition:

  • The beverage industry spent millions lobbying against the ordinance creating the tax. It passed anyway. City 1, Industry 0.
  • The beverage industry launched a case challenging the tax in the Court of Common Pleas. The plaintiffs’ complaint was promptly tossed as presenting no legally viable challenge to the tax. City 2, Industry 0.
  • The beverage industry appealed, enlisting thirty-six state legislators as support. On June 14th, the Commonwealth Court rejected that challenge. Williams v. City of Philadelphia, No.
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Tax Procedure: The Ninth Circuit Confirms that a Disregarded Entity is a Pass-Thru Partner Under TEFRA

TEFRAThe Tax Equity and Fiscal Responsibility Act (TEFRA) was enacted in 1982 to govern partnership audits. Despite its age, TEFRA still generates novel issues for courts. On June 7th, the Ninth Circuit affirmed the dismissal of a Tax Court petition brought by a taxpayer who owned his partnership interest through a limited liability company that was disregarded for tax purposes, ruling that form controls over substance, at least in this narrow context. Seaview Trading LLC v. Comm’r, No. 15-71330, 2017 U.S. App. LEXIS 10109 (9th Cir. June 7, 2017).

Robert Kotick and his father formed Seaview Trading, LLC, a Delaware limited liability company that was taxable as a partnership.… Read More

Tax Procedure: Wells Fargo and the Negligence Penalty

STARS, Wells FargoThe recent opinion in Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 80401 (D. Minn. May 24, 2017) provided a thoughtful application of the economic substance doctrine.

In the same opinion, the court also addressed the applicability of a negligence penalty for the underpayments associated with the aspects of the STARS transaction that lacked economic substance; the penalty potentially applied to its claims for foreign tax credits derived from the trust component of the transaction. Wells Fargo, 2017 U.S. Dist. LEXIS 80401 at *13. The question was what a taxpayer must establish to avoid a negligence penalty under section 6662(b)(1) of the Internal Revenue Code; Wells Fargo argued that it should not be penalized if the position it took on its tax return was objectively reasonable under relevant authority.… Read More

Tax Shelters: STARS Economic Substance Ruling In Wells Fargo Does Not Follow Conjunctive Test

STARS, TaxesThe litigation over Wells Fargo’s STARS transaction took another interesting turn last week, as the district court had to rule on the legal implications of the jury’s verdict. Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 80401 (D. Minn. May 24, 2017). The litigation focused on whether STARS was a sham transaction that should not be respected for tax purposes because it lacked economic substance.

STARS, an acronym for Structured Trust Advantaged Repackaged Securities, was a transaction promoted to U.S. banks by a British financial-services company. Under this arrangement, Wells Fargo placed assets in a trust managed by a trustee based in the United Kingdom, making the assets subject to U.K.… Read More

Trust Fund Recovery Penalty: The Sixth Circuit Concludes that Responsible Parties Were Not Willful Due to Remedial Measures that Followed Late Deposits

shutterstock_176498321When an employer fails to withhold and pay over FICA and income taxes from employees’ wages, individuals associated with the business may be subject to liability for the employer’s tax obligations under section 6672(a) of the Internal Revenue Code, which imposes the trust fund recovery penalty. Specifically, “the officers or employees of the employer responsible for effectuating the collection and payment of trust-fund taxes who willfully fail to do so are made personally liable to a ‘penalty’ equal to the amount of the delinquent taxes.” Slodov v. United States, 436 U.S. 238, 244-45 (1978). Liability is therefore tied to two distinct requirements: First, the individual must be “responsible,” and second, he must act willfully.… Read More

Refund Litigation: Think Before You Sue…Your Choice of Forum Matters

Pfizer, Inc. v. United States Choice of venue mattersDistrict courts and the Court of Federal Claims have concurrent jurisdiction over tax refund actions. Specifically, their jurisdiction reaches the following types of claims:

  • A civil action to recover “any internal-revenue tax alleged to have been erroneously or illegally assessed or collected”;
  • A civil action to recover “any penalty claimed to have been collected without authority”; or
  • A civil action to recover “any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.”

28 U.S.C. § 1346(a)(1). Section 1346(a)(1) also serves as a waiver of sovereign immunity by the United States.… Read More

Tax Procedure: A Marijuana Dispensary Cannot Enjoin an IRS Investigation Concerning Trafficking in a Controlled Substance

Marijuana, tax, IRSMarijuana is legal for medical use in over half of the states, along with the District of Columbia. It is also legal for recreational use in eight states and the District of Columbia. At the federal level, however, marijuana is classified as a controlled substance under Schedule I of the Controlled Substances Act. This dichotomy creates a variety of tricky issues for marijuana growers and dispensaries.

One problem is that the Internal Revenue Code precludes deductions for business expenses for any trade or business “if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).” I.R.C.… Read More

Partnership Taxation: A Penalty for Failure to Treat Items in a Manner Consistent with the Partnership Return is Subject to Deficiency Procedures

partnership level auditPartnerships are subject to special audit procedures. The current operative regime is TEFRA, which has been repealed but still governs partnerships for tax years commencing prior to December 31, 2017. Under TEFRA, partners are subject to an obligation to report any partnership items on their individual returns “in a manner which is consistent with the treatment of such partnership item on the partnership return.” I.R.C. § 6222(a). Alternatively, a partner who does not wish to treat a partnership item in a consistent manner must file a notice alerting the IRS to the inconsistent treatment. I.R.C. § 6222(b). The failure to file the notice of inconsistent treatment can trigger penalties.… Read More

A Fair Decision: IRS Refusal of Hardship Waiver for Rollover Contributions is Overturned

IRA RolloverA retired New York City policeman who missed the deadline to roll over retirement plan distributions into an IRA sought a hardship waiver and asked the IRS for “a fair decision” based on his personal difficulties. He received it from the Tax Court in a precedential opinion. Trimmer v. Comm’r, Docket No. 27238-14, 2017 U.S. Tax Ct. LEXIS 15 (Apr. 20, 2017).

Mr. Trimmer worked as a New York City police officer for twenty years until he retired in April of 2011. His wife worked as a school teacher. 2017 U.S. Tax Ct. LEXIS 15 at *3. Mr. Trimmer had planned to work as a security guard with the New York Stock Exchange after retirement, but that job was not offered to him.… Read More

State and Local Taxation: Franchise Fees Must Be Apportioned for Purposes of a Business Privilege Tax

PA State and local taxIn Pennsylvania, the Local Tax Enabling Act authorizes a variety of municipalities to impose a tax “on the privilege of doing business in the jurisdiction of the local taxing authority.” 53 P.S. § 6924.301.1(a.1)(1). As with any state or local tax, the tax cannot violate the Commerce Clause; as a consequence, a local business privilege tax may only be imposed “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Complete Auto Transit, Inc. v.Read More